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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________ 
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2019
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-12387
TENNECO INC .
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

500 North Field Drive , Lake Forest , Illinois
(Address of principal executive offices)

 

76-0515284
(I.R.S. Employer
Identification No.)

60045
(Zip Code)
Registrant’s telephone number, including area code: ( 847 )  482-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Class A Voting Common Stock, par value $0.01 per share
TEN
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes    ☑       No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes    ☑       No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☑
 
Accelerated filer
☐
Non-accelerated filer
☐
 
Smaller reporting company 
☐
 
 
 
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ☐       No   ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of Class A Voting Common Stock, par value $0.01 per share: 57,126,858 shares outstanding as of August 2, 2019 . The number of shares of Class B Non-Voting Common Stock, par value $0.01 per share: 23,793,669 shares outstanding as of August 2, 2019 .



TABLE OF CONTENTS
 
 
 
Page
Part I — Financial Information
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Part II — Other Information
 
Item 1.
Item 1A.
Item 2.
Item 3.
Defaults Upon Senior Securities
*
Item 4.
Mine Safety Disclosures
*
Item 5.
Other Information
*
Item 6.
 
*
No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative.

2


CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, our prospects and business strategies. These forward-looking statements are included in various sections of this report. The words “may,” “will,” “believe,” “should,” “could,” “plan,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:
•
general economic, business and market conditions;
•
our ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices;
•
the cost and outcome of existing and any future claims, legal proceedings or investigations, including, but not limited to, any of the foregoing arising in connection with the ongoing global antitrust investigation, product performance, product safety or intellectual property rights;
•
changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from historically higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements, and the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector;
•
changes in consumer demand for our original equipment products or aftermarket products, or changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, due to difficult economic conditions and/or regulatory or legal changes affecting internal combustion engines and/or aftermarket products;
•
our dependence on certain large customers, including the loss of any of our large original equipment manufacturer customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other customers or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;
•
new technologies that reduce the demand for certain of our products or otherwise render them obsolete;
•
our ability to introduce new products and technologies that satisfy customers' needs in a timely fashion;
•
the overall highly competitive nature of the automotive and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes over the life of the applicable program);
•
changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt;
•
our ability to comply with the covenants contained in our debt instruments;
•
our working capital requirements;
•
our ability to successfully execute cash management and other cost reduction plans, and to realize the anticipated benefits from these plans;
•
risks inherent in operating a multi-national company, including economic conditions, such as currency exchange and inflation rates, and political conditions in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability, and tax and other laws, and potential disruptions of production and supply;
•
increasing competition from lower cost, private-label products;
•
damage to the reputation of one or more of our leading brands;
•
the effect of improvements in automotive parts on aftermarket demand for some of our products;
•
industrywide strikes, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers;
•
developments relating to our intellectual property, including our ability to adapt to changes in technology;
•
costs related to product warranties and other customer satisfaction actions;
•
the failure or breach of our information technology systems, including the consequences of any misappropriation, exposure or corruption of sensitive information stored on such systems and the interruption to our business such failure or breach may cause;

3


•
the effect of consolidation among vehicle parts suppliers and customers on our ability to compete in the highly competitive automotive and commercial vehicle supplier industry;
•
changes in distribution channels or competitive conditions in the markets and countries where we operate;
•
the evolution towards autonomous vehicles, and car and ride sharing;
•
customer acceptance of new products;
•
our ability to successfully integrate, and benefit from, any acquisitions we complete;
•
our ability to effectively manage our joint ventures and other third-party relationships;
•
the potential impairment in the carrying value of our long-lived assets, goodwill, or indefinite-lived intangible assets or our inability to realize our deferred tax assets;
•
the negative effect of fuel price volatility on transportation and logistics costs, raw material costs, discretionary purchases of vehicles or aftermarket products, and demand for off-highway equipment;
•
increases in the costs of raw materials or components, including our ability to successfully reduce the effect of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery, and other methods;
•
changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
•
changes in accounting estimates and assumptions, including changes based on additional information;
•
any changes by the International Organization for Standardization (ISO) or other such committees in their certification protocols for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market;
•
the effect of the extensive, increasing, and changing laws and regulations to which we are subject, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved or increased costs or loss of revenues relating to products subject to changing regulation;
•
potential volatility in our effective tax rate;
•
disasters, such as fires, earthquakes and flooding, and any resultant disruptions in the supply or production of goods or services to us or by us, in demand by our customers or in the operation of our system, disaster recovery capabilities or business continuity capabilities;
•
acts of war and/or terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the effect of these acts on economic, financial, and social conditions in the countries where we operate; 
•
pension obligations and other postretirement benefits;
•
our hedging activities to address commodity price fluctuations; and
•
the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.
In addition, important factors related to the acquisition of Federal-Mogul LLC ("Federal-Mogul") and the planned separation of our company into a powertrain technology company and an aftermarket and ride performance company that could cause actual results to differ materially from the expectations reflected in the forward-looking statements, including:
•
the risk the Company may not complete a separation of its powertrain technology business and its aftermarket and ride performance business (or achieve some or all of the anticipated benefits of the separation);
•
the risk the combined company and each separate company following the separation will underperform relative to our expectations;
•
the ongoing transaction costs and risk we may incur greater costs following separation of the business;
•
the risk the spin-off is determined to be a taxable transaction;
•
the risk the benefits of the acquisition of Federal-Mogul, including synergies, may not be fully realized or may take longer to realize than expected;
•
the risk the acquisition of Federal-Mogul may not advance our business strategy;
•
the risk we may experience difficulty integrating or separating employees or operations; and
•
the risk the transaction may have an adverse effect on existing arrangements with us, including those related to transition, manufacturing and supply services, and tax matters; our ability to retain and hire key personnel; or our ability to maintain relationships with customers, suppliers or other business partners.



4


The risks included here are not exhaustive. Refer to “Part II, Item 1A — Risk Factors” herein and “Part I, Item 1A — Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2018 for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the effect such risk factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Unless otherwise indicated in this report, the forward-looking statements in this report are made as of the date of this report, and, except as required by law, the Company does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements.


5


PART I
FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(in millions, except share and per share amounts)  
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
   Net sales and operating revenues
$
4,504

 
$
2,533

 
$
8,988

 
$
5,114

 
 
 
 
 
 
 
 
Costs and expenses
 
 
 
 
 
 
 
Cost of sales
3,793

 
2,134

 
7,657

 
4,327

Selling, general, and administrative
288

 
154

 
604

 
305

Depreciation and amortization
169

 
60

 
338

 
120

Engineering, research, and development
78

 
39

 
170

 
79

Restructuring charges and asset impairments
61

 
29

 
85

 
41

Goodwill impairment charge
—

 
—

 
60

 
—

 
4,389

 
2,416

 
8,914

 
4,872

Other expense (income)
 
 
 
 
 
 
 
Non-service pension and other postretirement benefit costs (credits)
4

 
3

 
6

 
6

Equity in (earnings) losses of nonconsolidated affiliates, net of tax
(17
)
 
—

 
(33
)
 
—

Other expense (income), net
(13
)
 
3

 
(16
)
 
3

 
(26
)
 
6

 
(43
)
 
9

Earnings (loss) before interest expense, income taxes, and noncontrolling interests
141

 
111

 
117

 
233

Interest expense
82

 
22

 
163

 
45

Earnings (loss) before income taxes and noncontrolling interests
59

 
89

 
(46
)
 
188

Income tax expense (benefit)
14

 
26

 
14

 
51

Net income (loss)
45

 
63

 
(60
)
 
137

Less: Net income (loss) attributable to noncontrolling interests
19

 
16

 
31

 
30

Net income (loss) attributable to Tenneco Inc.
$
26

 
$
47

 
$
(91
)
 
$
107

Earnings (loss) per share
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Earnings (loss) per share
$
0.32

 
$
0.92

 
$
(1.13
)
 
$
2.08

Weighted average shares outstanding
80,920,825

 
51,258,668

 
80,897,731

 
51,232,639

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Earnings (loss) per share
$
0.32

 
$
0.92

 
$
(1.13
)
 
$
2.07

Weighted average shares outstanding
80,920,825

 
51,607,224

 
80,897,731

 
51,546,015

See accompanying notes to the condensed consolidated financial statements.

6


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(in millions)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
45

 
$
63

 
$
(60
)
 
$
137

Other comprehensive income (loss) — net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustment
(18
)
 
(99
)
 
17

 
(72
)
Cash flow hedges
(3
)
 
—

 
1

 
—

Defined benefit plans
(2
)
 
4

 
(1
)
 
7

 
(23
)
 
(95
)
 
17

 
(65
)
Comprehensive income (loss)
22

 
(32
)
 
(43
)
 
72

Less: Comprehensive income (loss) attributable to noncontrolling interests
18

 
9

 
36

 
31

Comprehensive income (loss) attributable to common shareholders
$
4

 
$
(41
)
 
$
(79
)
 
$
41

See accompanying notes to the condensed consolidated financial statements.




7



TENNECO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(in millions, except shares)
 
June 30,
2019
 
December 31,
2018
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
384

 
$
697

Restricted cash
6

 
5

Receivables:
 
 
 
Customer notes and accounts, net
2,754

 
2,487

Other
93

 
85

Inventories
2,207

 
2,245

Prepayments and other current assets
550

 
590

Total current assets
5,994

 
6,109

Property, plant and equipment, net
3,569

 
3,501

Long-term receivables, net
10

 
10

Goodwill
799

 
869

Intangibles, net
1,649

 
1,519

Investments in nonconsolidated affiliates
531

 
544

Deferred income taxes
480

 
467

Other assets
560

 
213

Total assets
$
13,592

 
$
13,232

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
Short-term debt, including current maturities of long-term debt
$
170

 
$
153

Accounts payable
2,725

 
2,759

Accrued compensation and employee benefits
391

 
343

Accrued income taxes
—

 
64

Accrued expenses and other current liabilities
1,024

 
1,001

Total current liabilities
4,310

 
4,320

Long-term debt
5,508

 
5,340

Deferred income taxes
110

 
88

Pension and postretirement benefits
1,129

 
1,167

Deferred credits and other liabilities
546

 
263

Commitments and contingencies (Note 13)


 


Total liabilities
11,603

 
11,178

Redeemable noncontrolling interests
145

 
138

Tenneco Inc. shareholders’ equity:
 
 
 
Preferred stock — $0.01 par value; none issued
—

 
—

Class A voting stock — $0.01 par value; shares issued: June 30, 2019 — 71,746,952 and December 31, 2018 — 71,675,379
1

 
1

Class B non-voting convertible stock — $0.01 par value; shares issued: June 30, 2019 — 23,793,669 and December 31, 2018 — 23,793,669
—

 
—

Additional paid-in capital
4,371

 
4,360

Accumulated other comprehensive loss
(680
)
 
(692
)
Accumulated deficit
(1,124
)
 
(1,013
)
 
2,568

 
2,656

Shares held as treasury stock — at cost: June 30, 2019 and December 31, 2018 — 14,592,888 shares
(930
)
 
(930
)
Total Tenneco Inc. shareholders’ equity
1,638

 
1,726

Noncontrolling interests
206

 
190

Total equity
1,844

 
1,916

Total liabilities, redeemable noncontrolling interests and equity
$
13,592

 
$
13,232

See accompanying notes to the condensed consolidated financial statements.

8


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(in millions)
 
Six Months Ended
June 30,
 
2019
 
2018
Operating Activities
 
 
 
Net income (loss)
$
(60
)
 
$
137

Adjustments to reconcile net income (loss) to cash provided (used) by operating activities:
 
 
 
Goodwill impairment charge
60

 
—

Depreciation and amortization
338

 
120

Deferred income taxes
(14
)
 
(9
)
Stock-based compensation
13

 
7

Restructuring charges and asset impairments, net of cash paid
14

 
10

Change in pension and other postretirement benefit plans
(32
)
 
2

Equity in earnings of nonconsolidated affiliates
(33
)
 
—

Cash dividends received from nonconsolidated affiliates
27

 
—

Loss (gain) on sale of assets
(1
)
 
—

Changes in operating assets and liabilities:
 
 
 
Receivables
(401
)
 
(233
)
Inventories
101

 
(51
)
Payables and accrued expenses
48

 
206

Accrued interest and accrued income taxes
(66
)
 
(2
)
Other assets and liabilities
(94
)
 
(109
)
Net cash provided (used) by operating activities
(100
)
 
78

Investing Activities
 
 
 
Proceeds from sale of assets
5

 
5

Net proceeds from sale of business
22

 
—

Cash payments for property, plant, and equipment
(379
)
 
(174
)
Acquisition of business, net of cash acquired
(158
)
 
—

Proceeds from deferred purchase price of factored receivables
147

 
66

Other
(1
)
 
2

Net cash used by investing activities
(364
)
 
(101
)
Financing Activities
 
 
 
Proceeds from term loans and notes
111

 
9

Repayments of term loans and notes
(190
)
 
(28
)
Borrowings on revolving lines of credit
4,525

 
2,669

Payments on revolving lines of credit
(4,254
)
 
(2,614
)
Issuance (repurchase) of common shares
(2
)
 
(1
)
Cash dividends
(20
)
 
(25
)
Net increase (decrease) in bank overdrafts
(8
)
 
(7
)
Other
(1
)
 
(22
)
Distributions to noncontrolling interest partners
(20
)
 
(28
)
Net cash provided (used) by financing activities
141

 
(47
)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
11

 
(11
)
Decrease in cash, cash equivalents and restricted cash
(312
)
 
(81
)
Cash, cash equivalents and restricted cash, beginning of period
702

 
318

Cash, cash equivalents and restricted cash, end of period
$
390

 
$
237

Supplemental Cash Flow Information
 
 
 
Cash paid during the period for interest
$
145

 
$
40

Cash paid during the period for income taxes, net of refunds
$
100

 
$
56

Non-cash Investing Activities
 
 
 
Period end balance of accounts payable for property, plant, and equipment
$
116

 
$
54

Deferred purchase price of receivables factored in the period
$
52

 
$
71

See accompanying notes to the condensed consolidated financial statements.

