Financials (10-K)

Part II – Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Accounting Policies

Consolidation and Presentation

Our 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 intercompany transactions. We have evaluated all subsequent events through the date our financial statements were issued.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include, among others allowances for doubtful receivables, promotional and product returns, pension and postretirement benefit plans, income taxes, and contingencies. These items are covered in more detail elsewhere in Note 1, Note 7, Note 10, and Note 12 of the consolidated financial statements of Tenneco Inc. Actual results could differ from those estimates.

Redeemable Noncontrolling Interests

We have noncontrolling interests in three joint ventures with redemption features that could require us to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of our subsidiaries. We do not believe that it is probable that the redemption features in any of these joint venture agreements will be triggered. However, the redemption of these shares is not solely within our control. Accordingly, the related noncontrolling interests are presented as “Redeemable noncontrolling interests” in the temporary equity section of our consolidated balance sheets.

In August 2011, we purchased the remaining 25 percent equity interest in our emission control joint venture in Thailand for $4 million in cash. As a result of this purchase, our equity ownership of this joint venture investment changed to 100 percent from 75 percent. Refer to Note 3 of the consolidated financial statements of Tenneco Inc.
for additional details.

The following is a rollforward of activity in our redeemable noncontrolling interests for the years ending December 31, 2011, 2010 and 2009, respectively:

    2011     2010     2009  
(Millions)      
Balance January 1   $ 12     $ 7     $ 7  
Net income attributable to redeemable noncontrolling interests     7       8       5  
Sale of 25 percent equity interest to Tenneco Inc     (2 )            
Capital Contributions     1              
Other comprehensive income (loss)           2        
Dividends declared     (6 )     (5 )     (5 )
Balance December 31   $ 12     $ 12     $ 7  

Inventories

At December 31, 2011 and 2010, inventory by major classification was as follows:

    2011     2010  
(Millions)      
Finished goods   $ 244     $ 222  
Work in process     181       164  
Raw materials     121       118  
Materials and supplies     46       43  
    $ 592     $ 547  

Our inventories are stated at the lower of cost or market value using the first-in, first-out (“FIFO”) or average cost methods.

Goodwill and Intangibles, net

We evaluate goodwill for impairment in the fourth quarter of each year, or more frequently if events indicate it is warranted. The goodwill impairment test consists of a two-step process. In step one, we compare the estimated fair value of our reporting units with goodwill to the carrying value of the unit’s assets and liabilities to determine if impairment exists within the recorded balance of goodwill. We estimate the fair value of each reporting unit using the income approach which is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors, including estimates of market trends, forecasted revenues and expenses, capital expenditures, weighted average cost of capital and other variables. A separate discount rate derived by a combination of published sources, internal estimates and weighted based on our debt and equity structure, was used to calculate the discounted cash flows for each of our reporting units. These estimates are based on assumptions that we believe to be reasonable, but which are inherently uncertain and outside of the control of management. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist which requires step two to be performed to measure the amount of the impairment loss. The amount of impairment is determined by comparing the implied fair value of a reporting unit’s goodwill to its carrying value.

In the fourth quarter of 2010, the estimated fair value of all of our reporting units, except for our Australian reporting unit, significantly exceeded the carrying value of its assets and liabilities. Our Australian reporting unit had a goodwill balance of $11 million with an estimated fair value in excess of its net carrying value of one percent as of the testing date.

During the third quarter of 2011, we performed an impairment evaluation of our Australian reporting unit’s goodwill balance as a result of continued deterioration of that reporting unit’s financial performance driven primarily by significant declines in industry production volumes in that region. We identified in our step one test that the carrying value of our Australian reporting unit was higher than its fair value which is an indication that impairment may exist which required us to perform step two of the goodwill impairment test to measure the amount of the impairment loss. Step two of the goodwill impairment evaluation required us to calculate the implied fair value of goodwill of our Australian reporting unit by allocating the estimated fair value to the assets and liabilities of this reporting unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the acquisition price. As a result of performing steps one and two of the goodwill impairment test, we concluded that the remaining amount of goodwill related to our Australian reporting unit was impaired and accordingly, we recorded a goodwill impairment charge of $11 million during the third quarter of 2011.

In the fourth quarter of 2011, the estimated fair value of each of our reporting units exceeded the carrying value of their assets and liabilities as of the testing date.

The changes in the net carrying amount of goodwill for the years ended December 31, 2011 and 2010 were as follows:

  Year Ended December 31, 2011  
    North America     Europe,
South America
and India
    Asia Pacific     Total  
(Millions)
Balance at January 1
Goodwill   $ 330     $ 85     $ 12     $ 427  
Accumulated impairment losses     (306 )     (31 )     (1 )     (338 )
      24       54       11       89
Translation adjustments     1       (5 )           (4 )
                  11       11  
Balance at December 31
Goodwill   331     80     12     423  
Accumulated impairment losses     (306 )     (31 )     (12 )     (349 )
    $ 25   $ 49   $     $ 74

  Year Ended December 31, 2010  
    North America     Europe,
South America
and India
    Asia Pacific     Total  
(Millions)
Balance at January 1
Goodwill   $ 330     $ 87     $ 10     $ 427  
Accumulated impairment losses     (306 )     (32 )           (338 )
      24       55       10       89
Translation adjustments           (1 )     1      
Balance at December 31
Goodwill   330     85     12     427  
Accumulated impairment losses     (306 )     (31 )     (1 )     (338 )
    $ 24   $ 54   $ 11     $ 89

We have capitalized certain intangible assets, primarily technology rights, trademarks and patents, based on their estimated fair value at the date we acquired them. We amortize our finite useful life intangible assets on a straight-line basis over periods ranging from five to 50 years. Amortization of intangibles amounted to $2 million in each of 2011, 2010 and 2009, and is included in the statements of income caption “Depreciation and amortization of intangibles.” The carrying amount and accumulated amortization of our finite useful life intangible assets were as follows:

    December 31, 2011     December 31, 2010  
    Gross Carrying
Value
    Accumulated
Amortization
    Gross Carrying
Value
    Accumulated
Amortization
 
(Millions)            
Customer contract   $ 8     $ (3 )   $ 8     $ (2 )
Patents     5       (4 )     5       (4 )
Technology rights     20       (6 )     21       (5 )
Other     9           6       (1 )
Total   $ 42     $ (13 )   $ 40     $ (12 )

Estimated amortization of intangible assets over the next five years is expected to be $3 million in 2012, $4 million in both 2013 and 2014, $3 million in 2015 and $2 million in 2016. We have capitalized indefinite life intangibles of $3 million relating to purchased trademarks from our Marzocchi acquisition in 2007.

Plant, Property, and Equipment, at Cost

At December 31, 2011 and 2010, plant, property, and equipment, at cost, by major category were as follows:

    2011     2010  
(Millions)      
Land, buildings, and improvements   $ 530     $ 524  
Machinery and equipment     2,406       2,406  
Other, including construction in progress     217       179  
    $ 3,153     $ 3,109  

We depreciate these properties excluding land on a straight-line basis over the estimated useful lives of the assets. Useful lives range from 10 to 50 years for buildings and improvements and from three to 25 years for machinery and equipment.

Notes and Accounts Receivable and Allowance for Doubtful Accounts

Receivables consist of amounts billed and currently due from customers and unbilled pre-production design and development costs. Short and long-term accounts receivable outstanding were $959 million and $823 million at December 31, 2011 and 2010, respectively. The allowance for doubtful accounts on short-term and long-term accounts receivable was $17 million and $20 million at December 31, 2011 and 2010, respectively. Short and long-term notes receivable outstanding were $4 million and $2 million at December 31, 2011 and 2010, respectively. The allowance for doubtful accounts on short-term and long-term notes receivable was zero at both December 31, 2011 and 2010.

Pre-production Design and Development and Tooling Assets

We expense pre-production design and development costs as incurred unless we have a contractual guarantee for reimbursement from the original equipment customer. Unbilled pre-production design and development costs recorded in prepayments and other and long-term receivables was $19 million and $15 million at December 31, 2011 and 2010, respectively. In addition, plant, property and equipment included $38 million at both December 31, 2011 and 2010, respectively, for original equipment tools and dies that we own, and prepayments and other included $49 million and $46 million at December 31, 2011 and 2010, respectively, for in-process tools and dies that we are building for our original equipment customers.

Internal Use Software Assets

We capitalize certain costs related to the purchase and development of software that we use in our business operations. We amortize the costs attributable to these software systems over their estimated useful lives, ranging from 3 to 12 years, based on various factors such as the effects of obsolescence, technology, and other economic factors. Capitalized software development costs, net of amortization, were $58 million and $53 million at December 31, 2011 and 2010, respectively, and are recorded in other long-term assets. Amortization of software development costs was approximately $15 million, $18 million and $22 million for the years ended December 31, 2011, 2010 and 2009, respectively, and is included in the statements of income (loss) caption “Depreciation and amortization of intangibles.” Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the statements of cash flows.

Income Taxes

We reported income tax expense of $88 million, $69 million and $13 million in the years ending 2011, 2010 and 2009, respectively. The tax expense recorded in 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 $7 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 the impact of recording a valuation allowance against the tax benefit for losses in certain foreign jurisdictions and taxes on repatriation of foreign earnings.

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:

In 2008, given our historical losses in the U.S., we concluded that our ability to fully utilize our NOLs was limited, as we were required to project the continuation of the negative economic environment at that time and the impact of the negative operating environment on our tax planning strategies. As a result, we recorded a valuation allowance against all of our U.S. deferred tax assets except for 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, as of December 31, 2011, relating to the expected utilization of those NOLs. The recording of a valuation allowance does not impact the amount of the NOL that would be available for federal and state income tax purposes in future periods. The federal NOLs expire beginning in tax years ending in 2021 through 2029. The state NOLs expire in various tax years through 2029.

If our operating performance continues to improve 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. In addition, the charge to establish the U.S. valuation allowance eliminated the need for certain tax reserves which would need to be recorded if the valuation allowance was reversed. If we were to reverse our U.S. valuation allowance, as of December 31, 2011, the impact on earnings would approximate $147 million.

In prior years, we recorded a valuation allowance against deferred tax assets generated by taxable losses in the U.S. as well as certain other foreign jurisdictions. Our 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. In certain foreign jurisdictions, we have recorded a tax benefit on NOLs and tax credits with unlimited lives that are supported by tax actions and forecasted profitability. If the tax actions are not successful or losses are incurred, we may need to record a valuation allowance in a future period. We have recorded net deferred tax assets of approximately $23 million in these jurisdictions as of December 31, 2011. These actions will cause variability in our effective tax rate.

