Financials (10-K): Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As you read the following review of our financial condition and results of operations, you should also read our consolidated financial statements and related notes beginning on Item 8.

Executive Summary
We are one of the world’s leading manufacturers of automotive emission control and ride control products and systems. We serve both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe®, Rancho®, Clevite® Elastomers and Fric Rot™ ride control products and Walker®, Fonos™, and Gillet™ emission control products. Worldwide we serve more than 65 different original equipment manufacturers, and our products or systems are included on six of the top 10 passenger models produced in Europe and eight of the top 10 light truck models produced in North America for 2009. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. As of December 31, 2009, we operated 84 manufacturing facilities worldwide and employed approximately 21,000 people to service our customers’ demands.

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

The deterioration in the global economy and global credit markets beginning in 2008 has negatively impacted global business activity in general, and specifically the automotive industry in which we operate. The market turmoil and tightening of credit, as well as the dramatic decline in the housing market in the United States and Western Europe, have led to a lack of consumer confidence evidenced by a rapid decline in light vehicle purchases in 2008 and the first six months of 2009. Light vehicle production during the first six months of 2009 decreased by 50 percent in North America and 35 percent in Europe as compared to the first six months of 2008. OE production has stabilized and overall the production environment strengthened in the third and fourth quarters compared to the first half of the year as production began to track more closely to vehicle sales after inventory corrections in the first half of the year. In North America, light vehicle production in the fourth quarter 2009 was up one percent year-over-year. In Europe, light vehicle production in the fourth quarter 2009 was up 14 percent year-over-year.

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

Other than the impact from production shutdowns during the second quarter, we incurred no other economic loss from the bankruptcy filings of Chrysler or General Motors. We collected substantially all of our pre-petition receivables from Chrysler Group LLC and Chrysler Group LLC has assumed substantially all of the contracts which we had with Chrysler LLC. We collected substantially all of our pre-petition receivables from General Motors Company and General Motors Company has assumed substantially all of the contracts which we had with General Motors Corporation.

We have a substantial amount of indebtedness. As such, our ability to generate cash — both to fund operations and service our debt — is also a significant area of focus for our company. As part of our strategic imperative to improve financial flexibility, we completed a common stock offering of 12 million shares in November 2009. We used the net proceeds of $188 million from the offering to pay down debt. See “Liquidity and Capital Resources” below for further discussion of cash flows and “Risk Factors” included in Item 1A.

Total revenues for 2009 were $4.6 billion, a 21 percent decrease from $5.9 billion in 2008. Excluding the impact of currency and substrate sales, revenue was down $456 million, or 10 percent, driven primarily by lower OE production in North America, Europe and Australia and lower European aftermarket sales. Partially offsetting these declines were increased North American aftermarket sales and higher sales in South America and Asia.

Gross margin for 2009 was 16.6 percent, up 2.2 percentage points from 14.4 percent in 2008. The gross margin improvement was driven by the benefits from our restructuring activities in 2008, material cost management, improved manufacturing efficiencies, lower year-over-year restructuring and related expenses and currency gains. Lower OE production volumes and the related fixed cost absorption partially offset these improvements.

Selling, general and administrative expense was down $48 million in 2009, to $344 million, including $1 million in restructuring and related expense, compared to $392 million in 2008 which included $22 million in restructuring and related expense and $7 million in aftermarket changeover costs. Cost reduction efforts, which included restructuring savings, 401(k) match suspension, temporary salary reductions and employee furloughs, drove the improvement. Engineering expense was $97 million and $127 million in 2009 and 2008, respectively. 2008 engineering expense included $1 million of restructuring and related expenses. The reduction in engineering expense was driven by engineering cost recoveries, employee furloughs and temporary salary reductions. In total, we reported selling, general, administrative and engineering expenses in 2009 at 9.5 percent of revenues, as compared to 8.8 percent of revenues in 2008 due to a decline in year-over-year revenues which out paced the decrease in selling, general, administrative and engineering costs.

Earnings before interest expense, taxes and noncontrolling interests (“EBIT”) was $92 million for 2009, an improvement of $95 million, when compared to a loss of $3 million in 2008. This increase was driven by the savings from prior restructuring activities, manufacturing efficiency improvements, lower selling, general and administrative spending, customer recovery of engineering costs, material cost management actions, lower restructuring and related expenses, reduced aftermarket changeover costs and lower goodwill impairment charges. The negative impact of currency and lower OE production and the related fixed cost absorption partially offset the EBIT improvement.

Results from Operations
Net Sales and Operating Revenues for Years 2009 and 2008
The following tables reflect our revenues for 2009 and 2008. We present these reconciliations of revenues in order to reflect the trend in our sales in various product lines and geographic regions separately from the effects of doing business in currencies other than the U.S. dollar. We have not reflected any currency impact in the 2008 table since this is the base period for measuring the effects of currency during 2009 on our operations. We believe investors find this information useful in understanding period-to-period comparisons in our revenues.

Additionally, we show the component of our revenue represented by substrate sales in the following tables. While we generally have primary design, engineering and manufacturing responsibility for OE emission control systems, we do not manufacture substrates. Substrates are porous ceramic filters coated with a catalyst — precious metals such as platinum, palladium and rhodium. These are supplied to us by Tier 2 suppliers and directed by our OE customers. We generally earn a small margin on these components of the system. As the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business, these substrate components have been increasing as a percentage of our revenue. Changes in commodity prices as well as changes in the mix of vehicles produced by our customers as a result of the economic crisis have recently reduced the percentage of our revenue related to substrates. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system. We view the growth of substrates as a key indicator that our value-add content in an emission control system is moving toward the higher technology hot-end gas and diesel business.

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

We present these substrate sales separately in the following table because we believe investors utilize this information to understand the impact of this portion of our revenues on our overall business and because it removes the impact of potentially volatile precious metals pricing from our revenues. While our original equipment customers generally assume the risk of precious metals pricing volatility, it impacts our reported revenues. Excluding “substrate” catalytic converter and diesel particulate filter sales removes this impact.

Year Ended December 31, 2009   Revenues     Currency
Impact
    Revenues
Excluding
Currency
    Substrate
Sales
Excluding
Currency
    Revenues
Excluding
Currency and
Substrate
Sales
 
(Millions)      
North America Original Equipment                                        
Ride Control   $ 382     $ (4 )   $ 386     $     $ 386  
Emission Control     1,154       (2 )     1,156       530       626  
Total North America Original Equipment     1,536       (6 )     1,542       530       1,012  
 
North America Aftermarket                                        
Ride Control     406       (4 )     410             410  
Emission Control     150       (2 )     152             152  
Total North America Aftermarket     556       (6 )     562             562  
Total North America     2,092       (12 )     2,104       530       1,574  
 
Europe Original Equipment                                        
Ride Control     421       (25 )     446             446  
Emission Control     917       (178 )     1,095       305       790  
Total Europe Original Equipment     1,338       (203 )     1,541       305       1,236  
 
Europe Aftermarket                                        
Ride Control     181       (14 )     195             195  
Emission Control     154       (16 )     170             170  
Total Europe Aftermarket     335       (30 )     365             365  
 
South America & India     374       (40 )     414       50       364  
Total Europe, South America & India     2,047       (273 )     2,320       355       1,965  
 
Asia     380       6       374       84       290  
Australia     130       (20 )     150       11       139  
Total Asia Pacific     510       (14 )     524       95       429  
Total Tenneco   $ 4,649     $ (299 )   $ 4,948     $ 980     $ 3,968  


Year Ended December 31, 2008   Revenues     Currency
Impact
    Revenues
Excluding
Currency
    Substrate
Sales
Excluding
Currency
    Revenues
Excluding
Currency and
Substrate
Sales
 
(Millions)      
North America Original Equipment                                        
Ride Control   $ 493     $     $ 493     $     $ 493  
Emission Control     1,591             1,591       773       818  
Total North America Original Equipment     2,084             2,084       773       1,311  
 
North America Aftermarket                                        
Ride Control     390             390             390  
Emission Control     156             156             156  
Total North America Aftermarket     546             546             546  
Total North America     2,630             2,630       773       1,857  
 
Europe Original Equipment                                        
Ride Control     479             479             479  
Emission Control     1,487             1,487       539       948  
Total Europe Original Equipment     1,966             1,966       539       1,427  
 
Europe Aftermarket                                        
Ride Control     213             213             213  
Emission Control     190             190             190  
Total Europe Aftermarket     403             403             403  
 
South America & India     389             389       55       334  
Total Europe, South America & India     2,758             2,758       594       2,164  
 
Asia     342             342       109       233  
Australia     186             186       16       170  
Total Asia Pacific     528             528       125       403  
Total Tenneco   $ 5,916     $     $ 5,916     $ 1,492     $ 4,424  

Revenues from our North American operations decreased $538 million for 2009 compared to the same period last year. Lower sales from both North American OE business units were partially offset by higher aftermarket revenues. North American OE emission control revenues were down $437 million for 2009; excluding substrate sales and currency, revenues were down $192 million compared to last year. This decrease was mainly due to lower OE production volumes year-over-year and a decrease in steel recovery due to lower steel costs. North American OE ride control revenues for 2009 were down $107 million from the prior year, excluding $4 million of unfavorable currency. The decline was mainly driven by lower OE production volumes. Our total North American OE revenues, excluding substrate sales and currency, decreased 23 percent for 2009 compared to 2008. North American light vehicle production decreased 32 percent in 2009 compared to 2008. Industry Class 8 commercial vehicle production was down 38 percent and industry Class 4-7 commercial vehicle production was down 39 percent in 2009 as compared to the previous year. Aftermarket revenues for North America were $556 million for 2009, an increase of $10 million compared to the prior year. Excluding $6 million in unfavorable currency, aftermarket revenues were up $16 million driven by stronger ride control volumes and pricing, partially offset by lower emission control volumes. Aftermarket ride control revenues, net of unfavorable currency, increased five percent for 2009 while aftermarket emission control revenues, net of unfavorable currency, decreased three percent for 2009.