9


TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(in millions)
 
Tenneco Inc. Shareholders' equity
 
 
 
$0.01 Par Value Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Tenneco Inc. Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance as of December 31, 2018
$
1

 
$
(930
)
 
$
4,360

 
$
(1,013
)
 
$
(692
)
 
$
1,726

 
$
190

 
$
1,916

Net income (loss)
—

 
—

 
—

 
(117
)
 
—

 
(117
)
 
7

 
(110
)
Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
29

 
29

 
4

 
33

Derivatives
 
 
 
 
 
 
 
 
4

 
4

 
—

 
4

Defined benefit plans
 
 
 
 
 
 
 
 
1

 
1

 
—

 
1

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(83
)
 
11

 
(72
)
Stock-based compensation, net
—

 
—

 
5

 
—

—

—

 
5

 
—

 
5

Cash dividends ($0.25 per share)
—

 
—

 
—

 
(20
)
 
—

 
(20
)
 
—

 
(20
)
Purchase accounting measurement period adjustment
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Distributions declared to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(1
)
 
(1
)
Balance as of March 31, 2019
1

 
(930
)
 
4,365

 
(1,150
)
 
(658
)
 
1,628

 
199

 
1,827

Net income (loss)
—

 
—

 
—

 
26

 
—

 
26

 
9

 
35

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
(17
)
 
(17
)
 
—

 
(17
)
Derivatives
 
 
 
 
 
 
 
 
(3
)
 
(3
)
 
—

 
(3
)
Defined benefit plans
 
 
 
 
 
 
 
 
(2
)
 
(2
)
 
—

 
(2
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
4

 
9

 
13

Stock-based compensation, net
—

 
—

 
6

 
—

 
—

 
6

 
—

 
6

Distributions declared to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Balance as of June 30, 2019
$
1

 
$
(930
)
 
$
4,371

 
$
(1,124
)
 
$
(680
)
 
$
1,638

 
$
206

 
$
1,844



10


 
Tenneco Inc. Shareholders' equity
 
 
 
$0.01 Par Value Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income (Loss)
 
Total Tenneco Inc. Shareholders' Equity
 
Noncontrolling Interests
 
Total Equity
Balance as of December 31, 2017
$
1

 
$
(930
)
 
$
3,112

 
$
(1,009
)
 
$
(538
)
 
$
636

 
$
46

 
$
682

Net Income (loss)
—

 
—

 
—

 
60

 
—

 
60

 
7

 
67

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
19

 
19

 
7

 
26

Defined benefit plans
 
 
 
 
 
 
 
 
3

 
3

 
—

 
3

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
82

 
14

 
96

Adjustments to adopt new accounting standards
—

 
—

 
—

 
(1
)
 
—

 
(1
)
 
—

 
(1
)
Stock-based compensation, net
—

 
—

 
3

 
—

 
—

 
3

 
—

 
3

Cash dividends ($0.25 per share)
—

 
—

 
—

 
(13
)
 
—

 
(13
)
 
—

 
(13
)
Balance as of March 31, 2018
1

 
(930
)
 
3,115

 
(963
)
 
(516
)
 
707

 
60

 
767

Net Income (loss)
—

 
—

 
—

 
47

 
—

 
47

 
7

 
54

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
 
 
 
 

 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
 
(92
)
 
(92
)
 
(5
)
 
(97
)
Derivatives
 
 
 
 
 
 
 
 
—

 
—

 
—

 
—

Defined benefit plans
 
 
 
 
 
 
 
 
4

 
4

 
—

 
4

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
(41
)
 
2

 
(39
)
Stock-based compensation, net
—

 
—

 
3

 
—

 
—

 
3

 
—

 
3

Cash dividends ($0.25 per share)
—

 
—

 
—

 
(12
)
 
—

 
(12
)
 

 
(12
)
Distributions declared to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(18
)
 
(18
)
Balance as of June 30, 2018
$
1

 
$
(930
)
 
$
3,118

 
$
(928
)
 
$
(604
)
 
$
657

 
$
44

 
$
701


See accompanying notes to the condensed consolidated financial statements.


11

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except share and per share amounts, or as otherwise noted)

1. Description of Business

Tenneco Inc. ("Tenneco" or "the Company") was formed under the laws of Delaware in 1996. Tenneco designs, manufactures, and sells products and services for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. The Company is one of the world's leading manufacturers of clean air, powertrain, and ride performance products and systems, and serves both original equipment manufacturers ("OEM") and replacement markets worldwide.

On January 10, 2019, the Company completed the acquisition of a 90.5% ownership interest in Öhlins Intressenter AB (“Öhlins”, the "Öhlins Acquisition"), a Swedish technology company that develops premium suspension systems and components for the automotive and motorsport industries. On October 1, 2018, the Company completed the acquisition of a 100% ownership interest in Federal-Mogul LLC ("Federal-Mogul Acquisition," and together with the Öhlins Acquisition, the "Acquisitions"), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems.

2. Summary of Significant Accounting Policies

Basis of Presentation — Interim Financial Statements
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) management believes are necessary to fairly state the results of operations, comprehensive income, financial position, changes in shareholders' equity, and cash flows. The Company's management believes the disclosures are adequate to make the information presented not misleading when read in conjunction with the audited consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2018 , which was filed with the Securities and Exchange Commission on March 18, 2019. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 .

The Company expects to separate its businesses to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company ("DRiV") and a new Powertrain Technology company ("New Tenneco"). The Company currently expects the separation of the businesses to occur through a spinoff transaction of DRiV in mid-2020. In preparation for the spinoff, the Company began to manage and report its DRiV businesses through two new operating segments, in the first quarter of 2019, as compared to the three operating segments it had previously reported. The DRiV operating segments consist of Motorparts and Ride Performance. The new Motorparts operating segment consists of the previously reported Aftermarket operating segment as well as the aftermarket portion of the previously reported Motorparts operating segment. The Ride Performance operating segment consists of the previously reported Ride Performance operating segment as well as the OE Braking business that was included in the previously reported Motorparts operating segment. As such, prior period operating segment results and related disclosures have been conformed to reflect the Company's current operating segments. The future New Tenneco consists of two existing operating segments, Powertrain and Clean Air. See Note 17, Segment Information .

Redeemable Noncontrolling Interests — The Company has noncontrolling interests with redemption features. These redemption features could require the Company to make an offer to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of its subsidiaries. The redemption of these redeemable noncontrolling interests is not solely within the Company's control. Accordingly, these noncontrolling interests are presented in the temporary equity section of the Company's condensed consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered, as a change in control event is generally not probable until it occurs, except as discussed in Note 3, Acquisitions and Divestitures , for the redeemable noncontrolling interests from the Acquisitions.

The following is a rollforward of activities in the Company's redeemable noncontrolling interests:
 
Six Months Ended June 30,
 
2019
 
2018
Balance at beginning of period
$
138

 
$
42

Net income (loss) attributable to redeemable noncontrolling interests
15

 
16

Other comprehensive income (loss)
1

 
(1
)
Acquisition and other
16

 
—

Purchase accounting measurement period adjustment
(8
)
 
—

Dividends declared
(17
)
 
(19
)
Balance at end of period
$
145

 
$
38



The Company recorded a decrease to the redeemable noncontrolling interests of $8 million from the Federal-Mogul Acquisition, as a result of adjustments made in the measurement period to the preliminary purchase price allocation. The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.

Earnings (loss) per share — Basic earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average shares outstanding during the period. Diluted earnings (loss) per share reflects the weighted average effect of all potentially dilutive securities from the date of issuance. Actual weighted average shares outstanding used in calculating earnings (loss) per share were:

12
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Three Months Ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
Weighted average shares of common stock outstanding
80,920,825

 
51,258,668

 
80,897,731

 
51,232,639

Effect of dilutive securities:
 
 
 
 
 
 
 
Restricted stock, PSUs and RSUs
—

 
298,826

 
—

 
251,971

Stock options
—

 
49,730

 
—

 
61,405

Dilutive shares outstanding
80,920,825

 
51,607,224

 
80,897,731

 
51,546,015



For the three and six months ended June 30, 2019 , the calculation of diluted earnings (loss) per share excluded 1,990,099 and 1,850,850 of share-based awards, as the effect on the calculation would have been anti-dilutive. For the three and six months ended June 30, 2018 , the calculation of diluted earnings (loss) per share excluded 123,773 and 123,947 of share-based awards, as the effect on the calculation would have been anti-dilutive.

Revision of Previously Issued Financial Statements
The Company identified an error in the accounting for certain costs capitalized into inventory that did not constitute inventoriable costs in its historical financial statements. The Company also revised for other immaterial errors related to various line items. As a result, certain amounts in the condensed consolidated financial statements have been revised for the three and six month periods ended June 30, 2018 . These revisions were not material to the previously issued financial statements and are presented in the tables below.

Reclassifications: Certain amounts in the prior years have been aggregated or disaggregated to conform to current year presentation. These reclassifications have no effect on previously reported earnings before income taxes and noncontrolling interests or net income, other comprehensive income (loss), current or total assets, current or total liabilities, and the cash provided (used) by operating, investing or financing activities within the condensed consolidated financial statements.


13
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


The following tables present the effects of these reclassifications and revisions for the condensed consolidated financial statement line items adjusted in the affected periods included within this quarterly report:

 
Three Months Ended June 30, 2018
 
As Reported
 
Reclasses
 
As Reclassified
 
Revisions
 
As Revised
Condensed consolidated statement of income (loss)
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Net sales and operating revenues
$
2,537

 
$
—

 
$
2,537

 
$
(4
)
 
$
2,533

Costs and expenses
 
 
 
 
 
 
 
 
 
Cost of sales
2,159

 
(23
)
 
2,136

 
(2
)
 
2,134

Selling, general, and administrative
156

 
(2
)
 
154

 
—

 
154

Depreciation and amortization
59

 
—

 
59

 
1

 
60

Engineering, research, and development
42

 
(4
)
 
38

 
1

 
39

Restructuring charges and asset impairments
—

 
29

 
29

 
—

 
29

 
2,416

 
—

 
2,416

 
—

 
2,416

Other expense (income)
 
 
 
 
 
 
 
 
 
Loss on sale of receivables
2

 
(2
)
 
—

 
—

 
—

Non-service pension and other postretirement benefit costs (credits)
—

 
3

 
3

 
—

 
3

Other expense (income), net
6

 
(3
)
 
3

 
—

 
3

 
8

 
(2
)
 
6

 
—

 
6

Earnings (loss) before interest expense, income taxes, and noncontrolling interests
113

 
2

 
115

 
(4
)
 
111

Interest expense
20

 
2

 
22

 
—

 
22

Earnings (loss) before income taxes and noncontrolling interests
93

 
—

 
93

 
(4
)
 
89

Income tax expense (benefit)
27

 
—

 
27

 
(1
)
 
26

Net income (loss)
66

 
—

 
66

 
(3
)
 
63

Less: Net income (loss) attributable to noncontrolling interests
16

 
—

 
16

 
—

 
16

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

 
$
—

 
$
50

 
$
(3
)
 
$
47

Earnings (loss) per share
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share of common stock
$
0.98

 
$
—

 
$
0.98

 
$
(0.06
)
 
$
0.92

Diluted earnings (loss) per share of common stock
$
0.98

 
$
—

 
$
0.98

 
$
(0.06
)
 
$
0.92


 
Three Months Ended June 30, 2018
 
As Reported
 
Reclasses
 
As Reclassified
 
Revisions
 
As Revised
Condensed consolidated statement of comprehensive income (loss)
 
 
 
 
 
 
 
 
 
Net income (loss)
$
66

 
$
—

 
$
66

 
$
(3
)
 
$
63

Other comprehensive income (loss)—net of tax

 

 

 

 

Foreign currency translation adjustment
(100
)
 
—

 
(100
)
 
1

 
(99
)
Defined benefit plans
4

 
—

 
4

 
—

 
4

 
(96
)
 
—

 
(96
)
 
1

 
(95
)
Comprehensive income (loss)
(30
)
 
—

 
(30
)
 
(2
)
 
(32
)
Less: Comprehensive income (loss) attributable to noncontrolling interests
9

 
—

 
9

 
—

 
9

Comprehensive income (loss) attributable to common shareholders
$
(39
)
 
$
—

 
$
(39
)
 
$
(2
)
 
$
(41
)