 

Revenue Recognition

We recognize revenue for sales to our original equipment and aftermarket customers when title and risk of loss passes to the customers under the terms of our arrangements with those customers, which is usually at the time of shipment from our plants or distribution centers. Generally, in connection with the sale of exhaust systems to certain original equipment manufacturers, we purchase catalytic converters and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of our customers which are used in the assembled system. These substrates are included in our inventory and “passed through” to the customer at our cost, plus a small margin, since we take title to the inventory and are responsible for both the delivery and quality of the finished product. Revenues recognized for substrate sales were $1,640 million, $1,297 million and $966 million in 2011, 2010 and 2009, respectively. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis. Shipping and handling costs billed to customers are included in revenues and the related costs are included in cost of sales in our consolidated statements of income (loss).

Warranty Reserves

Where we have offered product warranty, we also provide for warranty costs. 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 and upon specific warranty issues as they arise. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impact on our consolidated financial statements.

Earnings Per Share

We compute basic earnings per share by dividing income available to common shareholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that we adjust the weighted-average number of shares outstanding to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, we adjust income available to common shareholders to include any changes in income or loss that would result from the assumed issuance of the dilutive common shares. Due to the net loss for the year ended December 31, 2009, the calculation of diluted earnings per share did not include the dilutive effect from shares of restricted stock and stock options. See Note 2 to the consolidated financial statements of Tenneco Inc.

Engineering, Research and Development

We expense engineering, research, and development costs as they are incurred. Engineering, research, and development expenses were $133 million for 2011, $117 million for 2010 and $97 million for 2009, net of reimbursements from our customers. Our customers reimburse us for engineering, research, and development costs on some platforms when we prepare prototypes and incur costs before platform awards. Our engineering, research, and development expense for 2011, 2010, and 2009 has been reduced by $119 million, $110 million and $104 million, respectively, for these reimbursements.

Advertising and Promotion Expenses

We expense advertising and promotion expenses as they are incurred. Advertising and promotion expenses were $61 million, $59 million, and $50 million for the years ended December 31, 2011, 2010, and 2009, respectively.

Foreign Currency Translation

We translate the consolidated financial statements of foreign subsidiaries into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted-average exchange rate for revenues and expenses in each period. We record translation adjustments for those subsidiaries whose local currency is their functional currency as a component of accumulated other comprehensive loss in shareholders’ equity. We recognize transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency in earnings as incurred, except for those transactions which hedge purchase commitments and for those intercompany balances which are designated as long-term investments. Our results include foreign currency transaction losses of $3 million in 2011, less than $1 million in 2010, and $4 million in 2009, respectively.

Risk Management Activities

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. In managing our foreign currency exposures, we identify and aggregate existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The fair value of our foreign currency forward contracts was a net asset position of $1 million at December 31, 2011 and 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 consolidated statements of income (loss). The fair value of foreign exchange forward contracts are recorded in prepayments and other current assets or other current liabilities in the consolidated balance sheet.

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 consolidated financial statements.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements in United States Generally Accepted Accounting Principles (“U.S. GAAP”) and International Financial Reporting Standards (“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 which must be applied retrospectively for all periods presented. 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 and is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. 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. The FASB issued in December 2011, an amendment to defer the presentation of reclassification adjustments to allow additional time to redeliberate these new presentation requirements. We do not believe the adoption of this amendment to the accounting guidance for the presentation of comprehensive income on January 1, 2012 will have a material impact on our consolidated financial statements.

In September 2011, the FASB issued an amendment to the accounting guidance for testing goodwill for impairment. This amendment provides a reporting entity the option to first assess qualitative factors to determine whether the existence of events and circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the reporting entity’s assessment after considering all events and circumstances is that it is not more likely than not that its fair value is less than its carrying amount, then performing the two-step impairment test is not required. If the reporting entity concludes that it is more likely than not that its fair value is less than its carrying amount then the first step of the two-step impairment test is required. If the carrying amount of the reporting unit exceeds its fair value, then the reporting unit is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss. This amendment is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We do not believe the adoption of this amendment on January 1, 2012 for testing goodwill for impairment will have a material impact on our consolidated financial statements.

In December 2011, the FASB issued an amendment relating to the disclosure about offsetting assets and liabilities. This amendment requires disclosure to provide information to help reconcile differences in the offsetting requirements under U.S. GAAP and IFRS. A reporting entity will be required to disclose 1) the gross amount of recognized assets and liabilities, 2) the amounts offset to determine the net amounts presented in the statement of financial position, 3) the net amounts presented in the statement of financial position, 4) the amounts subject to an enforceable master netting arrangement or similar agreement not otherwise included in (2), and 5) the net amount after deducting the amounts in (4) and (3). This amendment is effective for a reporting entity’s interim and annual periods beginning on or after January 1, 2013. We do not believe the adoption of this amendment relating to the disclosure about offsetting assets and liabilities on January 1, 2013 will have a material impact on our consolidated financial statements.

Restricted Net Assets

In certain countries where we operate, transfers of funds out of such countries by way of dividends, loans or advances are subject to certain central bank restrictions which require approval from the central bank authorities prior to transferring funds out of these countries. The countries in which we operate that have such restrictions include China, Russia, South Africa, India, Thailand and Argentina. At December 31, 2011, the net asset balance of our subsidiaries in the countries in which we operate that have such restrictions was $137 million. These central banking restrictions do not have a significant effect on our ability to manage liquidity on a global basis.

2. Earnings (Loss) Per Share

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

Year Ended December 31,   2011     2010     2009  
(Millions Except Share and Per Share Amounts)      
Basic earnings (loss) per share  —                        
Net income (loss) attributable to Tenneco Inc.   $ 157   $ 39   $ (73 )
Average shares of common stock outstanding     59,884,139       59,208,103       48,572,463  
Earning(loss) per average share of common stock   $ 2.62   $ 0.65   $ (1.50 )
Diluted earnings (loss) per share —                        
Net income per attributable to Tenneco Inc.   $ 157   $ 39   $ (73 )
Average shares of common stock outstanding     59,884,139       59,208,103       48,572,463  
Effect of dilutive securities:                        
Restricted stock     168,539       441,561        
Stock options     1,467,482       1,349,030        
Average shares of common stock outstanding including dilutive securities     61,520,160       60,998,694       48,572,463  
Earnings (loss) per average share of common stock   $ 2.55   $ 0.63   $ (1.50 )

Options to purchase 202,009 and 612,832 shares of common stock were outstanding as of December 31, 2011 and 2010, respectively, but not included in the computation of diluted earnings per share, because the options were anti-dilutive. As a result of the net loss in 2009, the calculation of diluted loss per share excludes the dilutive effect of options and restricted stock.

3. Acquisitions

Acquisitions In August 2011, we purchased the remaining 25 percent equity interest in our emission control joint venture in Thailand for $4 million in cash. As a result of this purchase, our equity ownership of this joint venture investment changed to 100 percent from 75 percent.

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..

4. 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. For 2009, we incurred $21 million in restructuring and related costs, of which $16 million was recorded in cost of sales, $1 million was recorded in selling, general, administrative and engineering expense and $4 million was recorded in depreciation and amortization expense. In 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. During 2011, we incurred $8 million in restructuring and related costs, primarily related to headcount reductions in Europe and Australia 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, 2010
Restructuring
Reserve
    2011 Expenses     2011
Cash
Payments
    Reserve
Adjustments
    December 31, 2011
Restructuring
Reserve
 
(Millions)      
Severance   $ 7       8       (13)       (1)     $ 1  

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 December 31, 2011, we have excluded $17 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 were closing our original equipment ride control plant in Cozad, Nebraska. The closure of the Cozad plant will eliminate approximately 500 positions. 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. Much of the production is being shifted from Cozad to our plant in Hartwell, Georgia.

During the transition of production from our Cozad facility to our Hartwell facility, several customer programs, which were planned to phase out, were reinstated and volumes increased beyond the amount in our original restructuring plan. To meet the higher volume requirements, we have taken a number of actions over the past few months to stabilize the production environment in Hartwell including reinforcing several core processes, realigning assembly lines, upgrading equipment to increase output and accelerating our Lean manufacturing activities. Based on the higher volumes, we are adjusting our consolidation plan. Our revised consolidation plan includes temporarily continuing some basic production operations in Cozad, and redirecting some programs from our Hartwell facility to our other North American facilities to better balance production. These actions are anticipated to conclude during the third quarter of 2012. As of December 31, 2011, more than 95 percent of the positions at our Cozad facility have been eliminated.

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. In 2011, we have recorded an additional cash charge of $2 million related to this initiative.

In 2011, we recorded $3 million of restructuring and related expenses, all of which represented cash expenditures, related to the permanent elimination of 53 positions in our Australian operations as a result of the continued decline in industry production volumes in that region.

5. Long-Term Debt, Short-Term Debt, and Financing Arrangements

Long-Term Debt

A summary of our long-term debt obligations at December 31, 2011 and 2010, is set forth in the following table:

    2011     2010  
(Millions)      
Tenneco Inc. —                
Revolver borrowings due 2014, average effective interest rate 5.3% in 2011 and 5.4% in 2010   $ 24     $  
Senior Term Loan due 2012 through 2016, average effective interest rate 4.9% in 2011 and 5.1% in 2010     148       149  
7 3/4% Senior Notes due 2018     225       225  
6 7/8%  Senior Notes due 2020     500       500  
8 5/8% Senior Subordinated Notes due 2014(a)           20  
8 1/8% Senior Notes due 2015     250       250  
Debentures due 2012 through 2025, average effective interest rate 8.4% in 2011 and 2010     1       1  
Customer Notes due 2013, average effective interest rate 8.0% in 2011 and 2010     3       4  
Other subsidiaries —                
Notes due 2012 through 2025, average effective interest rate 1.3% in 2011 and 3.0% in 2010     11       13  
      1,162       1,162  
Less — maturities classified as current     4       2  
Total long-term debt   $ 1,158     $ 1,160  

(a)

On January 7, 2011, we redeemed the remaining $20 million 8 5/8 percent senior subordinated notes by increasing our revolver borrowings which are classified as long-term debt.

The aggregate maturities and sinking fund requirements applicable to the long-term debt outstanding at December 31, 2011, are $4 million, $5 million, $27 million, $253 million and $142 million for 2012, 2013, 2014, 2015 and 2016, respectively.