Our European, South American and Indian segment’s revenues decreased $711 million, or 26 percent, in 2009 compared to 2008. Europe OE emission control revenues of $917 million for 2009 were down 38 percent as compared to 2008. Excluding $178 million of unfavorable currency and a reduction in substrate sales, Europe OE emission control revenues decreased 17 percent from 2008 due to lower OE production volumes and decreased year-over-year alloy surcharge recovery due to lower alloy surcharge costs. Europe OE ride control revenues of $421 million in 2009 were down 12 percent year-over-year. Excluding unfavorable currency, ride control revenues decreased by seven percent for 2009 due to lower production volumes, partially offset by new ride control launches, including new CES business, and a favorable vehicle mix weighted toward the A/B segment vehicles, which have been better sellers under the recent government incentive programs. Our total European OE revenues, excluding substrate sales and currency, decreased 13 percent in 2009 compared to 2008. The 2009 total European light vehicle industry production was down 20 percent when compared to 2008. European aftermarket revenues decreased 17 percent or $68 million for 2009 compared to last year. When adjusted for unfavorable currency, aftermarket revenues were down nine percent. Excluding the negative $14 million impact of currency, ride control aftermarket revenues were down eight percent while emission control aftermarket revenues were down 11 percent, excluding $16 million in unfavorable currency. The decrease was driven by overall market declines but particularly heavy duty ride control products and the ride control market in Eastern Europe where economies have been more severely impacted by the economic crisis. South American and Indian revenues were $374 million during 2009, compared to $389 million in the prior year. When unfavorable currency and substrates are excluded, revenue was up $30 million compared to last year. Our South American and Indian operations benefited from improved OE production volumes and favorable pricing.

Revenues from our Asia Pacific segment, which includes Australia and Asia, decreased $18 million to $510 million in 2009 compared to last year. Excluding the impact of substrate sales and currency, revenues increased $26 million from $403 million in the prior year. Asian revenues for 2009 were $380 million, up 11 percent from last year. Higher OE production volumes in China were the primary reason for the increase. Excluding substrate sales and currency, Asian revenue increased $57 million when compared with last year. Full year 2009 revenues for Australia decreased 30 percent to $130 million. Excluding lower substrate sales and $20 million of unfavorable currency, Australian revenue decreased 18 percent due to industry light vehicle production declines.

Net Sales and Operating Revenues for Years 2008 and 2007
The following tables reflect our revenues for the years of 2008 and 2007. See “Net Sales and Operating Revenues for Years 2009 and 2008” for a description of why we present these reconciliations of revenue.

Year Ended December 31, 2008   Revenues     Currency
Impact
    Revenues
Excluding
Currency
    Substrate
Sales
Excluding
Currency
    Revenues
Excluding
Currency and
Substrate
Sales
 
(Millions)      
North America Original Equipment                                        
Ride Control   $ 493     $ (5 )   $ 498     $     $ 498  
Emission Control     1,591       (2 )     1,593       773       820  
Total North America Original Equipment     2,084       (7 )     2,091       773       1,318  
 
North America Aftermarket                                        
Ride Control     390             390             390  
Emission Control     156             156             156  
Total North America Aftermarket     546             546             546  
Total North America     2,630       (7 )     2,637       773       1,864  
 
Europe Original Equipment                                        
Ride Control     479       27       452             452  
Emission Control     1,487       54       1,433       498       935  
Total Europe Original Equipment     1,966       81       1,885       498       1,387  
 
Europe Aftermarket                                        
Ride Control     213       10       203             203  
Emission Control     190       7       183             183  
Total Europe Aftermarket     403       17       386             386  
 
South America & India     389       17       372       52       320  
Total Europe, South America & India     2,758       115       2,643       550       2,093  
 
Asia     342       29       313       101       212  
Australia     186       6       180       15       165  
Total Asia Pacific     528       35       493       116       377  
Total Tenneco   $ 5,916     $ 143     $ 5,773     $ 1,439     $ 4,334  


Year Ended December 31, 2007   Revenues     Currency
Impact
    Revenues
Excluding
Currency
    Substrate
Sales
Excluding
Currency
    Revenues
Excluding
Currency and
Substrate
Sales
 
(Millions)      
North America Original Equipment                                        
Ride Control   $ 514     $     $ 514     $     $ 514  
Emission Control     1,850             1,850       924       926  
Total North America Original Equipment     2,364             2,364       924       1,440  
 
North America Aftermarket                                        
Ride Control     385             385             385  
Emission Control     152             152             152  
Total North America Aftermarket     537             537             537  
Total North America     2,901             2,901       924       1,977  
 
Europe Original Equipment                                        
Ride Control     427             427             427  
Emission Control     1,569             1,569       556       1,013  
Total Europe Original Equipment     1,996             1,996       556       1,440  
 
Europe Aftermarket                                        
Ride Control     201             201             201  
Emission Control     207             207             207  
Total Europe Aftermarket     408             408             408  
 
South America & India     333             333       41       292  
Total Europe, South America & India     2,737             2,737       597       2,140  
 
Asia     352             352       125       227  
Australia     194             194       27       167  
Total Asia Pacific     546             546       152       394  
Total Tenneco   $ 6,184     $     $ 6,184     $ 1,673     $ 4,511  

Revenues from our North American operations decreased $271 million in 2008 compared to 2007. Higher aftermarket sales were more than offset by lower North American OE revenues. North American OE emission control revenues were down $259 million in 2008. Excluding substrate sales and currency, revenues were down $106 million compared to 2007. This decrease was primarily due to a 16% year-over-year decline in industry production volumes, including a temporary stop of production on the Toyota Tundra, as well as significant reduction in customer light truck production which included the Ford Super Duty and F150, GMT 900 and the Chevrolet Trailblazer and GMC Envoy. North American OE ride control revenues for 2008 were down $21 million from 2007 or down $16 million excluding unfavorable currency. Revenues of $84 million from our Kettering, Ohio ride-control operations which we acquired in May 2008 helped offset the significantly lower light truck production. Our total North American OE revenues, excluding substrate sales and currency, decreased nine percent in 2008 compared to 2007. The North American light truck production rate decreased 25 percent while production rates for passenger cars decreased three percent. Aftermarket revenues for North America were $546 million in 2008, an increase of $9 million compared to 2007, driven by higher volumes in both product lines as well as higher pricing to offset material cost increases. Aftermarket ride control revenues increased one percent in 2008 while aftermarket emission control revenues increased three percent in 2008.

Our European, South American and Indian segment’s revenues increased $21 million or one percent in 2008 compared to 2007. Total Europe OE revenues were $1,966 million, down one percent from 2007. Excluding favorable currency and substrate sales, total European OE revenue was down four percent while total light vehicle production for Europe was down five percent. Europe OE emission control revenues decreased five percent to $1,487 million from $1,569 million in 2007. Excluding substrate sales and a favorable impact of $54 million due to currency, Europe OE emission control revenues decreased eight percent from 2007, primarily due to lower volumes on the Opel Astra and Vectra, the BMW 3 Series and Volvo. Improved volumes on the BMW 1 series, VW Golf, the new Jaguar XF, and the Ford Mondea and C-Max helped partially offset the emission control decrease. Europe OE ride control revenues of $479 million in 2008 were up 12 percent year-over-year. Excluding currency, revenues increased by six percent in 2008 due to favorable volumes on the Suzuki Splash, VW Passat and Transporter, Ford Focus, the new Mazda 2 and Mercedes C-class. Also benefiting 2008 Europe OE ride control revenues were $18 million from our recently acquired suspension business of Gruppo Marzocchi. European aftermarket revenues decreased $5 million in 2008 compared to 2007. When adjusted for currency, aftermarket revenues were down $22 million year-over-year. Excluding the $10 million favorable impact of currency, ride control aftermarket revenues were $2 million better when compared to 2007. Emission control aftermarket revenues were down $24 million, excluding $7 million in currency benefit, due to overall market declines. South American and Indian revenues were $389 million during 2008, compared to $333 million in 2007. Stronger OE and aftermarket sales and currency appreciation drove this increase.

