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, 2011
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 (State or other jurisdiction of incorporation or organization)		76-0515284 (I.R.S. Employer Identification No.)

500 North Field Drive, Lake Forest, Illinois (Address of principal executive offices)		60045 (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 þ No o

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


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

(Do not check if a smaller reporting company)

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

Yes o No þ

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

Common Stock, par value $0.01 per share: 60,207,236 shares outstanding as of July 29, 2011.

TABLE OF CONTENTS


	Page

Part I — Financial Information
Item 1. Financial Statements (Unaudited)		4
Tenneco Inc. and Consolidated Subsidiaries —
Report of Independent Registered Public Accounting Firm		4
Condensed Consolidated Statements of Income		5
Condensed Consolidated Balance Sheets		6
Condensed Consolidated Statements of Cash Flows		7
Condensed Consolidated Statements of Changes in Shareholders’ Equity		8
Condensed Consolidated Statements of Comprehensive Income (Loss)		9
Notes to Condensed Consolidated Financial Statements		11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38
Item 3. Quantitative and Qualitative Disclosures About Market Risk		67
Item 4. Controls and Procedures		68
Part II — Other Information
Item 1. Legal Proceedings		*
Item 1A. Risk Factors		69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		69
Item 3. Defaults Upon Senior Securities		*
Item 4. Removed and Reserved		*
Item 5. Other Information		*
Item 6. Exhibits		71
EX-12
EX-15.1
EX-31.1
EX-31.2
EX-32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


*		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;

	•	our ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices, including any impact on our ability to source and procure such items and services due to supply disruptions that may be caused by the recent earthquake and tsunami in Japan;

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

	•	changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from light trucks, which tend to be higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply contracts;

	•	changes in automotive and commercial vehicle 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 automobile and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes for the applicable program over its life);

	•	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;

	•	industrywide strikes, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers (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 negative impact of higher fuel prices on transportation and logistics costs, raw material costs and discretionary purchases of vehicles or aftermarket products;

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

	•	our ability to successfully execute cash management, restructuring and other cost reduction plans and to realize anticipated benefits from these plans;

	•	costs related to product warranties and other customer satisfaction actions;


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

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

	•	the cost and outcome of existing and any future legal proceedings, including, but not limited to, proceedings against us or our customers relating to intellectual property rights;

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

	•	customer acceptance of new products;

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

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

	•	our ability to successfully integrate any acquisitions that we complete and effectively manage our joint ventures and other third-party partnerships;

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

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

	•	any changes by International Standards Organization (ISO), Technical Specifications (TS) and other such committees in their certification processes for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market;

	•	the impact of changes in and compliance with laws and regulations, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved, the implementation of mandated timelines for worldwide emission regulation, which could impact the demand for certain of our products, 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 or other vehicle 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, 2010, 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, 2011, and the related condensed consolidated statements of income, of cash flows, and of comprehensive income (loss) for the three-month and six-month periods ended June 30, 2011 and 2010, and of changes in shareholders’ equity for the six-month periods ended June 30, 2011 and 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.

We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet as of December 31, 2010, and the related consolidated statements of income (loss), of cash flows, of changes in shareholders’ equity and of comprehensive income (loss) for the year then ended (not presented herein), and in our report dated February 25, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Chicago, Illinois

August 5, 2011

The “Report of Independent Registered Public Accounting Firm” included above is not a “report” or “part of a Registration Statement” prepared or certified by an independent accountant within the meaning of Sections 7 and 11 of the Securities Act of 1933, and the accountants’ Section 11 liability does not extend to such report.

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30,			June 30,			June 30,			June 30,
	2011			2010			2011			2010
	(Millions Except Share and Per Share Amounts)

Revenues
Net sales and operating revenues	$	1,888		$	1,502		$	3,648		$	2,818

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,565			1,222			3,031			2,295
Engineering, research, and development		35			33			70			60
Selling, general, and administrative		118			98			227			198
Depreciation and amortization of other intangibles		54			53			105			108

		1,772			1,406			3,433			2,661

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

		(3	)		(3	)		(8	)		(5	)

Earnings before interest expense, income taxes, and noncontrolling interests		113			93			207			152
Interest expense (net of interest capitalized of $1 million in each of the three months ended June 30, 2011 and 2010, respectively and $2 million in each of the six months ended June 30, 2011 and 2010, respectively)		26			32			54			64
Income tax expense		30			15			44			30

Net income		57			46			109			58

Less: Net income attributable to noncontrolling interests		7			6			12			11

Net income attributable to Tenneco Inc.	$	50		$	40		$	97		$	47

Earnings per share
Weighted average shares of common stock outstanding —
Basic		59,980,866			59,142,946			59,901,929			59,033,416
Diluted		61,813,474			60,999,029			61,913,337			60,892,967
Basic earnings per share of common stock	$	0.84		$	0.68		$	1.62		$	0.79
Diluted earnings per share of common stock	$	0.81		$	0.66		$	1.56		$	0.77

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

TENNECO INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


	June 30,			December 31,
	2011			2010
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	161		$	233
Receivables —
Customer notes and accounts, net		1,091			796
Other		45			30
Inventories —
Finished goods		262			222
Work in process		179			164
Raw materials		138			118
Materials and supplies		47			43
Deferred income taxes		42			38
Prepayments and other		177			146

Total current assets		2,142			1,790

Other assets:
Long-term receivables, net		12			9
Goodwill		91			89
Intangibles, net		34			32
Deferred income taxes		92			92
Other		104			105

		333			327

Plant, property, and equipment, at cost		3,282			3,109
Less — Accumulated depreciation and amortization		(2,199	)		(2,059	)

		1,083			1,050

Total assets	$	3,558		$	3,167


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)	$	67		$	63
Trade payables		1,208			1,048
Accrued taxes		55			51
Accrued interest		13			13
Accrued liabilities		265			227
Other		62			66

Total current liabilities		1,670			1,468

Long-term debt		1,227			1,160
Deferred income taxes		58			56
Postretirement benefits		297			311
Deferred credits and other liabilities		121			125
Commitments and contingencies

Total liabilities		3,373			3,120

Redeemable noncontrolling interests		10			12

Tenneco Inc. Shareholders’ equity:
Common stock		1			1
Premium on common stock and other capital surplus		3,011			3,008
Accumulated other comprehensive loss		(182	)		(237	)
Retained earnings (accumulated deficit)		(2,439	)		(2,536	)

		391			236
Less — Shares held as treasury stock, at cost		251			240

Total Tenneco Inc. shareholders’ equity		140			(4	)