Short-Term Debt

Our short-term debt includes the current portion of long-term obligations and borrowings by foreign subsidiaries. Information regarding our short-term debt as of and for the years ended December 31, 2011 and 2010 is as follows:

 

    2011     2010  
(Millions)      
Maturities classified as current   $ 4     $ 2  
Notes payable     62       61  
Total short-term debt   $ 66     $ 63  

 

    2011     2010  
    Notes Payable(a)     Notes Payable(a)  
(Dollars in Millions)      
Outstanding borrowings at end of year   $ 62     $ 61  
Weighted average interest rate on outstanding borrowings at end of year(b)     6.0 %     7.8 %
Approximate maximum month-end outstanding borrowings during year   $ 178     $ 201  
Approximate average month-end outstanding borrowings during year   $ 118     $ 109  
Weighted average interest rate on approximate average month-end outstanding borrowings during year(b)     5.6 %     5.5 %

(a)

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

(b)

This calculation does not include the commitment fees to be paid on the unused revolving credit facility balances which are recorded as interest expense
for accounting purposes.

Financing Arrangements

Committed Credit Facilities(a) as of December 31, 2011   Term     Commitments     Borrowings     Letters of
Credit(b)
    Available  
(Millions)      
Tenneco Inc. revolving credit agreement     2014     $ 622     $     $ 58     $ 564  
Tenneco Inc. tranche B-1 letter of credit/revolving loan agreement     2014       130       24             106  
Tenneco Inc. Senior Term Loans     2016       148       148              
Subsidiaries’ credit agreements     2012-2025       88       73             15  
            $ 988     $ 245     $ 58     $ 685  

(a)

We generally are required to pay commitment fees on the unused portion of the total commitment.

(b)

Letters of credit reduce the available borrowings under the revolving credit agreement.

Overview.  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 December 31, 2011, the senior credit facility provides us with a total revolving credit facility size of $622 million until March 16, 2012, when commitments of $66 million will expire. After March 16, 2012, the extended revolving credit facility will provide $556 million of revolving credit and will mature on May 31, 2014. The extended facility will mature 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 December 31, 2011, the senior credit facility also provides a six-year, $148 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, 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 a margin on the $130 million deposited with the administrative agent. In addition, we pay lenders interest equal to the London Interbank Offered Rate (“LIBOR”) 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.

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 2.00 for extending lenders. Our consolidated net leverage ratio was 1.88 and 2.24 as of December 31, 2011 and 2010, respectively. Accordingly, in February of 2012 the margin we pay on these borrowings will be reduced by 25 basis points for extending lenders and will remain at such level for so long as our consolidated net leverage ratio remains below 2.00.

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 (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.

At December 31, 2011, of the $752 million available under the two revolving credit facilities within our senior secured credit facility, we had unused borrowing capacity of $670 million with $24 million in outstanding borrowings and $58 million in letters of credit outstanding. As of December 31, 2011, our outstanding debt also included $250 million of 8 1/8 percent senior notes due November 15, 2015, $148 million term loan B due June 3, 2016, $225 million of 7 3/4 percent senior notes due August 15, 2018, $500 million of 6 7/8 percent senior notes due December 15, 2020, and $78 million of other debt.

On December 9, 2010, we commenced a cash tender offer of our outstanding $500 million 8 5/8 percent senior subordinated notes due in 2014 and a consent solicitation to amend the indenture governing these notes. On December 23, 2010, we issued $500 million of 6 7/8 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 8 5/8 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. A total of $480 million of the senior subordinated notes were tendered prior to the expiration of the consent solicitation. 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 8 5/8 percent senior subordinated notes. On March 14, 2011, we completed an offer to exchange the $500 million of 6 7/8 percent senior notes due in 2020 which have been registered under the Securities Act of 1933, for and in replacement of all outstanding unregistered 6 7/8 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 7 3/4 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 10 1/4 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 10 1/4 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 7 3/4 percent senior notes due in 2018 which have been registered under the Securities Act of 1933, for and in replacement of all outstanding unregistered 7 3/4 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.

Senior Credit Facility — Interest Rates and Fees. . Borrowings and letters of credit issued under the senior credit facility bear interest at an annual rate equal to, at our option, either (i) LIBOR plus a margin as set forth in the table below; or (ii) a rate consisting of the greater of the JPMorgan Chase prime rate, the Federal Funds rate plus 50 basis points or the Eurodollar Rate plus 100 basis points, plus a margin as set forth in the table below:

For the Period   8/14/2009
thru
2/28/2010
    3/1/2010
thru
6/2/2010
      6/3/2010
thru
2/27/2011
    2/28/2011
thru
5/15/2011
    5/16/2011
thru
8/7/2011
    Beginning
8/8/2011
 
Applicable Margin over:                                                  
LIBOR for Revolving Loans     5.50 %     4.50 %       4.50 %     4.25 %     4.50 %     4.25 %*
LIBOR for Term Loan B Loans                   4.75 %     4.50 %     4.75 %     4.50 %*
LIBOR for Term Loan A Loans     5.50 %     4.50 %                        
LIBOR for Tranche B-1 Loans     5.50 %     5.00 %       5.00 %     5.00 %     5.00 %     5.00 %
Prime-based Term A Loans     4.50 %     3.50 %                        
Prime for Revolving Loans               3.50 %     3.25 %     3.50 %     3.25 %*
Prime for Term Loan B Loans                   3.75 %     3.50 %     3.75 %     3.50 %*
Prime for Tranche B-1 Loans                   4.00 %     4.00 %     4.00 %     4.00 %
Federal Funds for Revolving Loans                   3.50 %     3.25 %     3.50 %     3.25 %*
Federal Funds for Term Loan B Loans                   3.75 %     3.50 %     3.75 %     3.50 %*
Federal Funds for Tranche B-1 Loans     5.00 %     4.00 %       4.00 %     4.00 %     4.00 %     4.00 %
Commitment Fee     0.75 %     0.50 %       0.75 %     0.50 %     0.75 %     0.50 %*

*In February 2012, the margin we pay on borrowings will decrease by 25 basis points, as a result of a decrease in our consolidated net leverage ratio from 2.07 at September 30, 2011 to 1.88 at December 31, 2011.

Senior Credit Facility — Other Terms and Conditions. Our senior credit facility requires that we maintain financial ratios equal to or better than the following consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA, as defined in the senior credit facility agreement), and consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined under the senior credit facility agreement) at the end of each period indicated. Failure to maintain these ratios will result in a default under our senior credit facility. The financial ratios required under the amended and restated senior credit facility and, the actual ratios we achieved for the four quarters of 2011, are as follows:

Quarter Ended         March 31, 2011     June 30, 2011     September 30, 2011     December 31, 2011
    Req.     Act.     Req.     Act.     Req.     Act.     Req.   Act.  
Leverage Ratio (maximum)         4.00       2.32       3.75       2.17       3.50       2.07       3.50   1.88  
Interest Coverage Ratio (minimum)         2.55       4.37       2.55       4.76       2.55       5.17       2.55   5.69  

The financial ratios required under the senior credit facility for each quarter beyond December 31, 2011 include a maximum leverage ratio of 3.50 and a minimum interest coverage ratio of 2.75.

The covenants in our senior credit facility agreement generally prohibit us from repaying or refinancing our senior notes. So long as no default existed, we would, however, under our senior credit facility agreement, be permitted to repay or refinance our senior notes: (i) with the net cash proceeds of incremental facilities and permitted refinancing indebtedness (as defined in the senior credit facility agreement); (ii) with the net cash proceeds from the sale of shares of our common stock; (iii) in exchange for permitted refinancing indebtedness or in exchange for shares of our common stock; (iv) with the net cash proceeds of any new senior or subordinated unsecured indebtedness; (v) with the proceeds of revolving credit loans (as defined in the senior credit facility agreement); (vi) with the cash generated by the operations of the Company; and (vii) in an amount equal to the sum of (a) the net cash proceeds of qualified stock issued by the Company after March 16, 2007, plus (b) the portion of annual excess cash flow (beginning with excess cash flow for fiscal year 2010) not required to be applied to payment of the credit facilities and which is not used for other purposes, provided that the aggregate principal amount of senior notes purchased and cancelled or redeemed pursuant to clauses (v), (vi) and (vii), is capped as follows based on the pro forma consolidated leverage ratio after giving effect to such purchase, cancellation or redemption:

Proforma Consolidated Leverage Ratio Aggregate Senior Note Maximum Amount
(Millions)
Greater than or equal to 3.0x $ 20
Greater than or equal to 2.5x   100
Less than 2.5x   125

Although the senior credit facility agreement would permit us to repay or refinance our senior notes under the conditions described above, any repayment or refinancing of our outstanding notes would be subject to market conditions and either the voluntary participation of note holders or our ability to redeem the notes under the terms of the applicable note indenture. For example, while the senior credit agreement would allow us to repay our outstanding notes via a direct exchange of the notes for either permitted refinancing indebtedness or for shares of our common stock, we do not, under the terms of the agreements governing our outstanding notes, have the right to refinance the notes via any type of direct exchange.

The senior credit facility agreement also contains other restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the senior credit facility agreement); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; and (viii) refinancing of the senior notes. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans.

As of December 31, 2011, we were in compliance with all the financial covenants and operational restrictions of the facility. Our senior credit facility does not contain any terms that could accelerate payment of the facility or affect pricing under the facility as a result of a credit rating agency downgrade.

Senior Notes.  As of December 31, 2011, our outstanding debt also includes $250 million of 8 1/8 percent senior notes due November 15, 2015, $225 million of
7 3/4 percent senior notes due August 15, 2018 and $500 million of 6 7/8 percent senior notes due December 15, 2020. Under the indentures governing the notes, we are permitted to redeem some or all of the remaining senior notes at any time after November 15, 2011 in the case of the senior notes due 2015, August 14, 2014 in the case of the senior notes due 2018, and December 15, 2015 in the case of senior notes due 2020. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes. Under the indentures governing the notes, we are permitted to redeem up to 35 percent of the senior notes due 2018, with the proceeds of certain equity offerings completed before August 13, 2013 and up to 35 percent of the senior notes due 2020, with the proceeds of certain equity offerings completed
before December 15, 2013.

Our senior notes require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00. The indentures also contain restrictions on our operations, including limitations on: (i) incurring additional indebtedness or liens; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations. Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee these notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. As of December 31, 2011, we were in compliance with the covenants and restrictions of these indentures.

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 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 December 31, 2011 and 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 $121 million and $91 million at December 31, 2011 and 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.

