Financials (10-K): Part II – Notes to Consolidated Financial Statements


TENNECO INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Accounting Policies

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

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

The following is a rollforward of activity in our redeemable noncontrolling interests for the years ending December 31, 2009, 2008 and 2007, respectively:

    2009     2008     2007  
(Millions)      
Redeemable noncontrolling interests:      
Balance January 1   $ 7     $ 6     $ 4  
Net income attributable to redeemable noncontrolling interests     5       4       3  
Dividends declared     (5 )     (3 )     (1 )
Balance December 31   $ 7     $ 7     $ 6  

Sales of Accounts Receivable
We have an agreement to sell an interest in some of our U.S. trade accounts receivable to a third party. Receivables become eligible for the program on a daily basis, at which time the receivables are sold to the third party without recourse, net of a discount, through a wholly-owned subsidiary. Under this agreement, as well as individual agreements with third parties in Europe, we have accounts receivable of $137 million and $179 million at December 31, 2009 and 2008, respectively. We recognized a loss of $9 million, $10 million, and $10 million during 2009, 2008, and 2007 respectively, on these sales of trade accounts, representing the discount from book values at which these receivables were sold to the third party. The discount rate varies based on funding cost incurred by the third party, which has averaged approximately five percent during 2009. In the U.S. securitization program, we retain ownership of the remaining interest in the pool of receivables not sold to the third party. The retained interest represents a credit enhancement for the program. We record the retained interest based upon the amount we expect to collect from our customers, which approximates book value. In 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.

Inventories
At December 31, 2009 and 2008, inventory by major classification was as follows:

    2009     2008  
(Millions)      
Finished goods   $ 175     $ 211  
Work in process     116       143  
Raw materials     95       114  
Materials and supplies     42       45  
    $ 428     $ 513  

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

Goodwill and Intangibles, net
We evaluate goodwill for impairment in the fourth quarter of each year, or more frequently if events indicate it is warranted. 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.

The changes in the net carrying amount of goodwill for the twelve months ended December 31, 2009 and 2008 were as follows:

  Year Ended December 31, 2009  
    North America     Europe,
South America
and India
    Asia Pacific     Total  
(Millions)
Balance at January 1
Goodwill   $ 330     $ 95     $ 8     $ 433  
Accumulated impairment losses     (306 )     (32 )           (338 )
      24     63     8       95
Acquisition of business opening balance sheet adjustments           (10 )           (10 )
Translation adjustments           2     2     4
Balance at December 31
Goodwill   330     87     10     427  
Accumulated impairment losses     (306 )     (32 )           (338 )
    $ 24   $ 55   $ 10     $ 89

  Year Ended December 31, 2008  
    North America     Europe,
South America
and India
    Asia Pacific     Total  
(Millions)
Balance at January 1
Goodwill   $ 330     $ 92     $ 10     $ 432  
Accumulated impairment losses     (192 )     (32 )           (224 )
      138     60     10       208
Acquisition of business           10           10
Goodwill impairment write-off     (114 )               (114 )
Translation adjustments           (7 )     (2 )     (9 )
Balance at December 31
Goodwill   330     95     8     433  
Accumulated impairment losses     (306 )     (32 )           (338 )
    $ 24   $ 63   $ 8     $ 95

We have capitalized certain intangible assets, primarily technology rights, trademarks and patents, based on their estimated fair value at the date we acquired them. We amortize our finite useful life intangible assets on a straight-line basis over periods ranging from 5 to 30 years. Amortization of intangibles amounted to $2 million in 2009, $3 million in 2008 and $1 million in 2007, and is included in the statements of income caption “Depreciation and amortization of intangibles.” The carrying amount and accumulated amortization of our finite useful life intangible assets were as follows:

    December 31, 2009     December 31, 2008  
    Gross Carrying
Value
    Accumulated
Amortization
    Gross Carrying
Value
    Accumulated
Amortization
 
(Millions)            
Customer contract   $ 8     $ (2 )   $ 8     $ (2 )
Patents     4       (3 )     3       (3 )
Technology rights     22       (5 )     23       (3 )
Other     2                    
Total   $ 36     $ (10 )   $ 34     $ (8 )

Estimated amortization of intangible assets over the next five years is expected to be $2 million in 2010 through 2012 and $4 million in 2013 through 2014. We have capitalized indefinite life intangibles of $4 million relating to purchased trademarks from our Marzocchi acquisition in 2007.

Plant, Property, and Equipment, at Cost
At December 31, 2009 and 2008, plant, property, and equipment, at cost, by major category were as follows:

    2009     2008  
(Millions)      
Land, buildings, and improvements   $ 516     $ 490  
Machinery and equipment     2,431       2,282  
Other, including construction in progress     152       188  
    $ 3,099     $ 2,960  

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

Notes and Accounts Receivable and Allowance for Doubtful Accounts
Short and long-term notes receivable outstanding were $3 million at both December 31, 2009 and 2008. The allowance for doubtful accounts on short-term and long-term notes receivable was approximately $3 million at both December 31, 2009 and 2008.

Short and long-term accounts receivable outstanding were $602 million and $561 million at December 31, 2009 and 2008, respectively. The allowance for doubtful accounts on short-term and long-term accounts receivable was $22 million and $21 million, at December 31, 2009 and 2008, respectively.

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.

Internal Use Software Assets
We capitalize certain costs related to the purchase and development of software that we use in our business operations. We amortize the costs attributable to these software systems over their estimated useful lives, ranging from three to 15 years, based on various factors such as the effects of obsolescence, technology, and other economic factors. Capitalized software development costs, net of amortization, were $60 million and $74 million at December 31, 2009 and 2008 respectively, and are recorded in other long-term assets. Amortization of software development costs was approximately $22 million, $24 million and $21 million for the years ended December 31, 2009, 2008 and 2007, respectively, and is included in the statements of income (loss) caption “Depreciation and amortization of intangibles.” Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the statements of cash flows.

Income Taxes
We 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.

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 in 2009 and 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.

Earnings Per Share
We compute basic earnings per share by dividing income available to common shareholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that we adjust the weighted-average number of shares outstanding to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, we adjust income available to common shareholders to include any changes in income or loss that would result from the assumed issuance of the dilutive common shares. Due to the net losses for the years ended December 31, 2009, 2008 and 2007, respectively, the calculation of diluted earnings per share does not include the dilutive effect from shares of restricted stock and stock options. See Note 2 to the consolidated financial statements of Tenneco Inc.

Engineering, Research and Development
We expense engineering, research, and development costs as they are incurred. Engineering, research, and development expenses were $97 million for 2009, $127 million for 2008 and $114 million for 2007, net of reimbursements from our customers. Our customers reimburse us for engineering, research, and development costs on some platforms when we prepare prototypes and incur costs before platform awards. Our engineering, research, and development expense for 2009, 2008, and 2007 has been reduced by $104 million, $120 million and $72 million, respectively, for these reimbursements.

Foreign Currency Translation
We translate the consolidated financial statements of foreign subsidiaries into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted-average exchange rate for revenues and expenses in each period. We record translation adjustments for those subsidiaries whose local currency is their functional currency as a component of accumulated other comprehensive loss in shareholders’ equity. We recognize transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency in earnings as incurred, except for those transactions which hedge purchase commitments and for those intercompany balances which are designated as long-term investments. Our results include foreign currency transaction gains of $4 million in 2009, $11 million in foreign currency transaction losses in 2008 and $15 million in foreign currency transaction gains 2007.

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

We do not enter into derivative financial instruments for speculative purposes.

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

In June 2009, the FASB issued new accounting guidance which changes the criterion relating to the consolidation of variable interest entities (VIE) and amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE by requiring a qualitative rather than quantitative analysis. The new accounting guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE and enhanced disclosures about an entity’s involvement with a VIE. The new accounting guidance is effective for a reporting entity’s first annual reporting period that begins after November 15, 2009, and for interim and annual reporting periods thereafter. We do not believe the adoption of this new accounting guidance on January 1, 2010 will have a material impact on our consolidated financial statements. Additional disclosure relating to this new accounting guidance will be added to the notes to our consolidated financial statements.