14
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Six months ended June 30, 2018
 
As Reported
 
Reclasses
 
As Reclassified
 
Revisions
 
As Revised
Condensed consolidated statement of income (loss)
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
Net sales and operating revenues
$
5,111

 
$
—

 
$
5,111

 
$
3

 
$
5,114

Costs and expenses
 
 
 
 
 
 
 
 
 
Cost of sales
4,357

 
(32
)
 
4,325

 
2

 
4,327

Selling, general, and administrative
309

 
(4
)
 
305

 
—

 
305

Depreciation and amortization
118

 
—

 
118

 
2

 
120

Engineering, research, and development
83

 
(5
)
 
78

 
1

 
79

Restructuring charges and asset impairments
—

 
41

 
41

 
—

 
41

 
4,867

 
—

 
4,867

 
5

 
4,872

Other expense (income)
 
 
 
 
 
 
 
 
 
Loss on sale of receivables
5

 
(5
)
 
—

 
—

 
—

Non-service pension and other postretirement benefit costs (credits)
—

 
6

 
6

 
—

 
6

Other expense (income), net
9

 
(6
)
 
3

 
—

 
3

 
14

 
(5
)
 
9

 
—

 
9

Earnings (loss) before interest expense, income taxes, and noncontrolling interests
230

 
5

 
235

 
(2
)
 
233

Interest expense
40

 
5

 
45

 
—

 
45

Earnings (loss) before income taxes and noncontrolling interests
190

 
—

 
190

 
(2
)
 
188

Income tax expense (benefit)
52

 
—

 
52

 
(1
)
 
51

Net income (loss)
138

 
—

 
138

 
(1
)
 
137

Less: Net income (loss) attributable to noncontrolling interests
30

 
—

 
30

 
—

 
30

Net income (loss) attributable to Tenneco Inc.
$
108

 
$
—

 
$
108

 
$
(1
)
 
$
107

Earnings (loss) per share
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share of common stock
$
2.12

 
$
—

 
$
2.12

 
$
(0.04
)
 
$
2.08

Diluted earnings (loss) per share of common stock
$
2.10

 
$
—

 
$
2.10

 
$
(0.03
)
 
$
2.07


 
Six months ended June 30, 2018
 
As Reported
 
Reclasses
 
As Reclassified
 
Revisions
 
As Revised
Condensed consolidated statement of comprehensive income (loss)

Net income (loss)
$
138

 
$
—

 
$
138

 
$
(1
)
 
$
137

Other comprehensive income (loss)—net of tax
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
(73
)
 
—

 
(73
)
 
1

 
(72
)
Defined benefit plans
7

 
—

 
7

 
—

 
7

 
(66
)
 
—

 
(66
)
 
1

 
(65
)
Comprehensive income (loss)
72

 
—

 
72

 
—

 
72

Less: Comprehensive income (loss) attributable to noncontrolling interests
31

 
—

 
31

 
—

 
31

Comprehensive income (loss) attributable to common shareholders
$
41

 
$
—

 
$
41

 
$
—

 
$
41




15
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
 
Six months ended June 30, 2018
 
 
As Reported
 
Reclasses
 
As Reclassified
 
Revisions
 
As Revised
Condensed consolidated statements of cash flow
 

Operating Activities
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
138

 
$
—

 
$
138

 
$
(1
)
 
$
137

Net cash provided by (used by) operating activities
 
78

 
—

 
78

 
—

 
78

 
 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
 
Net cash used by investing activities
 
(101
)
 
—

 
(101
)
 
—

 
(101
)
 
 
 
 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
 
 
 
Proceeds from term loans and notes
 
—

 
—

 
—

 
9

 
9

Repayments of term loans and notes
 
—

 
(12
)
 
(12
)
 
(16
)
 
(28
)
Retirement of long-term debt
 
(12
)
 
12

 
—

 
—

 
—

Borrowings on revolving lines of credit
 
—

 
—

 
—

 
2,669

 
2,669

Payments on revolving lines of credit
 
—

 
—

 
—

 
(2,614
)
 
(2,614
)
Net increase (decrease) in revolver borrowings
 
48

 
—

 
48

 
(48
)
 
—

Issuance (repurchase) of common shares
 
(1
)
 
—

 
(1
)
 
—

 
(1
)
Cash dividends
 
(25
)
 
—

 
(25
)
 
—

 
(25
)
Debt issuance cost of long-term debt
 
(2
)
 
2

 
—

 
—

 
—

Purchase of common stock under the share repurchase program
 
—

 
—

 
—

 
—

 
—

Net increase (decrease) in bank overdrafts
 
(7
)
 
—

 
(7
)
 
—

 
(7
)
Net increase (decrease) in short-term borrowings secured by accounts receivable
 
(20
)
 
20

 
—

 
—

 
—

Other
 
—

 
(22
)
 
(22
)
 
—

 
(22
)
Distributions to noncontrolling interest partners
 
(28
)
 
—

 
(28
)
 
—

 
(28
)
Net cash provided by (used by) financing activities
 
(47
)
 
—

 
(47
)
 
—

 
(47
)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
 
(11
)
 
—

 
(11
)
 
—

 
(11
)
Increase (decrease) in cash, cash equivalents and restricted cash
 
(81
)
 
—

 
(81
)
 
—

 
(81
)
Cash, cash equivalents and restricted cash, beginning of period
 
318

 
—

 
318

 
—

 
318

Cash, cash equivalents and restricted cash, end of period
 
$
237

 
$
—

 
$
237

 
$
—

 
$
237



16
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
 
Three Months Ended June 30, 2018
 
 
As Reported
 
Revisions
 
As Revised
Condensed consolidated statements of changes in shareholders' equity
 
 
Accumulated Deficit
 
 
 
 
 
 
Balance March 31
 
$
(902
)
 
$
(61
)
 
$
(963
)
Net income (loss) attributable to Tenneco Inc.
 
50

 
(3
)
 
47

Cash dividends declared
 
(12
)
 
—

 
(12
)
Balance June 30
 
$
(864
)
 
$
(64
)
 
$
(928
)
Accumulated Other Comprehensive Income (loss)
 
 
 
 
 
 
Balance March 31
 
$
(519
)
 
$
3

 
$
(516
)
Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(93
)
 
1

 
(92
)
Defined benefit plans
 
4

 
—

 
4

Balance June 30
 
$
(608
)
 
$
4

 
$
(604
)
Total Tenneco Inc. Shareholders' Equity
 
 
 
 
 
 
Balance March 31
 
$
765

 
$
(58
)
 
$
707

Net income (loss) attributable to Tenneco Inc.
 
50

 
(3
)
 
47

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(93
)
 
1

 
(92
)
Defined benefit plans
 
4

 
—

 
4

Comprehensive income (loss)
 
(39
)
 
(2
)
 
(41
)
Cash dividends
 
(12
)
 
—

 
(12
)
Common Stock Issued
 
3

 
—

 
3

Balance June 30
 
$
717

 
$
(60
)
 
$
657

Total Equity
 
 
 
 
 
 
Balance March 31
 
$
825

 
$
(58
)
 
$
767

Net income (loss)
 
57

 
(3
)
 
54

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(98
)
 
1

 
(97
)
Defined benefit plans
 
4

 
—

 
4

Comprehensive income (loss)
 
(37
)
 
(2
)
 
(39
)
Common Stock Issued
 
3

 
—

 
3

Cash dividends
 
(30
)
 
—

 
(30
)
Balance June 30
 
$
761

 
$
(60
)
 
$
701



17
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
 
Six months ended June 30, 2018
 
 
As Reported
 
Revisions
 
As Revised
Condensed consolidated statements of changes in shareholders' equity
 

Accumulated Deficit
 
 
 
 
 
 
Balance January 1
 
$
(946
)
 
$
(63
)
 
$
(1,009
)
Net income (loss) attributable to Tenneco Inc.
 
108

 
(1
)
 
107

Cash dividends declared
 
(25
)
 
—

 
(25
)
Adjustments to adopt new accounting standards
 
(1
)
 
—

 
(1
)
Balance June 30
 
$
(864
)
 
$
(64
)
 
$
(928
)
Accumulated Other Comprehensive Income (loss)
 
 
 
 
 
 
Balance January 1
 
$
(541
)
 
$
3

 
$
(538
)
Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(74
)
 
1

 
(73
)
Defined benefit plans
 
7

 
—

 
7

Balance June 30
 
$
(608
)
 
$
4

 
$
(604
)
Total Tenneco Inc. Shareholders' Equity
 
 
 
 
 
 
Balance January 1
 
$
696

 
$
(60
)
 
$
636

Net income (loss) attributable to Tenneco Inc.
 
108

 
(1
)
 
107

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(74
)
 
1

 
(73
)
Defined benefit plans
 
7

 
—

 
7

Comprehensive income (loss)
 
41

 
—

 
41

Adjustments to adopt new accounting standards
 
(1
)
 
—

 
(1
)
Cash dividends
 
(25
)
 
—

 
(25
)
Common Stock Issued
 
6

 
—

 
6

Balance June 30
 
$
717

 
$
(60
)
 
$
657

Total Equity
 
 
 
 
 
 
Balance January 1
 
$
742

 
$
(60
)
 
$
682

Net income (loss)
 
122

 
(1
)
 
121

Other comprehensive income (loss)—net of tax:
 
 
 
 
 
 
Foreign currency translation adjustment
 
(72
)
 
1

 
(71
)
Defined benefit plans
 
7

 
—

 
7

Comprehensive income (loss)
 
57

 
—

 
57

Common Stock Issued
 
6

 
—

 
6

Cash dividends
 
(43
)
 
—

 
(43
)
Adjustments to adopt new accounting standards
 
(1
)
 
—

 
(1
)
Balance June 30
 
$
761

 
$
(60
)
 
$
701



New Accounting Pronouncements
Adoption of New Accounting Standards
Comprehensive income   — In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). The Company has elected not to adopt the optional reclassification.

Leases — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update supersedes the lease requirements in Topic 840, Leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flows arising from a lease. For public business entities, the standard is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted this update on January 1, 2019 using the modified retrospective method without the recasting of comparative periods’ financial information, as permitted by the transition guidance.


18
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


The Company adopted the package of practical expedients that allows companies to not reassess its previous conclusions related to contracts that contain leases, existing lease classification, and initial direct costs, and to carry forward its historical conclusions. It elected the land easements practical expedient allowing the Company not to reassess whether existing or expired land easements not accounted for as leases under previous guidance are or contain leases under the new guidance. It also did not adopt the hindsight practical expedient and has also made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheet recognition. Instead, short-term leases will be expensed over the lease term. As a part of the implementation effort, the Company reviewed its internal control structure and modified and augmented existing controls, as necessary.

The adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $387 million and $383 million , and a reduction of favorable lease intangibles of $4 million as of January 1, 2019. The standard did not materially affect the Company's condensed consolidated financial position or results of operations and had no effect on cash flows. See Note 14, Leases .

Accounting Standards Issued But Not Yet Adopted
Intangibles   — In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for interim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the potential effect of this new guidance on its financial statements.

Retirement benefits — In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this update are effective for fiscal years ending after December 15, 2020 with early adoption permitted. The Company is currently evaluating the potential effect of this new guidance on its financial statements.

Fair value measurements — In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating the potential effect of this new guidance on its financial statements.

3. Acquisitions and Divestitures

The preliminary allocation of the purchase price of the assets acquired and liabilities assumed, including the residual amount recognized as goodwill, is based upon estimated information and is subject to change within the measurement period. The measurement period is a period not to exceed one year from the acquisition date during which the Company may adjust estimated or provisional amounts recorded during purchase accounting if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. Any adjustments to amounts recorded in purchase accounting that do not qualify as measurement period adjustments are included in earnings in the period identified.

The fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the Company believes these preliminary estimates provide a reasonable basis for estimating the fair value of the assets acquired and liabilities assumed, it will continue to evaluate available information prior to finalization of the amounts.


19

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


Öhlins Intressenter AB Acquisition
The purchase price for the 90.5% ownership interest in Öhlins was $162 million . The remaining 9.5% ownership interest in Öhlins (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”). Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins Acquisition to sell the KÖ Interest to the Company. As the redemption of this redeemable noncontrolling interest is not solely within the Company's control, the noncontrolling interest is presented in the temporary equity section of the Company's condensed consolidated balance sheets. The fair value of the KÖ Interest was $17 million and represents its current redemption value at June 30, 2019 .

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 2019:
 
Initial Allocation
 
Adjustments
 
Revised Allocation
Cash, cash equivalents and restricted cash
$
4

 
$
—

 
$
4

Customer notes and accounts receivable
19

 
—

 
19

Inventories
31

 
—

 
31

Prepayments and other current assets
2

 
—

 
2

Property, plant, and equipment
8

 
—

 
8

Goodwill
28

 
2

 
30

Intangibles
135

 
(2
)
 
133

Other assets
9

 
—

 
9

Total assets acquired
$
236

 
$
—

 
$
236

 
 
 
 
 

Short-term debt, including current maturities of long-term debt
$
10

 
$
—

 
$
10

Accounts payable
11

 
—

 
11

Accrued compensation and employee benefits
12

 
—

 
12

Deferred income taxes
18

 
—

 
18

Deferred credits and other liabilities
6

 
—

 
6

Total liabilities assumed
57

 
—

 
57

Redeemable noncontrolling interest
17

 
—

 
17

Net assets acquired
$
162

 
$
—

 
$
162



The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the inventory, intangible assets, right of use assets, and deferred income tax assets and liabilities.