We adopted the amended accounting guidance under ASC Topic 860, Accounting for Transfers of Financial Assets effective January 1, 2010. Prior to the adoption of this new guidance, we accounted for activities under our North American and European accounts receivable securitization programs as sales of financial assets to our banks. The new accounting guidance changed the condition that must be met for the transfer of financial assets to be accounted for as a sale. The new guidance adds additional conditions that must be satisfied for transfers of financial assets to be accounted for as sales when the transferor has not transferred the entire original financial asset, including the requirement that no partial interest holder have rights in the transferred asset that are subordinate to the rights of other partial interest holders.

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, beginning January 1, 2010, 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 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 $3 million and $4 million in interest expense for the years ended 2011 and 2010, respectively, relating to our North American securitization program, which effective January 1, 2010, is accounted for as a secured borrowing under the amended accounting guidance for transfers of financial assets. In addition, we recognized a loss of $5 million, $3 million and $9 million for the years ended 2011, 2010 and 2009, respectively, on the sale of trade accounts receivable in our European and North American 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, four percent and five percent for the years ended 2011, 2010 and 2009, respectively.

6. Financial Instruments

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

 

    December 31, 2011     December 31, 2010  
    Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 
(Millions)              
   
Long-term debt (including current maturities)   $ 1,162     $ 1,200     $ 1,162     $ 1,201  
Instruments with off-balance sheet risk:                                
Foreign exchange forward contracts:
Asset derivative contracts
    1       1       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 consolidated statements of income. The fair value of foreign exchange forward contracts are recorded in prepayments and other current assets or other current liabilities in the consolidated balance sheet. The fair value of our foreign exchange forward contracts, presented on a gross basis by derivative contract at December 31, 2011 and 2010, respectively, was as follows:

Fair Value of Derivative Instruments   December 31, 2011     December 31, 2010  
    Asset Derivatives     Liability Derivatives     Total     Asset Derivatives     Liability Derivatives     Total  
(Millions)
Foreign exchange forward contracts   $ 1     $     $ 1     $ 2     $     $ 2  

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

    December 31, 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     $ 1       n/a       n/a     $ 2       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 December 31, 2011
(all of which mature in 2012):

                Notional Amount
in Foreign Currency
 
(Millions)
Australian dollars —Purchase                     2  
British pounds —Purchase                     4  
European euro —Sell                     (56 )
Japanese Yen —Purchase                     431  
South African rand —Purchase                     92  
U.S. dollars —Purchase                     2  
  —Sell                     (47 )
Other —Purchase                     1  
  —Sell                     (1 )

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 13 of the 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 was 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 relating to other participating employers is approximately $3 million as of December 31, 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 $13 million and $9 million at December 31, 2011 and 2010, respectively. At December 31, 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 December 31, 2011 the maximum amount reimbursable by Futaba to TMEL is approximately $3 million.

We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of December 31, 2011, we have guaranteed $58 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 $10 million and $6 million at December 31, 2011 and 2010, respectively. No negotiable financial instruments were held by our European subsidiary as of December 31, 2011 and 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 $14 million and $8 million at December 31, 2011 and 2010, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $9 million and $11 million at December 31, 2011 and 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 $9 million and $11 million in other current assets at December 31, 2011 and 2010, respectively. 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 December 31, 2011 and 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.

7. Income Taxes

The domestic and foreign components of our income before income taxes and noncontrolling interests are as follows:

 

Year Ended December 31,   2011     2010     2009  
(Millions)      
U.S. Income (loss) before income taxes   $ 55     $ (45 )   $ (118 )
Foreign income before income taxes     216       177       77  
Income (loss) before income taxes and noncontrolling interests   $ 271     $ 132     $ (41 )

Following is a comparative analysis of the components of income tax expense:
 
Year Ended December 31,   2011     2010     2009  
(Millions)      
Current —                        
U.S. federal   $     $     $ (2 )
State and local     2       1       4  
Foreign     91       64       35  
      93       65       37  
Deferred —                        
U.S. federal             (18 )
State and local             (3 )
Foreign     (5 )     4     (3 )
      (5 )     4     (24 )
Income tax expense   $ 88     $ 69     $ 13  

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income (loss):
 
Year Ended December 31,   2011     2010     2009  
(Millions)      
Income tax expense (benefit) computed at the statutory U.S. federal income tax rate   $ 95   $ 46   $ (14 )  
Increases (reductions) in income tax expense resulting from:                        
Foreign income taxed at different rates     (14 )     (16 )     14
Taxes on repatriation of dividends     6       4       4  
State and local taxes on income, net of U.S. federal income tax benefit     2       2       2  
Changes in valuation allowance for tax loss carryforwards and credits     (11 )     16       5  
Foreign tax holidays     (4 )     (5 )     (3 )
Investment and R&D tax credits     (4 )     (2 )     (5 )
Foreign earnings subject to U.S. federal income tax     6       5       3  
Adjustment of prior years taxes         4    
Impact of foreign tax law changes           (1 )     2  
Tax contingencies     3       12       6  
Goodwill impairment     3              
Other     6     4     (1 )
Income tax expense   $ 88     $ 69     $ 13  

The components of our net deferred tax assets were as follows:

December 31,   2011     2010  
(Millions)      
Deferred tax assets —                
Tax loss carryforwards:                
U.S.  federal   $ 41     $ 46  
State     45       43  
Foreign     57       56  
Investment tax credit benefits     45       46  
Postretirement benefits other than pensions     54       52  
Pensions     79       55  
Bad debts     3       3  
Sales allowances     6       6  
Payroll and other accruals     98       93  
Valuation allowance     (225 )     (247 )
Total deferred tax assets     203       203  
Deferred tax liabilities —                
Tax over book depreciation     65       82  
Other     62       54  
Total deferred tax liabilities     127       136  
Net deferred tax assets   $ 76     $ 67  

Certain amounts in the 2010 presentation were reclassified to conform to the current year presentation.

U.S. and state tax loss carryforwards have been presented net of uncertain tax positions, that if realized, would reduce tax loss carryforwards in 2011 and 2010 by $53 million and $9 million, respectively.

Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:

December 31,   2011     2010  
(Millions)      
Balance Sheet:                
Current portion — deferred tax asset   $ 40     $ 38  
Non-current portion — deferred tax asset     92       92  
Current portion — deferred tax liability shown in other current liabilities     (5 )     (7 )
Non-current portion — deferred tax liability     (51 )     (56 )
Net deferred tax assets   $ 76     $ 67  

As a result of the valuation allowances recorded for $225 million and $247 million at December 31, 2011 and 2010, respectively, we have potential tax assets that were not recognized on our balance sheet. These unrecognized tax assets resulted primarily from U.S. tax loss carryforwards, foreign tax loss carryforwards, foreign investment tax credits and U.S. state net operating losses that are available to reduce future U.S., U.S. state and foreign tax liabilities.

We reported income tax expense of $88 million, $69 million and $13 million in the years ending 2011, 2010 and 2009, respectively. The tax expense recorded in 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 $7 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 the impact of recording a valuation allowance against the tax benefit for losses in certain foreign jurisdictions and taxes on repatriation of foreign earnings.

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:

In 2008, given our historical losses in the U.S., we concluded that our ability to fully utilize our NOLs was limited, as we were required to project the continuation of the negative economic environment at that time and the impact of the negative operating environment on our tax planning strategies. As a result, we recorded a valuation allowance against all of our U.S. deferred tax assets except for 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, as of December 31, 2011, relating to the expected utilization of those NOLs. The recording of a valuation allowance does not impact the amount of the NOL that would be available for federal and state income tax purposes in future periods. The federal NOLs expire beginning in tax years ending in 2021 through 2029. The state NOLs expire in various tax years through 2029.

If our operating performance continues to improve on a sustained basis, our conclusion regarding the need for a U.S. 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. In addition, the charge to establish the U.S. valuation allowance eliminated the need for certain tax reserves which would need to be recorded if the valuation allowance was reversed. If we were to reverse our U.S. valuation allowance as of December 31, 2011, the impact on earnings would approximate $147 million.

In prior years, we recorded a valuation allowance against deferred tax assets generated by taxable losses in the U.S. as well as certain other foreign jurisdictions. Our 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. In certain foreign jurisdictions, we have recorded a tax benefit on NOLs and tax credits with unlimited lives that are supported by tax actions and forecasted profitability. If the tax actions are not successful or losses are incurred, we may need to record a valuation allowance in a future period. We have recorded net deferred tax assets of approximately $23 million in these jurisdictions as of December 31, 2011. These actions will cause variability in our effective tax rate.

We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries were approximately $698 million at December 31, 2011. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $269 million.

We have tax sharing agreements with our former affiliates that allocate tax liabilities for prior periods and establish indemnity rights on certain tax issues.

U.S. GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.

A reconciliation of our uncertain tax positions is as follows:

    2011     2010     2009  
(Millions)      
Uncertain tax positions —                      
Balance January 1   $ 111     $ 96     $ 83  
Gross increases in tax positions in current period     19       23       17  
Gross increases in tax positions in prior period     3       4       16  
Gross decreases in tax positions in prior period     (10 )     (6 )      
Gross decreases — settlements           (2 )     (17 )
Gross decreases — statute of limitations expired     (4 )     (4 )     (3 )
Balance December 31   $ 119     $ 111     $ 96  

Included in the balance of uncertain tax positions were $36 million at both December 31, 2011 and 2010, and $28 million in 2009, of tax benefits, that if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Related to the uncertain tax positions noted above, we accrued penalties of $2 million in 2009. No penalties were accrued in 2011 and 2010. Additionally, we accrued interest related to uncertain tax positions of $2 million in 2011, less than one million in 2010, and zero in 2009. Our liability for penalties was $2 million at December 31, 2011 and $3 million at both December 31, 2010 and 2009, respectively, and our liability for interest was $7 million, $5 million and $4 million at December 31, 2011, 2010 and 2009, respectively.

Our uncertain tax position at December 31, 2011 and 2010 included foreign exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $4 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of foreign income tax examinations may occur within the coming year.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2011, our tax years open to examination in primary jurisdictions are as follows:

    Open To Tax Year  
United States — due to NOL     1998  
Spain     2003  
Germany     2006  
Canada     2007  
Belgium     2009  
United Kingdom     2010  

8. Common Stock

We have authorized 135 million shares ($0.01 par value) of common stock, of which 62,101,335 shares and 61,541,760 shares were issued at December 31, 2011 and 2010, respectively. We held 1,694,692 and 1,294,692 shares of treasury stock at December 31, 2011 and 2010, respectively.