Revenues from our Asia Pacific segment decreased $18 million to $528 million in 2008 compared to $546 million in 2007. Excluding the impact of substrate sales and currency, revenues decreased to $377 million from $394 million in 2007. Asian revenues for 2008 were $342 million, down three percent from 2007. Although overall China OE production was up slightly, GM, Volkswagen, Ford and Brilliance, our largest customers in this region, all took unplanned downtime during the year. Revenues for Australia were down $8 million, to $186 million in 2008 compared to $194 million in 2007. Excluding substrate sales and favorable currency of $6 million, Australian revenue was down $2 million versus 2007.

Earnings before Interest Expense, Income Taxes and Noncontrolling Interests (“EBIT”) for Years 2009 and 2008

Year Ended December 31,   2009     2008     Change  
(Millions)      
North America   $ 42     $ (107 )   $ 149  
Europe, South America and India     20       85       (65 )
Asia Pacific     30       19       11  
    $ 92     $ (3 )   $ 95  


The EBIT results shown in the preceding table include the following items, discussed below under “Restructuring and Other Charges” and “Liquidity and Capital Resources — Capitalization”, which have an effect on the comparability of EBIT results between periods:

Year Ended December 31,   2009     2008  
(Millions)      
North America                
Restructuring and related expenses   $ 17     $ 16  
Environmental reserve(1)     5        
New aftermarket customer changeover costs(2)           7  
Goodwill impairment charge(3)           114  
Europe, South America and India                
Restructuring and related expenses     4       22  
Asia Pacific                
Restructuring and related expenses           2  
(1)   Represents a reserve related to environmental liabilities of a company Tenneco acquired in 1996, at locations never operated by Tenneco, and for which that acquired company had been indemnified by Mark IV Industries, which declared bankruptcy in the second quarter of 2009.
 
(2)   Represents costs associated with changing new aftermarket customers from their prior suppliers to an inventory of our products. Although our aftermarket business regularly incurs changeover costs, we specifically identify in the table above those changeover costs that, based on the size or number of customers involved, we believe are of an unusual nature for the period in which they were incurred.
 
(3)   Non-cash asset impairment charge related to goodwill for Tenneco’s 1996 acquisition of Clevite Industries.

EBIT for North American operations was $42 million in 2009, an increase of $149 million from a loss of $107 million one year ago. The benefits to EBIT from new platform launches, manufacturing efficiencies, reduced selling, general, administrative and engineering spending, lower customer changeover costs, restructuring savings, impairment charge and customer recoveries were only partially offset by lower OE production volumes and the related manufacturing fixed cost absorption and increased restructuring and related expenses. Currency had a $10 million favorable impact on North American EBIT. Restructuring and related expenses of $17 million and an environmental charge of $5 million were included in 2009. Restructuring and related costs of $16 million, a goodwill impairment charge of $114 million and changeover costs for new aftermarket customers of $7 million were included in 2008 EBIT.

Our European, South American and Indian segment’s EBIT was $20 million for 2009, down $65 million from $85 million in 2008. Significant OE production volume declines, the related manufacturing fixed cost absorption and lower aftermarket sales drove the decline in EBIT. Currency further reduced EBIT by $14 million. These decreases were partially offset by the impact of our new OE platform launches, improved pricing, favorable material costs, savings from our prior restructuring activities and reduced restructuring and related expenses. EBIT for 2009 included $4 million of restructuring and related expenses compared to $22 million in 2008.

EBIT for our Asia Pacific segment, which includes Asia and Australia, increased $11 million to $30 million in 2009 compared to $19 million in the prior year. Higher OE production volumes in Asia, restructuring savings, manufacturing cost improvements, material cost management and reduced restructuring and related expenses drove the improvement. Lower OE production volumes in Australia and the related manufacturing fixed cost absorption partially offset these improvements. Unfavorable currency of $3 million impacted Asia Pacific’s 2009 EBIT. Included in Asia Pacific’s 2008 EBIT was $2 million in restructuring and related expenses.

Currency had a $7 million unfavorable impact on overall company EBIT for 2009 as compared to the prior year.

EBIT for Years 2008 and 2007

Year Ended December 31,   2008     2007     Change  
(Millions)      
North America   $ (107 )   $ 120     $ (227 )
Europe, South America and India     85       99       (14 )
Asia Pacific     19       33       (14 )
    $ (3 )   $ 252     $ (255 )


The EBIT results shown in the preceding table include the following items, discussed below under “Restructuring and Other Charges” and “Liquidity and Capital Resources — Capitalization”, which have an effect on the comparability of EBIT results between periods:

Year Ended December 31,   2008     2007  
(Millions)      
North America                
Restructuring and related expenses   $ 16     $ 3  
New aftermarket customer changeover costs(1)     7       5  
Goodwill impairment charge(2)     114        
 
Europe, South America and India                
Restructuring and related expenses     22       22  
 
Asia Pacific                
Restructuring and related expenses     2        
(1)   Represents costs associated with changing new aftermarket customers from their prior suppliers to an inventory of our products. Although our aftermarket business regularly incurs changeover costs, we specifically identify in the table above those changeover costs that, based on the size or number of customers involved, we believe are of an unusual nature for the period in which they were incurred.
 
(2)   Non-cash asset impairment charge related to goodwill for Tenneco’s 1996 acquisition of Clevite Industries.

EBIT for North American operations was a loss of $107 million in 2008, a decrease of $227 million from $120 million of earnings in 2007. OE industry production volume declines and unfavorable product mix from reduced sales on light trucks negatively impacted EBIT by $89 million. SUV and pick-up truck business accounted for 54 percent of 2008 revenues compared to 72 percent of 2007 revenues. Lower manufacturing cost absorption driven by significant downward changes to customer production schedules reduced EBIT by an additional $31 million. Higher depreciation expense related to capital expenditures to support our sizeable 2007 emission control platform launches further reduced EBIT. North America’s 2008 EBIT was also negatively impacted by $16 million in restructuring and related costs, goodwill impairment charge of $114 million, changeover costs for new aftermarket customers of $7 million and unfavorable currency exchange of $20 million, related to the Mexican Peso and Canadian dollar. These decreases were partially offset by higher aftermarket volumes and new OE platform launches in both emission and ride control business which combined to impact EBIT favorably by $29 million as well as focused spending reduction efforts to help counter the eroding North American industry environment, mainly in lower selling, general and administrative costs. Restructuring and related costs of $3 million and changeover costs for new aftermarket customers of $5 million were included in 2007 EBIT.

Our European, South American and Indian segment’s EBIT was $85 million for 2008, down $14 million from $99 million in 2007. OE production volume declines, unfavorable vehicle mix, lower aftermarket sales volumes and related manufacturing fixed cost absorption had a combined $45 million unfavorable impact on 2008 EBIT. Currency further reduced EBIT by $6 million. These decreases were partially offset by the impact of our new OE platform launches, improved pricing, restructuring savings, and reduced selling, general and administrative spending due to discretionary spending controls and overhead reduction efforts. Restructuring and related expenses of $22 million were included in EBIT for each of 2008 and 2007.

EBIT for our Asia Pacific segment, which includes Asia and Australia, decreased $14 million to $19 million in 2008 compared to $33 million in 2007. Lower OE production volumes and the related manufacturing fixed cost absorption combined to reduce EBIT by $12 million. Favorable currency of $4 million partially offset these declines. Included in Asia Pacific’s 2008 EBIT were $2 million in restructuring and related expenses.

Currency had a $22 million unfavorable impact on overall company EBIT for 2008, as compared to 2007.

EBIT as a Percentage of Revenue for Years 2009, 2008 and 2007

Year Ended December 31,   2009     2008     2007  
North America     2 %     (4 )%     4 %
Europe, South America and India     1 %     3 %     4 %
Asia Pacific     6 %     4 %     6 %
Total Tenneco     2 %           4 %

In North America, EBIT as a percentage of revenue for 2009 was up six percentage points from the prior year level. The benefits to EBIT from new platform launches, manufacturing efficiencies, reduced selling, general, administrative and engineering spending, lower customer changeover costs and goodwill impairment charges, favorable currency, restructuring savings and customer recoveries were only partially offset by lower OE production volumes, the related manufacturing fixed cost absorption and an environmental reserve. During 2009, North American results included higher restructuring and related charges. In Europe, South America and India, EBIT margin for 2009 was down two percentage points from prior year. Lower OE production volumes and the related manufacturing fixed cost absorption, aftermarket sales declines and unfavorable currency impact were partially offset by new platform launches, improved pricing, favorable material costs and savings from our prior restructuring activities. Restructuring and related expenses were lower in Europe, South America and India’s 2009 EBIT compared to prior year. EBIT as a percentage of revenue for our Asia Pacific segment increased two percentage points in 2009 versus the prior year. Higher OE production volumes in Asia, restructuring savings, manufacturing cost improvements, material cost management and reduced restructuring and related expenses drove the improvement which was partially offset by OE production volume decreases in Australia and the related manufacturing fixed cost absorption and unfavorable currency. Asia Pacific 2009 results included lower restructuring and related expenses over prior year.

