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 June 30, 2010
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 o	Accelerated filer þ	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: 59,763,458 shares outstanding as of July 30, 2010.

TABLE OF CONTENTS


	Page

Part I — Financial Information
Item 1. Financial Statements (Unaudited)		4
Tenneco Inc. and Consolidated Subsidiaries —
Reports of Independent Registered Public Accounting Firms		4
Condensed Consolidated Statements of Income (Loss)		6
Condensed Consolidated Balance Sheets		7
Condensed Consolidated Statements of Cash Flows		8
Condensed Consolidated Statements of Changes in Shareholders’ Equity		9
Condensed Consolidated Statements of Comprehensive Income (Loss)		10
Notes to Condensed Consolidated Financial Statements		12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3. Quantitative and Qualitative Disclosures About Market Risk		64
Item 4. Controls and Procedures		65
Part II — Other Information
Item 1. Legal Proceedings		*
Item 1A. Risk Factors		66
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		66
Item 3. Defaults Upon Senior Securities		*
Item 4. Removed and Reserved		*
Item 5. Other Information		*
Item 6. Exhibits		68


*		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 ongoing financial difficulties facing a number of companies in the automotive industry as a result of the difficult global economic environment, including the potential impact thereof on labor unrest, supply chain disruptions, weakness in demand and the collectability of any accounts receivable due to us from such companies;

	•	changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt;

	•	the impact of the recent global economic crisis on the credit markets, which continue to be volatile and more restricted than they were previously;

	•	our ability to source and procure needed materials, components and other products and services as the economy recovers from the recent global economic crisis;

	•	changes in consumer demand, prices and our ability to have our products included on top selling vehicles, such as the recent shift in consumer preferences from light trucks, which tend to be higher margin products for our customers and us, to other vehicles, 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 during 2008 and 2009 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;

	•	decisions by federal, state and local governments to provide (or discontinue) incentive programs related to automobile purchases;

	•	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, 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, 2009, 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 as of June 30, 2010, and the related condensed consolidated statements of income (loss), cash flows, comprehensive income (loss) for the three-month and six-month periods ended June 30, 2010, and the changes in shareholders’ equity for the six-month period ended June 30, 2010. These interim financial statements are the responsibility of the Company’s management.

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

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

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois

August 5, 2010

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 June 30, 2009, and the related condensed consolidated statements of income (loss), cash flows, comprehensive income (loss) for the three-month and six-month periods ended June 30, 2009, and of changes in shareholder’s equity for the six-month period ended June 30, 2009. These interim financial statements are the responsibility of the Company’s management.

Based on our review, 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, 2009, 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 (not presented herein); and in our report dated February 26, 2010, we expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

Deloitte & Touche LLP

Chicago, Illinois

February 26, 2010

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)


	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
	(Millions Except Share and Per Share Amounts)

Revenues
Net sales and operating revenues	$	1,502		$	1,106		$	2,818		$	2,073

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,222			913			2,295			1,740
Engineering, research, and development		33			24			60			45
Selling, general, and administrative		98			88			198			166
Depreciation and amortization of other intangibles		53			55			108			107

		1,406			1,080			2,661			2,058

Other expense
Loss on sale of receivables		(1	)		(2	)		(2	)		(4	)
Other expense		(2	)		(7	)		(3	)		(7	)

		(3	)		(9	)		(5	)		(11	)

Income before interest expense, income taxes, and noncontrolling interests		93			17			152			4
Interest expense (net of interest capitalized of $1 million in each of the three months ended June 30, 2010 and 2009, and $2 million in each of the six months ended June 30, 2010 and 2009)		32			35			64			66
Income tax expense		15			11			30			14

Net income (loss)		46			(29	)		58			(76	)

Less: Net income attributable to noncontrolling interests		6			4			11			6

Net income (loss) attributable to Tenneco Inc.	$	40		$	(33	)	$	47		$	(82	)

Earnings (loss) per share
Weighted average shares of common stock outstanding —
Basic		59,142,946			46,660,573			59,033,416			46,668,343
Diluted		60,999,029			46,660,573			60,892,967			46,668,343
Basic earnings (loss) per share of common stock	$	0.68		$	(0.72	)	$	0.79		$	(1.76	)
Diluted earnings (loss) per share of common stock	$	0.66		$	(0.72	)	$	0.77		$	(1.76	)

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)


	June 30,			December 31,
	2010			2009
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	146		$	167
Receivables —
Customer notes and accounts, net		820			572
Other		35			24
Inventories —
Finished goods		193			175
Work in process		133			116
Raw materials		107			95
Materials and supplies		38			42
Deferred income taxes		47			35
Prepayments and other		153			167

Total current assets		1,672			1,393

Other assets:
Long-term receivables, net		9			8
Goodwill		85			89
Intangibles, net		32			30
Deferred income taxes		86			100
Other		103			111

		315			338

Plant, property, and equipment, at cost		2,886			3,099
Less — Accumulated depreciation and amortization		(1,893	)		(1,989	)

		993			1,110

	$	2,980		$	2,841


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)	$	65		$	75
Trade payables		954			766
Accrued taxes		40			36
Accrued interest		22			22
Accrued liabilities		268			257
Other		37			45

Total current liabilities		1,386			1,201

Long-term debt		1,189			1,145

Deferred income taxes		57			66

Postretirement benefits		314			331

Deferred credits and other liabilities		81			80

Commitments and contingencies
Total liabilities		3,027			2,823

Redeemable noncontrolling interests		10			7

Tenneco Inc. shareholders’ equity:
Common stock		1			1
Premium on common stock and other capital surplus		2,999			3,005
Accumulated other comprehensive loss		(318	)		(212	)
Retained earnings (accumulated deficit)		(2,528	)		(2,575	)

		154			219
Less — Shares held as treasury stock, at cost		240			240

Total Tenneco Inc. shareholders’ equity		(86	)		(21	)

Noncontrolling interests		29			32

Total equity		(57	)		11

Total liabilities, redeemable noncontrolling interests and equity	$	2,980		$	2,841

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			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2010			2009			2010			2009
	(Millions)

Operating Activities
Net income (loss)	$	46		$	(29	)	$	58		$	(76	)
Adjustments to reconcile net income (loss) to cash provided by operating activities —
Depreciation and amortization of other intangibles		53			55			108			107
Deferred income taxes		5			(4	)		2			(3	)
Stock-based compensation		2			2			5			4
Loss on sale of assets		1			2			3			4
Changes in components of working capital —
(Increase) decrease in receivables		(102	)		(3	)		(293	)		(57	)
(Increase) decrease in inventories		(27	)		33			(71	)		67
(Increase) decrease in prepayments and other current assets		9			(4	)		2			(5	)
Increase (decrease) in payables		112			38			232			(36	)
Increase (decrease) in accrued taxes		(6	)		22			1			19
Increase (decrease) in accrued interest		(8	)		(9	)		1			1
Increase (decrease) in other current liabilities		25			(2	)		19			(5	)
Changes in long-term assets		2			4			1			6
Changes in long-term liabilities		(10	)		6			(21	)		1
Other		2			1			—			4