Equity Plans — In December 1996, we adopted the 1996 Stock Ownership Plan, which permitted the granting of a variety of awards, including common stock, restricted stock, performance units, stock equivalent units, stock appreciation rights (“SARs”) and stock options to our directors, officers, employees and consultants. The 1996 plan, which terminated as to new awards on December 31, 2001, was renamed the “Stock Ownership Plan.” In December 1999, we adopted the Supplemental Stock Ownership Plan, which permitted the granting of a variety of similar awards to our directors, officers, employees and consultants. We were authorized to deliver up to about 1.1 million treasury shares of common stock under the Supplemental Stock Ownership Plan, which also terminated as to new awards on December 31, 2001. In March 2002, we adopted the 2002 Long-Term Incentive Plan which permitted the granting of a variety of similar awards to our officers, directors, employees and consultants. Up to 4 million shares of our common stock were authorized for delivery under the 2002 Long-Term Incentive Plan. In March 2006, we adopted the 2006 Long-Term Incentive Plan which replaced the 2002 Long-Term Incentive Plan and permits the granting of a variety of similar awards to directors, officers, employees and consultants. On May 13, 2009, our stockholders approved an amendment to the Tenneco Inc. 2006 Long-Term Incentive Plan to increase the shares of common stock available thereunder by 2.3 million. Each share underlying an award generally counts as one share against the total plan availability. Each share underlying a full value award (e.g. restricted stock), however, counts as 1.25 shares against the total plan availability. As of December 31, 2011, up to 1,569,025 shares of our common stock remain authorized for delivery under the 2006 Long-Term Incentive Plan. Our nonqualified stock options have seven to 20 year terms and vest equally over a three-year service period from the date of the grant.

We have granted restricted common stock and stock options to our directors and certain key employees and restricted stock units, payable in cash, to certain key employees. These awards generally require, among other things, that the award holder remain in service to our company during the restriction period, which is currently three years, with a portion of the award vesting equally each year. We also have granted stock equivalent units and long-term performance units to certain key employees that are payable in cash. At December 31, 2011, the long-term performance units outstanding included a three-year grant for 2010-2012 (“the 2010 Grant”) payable in the first quarter of 2013 and a three-year grant for 2011-2013 (“the 2011 Grant”) payable in the first quarter of 2014. Payment is based on the attainment of specified performance goals. Grant value is based on stock price, cumulative EBITDA and free cashflow metrics. In addition, we have granted SARs to certain key employees in our Asian and Indian operations that are payable in cash after a three-year service period. The grant value is indexed to the stock price..

In November 2009, we successfully completed the public offering of 12 million shares of common stock at a price of $16.50 per share. We received $198 million in gross proceeds and approximately $188 million in net proceeds, after expenses from the sales of our common stock. We used the proceeds to repay outstanding borrowings under our revolving credit facility and for general corporate purposes..

Accounting Methods — We have recorded compensation expense of $3 million in each of the three years ended December 31, 2011, 2010 and 2009, respectively, related to nonqualified stock options as part of our selling, general and administrative expense. This resulted in a decrease in basic and diluted earnings per share of $0.05 in both 2011 and 2010, and $0.06 in 2009.

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 December 31, 2011, there was approximately $5 million of unrecognized compensation costs related to our stock options awards that we expect to recognize over a weighted average period of 0.7 years.

Compensation expense for restricted stock, restricted stock units, long-term performance units and SARs was $11 million, $14 million and $5 million for each of the years ended 2011, 2010 and 2009, respectively, and was recorded in selling, general, and administrative expense on the consolidated statements of income (loss).

Cash received from stock option exercises was $6 million in both 2011 and 2010, and $1 million in 2009. Stock option exercises would have generated an excess tax benefit of $4 million in both 2011 and 2010, and $1 million in 2009. 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.

 

Year Ended December 31,   2011     2010     2009  
Stock Options Granted                        
Weighted average grant date fair value, per share   $ 26.13     $ 11.76     $ 1.34  
Weighted average assumptions used:                        
Expected volatility     70.1 %     75.4 %     82.6 %
Expected lives     4.8       4.6       4.5  
Risk-free interest rates     1.8 %     2.2 %     1.48 %
Dividend yields     0.00 %     0.00 %     0.00 %

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.

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

Year Ended December 31, 2011   Shares
Under
Option
    Weighted
Avg.
Exercise
Prices
    Weighted
Avg.
Remaining
Life in
Years
    Aggregate
Intrinsic
Value
 
(Millions)      
Outstanding Stock Options                                
Outstanding, January 1, 2011     3,168,474     $ 14.27       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     3,174,753     $ 16.34       4.4     $ 80  
Granted     2,711       43.51                  
Forfeited     (23,841 )     14.26                  
Exercised     (82,166 )     11.50             $ 3  
Outstanding, June 30, 2011     3,071,457     $ 16.51       4.2     $ 76  
Granted     1,649       44.02                  
Forfeited     (450 )     4.03                  
Exercised     (115,249 )     8.94             $ 3  
Outstanding, September 30, 2011     2,957,407     $ 16.83       4.0     $ 54  
Granted     173       24.97                  
Expired     (10,000 )     1.57                  
Forfeited     (17,716 )     1.82                  
Exercised     (186,665 )     10.19             $ 3  
Outstanding, December 31, 2011     2,743,199     $ 17.43       4.0     $ 37  
Vested and Expected to Vest, December 31, 2011     2,700,577     $ 17.17       4.0     $ 37  
Exercisable, December 31, 2011     2,164,226     $ 15.95       3.9     $ 30  

The weighted average grant-date fair value of options granted during the years 2011, 2010 and 2009 was $45.37, $11.84 and $1.34, respectively. The total intrinsic value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $13 million, $10 million and $4 million, respectively. The total fair value of shares vested was $3 million in both 2011 and 2010, and $4 million in 2009.

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

Year Ended December 31, 2011
  Shares     Weighted Avg.
Grant Date
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  
Granted     1,042       44.02  
Vested     (3,206 )     15.41  
Forfeited     (158 )     1.86  
Nonvested balance at September 30, 2011     413,539     $ 22.74  
Granted     109       24.97 .
Vested     (5,735 )     29.92  
Forfeited     (162 )     1.87  
Nonvested balance at December 31, 2011     407,751     $ 22.64  

The fair value of restricted stock grants is equal to the average market price of our stock at the date of grant. As of December 31, 2011, approximately $5 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.8 years.

The weighted average grant-date fair value of restricted stock granted during the years 2011, 2010 and 2009 was $45.38, $19.60 and $2.02, respectively. The total fair value of restricted shares vested was $3 million in 2011 and $2 million in both 2010 and 2009.

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. This share repurchase program was intended to offset dilution from shares of restricted stock and stock options that were issued in 2011 to employees. We purchased all of the 400,000 shares through open market purchases, which were funded through cash from operations, as of August 3, 2011 at a total cost of $16 million through this program. These repurchased shares are held as part of our treasury stock which increased to 1,694,692 shares at December 31, 2011 from 1,294,692 shares at December 31, 2010.

.In January 2012, our Board of Directors approved a share repurchase program, authorizing our company to repurchase up to 600,000 shares of the Company’s outstanding common stock over a 12 month period. This share repurchase program is intended to offset dilution from shares of restricted stock and stock options issued in 2012 to employees.

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 December 31, 2011, $7 million of total unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 1.2 years.

9. Preferred Stock

We had 50 million shares of preferred stock ($0.01 par value) authorized at December 31, 2011 and 2010, respectively. No shares of preferred stock were
outstanding at those dates.

10. Pension Plans, Postretirement and Other Employee Benefits

Pension benefits are based on years of service and, for most salaried employees, on average compensation. Our funding policy is to contribute to the plans amounts necessary to satisfy the funding requirement of applicable federal or foreign laws and regulations. Of our $784 million benefit obligation at December 31, 2011, approximately $710 million required funding under applicable federal and foreign laws. At December 31, 2011, we had approximately $529 million in assets to fund that obligation. The balance of our benefit obligation, $74 million, did not require funding under applicable federal or foreign laws and regulations. Pension plan assets were invested in the following classes of securities:

    Percentage of Fair Market Value  
    December 31, 2011     December 31, 2010  
    U.S.     Foreign     U.S.     Foreign  
Equity Securities     70 %     53 %     71 %     57 %
Debt Securities     29 %     40 %     28 %     36 %
Real Estate           2 %           2 %
Other     1 %     5 %     1 %     5 %

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 accounting guidance on fair value measurement.

The following table presents our plan assets using the fair value hierarchy as of December 31, 2011 and 2010, respectively. The fair value hierarchy has three levels based on the methods used to determine the fair value. Level 1 assets refer to those asset values based on quoted market prices in active markets for identical assets at the measurement date. Level 2 assets refer to assets with values determined using significant other observable inputs, and Level 3 assets include values determined with non-observable inputs.

Fair Value Level as of December 31, 2011   U.S.   Foreign
Asset Category   Level 1   Level 2   Level 3     Level 1   Level 2   Level 3  
(Millions)
Equity securities:
U.S. large cap     $ 24     $ 102     $       $ 23     $ 9     $  
U.S. mid cap                                 2        
U.S. small cap             18                     1        
Non-U.S. large cap                           26       63        
Non-U.S. mid cap             17               3       19        
Non-U.S. small cap                                        
Emerging markets             5               1              
Debt securities:
U.S. corporate bonds             4                            
U.S. other fixed income             67                            
Non-U.S. treasuries/government bonds                           37       35        
Non-U.S. corporate bonds                           17       20        
Non-U.S. mortgage backed securities                                 3        
Non-U.S. municipal obligations                           1              
Non-U.S. asset backed securities                                 3        
Non-U.S. other fixed income                                 1        
Real Estate:
Non-U.S. real estate                                 5        
Other:
Insurance contracts                                 7       6  
Cash held in bank accounts       2                     3              
Total     $ 26     $ 213     $       $ 111     $ 173     $ 6  
Fair Value Level as of December 31, 2010   U.S.   Foreign
Asset Category   Level 1   Level 2   Level 3     Level 1   Level 2   Level 3  
(Millions)
Equity securities:
U.S. large cap     $ 33     $ 96     $       $ 25     $ 7     $  
U.S. mid cap                                 1        
U.S. small cap             18                     1        
Non-U.S. large cap             18               36       65        
Non-U.S. mid cap                                 19        
Non-U.S. small cap                                        
Emerging markets             6               1              
Debt securities:
U.S. treasuries/government bonds       20                                  
U.S. corporate bonds             20                            
U.S. mortgage backed securities             24                            
U.S. asset backed securities             1                            
U.S. other fixed income             4                            
Non-U.S. treasuries/government bonds             1               59       5        
Non-U.S. corporate bonds             1               15       21        
Non-U.S. other fixed income                                       6  
Real Estate:
Non-U.S. real estate                                 5        
Other:
Insurance contracts                                 7        
Cash held in bank accounts                           6              
Total     $ 53     $ 189     $       $ 142     $ 139     $ 6  

 

Level 1 assets were valued using market prices based on daily net asset value (NAV) or prices available daily through a public stock exchange. Level 2 assets were valued primarily using market prices, sometimes net of estimated realization expenses, and based on broker/dealer markets or in commingled funds where NAV is not available daily or publicly. For insurance contracts, the estimated surrender value of the policy was used to estimate fair market value. Level 3 assets in the Netherlands were valued using an industry standard model based on certain assumptions such as the U-return and estimated technical reserve.