Noncontrolling interests		35			39

Total equity		175			35

Total liabilities, redeemable noncontrolling interests and equity	$	3,558		$	3,167

The accompanying notes to the 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,
	2011			2010			2011			2010
				(Millions)

Operating Activities
Net income	$	57		$	46		$	109		$	58
Adjustments to reconcile net income to cash provided (used) by operating activities —
Depreciation and amortization of other intangibles		54			53			105			108
Deferred income taxes		—			5			(5	)		2
Stock-based compensation		2			2			4			5
Loss on sale of assets		1			1			1			3
Changes in components of working capital —
(Increase) decrease in receivables		(39	)		(102	)		(290	)		(293	)
(Increase) decrease in inventories		17			(27	)		(60	)		(71	)
(Increase) decrease in prepayments and other current assets		(9	)		9			(24	)		2
Increase (decrease) in payables		(5	)		112			134			232
Increase (decrease) in accrued taxes		(8	)		(6	)		—			1
Increase (decrease) in accrued interest		(8	)		(8	)		—			1
Increase (decrease) in other current liabilities		16			25			17			19
Changes in long-term assets		—			2			(3	)		1
Changes in long-term liabilities		(9	)		(10	)		(21	)		(21	)
Other		(2	)		2			(3	)		—

Net cash provided (used) by operating activities		67			104			(36	)		47

Investing Activities
Proceeds from the sale of assets		—			—			4			1
Cash payments for plant, property, and equipment		(49	)		(34	)		(95	)		(72	)
Cash payments for software related intangible assets		(3	)		(6	)		(6	)		(8	)
Other		—			1			—			2

Net cash used by investing activities		(52	)		(39	)		(97	)		(77	)

Financing Activities
Capital contribution from noncontrolling interest partner		1			—			1			—
Purchase of common stock under the share repurchase program		(11	)		—			(11	)		—
Issuance of long-term debt		4			155			4			155
Debt issuance cost of long-term debt		(1	)		(9	)		(1	)		(9	)
Retirement of long-term debt		(1	)		(129	)		(23	)		(137	)
Increase (decrease) in bank overdrafts		1			3			8			2
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		41			18			88			20
Net decrease in short-term borrowings secured by accounts receivable		(82	)		(126	)		—			—
Distributions to noncontrolling interest partners		(10	)		(10	)		(10	)		(11	)

Net cash provided (used) by financing activities		(58	)		(98	)		56			20

Effect of foreign exchange rate changes on cash and cash equivalents		5			(14	)		5			(11	)

Decrease in cash and cash equivalents		(38	)		(47	)		(72	)		(21	)
Cash and cash equivalents, April 1 and January 1, respectively		199			193			233			167

Cash and cash equivalents, June 30 (Note)	$	161		$	146		$	161		$	146

Supplemental Cash Flow Information
Cash paid during the period for interest	$	34		$	39		$	53		$	61
Cash paid during the period for income taxes (net of refunds)		23			16			33			24
Non-cash Investing and Financing Activities
Period end balance of trade payables for plant, property, and equipment	$	22		$	11		$	22		$	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 the 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,
	2011					2010
	Shares		Amount			Shares		Amount
	(Millions Except Share Amounts)

Tenneco Inc. Shareholders:
Common Stock
Balance January 1		61,541,760	$	1			60,789,739	$	1
Issued pursuant to benefit plans		53,302		—			141,246		—
Stock options exercised		207,790		—			92,921		—

Balance June 30		61,802,852		1			61,023,906		1

Premium on Common Stock and Other Capital Surplus
Balance January 1				3,008					3,005
Purchase of additional noncontrolling equity interest				—					(11	)
Premium on common stock issued pursuant to benefit plans				3					5

Balance June 30				3,011					2,999

Accumulated Other Comprehensive Loss
Balance January 1				(237	)				(212	)
Other comprehensive income (loss)				55					(106	)

Balance June 30				(182	)				(318	)

Retained Earnings (Accumulated Deficit)
Balance January 1				(2,536	)				(2,575	)
Net income attributable to Tenneco Inc.				97					47

Balance June 30				(2,439	)				(2,528	)

Less — Common Stock Held as Treasury Stock, at Cost
Balance January 1		1,294,692		240			1,294,692		240
Purchase of common stock through stock repurchase program		270,500		11			—		—

Balance June 30		1,565,192		251			1,294,692		240

Total Tenneco Inc. shareholders’ equity			$	140				$	(86	)

Noncontrolling Interests:
Balance January 1			$	39				$	32
Net income				10					7
Sale of twenty percent equity interest to Tenneco Inc.				—					(4	)
Other comprehensive income (loss)				—					2
Dividend declared				(14	)				(8	)

Balance June 30			$	35				$	29

Total equity			$	175				$	(57	)

The accompanying notes to the 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 30, 2011
	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				$	50				$	7					$	57

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance April 1	$	38				$	6					$	44
Translation of foreign currency statements		21			21		(1	)		(1	)		20			20

Balance June 30		59					5						64

Additional Liability for Pension Benefits
Balance April 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	$	(187	)			$	5					$	(182	)

Other Comprehensive Income (Loss)					24					(1	)					23

Comprehensive Income				$	74				$	6					$	80


	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	)

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

of these statements of comprehensive income (loss).

TENNECO INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)


	Six Months Ended June 30, 2011
	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				$	97			$	12				$	109

Accumulated Other Comprehensive Income (Loss)
Cumulative Translation Adjustment
Balance January 1	$	8				$	5			$	13
Translation of foreign currency statements		51			51		—		—		51			51

Balance June 30		59					5				64

Additional Liability for Pension Benefits
Balance January 1		(250	)				—				(250	)

Additional Liability for Pension and Postretirement Benefits, net of tax		4			4						4			4

Balance June 30		(246	)				—				(246	)

Balance June 30	$	(187	)			$	5			$	(182	)

Other Comprehensive Income					55				—					55

Comprehensive Income				$	152			$	12				$	164


	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	)

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

of these statements of comprehensive income (loss).

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


(1)	Consolidation and Presentation

As you read the accompanying financial statements you should also read our Annual Report on Form 10-K for the year ended December 31, 2010.

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)	Financial Instruments

The carrying and estimated fair values of our financial instruments by class at June 30, 2011 and December 31, 2010 were as follows:


	June 30, 2011				December 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Millions)

Long-term debt (including current maturities)	$	1,230	$	1,265	$	1,162	$	1,201
Instruments with off-balance sheet risk:
Foreign exchange forward contracts		—		—		2		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 the carrying amount.