Net cash provided by operating activities		104			112			47			31

Investing Activities
Proceeds from the sale of assets		—			—			1			2
Cash payments for plant, property, and equipment		(34	)		(30	)		(72	)		(66	)
Cash payments for software related intangible assets		(6	)		(2	)		(8	)		(4	)
Acquisition of business, net of cash acquired		—			—			—			1
Other		1			—			2			—

Net cash used by investing activities		(39	)		(32	)		(77	)		(67	)

Financing Activities
Issuance of long-term debt		155			—			155			2
Debt issuance cost of long-term debt		(9	)		—			(9	)		(8	)
Retirement of long-term debt		(129	)		(7	)		(137	)		(8	)
Increase (decrease) in bank overdrafts		3			(11	)		2			(24	)
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable		18			(62	)		20			75
Net decrease in short-term borrowings secured by accounts receivable		(126	)		—			—			—
Distributions to noncontrolling interest partners		(10	)		(10	)		(11	)		(10	)

Net cash provided (used) by financing activities		(98	)		(90	)		20			27

Effect of foreign exchange rate changes on cash and cash equivalents		(14	)		8			(11	)		(6	)

Decrease in cash and cash equivalents		(47	)		(2	)		(21	)		(15	)
Cash and cash equivalents, April 1 and January 1, respectively		193			113			167			126

Cash and cash equivalents, June 30 (Note)	$	146		$	111		$	146		$	111

Supplemental Cash Flow Information
Cash paid during the period for interest	$	39		$	43		$	61		$	65
Cash paid during the period for income taxes (net of refunds)		16			8			24			12
Non-cash Investing and Financing Activities
Period ended balance of payable for plant, property, and equipment	$	11		$	11		$	11		$	11


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)


	Six Months Ended June 30,
	2010					2009
	Shares		Amount			Shares		Amount
	(Millions Except Share Amounts)

Tenneco Inc. Shareholders:
Common Stock
Balance January 1		60,789,739	$	1			48,314,490	$	—
Issued pursuant to benefit plans		141,246		—			289,189		—
Stock options exercised		92,921		—			41,460		—

Balance June 30		61,023,906		1			48,645,139		—

Premium on Common Stock and Other Capital Surplus
Balance January 1				3,005					2,809
Purchase of additional noncontrolling equity interest				(11	)				—
Premium on common stock issued pursuant to benefit plans				5					4

Balance June 30				2,999					2,813

Accumulated Other Comprehensive Loss
Balance January 1				(212	)				(318	)
Other comprehensive income (loss)				(106	)				39

Balance June 30				(318	)				(279	)

Retained Earnings (Accumulated Deficit)
Balance January 1				(2,575	)				(2,502	)
Net income (loss) attributable to Tenneco Inc.				47					(82	)

Balance June 30				(2,528	)				(2,584	)

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

Total Tenneco Inc. shareholders’ equity			$	(86	)			$	(290	)

Noncontrolling Interests:
Balance January 1			$	32				$	24
Net income				7					4
Sale of twenty percent equity interest to Tenneco Inc.				(4	)				—
Other comprehensive income (loss)				2					—
Dividend declared				(8	)				(5	)

Balance June 30			$	29				$	23

Total equity			$	(57	)			$	(267	)

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 June, 2010
	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				$	40				$	6				$	46

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance April 1	$	5					$	—			$	5
Translation of foreign currency statements		(77	)		(77	)		3		3		(74	)		(74	)

Balance June 30		(72	)					3				(69	)

Additional Liability for Pension Benefits
Balance April 1		(248	)					—				(248	)
Additional Liability for Pension and Postretirement Benefits, net of tax		2			2							2			2

Balance June 30		(246	)					—				(246	)

Balance June 30	$	(318	)				$	3			$	(315	)

Other Comprehensive Income (Loss)					(75	)				3					(72	)

Comprehensive Income (Loss)				$	(35	)			$	9				$	(26	)


	Three Months Ended June 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)				$	(33	)			$	4				$	(29	)

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance April 1	$	(82	)				$	—			$	(82	)
Translation of foreign currency statements		79			79			—		—		79			79

Balance June 30		(3	)					—				(3	)

Additional Liability for Pension Benefits
Balance April 1 and June 30		(276	)					—				(276	)

Balance June 30	$	(279	)				$	—			$	(279	)

Other Comprehensive Income					79					—					79

Comprehensive Income				$	46				$	4				$	50

TENNECO INC.

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


	Six Months Ended June, 2010
	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				$	47				$	11				$	58

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance January 1	$	37					$	—			$	37
Translation of foreign currency statements		(109	)		(109	)		3		3		(106	)		(106	)

Balance June 30		(72	)					3				(69	)

Additional Liability for Pension Benefits
Balance January 1		(249	)					—				(249	)
Additional Liability for Pension and Postretirement Benefits, net of tax		3			3							3			3

Balance June 30		(246	)					—				(246	)

Balance June 30	$	(318	)				$	3			$	(315	)

Other Comprehensive Income (Loss)					(106	)				3					(103	)

Comprehensive Income (Loss)				$	(59	)			$	14				$	(45	)


	Six Months Ended June 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)				$	(82	)			$	6				$	(76	)

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance January 1	$	(42	)				$	—			$	(42	)
Translation of foreign currency statements		39			39			—		—		39			39

Balance June 30		(3	)					—				(3	)

Additional Liability for Pension Benefits
Balance January 1 and June 30		(276	)					—				(276	)

Balance June 30	$	(279	)				$	—			$	(279	)

Other Comprehensive Income (Loss)					39					—					39

Comprehensive Income (Loss)				$	(43	)			$	6				$	(37	)

The accompanying notes to financial statements are in an integral part

of these 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, 2009.

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 in which the Company does not have a controlling interest, as equity method investments, at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. We have eliminated all intercompany transactions. We have evaluated all subsequent events through the date the financial statements were issued.

(2) The carrying and estimated fair values of our financial instruments by class at June 30, 2010 and December 31, 2009 were as follows:


	June 30, 2010					December 31, 2009
	Carrying Amount		Fair Value			Carrying Amount		Fair Value
			(Millions)

Long-term debt (including current maturities)	$	1,193	$	1,207		$	1,151	$	1,168
Instruments with off-balance sheet risk:
Foreign exchange forward contracts		—		(1	)		—		2

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 their 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.