In North America, EBIT as a percentage of revenue for 2008 was down eight percentage points from 2007 levels. OE industry production volume declines, unfavorable product mix, lower manufacturing cost absorption driven by significant downward changes to customer production schedules, goodwill impairment charge, higher depreciation expense and unfavorable currency impact drove the decrease. During 2008, North American results included higher restructuring and related charges and aftermarket changeover costs. In Europe, South America and India, EBIT margin for 2008 was down one percentage point from 2007. Lower OE production volumes and the related manufacturing fixed cost absorption, aftermarket sales declines, unfavorable currency impact and increased investments in engineering were partially offset by new platform launches. Restructuring and related expenses were the same as 2007. EBIT as a percentage of revenue for our Asia Pacific segment decreased two percentage points in 2008 versus 2007. OE production volume decreases and manufacturing fixed cost absorption, drove the decline. Favorable currency partially offset the decline in EBIT margin. Asia Pacific 2008 results included higher restructuring and related expenses over 2007.

Interest Expense, Net of Interest Capitalized
We reported interest expense for 2009 of $133 million net of interest capitalized of $4 million ($130 million in our U.S. operations and $3 million in our foreign operations), up from $113 million net of interest capitalized of $6 million ($111 million in our U.S. operations and $2 million in our foreign operations) a year ago primarily related to higher interest rates due to the amendment of the senior credit facility in February 2009. In addition, the requirement to mark to market our interest rate swaps decreased interest expense by $7 million in 2008.

We reported interest expense in 2008 of $113 million net of interest capitalized of $6 million ($111 million in our U.S. operations and $2 million in our foreign operations), down from $164 million ($162 million in our U.S. operations and $2 million in our foreign operations) in 2007. The requirement to mark to market the interest rate swaps decreased interest expense by $7 million for 2008, versus a decrease to expense of $6 million in 2007. Included in the 2007 results was $5 million related to a charge to expense the unamortized portion of debt issuance costs related to our amended and restated senior credit facility in connection with our debt refinancing in the first quarter of 2007 and $21 million related to a net charge to expense the costs associated with the tender premium and fees, the write-off of deferred debt issuance costs and the write-off of previously recognized debt issuance premium in connection with our November 2007 refinancing transaction. Interest expense decreased in 2008 compared to 2007 as a result of a decrease in our variable and fixed rate debt and lower rates on both our variable rate debt and a portion of our fixed rate debt.

On December 31, 2009, we had $1.012 billion in long-term debt obligations that have fixed interest rates. Of that amount, $245 million is fixed through July 2013, $500 million is fixed through November 2014, $250 million is fixed through November 2015, and the remainder is fixed from 2010 through 2025. We also have $139 million in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” later in this Management’s Discussion and Analysis.

Income Taxes
In 2009, we recorded income tax expense of $13 million. Computed using the U.S. Federal statutory income tax rate of 35 percent, income tax would be a benefit of $14 million. The difference is due primarily to valuation allowances against deferred tax assets generated by 2009 losses in the U.S. and in certain foreign countries which we cannot benefit, partially offset by adjustments to past valuation allowances for deferred tax assets including a reversal of $20 million of U.S. valuation allowance based on the change in the fair value of a tax planning strategy. We reported income tax expense of $289 million in 2008 which included $244 million in tax charges primarily related to recording a valuation allowance against our U.S. deferred tax assets, repatriating cash from Brazil as a result of strong performance in South America over the past several years and changes in foreign tax rates. We reported $83 million of income tax expense in 2007 which included $56 million in tax charges primarily related to a $66 million non-cash tax charge to realign the company’s European ownership structure, partially offset by net tax benefits of $10 million related to a reduction in foreign income tax rates and adjustments for prior year income tax returns.

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. Our Board of Directors approved a restructuring project in 2001, known as Project Genesis, which was designed to lower our fixed costs, relocate capacity, reduce our work force, improve efficiency and utilization, and better optimize our global footprint. We have subsequently engaged in various other restructuring projects related to Project Genesis. We incurred $25 million in restructuring and related costs during 2007, of which $22 million was recorded in cost of sales and $3 million was recorded in selling, general, administrative and engineering expense. We incurred $40 million in restructuring and related costs during 2008, of which $17 million was recorded in cost of sales and $23 million was recorded in selling, general, administrative and engineering expense. In 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.

Under the terms of our amended and restated senior credit agreement that took effect on February 23, 2009, we are allowed to exclude $40 million of cash charges and expenses, before taxes, related to cost reduction initiatives incurred after February 23, 2009 from the calculation of the financial covenant ratios required under our senior credit facility. As of December 31, 2009, we have excluded $16 million in allowable charges relating to restructuring initiatives against the $40 million available under the terms of the February 2009 amended and restated senior credit facility.

On September 22, 2009, we announced that we will be closing our original equipment ride control plant in Cozad, Nebraska as we continue to restructure our operations. We now estimate this closing will generate $8 million in annualized cost savings once completed, incremental to the $58 million of savings related to our October 2008 announcement. We expect the elimination of 500 positions at the Cozad plant and expect to record up to $20 million in restructuring and related expenses, of which approximately $14 million represents cash expenditures, with all expenses recorded by third quarter 2010. We plan to hire at other facilities as we move the production from Cozad to those facilities, resulting in a net decrease of approximately 60 positions. During 2009 we recorded $11 million of restructuring and related expenses related to this initiative.

As originally announced in October 2008 and revised in January 2009, we eliminated 1,100 positions and recorded $31 million in charges, of which approximately $25 million represented cash expenditures. We recorded $24 million of these charges in 2008 and $7 million in 2009. We generated approximately $58 million in annual savings beginning in 2009 related to this restructuring program.

Earnings (Loss) Per Share
We reported a net loss of $73 million or $1.50 per diluted common share for 2009, as compared to a net loss of $415 million or $8.95 per diluted common share for 2008. Included in the results for 2009 were negative impacts from expenses related to our restructuring activities, an environmental reserve and tax adjustments. The net impact of these items decreased earnings per diluted share by $0.91. Included in the results for 2008 were negative impacts from expenses related to our restructuring activities, new aftermarket customer changeover costs, a goodwill impairment charge and tax adjustments. The net impact of these items decreased earnings per diluted share by $9.37.

We reported a net loss of $415 million or $8.95 per diluted common share for 2008, as compared to a net loss of $5 million or $0.11 per diluted common share for 2007. Included in the results for 2008 were negative impacts from expenses related to our restructuring activities, new aftermarket customer changeover costs, a goodwill impairment charge and tax adjustments. The net impact of these items decreased earnings per diluted share by $9.37. Included in the results for 2007 were negative impacts from expenses related to our restructuring activities, new aftermarket customer changeover costs, charges relating to refinancing activities and tax adjustments. The net impact of these items decreased earnings per diluted share by $1.93.

Dividends on Common Stock
On January 10, 2001, our Board of Directors eliminated the quarterly dividend on our common stock. There are no current plans to reinstate a dividend on our common stock.

Cash Flows for 2009 and 2008

Year Ended December 31,   2009     2008  
(Millions)      
Cash provided (used) by:                
Operating activities   $ 241     $ 160  
Investing activities     (119 )     (261 )
Financing activities     (87 )     58  

Operating Activities
In 2009, operating activities provided $241 million in cash compared to $160 million in cash provided during last year. In 2009, working capital provided cash of $65 million versus a cash use of $31 million in 2008. Receivables were a use of cash of $8 million compared to cash provided by receivables of $126 million in the prior year. This decrease in cash flow from receivables was attributable to the revenue decline in the fourth quarter 2008 as compared to the revenue increase in the fourth quarter 2009 combined with reduced cash flow from factored receivables which decreased receivable collections by $42 million in 2009 compared to $22 million in increased collections of receivables for last year. Inventory cash flow improved by $82 million as a result of our inventory management efforts. Accounts payable used cash of $2 million compared to $181 million last year, an improvement of $179 million. Cash taxes were $38 million for 2009, compared to $62 million in the prior year, reflecting lower 2009 taxable income in jurisdictions where we were taxpayers.