The table below summarizes the changes in the fair value of the Level 3 assets:

    December 31, 2011     December 31, 2010  
Level 3 Assets   U.S.     Foreign     U.S.     Foreign  
(Millions)
Balance at December 31 of the previous year   $     $ 6     $     $ 6  
Actual return on plan assets:
Relating to assets still held at the reporting date                        
Ending Balance at December 31   $     $ 6     $     $ 6  

The following table contains information about significant concentrations of risk, including all individual assets that make up more than 5% of the total assets and any direct investments in Tenneco stock:

Asset Category   Fair Value Level  Value
(Millions)
  Percentage of
Total Assets
 
2011: Tenneco Stock       1     $ 24       4.6 %
2010: Tenneco Stock       1     $ 34       6.3 %

Our investment policy for both our domestic and foreign plans is to invest more heavily in equity securities than debt securities. Targeted pension plan allocations are 70 percent in equity securities and 30 percent in debt securities, with acceptable tolerance levels of plus or minus five percent within each category for our domestic plans. Our foreign plans are individually managed to different target levels depending on the investing environment in each country.

Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and adjusts for any expected changes in the long-term outlook for the equity and fixed income markets for both our domestic and foreign plans.

A summary of the change in benefit obligation, the change in plan assets, the development of net amount recognized, and the amounts recognized in the balance sheets for the pension plans and postretirement benefit plan follows:

    Pension     Postretirement  
    2011     2010     2011     2010  
    U.S.     Foreign     U.S.     Foreign     U.S.     U.S.  
(Millions)      
Change in benefit obligation:                                                
Benefit obligation at December 31 of the previous year   $ 354     $ 361     $ 341     $ 333     $ 135     $ 142  
Currency rate conversion           (6 )           (3 )            
Settlement           (4 )           (2 )            
Service cost     1       6       1       5       1       1  
Interest cost     20       19       20       19       7       8  
Administrative expenses/taxes paid           (1 )           (1 )            
Plan amendments                       1              
Actuarial (gain)/loss     56       8       22       21       5       (7 )
Benefits paid     (17 )     (15 )     (30 )     (15 )     (8 )     (9 )
Participants’ contributions           2             3              
Benefit obligation at December 31   $ 414     $ 370     $ 354     $ 361     $ 140     $ 135  
Change in plan assets:                                                
Fair value at December 31 of the previous year   $ 242     $ 287     $ 199     $ 262     $     $  
Currency rate conversion           (4 )           (1 )            
Settlement           (4 )           (2 )            
Actual return on plan assets     (7 )           40       20              
Employer contributions     21       24       33       20       9       9  
Prescription drug subsidy received                             (1 )      
Participants’ contributions           2             3              
Benefits paid     (17 )     (15 )     (30 )     (15 )     (8 )     (9 )
Fair value at December 31   $ 239     $ 290     $ 242     $ 287     $     $  
Development of net amount recognized:                                                
Unfunded status at December 31   $ (175 )   $ (80 )   $ (112 )   $ (74 )   $ (140 )   $ (135 )
Unrecognized cost:                                                
Actuarial loss     248       138       165       120       64       63  
Prior service cost/(credit)     1       9       2       11       (29 )     (35 )
Net amount recognized at December 31   $ 74     $ 67     $ 55     $ 57     $ (105 )   $ (107 )
Amounts recognized in the balance sheets as of December 31                                                
Noncurrent assets   $     $     $     $ 1     $     $  
Current liabilities     (3 )     (2 )     (3 )     (3 )     (9 )     (10 )
Noncurrent liabilities     (172 )     (78 )     (109 )     (72 )     (131 )     (125 )
Net amount recognized   $ (175 )   $ (80 )   $ (112 )   $ (74 )   $ (140 )   $ (135 )

Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) pension cost has been recorded based upon certain actuarial estimates as described below. Those estimates are subject to revision in future periods given new facts or circumstances.

Net periodic pension costs (income) for the years 2011, 2010, and 2009, consist of the following components:

    2011     2010     2009  
    U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
(Millions)      
Service cost — benefits earned during the year   $ 1     $ 6     $ 1     $ 5   $ 1     $ 4    
Interest cost     20       19       20       19     20       18    
Expected return on plan assets     (23 )     (20 )     (21 )     (19 )   (22 )     (19 )  
Curtailment loss                           1          
Settlement loss           1       6           2          
Net amortization:                                                
Actuarial loss     4       5       3       3     2       2    
Prior service cost           2             2     1       2    
Net pension costs   $ 2     $ 13     $ 9     $ 10   $ 5     $ 7    

Amounts recognized in accumulated other comprehensive loss for pension benefits consist of the following components:

    2011     2010  
    U.S.     Foreign     U.S.     Foreign  
(Millions)
Net actuarial loss   $ 248     $ 138     $ 165     $ 120  
Prior service cost     1       9       2       11  
    $ 249     $ 147     $ 167     $ 131  

In 2012, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive loss, as components of net periodic benefit cost:

    2012  
    U.S.     Foreign  
(Millions)
Net actuarial loss   $ 6     $ 7  
Prior service cost           1  
    $ 6     $ 8  

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2011 and 2010 were as follows::

    December 31, 2011     December 31, 2010  
    U.S.     Foreign     U.S.     Foreign  
(Millions)
Projected benefit obligation   $ 414     $ 363     $ 354     $ 332  
Accumulated benefit obligation     414       355       352       328  
Fair value of plan assets     239       284       242       257  

The following estimated benefit payments are payable from the pension plans to participants:

Year   U.S.     Foreign  
(Millions)
2012   $ 19     $ 16  
2013     24       15  
2014     22       16  
2015     20       17  
2016     20       18  
2017-2021     122       100  

The following assumptions were used in the accounting for the pension plans for the years of 2011, 2010, and 2009:

    2011     2010  
    U.S.     Foreign     U.S.     Foreign  
Weighted-average assumptions used to determine benefit obligations
Discount rate     4.8 %     4.9 %     5.6 %   5.4 %
Rate of compensation increase     N/A       3.5 %     N/A       3.5 %

 

    2011     2010     2009  
    U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
Weighted-average assumptions used to
  determine net periodic benefit cost
                                               
Discount rate     5.6 %     5.4 %     6.1 %     6.0 %     6.2 %     6.3 %
Expected long-term return on plan assets     8.3 %     6.4 %     8.3 %     6.9 %     8.8 %     7.3 %
Rate of compensation increase     N/A       3.5 %     N/A       3.5 %     N/A       3.1 %

We made contributions of $45 million to our pension plans during 2011. Based on current actuarial estimates, we believe we will be required to make contributions of $48 million to those plans during 2012. Pension contributions beyond 2012 will be required, but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2012.

We have life insurance plans which provided benefit to a majority of our U.S. employees. We also have postretirement plans for our U.S. employees hired before January 1, 2001. The plans cover salaried employees retiring on or after attaining age 55 who have at least 10 years of service with us after attaining age 45. For hourly employees, the postretirement benefit plans generally cover employees who retire according to one of our hourly employee retirement plans. All of these benefits may be subject to deductibles, co-payment provisions and other limitations, and we have reserved the right to change these benefits. For those employees hired after January 1, 2001, we do not provide any postretirement benefits. Our postretirement healthcare and life insurance plans are not funded. The measurement date used to determine postretirement benefit obligations is December 31.

 

Net periodic postretirement benefit cost for the years 2011, 2010, and 2009, consists of the following components:

    2011     2010     2009  
(Millions)      
Service cost — benefits earned during the year   $ 1     $ 1     $ 1  
Interest on accumulated postretirement benefit obligation     7       8       8  
Net amortization:                        
Actuarial loss     4       4       5  
Prior service credit     (6 )     (6 )     (6 )
Net periodic postretirement benefit cost   $ 6     $ 7     $ 8  

In 2012, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive loss, as components of net periodic benefit cost:

    2012  
(Millions)    
Net actuarial loss   $  5  
Prior service credit   (6 )
    $  (1 )

The following estimated postretirement benefit payments are payable from the plan to participants:

Year   Postretirement Benefits  
(Millions)      
2012     9  
2013     10  
2014     10  
2015     10  
2016     10  
2017-2021     48  

The following estimated subsidies under the Medicare Prescription Drug, Improvement, and Modernization Act are expected to be received:

Year   Postretirement Benefits  
(Millions)      
2012     1  
2013     1  
2014     1  
2015     1  
2016     1  
2017-2021     4  

The weighted-average assumed health care cost trend rate used in determining the 2011 accumulated postretirement benefit obligation was 8.0 percent, declining to 4.5 percent by 2019. The health care cost trend rate was 7.5 percent for 2010 and 8.3 percent in 2009, declining to five percent over succeeding periods.

The following assumptions were used in the accounting for postretirement cost for the years of 2011, 2010 and 2009:

    2011     2010  
Weighted-average assumptions used to determine benefit obligations                
Discount rate     4.8 %     5.6 %
Rate of compensation increase     N/A       N/A  

    2011     2010     2009  
Weighted-average assumptions used to determine net periodic benefit cost                        
Discount rate     5.6 %     6.1 %     6.2 %
Rate of compensation increase     N/A       N/.A       4.0 %

A one-percentage-point increase in the 2011 assumed health care cost trend rates would increase total service and interest cost by less than $1 million and would increase the postretirement benefit obligation by $10 million. A one-percentage-point decrease in the 2011 assumed health care cost trend rates would decrease the total service and interest cost by less than $1 million and decrease the postretirement benefit obligation by $8 million.

Based on current actuarial estimates, we believe we will be required to make postretirement contributions of approximately $9 million during 2012.