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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

forward contracts, presented on a gross basis by derivative contract at June 30, 2010 and December 31, 2009, respectively, was as follows:


	Fair Value of Derivative Instruments
	June 30, 2010							December 31, 2009
	Asset		Liability					Asset		Liability
	Derivatives		Derivatives		Total			Derivatives		Derivatives		Total

Foreign exchange forward contracts	$	1	$	2	$	(1	)	$	3	$	1	$	2

The fair value of our recurring financial assets and liabilities at June 30, 2010 and December 31, 2009, respectively, are as follows:

June 30, 2010

December 31, 2009

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

(Millions)

Financial Assets:

Foreign exchange forward contracts

n/a

Financial Liabilities:

Foreign exchange forward contracts

n/a

The fair value hierarchy definition prioritizes the inputs used in measuring fair value into the following levels:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.

Level 3 — Unobservable inputs based on our own assumptions.

The following table summarizes by major currency the notional amounts, weighted-average settlement rates, and fair value for foreign currency forward purchase and sale contracts as of June 30, 2010:


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

Australian dollars	—Purchase		50			0.840	$	42
	—Sell		(12	)		0.840		(10	)
British pounds	—Purchase		38			1.494		56
	—Sell		(34	)		1.494		(51	)
European euro	—Purchase		—			—		—
	—Sell		(21	)		1.223		(26	)
South African rand	—Purchase		323			0.130		42
	—Sell		(44	)		0.130		(5	)
U.S. dollars	—Purchase		7			1.000		7
	—Sell		(61	)		1.000		(61	)
Other	—Purchase		548			0.011		6
	—Sell		(1	)		0.939		(1	)

							$	(1	)

(3) 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 65 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

On June 3, 2010 we completed an amendment and extension of our senior secured credit facility by extending the term of our revolving credit facility and replacing our $128 million term loan A with a larger and longer maturity term loan B facility. As a result of the amendment and extension, as of June 30, 2010, the senior credit facility provides us with a total revolving credit facility size of $622 million until March 16, 2012, when commitments of $66 million will expire. After March 16, 2012, the extended revolving credit facility will provide $556 million of revolving credit and will mature on May 31, 2014. The extended facility will mature on December 14, 2013 if our tranche B-1 letter of credit/revolving loan facility is not refinanced by that date. Prior to maturity, funds may be borrowed, repaid and re-borrowed under the revolving credit facilities without premium or penalty. The leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement) was decreased from 5.00 to 4.50 for the second quarter of 2010; from 4.75 to 4.25 for the third quarter of 2010; and from 4.50 to 4.25 for the fourth quarter of 2010 as a result of the June 3, 2010 amendment.

As of June 30, 2010, the senior credit facility also provides a six-year, $150 million term loan B maturing in June 2016, and a seven-year $130 million tranche B-1 letter of credit/revolving loan facility maturing in March 2014. The term loan B facility will mature on August 16, 2014 if we do not refinance our senior subordinated notes by that date.

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 at a rate 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.

As of June 30, 2010 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 June 30, 2010, we had unused borrowing capacity of $675 million under our $752 million revolving credit facilities with $25 million in outstanding borrowings and $52 million in letters of credit outstanding.

The financial ratios required under the senior credit facility for the remainder of 2010 and beyond are set forth below. As of June 30, 2010, we were in compliance with all the financial covenants and operational restrictions of the senior credit facility.


			Interest
	Leverage		Coverage
Period Ending	Ratio		Ratio

September 30, 2010		4.25		2.30
December 31, 2010		4.25		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 June 3, 2010 and following each fiscal quarter thereafter, the margin we pay on borrowings under our term loan B and revolving credit facility, incurred interest at an annual rate equal to, at our option, either (i) the

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

London Interbank Offered Rate plus a margin of 475 and 450 basis points, respectively, or (ii) a rate consisting of the greater of (a) the JPMorgan Chase prime rate plus a margin of 375 and 350 basis points, respectively, (b) the Federal Funds rate plus 50 basis points plus a margin of 375 and 350 basis points, respectively, and (c) the Eurodollar Rate plus 100 basis points plus a margin of 375 and 350 basis points, respectively. The margin we pay on these borrowings will be reduced by 25 basis points following each fiscal quarter for which our consolidated net leverage ratio is less than 2.25 for extending lenders and will be further reduced by an additional 25 basis points following each fiscal quarter for which the consolidated net leverage ratio is less than 2.0 for extending lenders.

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 500 basis points, or (ii) a rate consisting of the greater of (a) the JPMorgan Chase prime rate plus a margin of 400 basis points, (b) the Federal Funds rate plus 50 basis points plus a margin of 400 basis points, and (c) the Eurodollar Rate plus 100 basis points plus a margin of 400 basis points.

On August 3, 2010 we issued $225 million of 73/4 percent senior notes due August 15, 2018 in a private offering. The net proceeds of this transaction, together with cash and available liquidity, will be used to finance the redemption of our 101/4 percent senior secured notes due in 2013. We called the senior secured notes for redemption on August 3, 2010, and expect to complete the redemption on September 2, 2010 at a price of 101.708 percent of the principal amount, plus accrued and unpaid interest. The new notes are general senior obligations of the subsidiary guarantors and will not be secured by assets of Tenneco Inc. or the guarantors.

(4) 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.

We reported income tax expense of $30 million in the first six months of 2010. The tax expense recorded differs from the expense that would be recorded using a U.S. Federal statutory rate of 35 percent because a favorable mix of tax rates in the jurisdictions we pay taxes more than offset the impact of charges primarily related to adjustments to prior year income tax estimates and the impact of not benefiting tax losses in the U.S. and certain foreign jurisdictions. During the first six months of 2010, we recorded a $52 million reduction in our valuation allowance related to the utilization of U.S. NOLs resulting from a reorganization of our European operations. The amount recorded is an estimate that can not be finalized until year end. The estimated amount recorded does not impact the tax rate. In evaluating the requirements to record a valuation allowance, accounting standards do not permit us to consider an economic recovery in the U.S. or new business we have won. Consequently, beginning in 2008, given our historical losses, we concluded that our ability to fully utilize our NOLs was limited due to projecting the continuation of the negative economic environment and the impact of the negative operating environment on our tax planning strategies. As a result of our tax planning strategies which have not yet been

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

implemented and which do not depend upon generating future taxable income, we carry deferred tax assets in the U.S. of $90 million relating to the expected utilization of those NOLs. The federal NOLs expire beginning in 2020 through 2029. The state NOLs expire in various years through 2029.

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 jurisdictions. 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.