One of our European subsidiaries receives payment from one of its OE customers whereby the accounts receivable are satisfied through the delivery of negotiable financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets as they do not meet our definition of cash equivalents. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $5 million as of December 31, 2009, compared with $23 million at December 31, 2008. No negotiable financial instruments were held by our European subsidiary as of December 31, 2009 or 2008, 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 $15 million and $6 million at December 31, 2009 and 2008, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $15 million and $6 million at December 31, 2009 and 2008, respectively, and were classified as other current assets. Some of our Chinese subsidiaries that issue their own negotiable financial instruments to pay vendors are required to maintain a cash balance if they exceed certain credit limits with the financial institution that guarantees those financial instruments. A restricted cash balance was not required at those Chinese subsidiaries at December 31, 2009 and 2008, 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.

Investing Activities
Cash used for investing activities was $142 million lower in 2009 compared to a year ago. Cash payments for plant, property and equipment were $120 million in 2009 versus payments of $233 million in 2008, a reduction of $113 million. This reduction was due to deferring discretionary projects, redeploying assets and using existing capacity while continuing to make the investments needed for new business launches, technology development and future growth opportunities. Cash of $19 million was used to acquire ride control assets at Delphi’s Kettering, Ohio location during 2008. Also in 2008, we acquired Gruppo Marzocchi which resulted in a $3 million cash inflow ($(1) million cash consideration paid, net of $4 million cash acquired). Cash payments for software-related intangible assets were $6 million in 2009 compared to $15 million in 2008.

Financing Activities
Cash flow from financing activities was an outflow of $87 million in 2009 compared to an inflow of $58 million in 2008. We used the $188 million in net proceeds from our common stock offering in the fourth quarter of 2009 to pay down debt, primarily borrowings against our revolving credit facility. We ended 2009 with no borrowings under our revolving credit facility.

Cash Flows for 2008 and 2007

Year Ended December 31,   2008     2007  
(Millions)      
Cash provided (used) by:                
Operating activities   $ 160     $ 158  
Investing activities     (261 )     (202 )
Financing activities     58       (10 )

Operating Activities
For 2008, operating activities provided $160 million in cash compared to $158 million in cash from 2007. Cash used for working capital during 2008 was $31 million versus $83 million in 2007. Receivables provided cash of $126 million compared to a use of cash of $116 million in 2007. The cash provided by receivables reflects an increase of $22 million in securitized accounts receivable. Inventory cash flow represented a cash inflow of $19 million during 2008 versus a cash outflow of $66 million in 2007. The improvement was primarily due to a significant decrease in cash used for inventories of catalytic converters sourced from South Africa. Accounts payable used cash of $181 million compared to 2007’s cash inflow of $100 million driven by the rapid decline in global production. Cash taxes were $62 million for 2008, compared to $60 million in 2007.

One of our European subsidiaries receives payment from one of its OE customers whereby the accounts receivable are satisfied through the delivery of negotiable financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets as they do not meet our definition of cash equivalents. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $23 million as of December 31, 2008, compared with $15 million at the same date in 2007. No negotiable financial instruments were held by our European subsidiary as of December 31, 2008 or December 31, 2007.

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 $6 million and $23 million at December 31, 2008 and 2007, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $6 million and $8 million at December 31, 2008 and 2007, respectively, and were classified as other current assets. One of our Chinese subsidiaries that issues its own negotiable financial instruments to pay its vendors is required to maintain a cash balance if they exceed certain credit limits with the financial institution that guarantees those financial instruments. A restricted cash balance was not required at that Chinese subsidiary as of December 31, 2008 and 2007.

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.

Investing Activities
Cash used for investing activities was $59 million higher in 2008 compared to 2007. Cash payments for plant, property and equipment were $233 million in 2008 versus payments of $177 million in 2007. The increase of $56 million in cash payments for plant, property and equipment was to support new business that has been awarded for 2010 and 2011. Cash of $19 million was used to acquire ride control assets at Delphi’s Kettering, Ohio location during 2008. Also in 2008, we acquired Gruppo Marzocchi which resulted in a $3 million cash inflow ($(1) million cash consideration paid, net of $4 million cash acquired). Cash of $16 million was used to acquire Combustion Components Associates’ ELIM-NOx™ technology during 2007. Cash payments for software-related intangible assets were $15 million in 2008 compared to $19 million in 2007.

Financing Activities
Cash flow from financing activities was a $58 million inflow in 2008 compared to an outflow of $10 million in 2007. The increase was mainly due to higher borrowings under our revolving credit facility.

Outlook
In 2010, OE production schedules are projected to increase over 2009’s record low levels. According to Global Insight, North American light vehicle production levels are expected to increase an estimated 24 percent in 2010 compared to 2009, with passenger car production levels expected to increase by 22 percent and light trucks projected to increase by 26 percent. Light vehicle production for 2010 in Europe is projected by Global Insight to improve by four percent compared to 2009, with estimated production increases of three percent for passenger cars and 19 percent for light trucks. Compared to 2009, Global Insight projects production to rise in South America by eight percent, and 20 percent in India in 2010. Global Insight also projects that China’s 2010 light vehicle production will increase by eight percent over 2009. For the Class 4-8 on-road commercial vehicle segment, Global Insight projects that OE production schedules will increase 18 percent in North America, 36 percent in Europe and eight percent in China. We anticipate that the global aftermarket for 2010 will be stable. We will continue to support our strong brands and aggressively pursue new customers, actions that we hope will help expand our market share globally.

We are well positioned to deliver revenue and earnings growth in 2010 as we launch new business and take advantage of volume increases while continuing to benefit from cost reductions and operational improvements. Tenneco estimates that our global original equipment revenues will be approximately $4.4 billion in 2010 and $5.7 billion in 2011. Adjusted for substrate sales, the company’s global original equipment value-added revenues are estimated to be approximately $3.2 billion in 2010 and $4.0 billion in 2011. Our estimates are based on 2010 light vehicle production forecasts of 10.6 million units in North America, 17.6 million units in Europe and 13.4 million units in China. In 2011, light vehicle production is forecasted to be 12.3 million in North America, 18.3 million in Europe and 14.8 million in China.

In addition, we project we will achieve a five year average compounded annual OE revenue growth rate of 18 percent to 20 percent through 2014. The growth is primarily driven by increasingly stringent and broader emissions regulations that are being implemented globally, which will accelerate growth in the on-road and off-road commercial vehicle markets. Our estimates of our future OE revenue growth is also based on unit volume projections by Global Insight that global light vehicle production will grow at an annual compounded growth rate of seven percent through 2014 and on-road commercial vehicle production will grow at an annual compounded growth rate of 12 percent through 2014. We assume non-road commercial vehicle production will grow at slightly lower growth rates than on-road commercial vehicles.

Between fourth quarter 2009 and fourth quarter 2011, we are launching multiple programs with eleven different commercial vehicle customers, both truck and engine manufacturers, to help customers meet new emissions regulations for on and off-road commercial vehicles. We began launching some of these programs in China at the end of last year with China National Heavy Truck Company, Shanghai Diesel Engine Company and Weichai Power. Programs in North America, Europe and South America primarily begin launching in the second half of 2010. Our commercial vehicle emission control customers also include Caterpillar, Navistar and Deutz as well as five customers who will be announced as programs launch. We will also supply diesel aftertreatment systems, including selective catalytic reduction, for next generation heavy-duty pick-up trucks in North America. Based on current light and commercial vehicle production forecasts, we project that 15 percent of our global OE revenues for 2011 and between 25 percent and 30 percent of our global OE revenues for 2012 will be generated by commercial vehicle business.

The revenue estimates presented in this “Outlook” are based on original equipment manufacturers’ programs that have been formally awarded to the company; programs where the company is highly confident that it will be awarded business based on informal customer indications consistent with past practices; Tenneco’s status as supplier for the existing program and its relationship with the customer; and the actual original equipment revenues achieved by the company for each of the last several years compared to the amount of those revenues that the company estimated it would generate at the beginning of each year. Our revenue estimates are subject to increase or decrease due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by our customers. We update these estimates annually. In the interim we do not intend to otherwise update the estimates to reflect future changes in these assumptions. In addition, our revenue estimate is based on our anticipated pricing for each applicable program over its life. However, we are under continuing pricing pressures from our OE customers. We do not intend to update the amounts shown above for any price changes. Finally, for our foreign operations, our revenue estimate assumes a fixed foreign currency value. This value is used to translate foreign business to the U.S. dollar. Currency in our foreign operations is subject to fluctuation based on the economic conditions in each of our foreign operations. We do not intend to update the amounts shown above due to these fluctuations. See “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” and Item 1A, “Risk Factors.”

We expect our capital expenditures for 2010 to be approximately $160 million to $170 million. Depreciation and amortization for 2010 will be approximately $225 million. We expect our interest expense to be about $125 million and our cash taxes to range between $50 million and $60 million.