Goodwill of $30 million was recognized as part of the acquisition and is reflected in the Ride Performance segment. During the three months ended June 30, 2019, the Company adjusted the initial allocation of the total purchase consideration, which resulted in a $2 million increase to goodwill. The goodwill consists of the Company’s expected future economic benefits that will result from the acquisition of Öhlins’ technology, which will allow the Company to more rapidly grow its product offerings for current and future customers, as well as assist the Company in obtaining a larger share of business in developing mobility markets. None of the goodwill is deductible for tax purposes.

20

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)



Other intangible assets acquired include the following:
 
Estimated Fair Value
 
Weighted-Average Useful Lives
Definite-lived intangible assets:
 
 
 
Customer platforms and relationships
$
37

 
10 years
Technology rights
41

 
10 years
Total definite-lived intangible assets
78

 
 
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
Trade names and trademarks
55

 
 
Total
$
133

 
 


The Company recorded a $5 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation and recognized $3 million and $5 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold.

Pro Forma Results
Pro forma results of operations have not been presented because the effects of the Öhlins Acquisition were not material to the Company’s condensed consolidated results of operations.

Acquisition of Federal-Mogul
During the six months ended June 30, 2019 , the Company made measurement period adjustments based on further evaluation of available information to facts and circumstances that existed as of the acquisition date.


21

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 2019 :
 
Initial Allocation
 
Adjustments
 
Revised Allocation
Cash, cash equivalents and restricted cash
$
277

 
$
—

 
$
277

Customer notes and accounts receivable
1,258

 
—

 
1,258

Other receivables
62

 
—

 
62

Inventories
1,551

 
(5
)
 
1,546

Prepayments and other current assets
198

 
1

 
199

Property, plant and equipment
1,711

 
(28
)
 
1,683

Long-term receivables
48

 
—

 
48

Goodwill
825

 
(40
)
 
785

Intangibles
1,530

 
71

 
1,601

Investments in nonconsolidated affiliates
528

 
(15
)
 
513

Deferred income taxes
166

 
—

 
166

Other assets
55

 
(6
)
 
49

Total assets acquired
$
8,209

 
$
(22
)
 
$
8,187

 
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
130

 
$
—

 
$
130

Accounts payable
957

 
—

 
957

Accrued compensation and employee benefits
231

 
—

 
231

Accrued income taxes
49

 
—

 
49

Accrued expenses and other current liabilities
522

 
(8
)
 
514

Long-term debt
1,315

 
—

 
1,315

Deferred income taxes
56

 
—

 
56

Pension and postretirement benefits
879

 
—

 
879

Deferred credits and other liabilities
124

 
(5
)
 
119

Total liabilities assumed
4,263

 
(13
)
 
4,250

Redeemable noncontrolling interests
96

 
(8
)
 
88

Noncontrolling interests
143

 
(1
)
 
142

Net assets and noncontrolling interests acquired
$
3,707

 
$
—

 
$
3,707



The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of property, plant and equipment; intangible assets; unconsolidated affiliates; deferred income tax assets and liabilities; redeemable noncontrolling interests; and noncontrolling interests.

Goodwill of $412 million was allocated to the Powertrain segment, $318 million was allocated to the Motorparts segment, and $55 million was allocated to the Ride Performance segment. The goodwill consists of the Company's expected future economic benefits that will arise from expected future product sales and synergies from combining Federal-Mogul with its existing portfolio of products. None of the goodwill is deductible for tax purposes.



22

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


Other intangible assets acquired include the following:
 
Estimated Fair Value
 
Weighted-Average Useful Lives
Definite-lived intangible assets:
 
 
 
Customer platforms and relationships
$
978

 
10 years
Technology rights
68

 
10 years
Packaged kits know-how
54

 
10 years
Catalogs
40

 
10 years
Licensing agreements
64

 
4.5 years
Land use rights
30

 
42.8 years
Total definite-lived intangible assets
1,234

 
10.5 years
 
 
 
 
Indefinite-lived intangible assets:
 
 
 
Trade names and trademarks
367

 
 
Total
$
1,601

 
 


The Company recorded a $152 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The Company recognized $3 million and $44 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold. The Company recognized $105 million as a non-cash charge to cost of goods sold during the year ended December 31, 2018 and expects to recognize the remaining amortization of the inventory step-up during 2019.

In addition, the Company acquired  $83 million  in redeemable noncontrolling interests related to a subsidiary from the Federal-Mogul Acquisition. The Company initiated the process to make a tender offer for the shares it does not own due to the change in control in accordance with local regulations triggered by the acquisition. It is probable these shares will become redeemable during 2019 under the tender offer at a price that is representative of fair value and as a result, the noncontrolling interest is presented in the temporary equity section of the Company’s condensed consolidated balance sheets. The carrying amount for this redeemable noncontrolling interest represents its current redemption value at  June 30, 2019 .

The Company's condensed consolidated statements of income (loss) for the six months ended June 30, 2019 included net sales and operating revenues of $3,762 million and net income of $17 million associated with the operating results of Federal-Mogul.

Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the Federal-Mogul Acquisition, and the related financing, if the transaction had occurred as of January 1, 2017. The pro forma results are not necessarily indicative of either the actual consolidated results had the Federal-Mogul Acquisition occurred on January 1, 2017 or of future consolidated operating results.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Net sales and operating revenues
$
4,504

 
$
4,618

 
$
8,988

 
$
9,298

Earnings (loss) before income taxes and noncontrolling interests
$
171

 
$
232

 
$
201

 
$
458

Net income (loss) attributable to Tenneco Inc.
$
43

 
$
78

 
$
(27
)
 
$
171

Basic earnings (loss) per share of common stock
$
0.54

 
$
0.97

 
$
(0.33
)
 
$
2.13

Diluted earnings (loss) per share of common stock
$
0.54

 
$
0.96

 
$
(0.33
)
 
$
2.12



These pro forma amounts have been calculated after applying the Company's accounting policies and the results presented above primarily reflect: (i) depreciation adjustments relating to fair value adjustments to property, plant, and equipment; (ii) amortization adjustments relating to fair value estimates of intangible assets; (iii) incremental interest expense, net on assumed indebtedness, the new credit facility, debt issuance costs, and fair value adjustments to debt; and (iv) cost of goods sold

23

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


adjustments relating to fair value adjustments to inventory. Pro forma adjustments described above have been tax affected using the Company's effective rate during the respective periods.

Assets Held for Sale
On March 1, 2019, the Company sold its wipers business in the Motorparts segment for a sale price of $29 million , subject to adjustment based on terms of the sale agreement. Proceeds from the sale were $22 million , subject to customary working capital adjustments. Certain assets and liabilities of the business are still classified as held for sale within the condensed consolidated balance sheet as of June 30, 2019 and are expected to transfer in the second half of 2019.

The related assets and liabilities were classified as held for sale as of June 30, 2019 and December 31, 2018 :
                          
June 30, 2019
 
December 31, 2018
Assets
 
 
 
Inventories
$
3

 
$
33

Other current assets
—

 
5

Long-lived assets
1

 
23

Total assets held for sale
$
4

 
$
61

Liabilities
 
 
 
Accounts payable
$
2

 
$
21

Accrued liabilities
—

 
7

Other liabilities
1

 
11

Total liabilities held for sale
$
3

 
$
39



4. Restructuring Charges and Asset Impairments, Net

Restructuring and Other Charges
The Company's restructuring activities are undertaken as necessary to execute management's strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company's businesses and to relocate operations to best cost locations.

The Company's restructuring charges consist primarily of employee costs (principally severance and/or termination benefits), and facility closure and other costs.

For the three and six months ended June 30, 2019 and 2018 , restructuring charges, net and asset impairments by segment are as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Clean Air
$
15

 
$
17

 
$
20

 
$
18

Powertrain
17

 
—

 
18

 
—

Ride Performance
22

 
9

 
35

 
17

Motorparts
7

 
1

 
11

 
4

Corporate
—

 
2

 
1

 
2


$
61

 
$
29

 
$
85

 
$
41



Presented within the table above are asset impairments of $1 million in the Clean Air segment and $1 million in the Motorparts segment incurred during the three and six months ended June 30, 2019 .

During the three and six months ended June 30, 2019 , the Company incurred $3 million and $9 million in restructuring and related costs and reduced previously recorded estimates by $2 million related to a restructuring plan designed to achieve a portion of the synergies the Company anticipates achieving in connection with the Federal-Mogul Acquisition. Pursuant to the plan, the Company will reduce its headcount globally across all segments. The Company began implementing headcount reductions in January 2019 and these actions will continue throughout 2019. The Federal-Mogul Acquisition is discussed further in Note 3, Acquisitions and Divestitures . During the three and six months ended June 30, 2019 , the Company also incurred $17 million and $28 million in restructuring and related costs related to plant relocation and closures within its Ride Performance segment. The Company expects the actions to be completed by the second quarter of 2020.

During the three and six months ended June 30, 2018, the Company incurred $7 million  and $14 million in restructuring and related costs related to the accelerated move of the Beijing Ride Performance plant.

Restructuring Reserve Rollforward
Amounts related to activities that were charges to restructuring reserves, including costs incurred to support future structural cost reductions, by reportable segments are as follows:

24

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Reportable Segments
 
Corporate
 
Total
Balance as of December 31, 2018
$
17

 
$
15

 
$
25

 
$
43

 
$
100

 
$
3

 
$
103

Provisions
5

 
1

 
13

 
4

 
23

 
1

 
24

Payments
(6
)
 
(3
)
 
(13
)
 
(14
)
 
(36
)
 
(2
)
 
(38
)
Balance as of March 31, 2019
16

 
13

 
25

 
33

 
87

 
2

 
89

Provisions
14

 
17

 
22

 
8

 
61

 
—

 
61

Revisions to estimates
—

 
—

 
—

 
(2
)
 
(2
)
 
—

 
(2
)
Payments
(2
)
 
(4
)
 
(19
)
 
(7
)
 
(32
)
 
(1
)
 
(33
)
Balance as of June 30, 2019
$
28

 
$
26

 
$
28

 
$
32

 
$
114

 
$
1

 
$
115

 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Reportable Segments
 
Corporate
 
Total
Balance as of December 31, 2017
$
14

 
$
—

 
$
7

 
$
4

 
$
25

 
$
—

 
$
25

Provisions
1

 
—

 
8

 
3

 
12

 
—

 
12

Payments
(5
)
 
—

 
(9
)
 
(2
)
 
(16
)
 
—

 
(16
)
Balance as of March 31, 2018
10

 
—

 
6

 
5

 
21

 
—

 
21

Provisions
17

 
—

 
9

 
1

 
27

 
2

 
29

Payments
(3
)
 
—

 
(10
)
 
(2
)
 
(15
)
 
—

 
(15
)
Balance as of June 30, 2018
$
24

 
$
—

 
$
5

 
$
4

 
$
33

 
$
2

 
$
35


25

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


The following table provides a summary of the Company's restructuring liabilities and related activity for each type of exit costs:
 
Employee Costs
 
Facility Closure and Other Costs
 
Total
Balance as of December 31, 2018
$
98

 
$
5

 
$
103

Provisions
11

 
13

 
24

Payments
(25
)
 
(13
)
 
(38
)
Balance as of March 31, 2019
84

 
5

 
89

Provisions
44

 
17

 
61

Revisions to estimates
(2
)
 
—

 
(2
)
Payments
(16
)
 
(17
)
 
(33
)
Balance as of June 30, 2019
$
110

 
$
5

 
$
115

 
Employee Costs
 
Facility Closure and Other Costs
 
Total
Balance as of December 31, 2017
$
19

 
$
6

 
$
25

Provisions
10

 
2

 
12

Payments
(13
)
 
(3
)
 
(16
)
Balance as of March 31, 2018
16

 
5

 
21

Provisions
26

 
3

 
29

Payments
(12
)
 
(3
)
 
(15
)
Balance as of June 30, 2018
$
30

 
$
5

 
$
35



5. Inventories

At June 30, 2019 and December 31, 2018 , inventory consists of the following:
 
June 30, 2019
 
December 31, 2018
Finished goods
$
1,110

 
$
1,116

Work in process
497

 
562

Raw materials
489

 
457

Materials and supplies
111

 
110

 
$
2,207

 
$
2,245



6. Goodwill and Other Intangible Assets

At June 30, 2019 and December 31, 2018 , goodwill consists of the following:
 
Six Months Ended June 30, 2019
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Gross carrying amount at December 31, 2018
$
22

 
$
388

 
$
210

 
$
611

 
$
1,231

Measurement period adjustments
—

 
21

 
—

 
(67
)
 
(46
)
Acquisitions
—

 
—

 
28

 
—

 
28

Gross carrying amount at March 31, 2019
22

 
409

 
238

 
544

 
1,213

Measurement period adjustments
—

 
3

 
2

 
3

 
8

Foreign exchange
—

 
—

 
—

 
—

 
—

Gross carrying amount at June 30, 2019
22

 
412

 
240

 
547

 
1,221

 
 
 
 
 
 
 
 
 
 
Accumulated impairment loss at December 31, 2018
—

 
—

 
(143
)
 
(219
)
 
(362
)
Impairment
—

 
—

 
(60
)
 
—

 
(60
)
Accumulated impairment loss at March 31, 2019
—

 
—

 
(203
)
 
(219
)
 
(422
)
Foreign exchange
—

 
—

 
—

 
—

 
—

Accumulated impairment loss at June 30, 2019
—

 
—

 
(203
)
 
(219
)
 
(422
)
 
 
 
 
 
 
 
 
 
 
Net carrying value at end of period
$
22

 
$
412

 
$
37

 
$
328

 
$
799



The Öhlins Acquisition resulted in $30 million of goodwill which was included in the Ride Performance segment. During the six months ended June 30, 2019 , the Company made the following adjustments to goodwill in the measurement period to the preliminary purchase price allocation for the Acquisitions:
•
an increase of $2 million for the Öhlins Acquisition; and
•
a net decrease of $40 million for the Federal-Mogul Acquisition.