(5) In addition to our senior credit facility, senior secured notes, senior notes and senior subordinated notes, we also securitize some of our accounts receivable on a limited recourse basis in North America and Europe. As servicer under these accounts receivable securitization programs, we are responsible for performing all accounts receivable administration functions for these securitized financial assets including collections and processing of customer invoice adjustments. In North America, we have an accounts receivable securitization program with three commercial banks. We securitize original equipment and aftermarket receivables on a daily basis under the bank program. The amount of outstanding third party investments in our securitized accounts receivable bank program was $0 and $62 million at June 30, 2010 and December 31, 2009, respectively. In February 2010, the North American program was amended and extended to February 18, 2011, at a maximum facility size of $100 million. As part of this renewal, the margin we pay to our banks decreased. In March 2010, the North American program was further amended to extend the revolving terms of the program to March 25, 2011, add an additional bank and increase the available financing under the facility by $10 million to a new maximum of $110 million. In addition, we added a second priority facility to the North American program, which provides up to an additional $40 million of financing against accounts receivable generated in the U.S. or Canada that would otherwise be ineligible under the existing securitization facility. This new second priority facility also expires on March 25, 2011, and is subordinated to the existing securitization facility.

Each facility contains customary covenants for financings of this type, including restrictions related to liens, payments, merger or consolidation and amendments to the agreements underlying the receivables pool. Further, each facility may be terminated upon the occurrence of customary events (with customary grace periods, if applicable), including breaches of covenants, failure to maintain certain financial ratios, inaccuracies of representations and warranties, bankruptcy and insolvency events, certain changes in the rate of default or delinquency of the receivables, a change of control and the entry or other enforcement of material judgments. In addition, each facility contains cross-default provisions, where the facility could be terminated in the event of non-payment of other material indebtedness when due and any other event which permits the acceleration of the maturity of material indebtedness.

We also securitize receivables in our European operations to regional banks in Europe. The amount of outstanding third party investments in our securitized accounts receivable in Europe was $105 million and $75 million at June 30, 2010 and December 31, 2009, respectively. The arrangements to securitize receivables in Europe are provided under seven separate facilities provided by various financial institutions in each of the foreign jurisdictions. The commitments for these arrangements are generally for one year but some may be cancelled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon 15 days, or less, notification.

If we were not able to securitize receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreements might increase. These accounts receivable

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreements.

We adopted the new accounting guidance for transfers of financial assets effective January 1, 2010. Prior to the adoption of this new guidance, we accounted for activities under our North American and European accounts receivable securitization programs as sales of financial assets to our banks. The new accounting guidance changed the accounting rules for the transfer of financial assets which companies need to meet to qualify for sales accounting treatment. Based on these new accounting rules, effective January 1, 2010, we account for our North American securitization program as a secured borrowing as we no longer meet the conditions required for sales accounting treatment. Our European securitization programs continue to qualify for sales accounting treatment under these new accounting rules. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under our European securitization programs approximates the fair value of such receivables. We recognized $1 million and $2 million in interest expense for the three month and six month periods ended June 30, 2010, respectively, relating to our North American securitization program which effective January 1, 2010, is accounted for as a secured borrowing arrangement under the new accounting guidance for transfers of financial assets. In addition, we recognized a loss of $1 million and $2 million for the three month periods ended June 30, 2010 and 2009, respectively, and $2 million and $4 million for the six month periods ended June 30, 2010 and 2009, respectively, on the sale of trade accounts receivable in both the North American and European accounts receivable securitization programs, representing the discount from book values at which these receivables were sold to our banks. The discount rate varies based on funding costs incurred by our banks, which averaged approximately five percent during 2010.

The impact of the new accounting rules on our condensed consolidated financial statements includes an increase of $1 million and $2 million in interest expense and a corresponding decrease in loss on sale of receivables on our income statement for the three month and six month periods ended June 30, 2010, respectively. For the six month period ended June 30, 2010, there was no cash flow impact as a result of the new accounting rules, however, for the three month period ended June 30, 2010, our cash flow provided (used) by financing activities decreased by $126 million, due to the impact of the accounting rule changes on our North America accounts receivable securitization program. Funding levels provided by our European securitization programs continue to be reflected as a change in receivables and included in net cash provided (used) by operating activities as under the previous accounting rules. Had the new accounting rules been in effect in 2009, reported receivables and short-term debt would both have been $62 million higher as of December 31, 2009. The loss on sale of receivables would have been $1 million and $2 million lower, offset by a corresponding $1 million and $2 million increase to interest expense for the three month and six month periods ended June 30, 2009, respectively. Additionally, our cash provided (used) by operations would have decreased by $4 million and $66 million with a corresponding increase in cash provided by financing activities for the same amount for the three month and six month periods ended June 30, 2009, respectively.

(6) 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. In 2009, we incurred $21 million in restructuring and related costs, of which $16 million was recorded in cost of sales, $1 million was recorded in selling, general, administrative and engineering expense and $4 million was recorded in depreciation and amortization expense. In the second quarter of 2010, we incurred $4 million in restructuring and related costs, of which $3 million was recorded in cost of sales and $1 million was recorded in depreciation and amortization expense. In the first half of 2010, we incurred $9 million in restructuring and related costs, of which $7 million was recorded in cost of sales and $2 million was recorded in depreciation and amortization expense.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Amounts related to activities that are part of our restructuring plans are as follows:

(Millions)

December 31,

June 30,

2009

2010

Impact of

2010

Restructuring

Cash

Exchange

Reserve

Restructuring

Reserve

Payments

Rates

Adjustments

Reserve

Severance

)

—

)

Under the terms of our amended and restated senior credit agreement that took effect on June 3, 2010, we are allowed to exclude $60 million of cash charges and expenses, before taxes, related to cost reduction initiatives incurred after June 3, 2010 from the calculation of the financial covenant ratios required under our senior credit facility. As of June 30, 2010, we have excluded $3 million in cumulative allowable charges relating to restructuring initiatives against the $60 million available under the terms of the February 2010 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. 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. We expect that all expenses will be recorded by the end 2010. We plan to hire at other facilities as we move the production from Cozad to those facilities, resulting in a net decrease of approximately 60 positions. During 2009, we recorded $11 million of restructuring and related expenses related to this initiative. For the second quarter of 2010, we recorded $2 million of restructuring and related expenses related to this initiative. For the first six months of 2010, we recorded $5 million of restructuring and related expenses related to this initiative.

(7) 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 condensed consolidated financial statements.

As of June 30, 2010, we have the obligation to remediate or contribute towards the remediation of certain sites, including two existing Superfund sites. At June 30, 2010, our estimated share of environmental remediation costs at these sites was approximately $17 million on a discounted basis. The undiscounted value of the estimated remediation costs was $21 million. For those locations in which the liability was discounted, the weighted average discounted rate used was 2.9 percent. 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.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The $17 million noted above includes $5 million of estimated environmental remediation costs that result from the bankruptcy of Mark IV Industries in 2009. 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 has 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 condensed consolidated results of operations, financial position or cash flows.

We also from time to time are 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 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 become subject to an audit in 12 states of our practices with respect to the payment of unclaimed property to those states. We have practices in place which we believe ensure that we pay unclaimed property as required. We are in the initial stages of this audit, which could cover nearly 25 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. In the early 2000’s we were named in nearly 20,000 complaints, most of which were filed in Mississippi state court and the vast majority of which made no allegations of exposure to asbestos from our product categories. Most of these claims have been dismissed and our current docket of active and inactive cases is less than 500 cases nationwide. A small number of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by The Pullman Company, one of our subsidiaries. The balance of the claims is 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. Accordingly, we presently believe

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

that these asbestos-related claims will not have a material adverse impact on our future consolidated financial condition, results of operations or cash flows.