Long-term Debt — The fair value of our public fixed rate senior 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 derivative financial instruments, principally foreign currency forward purchase and sales contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We manage counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. We do not enter into derivative financial instruments for speculative purposes. The fair value of our foreign currency forward contracts is based on an internally developed model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. We record the change in fair value of these foreign exchange forward contracts as part of currency gains (losses) within cost of sales in the condensed consolidated statements of income. The fair value of foreign exchange forward contracts are recorded in

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

prepayments and other current assets or other current liabilities in the condensed consolidated balance sheet. The fair value of our foreign exchange forward contracts, presented on a gross basis by derivative contract at June 30, 2011 and December 31, 2010, respectively, was as follows:


	Fair Value of Derivative Instruments
	June 30, 2011						December 31, 2010
	Asset		Liability				Asset		Liability
	Derivatives		Derivatives		Total		Derivatives		Derivatives		Total
	(Millions)

Foreign exchange forward contracts	$	—	$	—	$	—	$	2	$	—	$	2

The fair value of our recurring financial assets at June 30, 2011 and December 31, 2010, respectively, are as follows:

June 30, 2011

December 31, 2010

Level 1

Level 2

Level 3

Level 1

Level 2

Level 3

(Millions)

Financial Assets:

Foreign exchange forward contracts

n/a

—

n/a

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

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

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

Level 3 — Unobservable inputs based on our own assumptions.

The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of June 30, 2011 (all of which mature in 2011):


		Notional Amount
		in Foreign Currency
		(Millions)

Australian dollars	—Purchase		2
British pounds	—Purchase		4
European euro	—Sell		(12	)
Japanese Yen	—Purchase		532
South African rand	—Purchase		164
U.S. dollars	—Purchase		14
	—Sell		(22	)
Other	—Purchase		1
	—Sell		(13	)


(3)	Long-Term Debt and Financing Arrangements

Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries.

On 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, 2011, the senior credit facility

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 earlier on December 15, 2013, if our $130 million 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 two revolving credit facilities without premium or penalty.

As of June 30, 2011, 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. We are required to make quarterly principal payments of $375 thousand on the term loan B, beginning on September 20, 2010 through March 31, 2016 with a final payment of $141 million due June 3, 2016. The tranche B-1 letter of credit/revolving loan facility requires repayment by March 2014. We can enter into 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 enter into revolving loans under the facility. We pay the tranche B-1 lenders interest equal to the London Interbank Offered Rate (“LIBOR”) plus a margin on all borrowings under the facility. Funds deposited with the administrative agent by the lenders and not borrowed by the Company earn interest at an annual rate approximately equal to LIBOR less 25 basis points.

The financial ratios required under the senior credit facility for the remainder of 2011 and beyond are set forth below. As of June 30, 2011, 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, 2011		3.50		2.55
December 31, 2011		3.50		2.55
Each quarter thereafter		3.50		2.75

Beginning June 3, 2010, our term loan B and revolving credit facility bear interest at an annual rate equal to, at our option, either (i) LIBOR 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 for the term loan B 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 these borrowings for extending lenders will increase by 50 basis points following each fiscal quarter for which our consolidated net leverage ratio is greater than or equal to 4.00 and will be further increased by an additional 50 basis points following each fiscal quarter for which the consolidated net leverage ratio is greater than or equal to 5.00. Our consolidated net leverage ratio was 2.17 and 2.24 as of June 30, 2011 and December 31, 2010, respectively. As a result, the margin we pay on these borrowings was reduced in February 2011 by 25 basis points for extending lenders. However, since the ratio increased during the first quarter to 2.32, the margin we pay on borrowings increased by 25 basis points beginning in May 2011 and will remain at such level until August 2011 when it will decrease again by 25 basis points.

The borrowings under our tranche B-1 letter of credit/revolving loan facility incur interest at an annual rate equal to, at our option, either (i) LIBOR plus a margin of 500 basis points, or (ii) a rate consisting of the greater of

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

(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. The rate will increase by 50 basis points following each fiscal quarter for which our consolidated net leverage ratio is greater than or equal to 5.00.

At June 30, 2011, of the $752 million available under the two revolving credit facilities within our senior secured credit facility, we had unused borrowing capacity of $614 million with $85 million in outstanding borrowings and $53 million in letters of credit outstanding. As of June 30, 2011, our outstanding debt also included $250 million of 81/8 percent senior notes due November 15, 2015, $149 million term loan B due June 3, 2016, $225 million of 73/4 percent senior notes due August 15, 2018, $500 million of 67/8 percent senior notes due December 15, 2020, and $85 million of other debt.

On December 9, 2010, we commenced a cash tender offer of our outstanding $500 million 85/8 percent senior subordinated notes due in 2014 and a consent solicitation to amend the indenture governing these notes. The consent solicitation expired on December 22, 2010 and the cash tender offer expired on January 6, 2011. On December 23, 2010, we issued $500 million of 67/8 percent senior notes due December 15, 2020 in a private offering. The net proceeds of this transaction, together with cash and available liquidity, were used to finance the purchase of our 85/8 percent senior subordinated notes pursuant to the tender offer at a price of 103.25 percent of the principal amount, plus accrued and unpaid interest for holders who tendered prior to the expiration of the consent solicitation, and 100.25 percent of the principal amount, plus accrued and unpaid interest, for other participants. On January 7, 2011, we redeemed all remaining outstanding $20 million of senior subordinated notes that were not previously tendered, at a price of 102.875 percent of the principal amount, plus accrued and unpaid interest. To facilitate these transactions, we amended our senior credit agreement to permit us to refinance our senior subordinated notes with new senior unsecured notes. We did not incur any fee in connection with this amendment. The new notes are general senior obligations of Tenneco Inc. and are not secured by assets of Tenneco Inc. or any of our subsidiaries that guarantee the new notes. We recorded $20 million of pre-tax charges in December 2010 and an additional $1 million of pre-tax charges in the first quarter of 2011 related to our repurchase and redemption of our 85/8 percent senior subordinated notes. On March 14, 2011, we completed an offer to exchange the $500 million of 67/8 percent senior notes due in 2020 which have been registered under the Securities Act of 1933, for and in replacement of all outstanding unregistered 67/8 percent senior notes due in 2020. We received tenders from holders of all $500 million of the aggregate outstanding amount of the original notes. The terms of the new notes are substantially identical to the terms of the original notes for which they were exchanged, except that the transfer restrictions and the registration rights applicable to the original notes generally do not apply to the new notes.