Liquidity and Capital Resources
Capitalization

Year Ended December 31,   2009     2008     % Change  
(Millions)      
Short-term debt and maturities classified as current   $ 75     $ 49       53 %
Long-term debt     1,145       1,402       (18 )
Total debt     1,220       1,451       (16 )
Total redeemable noncontrolling interests     7       7        
Total noncontrolling interests     32       24       33  
Tenneco Inc. Shareholders’ equity     (21 )     (251 )     92  
Total equity     11       (227 )     105  
Total capitalization   $ 1,238     $ 1,231       1

General.   Short-term debt, which includes maturities classified as current and borrowings by foreign subsidiaries, was $75 million and $49 million as of December 31, 2009 and 2008, respectively. Borrowings under our revolving credit facilities, which are classified as long-term debt, were $0 million and $239 million as of December 31, 2009 and December 31, 2008, respectively.

The 2009 increase in total equity resulted primarily from a $188 million increase in common stock due to the November 2009 public offering of 12 million shares of common stock at a price of $16.50 per share, a $79 million increase from translation of foreign balances into U.S. dollars, a $27 million increase in additional liability for pension and postretirement benefits offset by a net loss attributable to Tenneco Inc. of $73 million. While our shareholders’ equity balance was negative at December 31, 2009 and 2008, it had no effect on our business operations. We have no debt covenants that are based upon our book equity, and there are no other agreements that are adversely impacted by our negative book equity.

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. As of December 31, 2009, the senior credit facility consisted of a five-year, $133 million term loan A maturing in March 2012, a five-year, $550 million revolving credit facility maturing in March 2012, and a seven-year $130 million tranche B-1 letter of credit/revolving loan facility maturing in March 2014. Our outstanding debt also includes $245 million of 10 1/4 percent senior secured notes due July 15, 2013, $250 million of 8 1/8 percent senior notes due November 15, 2015 and $500 million of 8 5/8 percent senior subordinated notes due November 15, 2014. At December 31, 2009 we had unused borrowing capacity of $630 million under our $680 million revolving credit facilities with $50 million in letters of credit outstanding and no borrowings.

The term loan A facility is payable in twelve consecutive quarterly installments, commencing June 30, 2009 as follows: $6 million due each of June 30, September 30, December 31, 2009 and March 31, 2010, $15 million due each of June 30, September 30, December 31, 2010 and March 31, 2011, and $17 million due each of June 30, September 30, December 31, 2011 and March 16, 2012. Over the next twelve months we plan to repay $51 million of the senior term loan due 2012 by increasing our revolver borrowings which are classified as long-term debt. Accordingly, we have classified the $51 million repayment as long-term debt. The revolving credit facility requires that any amounts drawn be repaid by March 2012. Prior to that date, funds may be borrowed, repaid and re-borrowed under the revolving credit facility without premium or penalty. Letters of credit may be issued under the revolving credit facility.

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

On February 23, 2009, in light of the then challenging macroeconomic environment and auto production outlook, we amended our senior credit facility to increase the allowable consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA as defined in the senior credit facility agreement) and reduce the allowable consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense as defined in the senior credit facility agreement). These changes are detailed in “Management’s Discussion and Analysis of Financial Conditions and Operations — Liquidity and Capital Resources — Senior Credit Facility — Other Terms and Conditions.”

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

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

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

On December 23, 2008, we amended our senior secured credit facility leverage covenant effective for the fourth quarter of 2008 which increased the consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA, as defined in the senior credit facility agreement) by increasing the maximum ratio to 4.25 from 4.0. We also agreed to increase the margin we pay on the borrowings from 1.50 percent to 3.00 percent on revolver loans, term loan A and tranche B-1 loans; from 0.50 percent to 2.00 percent on prime based loans; from 1.00 percent to 2.50 percent on Federal Funds based loans and from 0.35 percent to 0.50 percent on the commitment fee associated with the facility. In addition, we agreed to pay each consenting lender a fee. The lender fee plus amendment costs were approximately $3 million and were paid in December 2008.

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

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) the London Interbank Offered Rate plus a margin as set forth in the table below; or (ii) a rate consisting of the greater of the JPMorgan Chase prime rate or the Federal Funds rate, plus a margin as set forth in the table below:

For the Period   4/3/2006
thru
3/15/2007
    3/16/2007
thru
12/23/2008
    12/24/2008
thru
2/22/2009
    2/23/2009
thru
3/1/2009
    3/2/2009
thru
5/14/2009
    5/15/2009
thru
8/13/2009
    Beginning
8/14/2009
 
Applicable Margin over LIBOR for
Revolving Loans
    2.75 %     1.50 %     3.00 %     5.50 %     4.50 %     5.00 %     5.50 %
Applicable Margin over LIBOR for
Term Loan B Loans
    2.00 %     N/A       N/A       N/A       N/A       N/A       N/A  
Applicable Margin over LIBOR for
Term Loan A Loans
    N/A       1.50 %     3.00 %     5.50 %     4.50 %     5.00 %     5.50 %
Applicable Margin over LIBOR for
Tranche B-1 Loans
    2.00 %     1.50 %     3.00 %     5.50 %     5.00 %     5.00 %     5.50 %
Applicable Margin for Prime-based Loans     1.75 %     0.50 %     2.00 %     4.50 %     3.50 %     4.00 %     4.50 %
Applicable Margin for Federal Funds based Loans     2.125 %     1.00 %     2.50 %     5.00 %     4.00 %     4.50 %     5.00 %
Commitment Fee     0.375 %     0.35 %     0.50 %     0.75 %     0.50 %     0.50 %     0.75 %

Senior Credit Facility — Other Terms and Conditions.   As described above, we are highly leveraged. 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 four quarters of 2009, are as follows:

Quarter Ended         March 31, 2009     June 30, 2009     September 30, 2009     December 31, 2009
    Req.     Act.     Req.     Act.     Req.     Act.     Req.   Act.  
Leverage Ratio (maximum)         5.50       4.72       7.35       5.77       7.90       5.16       6.60   3.43  
Interest Coverage Ratio (minimum)         2.25       2.91       1.85       2.21       1.55       2.17       1.60   2.48  


The financial ratios required under the senior credit facility for 2010 and beyond are set forth below.

Period Ending   Leverage Ratio     Interest Coverage Ratio  
March 31, 2010     5.50     2.00  
June 30, 2010     5.00     2.25  
September 30, 2010     4.75     2.30  
December 31, 2010     4.50     2.35  
March 31, 2011     4.00     2.55  
June 30, 2011     3.75     2.55  
September 30, 2011     3.50     2.55  
December 31, 2011     3.50     2.55  
Each quarter thereafter     3.50     2.75  

The senior credit facility agreement provides the ability to refinance our senior subordinated notes and/or our senior secured notes (i) in exchange for permitted refinancing indebtedness (as defined in the senior credit facility agreement); (ii) in exchange for shares of common stock; or (iii) in an amount equal to the sum of (A) the net cash proceeds of equity issued after March 16, 2007, plus (B) the portion of annual excess cash flow (as defined in the senior credit facility agreement) that is not required to be applied to the payment of the credit facilities and which is not used for other purposes, provided that the amount of the subordinated notes and the aggregate amount of the senior secured notes and the subordinated notes that may be refinanced is capped based upon the pro forma consolidated leverage ratio after giving effect to such refinancing as shown in the following table:

Proforma Consolidated Leverage Ratio Senior Subordinated Notes Aggregate
Maximum Amount
  Senior Subordinated
Notes and Senior
Secured Notes Aggregate
Maximum Amount
 
Greater than or equal to 3.0x     $    0 million       $  10 million  
Greater than or equal to 2.5x     $100 million       $300 million  
Less than 2.5x     $125 million       $375 million  

In addition, the senior secured notes may be refinanced with (i) the net cash proceeds of incremental facilities and permitted refinancing indebtedness (as defined in the senior credit facility agreement), (ii) shares of common stock, (iii) the net cash proceeds of any new senior or subordinated unsecured indebtedness, (iv) proceeds of revolving credit loans (as defined in the senior credit facility agreement), (v) up to €200 million of unsecured indebtedness of the company’s foreign subsidiaries and (vi) cash generated by the company’s operations provided that the amount of the senior secured notes that may be refinanced is capped based upon the pro forma consolidated leverage ratio after giving effect to such refinancing as shown in the following table:

Proforma Consolidated Leverage Ratio Aggregate Senior and
Subordinate Note
Maximum Amount
 
Greater than or equal to 3.0x     $  10 million  
Greater than or equal to 2.5x     $300 million  
Less than 2.5x     $375 million  

The senior credit facility agreement also contains 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 amended and restated 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 subordinated and 10 1/4 percent senior secured 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, 2009, 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 Secured, Senior and Subordinated Notes.   As of December 31, 2009, our outstanding debt includes $245 million of 10 1/4 percent senior secured notes due July 15, 2013, $250 million of 8 1/8 percent senior notes due November 15, 2015, and $500 million of 8 5/8 percent senior subordinated notes due November 15, 2014. We can redeem some or all of the notes at any time after July 15, 2008 in the case of the senior secured notes, November 15, 2009 in the case of the senior subordinated notes and November 15, 2011 in the case of the senior notes. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes. We are permitted to redeem up to 35 percent of the senior notes with the proceeds of certain equity offerings completed before November 15, 2010.