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

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


	Six Months
	Ended
	June 30,
	2010			2009
	(Millions)

Beginning Balance January 1,	$	32		$	27
Accruals related to product warranties		8			7
Reductions for payments made		(8	)		(6	)

Ending Balance June 30,	$	32		$	28

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


	Three Months		Three Months			Six Months		Six Months
	Ended		Ended			Ended		Ended
	June 30,		June 30,			June 30,		June 30,
	2010		2009			2010		2009
	(Millions Except Share and Per Share Amounts)

Basic earnings (loss) per share —
Net income (loss) attributable to Tenneco Inc.	$	40	$	(33	)	$	47	$	(82	)

Average shares of common stock outstanding		59,142,946		46,660,573			59,033,416		46,668,343

Earnings (loss) per average share of common stock	$	0.68	$	(0.72	)	$	0.79	$	(1.76	)

Diluted earnings (loss) per share —
Net income (loss) attributable to Tenneco Inc.	$	40	$	(33	)	$	47	$	(82	)

Average shares of common stock outstanding		59,142,946		46,660,573			59,033,416		46,668,343
Effect of dilutive securities:
Restricted stock		354,974		—			414,059		—
Stock options		1,501,109		—			1,445,492		—

Average shares of common stock outstanding including dilutive securities		60,999,029		46,660,573			60,892,967		46,668,343

Earnings (loss) per average share of common stock	$	0.66	$	(0.72	)	$	0.77	$	(1.76	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The calculation of diluted earnings per share includes the dilutive effect of 1,501,109 stock options and 354,974 shares of restricted stock for the three months ended June 30, 2010 and 1,445,492 stock options and 414,059 shares of restricted stock for the six months ended June 30, 2010. The calculation of diluted loss per share for the same three month and six month periods in 2009 does not include the dilutive effect of 698,919 and 397,078 stock options or any shares of restricted stock. In addition, for the three month periods ended June 30, 2010 and 2009, options to purchase 2,156,778 and 3,079,921 shares of common stock and 219,614 and 651,291 shares of restricted stock were outstanding, respectively, but not included in the computation of dilutive earnings (loss) per share, because the options were antidilutive. For the six month periods ended June 30, 2010 and 2009, options to purchase, 2,212,395 and 3,381,762 shares of common stock and 160,529 and 651,291 shares of restricted stock were outstanding, respectively, but not included in the computation of diluted earnings (loss) per share as they were antidilutive.

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

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


	Six Months
	Ended June 30,
	2010			2009
	(Millions)

Selling, general and administrative	$	2		$	2

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

Net loss	$	(2	)	$	(2	)

Decrease in basic earnings per share	$	(0.03	)	$	(0.03	)
Decrease in diluted earnings per share	$	(0.03	)	$	(0.03	)

We immediately expense stock options and restricted stock 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 and restricted stock.

As of June 30, 2010, there was approximately $5 million of unrecognized compensation costs related to our stock option awards that we expect to recognize over a weighted average period of 1.1 years.

Compensation expense for restricted stock, restricted stock units, long-term performance units and SARs, was $5 million and $3 million for the six months ended June 30, 2010 and 2009, respectively, and was recorded in selling, general, and administrative expense on the statement of income (loss).

Cash received from stock option exercises during the six months ended June 30, 2010 was $1 million and stock options exercised during the first six months of 2010 would have generated an excess tax benefit of less than $1 million. Cash received from stock option exercises during the six months ended June 30, 2009 was less than $1 million. Stock options exercised during the first six months of 2009 would have generated an excess tax benefit of less than $1 million. 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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

the time the awards are granted which is generally in January of each year, and requires judgment in estimating employee and market behavior.


	Six Months
	Ended
	June 30,
	2010			2009

Stock Options Granted
Weighted average grant date fair value, per share	$	11.76		$	1.31
Weighted average assumptions used:
Expected volatility		75.4	%		82.6	%
Expected lives		4.6			4.5
Risk-free interest rates		2.2	%		1.5	%
Dividend yields		0.0	%		0.0	%

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

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

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


	Six Months Ended June 30, 2010
						Weighted Avg.
	Shares			Weighted Avg.		Remaining		Aggregate
	Under			Exercise		Life in		Intrinsic
	Option			Prices		Years		Value
								(Millions)

Outstanding Stock Options
Outstanding, January 1, 2010		3,425,457		$	13.21		4.6	$	20
Granted		346,774			19.48
Canceled		(15,000	)		10.66
Forfeited		(16,471	)		19.72
Exercised		(55,375	)		6.06				1

Outstanding, March 31, 2010		3,685,385		$	13.89		4.7	$	30
Granted		6,398			24.27
Canceled		—			—
Forfeited		(1,350	)		25.09
Exercised		(32,546	)		11.30				—

Outstanding, June 30, 2010		3,657,887		$	13.93		4.6	$	37

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:


	Six Months Ended
	June 30, 2010
				Weighted Avg.
				Grant Date
	Shares			Fair Value

Nonvested Restricted Shares
Nonvested balance at January 1, 2010		644,052		$	9.85
Granted		240,555			19.48
Vested		(307,981	)		13.82
Forfeited		(3,064	)		4.10

Nonvested balance at March 31, 2010		573,562		$	11.50
Granted		4,099			24.27
Vested		(2,913	)		13.54
Forfeited		(160	)		1.85

Nonvested balance at June 30, 2010		574,588		$	11.59

The fair value of restricted stock grants is equal to the average of the high and low market price of our stock at the date of grant. As of June 30, 2010, approximately $5 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.0 years.

Long-Term Performance Units, Restricted Stock Units and SARs — Long-term performance units, restricted stock units and SARs are paid in cash and recognized as a liability based upon their fair value. As of June 30, 2010, $7 million of unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 2.4 years.

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


	Three Months Ended June 30,
	Pension												Postretirement
	2010						2009						2010			2009
	US			Foreign			US			Foreign			US			US
							(Millions)

Service cost — benefits earned during the period	$	—		$	2		$	1		$	1		$	1		$	—
Interest cost		5			4			5			4			2			2
Expected return on plan assets		(5	)		(5	)		(6	)		(5	)		—			—
Settlement loss		—			—			1			—			—			—
Net amortization:
Actuarial loss		1			1			—			—			1			2
Prior service cost		—			1			—			1			(2	)		(2	)

Net pension and postretirement costs	$	1		$	3		$	1		$	1		$	2		$	2

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


	Six Months Ended June 30,
	Pension												Postretirement
	2010						2009						2010			2009
	US			Foreign			US			Foreign			US			US
							(Millions)

Service cost — benefits earned during the period	$	—		$	3		$	1		$	2		$	1		$	—
Interest cost		10			9			10			8			4			4
Expected return on plan assets		(10	)		(10	)		(11	)		(9	)		—			—
Settlement loss		—			—			2			—			—			—
Net amortization:
Actuarial loss		2			2			1			1			2			3
Prior service cost		—			1			—			1			(3	)		(3	)

Net pension and postretirement costs	$	2		$	5		$	3		$	3		$	4		$	4

For the six months ended June 30, 2010, we made pension contributions of $4 million for our domestic pension plans and $8 million for our foreign pension plans. Based on current actuarial estimates, we believe we will be required to make approximately $42 million in contributions for the remainder of 2010.