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, were 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 completed the redemption on September 2, 2010 at a price of 101.708 percent of the principal amount, plus accrued and unpaid interest. We recorded $5 million of expense related to our redemption of our 101/4 percent senior secured notes in the third quarter of 2010. The new notes are general senior obligations of Tenneco Inc. and are not secured by assets of Tenneco Inc. or any of our subsidiaries that guarantee the new notes. On February 14, 2011, we completed an offer to exchange the $225 million of 73/4 percent senior notes due in 2018 which have been registered under the Securities Act of 1933, for and in replacement of all outstanding unregistered 73/4 percent senior notes due in 2018. We received tenders from holders of all $225 million of the aggregate outstanding amount of the original notes. The terms of the new notes are substantially identical to the terms of the original notes for which they were exchanged, except that the transfer restrictions and the registration rights applicable to the original notes generally do not apply to the new notes.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


(4)	Income Taxes

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 and $44 million in the three month and six month periods ending June 30, 2011, respectively. The tax expense recorded for the first six months of 2011 differs from the expense that would be recorded using a U.S. Federal statutory rate of 35 percent due to a net tax benefit of $11 million primarily related to U.S. taxable income with no associated tax expense due to our net operating loss (“NOL”) carryforward and income generated in lower tax rate jurisdictions, partially offset by adjustments to prior year income tax estimates and the impact of recording a valuation allowance against the tax benefit for losses in certain foreign jurisdictions. 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 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 tax years ending in 2020 through 2029. The state NOLs expire in various tax 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)	Accounts Receivable Securitization

We securitize some of our accounts receivable on a limited recourse basis in North America and Europe. As servicer under these accounts receivable securitization programs, we are responsible for performing all accounts receivable administration functions for these securitized financial assets including collections and processing of customer invoice adjustments. In North America, we have an accounts receivable securitization program with three commercial banks comprised of a first priority facility and a second priority facility. We securitize original

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

equipment and aftermarket receivables on a daily basis under the bank program. In March 2011, the North American program was amended and extended to March 23, 2012. The first priority facility continues to provide financing of up to $110 million and the second priority facility, which is subordinated to the first priority facility, continues to provide up to an additional $40 million of financing. Both facilities monetize accounts receivable generated in the U.S. and Canada that meet certain eligibility requirements, and the second priority facility also monetizes certain accounts receivable generated in the U.S. or Canada that would otherwise be ineligible under the first priority securitization facility. The amendments to the North American program expand the trade receivables that are eligible for purchase under the program and decrease the margin we pay to our banks. We had no outstanding third party investments in our securitized accounts receivable under the North American program at June 30, 2011 and December 31, 2010, respectively.

Each facility contains customary covenants for financings of this type, including restrictions related to liens, payments, mergers 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 with regional banks in Europe. 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. The amount of outstanding third party investments in our securitized accounts receivable in Europe was $136 million and $91 million at June 30, 2011 and December 31, 2010, respectively.

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 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.

In our North American accounts receivable securitization programs, we transfer a partial interest in a pool of receivables and the interest that we retain is subordinate to the transferred interest. Accordingly, we account for our North American securitization program as a secured borrowing. In our European programs, we transfer accounts receivables in their entirety to the acquiring entities and satisfy all of the conditions established under ASC Topic 860, “Transfers and Servicing,” to report the transfer of financial assets in their entirety as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under our European securitization programs approximates the fair value of such receivables. We recognized $1 million in interest expense in each of the three month periods ended June 30, 2011 and 2010, respectively, and $2 million for each of the six month periods ended June 30, 2011 and 2010 respectively, relating to our North American securitization program. In addition, we recognized a loss of $2 million and $1 million in the three month periods ended June 30, 2011 and 2010, respectively, and $3 million and $2 million for the six month periods ended June 30, 2011 and 2010, respectively, on the sale of trade accounts receivable in our European accounts receivable securitization programs, representing the discount from book values at which these receivables were sold to our banks. The discount rate varies based on funding costs incurred by our banks, which averaged approximately three percent and five percent during the first half of 2011 and 2010, respectively.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


(6)	Restructuring and Other Charges

Over the past several years, we have adopted plans to restructure portions of our operations. These plans were approved by our Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. In 2010, we incurred $19 million in restructuring and related costs, of which $14 million was recorded in cost of sales and $5 million was recorded in depreciation and amortization expense. In the second quarter of 2011, we incurred $2 million in restructuring and related costs, all of which was recorded in cost of sales. For the first six months of 2011, we incurred $3 million in restructuring and related costs, primarily related to headcount reductions in Europe and the closure of our ride control plant in Cozad, Nebraska, all of which was recorded in cost of sales.

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

December 31,

June 30,

2010

2011

Impact of

2011

Restructuring

Cash

Exchange

Reserve

Restructuring

Reserve

Payments

Rates

Adjustments

Reserve

(Millions)

Severance

)

—

Under the terms of our amended and extended 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, 2011, we have excluded $12 million in cumulative allowable charges relating to restructuring initiatives against the $60 million available under the terms of the senior credit facility.

On September 22, 2009, we announced that we will be closing our original equipment ride control plant in Cozad, Nebraska. Approximately 500 positions are being eliminated at the Cozad plant. As of June 30, 2011, 95 percent of those positions have been eliminated. We are hiring at other facilities as we move production from Cozad to those facilities, which will result in a net decrease of approximately 60 positions. We originally planned to have completed the closing of this facility by the end of 2010, however, as a result of increased customer demand and to better optimize the transfer of some of the manufacturing activities, we are supplying certain of our other facilities with components from Cozad to support this increased demand until capacity adjustments are completed at our other facilities. During 2009 and 2010, we recorded $11 million and $10 million, respectively, of restructuring and related expenses related to this initiative, of which approximately $16 million represents cash expenditures.