In May 2009, the FASB issued new accounting guidance on subsequent events which were further amended in February 2010 to require SEC filers to evaluate subsequent events through the date the financial statements were issued. The new accounting guidance for subsequent events is effective for interim or annual reporting periods ending after June 15, 2009. The adoption of this accounting guidance did not have a material impact on our notes or consolidated financial statements.

In April 2009, the FASB issued new accounting guidance which requires public companies to disclose information relating to fair value of financial instruments for interim and annual reporting periods. Additional disclosure is required for all financial instruments for which it is practicable to estimate fair value, including the fair value and carrying value and the significant assumptions used to estimate the fair value of these financial instruments. This new accounting guidance is effective for interim reporting periods ending after June 15, 2009 on a prospective basis with comparative disclosures only for periods after initial adoption. We have incorporated these new disclosure requirements within footnote 6 of our notes to consolidated financial statements.

In December 2008, the FASB issued new accounting guidance on employers’ disclosure about postretirement benefit plan assets which requires disclosure of plan asset investment policies and strategies, the fair value of each major category of plan assets, information about inputs and valuation techniques used to develop fair value measurements of plan assets, and additional disclosure about significant concentrations of risk in plan assets for an employer’s pension and other postretirement plans. These additional disclosure requirements for postretirement benefit plan assets is effective for fiscal years ending after December 15, 2009. The adoption of this new accounting guidance did not have a material impact on our consolidated financial statements. We have added disclosure in footnote 10 to consolidated financial statements to meet these new disclosure requirements.

In March 2008, the FASB issued new accounting guidance on the disclosures about derivative instruments and hedging activities which requires enhanced disclosures about an entity’s derivative and hedging activities including how and why an entity uses derivative instruments, how an entity accounts for derivatives and hedges and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This new accounting guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted these new guidelines on a prospective basis on January 1, 2009 and have incorporated the disclosure requirements within footnote 6 of our notes to consolidated financial statements.

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

In September 2006, the FASB issued new accounting guidance on fair value measurements which defines fair value, establishes a fair value hierarchy for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements. This new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007. The FASB issued in February 2008 a delay in the effective date of this new guidance for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. We have adopted the measurement and disclosure provisions of this new guidance relating to our financial assets and financial liabilities which are measured on a recurring basis (at least annually) effective January 1, 2008. For our nonfinancial assets and liabilities, we have adopted the measurement and disclosure provisions of this new guidance on January 1, 2009. We have added additional disclosures in footnote 6 of our notes to consolidated financial statements, relating to the fair value of our financial and nonfinancial assets and liabilities.

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

2. Earnings (Loss) Per Share
Earnings (loss) per share of common stock outstanding were computed as follows:

Year Ended December 31,   2009     2008     2007  
(Millions Except Share and Per Share Amounts)      
Basic loss per share —                        
Net loss attributable to Tenneco Inc.   $ (73 )   $ (415 )   $ (5 )
Average shares of common stock outstanding     48,572,463       46,406,095       45,809,730  
Earnings (loss) per average share of common stock   $ (1.50 )   $ (8.95 )   $ (0.11 )
Diluted loss per share —                        
Net loss attributable to Tenneco Inc.   $ (73 )   $ (415 )   $ (5 )
Average shares of common stock outstanding     48,572,463       46,406,095       45,809,730  
Effect of dilutive securities:                        
Restricted stock                  
Stock options                  
Average shares of common stock outstanding including dilutive securities     48,572,463       46,406,095       45,809,730  
Earnings (loss) per average share of common stock   $ (1.50 )   $ (8.95 )   $ (0.11 )

As a result of the net loss in 2009, 2008, and 2007, the calculation of diluted loss per share does not include the dilutive effect of 1,026,955 and 955,072 and 1,509,462 stock options, respectively. The calculation also does not include the dilutive effect of 174,545, 8,915 and 206,960 shares of restricted stock, respectively. In addition, options to purchase 2,403,502, 2,194,304 and 1,311,427 shares of common stock and 469,507, 426,553 and 262,434 shares of restricted stock were outstanding, respectively, but not included in the computation of diluted loss per share because the options were anti-dilutive.

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

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

4. Restructuring and Other Charges
Over the past several years, we have adopted plans to restructure portions of our operations. These plans were approved by our Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business. 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 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.

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.

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

Long-Term Debt
A summary of our long-term debt obligations at December 31, 2009 and 2008, is set forth in the following table:

    2009     2008  
(Millions)      
Tenneco Inc. —                
Revolver borrowings due 2012 and 2014, average effective interest rate 5.6% in 2009 and 4.4% in 2008   $     $ 239  
Senior Term Loans due 2012, average effective interest rate 5.7% in 2009 and 4.8% in 2008     133       150  
10 1/4 % Senior Secured Notes due 2013, including unamortized premium     249       250  
8 5/8 % Senior Subordinated Notes due 2014     500       500  
8 1/8 % Senior Notes due 2015     250       250  
Debentures due 2012 through 2025, average effective interest rate 8.4% in 2009 and 2008     1       1  
Customer Notes due 2013, average effective interest rate 8.0% in 2009     6        
Other subsidiaries —                
Notes due 2010 through 2017, average effective interest rate 4.0% in 2009 and 4.8% in 2008     12       17  
      1,151       1,407  
Less — maturities classified as current     6       5  
Total long-term debt   $ 1,145     $ 1,402  

The aggregate maturities and sinking fund requirements applicable to the long-term debt outstanding at December 31, 2009, are $57 million, $68 million, $20 million, $248 million, and $501 million for 2010, 2011, 2012, 2013 and 2014, respectively.

Short-Term Debt
Our short-term debt includes the current portion of long-term obligations and borrowing by foreign subsidiaries. Information regarding our short-term debt as of and for the years ended December 31, 2009 and 2008 is as follows:

    2009     2008  
(Millions)      
Maturities classified as current   $ 6     $ 5  
Notes payable     69       44  
Total short-term debt   $ 75     $ 49  


    2009     2008  
    Notes Payable(a)     Notes Payable(a)  
(Dollars in Millions)      
Outstanding borrowings at end of year   $ 69     $ 44  
Weighted average interest rate on outstanding borrowings at end of year(b)     6.9 %     10.5 %
Approximate maximum month-end outstanding borrowings during year   $ 71     $ 49  
Approximate average month-end outstanding borrowings during year   $ 60     $ 43  
Weighted average interest rate on approximate average month-end outstanding borrowings during year(b)     7.8 %     7.1 %
(a)   Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements.
 
(b)   This calculation does not include the commitment fees to be paid on the unused revolving credit facility balances which are recorded as interest expense for accounting purposes.

Financing Arrangements

Committed Credit Facilities(a) as of December 31, 2009   Term     Commitments     Borrowings     Letters of
Credit(b)
    Available  
(Millions)      
Tenneco Inc. revolving credit agreement     2012     $ 550     $     $ 50     $ 500  
Tenneco Inc. tranche B-1 letter of credit/revolving loan agreement     2014       130                   130  
Tenneco Inc. Senior Term Loans     2012       133       133              
Subsidiaries’ credit agreements     2010-2017       80       77             3  
            $ 893     $ 210     $ 50     $ 633  
(a) We generally are required to pay commitment fees on the unused portion of the total commitment.

(b) Letters of credit reduce the available borrowings under the tranche B-1 letter of credit/revolving loan agreement.

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

Pro Forma 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:

Pro Forma 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 Senior 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.

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

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

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

Level 3 — Unobservable inputs based on our own assumptions.