We have established Employee Stock Ownership Plans for the benefit of U.S. employees. Under the plans, subject to limitations in the Internal Revenue Code, participants may elect to defer up to 75 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We match in cash
50 percent of each employee’s contribution up to eight percent of the employee’s salary. In 2009, we temporarily discontinued these matching contributions, as a result of the global economic downturn that began in 2008. We restored the matching contributions to salaried and non-union hourly U.S. employees beginning on January 1, 2010. In connection with freezing the defined benefit pension plans for nearly all U.S. based salaried and non-union hourly employees effective December 31, 2006, and the related replacement of those defined benefit plans with defined contribution plans, we are making additional contributions to the Employee Stock Ownership Plans. We recorded expense for these contributions of approximately $18 million, $17 million, and $10 million in 2011, 2010 and 2009, respectively. Matching contributions vest immediately. Defined benefit replacement contributions fully vest on the employee’s third anniversary of employment.

Effective January 1, 2012, the Tenneco Employee Stock Ownership Plan for Hourly Employees and the Tenneco Employee Stock Ownership Plan for Salaried Employees were merged into one plan called the Tenneco 401(k) Retirement Savings Plan (the “Retirement Savings Plan”). The Retirement Savings Plan has been designed to adopt a Safe-Harbor approach approved by the Internal Revenue Service and which will provide for increased company matching contributions at lower percentages of employee deferrals. The company matching contribution will increase from 50 percent on the first eight percent of employee contributions to 100 percent on the first three percent and 50 percent on the next two percent of employee contributions.

 

 

11. Segment and Geographic Area 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.

Segment results for 2011, 2010, and 2009 are as follows:

    Segment  
    North
America
    Europe     Asia
Pacific
    Reclass
& Elims
    Consolidated  
(Millions)      
At December 31, 2011, and for the Year Then Ended                                        
Revenues from external customers   $ 3,414     $ 3,013     $ 778     $     $ 7,205  
Intersegment revenues     12       156       26       (194 )      
Interest income           3       1             4  
Depreciation and amortization of intangibles     95       88       24             207  
Earnings before interest expense, income taxes, and noncontrolling interests     216       125       38             379  
Total assets     1,419       1,326       567       25       3,337  
Equity in net assets of unconsolidated affiliates           9                   9  
Expenditures for plant, property and equipment     88       95       35             218  
Noncash items other than depreciation and amortization     6       12     11             29  
At December 31, 2010, and for the Year Then Ended                                        
Revenues from external customers   $ 2,821     $ 2,446     $ 670     $     $ 5,937  
Intersegment revenues     11       148       28       (187 )      
Interest income           3       1             4  
Depreciation and amortization of intangibles     109       86       21             216  
Earnings before interest expense, income taxes, and noncontrolling interests     155       76       50             281  
Total assets     1,281       1,337       525       24       3,167  
Equity in net assets of unconsolidated affiliates           9                   9  
Expenditures for plant, property and equipment     59       66       29             154  
Noncash items other than depreciation and amortization     4       6                 10  
At December 31, 2009, and for the Year Then Ended                                        
Revenues from external customers   $ 2,092     $ 2,047     $ 510     $     $ 4,649  
Intersegment revenues     7       162       15       (184 )      
Interest income           3       1             4  
Depreciation and amortization of intangibles     113       89       19             221  
Income before interest expense, income taxes, and noncontrolling interests     42       20       30             92  
Total assets     1,102       1,338       391       10       2,841  
Equity in net assets of unconsolidated affiliates           12                   12  
Expenditures for plant, property and equipment     45       58       15             118  
Noncash items other than depreciation and amortization     8       (1 )     1             8  

The following table shows information relating to our external customer revenues for each product or each group of similar products:

    Net Sales  
Year Ended December 31,   2011     2010     2009  
(Millions)      
Emission Control Systems & Products                        
Aftermarket   $ 351     $ 318     $ 315  
Original Equipment                        
OE Value-add     2,732       2,223       1,638  
OE Substrate     1,678       1,284       966  
      4,410       3,507       2,604  
      4,761       3,825       2,919  
Ride Control Systems & Products                        
Aftermarket     944       851       721  
Original Equipment     1,500       1,261       1,009  
      2,444       2,112       1,730  
Total Revenues   $ 7,205     $ 5,937     $ 4,649  

The following customers accounted for 10 percent or more of our net sales in any of the last three years.
 
Customer   2011     2010     2009  
General Motors     19 %     19 %     16 %
Ford     15 %     13 %     14 %

The following table shows information relating to the geographic regions in which we operate:

    Geographic Area  
    United States     Germany     Canada     China     Other Foreign(a)     Reclass & Elims     Consolidated  
(Millions)      
At December 31, 2011, and for the Year Then Ended                                                        
Revenues from external customers(b)   $ 2,795     $ 826     $ 343     $ 567     $ 2,674     $     $ 7,205  
Long-lived assets(c)     359       110       57       104       530             1,160  
Total assets     1,280       347       163       387       1,251       (91 )     3,337  
At December 31, 2010, and for the Year Then Ended                                                        
Revenues from external customers(b)   $ 2,275     $ 616     $ 327     $ 473     $ 2,246     $     $ 5,937  
Long-lived assets(c)     352       109       64       76       564             1,165  
Total assets     1,147       322       149       321       1,308       (80 )     3,167  
At December 31, 2009, and for the Year Then Ended                                                        
Revenues from external customers(b)   $ 1,531     $ 559     $ 416     $ 361     $ 1,782     $     $ 4,649  
Long-lived assets(c)     373       116       75       61       604             1,229  
Total assets     984       409       125       249       1,153       (79 )     2,841  
Note:  (a)   Revenues from external customers and long-lived assets for individual foreign countries other than Germany, Canada, and China are not material.
(b)   Revenues are attributed to countries based on location of the shipper.
(c)   Long-lived assets include all long-term assets except goodwill, intangibles and deferred tax assets.

12. Commitments and Contingencies

Capital Commitments

We estimate that expenditures aggregating approximately $80 million will be required after December 31, 2011 to complete facilities and projects authorized at such date, and we have made substantial commitments in connection with these facilities and projects.

Lease Commitments

We have long-term leases for certain facilities, equipment and other assets. The minimum lease payments under our non-cancelable operating leases with lease terms in excess of one year are $33 million in 2012, $24 million in 2013, $17 million in 2014, $10 million in 2015, and $8 million in both 2016 and subsequent years. The minimum lease payments under our non-cancelable capital leases with lease terms in excess of one year are less than $1 million in each of the next five years. Total rental expense for the year 2011, 2010 and 2009 was $52 million, $45 million and $43 million, respectively.

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 upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors 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 consolidated financial statements.

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 December 31, 2011, we have the obligation to remediate or contribute towards the remediation of certain sites, including one Federal Superfund site. At December 31, 2011, our aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $17 million, of which $5 million is recorded in other current liabilities and $12 million is recorded in deferred credits and other liabilities in our consolidated balance sheet. For those locations in which the liability was discounted, the weighted average discount rate used was 1.9 percent. The undiscounted value of the estimated remediation costs was $20 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 is 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 site, or as a liable party at the other locations referenced herein, will be material to our consolidated results of operations, financial position or cash flows.

We 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, in the U.S. we are subject to an audit in 11 states with respect to the payment of unclaimed property to those states, spanning a period as far back as 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 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 products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 100 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to 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:

Year Ended December 31,   2011     2010     2009  
(Millions)      
Beginning Balance   $ 33     $ 32     $ 27  
Accruals related to product warranties     11       19       18  
Reductions for payments made     (18 )     (18 )     (13 )
Ending Balance   $ 26     $ 33     $ 32  

In the fourth quarter of 2011, we encountered an issue in our North America OE ride control business involving struts supplied on one particular OE platform. As a result, we directly incurred approximately $2 million in premium freight and overtime costs. We are continuing to work through details with the customer to determine responsibility for any other costs associated with this issue. We cannot estimate the amount of these costs at this time, but do not believe they will be material to our annual operating results.

13. Supplemental Guarantor Condensed Consolidating Financial Statements

Basis of Presentation

Substantially 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. However, a subsidiary’s guarantee may be released in certain customary circumstances such as a sale of the subsidiary, or all, or substantially all of its assets in accordance with the indenture applicable to the notes. The Guarantor Subsidiaries are combined in the presentation below.

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 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.

STATEMENT OF INCOME (LOSS)

For the Year Ended December 31, 2011   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Revenues                                        
Net sales and operating revenues —                                        
External   $ 3,103     $ 4,102     $     $     $ 7,205  
Affiliated companies     162       514             (676 )      
      3,265       4,616             (676 )     7,205  
Costs and expenses                                        
Cost of sales
(exclusive of depreciation and amortization shown below)
    2,764       3,949             (676 )     6,037  
Goodwill impairment charge           11                   11  
Engineering, research, and development     57       76                   133  
Selling, general, and administrative     144       281       3             428  
Depreciation and amortization of other intangibles     74       133                   207  
      3,039       4,450       3       (676 )     6,816  
Other income (expense)                                        
Loss on sale of receivables           (5 )                 (5 )
Other income (expense)     80     1             (86 )     (5 )
      80     (4 )           (86 )     (10 )
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income from affiliated companies     306     162       (3 )     (86 )     379  
Interest expense —                                        
External (net of interest capitalized)     (1 )     6       103             108  
Affiliated companies (net of interest income)     211       (72 )     (139 )            
Earnings (loss) before income taxes, noncontrolling interests and equity in net income from affiliated companies     96     228       33     (86 )     271  
Income tax expense (benefit)     12     76                 88  
Equity in net income (loss) from affiliated companies     116             124     (240 )      
Net income (loss)     200     152       157     (326 )     183
Less: Net income attributable to noncontrolling interests           26                   26  
Net income (loss) attributable to Tenneco Inc.   $ 200   $ 126     $ 157   $ (326 )   $ 157

STATEMENT OF INCOME (LOSS)

For the Year Ended December 31, 2010   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Revenues                                        
Net sales and operating revenues —                                        
External   $ 2,571     $ 3,366     $     $     $ 5,937  
Affiliated companies     130       472             (602 )      
      2,701       3,838             (602 )     5,937  
Costs and expenses                                        
Cost of sales
(exclusive of depreciation and amortization shown below)
    2,331       3,171             (602 )     4,900  
Engineering, research, and development     48       69                   117  
Selling, general, and administrative     153       261       3             417  
Depreciation and amortization of other intangibles     86       130                   216  
      2,618       3,631       3       (602 )     5,650  
Other income (expense)                                        
Loss on sale of receivables           (3 )                 (3 )
Other income (expense)     12     1             (16 )     (3 )
      12     (2 )           (16 )     (6 )
Earnings before interest expense, income taxes, noncontrolling interests and equity in
net income from affiliated companies
    95     205       (3 )     (16 )     281  
Interest expense —                                        
External (net of interest capitalized)     (2 )     7       144             149  
Affiliated companies (net of interest income)     186       (54 )     (132 )            
Earnings (loss) before income taxes, noncontrolling interests and equity in
net income from affiliated companies
    (89 )     252       (15 )     (16 )     132  
Income tax expense (benefit)     7     62                 69  
Equity in net income (loss) from affiliated companies     154             54     (208 )      
Net income (loss)     58     190       39     (224 )     63
Less: Net income attributable to noncontrolling interests           24                   24  
Net income (loss) attributable to Tenneco Inc.   $ 58   $ 166     $ 39   $ (224 )   $ 39