The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.

During the first quarter of 2019, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time.

During the three months ended June 30, 2019 , the Company performed a review of potential triggering events, and concluded no events indicated it was more likely than not that the fair values of its reporting units had declined to below their carrying values at June 30, 2019 . The Company considered the results of the post-reorganized reporting unit changes that occurred in the first quarter of 2019, which indicated nine reporting units with goodwill. Three of these nine reporting units have fair values that are within 15% of their carrying values and are reporting units that were acquired as part of the Acquisitions within the last year. The goodwill balance as of June 30, 2019 attributable to these three reporting units was $442 million . Management compared its future projected cash flows for these three reporting units as of June 30, 2019 compared to the future projected cash flows utilized in the valuation performed during the first quarter of 2019 and concluded there is no indication the carrying value of its reporting units would be less than their fair values.


26

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


If the Company’s market capitalization remains at current levels for a sustained period of time or declines further, and if such a decline becomes indicative the fair value of its reporting units have declined to below their carrying values, the Company will need to determine the fair value of its reporting units which may result in a material non-cash goodwill impairment charge in a future period.

At June 30, 2019 and December 31, 2018, the Company's intangible assets consist of the following:
 
 
 
June 30, 2019
 
December 31, 2018
 
Useful Lives
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
Definite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships and platforms
10 years
 
$
1,014

 
$
(75
)
 
$
939

 
$
964

 
$
(24
)
 
$
940

Customer contract
10 years
 
8

 
(6
)
 
2

 
8

 
(5
)
 
3

Patents
10 to 17 years
 
1

 
(1
)
 
—

 
1

 
(1
)
 
—

Technology rights
10 to 30 years
 
136

 
(31
)
 
105

 
98

 
(27
)
 
71

Packaged kits know-how
10 years
 
54

 
(4
)
 
50

 
36

 
(1
)
 
35

Catalogs
10 years
 
40

 
(3
)
 
37

 
—

 
—

 
—

Licensing agreements
3 to 5 years
 
63

 
(11
)
 
52

 
66

 
(3
)
 
63

Land use rights
28 to 46 years
 
46

 
(2
)
 
44

 
44

 
(2
)
 
42

 
 
 
1,362

 
(133
)
 
1,229

 
1,217

 
(63
)
 
1,154

Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Trade names and trademarks
 
 
420

 
—

 
420

 
365

 
—

 
365

Total
 
 
$
1,782

 
$
(133
)
 
$
1,649

 
$
1,582

 
$
(63
)
 
$
1,519



The Company recorded definite-lived and indefinite-lived intangible assets of $133 million as a result of the Öhlins Acquisition. During the six months ended June 30, 2019 , the Company made the following adjustments to definite-lived and indefinite-lived intangible assets in the measurement period to the preliminary purchase price allocation for the Acquisitions:
•
a decrease of $2 million was recognized for the Öhlins Acquisition; and
•
a net increase of $71 million was recognized for the Federal-Mogul Acquisition.

The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.

The amortization expense associated with definite-lived intangible assets was as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Amortization expense
 
$
33

 
$
—

 
$
68

 
$
1


The expected future amortization expense for the Company's definite-lived intangible assets is as follows:
 
 
2019
 
2020
 
2021
 
2022
 
2023
 
2024 and thereafter
 
Total
Expected amortization expense
 
$
70

 
$
139

 
$
138

 
$
134

 
$
130

 
$
618

 
$
1,229



7. Investment in Nonconsolidated Affiliates

The Company has investments in several nonconsolidated affiliates, which are primarily located in China, Korea, Turkey, and the U.S. The Company generally equates control to ownership percentage whereby investments more than 50% owned are consolidated.


27

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


The Company's ownership interest in affiliates accounted for under the equity method is as follows:
 
June 30, 2019
 
December 31, 2018
Anqing TP Goetze Piston Ring Company Limited (China)
35.7
%
 
35.7
%
Anqing TP Powder Metallurgy Co., Ltd (China)
20.0
%
 
20.0
%
Dongsuh Federal-Mogul Industrial Co. Ltd. (Korea)
50.0
%
 
50.0
%
Farloc Argentina SAIC Y F (Argentina)
23.9
%
 
23.9
%
Federal-Mogul Powertrain Otomotiv A.S. (Turkey)
50.0
%
 
50.0
%
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. (Turkey)
25.0
%
 
25.0
%
Federal-Mogul TP Liners, Inc. (USA)
46.0
%
 
46.0
%
Frenos Hidraulicos Automotrices, S.A. de C.V. (Mexico)
49.0
%
 
49.0
%
JURID do Brasil Sistemas Automotivos Ltda. (Brazil)
19.9
%
 
19.9
%
KB Autosys Co., Ltd. (Korea)
33.6
%
 
33.6
%
Montagewerk Abgastechnik Emden GmbH (Germany)
50.0
%
 
50.0
%

The Company's investments in its nonconsolidated affiliates at June 30, 2019 and December 31, 2018 are:
 
June 30, 2019
 
December 31, 2018
Investments in nonconsolidated affiliates
$
531

 
$
544


The following table represents the activity from the Company's investments in its nonconsolidated affiliates for the three and six months ended June 30, 2019 and 2018 :
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Equity earnings (losses) of nonconsolidated affiliates, net of tax
$
17

 
$
—

 
$
33

 
$
—

Cash dividends received from nonconsolidated affiliates
$
12

 
$
—

 
$
27

 
$
—



During the six months ended June 30, 2019 , the Company made adjustments in the measurement period to the preliminary purchase price allocation for the Federal-Mogul Acquisition which resulted in a reduction to the fair value of its investments in nonconsolidated affiliates of $15 million . The purchase price allocation is preliminary and subject to the finalization. The Company's current estimates and assumptions may change as more information becomes available. See Note 3, Acquisitions and Divestitures , for additional information.

The following tables present summarized aggregated financial information of the Company's nonconsolidated affiliates for the three and six months ended June 30, 2019 . The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share:
 
Three Months Ended June 30, 2019
Statements of Income
Otomotiv A.S.
 
Anqing TP Goetze
 
Other
 
Total
Sales
$
85

 
$
39

 
$
120

 
$
244

Gross profit
$
22

 
$
10

 
$
23

 
$
55

Income from continuing operations
$
17

 
$
9

 
$
11

 
$
37

Net income
$
21

 
$
9

 
$
11

 
$
41



28

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Six Months Ended June 30, 2019
Statements of Income
Otomotiv A.S.
 
Anqing TP Goetze
 
Other
 
Total
Sales
$
176

 
$
78

 
$
245

 
$
499

Gross profit
$
43

 
$
26

 
$
46

 
$
115

Income from continuing operations
$
36

 
$
20

 
$
24

 
$
80

Net income
$
39

 
$
18

 
$
22

 
$
79



See Note 18, Related Party Transactions , for additional information on balances and transactions with equity method investments.

8. Derivatives and Hedging Activities

The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, equity compensation liabilities, and changes in interest rates, which may result in cash flow risks. For exposures not offset within its operations, the Company may enter into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes. Designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.

Market Risks
Foreign Currency Risk — The Company manufactures and sells its products in North America, South America, Asia, Europe, Australia and Africa. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, Mexican peso, and Canadian dollar.

Concentrations of Credit Risk — Financial instruments including cash equivalents and derivative contracts expose the Company to counterparty credit risk for non-performance. The Company's counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company's requirement of high credit standing. The Company's counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counterparty and through monitoring counterparty credit risks. The Company's concentration of credit risk related to derivative contracts at June 30, 2019 and 2018 is not material.

Other — The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in "Cost of sales" in the condensed consolidated statements of income (loss). Derivative gains and losses included in accumulated other comprehensive income (loss) for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in "Cost of sales" in the condensed consolidated statements of income (loss).

Derivative Instruments
Foreign Currency Forward Contracts — The Company enters into foreign currency forward purchase and sale contracts to mitigate its exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. In managing its foreign currency exposures, the Company identifies and aggregates existing offsetting positions and then hedges residual exposures through third-party derivative contracts. The gains or losses on these contracts is recognized in "Cost of sales" in the condensed consolidated statements of income (loss). The fair value of foreign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the condensed consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at June 30, 2019 and December 31, 2018 .

The following table summarizes by position the notional amounts for foreign currency forward contracts as of June 30, 2019 (all of which mature in 2019):
 
Notional Amount
Long positions
$
(26
)
Short positions
$
26



Cash-Settled Share Swap Transactions — In May 2019, the Company entered into an amended and restated equity swap agreement. The Company selectively uses cash-settled share swaps to reduce market risk associated with its deferred compensation liabilities. These equity deferred compensation liabilities increase as the Company's stock price increases and

29

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


decrease as the Company's stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of June 30, 2019 , the Company had hedged its deferred compensation liability related to approximately 250,000 common share equivalents. The fair value of the equity swap agreement is recorded in "Prepayments and other current assets" in the condensed consolidated balance sheets. The fair value of the Company's equity swap agreement was a net asset position of $3 million at June 30, 2019 and $4 million at December 31, 2018 .

Hedging Instruments
Cash Flow Hedges — Commodity Price Risk — The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of the Company’s commodity price forward contract activity is to manage the volatility associated with forecasted purchases for up to eighteen months in the future. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include copper and tin. In certain instances within this program, foreign currency forwards may be used in order to match critical terms for commodity exposure.

The Company has designated these contracts as cash flow hedging instruments. The Company records unrecognized gains and losses in other comprehensive income (loss) (“OCI or OCL”) and makes regular reclassifying adjustments into “Cost of sales” within the condensed consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $25 million as of June 30, 2019 and $27 million as of December 31, 2018 . Substantially all of the commodity price hedge contracts mature within one year .

Net Investment Hedge — Foreign Currency Borrowings — The Company has foreign currency denominated debt, €774 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of the Company. Changes to its carrying value are included in shareholders' equity in the foreign currency translation component of OCL and offset against the translation adjustment on the underlying net assets of those foreign subsidiaries and affiliates, which are also recorded in OCL. The Company’s debt instruments are discussed further in Note 10, Debt and Other Financing Arrangements .

The following table is a summary of the carrying value of derivative and non-derivative instruments designated as hedges as of June 30, 2019 :
 
 
  
Carrying Value
 
Balance sheet classification
  
June 30, 2019
 
December 31, 2018
Commodity price hedge contracts designated as cash flow hedges
Accrued expenses and other current liabilities
 
$
—

 
$
2

Foreign currency borrowings designated as net investment hedges
Long-term debt
  
$
880

  
$
863


The following table represents the effects before reclassification into net income of derivative and non-derivative instruments designated as hedges in accumulated other comprehensive income (loss) three and six month periods ended June 30, 2019 and 2018:
 
 
 Amount of gain (loss) recognized in accumulated OCI or OCL (effective portion):
 
  
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2019
Commodity price hedge contracts designated as cash flow hedges
  
$
(3
)
  
$
1

Foreign currency borrowings designated as net investment hedges
  
$
(12
)
  
$
7



The Company estimates $1 million included in accumulated OCI or OCL as of June 30, 2019 will be reclassified into earnings within the following 12 months.



30

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


9. Fair Value of Financial Instruments

A three-level valuation hierarchy, based upon observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy definition prioritizes the inputs used in measuring fair value into the following levels:
Level 1
—
Quoted prices in active markets for identical assets or liabilities.
 
 
 
Level 2
—
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly.
 
 
 
Level 3
—
Unobservable inputs based on our own assumptions.


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents assets and liabilities included in the Company's condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
 
 
 
June 30, 2019
 
December 31, 2018
 
Fair value
hierarchy
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Derivative instruments:
 
 
 
 
 
 
 
 
 
Equity swap agreement
Level 2
 
$
3

 
$
3

 
$
4

 
$
4

Commodity contracts
Level 2
 
$
—

 
$
—

 
$
(2
)
 
$
(2
)


Cash-Settled Share Swap Transactions — The fair value of the equity swap agreement is recorded in "Prepayments and other current assets" in the condensed consolidated balance sheets.