The carrying and estimated fair values of our financial instruments by class at December 31, 2009 and 2008 were as follows:

    December 31, 2009     December 31, 2008  
    Carrying
Amount
    Fair
Value
    Carrying
Amount
    Fair
Value
 
(Millions)              
Assets (Liabilities)  
Long-term debt (including current maturities)   $ 1,151     $ 1,168     $ 1,407     $ 713  
Instruments with off-balance sheet risk:                                
Foreign exchange forward contracts           2             2

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

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

Instruments With Off-Balance Sheet Risk
Foreign Exchange Forward Contracts  — Note 1 of the consolidated financial statements of Tenneco Inc. and Consolidated Subsidiaries, “Summary of Accounting Policies — Risk Management Activities” describes our use of and accounting for foreign currency exchange contracts.

The following table summaries by major currency the contractual amounts of currency we utilize:

    December 31, 2009     December 31, 2008  
Notional Amount   Purchase     Sell     Purchase     Sell  
(Millions)              
Foreign currency contracts (in U.S.$):                                
Australian dollars   $ 73     $ 35     $ 23     $ 5  
British pounds     16       16       20       17  
European euro           26             13  
South Africa rand     44       8       30       5  
U.S. dollars     41       98       9       46  
Other     12       1       7       1  
    $ 186     $ 184     $ 89     $ 87  

We manage our foreign currency risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. Based on exchange rates at December 31, 2009 and 2008, the cost of replacing these contracts in the event of non-performance by the counterparties would not have been material. The fair value of these instruments is recorded in other current assets or liabilities.

The fair value of our foreign exchange forward contracts, presented on a gross basis by derivative contract at December 31, 2009 was as follows:

Fair Value of Derivative Instruments   Asset Derivatives     Liability Derivatives     Total  
The fair value of our recurring financial assets and liabilities at December 31, 2009 are as follows:
Foreign exchange forward contracts
  $ 3     $ 1     $ 2  
(Millions)   Level 1     Level 2     Level 3  
Financial Assets:  
Foreign exchange forward contracts   N/A     $ 2     N/A  

Financial Guarantees  — We have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic wholly-owned subsidiaries fully and unconditionally guarantee our senior credit facility, our senior secured notes, our senior notes and our senior subordinated notes on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. The $245 million senior secured notes is also secured by second-priority liens on substantially all our domestic assets, excluding some of the stock of our domestic subsidiaries. No assets or capital stock of our direct or indirect foreign subsidiaries secure these notes. For additional information, refer to Note 13 of the consolidated financial statements of Tenneco Inc., where we present the Supplemental Guarantor Condensed Consolidating Financial Statements.

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

Interest Rate Swaps  — In December 2008, we elected to terminate our fixed-to-floating interest rate swap contracts covering $150 million of our fixed interest rate debt. The change in market value of these swaps was recorded as part of interest expense and other long-term assets or liabilities prior to their termination. We received $6 million in consideration with respect to the termination of the interest rate swaps.

Negotiable Financial Instruments  — One of our European subsidiaries receives payment from one of its OE customers whereby the accounts receivable are satisfied through the delivery of negotiable financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets as they do not meet our definition of cash equivalents. The amount of these financial instruments that was collected before their maturity date and sold at a discount totaled $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.

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

Year Ended December 31,   2009     2008     2007  
(Millions)      
U.S. loss before income taxes   $ (118 )   $ (257 )   $ (99 )
Foreign income before income taxes     77       141       187  
Income (loss) before income taxes and noncontrolling interests   $ (41 )   $ (116 )   $ 88  

Following is a comparative analysis of the components of income tax expense:
 
Year Ended December 31,   2009     2008     2007  
(Millions)      
Current —                        
U.S.    $ (2 )   $ 42     $  
State and local     4              
Foreign     35       12       58  
      37       54       58  
Deferred —                        
U.S.      (18 )     190       38
State and local     (3 )     45       5
Foreign     (3 )           (18 )
      (24 )     235       25
Income tax expense   $ 13     $ 289     $ 83  

Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent for all years presented) to the income tax expense reflected in the statements of income (loss):
 
Year Ended December 31,   2009     2008     2007  
(Millions)      
Income tax expense (benefit) computed at the statutory U.S. federal income tax rate   $ (14 )   $ (41 )   $ 31  
Increases (reductions) in income tax expense resulting from:                        
Foreign income taxed at different rates and foreign losses with no tax benefit     14     (6 )     (3 )
Taxes on repatriation of dividends     4       15       1  
State and local taxes on income, net of U.S. federal income tax benefit     2       2     (1 )
Changes in valuation allowance for tax loss carryforwards and credits     5       233       6  
Amortization of tax goodwill         (6 )     (2 )
Foreign tax holidays     (3 )         (5 )
Investment and R&D tax credits     (5 )     (1 )     (1 )
European ownership structure realignment                 66  
Foreign earnings subject to U.S. federal income tax     3       3       4  
Adjustment of prior years taxes         (2 )     (9 )
Impact of foreign tax law changes     2       10     (7 )
Tax contingencies     6       40       6
Goodwill impairment           40        
Other     (1 )     2     (3 )
Income tax expense   $ 13     $ 289     $ 83  

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

December 31,   2009     2008  
(Millions)      
Deferred tax assets —                
Tax loss carryforwards:                
U.S.    $ 218     $ 165  
State     61       56  
Foreign     55       44  
Investment tax credit benefits     44       46  
Postretirement benefits other than pensions     54       48  
Pensions     69       81  
Bad debts     3       2  
Sales allowances     5       5  
Other     91       107  
Valuation allowance     (378 )     (336 )
Total deferred tax assets     222       218  
Deferred tax liabilities —                
Tax over book depreciation     89       92  
Other     70       81  
Total deferred tax liabilities     159       173  
Net deferred tax assets   $ 63     $ 45  

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

December 31,   2009     2008  
(Millions)      
Balance Sheet:                
Current portion — deferred tax asset   $ 35     $ 18  
Non-current portion — deferred tax asset     100       88  
Current portion — deferred tax liability shown in other current liabilities     (6 )     (10 )
Non-current portion — deferred tax liability     (66 )     (51 )
Net deferred tax assets   $ 63     $ 45  

We had potential tax assets of $378 million and $336 million at December 31, 2009 and 2008, respectively, that were not recognized on our balance sheet as a result of the valuation allowance recorded. These unrecognized tax assets resulted primarily from U.S. tax loss carryforwards, foreign tax loss carryforwards, foreign investment tax credits and U.S. state net operating losses that are available to reduce future U.S., U.S. state and foreign tax liabilities.

We 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.

We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of our Brazilian operations and certain of our China operations, as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries were approximately $604 million at December 31, 2009. We estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $111 million.

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

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

A reconciliation of our uncertain tax positions is as follows:

    2009     2008     2007  
Uncertain tax positions —                      
Balance January 1   $ 83     $ 44     $ 42  
Gross increases in tax positions in current period     17       16       3  
Gross increases in tax positions in prior period     16       56       6  
Gross decreases in tax positions in prior period           (12 )     (5 )
Gross decreases — settlements     (17 )     (8 )     (1 )
Gross decreases — statute of limitations expired     (3 )     (13 )     (1 )
Balance December 31   $ 96     $ 83     $ 44  

Included in the balance of uncertain tax positions at December 31, 2009, 2008 and 2007 were $28 million, $75 million and $41 million, respectively, of tax benefits, that, if recognized, would affect the effective tax rate. We recognize accrued interest and penalties related to unrecognized tax benefits as income tax expense. Related to the uncertain tax positions noted above, we accrued penalties of $2 million in 2009. No penalties were accrued in 2008 and penalties of $1 million were accrued in 2007. Additionally, no interest was accrued in 2009 and $2 million and $3 million of interest related to uncertain tax positions was accrued in 2008 and 2007, respectively. Our liability for penalties was $3 million, $1 million and $2 million at December 31, 2009, 2008 and 2007, respectively, and our liability for interest was $4 million, $7 million and $5 million at December 31, 2009, 2008 and 2007, respectively.

Our uncertain tax position at December 31, 2009 and 2008 included foreign exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $2 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of foreign income tax examinations may occur within the coming year.