STATEMENT OF INCOME (LOSS)

For the Year Ended December 31, 2009   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Revenues                                        
Net sales and operating revenues —                                        
External   $ 1,915     $ 2,734     $     $     $ 4,649  
Affiliated companies     92       399             (491 )      
      2,007       3,133             (491 )     4,649  
Costs and expenses                                        
Cost of sales
(exclusive of depreciation and amortization shown below)
    1,836       2,530             (491 )     3,875  
Engineering, research, and development     36       61                   97  
Selling, general, and administrative     105       236       3             344  
Depreciation and amortization of other intangibles     91       130                   221  
      2,068       2,957       3       (491 )     4,537  
Other income (expense)                                        
Loss on sale of receivables           (9 )                 (9 )
Other income (expense)     (2 )     4             (13 )     (11 )
      (2 )     (5 )           (13 )     (20 )
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in
net income from affiliated companies
    (63 )     171       (3 )     (13 )     92  
Interest expense —                                        
External (net of interest capitalized)     (1 )     4       130             133  
Affiliated companies (net of interest income)     140       (15 )     (125 )            
Earnings (loss) before income taxes, noncontrolling interests, and equity in
net income from affiliated companies
    (202 )     182       (8 )     (13 )     (41 )
                                         
Income tax expense (benefit)     (1 )     33       (19 )           13  
Equity in net income (loss) from affiliated companies     124             (84 )     (40 )      
Net income (loss)     (77 )     149       (73 )     (53 )     (54 )
Less: Net income attributable to noncontrolling interests           19                   19  
Net income (loss) attributable to Tenneco Inc.   $ (77 )   $ 130     $ (73 )   $ (53 )   $ (73 )

BALANCE SHEET

December 31, 2011   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
ASSETS                                        
Current assets:                                        
Cash and cash equivalents   $ 1     $ 213     $     $     $ 214  
Receivables, net     455       1,214       27       (716 )     980  
Inventories     248       344                   592  
Deferred income taxes     35       31             (26 )     40  
Prepayments and other     21       132                   153  
Total current assets     760       1,934       27       (742 )     1,979  
Other assets:                                        
Investment in affiliated companies     444             681       (1,125 )      
Notes and advances receivable from affiliates     4,252       1,507       6,059       (11,818 )      
Long-term receivables, net     2       8                   10  
Goodwill     22       52                   74  
Intangibles, net     13       19                   32  
Deferred income taxes     64       25       3           92  
Other     31       45       27             103  
      4,828       1,656       6,770       (12,943 )     311  
Plant, property, and equipment, at cost     1,041       2,112                   3,153  
Less — Accumulated depreciation and amortization     (749 )     (1,357 )                 (2,106 )
      292       755                   1,047  
Total assets   $ 5,880     $ 4,345     $ 6,797     $ (13,685 )   $ 3,337  
LIABILITIES AND SHAREHOLDERS' EQUITY                                        
Current liabilities:                                        
Short-term debt (including current maturities of long-term debt)                                        
Short-term debt — non-affiliated   $     $ 64     $ 2     $     $ 66  
Short-term debt — affiliated     203       374       10       (587 )      
Trade payables     455       825             (109 )     1,171  
Accrued taxes     11       33                   44  
Other     118       178       39       (46 )     289  
Total current liabilities     787       1,474       51       (742 )     1,570  
Long-term debt — non-affiliated           9       1,149             1,158  
Long-term debt — affiliated     4,718       1,546       5,554       (11,818 )      
Deferred income taxes           51                 51  
Postretirement benefits and other liabilities     407       92             4       503  
Commitments and contingencies                              
Total liabilities     5,912       3,172       6,754       (12,556 )     3,282  
Redeemable noncontrolling interests           12                   12  
Tenneco Inc. Shareholders' equity     (32 )     1,118       43     (1,129 )    
Noncontrolling interests           43                   43  
Total equity     (32 )     1,161       43     (1,129 )     43  
Total liabilities, redeemable noncontrolling interests and equity   $ 5,880     $ 4,345     $ 6,797     $ (13,685 )   $ 3,337  

BALANCE SHEET

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

STATEMENT OF CASH FLOWS

Year Ended December 31, 2011   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Operating Activities                                        
Net cash provided (used) by operating activities   $ 401     $ 83     $ (239 )   $     $ 245  
Investing Activities                                        
Proceeds from sale of assets     3       1                   4  
Cash payments for plant, property, and equipment     (69 )     (144 )                 (213 )
Cash payments for software related intangible assets     (4 )     (11 )                 (15 )
Net cash used by investing activities     (70 )     (154 )                 (224 )
Financing Activities                                        
Issuance of long-term debt           5                 5  
Debit issuance cost on long-term debt                 (1 )           (1 )
Retirement of long-term debt           (1 )     (23 )           (24 )
Increase (decrease) in bank overdrafts           3                 3
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt           6       24           30  
Intercompany dividends and net increase (decrease) in intercompany obligations     (330 )     75       255              
Capital contribution from noncontrolling interest partner           1                   1  
Purchase of additional noncontrolling equity interest           (4 )                 (4 )
Distribution to noncontrolling interests partners           (20 )                 (20 )
Purchase of common stock under the share repurchase program                 (16 )           (16 )
Net cash provided (used) by financing activities     (330 )     65       239             (26 )
Effect of foreign exchange rate changes on cash and cash equivalents           (14 )                 (14 )
Increase (decrease) in cash and cash equivalents     1       (20 )                 (19 )
Cash and cash equivalents, January 1           233                   233  
Cash and cash equivalents, December 31 (Note)   $ 1     $ 213     $     $     $ 214  
Note:   Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase.

STATEMENT OF CASH FLOWS

Year Ended December 31, 2010   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Operating Activities                                        
Net cash provided (used) by operating activities   $ 97     $ 380     $ (233 )   $     $ 244  
Investing Activities                                        
Proceeds from sale of assets     1       2                   3  
Cash payments for plant, property, and equipment     (50 )     (101 )                 (151 )
Cash payments for software related intangible assets     (7 )     (5 )                 (12 )
Investment and other           3                   3  
Net cash used by investing activities     (56 )     (101 )                 (157 )
Financing Activities                                        
Issuance of long-term debt           5     875             880  
Debit issuance cost on long-term debt                 (24 )           (24 )
Retirement of long-term debt           (4 )     (860 )           (864 )
Increase (decrease) in bank overdrafts           2                 2
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt           (10 )               (10 )
Intercompany dividends and net increase (decrease) in intercompany obligations     (61 )     (181 )     242              
Distribution to noncontrolling interests partners           (14 )                 (14 )
Net cash provided (used) by financing activities     (61 )     (202 )     233             (30 )
Effect of foreign exchange rate changes on cash and cash equivalents           9                   9  
Increase (decrease) in cash and cash equivalents     (20 )     86                   66  
Cash and cash equivalents, January 1     20       147                   167  
Cash and cash equivalents, December 31 (Note)   $     $ 233     $     $     $ 233  
Note:   Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase.

STATEMENT OF CASH FLOWS

Year Ended December 31, 2009   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Operating Activities                                        
Net cash provided (used) by operating activities   $ 347     $ 160     $ (266 )   $     $ 241  
Investing Activities                                        
Proceeds from sale of assets           5                   5  
Cash payments for plant, property, and equipment     (42 )     (78 )                 (120 )
Acquisition of business (net of cash acquired)         1                   1  
Cash payments for software related intangible assets     (2 )     (4 )                 (6 )
Investments and other           1                   1  
Net cash used by investing activities     (44 )     (75 )                 (119 )
Financing Activities                                        
Issuance of common shares                 188             188  
Issuance of long-term debt                 6             6  
Debit issuance cost on long-term debt                 (8 )           (8 )
Retirement of long-term debt           (5 )     (17 )           (22 )
Increase (decrease) in bank overdrafts           (23 )                 (23 )
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt           21       (239 )           (218 )
Intercompany dividends and net increase (decrease) in intercompany obligations     (299 )     (37 )     336              
Distribution to noncontrolling interests partners           (10 )                 (10 )
Net cash provided (used) by financing activities     (229 )     (54 )     266             (87 )
Effect of foreign exchange rate changes on cash and cash equivalents           6                   6  
Increase (decrease) in cash and cash equivalents     4       37                   41  
Cash and cash equivalents, January 1     16       110                   126  
Cash and cash equivalents, December 31 (Note)   $ 20     $ 147     $     $     $ 167  
Note:   Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase.

 

14. Quarterly Financial Data (Unaudited)
Quarter     Net Sales
and
Operating
Revenues
    Cost of Sales
(Excluding
Depreciation and
Amortization)
    Earnings Before
Interest Expense,
Income Taxes
and Noncontrolling
Interests
    Net Income (Loss)
Attributable
to Tenneco Inc.
   
(Millions)  
2011                          
1st   $ 1,760   $ 1,466   $ 94 $ 47
2nd     1,888     1,565     113     50
3rd     1,773     1,492     84     30
4th     1,784     1,514     88     30  
    $ 7,205   $ 6,037   $ 379   $ 157
2010                          
1st   $ 1,316   $ 1,073   $ 59 $ 7
2nd     1,502     1,222     93     40
3rd     1,542     1,280     67     10
4th     1,577     1,325     62     (18 )
    $ 5,937   $ 4,900   $ 281   $ 39

Quarter   Basic
Earnings (Loss)
per Share of
Common Stock
    Diluted
Earnings (Loss)
per Share of
Common Stock
 
2011                
1st   $ 0.78     $ 0.75
2nd     0.84     0.81
3rd     0.51     0.49
4th     0.50       0.49  
Full Year     2.62       2.55  
2010                
1st   $ 0.11     $ 0.11
2nd     0.68     0.66
3rd     0.17     0.17
4th     (0.31 )     (0.31 )
Full Year     0.65       0.63  
Note:   The sum of the quarters may not equal the total of the respective year's earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year.

(The preceding notes are an integral part of the foregoing consolidated financial statements.)