We made postretirement contributions of approximately $4 million during the first six months of 2010. Based on current actuarial estimates, we believe we will be required to make approximately $6 million in contributions for the remainder of 2010.

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.

(11) In January 2010, we purchased an additional 20 percent equity interest in our Dalian Walker Gillet Automobile Muffler Co. Ltd. joint venture investment in China for $15 million in cash. As a result of this purchase, our equity ownership percentage of this joint venture investment increased to 80 percent from 60 percent.

(12) In June 2009, the FASB issued new accounting guidance which changes the accounting for transfers of financial assets, by eliminating the concept of a qualifying special purpose entity (QSPE), clarifying and amending the derecognition criteria for a transfer to be accounted for as a sale, amending and clarifying the unit of account eligible for sale accounting and requiring that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of a financial asset or group of financial assets accounted for as a sale. Additionally, all existing QSPE’s must be evaluated for consolidation by reporting entities in accordance with the applicable consolidation guidance. The new accounting guidance requires additional disclosures about a transferor’s continuing involvement with transfers of financial assets accounted for as a sale, the risks inherent in the transferred financial assets that have been retained, and the nature and financial effect of restrictions on the transferor’s assets that continue to be reported in the statement of financial position. 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 have adopted this new accounting guidance on January 1, 2010. Prior to the adoption of this new accounting guidance, our securitized accounts receivable programs qualified for sales accounting treatment. The discount fees charged by the factor banks were recorded as a loss on sale of receivables in our condensed consolidated statements of income (loss). Based on the new accounting rules, effective January 1, 2010, we account for our North American securitization programs as a secured borrowing as we no longer meet the conditions required for sales accounting treatment. Our European securitization programs continue to qualify for

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

sales accounting treatment under these new accounting rules. We have disclosed the impact of this accounting rule change on our condensed consolidated financial statements and added additional disclosures as required under this new accounting guidance in footnote 5 of our notes to 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. The adoption of this new accounting guidance on January 1, 2010 did not have any impact on our condensed consolidated financial statements.

(13) 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 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 15 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 June 30, 2010, we have guaranteed $52 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 the definition of cash equivalents. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $4 million and $5 million at June 30, 2010 and December 31, 2009, respectively. No negotiable financial instruments were held by our European subsidiary as of June 30, 2010 or December 31, 2009, respectively.

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 $11 million and $15 million at June 30, 2010 and December 31, 2009, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $22 million and $15 million at June 30, 2010 and December 31, 2009, respectively. We classify financial instruments received from our OE customers as other current assets if issued by a financial institution of our customers or as customer notes and accounts, net if issued by our customer. At June 30, 2010, we classified $21 million in other current assets and $1 million in customer notes and accounts, net. At December 31, 2009, we classified $15 million in other current assets. Some of our Chinese subsidiaries that issue their own negotiable financial instruments to pay vendors are required to maintain a cash balance if they exceed certain credit limits with the financial institution that guarantees those financial instruments. A restricted cash balance of $1 million was required at one of our Chinese subsidiaries at June 30, 2010. At December 31, 2009, there was no restricted cash balance required.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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.

(14) 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.

The following table summarizes certain Tenneco Inc. segment information:


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

For the Three Months Ended June 30, 2010
Revenues from external customers	$	738	$	606		$	158	$	—		$	1,502
Intersegment revenues		2		42			7		(51	)		—
Income before interest expense, income taxes, and noncontrolling interests		50		30			13		—			93
For the Three Months Ended June 30, 2009
Revenues from external customers	$	468	$	520		$	118	$	—		$	1,106
Intersegment revenues		2		34			3		(39	)		—
Income before interest expense, income taxes, and noncontrolling interests		6		6			5		—			17
At June 30, 2010 and for the Six Months Then Ended
Revenues from external customers	$	1,343	$	1,167		$	308	$	—		$	2,818
Intersegment revenues		5		71			12		(88	)		—
Income before interest expense, income taxes, and noncontrolling interests		86		42			24		—			152
Total assets		1,310		1,254			397		19			2,980
At June 30, 2009 and for the Six Months Then Ended
Revenues from external customers	$	937	$	926		$	210	$	—		$	2,073
Intersegment revenues		3		72			5		(80	)		—
Income before interest expense, income taxes, and noncontrolling interests		10		(11	)		5		—			4
Total assets		1,070		1,354			331		12			2,767

(15) 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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

in 2014, our senior notes due in 2015 and our senior secured notes due 2013 on a joint and several basis. 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 June 30, 2010
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
							(Millions)

Revenues
Net sales and operating revenues —
External	$	677		$	825		$	—		$	—		$	1,502
Affiliated companies		31			126			—			(157	)		—

		708			951			—			(157	)		1,502

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		533			846			—			(157	)		1,222
Engineering, research, and development		17			16			—			—			33
Selling, general, and administrative		36			60			2			—			98
Depreciation and amortization of other intangibles		21			32			—			—			53

		607			954			2			(157	)		1,406

Other income (expense)
Loss on sale of receivables		—			(1	)		—			—			(1	)
Other income (loss)		9			3			1			(15	)		(2	)

		9			2			1			(15	)		(3	)

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		110			(1	)		(1	)		(15	)		93

Interest expense —
External (net of interest capitalized)		(1	)		3			30			—			32
Affiliated companies (net of interest income)		50			(18	)		(32	)		—			—
Income tax expense (benefit)		3			12			—			—			15
Equity in net income (loss) from affiliated companies		(8	)		—			39			(31	)		—

Net Income (loss)		50			2			40			(46	)		46

Less: Net income (loss) attributable to noncontrolling interests		—			6			—			—			6

Net income (loss) attributable to Tenneco Inc.	$	50		$	(4	)	$	40		$	(46	)	$	40

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


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

Revenues
Net sales and operating revenues —
External	$	434		$	672		$	—		$	—		$	1,106
Affiliated companies		18			82			—			(100	)		—

		452			754			—			(100	)		1,106

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		440			573			—			(100	)		913
Engineering, research, and development		8			16			—			—			24
Selling, general, and administrative		25			62			1			—			88
Depreciation and amortization of other intangibles		23			32			—			—			55