We are subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2009, our tax years open to examination in primary jurisdictions are as follows:

    Open To Tax Year  
United States — due to NOL     1998  
Germany     2006  
Belgium     2007  
Canada     2005  
United Kingdom     2008  
Spain     2003  

8. Common Stock
We have authorized 135 million shares ($0.01 par value) of common stock, of which 60,789,739 shares and 48,314,490 shares were issued at December 31, 2009 and 2008, respectively. We held 1,294,692 shares of treasury stock at both December 31, 2009 and 2008.

Equity Plans  — In December 1996, we adopted the 1996 Stock Ownership Plan, which permitted the granting of a variety of awards, including common stock, restricted stock, performance units, stock equivalent units, stock appreciation rights (“SARs”) and stock options to our directors, officers, employees and consultants. The 1996 plan, which terminated as to new awards on December 31, 2001, was renamed the “Stock Ownership Plan.” In December 1999, we adopted the Supplemental Stock Ownership Plan, which permitted the granting of a variety of similar awards to our directors, officers, employees and consultants. We were authorized to deliver up to about 1.1 million treasury shares of common stock under the Supplemental Stock Ownership Plan, which also terminated as to new awards on December 31, 2001. In March 2002, we adopted the 2002 Long-Term Incentive Plan which permitted the granting of a variety of similar awards to our officers, directors, employees and consultants. Up to 4 million shares of our common stock were authorized for delivery under the 2002 Long-Term Incentive Plan. In March 2006, we adopted the 2006 Long-Term Incentive Plan which replaced the 2002 Long-Term Incentive Plan and permits the granting of a variety of similar awards to directors, officers, employees and consultants. On May 13, 2009, our stockholders approved an amendment to the Tenneco Inc. 2006 Long-Term Incentive Plan to increase the shares of common stock available thereunder by 2.3 million. Each share underlying an award generally counts as one share against the total plan availability. Each share underlying a full value award (e.g. restricted stock), however, counts as 1.25 shares against the total plan availability. As of December 31, 2009, up to 2,551,620 shares of our common stock remain authorized for delivery under the 2006 Long-Term Incentive Plan. Our nonqualified stock options have 7 to 20 year terms and vest equally over a three-year service period from the date of the grant.

We have granted restricted common stock to our directors and certain key employees. These awards generally require, among other things, that the award holder remain in service to our company during the restriction period, which is currently 3 years, with a portion of the award vesting equally each year. We also have granted stock equivalent units and long-term performance units to certain key employees that are payable in cash. At December 31, 2009, the long-term performance units outstanding included a three year grant for 2007-2009 payable in the first quarter of 2010 and a three-year grant for 2008-2010 payable in the first quarter of 2011. Payment is based on the attainment of specified performance goals. The grant value is indexed to the stock price. In addition, we have granted SARs to certain key employees in our Asian and Indian operations that are payable in cash after a three-year service period. The grant value is indexed to the stock price.

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

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

Year Ended December 31,   2009     2008     2007  
(Millions)      
Selling, general and administrative   $ 3     $ 4     $ 4  
Loss before interest expense, income taxes and noncontrolling interests     (3 )     (4 )     (4 )
Income tax benefit                 (1 )
Net loss   $ (3 )   $ (4 )   $ (3 )
Decrease in basic earnings per share   $ (0.06 )   $ (0.09 )   $ (0.06 )
Decrease in diluted earnings per share   $ (0.06 )   $ (0.09 )   $ (0.06 )

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

As of December 31, 2009, there was approximately $4 million of unrecognized compensation costs related to these stock-based awards that we expect to recognize over a weighted average period of 1.0 year.

Compensation expense for restricted stock, long-term performance units and SARs, was $5 million for each of the years ended December 31, 2009, 2008 and 2007 respectively, and was recorded in selling, general, and administrative expense on the statement of income (loss).

Cash received from stock option exercises for the year ended December 31, 2009 and 2008 was $1 million and $2 million, respectively. Stock option exercises in 2009 and 2008 would have generated an excess tax benefit of $1 million in each period, respectively. We did not record the excess tax benefit as we have federal and state net operating losses which are not currently being utilized.

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

Year Ended December 31,   2009     2008     2007  
Stock Options Granted                        
Weighted average grant date fair value, per share   $ 1.34     $ 8.03     $ 9.93  
Weighted average assumptions used:                        
Expected volatility     82.6 %     37.7 %     38.4 %
Expected lives     4.5       4.1       4.1  
Risk-free interest rates     1.48 %     2.8 %     4.7 %
Dividend yields     0.00 %     0.0 %     0.0 %

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

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

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

Year Ended December 31, 2009   Shares
Under
Option
    Weighted
Avg.
Exercise
Prices
    Weighted
Avg.
Remaining
Life in
Years
    Aggregate
Intrinsic
Value
 
(Millions)      
Outstanding Stock Options                                
Outstanding, January 1, 2009     3,149,376     $ 15.16       4.1     $ 1  
Granted     697,600       1.99                  
Cancelled                            
Forfeited     (12,994 )     19.41                  
Exercised                       $  
Outstanding, March 31, 2009     3,833,982     $ 12.75       5.0     $  
Granted     12,159       6.61                  
Cancelled                            
Forfeited     (25,841 )     26.31                  
Exercised     (41,460 )     2.29             $  
Outstanding, June 30, 2009     3,778,840     $ 12.75       4.7     $ 5  
Granted                            
Cancelled                            
Forfeited     (8,775 )     14.36                  
Exercised     (90,144 )     7.59             $ 1  
Outstanding, September 30, 2009     3,679,921     $ 12.87       4.6     $ 19  
Granted     3,123       11.72                  
Cancelled     (186,804 )     8.56                
Forfeited     (5,633 )     23.47                  
Exercised     (65,150 )     6.31             $ 1  
Outstanding, December 31, 2009     3,425,457     $ 13.21       4.6     $ 20  
Vested or Expected to Vest, December 31, 2009     3,300,800     $ 13.37       4.6     $ 19  
Exercisable, December 31, 2009     2,235,424     $ 13.81       4.5     $ 11  

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

Year Ended December 31, 2009   Shares     Weighted Avg.
Grant Date
Fair Value
 
Nonvested balance at January 1, 2009     435,468     $ 24.58  
Granted     431,975       1.96  
Vested     (204,965 )     24.17  
Forfeited            
Nonvested balance at March 31, 2009     662,478     $ 9.92  
Granted     5,622       6.61  
Vested     (19,569 )     12.75  
Forfeited            
Nonvested balance at June 30, 2009     648,531     $ 9.81  
Granted            
Vested     (2,277 )     14.58  
Forfeited     (741 )     1.84  
Nonvested balance at September 30, 2009     645,513     $ 9.84  
Granted            
Vested            
Forfeited     (1,461 )     1.86  
Nonvested balance at December 31, 2009     644,052     $ 9.85  

The fair value of restricted stock grants is equal to the average market price of our stock at the date of grant. As of December 31, 2009, approximately $2 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.3 years.

Long-term Performance Units and SARs  — Long-term performance units and SARs are paid in cash and recognized as a liability based upon their fair value. As of December 31, 2009, less than $1 million of total unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 1.3 years.

Rights Plan
On September 9, 1998, we adopted a Rights Plan and established an independent Board committee to review it every three years. The Rights Plan was adopted to deter coercive takeover tactics and to prevent a potential acquirer from gaining control of us in a transaction that is not in the best interests of our shareholders. Generally, under the Rights Plan, if a person became the beneficial owner of 15 percent or more of our outstanding common stock, each right entitled its holder to purchase, at the right’s exercise price, a number of shares of our common stock or, under certain circumstances, of the acquiring person’s common stock, having a market value of twice the right’s exercise price. Rights held by the 15 percent or more holders would become void and will not be exercisable. The Rights Plan expired in September 2008.

9. Preferred Stock
We had 50 million shares of preferred stock ($0.01 par value) authorized at December 31, 2009 and 2008, respectively. No shares of preferred stock were outstanding at those dates.