Our senior secured, senior and senior subordinated 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. We have not incurred any of the types of indebtedness not otherwise permitted by the indentures. 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. In addition, the senior secured notes and related guarantees are secured by second priority liens, subject to specified exceptions, on all of our and our subsidiary guarantors’ assets that secure obligations under our senior credit facility, except that only a portion of the capital stock of our subsidiary guarantors’ domestic subsidiaries is provided as collateral and no assets or capital stock of our direct or indirect foreign subsidiaries secure the notes or guarantees. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. The senior subordinated notes rank junior in right of payment to our senior credit facility and any future senior debt incurred. As of December 31, 2009, we were in compliance with the covenants and restrictions of these indentures.

Accounts Receivable Securitization.   In addition to our senior credit facility, senior secured notes, senior notes and senior subordinated notes, we also sell some of our accounts receivable on a nonrecourse basis in North America and Europe. In North America, we have an accounts receivable securitization program with two commercial banks. We sell original equipment and aftermarket receivables on a daily basis under the bank program. We had sold accounts receivable under the bank program of $62 million and $101 million at December 31, 2009 and 2008, respectively. This program is subject to cancellation prior to its maturity date if we (i) fail to pay interest or principal payments on an amount of indebtedness exceeding $50 million, (ii) default on the financial covenant ratios under the senior credit facility, or (iii) fail to maintain certain financial ratios in connection with the accounts receivable securitization program. In February 2010, the U.S. program was amended and extended to February 18, 2011 at a facility size of $100 million. As part of the renewal, the margin we pay the banks decreased. We also sell some receivables in our European operations to regional banks in Europe. At December 31, 2009, we had sold $75 million of accounts receivable in Europe down from $78 million at December 31, 2008. The arrangements to sell receivables in Europe are provided under seven separate arrangements, 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 90 day notice prior to renewal. In some instances, the arrangement provides for cancellation by financial institution at any time upon 15 days, or less, notification. If we were not able to sell receivables under either the North American or European securitization programs, our borrowings under our revolving credit agreements may 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.

Capital Requirements.   We believe that cash flow from operations, combined with available borrowing capacity described above, assuming that we maintain compliance with the financial covenants and other requirements of our loan agreement, will be sufficient to meet our future capital requirements for the following year. Our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. Factors that could impact our ability to comply with the financial covenants include the rate at which consumers continue to buy new vehicles and the rate at which they continue to repair vehicles already in service, as well as our ability to successfully implement our restructuring plans and operate at historically low production rates. Further deterioration in North American vehicle production levels, weakening in the global aftermarket, or a further reduction in vehicle production levels in Europe, beyond our expectations, could impact our ability to meet our financial covenant ratios. In the event that we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. Such actions include additional restructuring initiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, issuance of equity and other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame.

Contractual Obligations.
Our remaining required debt principal amortization and payment obligations under lease and certain other financial commitments as of December 31, 2009 are shown in the following table:

Payments due in:   2010     2011     2012     2013     2014     Beyond
2014
    Total  
(Millions)      
Obligations:                                                        
Revolver borrowings   $     $     $     $     $     $     $  
Senior term loans     50       66       17                         133  
Senior secured notes                 1       245                   246  
Senior subordinated notes                             500             500  
Senior notes                                   250       250  
Customer notes     2       1       1       2                   6  
Capital leases     4                                     4  
Other subsidiary debt     1       1       1       1       1       3       8  
Short-term debt     69                                     69  
Debt and capital lease obligations     126       68       20       248       501       253       1,216  
Operating leases     19       15       11       6       3       13       67  
Interest payments     107       104       97       84       60       20       472  
Capital commitments     36                                     36  
Total Payments   $ 288     $ 187     $ 128     $ 338     $ 564     $ 286     $ 1,791  

If we do not maintain compliance with the terms of our senior credit facility, senior secured notes indenture, senior notes indenture and senior subordinated notes indenture described above, all amounts under those arrangements could, automatically or at the option of the lenders or other debt holders, become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute a default under the other facility, allowing the acceleration of all amounts due. We currently expect to maintain compliance with terms of all of our various credit agreements for the foreseeable future.

Included in our contractual obligations is the amount of interest to be paid on our long-term debt. As our debt structure contains both fixed and variable rate obligations, we have made assumptions in calculating the amount of future interest payments. Interest on our senior secured notes, senior subordinated notes, and senior notes is calculated using the fixed rates of 10 1/4 percent, 8 5/8  percent, and 8 1/8; percent respectively. Interest on our variable rate debt is calculated as LIBOR plus the applicable margin in effect at December 31, 2009 for the Eurodollar, term loan A and tranche B-1 loans and prime plus the applicable margin in effect on December 31, 2009 on the prime-based loans. We have assumed that both LIBOR and the prime rate will remain unchanged for the outlying years. See “— Capitalization.”

We have also included an estimate of expenditures required after December 31, 2009 to complete the projects authorized at December 31, 2009, in which we have made substantial commitments in connection with purchasing plant, property and equipment for our operations. For 2010, we expect our capital expenditures to be about $160 million to $170 million.

We have not included purchase obligations as part of our contractual obligations as we generally do not enter into long-term agreements with our suppliers. In addition, the agreements we currently have do not specify the volumes we are required to purchase. If any commitment is provided, in many cases the agreements state only the minimum percentage of our purchase requirements we must buy from the supplier. As a result, these purchase obligations fluctuate from year-to-year and we are not able to quantify the amount of our future obligation.

We have not included material cash requirements for unrecognized tax benefits or taxes as we are a taxpayer in certain foreign jurisdictions but not in the U.S. Additionally, it is difficult to estimate taxes to be paid as changes in where we generate income can have a significant impact on future tax payments. We have also not included cash requirements for funding pension and postretirement benefit costs. Based upon current estimates, we believe we will be required to make contributions of approximately $64 million to those plans in 2010. Pension and postretirement contributions beyond 2010 will be required but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2010. In addition, we have not included cash requirements for environmental remediation. Based upon current estimates we believe we will be required to spend approximately $23 million over the next 20 to 30 years. However, due to possible modifications in remediation processes and other factors, it is difficult to determine the actual timing of the payments. See “— Environmental and Other Matters.”

We occasionally provide guarantees that could require us to make future payments in the event that the third party primary obligor does not make its required payments. We have not recorded a liability for any of these guarantees.

Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes, our senior notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. Our $245 million senior secured notes are also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. You should also read Note 14 of the consolidated financial statements of Tenneco Inc., where we present the Supplemental Guarantor Condensed Consolidating Financial Statements.

We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of December 31, 2009, we have $50 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.

Critical Accounting Policies
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our consolidated financial statements in accordance with generally accepted accounting principles 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. The following paragraphs include a discussion of some critical areas where estimates are required.

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. 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 $966 million, $1,492 million and $1,673 million for 2009, 2008, and 2007 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 Statements of Income (Loss).

Warranty Reserves
Where we have offered product warranty, we also provide for warranty costs. Those estimates are based upon historical experience and upon specific warranty issues as they arise. 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.

Engineering, Research and Development
We expense engineering, research, and development costs as they are incurred. Engineering, research, and development expenses were $97 million for 2009, $127 million for 2008 and $114 million for 2007, net of reimbursements from our customers. Of these amounts, $10 million in 2009, $18 million in 2008 and $20 million in 2007 relate to research and development, which includes the research, design, and development of a new unproven product or process. Additionally, $61 million, $80 million and $62 million of engineering, research, and development expense for 2009, 2008, and 2007, respectively, relates to engineering costs we incurred for application of existing products and processes to vehicle platforms. The remainder of the expenses in each year relate to improvements and enhancements to existing products and processes. Reclassifications have been made to prior year amounts in each engineering cost category to be consistent with current year classification. Further, 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 2009, 2008, and 2007 has been reduced by $104 million, $120 million and $72 million, respectively, for these reimbursements.

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 $14 million and $12 million on December 31, 2009 and 2008, respectively. In addition, plant, property and equipment included $49 million and $53 million at December 31, 2009 and 2008, respectively, for original equipment tools and dies that we own, and prepayments and other included $50 million and $22 million at December 31, 2009 and 2008, respectively, for in-process tools and dies that we are building for our original equipment customers.

Income Taxes
We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.

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

   
  • Future reversals of existing taxable temporary differences;
  • Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards; and
  • Tax-planning strategies.