Commodity and Foreign Currency Contracts — The Company calculates the fair value of its commodity contracts and foreign currency contracts using quoted commodity forward rates and quoted currency forward rates, to calculate forward values, and then discounts the forward values. The discount rates for all derivative contracts are based on quoted bank deposit rates. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at June 30, 2019 and December 31, 2018 .

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to items measured at fair value on a recurring basis, assets may be measured at fair value on a nonrecurring basis. These assets include long-lived assets and intangible assets which may be written down to fair value as a result of impairment.

The Company has determined the fair value measurements related to each of these rely primarily on Company-specific inputs and the Company's assumptions about the use of the assets, as observable inputs are not available (level 3). To determine the fair value of long-lived asset groups, the Company utilizes discounted cash flows expected to be generated by the long-lived asset group.

The Company evaluates the carrying value of its goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each year. These fair value measurements require the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, and growth rates, which are subject to a high degree of uncertainty. The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable, but different assumptions could materially affect the estimated fair value.

During the first quarter, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis

31

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time. See Note 6, Goodwill and Other Intangible Assets .

Financial Instruments Not Carried at Fair Value
Estimated fair values of the Company's outstanding debt were:
 
 
 
June 30, 2019
 
December 31, 2018
 
Fair value
hierarchy
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Long-term debt (including current maturities):
 
 
 
 
 
 
 
 
 
Term loans and senior notes
Level 2
 
$
5,247

 
$
5,035

 
$
5,307

 
$
5,218



The fair value of the Company's public senior notes and private borrowings under its senior credit facility is based on observable inputs, and its borrowings on the revolving credit facility approximate fair value. The Company also had $91 million and $106 million at June 30, 2019 and December 31, 2018 in other debt whose carrying value approximates fair value, which consists primarily of foreign debt with maturities of one year or less.

Assets and Liabilities Not Carried at Fair Value
The carrying value of cash and cash equivalents, restricted cash, short and long-term receivables, accounts payable, and short-term debt approximates fair value.

10. Debt and Other Financing Arrangements

Long-Term Debt
A summary of our long-term debt obligations at June 30, 2019 and December 31, 2018 is set forth in the following table:
 
June 30, 2019
 
December 31, 2018
 
Principal
 
Carrying Amount (1)
 
Principal
 
Carrying Amount (1)
Credit Facilities
 
 
 
 
 
 
 
Revolver Borrowings
 
 
 
 
 
 
 
Due 2023
$
250

 
$
250

 
$
—

 
$
—

Term Loans
 
 
 
 
 
 
 
LIBOR plus 1.75% Term Loan A due 2019 through 2023
1,658

 
1,649

 
1,700

 
1,691

LIBOR plus 3.00% Term Loan B due 2019 through 2025 (2)
1,692

 
1,626

 
1,700

 
1,629

Senior Unsecured Notes
 
 
 
 
 
 
 
$225 million of 5.375% Senior Notes due 2024
225

 
222

 
225

 
222

$500 million of 5.000% Senior Notes due 2026
500

 
494

 
500

 
493

Senior Secured Notes
 
 
 
 
 
 
 
€415 million 4.875% Euro Fixed Rate Notes due 2022
472

 
489

 
476

 
496

€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024
341

 
345

 
344

 
349

€350 million of 5.000% Euro Fixed Rate Notes due 2024
398

 
422

 
401

 
427

Other debt, primarily foreign instruments
93

 
91

 
108

 
106

 
 
 
5,588

 
 
 
5,413

Less - maturities classified as current
 
 
80

 
 
 
73

Total long-term debt
 
 
$
5,508

 
 
 
$
5,340


(1) Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $83 million and $90 million as of June 30, 2019 and December 31, 2018. Total unamortized debt (premium) discount, net was $(43) million and $(49) million as of June 30, 2019 and December 31, 2018.

32

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


(2) As of December 31, 2018, the rate on Term Loan B was LIBOR plus 2.75% .

Term Loans
On October 1, 2018, the Company entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the "New Credit Facility") in connection with the Federal-Mogul Acquisition. The New Credit Facility provides $4.9 billion of total debt financing, consisting of a five -year $1.5 billion revolving credit facility, a five -year $1.7 billion term loan A facility ("Term Loan A") and a seven -year $1.7 billion term loan B facility ("Term Loan B").

Senior Notes
The Company has outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). The Company has outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 (" 5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 (" 4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").

Credit Facilities
The Company had availability on its credit facilities as of June 30, 2019 as follows:
 
Credit Facilities as of June 30, 2019
 
Term
 
Available (b)
 
 
 
(in billions)
Tenneco Inc. revolving credit facility (a)
2023
 
$
1.2

Tenneco Inc. Term Loan A
2023
 
—

Tenneco Inc. Term Loan B
2025
 
—

Subsidiaries’ credit agreements
2020
 
0.2

 
 
 
$
1.4

(a)  
The Company is required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment.
(b)  
Letters of credit reduce the available borrowings under the revolving credit facility, as of June 30, 2019 the revolving credit facility had $20 million in letters of credit outstanding.

Interest expense associated with the amortization of the debt issuance costs and original issue discounts recognized in the Company's condensed consolidated statements of income (loss) consist of the following:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Amortization of debt issuance fees
$
4

 
$
1

 
$
9

 
$
2



Included in the table above, is the amortization of debt issuance costs on the revolver, which are $20 million at June 30, 2019 and are recorded in "Other assets" in the condensed consolidated balance sheets. In addition, there was a $3 million and $6 million reduction to interest expense during the three and six months ended June 30, 2019 related to the accretion of the debt premium on the Senior Secured Notes.

New Credit Facility — Other Terms and Conditions — The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility) as of the end of each fiscal quarter of not greater than 4.0 to 1 through September 30, 2019, 3.75 to 1 through September 30, 2020 and 3.5 to 1 thereafter; and a requirement to maintain a consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1.  

Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions — The Senior Unsecured Notes and Senior Secured Notes contain covenants that will, among other things, limit the Company's ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, the Company's consolidated fixed

33

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00 , as well as containing restrictions on its operations, including limitations on: (i) incurring additional indebtedness; (ii) paying dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations.

Subject to limited exceptions, all of the Company's existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed the Company's Senior Notes to make distributions to the Company.

As of June 30, 2019 , the Company was in compliance with all of its financial covenants.

Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — The Company has securitization programs for some of its accounts receivables, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at June 30, 2019 and December 31, 2018 are as follows:
 
June 30, 2019
 
December 31, 2018
Borrowings on securitization programs
$
4

 
$
6



Off-Balance Sheet Arrangements — In the Company's European and U.S. accounts receivable factoring programs, accounts receivables are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under these factoring programs approximates the fair value of such receivables. Certain programs in Europe have deferred purchase price arrangements with the banks.

The Company is the servicer of the receivables under some of these arrangements and is responsible for performing all accounts receivable administration functions. Where the Company receives a fee to service and monitor these transferred accounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.

In the U.S and Canada, the Company participates in supply chain financing programs with certain of the Company's aftermarket customers through a drafting program.

The amounts outstanding for these factoring and drafting arrangements as of June 30, 2019 and December 31, 2018 are as follows:
 
June 30, 2019
 
December 31, 2018
 
(in billions)
Accounts receivable outstanding and derecognized
$
1.1

 
$
1.0


The deferred purchase price receivable as of June 30, 2019 and December 31, 2018 is as follows:
 
June 30, 2019
 
December 31, 2018
Deferred purchase price receivable
$
52

 
$
154


Proceeds from the factoring of accounts receivable qualifying as sales are as follows:
 
Three months ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in billions)
Proceeds from factoring qualifying as sales
$
1.3

 
$
0.7

 
$
2.5

 
$
1.5


Financing charges associated with the factoring of receivables are as follows:

34

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Three months ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Financing charges on sale of receivables (a)
$
6

 
$
2

 
$
14

 
$
5

(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss).
 
 
 
 


If the Company were not able to factor receivables or sell drafts under either of these programs, its borrowings under its revolving credit agreement might increase. These programs provide the Company with access to cash at costs that are generally favorable to alternative sources of financing and allow the Company to reduce borrowings under its revolving credit agreement.


35

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


11. Pension Plans, Postretirement and Other Employee Benefits

The Company sponsors several defined benefit pension plans ("Pension Benefits") and health care and life insurance benefits ("Other Postretirement Benefits", or "OPEB") for certain employees and retirees around the world.

Components of net periodic benefit cost (credit) for the three months ended June 30, 2019 and 2018 are as follows:
 
Three Months Ended June 30
 
Pension
 
Other Postretirement Benefits
 
2019
 
2018
 
 
US
 
Non-U.S.
 
US
 
Non-U.S.
 
2019
 
2018
Service cost
$
—

 
$
6

 
$
—

 
$
2

 
$
—

 
$
—

Interest cost
14

 
5

 
2

 
3

 
4

 
1

Expected return on plan assets
(17
)
 
(4
)
 
(3
)
 
(5
)
 
—

 
—

Net amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss
1

 
2

 
1

 
2

 
1

 
3

Prior service cost (credit)
—

 
—

 
—

 
—

 
(2
)
 
(1
)
Net pension and postretirement costs (credits)
$
(2
)
 
$
9

 
$
—

 
$
2

 
$
3

 
$
3

 
 
 
 
 
 
 
 
 
 
 
 

Components of net periodic benefit cost (credit) for the six months ended June 30, 2019 and 2018 are as follows:
 
Six Months Ended June 30
 
Pension
 
Other Postretirement Benefits
 
2019
 
2018
 
 
US
 
Non-U.S.
 
US
 
Non-U.S.
 
2019
 
2018
Service cost
$
1

 
$
12

 
$
—

 
$
5

 
$
—

 
$
—

Interest cost
27

 
12

 
5

 
6

 
7

 
3

Expected return on plan assets
(34
)
 
(9
)
 
(7
)
 
(10
)
 
—

 
—

Net amortization:
 
 
 
 
 
 
 
 
 
 
 
Actuarial loss
2

 
3

 
2

 
4

 
2

 
4

Prior service cost (credit)
—

 
—

 
—

 
—

 
(4
)
 
(1
)
Net pension and postretirement costs (credits)
$
(4
)
 
$
18

 
$
—

 
$
5

 
$
5

 
$
6

 
 
 
 
 
 
 
 
 
 
 
 


12. Income Taxes

For interim tax reporting, the Company estimates its annual effective tax rate and applies it to year-to-date ordinary income. Jurisdictions where no tax benefit can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The effect of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a quarter due to the mix and timing of actual earnings versus annual projections. The tax effects of certain items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.

For the three months ended June 30, 2019 , the Company recorded income tax expense of $14 million on income from continuing operations before income taxes of $ 59 million . This compares to income tax expense of $ 26 million on income from continuing operations before income taxes of $ 89 million in the same period of 2018.

For the six months ended June 30, 2019 , the Company recorded income tax expense of $ 14 million on loss from continuing operations before income taxes of $ 46 million . This compares to income tax expense of $ 51 million on income from continuing operations before income taxes of $ 188 million in the same period of 2018.

Income tax expense for the three and six months ended June 30, 2019 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates higher than the U.S. statutory rate and pre-tax losses with no tax benefit.

Income tax expense for the three and six months ended June 30, 2018 differs from the U.S. statutory rate due primarily to $2 million of tax expense for changes in the toll tax, pre-tax income taxed at rates lower than the U.S. statutory rate, and pre-tax losses with no tax benefit. In addition, during the three and six months ended June 30, 2018, a $5 million and $7 million tax benefit was recognized related to acquisition charges.

On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from 35% to 21%, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactments. The Internal Revenue Service (IRS) issued final regulations, effective on February 5, 2019, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the final regulations a $2 million discrete benefit was recorded in income tax expense during the six months ended June 30, 2019 .

The Company evaluates its deferred tax assets quarterly to determine if valuation allowances are required or should be adjusted. 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. If recent operational improvements continue in our foreign subsidiaries or if certain restructuring steps are completed as part of the Federal-Mogul Acquisition and anticipated spin-off of DRiV, the Company believes it is reasonably possible sufficient positive evidence may be available to release all, or a portion, of its valuation allowance in the next twelve months in certain jurisdictions. This may result in a one-time tax benefit of up to $45 million , primarily related to Spain and the Czech Republic.

The Company believes it is reasonably possible up to $11 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months .

13. Commitments and Contingencies

Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it operates. The Company has been notified by the U.S. Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities. Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these

36

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


sites, its share of the total waste sent to these sites generally has been small. The Company believes its exposure for liability at these sites is not material.

On a global basis, the Company has also identified certain other present and former properties at which it may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments and/or federal or state environmental laws. The Company is seeking to resolve its responsibilities for those sites for which a claim has been received.

The Company expenses or capitalizes, as appropriate, expenditures for ongoing compliance with environmental regulations. As of June 30, 2019 , the Company has an obligation to remediate or contribute towards the remediation of certain sites, including the sites discussed above at which it may be a PRP.

The Company maintains the aggregated estimated share of environmental remediation costs for all these sites on a discounted basis in the condensed consolidated balance sheets as follows:
 
June 30, 2019
 
December 31, 2018
Accrued expenses and other current liabilities
$
8

 
$
12

Deferred credits and other liabilities
30

 
28

 
$
38

 
$
40



For those locations where the liability was discounted, the weighted average discount rate used was  1.4% and 2.9% at June 30, 2019 and December 31, 2018.