10. Pension Plans, Postretirement and Other Employee Benefits
We have various defined benefit pension plans that cover some of our employees. On January 1, 2007, we changed the measurement date used to determine the measurement of our pension plan assets and benefit obligations from September 30th to December 31st in 2007 for both our domestic and foreign plans.

The changes in plan assets and benefit obligations recognized in accumulated other comprehensive loss as a result of our adoption of the measurement date provision of Financial Accounting Standards Codification (“ASC”) Section 715, Compensation-Retirement Plans consisted of the following components:

    2007  
    U.S.     Foreign     Total  
(Millions)      
Net actuarial gain   $ (18 )   $ (23 )   $ (41 )
Recognized actuarial loss     (2 )     (6 )     (8 )
Currency translation adjustment           9       9  
Recognition of prior service cost     (1 )     (2 )     (3 )
Total recognized in other comprehensive loss before tax effects   $ (21 )   $ (22 )   $ (43 )

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

    2007  
    U.S.   Foreign  
(Millions)
Net actuarial loss   $ 81   $ 101  
Prior service cost     3     14  
    $ 84   $ 115  

As a result of the change in measurement date, on January 1, 2007, the following adjustments were made to retained earnings (accumulated deficit) and other comprehensive income (both net of tax effects) for our defined benefit pension plans:
 
    U.S.   Foreign  
(Millions)
Retained earnings (accumulated deficit), net of tax   $ (3 ) $ (2 )
Accumulated other comprehensive income, net of tax     8     6  

Pension benefits are based on years of service and, for most salaried employees, on average compensation. Our funding policy is to contribute to the plans amounts necessary to satisfy the funding requirement of applicable federal or foreign laws and regulations. Of our $674 million benefit obligation at December 31, 2009, approximately $597 million required funding under applicable federal and foreign laws. At December 31, 2009, we had approximately $461 million in assets to fund that obligation. The balance of our benefit obligation, $77 million, did not require funding under applicable federal or foreign laws and regulations. Pension plan assets were invested in the following classes of securities:

    Percentage of Fair Market Value  
    December 31, 2009     December 31, 2008  
    U.S.     Foreign     U.S.     Foreign  
Equity Securities     71 %     55 %     59 %     51 %
Debt Securities     29 %     38 %     41 %     37 %
Real Estate           2 %           3 %
Other           5 %           9 %

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

The following table presents our plan assets using the fair value hierarchy as of December 31, 2009. The fair value hierarchy has three levels based on the methods used to determine the fair value. Level 1 assets refer to those asset values based on quoted market in active markets for identical assets at the measurement date. Level 2 assets refer to assets with values determined using significant other observable inputs, and Level 3 assets include values determined with non-observable inputs.

Fair Value Level as of December 31, 2009   U.S. Foreign
Asset Category   Level 1   Level 2   Level 3   Level 1   Level 2   Level 3  
(Millions)
Equity securities:
U.S. large cap     $ 14     $ 89     $     $ 4     $ 24     $  
U.S. mid cap             3                          
U.S. small cap             16                          
Non-U.S. large cap             15             35       60        
Non-U.S. mid cap                               17        
Non-U.S. small cap                                      
Emerging markets       5                         6        
Debt securities:
U.S. treasuries/government bonds       13       3                          
U.S. corporate bonds             14                          
U.S. mortgage backed securities             20                          
U.S. municipal obligations                                      
U.S. asset backed securities             3                          
U.S. other fixed income             4                          
Non-U.S. treasuries / government bonds                         33       22        
Non-U.S. corporate bonds                         7       31        
Non-U.S. mortgage backed securities                                      
Non-U.S. municipal obligations                               1        
Non-U.S. asset backed securities                                      
Non-U.S. other fixed income                                     6  
Real Estate:
U.S. real estate                                      
Non-U.S. real estate                               5        
Other:
Hedge funds                                      
Insurance contracts                               7        
Other alternative                                      
Cash held in bank accounts                         4              
Total     $ 32     $ 167     $     $ 83     $ 173     $ 6  

Level 1 assets were valued using market prices based on daily net asset value (NAV) or prices available through a public stock exchange. Level 2 assets were valued primarily using market prices, sometimes net of estimated realization expenses, and based on broker/dealer markets or in commingled funds where NAV is not available publicly. For insurance contracts, the estimated surrender value of the policy was used to estimate fair market value. Level 3 assets were valued using the net present value of the future cash flows based on certain assumptions such as discount rate and estimated redemptions.

The table below summarizes the changes in the fair value of the Level 3 assets for the year ended December 31, 2009:

Level 3 Assets   U.S.  Foreign 
(Millions)
Balance at December 31 of the previous year     $     $ 4  
Actual return on plan assets:
Relating to assets still held at the reporting date             2  
Relating to assets sold during the period              
Purchases, sales and settlements              
Transfers in and/or out of level 3              
Currency translation adjustment              
Ending Balance at December 31     $     $ 6  

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

Asset Category   Fair Value Level  Value
(Millions)
  Percentage of
Total Assets
 
Tenneco Stock       1     $ 14       7.3 %

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

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

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

    Pension     Postretirement  
    2009     2008     2009     2008  
    U.S.     Foreign     U.S.     Foreign     U.S.     U.S.  
(Millions)      
Change in benefit obligation:                                                
Benefit obligation at December 31 of the previous year   $ 334     $ 276     $ 313     $ 364     $ 143     $ 152  
Adjustment to benefit obligation                       17              
Currency rate conversion           31             (73 )            
Settlement           (1 )           (2 )            
Curtailment                                    
Service cost     1       3       1       5       1       2  
Interest cost     20       18       20       20       8       9  
Plan amendments                                   (10 )
Acquisition                       3              
Actuarial (gain)/ loss     4       17       14       (45 )     (2 )     (2 )
Benefits paid     (18 )     (13 )     (14 )     (17 )     (9 )     (8 )
Participants’ contributions           2             4              
Benefit obligation at December 31   $ 341     $ 333     $ 334     $ 276     $ 141     $ 143  
Change in plan assets:                                                
Fair value at December 31 of the previous year   $ 165     $ 196     $ 249     $ 282     $     $  
Adjustment to plan assets                       17              
Currency rate conversion           25             (57 )            
Settlement           (1 )           (2 )            
Actual return on plan assets     43       35       (78 )     (50 )            
Employer contributions     9       18       8       19       9       9  
Participants’ contributions           2             4              
Benefits paid     (18 )     (13 )     (14 )     (17 )     (9 )     (9 )
Fair value at December 31   $ 199     $ 262     $ 165     $ 196     $     $  
Development of net amount recognized:                                                
Unfunded status at December 31   $ (142 )   $ (71 )   $ (169 )   $ (80 )   $ (141 )   $ (143 )
Unrecognized cost:                                                
Actuarial loss     171       104       192       95       74       80  
Prior service cost     2       11       3       11       (41 )     (46 )
Net amount recognized at December 31   $ 31     $ 44     $ 26     $ 26     $ (108 )   $ (109 )
Amounts recognized in the balance sheets as of December 31                                                
Noncurrent assets   $     $ 2     $     $     $     $  
Current liabilities     (17 )     (2 )     (7 )     (2 )     (10 )     (9 )
Noncurrent liabilities     (125 )     (71 )     (162 )     (78 )     (131 )     (134 )
Net amount recognized   $ (142 )   $ (71 )   $ (169 )   $ (80 )   $ (141 )   $ (143 )

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

Net periodic pension costs (income) for the years 2009, 2008, and 2007, consist of the following components:

    2009     2008     2007  
    U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
(Millions)      
Service cost — benefits earned during the year   $ 1     $ 4     $ 1     $ 5     $ 1     $ 5  
Interest on prior year’s projected benefit obligation     20       18       20       20       19       19  
Expected return on plan assets     (22 )     (19 )     (23 )     (21 )     (21 )     (20 )
Curtailment loss     1                                
Settlement loss     2                   1              
Recognition of:                                                
Actuarial loss     2       2       3       4       2       6  
Prior service cost     1       2       1       1       1       2  
Net pension costs   $ 5     $ 7     $ 2     $ 10     $ 2     $ 12  
Other comprehensive loss   $     $     $     $     $     $  