In 2009, we recorded income tax expense of $13 million. Computed using the U.S. Federal statutory income tax rate of 35 percent, income tax would be a benefit of $14 million. The difference is due primarily to valuation allowances against deferred tax assets generated by 2009 losses in the U.S. and in certain foreign countries which we cannot benefit, partially offset by adjustments to past valuation allowances for deferred tax assets including a reversal of $20 million of U.S. valuation allowance based on the change in the fair value of a tax planning strategy. In evaluating the requirements to record a valuation allowance, accounting standards do not permit us to consider an economic recovery in the U.S. or new business we have won in the commercial vehicle segment. Consequently, beginning in 2008, given our historical losses, we concluded that our ability to fully utilize our NOLs was limited due to projecting the continuation of the negative economic environment and the impact of the negative operating environment on our tax planning strategies. As a result of the tax planning strategy which has not yet been implemented but which we plan to implement and which does not depend upon generating future taxable income, we carry deferred tax assets in the U.S. of $90 million relating to the expected utilization of those NOLs. The federal NOLs expire beginning in 2020 through 2029. The state NOLs expire in various years through 2029.

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

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

Goodwill, net
We evaluate goodwill for impairment in the fourth quarter of each year, or more frequently if events indicate it is warranted. 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. These estimates are based on assumptions that we believe to be reasonable, but which are inherently uncertain.

In the fourth quarter of 2009, estimated fair value of each of our reporting units significantly exceeded the carrying value of its assets and liabilities. In the fourth quarter of 2008, the fair value also exceeded the carrying value for all of our reporting units with the exception of our North America Original Equipment Ride Control reporting unit whose carrying value exceeded the estimated fair value. We were required to calculate the implied fair value of goodwill of the North America Original Equipment Ride Control 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 this testing, we determined that the remaining amount of goodwill related to our elastomer business acquired in 1996 was impaired due to the significant decline in light vehicle production in 2008 and anticipated in future periods. Accordingly, we recorded an impairment charge of $114 million during the fourth quarter of 2008.

Pension and Other Postretirement Benefits
We have various defined benefit pension plans that cover some of our employees. We also have postretirement health care and life insurance plans that cover some of our domestic employees. Our pension and postretirement health care and life insurance expenses and valuations are dependent on assumptions used by our actuaries in calculating those amounts. These assumptions include discount rates, health care cost trend rates, long-term return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend rate assumptions are developed based on historical cost data and an assessment of likely long-term trends. Retirement rates are based primarily on actual plan experience while mortality rates are based upon the general population experience which is not expected to differ materially from our experience.

Our approach to establishing the discount rate assumption for both our domestic and foreign plans starts with high-quality investment-grade bonds adjusted for an incremental yield based on actual historical performance. This incremental yield adjustment is the result of selecting securities whose yields are higher than the “normal” bonds that comprise the index. Based on this approach, we lowered the weighted average discount rate for all of our pension plans to 6.0 percent in 2009 from 6.2 percent in 2008. The discount rate for our postretirement benefits was also lowered to 6.1 percent for 2009 from 6.2 percent in 2008.

Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and is adjusted for any expected changes in the long-term outlook for the equity and fixed income markets. As a result, our estimate of the weighted average long-term rate of return on plan assets for all of our pension plans was lowered to 7.8 percent for 2009 from 7.9 percent for 2008.

Except in the U.K., our pension plans generally do not require employee contributions. Our policy is to fund our pension plans in accordance with applicable U.S. and foreign government regulations and to make additional payments as funds are available to achieve full funding of the accumulated benefit obligation. At December 31, 2009 and 2008, all legal funding requirements had been met. Other postretirement benefit obligations, such as retiree medical, and certain foreign pension plans are funded as the obligations become due.

Recent Accounting Pronouncements
Footnote 1 to the consolidated financial statements of Tenneco Inc. located in Item 8 — Financial Statements and Supplemental Data are incorporated herein by reference.

Derivative Financial Instruments
Foreign Currency Exchange Rate Risk
We use derivative financial instruments, principally foreign currency forward purchase and sale 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 following table summarizes by major currency the notional amounts, weighted-average settlement rates, and fair value for foreign currency forward purchase and sale contracts as of December 31, 2009. 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. All contracts in the following table mature in 2010.

December 31, 2009   Notional Amount
in Foreign Currency
    Weighted Average
Settlement Rates
    Fair Value in
U.S. Dollars
 
(Millions Except Settlement Rates)
Australian dollars —Purchase     82       .898       $  73  
  —Sell     (39 )     .898       (35 )
British pounds —Purchase     10       1.598       16  
  —Sell     (10 )     1.598       (16 )
European euro —Purchase                  
  —Sell     (18 )     1.432       (26 )
South African rand —Purchase     329       0.135       44  
  —Sell     (63 )     0.135       (8 )
U.S. dollars —Purchase     41       1.000       41  
  —Sell     (98 )     1.000       (98 )
Other —Purchase     752       0.016       12  
  —Sell     (1 )     0.951       (1 )
                        $   2  

Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facilities to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from five to ten years. On December 31, 2009, we had $1.012 billion in long-term debt obligations that have fixed interest rates. Of that amount, $245 million is fixed through July 2013, $500 million is fixed through November 2014, $250 million is fixed through November 2015, and the remainder is fixed from 2010 through 2025. We also have $139 million in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” earlier in this Management’s Discussion and Analysis.

We estimate that the fair value of our long-term debt at December 31, 2009 was about 101 percent of its book value. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $2 million.

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

As of December 31, 2009, we have the obligation to remediate or contribute towards the remediation of certain sites, including two existing Superfund sites. At December 31, our estimated share of environmental remediation costs at these sites was approximately $16 million, on a discounted basis. The undiscounted value of the estimated remediation costs was $23 million. For those locations in which the liability was discounted, the weighted average discount rate used was 3.6 percent. Based on information known to us, we have established reserves that we believe are adequate for these costs. Although we believe these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute towards the remediation costs. In addition, certain environmental statutes provide that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible parties at these sites has been considered, where appropriate, in our determination of our estimated liability.

The $16 million noted above includes $5 million of estimated environmental remediation costs that result from the bankruptcy of Mark IV Industries in 2009. Prior to our 1996 acquisition of The Pullman Company, Pullman had sold certain assets to Mark IV. As partial consideration for the purchase of these assets, Mark IV agreed to assume Pullman’s and its subsidiaries’ historical obligations to contribute to the environmental remediation of certain sites. Mark IV has filed a petition for insolvency under Chapter 11 of the United States Bankruptcy Code and notified Pullman that it no longer intends to continue to contribute toward the remediation of those sites. We are conducting a thorough analysis and review of these matters and it is possible that our estimate may change as additional information becomes available to us.

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

We also from time to time are involved in legal proceedings, claims or investigations that are incidental to the conduct of our business. Some of these proceedings allege damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warning issues, and other product liability related matters), taxes, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. For example, one of our Argentine subsidiaries is currently defending against a criminal complaint alleging the failure to comply with laws requiring the proceeds of export transactions to be collected, reported and/or converted to local currency within specified time periods. As another example, we have recently become subject to an audit in 11 states of our practices with respect to the payment of unclaimed property to those states. We have practices in place designed to ensure that we pay unclaimed property as required. We are in the early stages of this audit, which could cover over 20 years. We vigorously defend ourselves against all of these claims. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved on unfavorable terms. However, although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, we do not expect that these legal proceedings or claims will have any material adverse impact on our future consolidated financial position, results of operations or cash flows.

In addition, we are subject to a number of lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. In the early 2000’s we were named in nearly 20,000 complaints, most of which were filed in Mississippi state court and the vast majority of which made no allegations of exposure to asbestos from our product categories. Most of these claims have been dismissed and our current docket of active and inactive cases is less than 500 cases nationwide. A small number of claims have been asserted by railroad workers alleging exposure to asbestos products in railroad cars manufactured by The Pullman Company, one of our subsidiaries. The balance of the claims is related to alleged exposure to asbestos in our automotive emission control products. Only a small percentage of the claimants allege that they were automobile mechanics and a significant number appear to involve workers in other industries or otherwise do not include sufficient information to determine whether there is any basis for a claim against us. We believe, based on scientific and other evidence, it is unlikely that mechanics were exposed to asbestos by our former muffler products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number of each in some cases exceeding 100 defendants from a variety of industries. Additionally, the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or non-cash charges to earnings if any of these matters is resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolution. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our future consolidated financial condition, results of operations or cash flows.

Employee Stock Ownership Plans
We have established Employee Stock Ownership Plans for the benefit of our domestic 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 recent global economic downturn. 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 $10 million, $18 million, and $17 million in 2009, 2008 and 2007 respectively. Matching contributions vest immediately. Defined benefit replacement contributions fully vest on the employee’s third anniversary of employment.