		496			683			1			(100	)		1,080

Other income (expense)
Loss on sale of receivables		—			(2	)		—			—			(2	)
Other income (loss)		12			(6	)		1			(14	)		(7	)

		12			(8	)		1			(14	)		(9	)

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		(32	)		63			—			(14	)		17

Interest expense —
External (net of interest capitalized)		(1	)		2			34			—			35
Affiliated companies (net of interest income)		35			(4	)		(31	)		—			—
Income tax expense (benefit)		4			7			—			—			11
Equity in net income (loss) from affiliated companies		53			—			(30	)		(23	)		—

Net income (loss)		(17	)		58			(33	)		(37	)		(29	)

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

Net income (loss) attributable to Tenneco Inc.	$	(17	)	$	54		$	(33	)	$	(37	)	$	(33	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


	For the Six Months Ended June 30, 2010
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass &
	Subsidiaries			Subsidiaries			Company)			Elims			Consolidated
							(Millions)

Revenues
Net sales and operating revenues —
External	$	1,220		$	1,598		$	—		$	—		$	2,818
Affiliated companies		62			235			—			(297	)		—

		1,282			1,833			—			(297	)		2,818

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,052			1,540			—			(297	)		2,295
Engineering, research, and development		26			34			—			—			60
Selling, general, and administrative		73			123			2			—			198
Depreciation and amortization of other intangibles		43			65			—			—			108

		1,194			1,762			2			(297	)		2,661

Other income (expense)
Loss on sale of receivables		—			(2	)		—			—			(2	)
Other income (loss)		9			2			1			(15	)		(3	)

		9			—			1			(15	)		(5	)

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		97			71			(1	)		(15	)		152

Interest expense —
External (net of interest capitalized)		(1	)		4			61			—			64
Affiliated companies (net of interest income)		87			(23	)		(64	)		—			—
Income tax expense (benefit)		4			26			—			—			30
Equity in net income (loss) from affiliated companies		47			—			45			(92	)		—

Net Income (loss)		54			64			47			(107	)		58

Less: Net income (loss) attributable to noncontrolling interests		—			11			—			—			11

Net income (loss) attributable to Tenneco Inc.	$	54		$	53		$	47		$	(107	)	$	47

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF INCOME (LOSS)


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

Revenues
Net sales and operating revenues —
External	$	857		$	1,216		$	—		$	—		$	2,073
Affiliated companies		40			170			—			(210	)		—

		897			1,386			—			(210	)		2,073

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		801			1,149			—			(210	)		1,740
Engineering, research, and development		14			31			—			—			45
Selling, general, and administrative		49			115			2			—			166
Depreciation and amortization of other intangibles		45			62			—			—			107

		909			1,357			2			(210	)		2,058

Other income (expense)
Loss on sale of receivables		—			(4	)		—			—			(4	)
Other income (loss)		(3	)		9			1			(14	)		(7	)

		(3	)		5			1			(14	)		(11	)

Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		(15	)		34			(1	)		(14	)		4

Interest expense —
External (net of interest capitalized)		(1	)		2			65			—			66
Affiliated companies (net of interest income)		67			(6	)		(61	)		—			—
Income tax expense (benefit)		5			9			—			—			14
Equity in net income (loss) from affiliated companies		21			—			(77	)		56			—

Net income (loss)		(65	)		29			(82	)		42			(76	)

Less: Net income (loss) attributable to noncontrolling interests		—			6			—			—			6

Net income (loss) attributable to Tenneco Inc.	$	(65	)	$	23		$	(82	)	$	42		$	(82	)

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

BALANCE SHEET


	June 30, 2010
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims			Consolidated
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	2		$	144		$	—		$	—		$	146
Receivables, net		591			1,012			39			(787	)		855
Inventories		193			278			—			—			471
Deferred income taxes		101			—			—			(54	)		47
Prepayments and other		23			130			1			(1	)		153

Total current assets		910			1,564			40			(842	)		1,672

Other assets:
Investment in affiliated companies		400			—			572			(972	)		—
Notes and advances receivable from affiliates		3,814			593			5,782			(10,189	)		—
Long-term receivables, net		2			7			—			—			9
Goodwill		22			63			—			—			85
Intangibles, net		15			17			—			—			32
Deferred income taxes		66			20			28			(28	)		86
Other		28			45			30			—			103

		4,347			745			6,412			(11,189	)		315

Plant, property, and equipment, at cost		991			1,895			—			—			2,886
Less — Accumulated depreciation and amortization		(696	)		(1,197	)		—			—			(1,893	)

		295			698			—			—			993

Total assets	$	5,552		$	3,007		$	6,452		$	(12,031	)	$	2,980


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)
Short-term debt — non-affiliated	$	—		$	64		$	1		$	—		$	65
Short-term debt — affiliated		143			502			10			(655	)		—
Trade payables		399			674			—			(119	)		954
Accrued taxes		18			23			—			(1	)		40
Other		157			192			45			(67	)		327

Total current liabilities		717			1,455			56			(842	)		1,386

Long-term debt — non-affiliated		—			11			1,178			—			1,189
Long-term debt — affiliated		4,539			346			5,304			(10,189	)		—
Deferred income taxes		28			57			—			(28	)		57
Postretirement benefits and other liabilities		325			66			—			4			395
Commitments and contingencies

Total liabilities		5,609			1,935			6,538			(11,055	)		3,027

Redeemable noncontrolling interests		—			10			—			—			10

Tenneco Inc. Shareholders’ equity		(57	)		1,033			(86	)		(976	)		(86	)

Noncontrolling interests		—			29			—			—			29

Total equity		(57	)		1,062			(86	)		(976	)		(57	)

Total liabilities, redeemable noncontrolling interests and equity	$	5,552		$	3,007		$	6,452		$	(12,031	)	$	2,980

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

BALANCE SHEET


	December 31, 2009
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims			Consolidated
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	20		$	147		$	—		$	—		$	167
Receivables, net		289			936			39			(668	)		596
Inventories		161			267			—			—			428
Deferred income taxes		—			69			—			(34	)		35
Prepayments and other		43			124			—			—			167

Total current assets		513			1,543			39			(702	)		1,393

Other assets:
Investment in affiliated companies		591			—			632			(1,223	)		—
Notes and advances receivable from affiliates		3,872			308			5,818			(9,998	)		—
Long-term receivables, net		3			5			—			—			8
Goodwill		22			67			—			—			89
Intangibles, net		16			14			—			—			30
Deferred income taxes		75			25			15			(15	)		100
Other		28			58			25			—			111

		4,607			477			6,490			(11,236	)		338

Plant, property, and equipment, at cost		1,005			2,094			—			—			3,099
Less — Accumulated depreciation and amortization		(696	)		(1,293	)		—			—			(1,989	)