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

    2009     2008  
    U.S.     Foreign     U.S.     Foreign  
(Millions)
Net actuarial loss   $ 171     $ 104     $ 192     $ 95  
Prior service cost     2       11       3       11  
    $ 173     $ 115     $ 195     $ 106  

In 2010, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive income, as components of net periodic benefit cost:

    2010  
    U.S.     Foreign  
(Millions)
Net actuarial loss   $ 3     $ 4  
Prior service cost           2  
    $ 3     $ 6  

The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2009 and 2008 were as follows:

    December 31, 2009     December 31, 2008  
    U.S.     Foreign     U.S.     Foreign  
(Millions)
Projected Benefit Obligation   $ 341     $ 302     $ 334     $ 271  
Accumulated Benefit Obligation     339       297       333       266  
Fair Value of Plan Assets     199       229       165       191  

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

Year   U.S.     Foreign  
(Millions)
2010   $ 32     $ 14  
2011     17       18  
2012     18       15  
2013     19       16  
2014     20       17  
2015-2018     113       98  

The following assumptions were used in the accounting for the pension plans for the years of 2009, 2008, and 2007:

    2009     2008  
    U.S.     Foreign     U.S.     Foreign  
Weighted-average assumptions used to determine benefit obligations                                
Discount rate     6.1 %     6.0 %     6.2 %     6.3 %
Rate of compensation increase     N/A       3.5 %     N/A       3.1 %

    2009     2008     2007  
    U.S.     Foreign     U.S.     Foreign     U.S.     Foreign  
Weighted-average assumptions used to
  determine net periodic benefit cost
                                               
Discount rate     6.2 %     6.3 %     6.2 %     5.6 %     6.0 %     5.0 %
Expected long-term return on plan assets     8.8 %     7.3 %     8.8 %     7.7 %     8.8 %     7.6 %
Rate of compensation increase     N/A       3.1 %     N/A       4.4 %     N/A       4.3 %

We made contributions of $27 million to our pension plans during 2009. Based on current actuarial estimates, we believe we will be required to make contributions of $54 million to those plans during 2010. Pension 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.

The pension results for the year ended December 31, 2008 include amounts relating to our acquisition of Gruppo Marzocchi on September 1, 2008. In addition, during the year 2008, the Company adjusted the beginning balance of both the foreign pension benefit obligation and related plan assets by $17 million to include a cash balance plan relating to a foreign subsidiary.

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

Effective December 31, 2006, we froze future accruals under our defined benefit plans for substantially all U.S. salaried and non-union hourly employees and replaced these benefits with additional contributions under defined contribution plans. These changes reduced expense in 2007 by approximately $11 million. As of December 31, 2008, we froze future accruals for the formerly unionized employees at Grass Lake, Michigan participating in the Tenneco Pension Plan for Hourly Employees defined benefit plan.

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

On September 1, 2003, we changed our retiree medical benefits program to provide participating retirees with continued access to group health coverage while reducing our subsidization of the program. This negative plan amendment is being amortized over the average remaining service life to retirement eligibility of active plan participants as a reduction of service cost beginning September 1, 2003.

In July 2004, we entered into a settlement with a group of the retirees which were a part of the September 2003 change mentioned above. This settlement provided the group with increased coverage, and as a result, a portion of the negative plan amendment was reversed and a positive plan amendment put in place. The effect of the settlement increased our 2004 postretirement benefit expense by approximately $1 million and increased our accumulated postretirement benefit obligation by approximately $13 million.

Net periodic postretirement benefit cost for the years 2009, 2008, and 2007, consists of the following components:

    2009     2008     2007  
(Millions)      
Service cost — benefits earned during the year   $ 1     $ 2     $ 2  
Interest on accumulated postretirement benefit obligation     8       8       9  
Recognition of:                        
Actuarial loss     5       5       6  
Prior service cost     (6 )     (5 )     (5 )
Net periodic pension cost   $ 8     $ 10     $ 12  

In 2010, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive income, as components of net periodic benefit cost:

    2010  
Net actuarial loss   $   5  
Prior service cost     (6 )
    $  (1 )

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

Year   Postretirement Benefits  
(Millions)      
2010     $  10  
2011     11  
2012     11  
2013     11  
2014     11  
2015-2018     54  

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

Year   Postretirement Benefits  
(Millions)      
2010     $  1  
2011     1  
2012     1  
2013     1  
2014     1  
2015-2018     4  

The weighted average assumed health care cost trend rate used in determining the 2009 accumulated postretirement benefit obligation was 8.3 percent, declining to 5 percent by 2014. The healthcare cost trend rate was 9 percent for both 2008 and 2007, declining to 5 percent over succeeding periods.

The following assumptions were used in the accounting for postretirement cost for the years of 2009, 2008 and 2007:

    2009     2008  
Weighted-average assumptions used to determine benefit obligations                
Discount rate     6.1 %     6.2 %
Rate of compensation increase     N/A       4.0 %

    2009     2008     2007  
Weighted-average assumptions used to determine net periodic benefit cost                        
Discount rate     6.2 %     6.2 %     6.0 %
Rate of compensation increase     4.0 %     4.0 %     4.0 %

The effect of a one-percentage-point increase or decrease in the 2009 assumed health care cost trend rates on total service cost and interest and the postretirement benefit obligation are as follows:

    One-Percentage
Point Increase
    One-Percentage
Point Decrease
 
(Millions)      
Effect on total of service cost and interest cost   $ 1     $ (1 )
Effect on postretirement benefit obligation     11       (9 )

Based on current actuarial estimates, we believe we will be required to make postretirement contributions of approximately $10 million during 2010.

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.

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

Segment results for 2009, 2008, and 2007 are as follows:

    Segment  
    North
America
    Europe     Asia
Pacific
    Reclass
& Elims
    Consolidated  
(Millions)      
At December 31, 2009, and for the Year Then Ended                                        
Revenues from external customers   $ 2,092     $ 2,047     $ 510     $     $ 4,649  
Intersegment revenues     7       162       15       (184 )      
Interest income           3       1             4  
Depreciation and amortization of intangibles     113       89       19             221  
Income before interest expense, income taxes, and noncontrolling interests     42       20       30             92  
Total assets     1,102       1,338       391       10       2,841  
Investment in affiliated companies           12                   12  
Expenditures for plant, property and equipment     45       58       15             118  
Noncash items other than depreciation and amortization     8       (1 )     1             8  
At December 31, 2008, and for the Year Then Ended                                        
Revenues from external customers   $ 2,630     $ 2,758     $ 528     $     $ 5,916  
Intersegment revenues     11       225       15       (251 )      
Interest income           10       1             11  
Depreciation and amortization of intangibles     108       97       17             222  
Income before interest expense, income taxes, and noncontrolling interests     (107 )     85       19             (3 )
Total assets     1,120       1,352       322       34       2,828  
Investment in affiliated companies           14                   14  
Expenditures for plant, property and equipment     108       89       24             221  
Noncash items other than depreciation and amortization     (122 )     (11 )                 (133 )
At December 31, 2007, and for the Year Then Ended                                        
Revenues from external customers   $ 2,901     $ 2,737     $ 546     $     $ 6,184  
Intersegment revenues     9       398       14       (421 )      
Interest income           12                   12  
Depreciation and amortization of intangibles     103       86       16             205  
Income before interest expense, income taxes, and noncontrolling interests     120       99       33             252  
Total assets     1,555       1,605       368       62       3,590  
Investment in affiliated companies           10                   10  
Expenditures for plant, property and equipment     106       74       18             198  
Noncash items other than depreciation and amortization     (18 )     (1 )     1             (18 )

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

    Net Sales  
Year Ended December 31,   2009     2008     2007  
(Millions)      
Emission Control Systems & Products                        
Aftermarket   $ 315     $ 358     $ 370  
Original Equipment                        
OE Value-add     1,638       2,128       2,288  
OE Substrate     966       1,492       1,673  
      2,604       3,620       3,961  
      2,919       3,978       4,331  
Ride Control Systems & Products                        
Aftermarket     721       761       734  
Original Equipment     1,009       1,177       1,119  
      1,730       1,938       1,853  
Total Revenues   $ 4,649     $ 5,916     $ 6,184  

The following customers accounted for 10 percent or more of our net sales in any of the last three years.
 