(7)	Environmental Matters, Litigation and Product Warranties

We are involved in environmental remediation matters, legal proceedings, claims, investigations and warranty obligations that are incidental to the conduct of our business and create the potential for contingent losses. We accrue for potential contingent losses when our review of available facts indicates that it is probable a loss has been incurred and the amount of the loss is reasonably estimable. Each quarter we assess our loss contingencies based on 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 and record adjustments to these reserves as required. As an example, we consider all available evidence including prior experience in remediation of contaminated sites, other companies’ cleanup experiences and data released by the United States Environmental Protection Agency or other organizations when we evaluate our environmental remediation contingencies. Further, all of our loss contingency estimates are subject to revision in future periods based on actual costs or new information. With respect to our environmental liabilities, where future cash flows are fixed or reliably determinable, we have discounted those liabilities. All other environmental liabilities are recorded at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our condensed consolidated financial statements.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense costs related to an existing condition caused by past operations that do not contribute to current or future revenue generation. As of June 30, 2011, we have the obligation to remediate or contribute towards the remediation of certain sites, including two existing Federal Superfund sites. At June 30, 2011, our aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $16 million, of which $5 million is recorded in other current liabilities and $11 million is recorded in deferred credits and other liabilities in our condensed consolidated balance sheet. For those locations in which the liability was discounted, the weighted average discount rate used was 3.0 percent. The undiscounted value of the estimated remediation costs was $21 million. Based on information known to us, we have established reserves that we believe are adequate for these costs. Although we believe these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute towards the remediation costs. In addition, certain environmental statutes provide that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at these sites has been considered, where appropriate, in our determination of our estimated liability. We do not believe that any potential costs associated with our current status as a potentially responsible party in the Federal 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. 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 are subject to an audit in 11 states of our practices with respect to the payment of unclaimed property to those states, which could cover over 30 years. We now have practices in place which we believe ensure that we pay unclaimed property as required. We vigorously defend ourselves against all of these claims. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved on unfavorable terms. 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 the claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other 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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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 charges to earnings if any of these matters are resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolutions. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future consolidated financial condition, results of operations or cash flows.

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

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


	Six Months
	Ended
	June 30,
	2011			2010
	(Millions)

Beginning Balance January 1,	$	33		$	32
Accruals related to product warranties		2			8
Reductions for payments made		(6	)		(8	)

Ending Balance June 30,	$	29		$	32

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)


(8)	Earnings Per Share

Earnings 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,
	2011		2010		2011		2010
	(Millions Except Share and Per Share Amounts)

Basic earnings per share —
Net income attributable to Tenneco Inc.	$	50	$	40	$	97	$	47

Average shares of common stock outstanding		59,980,866		59,142,946		59,901,929		59,033,416

Earnings per average share of common stock	$	0.84	$	0.68	$	1.62	$	0.79

Diluted earnings per share —
Net income attributable to Tenneco Inc.	$	50	$	40	$	97	$	47

Average shares of common stock outstanding		59,980,866		59,142,946		59,901,929		59,033,416
Effect of dilutive securities:
Restricted stock		211,556		354,974		294,526		414,059
Stock options		1,621,052		1,501,109		1,716,882		1,445,492

Average shares of common stock outstanding including dilutive securities		61,813,474		60,999,029		61,913,337		60,892,967

Earnings per average share of common stock	$	0.81	$	0.66	$	1.56	$	0.77

Options to purchase 200,360 and 1,393,879 shares of common stock were outstanding as of June 30, 2011 and 2010, respectively, but not included in the computation of diluted earnings per share respectively, because the options were anti-dilutive.


(9)	Common Stock

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

Accounting Methods — We have recorded $1 million in compensation expense in both the three months ended June 30, 2011 and 2010, and $2 million in compensation expense in both the six months ended June 30, 2011 and 2010, related to nonqualified stock options as part of our selling, general and administrative expense. This resulted in a decrease of $0.01 and $0.02 in basic and diluted earnings per share for the three month periods ended June 30, 2011 and 2010, respectively, and a decrease of $0.03 in basic and diluted earnings per share for both the six month periods ended June 20, 2011 and 2010.

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, 2011, there was approximately $6 million of unrecognized compensation costs related to our stock options awards that we expect to recognize over a weighted average period of 1.2 years.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

Compensation expense for restricted stock, restricted stock units, long-term performance units and SARs was $7 million and $5 million for the six month periods ended June 30, 2011 and 2010 respectively, and was recorded in selling, general, and administrative expense on the statement of income.

Cash received from stock option exercises for the six months ended June 30, 2011 and 2010 was $3 million, and $1 million, respectively. Stock option exercises in the first six months of 2011 and 2010 would have generated an excess tax benefit of $2 million and less than $1 million, respectively. We did not record the excess tax benefit as we have federal and state net operating losses which are not currently being utilized.

Assumptions — We calculated the fair values of stock option awards using the Black-Scholes option pricing model with the weighted average assumptions listed below. The fair value of share-based awards is determined at the time the awards are granted which is generally in January of each year, and requires judgment in estimating employee and market behavior.


	Six Months
	Ended
	June 30,
	2011			2010

Stock Options Granted
Weighted average grant date fair value, per share	$	26.13		$	11.76
Weighted average assumptions used:
Expected volatility		70.1	%		75.4	%
Expected lives		4.8			4.6
Risk-free interest rates		1.8	%		2.2	%
Dividend yields		0.0	%		0.0	%

Expected volatility is calculated based on current implied volatility and historical realized volatility for the Company.

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

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

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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


	Six Months Ended June 30, 2011
						Weighted Avg.
	Shares			Weighted Avg.		Remaining		Aggregate
	Under			Exercise		Life in		Intrinsic
	Option			Prices		Years		Value
								(Millions)

Outstanding Stock Options
Outstanding, January 1, 2011		3,129,241		$	14.43		4.3	$	68
Granted		201,133			45.42
Expired		(56,046	)		3.66
Forfeited		(13,184	)		9.36
Exercised		(125,624	)		17.10				3

Outstanding, March 31, 2011		3,135,520		$	16.53		4.4	$	80
Granted		2,711			43.51
Forfeited		(23,841	)		14.26
Exercised		(82,166	)		11.50				3

Outstanding, June 30, 2011		3,032,224		$	16.71		4.2	$	76

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


	Six Months Ended
	June 30, 2011
				Weighted Avg.
				Grant Date
	Shares			Fair Value

Nonvested Restricted Shares
Nonvested balance at January 1, 2011		558,198		$	11.58
Granted		141,036			45.42
Vested		(268,891	)		12.00
Forfeited		(4,822	)		13.74

Nonvested balance at March 31, 2011		425,521		$	22.51
Granted		1,381			43.51
Vested		(3,851	)		15.47
Forfeited		(7,190	)		23.82

Nonvested balance at June 30, 2011		415,861		$	22.62

The fair value of restricted stock grants is equal to the average market price of our stock at the date of grant. As of June 30, 2011, approximately $7 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 2.1 years.