		309			801			—			—			1,110

Total assets	$	5,429		$	2,821		$	6,529		$	(11,938	)	$	2,841


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)
Short-term debt — non-affiliated	$	—		$	74		$	1		$	—		$	75
Short-term debt — affiliated		302			229			10			(541	)		—
Trade payables		270			609			—			(113	)		766
Accrued taxes		6			30			—			—			36
Other		167			166			39			(48	)		324

Total current liabilities		745			1,108			50			(702	)		1,201

Long-term debt — non-affiliated		—			8			1,137			—			1,145
Long-term debt — affiliated		4,374			261			5,363			(9,998	)		—
Deferred income taxes		15			66			—			(15	)		66
Postretirement benefits and other liabilities		326			81			—			4			411
Commitments and contingencies

Total liabilities		5,460			1,524			6,550			(10,711	)		2,823

Redeemable noncontrolling interests		—			7			—			—			7

Tenneco Inc. Shareholders’ equity		(31	)		1,258			(21	)		(1,227	)		(21	)

Noncontrolling interests		—			32			—			—			32

Total equity		(31	)		1,290			(21	)		(1,227	)		11

Total liabilities, redeemable noncontrolling interests and equity	$	5,429		$	2,821		$	6,529		$	(11,938	)	$	2,841

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF CASH FLOWS


	Three Months Ended June 30, 2010
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	(91	)	$	263		$	(68	)	$	—	$	104

Investing Activities
Cash payments for plant, property, and equipment		(14	)		(20	)		—			—		(34	)
Cash payments for software related intangible assets		(4	)		(2	)		—			—		(6	)
Investments and other		—			1			—			—		1

Net cash used by investing activities		(18	)		(21	)		—			—		(39	)

Financing Activities
Issuance of long-term debt		—			5			150			—		155
Retirement of long-term debt		—			(1	)		(128	)		—		(129	)
Debt issuance cost on long-term debt		—			—			(9	)		—		(9	)
Increase (decrease) in bank overdrafts		—			3			—			—		3
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivables		—			(7	)		25			—		18
Net increase (decrease) in short-term borrowings secured by accounts receivables		—			(126	)		—			—		(126	)
Intercompany dividends and net increase (decrease) in intercompany obligations		111			(141	)		30			—		—
Distribution to noncontrolling interests partners		—			(10	)		—			—		(10	)

Net cash provided (used) by financing activities		111			(277	)		68			—		(98	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			(14	)		—			—		(14	)

Increase (decrease) in cash and cash equivalents		2			(49	)		—			—		(47	)
Cash and cash equivalents, April 1		—			193			—			—		193

Cash and cash equivalents, June 30 (Note)	$	2		$	144		$	—		$	—	$	146


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


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

Operating Activities
Net cash provided (used) by operating activities	$	103		$	84		$	(75	)	$	—	$	112

Investing Activities
Cash payment for plant, property, and equipment		(8	)		(22	)		—			—		(30	)
Cash payment for software related intangible assets		—			(2	)		—			—		(2	)

Net cash used by investing activities		(8	)		(24	)		—			—		(32	)

Financing Activities
Retirement of long-term debt		—			(1	)		(6	)		—		(7	)
Increase (decrease) in bank overdrafts		—			(11	)		—			—		(11	)
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			1			(63	)		—		(62	)
Intercompany dividends and net increase (decrease) in intercompany obligations		(103	)		(41	)		144			—		—
Distribution to noncontrolling interest partners		—			(10	)		—			—		(10	)

Net cash provided (used) by financing activities		(103	)		(62	)		75			—		(90	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			8			—			—		8

Increase (decrease) in cash and cash equivalents		(8	)		6			—			—		(2	)
Cash and cash equivalents, April 1		8			105			—			—		113

Cash and cash equivalents, June 30 (Note)	$	—		$	111		$	—		$	—	$	111


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


	Six Months Ended June 30, 2010
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	(63	)	$	227		$	(117	)	$	—	$	47

Investing Activities
Proceeds from sale of assets		—			1			—			—		1
Cash payments for plant, property, and equipment		(29	)		(43	)		—			—		(72	)
Cash payments for software related intangible assets		(5	)		(3	)		—			—		(8	)
Investments and other		—			2			—			—		2

Net cash used by investing activities		(34	)		(43	)		—			—		(77	)

Financing Activities
Issuance of long-term debt		—			5			150			—		155
Retirement of long-term debt		—			(2	)		(135	)		—		(137	)
Debt issuance cost on long-term debt		—			—			(9	)		—		(9	)
Increase (decrease) in bank overdrafts		—			2			—			—		2
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			(5	)		25			—		20
Intercompany dividends and net increase (decrease) in intercompany obligations		79			(165	)		86			—		—
Distribution to noncontrolling interests partners		—			(11	)		—			—		(11	)

Net cash provided (used) by financing activities		79			(176	)		117			—		20

Effect of foreign exchange rate changes on cash and cash equivalents		—			(11	)		—			—		(11	)

Increase (decrease) in cash and cash equivalents		(18	)		(3	)		—			—		(21	)
Cash and cash equivalents, January 1		20			147			—			—		167

Cash and cash equivalents, June 30 (Note)	$	2		$	144		$	—		$	—	$	146


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


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

Operating Activities
Net cash provided (used) by operating activities	$	40		$	128		$	(137	)	$	—	$	31

Investing Activities
Proceeds from the sale of assets		—			2			—			—		2
Cash payment for plant, property, and equipment		(24	)		(42	)		—			—		(66	)
Cash payment for software related intangible assets		(1	)		(3	)		—			—		(4	)
Acquisition of business (net of cash acquired)		—			1			—			—		1

Net cash used by investing activities		(25	)		(42	)		—			—		(67	)

Financing Activities
Issuance of long-term debt		—			—			2			—		2
Debt issuance cost of long-term debt		—			—			(8	)		—		(8	)
Retirement of long-term debt		—			(2	)		(6	)		—		(8	)
Increase (decrease) in bank overdrafts		—			(24	)		—			—		(24	)
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			15			60			—		75
Intercompany dividends and net increase (decrease) in intercompany obligations		(31	)		(58	)		89			—		—
Distribution to noncontrolling interest partners		—			(10	)		—			—		(10	)

Net cash provided (used) by financing activities		(31	)		(79	)		137			—		27

Effect of foreign exchange rate changes on cash and cash equivalents		—			(6	)		—			—		(6	)

Increase (decrease) in cash and cash equivalents		(16	)		1			—			—		(15	)
Cash and cash equivalents, January 1		16			110			—			—		126

Cash and cash equivalents, June 30 (Note)	$	—		$	111		$	—		$	—	$	111


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


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

As you read the following review of our financial condition and results of operations, you should also read our condensed consolidated financial statements and related notes beginning on page 6.

Executive Summary

We are one of the world’s leading manufacturers of automotive emission control and ride control products and systems. We serve both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe^®, Rancho^®, Clevite