Customer   2009     2008     2007  
General Motors     16 %     20 %     20 %
Ford     14 %     11 %     13 %
    Geographic Area  
    United States     Germany     Canada     China     Other Foreign(a)     Reclass & Elims     Consolidated  
(Millions)      
At December 31, 2009, and for the Year Then Ended                                                        
Revenues from external customers(b)   $ 1,531     $ 559     $ 416     $ 361     $ 1,782     $     $ 4,649  
Long-lived assets(c)     373       116       75       61       604             1,229  
Total assets     984       409       125       249       1,153       (79 )     2,841  
At December 31, 2008, and for the Year Then Ended                                                        
Revenues from external customers(b)   $ 1,954     $ 898     $ 483     $ 309     $ 2,272     $     $ 5,916  
Long-lived assets(c)     421       130       74       57       599             1,281  
Total assets     1,066       429       112       186       1,149       (114 )     2,828  
At December 31, 2007, and for the Year Then Ended                                                        
Revenues from external customers(b)   $ 2,121     $ 1,036     $ 590     $ 320     $ 2,117     $     $ 6,184  
Long-lived assets(c)     410       151       89       46       649             1,345  
Total assets     1,476       477       150       198       1,423       (134 )     3,590  
Note:  (a)   Revenues from external customers and long-lived assets for individual foreign countries other than Germany, Canada, and China are not material.
(b)   Revenues are attributed to countries based on location of the shipper.
(c)   Long-lived assets include all long-term assets except goodwill, intangibles and deferred tax assets.

12. Commitments and Contingencies

Capital Commitments
We estimate that expenditures aggregating approximately $36 million will be required after December 31, 2009 to complete facilities and projects authorized at such date, and we have made substantial commitments in connection with these facilities and projects.

Lease Commitments
We have long-term leases for certain facilities, equipment and other assets. The minimum lease payments under non-cancelable leases with lease terms in excess of one year are:

    2010     2011     2012     2013     2014     Subsequent
Years
 
(Millions)                                                
Operating Leases   $ 19     $ 15     $ 11     $ 6     $ 3     $ 13  
Capital Leases   4                      

Total rental expense for the year 2009, 2008 and 2007 was $43 million, $46 million and $40 million, respectively.

Risk Related to the Automotive Industry and Concentration of Credit Risk
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.

Litigation
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.

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

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

Year Ended December 31,   2009     2008     2007  
(Millions)      
Beginning Balance   $ 27     $ 25     $ 25  
Accruals related to product warranties     18       17       12  
Reductions for payments made     (13 )     (15 )     (12 )
Ending Balance   $ 32     $ 27     $ 25  

Environmental 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 condensed 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, 2009, 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 condensed consolidated results of operations, financial position or cash flows.

13. Supplemental Guarantor Condensed Consolidating Financial Statements

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

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

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

STATEMENT OF INCOME (LOSS)

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

STATEMENT OF INCOME (LOSS)

For the Year Ended December 31, 2008   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Revenues                                        
Net sales and operating revenues —                                        
External   $ 2,392     $ 3,524     $     $     $ 5,916  
Affiliated companies     66       476             (542 )      
      2,458       4,000             (542 )     5,916  
Costs and expenses                                        
Cost of sales (exclusive of depreciation and amortization shown below)     2,058       3,547             (542 )     5,063  
Goodwill impairment charge     114                         114  
Engineering, research, and development     52       75                   127  
Selling, general, and administrative     124       264       4             392  
Depreciation and amortization of intangibles     86       136                   222  
      2,434       4,022       4       (542 )     5,918  
Other income (expense)                                        
Loss on sale of receivables           (10 )                 (10 )
Other income (expense)     63       (1 )     (1 )     (52 )     9  
      63       (11 )     (1 )     (52 )     (1 )
Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies     87       (33 )     (5 )     (52 )     (3 )
Interest expense —                                        
External (net of interest capitalized)     (3 )     3       113             113  
Affiliated companies (net of interest income)     124       (10 )     (114 )            
Income tax expense (benefit)     20       89       185       (5 )     289  
Equity in net income (loss) from affiliated companies     (138 )           (226 )     364        
Net income (loss)     (192 )     (115 )     (415 )     317       (405 )
Less: Net income attributable to noncontrolling interests           10                   10  
Net income (loss) attributable to Tenneco Inc.   $ (192 )   $ (125 )   $ (415 )   $ 317     $ (415 )

STATEMENT OF INCOME (LOSS)

For the Year Ended December 31, 2007   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Revenues                                        
Net sales and operating revenues —                                        
External   $ 2,827     $ 3,357     $     $     $ 6,184  
Affiliated companies     95       895             (990 )      
      2,922       4,252             (990 )     6,184  
Costs and expenses                                        
Cost of sales (exclusive of depreciation and amortization shown below)     2,619       3,582       (1 )     (990 )     5,210  
Engineering, research, and development     55       59                   114  
Selling, general, and administrative     145       249       4       1       399  
Depreciation and amortization of intangibles     80       125                   205  
      2,899       4,015       3       (989 )     5,928  
Other income (expense)                                        
Loss on sale of receivables           (10 )                 (10 )
Other income (expense)     13       3             (10 )     6  
      13       (7 )           (10 )     (4 )
Income (loss) before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies     36       230       (3 )     (11 )     252  
Interest expense —                                        
External (net of interest capitalized)     (2 )     2       164             164  
Affiliated companies (net of interest income)     185       (16 )     (169 )            
Income tax expense (benefit)     (42 )     78       57       (10 )     83  
Equity in net income (loss) from affiliated companies     135             50       (185 )      
Net income (loss)     30       166       (5 )     186       5  
Less: Net income attributable to noncontrolling interests           10                   10  
Net income (loss) attributable to Tenneco Inc.   $ 30     $ 156     $ (5 )   $ (186 )   $ (5 )

BALANCE SHEET

December 31, 2009   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
ASSETS                                        
Current assets:                                        
Cash and cash equivalents   $ 20     $ 147     $     $     $ 167  
Receivables, net     289       936       39       (668 )     596  
Inventories     161       267                   428  
Deferred income taxes           69             (34 )     35  
Prepayments and other     43       124                   167  
Total current assets     513       1,543       39       (702 )     1,393  
Other assets:                                        
Investment in affiliated companies     591             632       (1,223 )      
Notes and advances receivable from affiliates     3,872       308       5,818       (9,998 )      
Long-term receivables, net     3       5                   8  
Goodwill     22       67                   89  
Intangibles, net     16       14                   30  
Deferred income taxes     75       25       15       (15 )     100  
Other     28       58       25             111  
      4,607       477       6,490       (11,236 )     338  
Plant, property, and equipment, at cost     1,005       2,094                   3,099  
Less — Accumulated depreciation and amortization     (696 )     (1,293 )                 (1,989 )
      309       801                   1,110  
Total assets   $ 5,429     $ 2,821     $ 6,529     $ (11,938 )   $ 2,841  
LIABILITIES AND SHAREHOLDERS’ EQUITY                                        
Current liabilities:                                        
Short-term debt (including current maturities of long-term debt)                                        
Short-term debt — non-affiliated   $     $ 74     $ 1     $     $ 75  
Short-term debt — affiliated     302       229       10       (541 )      
Trade payables     270       609             (113 )     766  
Accrued taxes     6       30                   36  
Other     167       166       39       (48 )     324  
Total current liabilities     745       1,108       50       (702 )     1,201  
Long-term — debt-non-affiliated           8       1,137             1,145  
Long-term — debt-affiliated     4,374       261       5,363       (9,998 )      
Deferred income taxes     15       66             (15 )     66  
Postretirement benefits and other liabilities     326       81             4       411  
Commitments and contingencies                                        
Total liabilities     5,460       1,524       6,550       (10,711 )     2,823  
Redeemable noncontrolling interests           7                   7  
Tenneco Inc. Shareholders’ equity     (31 )     1,258       (21 )     (1,227 )     (21 )
Noncontrolling interests           32                   32  
Total equity     (31 )     1,290       (21 )     (1,227 )     11  
Total liabilities, redeemable noncontrolling interests and equity   $ 5,429     $ 2,821     $ 6,529     $ (11,938 )   $ 2,841  