Share Repurchase Program — In May 2011, our Board of Directors approved a share repurchase program, authorizing our company to repurchase up to 400,000 shares of our outstanding common stock over a 12 month period. Our share repurchase program is intended to offset dilution from shares of restricted stock and stock options that were issued in 2011 to employees. As of June 30, 2011, we purchased 270,500 shares at a total cost of

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

$10.5 million through this program. These repurchased shares are held as part of our treasury stock which increased to 1,565,192 shares at June 30, 2011 from 1,294,692 shares at December 31, 2010. We completed the repurchase of the remaining 129,500 shares by August 3, 2011, at a total cost of $5.5 million through this program. We have acquired all of these shares through open market purchases, which were funded through cash from operations.

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, 2011, $14 million of unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 1.9 years.


(10)	Pension Plans, Postretirement and Other Employee Benefits

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


	Three Months Ended June 30,
	Pension												Postretirement
	2011						2010						2011			2010
	US			Foreign			US			Foreign			US			US
	(Millions)

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

Net pension and postretirement costs	$	—		$	4		$	1		$	3		$	1		$	2


	Six Months Ended June 30,
	Pension												Postretirement
	2011						2010						2011			2010
	US			Foreign			US			Foreign			US			US
	(Millions)

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

Net pension and postretirement costs	$	1		$	7		$	2		$	5		$	3		$	4

For the six months ended June 30, 2011, we made pension contributions of $8 million for our domestic pension plans and $11 million for our foreign pension plans. Based on current actuarial estimates, we believe we will be required to make approximately $25 million in contributions for the remainder of 2011. Pension contributions beyond 2011 will be required, but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2011.

We made postretirement contributions of approximately $4 million during the first six months of 2011. Based on current actuarial estimates, we believe we will be required to make approximately $6 million in contributions for the remainder of 2011.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

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)	Acquisitions

In January 2010, we purchased an additional 20 percent equity interest in our Tenneco Tongtai (Dalian) Exhaust System 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)	New Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment to the accounting guidance for transfers of financial assets which changes the criteria that must be met to achieve sales accounting. This amendment removes from the assessment of effective control the criterion relating to the transferor’s ability to repurchase or redeem financial assets on substantially the agreed terms, even in the event of default by the transferee. In addition, this amendment eliminates the requirement to demonstrate that the transferor possesses adequate collateral to fund substantially all the cost of purchasing replacement financial assets. This amendment is effective for a reporting entity’s first interim or annual period beginning on or after December 15, 2011. We do not believe the adoption of this amendment to the accounting guidance for transfers of financial assets on January 1, 2012 will have a material impact on our condensed consolidated financial statements.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. The amendment includes (1) that the concepts of highest and best use and valuation premise in a fair value measurement are relevant only when measuring the fair value of nonfinancial assets, (2) provides specific requirements for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, (3) requires disclosure of quantitative information about unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy, (4) allows the use of a price, that would be received to sell a net asset position for a particular risk or to transfer a net liability position for a particular risk, in measuring the fair value of financial instruments that are managed within a portfolio, (5) in the absence of a Level 1 input a reporting entity should apply premiums or discounts when market participants would do so when pricing an asset or liability and (6) additional disclosure about fair value measurements. This amendment is effective for a reporting entity’s interim and annual periods beginning after December 15, 2011. We do not believe the adoption of this amendment for fair value measurements on January 1, 2012 will have a material impact on the measurement of our financial assets and liabilities. We will add additional fair value disclosures, as required by this amendment, beginning with our first interim reporting period ending March 31, 2012.

In June 2011, the FASB issued an amendment to the accounting guidance for the presentation on comprehensive income. This amendment removes one of the three presentation options for presenting the components of other comprehensive income as part of the statement of changes in stockholders’ equity and requires either a single continuous statement of comprehensive income or a two statement approach. If a reporting entity elects the two statement approach, this amendment requires consecutive presentation of the statement of net income followed by the statement of other comprehensive income. In addition, this amendment requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. This amendment shall be applied retrospectively and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. We do not believe the adoption of this amendment to the accounting

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

guidance for the presentation of comprehensive income on January 1, 2012 will have a material impact on our condensed consolidated financial statements.


(13)	Guarantees

We have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility and our senior notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure our senior notes. For additional information, refer to Note 15 of the condensed consolidated financial statements of Tenneco Inc., where we present the Supplemental Guarantor Condensed Consolidating Financial Statements.

In March 2011, we entered into two performance guarantee agreements in the U.K. between Tenneco Management Europe Limited (“TMEL”) and the two Walker Group Retirement Plans, the Walker Group Employee Benefit Plan and the Walker Group Executive Retirement Benefit Plan (the “Walker Plans”), whereby TMEL will guarantee the payment of all current and future pension contributions in event of a payment default by the sponsoring or participating employers of the Walker Plans. As a result of our decision to enter into these performance guarantee agreements, the levy due to the U.K. Pension Protection Fund will be reduced. The Walker Plans are comprised of employees from Tenneco Walker (U.K.) Limited and our Futaba Tenneco U.K. joint venture. Employer contributions are funded by both Tenneco Walker (U.K.) Limited, as the sponsoring employer and Futaba Tenneco U.K., as a participating employer. The performance guarantee agreements are expected to remain in effect until all pension obligations for the Walker Plans’ sponsoring and participating employers have been satisfied. The maximum amount payable for these pension performance guarantees is approximately $26 million as of June 30, 2011 which is determined by taking 105 percent of the liability of the Walker Plans calculated under section 179 of the U.K. Pension Act of 2004 offset by plan assets. We did not record an additional liability in March 2011 for this performance guarantee since Tenneco Walker (U.K.) Limited, as the sponsoring employer of the Walker Plans, already recognizes 100 percent of the pension obligation calculated based on U.S. GAAP, for all of the Walker Plans’ participating employers on its balance sheet, which was $7 million and $9 million at June 30, 2011 and December 31, 2010, respectively. At June 30, 2011, all pension contributions under the Walker Plans were current for all of the Walker Plans’ sponsoring and participating employers.

In June 2011, we entered into an indemnity agreement between TMEL and Futaba Industrial Co. Ltd. (“Futaba”) which requires Futaba to indemnify TMEL for any cost, loss or liability which TMEL may incur under the performance guarantee agreements. The maximum amount reimbursable by Futaba to TMEL under this indemnity agreement is equal to the amount incurred by TMEL under the performance guarantee agreements multiplied by Futaba’s shareholder ownership percentage of the Futaba Tenneco U.K. joint venture. At June 30, 2011 the maximum amount reimbursable by Futaba to TMEL is approximately $4 million.