The Company's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately:
 
2019
 
2020
 
2021
 
2022
 
2023
 
2024 and thereafter
Expected payments
$
7

 
$
5

 
$
3

 
$
3

 
$
2

 
$
16



Based on information known to the Company from site investigations and the professional judgment of consultants, the Company has established reserves it believes are adequate for these costs. Although the Company believes these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates, difficult to quantify based on the complexity of the issues, and are subject to revision as more information becomes available about the extent of remediation required. At some sites, the Company expects other parties will contribute to the remediation costs. In addition, certain environmental statutes provide the Company's liability could be joint and several, meaning the Company could be required to pay amounts in excess of its share of remediation costs. The financial strength of the other PRPs at these sites has been considered, where appropriate, in the determination of the estimated liability. The Company does not believe any potential costs associated with its current status as a PRP, or as a liable party at the other locations referenced herein, will be material to its annual consolidated financial position, results of operations, or liquidity.

Asset Retirement Obligations
The Company’s primary asset retirement obligations ("ARO") activities relate to the removal of hazardous building materials at its facilities. The Company records an ARO at fair value upon initial recognition when the amount is probable and can be reasonably estimated. ARO fair values are determined based on the Company’s determination of what a third party would charge to perform the remediation activities, generally using a present value technique.

The Company maintains ARO liabilities in the condensed consolidated balance sheets as follows:
 
June 30, 2019
 
December 31, 2018
Accrued expenses and other current liabilities
$
3

 
$
3

Deferred credits and other liabilities
12

 
12

 
$
15

 
$
15



Antitrust Investigations and Litigation

37

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


On March 25, 2014, representatives of the European Commission (EC) were at Tenneco GmbH's Edenkoben, Germany administrative facility to gather information in connection with an ongoing global antitrust investigation concerning multiple automotive suppliers. On the same date, the Company also received a related subpoena from the U.S. Department of Justice (“DOJ”).

On November 5, 2014, the DOJ granted conditional leniency to the Company, its subsidiaries, and its 50% affiliates as of such date ("2014 Tenneco Entities") pursuant to an agreement the Company entered into under the Antitrust Division's Corporate Leniency Policy. This agreement provides important benefits to the 2014 Tenneco Entities in exchange for the Company's self-reporting of matters to the DOJ and its continuing full cooperation with the DOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against the 2014 Tenneco Entities, nor seek any criminal fines or penalties, in connection with the matters the Company reported to the DOJ. Additionally, there are limits on the liability of the 2014 Tenneco Entities related to any follow-on civil antitrust litigation in the United States. The limits include single rather than treble damages, as well as relief from joint and several antitrust liability with other relevant civil antitrust action defendants. These limits are subject to the Company satisfying the DOJ and any court presiding over such follow-on civil litigation.

On April 27, 2017, the Company received notification from the EC that it has administratively closed its global antitrust inquiry regarding the production, assembly, and supply of complete exhaust systems. No charges against the Company or any other competitor were initiated at any time and the EC inquiry is now closed.

Certain other competition agencies are also investigating possible violations of antitrust laws relating to products supplied by the Company and its subsidiaries, including Federal-Mogul. The Company has cooperated and continues to cooperate fully with all of these antitrust investigations and take other actions to minimize its potential exposure.

The Company and certain of its competitors are also currently defendants in civil putative class action litigation and are subject to similar claims filed by other plaintiffs, in the United States and Canada. More related lawsuits may be filed, including in other jurisdictions. Plaintiffs in these cases generally allege that defendants have engaged in anticompetitive conduct, in violation of federal and state laws, relating to the sale of automotive exhaust systems or components thereof. Plaintiffs seek to recover, on behalf of themselves and various purported classes of purchasers, injunctive relief, damages and attorneys’ fees. However, as explained above, because the DOJ granted conditional leniency to the 2014 Tenneco Entities, the Company's civil liability in U.S. follow-on actions with respect to these entities is limited to single damages and the Company will not be jointly and severally liable with the other defendants, provided that the Company has satisfied its obligations under the DOJ leniency agreement and approval is granted by the presiding court. Typically, exposure for follow-on actions in Canada is less than the exposure for U.S. follow-on actions.

Following the EC's decision to administratively close its antitrust inquiry into exhaust systems in 2017, receipt by the 2014 Tenneco Entities of conditional leniency from the DOJ and discussions during the third quarter of 2017 following the appointment of a special settlement master in the civil putative class action cases pending against the Company and/or certain of its competitors in the United States, the Company continues to vigorously defend itself and/or take actions to minimize its potential exposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the Company and its stockholders. For example, in October 2017, the Company settled an administrative action brought by Brazil's competition authority for an amount that was not material. In December 2018, the Company settled a separate administrative action brought by Brazil’s competition authority against a Federal-Mogul subsidiary, also for an amount that was not material.

Additionally, in February 2018, the Company settled civil putative class action litigation in the United States brought by classes of direct purchasers, end-payors and auto dealers. No other classes of plaintiffs have brought claims against the Company in the United States. Based upon those earlier developments, including settlement discussions, the Company established a reserve of $132 million in its second quarter 2017 financial results for settlement costs that were probable, reasonably estimable, and expected to be necessary to resolve its antitrust matters globally, which primarily involves the resolution of civil suits and related claims. Of the $132 million reserve that was established, $79 million was paid through June 30, 2019 resulting in a remaining reserve of  $53 million  as of  June 30, 2019 , which is recorded in accrued expenses and other current liabilities in the Company's condensed consolidated balance sheets. While the Company, including its Federal-Mogul subsidiaries, continues to cooperate with certain competition agencies investigating possible violations of antitrust laws relating to products supplied by the Company, and the Company may be subject to other civil lawsuits and/or related claims, no amount of this reserve is attributable to matters with the DOJ or the EC, and no such amount is expected based on current information.


38

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


The Company's reserve for its antitrust matters is based upon all currently available information and an assessment of the probability of events for those matters where the Company can make a reasonable estimate of the costs to resolve such outstanding matters. The Company's estimate involves significant judgment, given the number, variety and potential outcomes of actual and potential claims, the uncertainty of future rulings and approvals by a court or other authority, the behavior or incentives of adverse parties or regulatory authorities, and other factors outside of its control. As a result, the Company's reserve may change from time to time, and actual costs may vary. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, the Company does not expect any such change in the reserve will have a material adverse effect on the Company's annual consolidated financial position, results of operations or liquidity.

Other Legal Proceedings, Claims and Investigations
For many years the Company has been and continues to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. The Company's current docket of active and inactive cases is less than 500 cases in the United States and less than 50 in Europe.

With respect to the claims filed in the United States, the substantial majority of the claims are related to alleged exposure to asbestos in the Company's line of Walker® exhaust automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. A small number of claims have been asserted against one of the Company's subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. The Company believes, based on scientific and other evidence, it is unlikely that U.S. claimants were exposed to asbestos by the Company's former products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number in some cases exceeding 100 defendants from a variety of industries. Additionally, in many cases the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages.

With respect to the claims filed in Europe, the substantial majority relate to occupational exposure claims brought by current and former employees of Federal-Mogul facilities in France and amounts paid out were not material. A small number of occupational exposure claims have also been asserted against Federal-Mogul entities in Italy and Spain.

As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, the Company may experience an increased number of these claims. The Company vigorously defends itself against these claims as part of its ordinary course of business. In future periods, the Company could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to the Company. To date, with respect to claims that have proceeded sufficiently through the judicial process, the Company has regularly achieved favorable resolutions. Accordingly, the Company presently believes that these asbestos-related claims will not have a material adverse effect on the Company's annual consolidated financial position, results of operations or liquidity.

The Company is also from time to time involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of damages against the Company 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, unclaimed property, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance.

While the Company vigorously defends itself against all of these legal proceedings, claims and investigations and take other actions to minimize its potential exposure, in future periods, the Company could be subject to cash costs or charges to earnings if any of these matters are resolved on unfavorable terms. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including the Company's assessment of the merits of the particular claim, except as described above under "Antitrust Investigations", the Company does expect the legal proceedings, claims or investigations currently pending against it will have any material adverse effect on its annual consolidated financial position, results of operations or liquidity.

Warranty Matters
The Company provides warranties on some of its products. The warranty terms vary but range from one year up to limited lifetime warranties on some of its 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 with the Company's products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The

39

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


Company believes 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 condensed consolidated balance sheets.

Below is a table that shows the activity in the warranty accrual accounts:
 
2019
 
2018
Balance as of December 31 of the prior year
$
45

 
$
26

Accruals related to product warranties
5

 
6

Reductions for payments made
(2
)
 
(3
)
Foreign currency
—

 
—

Balance as of March 31
$
48

 
$
29

Accruals related to product warranties
16

 
2

Reductions for payments made
(11
)
 
(2
)
Foreign currency
—

 
—

Balance as of June 30
$
53

 
$
29



14. Leases

The Company has operating and finance leases for real estate and equipment. Generally, the leases have remaining terms of one month to ten years . Leases with an initial term of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.

In addition, some leases include options to terminate the lease. The Company generally negotiates these termination clauses in anticipation of any changes in market conditions; however, because a termination option requires approval from management, the Company assumes the majority of its termination options will not be exercised when determining the lease term.

The Company has elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease cost. Lease expense is recorded in operating expenses in the results of operations.

Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable portion of lease payments is not included in the computation of the right of use assets or lease liabilities. Rather, variable payments, other than those dependent upon a market index or rate, are expensed when the obligation for those payments is incurred and are included in "Cost of sales" and "Selling, general, and administrative" within the condensed consolidated statements of income (loss).

The Company does not include significant restrictions or covenants in its lease agreements, and residual value guarantees are generally not included within its operating leases.

The components of lease expense were as follows:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Operating lease expense
$
30

 
$
64

Short-term lease expense
2

 
4

Variable lease expense
12

 
20

Total lease expense
$
44

 
$
88


Other information related to leases was as follows:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
Operating cash flows from operating leases
$
41

 
$
82



Supplemental balance sheet information related to leases was as follows:

40

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
June 30, 2019
Operating leases
 
Operating lease right-of-use assets (a)
$
344

 
 
Other current liabilities (b)
$
99

Other long-term liabilities (c)
239

Total operating lease liabilities
$
338

 
 
Finance leases
 
Property, plant and equipment, gross
$
2

Accumulated depreciation
—

Total finance lease right-of-use assets
$
2

 
 
Other current liabilities (b)
$
1

Other long-term liabilities (c)
1

Total finance lease liabilities
$
2

 
 
(a) Included in "Other assets" in the condensed consolidated balance sheets.
 
(b) Included in "Accrued expenses and other current liabilities" in the condensed consolidated balance sheets.
 
(c) Included in "Deferred credits and other liabilities" in the condensed consolidated balance sheets.
 


 
June 30, 2019
 
Weighted average remaining lease term
 
Weighted average discount rate
Operating leases
4.96 years
 
4.26
%
Finance leases
3.05 years
 
5.08
%


Maturities of lease liabilities under non-cancellable leases as of June 30, 2019 were as follows:
Year ending December 31
Operating leases
 
Finance leases
2019 (excluding the six months ended June 30, 2019)
$
56

 
$
1

2020
97

 
1

2021
75

 
—

2022
53

 
—

2023
37

 
—

Thereafter
57

 
—

Total future undiscounted lease payments
375

 
2

Less imputed interest
(37
)
 
—

Total reported lease liability
$
338

 
$
2




41

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


Future minimum operating lease payments at December 31, 2018 are as follows:
2019
$
120

2020
100

2021
86

2022
68

2023
56

Beyond 2023
53

 
$
483



15. Share-Based Compensation

Share-Based Compensation Expense
The total share-based compensation expense was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Cash-settled share-based compensation expense (benefit)
$
1

 
$
(2
)
 
—

 
(3
)
Share-settled share-based compensation expense (benefit)
6

 
2

 
13

 
7

 
$
7

 
$
—

 
13

 
4



Cash-Settled Awards
Prior to 2018, the Company has granted restricted stock units ("RSUs") and long-term performance units ("LTPUs") to certain key employees that are payable in cash. These awards are classified as liabilities and are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. At June 30, 2019 , the LTPUs outstanding included a three-year grant for 2017 - 2019 payable in the first quarter of 2020.

As of June 30, 2019 , $1 million of total unrecognized compensation costs is expected to be recognized on the cash-settled awards over a weighted-average period of less than 1 year .

Share-Settled Awards
The Company has granted restricted stock to its directors and certain key employees as well as RSUs and performance share units ("PSUs") that are payable in common stock to certain key employees. These awards are settled in shares upon vesting and recognized in equity based on their fair value.