BALANCE SHEET

December 31, 2008   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
ASSETS                                        
Current assets:                                        
Cash and cash equivalents   $ 16     $ 110     $     $     $ 126  
Receivables, net     461       792       33       (712 )     574  
Inventories     193       320                   513  
Deferred income taxes     58                   (40 )     18  
Prepayments and other     24       83                   107  
Total current assets     752       1,305       33       (752 )     1,338  
Other assets:                                        
Investment in affiliated companies     399             614       (1,013 )      
Notes and advances receivable from affiliates     3,641       234       5,605       (9,480 )      
Long-term receivables, net     1       10                   11  
Goodwill     22       73                   95  
Intangibles, net     17       9                   26  
Deferred income taxes     64       24       46       (46 )     88  
Other     36       66       23             125  
      4,180       416       6,288       (10,539 )     345  
Plant, property, and equipment, at cost     1,039       1,921                   2,960  
Less — Accumulated depreciation and amortization     (687 )     (1,128 )                 (1,815 )
      352       793                   1,145  
Total assets   $ 5,284     $ 2,514     $ 6,321     $ (11,291 )   $ 2,828  
LIABILITIES AND SHAREHOLDERS’ EQUITY                                        
Current liabilities:                                        
Short-term debt (including current maturities of long-term debt)                                        
Short-term debt — non-affiliated   $     $ 49     $     $     $ 49  
Short-term debt — affiliated     174       371       10       (555 )      
Trade payables     332       594             (136 )     790  
Accrued taxes     12       18                   30  
Other     132       169       48       (61 )     288  
Total current liabilities     650       1,201       58       (752 )     1,157  
Long-term — debt-non-affiliated           12       1,390             1,402  
Long-term — debt-affiliated     4,229       127       5,124       (9,480 )      
Deferred income taxes     43       54             (46 )     51  
Postretirement benefits and other liabilities     345       89             4       438  
Commitments and contingencies                                        
Total liabilities     5,267       1,483       6,572       (10,274 )     3,048  
Redeemable noncontrolling interests           7                   7  
Tenneco Inc. Shareholders’ equity     17       1,000       (251 )     (1,017 )     (251 )
Noncontrolling interests           24                   24  
Total equity     17       1,024       (251 )     (1,017 )     (227 )
Total liabilities, redeemable noncontrolling interests and equity   $ 5,284     $ 2,514     $ 6,321     $ (11,291 )   $ 2,828  

STATEMENT OF CASH FLOWS

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

STATEMENT OF CASH FLOWS

Year Ended December 31, 2008   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Operating Activities                                        
Net cash provided (used) by operating activities   $ 167     $ 130     $ (137 )   $     $ 160  
Investing Activities                                        
Proceeds from sale of assets           3                   3  
Cash payments for plant, property, and equipment     (90 )     (143 )                 (233 )
Acquisition of business (net of cash acquired)     (19 )     3                   (16 )
Cash payments for software related intangible assets     (9 )     (6 )                 (15 )
Investments and other                              
Net cash used by investing activities     (118 )     (143 )                 (261 )
Financing Activities                                        
Issuance of common shares                 2             2  
Issuance of long-term debt           1                   1  
Retirement of long-term debt           (4 )     (2 )           (6 )
Debit issuance cost on long-term debt                 (2 )           (2 )
Increase (decrease) in bank overdrafts           (1 )                 (1 )
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt           7       70             77  
Intercompany dividends and net increase (decrease) in intercompany obligations     (39 )     (30 )     69              
Distribution to noncontrolling interests partners           (13 )                 (13 )
Net cash provided (used) by financing activities     (39 )     (40 )     137             58  
Effect of foreign exchange rate changes on cash and cash equivalents           (19 )                 (19 )
Increase (decrease) in cash and cash equivalents     10       (72 )                 (62 )
Cash and cash equivalents, January 1     6       182                   188  
Cash and cash equivalents, December 31 (Note)   $ 16     $ 110     $     $     $ 126  
Note:   Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase.

STATEMENT OF CASH FLOWS

Year Ended December 31, 2007   Guarantor Subsidiaries     Nonguarantor Subsidiaries     Tenneco Inc. (Parent Company)     Reclass & Elims     Consolidated  
(Millions)      
Operating Activities                                        
Net cash provided (used) by operating activities   $ 380     $ 302     $ (524 )   $     $ 158  
Investing Activities                                        
Proceeds from sale of assets     1       9                   10  
Cash payments for plant, property, and equipment     (59 )     (118 )                 (177 )
Cash payment for net assets purchased     (16 )                       (16 )
Cash payments for software related intangible assets     (13 )     (6 )                 (19 )
Investments and other           (250 )     250              
Net cash provided (used) by investing activities     (87 )     (365 )     250             (202 )
Financing Activities                                        
Issuance of common shares                 8             8  
Issuance of subsidiary equity     41       (41 )                  
Issuance of long-term debt                 400             400  
Retirement of long-term debt           (3 )     (588 )           (591 )
Debt issuance cost on long-term debt                 (11 )           (11 )
Increase (decrease) in bank overdrafts           7                   7  
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt           16       167             183  
Intercompany dividends and net increase (decrease) in intercompany obligations     (384 )     86       298              
Distribution to noncontrolling interests partners           (6 )                 (6 )
Net cash provided (used) by financing activities     (343 )     59       274             (10 )
Effect of foreign exchange rate changes on cash and cash equivalents           40                   40  
Increase (decrease) in cash and cash equivalents     (50 )     36                   (14 )
Cash and cash equivalents, January 1     56       146                   202  
Cash and cash equivalents, December 31 (Note)   $ 6     $ 182     $     $     $ 188  
Note:   Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase.
14. Quarterly Financial Data (Unaudited)
Quarter     Net Sales
and
Operating
Revenues
    Cost of Sales
(Excluding
Depreciation and
Amortization)
    Income Before
Interest Expense,
Income Taxes
and Noncontrolling
Interests
    Net
Income
(Loss)
   
(Millions)  
2009                          
1st   $ 967   $ 827   $ (13 ) $ (49 )
2nd     1,106     913     17     (33 )
3rd     1,254     1,043     35     (8 )
4th     1,322     1,092     53     17  
    $ 4,649   $ 3,875   $ 92   $ (73 )
2008                          
1st   $ 1,560   $ 1,326   $ 39   $ 6  
2nd     1,651     1,383     75     13  
3rd     1,497     1,298     28     (136 )
4th     1,208     1,056     (145 )   (298 )
    $ 5,916   $ 5,063   $ (3 ) $ (415 )

Quarter   Basic
Earnings (Loss)
per Share of
Common Stock
    Diluted
Earnings (Loss)
per Share of
Common Stock
 
2009                
1st   $  (1.05 )   $  (1.05 )
2nd     (0.72 )     (0.72 )
3rd     (0.17 )     (0.17 )
4th     0.33       0.32  
Full Year     (1.50 )     (1.50 )
2008                
1st   $   0.14     $   0.13  
2nd     0.26       0.26  
3rd     (2.92 )     (2.92 )
4th     (6.40 )     (6.40 )
Full Year     (8.95 )     (8.95 )
Note:   The sum of the quarters may not equal the total of the respective year’s earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year.

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