We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of June 30, 2011, we have guaranteed $53 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. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $6 million at June 30, 2011 and December 31,

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

2010, respectively. No negotiable financial instruments were held by our European subsidiary as of June 30, 2011 and December 31, 2010, 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 $13 million and $8 million at June 30, 2011 and December 31, 2010, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $18 million and $11 million at June 30, 2011 and December 31, 2010, respectively. We classify financial instruments received from our OE customers as other current assets if issued by a financial institution of our customers or as customer notes and accounts, net if issued by our customer. We classified $17 million in other current assets and $1 million in customer notes and accounts, net at June 30, 2011. At December 31, 2010, we classified $11 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 was not required at those Chinese subsidiaries at June 30, 2011 and December 31, 2010, respectively.

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)	Segment Information

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 earnings before interest expense, income taxes, and noncontrolling interests. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the “market value” of the products.

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

The following table summarizes certain Tenneco Inc. segment information:


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

For the Three Months Ended June 30, 2011
Revenues from external customers	$	874	$	817	$	197	$	—		$	1,888
Intersegment revenues		3		42		7		(52	)		—
Earnings before interest expense, income taxes, and noncontrolling interests		62		37		14		—			113
For the Three Months Ended June 30, 2010
Revenues from external customers	$	738	$	606	$	158	$	—		$	1,502
Intersegment revenues		2		42		7		(51	)		—
Earnings before interest expense, income taxes, and noncontrolling interests		50		30		13		—			93
At June 30, 2011 and for the Six Months Then Ended
Revenues from external customers	$	1,725	$	1,558	$	365	$	—		$	3,648
Intersegment revenues		6		79		13		(98	)		—
Earnings before interest expense, income taxes, and noncontrolling interests		124		61		22		—			207
Total assets		1,436		1,548		549		25			3,558
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	)		—
Earnings before interest expense, income taxes, and noncontrolling interests		86		42		24		—			152
Total assets		1,310		1,254		397		19			2,980


(15)	Supplemental Guarantor Condensed Consolidating Financial Statements

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 notes due in 2015, 2018, and 2020 on a joint and several basis. The Guarantor Subsidiaries are combined in the presentation below.

These 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, 2011
						Tenneco Inc.
	Guarantor		Nonguarantor			(Parent			Reclass &
	Subsidiaries		Subsidiaries			Company)			Elims			Consolidated
						(Millions)

Revenues
Net sales and operating revenues —
External	$	797	$	1,091		$	—		$	—		$	1,888
Affiliated companies		40		126			—			(166	)		—

		837		1,217			—			(166	)		1,888

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		721		1,010			—			(166	)		1,565
Engineering, research, and development		13		22			—			—			35
Selling, general, and administrative		39		79			—			—			118
Depreciation and amortization of other intangibles		19		35			—			—			54

		792		1,146			—			(166	)		1,772

Other income (expense)
Loss on sale of receivables		—		(2	)		—			—			(2	)
Other income (loss)		33		1			—			(35	)		(1	)

		33		(1	)		—			(35	)		(3	)

Earnings before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		78		70			—			(35	)		113

Interest expense —
External (net of interest capitalized)		—		1			25			—			26
Affiliated companies (net of interest income)		53		(19	)		(34	)		—			—
Income tax expense		4		26			—			—			30
Equity in net income (loss) from affiliated companies		53		—			41			(94	)		—

Net Income		74		62			50			(129	)		57

Less: Net income attributable to noncontrolling interests		—		7			—			—			7

Net income (loss) attributable to Tenneco Inc.	$	74	$	55		$	50		$	(129	)	$	50

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	)

Earnings (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 Six Months Ended June 30, 2011
						Tenneco Inc.
	Guarantor		Nonguarantor			(Parent			Reclass &
	Subsidiaries		Subsidiaries			Company)			Elims			Consolidated
	(Millions)

Revenues
Net sales and operating revenues —
External	$	1,570	$	2,078		$	—		$	—		$	3,648
Affiliated companies		81		257			—			(338	)		—

		1,651		2,335			—			(338	)		3,648

Costs and expenses
Cost of sales (exclusive of depreciation and amortization shown below)		1,445		1,924			—			(338	)		3,031
Engineering, research, and development		28		42			—			—			70
Selling, general, and administrative		72		154			1			—			227
Depreciation and amortization of other intangibles		37		68			—			—			105

		1,582		2,188			1			(338	)		3,433

Other income (expense)
Loss on sale of receivables		—		(3	)		—			—			(3	)
Other income (loss)		32		(2	)		—			(35	)		(5	)

		32		(5	)		—			(35	)		(8	)

Earnings before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies		101		142			(1	)		(35	)		207

Interest expense —
External (net of interest capitalized)		—		2			52			—			54
Affiliated companies (net of interest income)		102		(34	)		(68	)		—			—
Income tax expense		5		39			—			—			44
Equity in net income (loss) from affiliated companies		118		—			82			(200	)		—

Net Income		112		135			97			(235	)		109

Less: Net income attributable to noncontrolling interests		—		12			—			—			12

Net income (loss) attributable to Tenneco Inc.	$	112	$	123		$	97		$	(235	)	$	97

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	)

Earnings (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)

BALANCE SHEET


	June 30, 2011
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent		Reclass
	Subsidiaries			Subsidiaries			Company)		& Elims			Consolidated
	(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	—		$	161		$	—	$	—		$	161
Receivables, net		512			1,374			24		(774	)		1,136
Inventories		233			393			—		—			626
Deferred income taxes		73			—			—		(31	)		42
Prepayments and other		28			149			—		—			177

Total current assets		846			2,077			24		(805	)		2,142

Other assets:
Investment in affiliated companies		495			—			830		(1,325	)		—
Notes and advances receivable from affiliates		4,149			963			5,950		(11,062	)		—
Long-term receivables, net		1			11			—		—			12
Goodwill		22			69			—		—			91
Intangibles, net		14			20			—		—			34
Deferred income taxes		41			24			27		—			92
Other		25			48			31		—			104

		4,747			1,135			6,838		(12,387	)		333

Plant, property, and equipment, at cost		998			2,284			—		—			3,282
Less — Accumulated depreciation and amortization		(723	)		(1,476	)		—		—			(2,199	)

		275			808			—		—			1,083

Total assets	$	5,868		$	4,020		$	6,862	$	(13,192	)	$	3,558


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)
Short-term debt — non-affiliated	$	—		$	66		$	1	$	—		$	67
Short-term debt — affiliated		219			394			10		(623	)		—
Trade payables		445			873			1		(111	)		1,208
Accrued taxes		27			28			—		—			55
Other		132			238			41		(71	)		340

Total current liabilities		823			1,599			53		(805	)		1,670

Long-term debt — non-affiliated		—			16			1,211		—			1,227
Long-term debt — affiliated		4,649			990			5,423		(11,062	)		—
Deferred income taxes		—			58			—		—			58
Postretirement benefits and other liabilities		332			82			—		4			418
Commitments and contingencies

Total liabilities		5,804			2,745			6,687		(11,863	)		3,373

Redeemable noncontrolling interests		—			10			—		—			10

Tenneco Inc. Shareholders’ equity		64			1,230			175		(1,329	)		140

Noncontrolling interests		—			35			—		—			35

Total equity		64			1,265			175		(1,329	)		175

Total liabilities, redeemable noncontrolling interests and equity	$	5,868		$	4,020		$	6,862	$	(13,192	)	$	3,558

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

BALANCE SHEET


	December 31, 2010
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent		Reclass
	Subsidiaries			Subsidiaries			Company)		& Elims			Consolidated
							(Millions)

ASSETS
Current assets:
Cash and cash equivalents	$	—		$	233		$	—	$	—		$	233
Receivables, net		402			1,106			24		(706	)		826
Inventories		221			326			—		—			547
Deferred income taxes		103			—			—		(65	)		38
Prepayments and other		35			111			—		—			146

Total current assets		761			1,776			24		(771	)		1,790

Other assets:
Investment in affiliated companies		391			—			707		(1,098	)		—
Notes and advances receivable from affiliates		4,119			788			5,853		(10,760	)		—
Long-term receivables, net		1			8			—		—			9
Goodwill		22			67			—		—			89
Intangibles, net		14			18			—		—			32
Deferred income taxes		37			21			34		—			92
Other		26			46			33		—			105

		4,610			948			6,627		(11,858	)		327

Plant, property, and equipment, at cost		997			2,112			—		—			3,109
Less — Accumulated depreciation and amortization		(713	)		(1,346	)		—		—			(2,059	)

		284			766			—		—			1,050

Total assets	$	5,655		$	3,490		$	6,651	$	(12,629	)	$	3,167


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term debt (including current maturities of long-term debt)
Short-term debt — non-affiliated	$	—		$	62		$	1	$	—		$	63
Short-term debt — affiliated		214			371			10		(595	)		—
Trade payables		367			773			—		(92	)		1,048
Accrued taxes		20			31			—		—			51
Other		130			213			47		(84	)		306

Total current liabilities		731			1,450			58		(771	)		1,468

Long-term debt — non-affiliated		—			11			1,149		—			1,160
Long-term debt — affiliated		4,583			768			5,409		(10,760	)		—
Deferred income taxes		—			56			—		—			56
Postretirement benefits and other liabilities		347			85			—		4			436
Commitments and contingencies

Total liabilities		5,661			2,370			6,616		(11,527	)		3,120

Redeemable noncontrolling interests		—			12			—		—			12

Tenneco Inc. Shareholders’ equity		(6	)		1,069			35		(1,102	)		(4	)

Noncontrolling interests		—			39			—		—			39

Total equity		(6	)		1,108			35		(1,102	)		35

Total liabilities, redeemable noncontrolling interests and equity	$	5,655		$	3,490		$	6,651	$	(12,629	)	$	3,167

TENNECO INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unaudited)

STATEMENT OF CASH FLOWS


	Three Months Ended June 30, 2011
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims		Consolidated
	(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	46		$	90		$	(69	)	$	—	$	67

Investing Activities
Proceeds from sale of assets		(1	)		1			—			—		—
Cash payments for plant, property, and equipment		(16	)		(33	)		—			—		(49	)
Cash payments for software related intangible assets		(1	)		(2	)		—			—		(3	)

Net cash used by investing activities		(18	)		(34	)		—			—		(52	)

Financing Activities
Capital contribution from noncontrolling interest partner		—			1			—			—		1
Purchase of common stock under the share repurchase program		—			—			(11	)		—		(11	)
Issuance of long-term debt		—			4			—			—		4
Debt issuance cost of long-term debt		—			—			(1	)		—		(1	)
Retirement of long-term debt		—			(1	)		—			—		(1	)
Increase (decrease) in bank overdrafts		—			1			—			—		1
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		—			3			38			—		41
Net increase (decrease) in short-term borrowings secured by accounts receivables		—			(82	)		—			—		(82	)
Intercompany dividends and net increase (decrease) in intercompany obligations		(30	)		(13	)		43			—		—

Distributions to noncontrolling interest partners		—			(10	)		—			—		(10	)

Net cash provided (used) by financing activities		(30	)		(97	)		69			—		(58	)

Effect of foreign exchange rate changes on cash and cash equivalents		—			5			—			—		5

Increase (decrease) in cash and cash equivalents		(2	)		(36	)		—			—		(38	)
Cash and cash equivalents, April 1		2			197			—			—		199

Cash and cash equivalents, June 30 (Note)	$	—		$	161		$	—		$	—	$	161


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, 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


	Six Months Ended June 30, 2011
							Tenneco Inc.
	Guarantor			Nonguarantor			(Parent			Reclass
	Subsidiaries			Subsidiaries			Company)			& Elims		Consolidated
							(Millions)

Operating Activities
Net cash provided (used) by operating activities	$	152		$	(70	)	$	(118	)	$	—	$	(36	)

Investing Activities
Proceeds from sale of assets		3			1			—			—		4
Cash payments for plant, property, and equipment		(30	)		(65	)		—			—		(95	)
Cash payments for software related intangible assets		(2	)		(4	)		—			—		(6	)

Net cash used by investing activities		(29	)		(68	)		—			—		(97	)

Financing Activities
Capital contribution from noncontrolling interest partner		—			1			—			—		1
Purchase of common stock under the share repurchase program		—			—			(11	)		—		(11	)
Issuance of long-term debt		—			4			—			—		4
Debt issuance cost of long-term debt		—			—			(1	)		—		(1	)
Retirement of long-term debt		—			(1	)		(22	)		—		(23	)
Increase (decrease) in bank overdrafts		—			8			—			—		8
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt		—			3			85			—		88
Intercompany dividends and net increase (decrease) in intercompany obligations		(123	)		56			67			—		—
Distribution to noncontrolling interest partners		—			(10	)		—			—		(10	)

Net cash provided (used) by financing activities		(123	)		61			118			—		56

Effect of foreign exchange rate changes on cash and cash equivalents		—			5			—			—		5

Increase (decrease) in cash and cash equivalents		—			(72	)		—			—		(72	)
Cash and cash equivalents, January 1		—			233			—			—		233

Cash and cash equivalents, June 30 (Note)	$	—		$	161		$	—		$	—	$	161


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	)

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