The following table reflects the status for all nonvested restricted shares, share-settled RSUs, and PSUs as of June 30, 2019 and December 31, 2018 :
 
Restricted Stock
 
Share-Settled RSUs
 
PSUs
 
Shares
 
Weighted Avg.
Grant Date
Fair Value
 
Units
 
Weighted Avg.
Grant Date
Fair Value
 
Units
 
Weighted Avg.
Grant Date
Fair Value
Nonvested balance at beginning of period
178,550

 
$
55.46

 
440,403

 
$
47.99

 
227,049

 
$
49.18

Granted
34,009

 
34.66

 
867,137

 
34.21

 
634,511

 
24.77

Vested
(172,050
)
 
50.12

 
(88,590
)
 
54.60

 
—

 
—

Forfeited
(3,329
)
 
62.12

 
(50,113
)
 
41.26

 
(43,527
)
 
43.61

Nonvested balance at end of period
37,180

 
$
63.30

 
1,168,837

 
$
38.04

 
818,033

 
$
34.25


As of June 30, 2019 , approximately $54 million of total unrecognized compensation costs is expected to be recognized on the share-settled awards over a weighted-average period of approximately 2 years .

16. Shareholders' Equity

Common Stock Outstanding
The Company has authorized 175,000,000 shares and 135,000,000 shares ( $0.01 par value) of Class A Common Stock at June 30, 2019 and 2018 . The Company has authorized 25,000,000 shares ( $0.01  par value) of Class B Common Stock at June 30, 2019 .

42

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)



Total common stock outstanding and changes in common stock issued are as follows:
 
Class A Common Stock
 
Class B Common Stock
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
Shares issued at beginning of period
71,675,379

 
66,033,509

 
23,793,669

Issuance (repurchased) pursuant to benefit plans
123,216

 
(15,906
)
 
—

Restricted stock forfeited and withheld for taxes
(60,081
)
 
(7,590
)
 
—

Stock options exercised
8,438

 
(6,975
)
 
—

Shares issued at end of period
71,746,952

 
66,003,038

 
23,793,669

 
 
 
 
 
 
Treasury stock
14,592,888

 
14,592,888

 
—

Total shares outstanding
57,154,064

 
51,410,150

 
23,793,669



Preferred Stock
The Company had 50,000,000 shares of preferred stock ( $0.01  par value) authorized at both June 30, 2019 and 2018 . No shares of preferred stock were issued or outstanding at those dates.


43

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


Accumulated Other Comprehensive Income (Loss)
The following represents the Company's changes in accumulated other comprehensive income (loss) by component, net of tax for the three and six months ended June 30, 2019 and 2018 :
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Foreign currency translation adjustments and other
 
 
 
 
 
 
 
Balance at beginning of period
$
(366
)
 
$
(244
)
 
$
(395
)
 
$
(263
)
Other comprehensive income (loss) before reclassifications adjustments
(16
)
 
(94
)
 
11

 
(75
)
Reclassification from other comprehensive income (loss)
—

 
—

 
—

 
—

Other comprehensive income (loss)
(16
)
 
(94
)
 
11

 
(75
)
Income tax provision (benefit)
(1
)
 
2

 
1

 
2

Balance at end of period
$
(383
)
 
$
(336
)
 
$
(383
)
 
$
(336
)
 
 
 
 
 
 
 
 
Pensions and other postretirement benefits
 
 
 
 
 
 
 
Balance at beginning of period
$
(296
)
 
$
(272
)
 
$
(297
)
 
$
(275
)
Other comprehensive income (loss) before reclassifications
—

 
—

 
—

 
—

Reclassification from other comprehensive income (loss)
2

 
5

 
3

 
9

Other comprehensive income (loss)
2

 
5

 
3

 
9

Income tax provision (benefit)
(4
)
 
(1
)
 
(4
)
 
(2
)
Balance at end of period
$
(298
)
 
$
(268
)
 
$
(298
)
 
$
(268
)
 
 
 
 
 
 
 
 
Cash flow hedge instruments
 
 
 
 
 
 
 
Balance at beginning of period
$
4

 
$
—

 
$
—

 
$
—

Other comprehensive income (loss) before reclassifications
(3
)
 
—

 
1

 
—

Reclassification from other comprehensive income (loss)
—

 
—

 
—

 
—

Other comprehensive income (loss)
(3
)
 
—

 
1

 
—

Income tax provision (benefit)
—

 
—

 
—

 
—

Balance at end of period
$
1

 
$
—

 
$
1

 
$
—

 
 
 
 
 
 
 
 
Other comprehensive income (loss) attributable to noncontrolling interests
$
(1
)
 
$
(7
)
 
$
5

 
$
1



17. Segment Information

The Company expects to separate its businesses to form two new, independent publicly traded companies and currently expects the DRiV spin-off to occur in mid-2020. As such, the Company began to manage and report its DRiV businesses through two new operating segments, in the first quarter of 2019, as compared to the three operating segments it had previously reported. The DRiV operating segments consist of Motorparts and Ride Performance. The new Motorparts operating segment consists of the previously reported Aftermarket operating segment as well as the aftermarket portion of the previously reported Motorparts operating segment. The Ride Performance operating segment consists of the previously reported Ride Performance operating segment as well as the OE Braking business that was included in the previously reported Motorparts operating segment. As such, prior period operating segment results have been conformed to reflect the Company's current operating segments. The future New Tenneco consists of two existing operating segments, Powertrain and Clean Air. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as "Corporate."

Management uses EBITDA including noncontrolling interests as the key performance measure of segment profitability and uses the measure in its financial and operational decision making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. Segment assets are not presented as it is not a measure reviewed by the Chief Operating Decision Maker in allocating resources and assessing performance.

44

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)



EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with US GAAP and should not be considered an alternative to net income, which is the most directly comparable financial measure to EBITDA including noncontrolling interests that is in accordance with US GAAP. EBITDA including noncontrolling interests, as determined and measured by the Company, should not be compared to similarly titled measures reported by other companies.

The following table summarizes certain of the Company's segment information:
 
Reportable Segments
 
 
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
For the Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,827

 
$
1,133

 
$
709

 
$
835

 
$
4,504

 
$
—

 
$
—

 
$
4,504

Intersegment revenues
$
—

 
$
40

 
$
38

 
$
11

 
$
89

 
$
—

 
$
(89
)
 
$
—

EBITDA, including noncontrolling interests
$
152

 
$
100

 
$
26

 
$
110

 
$
388

 
$
(78
)
 
$
—

 
$
310

For the Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
1,694

 
$
—

 
$
506

 
$
333

 
$
2,533

 
$
—

 
$
—

 
$
2,533

Intersegment revenues
$
—

 
$
—

 
$
5

 
$
—

 
$
5

 
$
—

 
$
(5
)
 
$
—

EBITDA, including noncontrolling interests
$
142

 
$
—

 
$
20

 
$
55

 
$
217

 
$
(46
)
 
$
—

 
$
171


 
Reportable Segments
 
 
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
For the Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
3,606

 
$
2,308

 
$
1,442

 
$
1,632

 
$
8,988

 
$
—

 
$
—

 
$
8,988

Intersegment revenues
$
—

 
$
86

 
$
84

 
$
22

 
$
192

 
$
—

 
$
(192
)
 
$
—

EBITDA, including noncontrolling interests
$
283

 
$
213

 
$
(19
)
 
$
155

 
$
632

 
$
(177
)
 
$
—

 
$
455

For the Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues from external customers
$
3,450

 
$
—

 
$
1,019

 
$
645

 
$
5,114

 
$
—

 
$
—

 
$
5,114

Intersegment revenues
$
—

 
$
—

 
$
11

 
$
—

 
$
11

 
$
—

 
$
(11
)
 
$
—

EBITDA, including noncontrolling interests
$
299

 
$
—

 
$
44

 
$
100

 
$
443

 
$
(90
)
 
$
—

 
$
353





45

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


Segment EBITDA including noncontrolling interests and the reconciliation to earnings before interest expense, income taxes, and noncontrolling interests are as follow:
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2019
 
2018
 
2019
 
2018
EBITDA including noncontrolling interests by Segments:
 
 
 
 
 
 
 
Clean Air
$
152

 
142

 
$
283

 
$
299

Powertrain
100

 
—

 
213

 
—

Ride Performance
26

 
20

 
(19
)
 
44

Motorparts
110

 
55

 
155

 
100

Corporate
(78
)
 
(46
)
 
(177
)
 
(90
)
Total EBITDA including noncontrolling interests
310

 
171

 
455

 
353

Depreciation and amortization
(169
)
 
(60
)
 
(338
)
 
(120
)
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
141

 
111

 
117

 
233

Interest expense
(82
)
 
(22
)
 
(163
)
 
(45
)
Income tax (expense) benefit
(14
)
 
(26
)
 
(14
)
 
(51
)
Net income (loss)
$
45

 
$
63

 
$
(60
)
 
$
137



Revenue from contracts with customers is disaggregated by customer type and geography, as it depicts the nature and amount of the Company’s revenue that is aligned with the Company's key growth strategies. In the following tables, revenue is disaggregated accordingly:
 
Reportable Segments
By Customer Type
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
OE - Substrate
$
777

 
$
—

 
$
—

 
$
—

 
$
777

OE - Value add
1,050

 
1,133

 
709

 
—

 
2,892

Aftermarket
—

 
—

 
—

 
835

 
835

Total
$
1,827

 
$
1,133

 
$
709

 
$
835

 
$
4,504

Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
OE - Substrate
$
621

 
$
—

 
$
—

 
$
—

 
$
621

OE - Value add
1,073

 
—

 
506

 
—

 
1,579

Aftermarket
—

 
—

 
—

 
333

 
333

Total
$
1,694

 
$
—

 
$
506

 
$
333

 
$
2,533



46

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Reportable Segments
By Customer Type
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
OE - Substrate
$
1,483

 
$
—

 
$
—

 
$
—

 
$
1,483

OE - Value add
2,123

 
2,308

 
1,442

 
—

 
5,873

Aftermarket
—

 
—

 
—

 
1,632

 
1,632

Total
$
3,606

 
$
2,308

 
$
1,442

 
$
1,632

 
$
8,988

Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
OE - Substrate
$
1,273

 
$
—

 
$
—

 
$
—

 
$
1,273

OE - Value add
2,177

 
—

 
1,019

 
—

 
3,196

Aftermarket
—

 
—

 
—

 
645

 
645

Total
$
3,450

 
$
—

 
$
1,019

 
$
645

 
$
5,114


 
Reportable Segments
By Geography
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
North America
$
800

 
$
398

 
$
228

 
$
536

 
$
1,962

Europe, Middle East and Africa
609

 
540

 
349

 
241

 
1,739

Rest of world
418

 
195

 
132

 
58

 
803

Total
$
1,827

 
$
1,133

 
$
709

 
$
835

 
$
4,504

Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
North America
$
745

 
$
—

 
$
185

 
$
210

 
$
1,140

Europe, Middle East and Africa
623

 
—

 
212

 
105

 
940

Rest of world
326

 
—

 
109

 
18

 
453

Total
$
1,694

 
$
—

 
$
506

 
$
333

 
$
2,533



 
Reportable Segments
By Geography
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
North America
$
1,593

 
$
803

 
$
460

 
$
1,043

 
$
3,899

Europe, Middle East and Africa
1,250

 
1,115

 
727

 
478

 
3,570

Rest of world
763

 
390

 
255

 
111

 
1,519

Total
$
3,606

 
$
2,308

 
$
1,442

 
$
1,632

 
$
8,988

Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
North America
$
1,513

 
$
—

 
$
365

 
$
398

 
$
2,276

Europe, Middle East and Africa
1,280

 
—

 
437

 
213

 
1,930

Rest of world
657

 
—

 
217

 
34

 
908

Total
$
3,450

 
$
—

 
$
1,019

 
$
645

 
$
5,114




47

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


18. Related Party Transactions

Amounts presented as Icahn Automotive Group LLC represent the Company's activity with Auto Plus and Pep Boys. See Note 7, Investment in Nonconsolidated Affiliates , for further information for companies within the tables below that represent equity method investments.

The following tables are summaries of the net sales, purchases, and royalty and other income from related parties for the three and six months ended June 30, 2019 :
 
Three Months Ended June 30, 2019
 
Net Sales
 
Purchases
 
Royalty and Other Income
Icahn Automotive Group LLC
$
47

 
$
—

 
$
1

PSC Metals, Inc.
$
—

 
$
—

 
$
—

Anqing TP Goetze Piston Ring Company Limited
$
—

 
$
15

 
$
1

Anqing TP Powder Metallurgy Company Limited
$
1

 
$
2

 
$
—

Dongsuh Federal-Mogul Industrial Co., Ltd.
$
2

 
$
5

 
$
—

Federal-Mogul Powertrain Otomotiv A.S.
$
15

 
$
49

 
$
1

Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti.
$
—

 
$
2

 
$
—

Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S.
$
1

 
$
4

 
$
—

Federal-Mogul TP Liners, Inc.
$
4

 
$
—

 
$
1

Frenos Hidraulicos Auto
$
1

 
$
—

 
$
—

Montagewerk Abgastechnik Emden GmbH
$
—

 
$
—

 
$
—



 
Six Months Ended June 30, 2019
 
Net Sales
 
Purchases
 
Royalty and Other Income
Icahn Automotive Group LLC
$
90

 
$
—

 
$
2

PSC Metals, Inc.
$
1

 
$
—

 
$
—

Anqing TP Goetze Piston Ring Company Limited
$
—

 
$
29

 
$
—

Anqing TP Powder Metallurgy Company Limited
$
1

 
$
3

 
$
—

Dongsuh Federal-Mogul Industrial Co., Ltd.
$
3

 
$
7

 
$
—

Federal-Mogul Powertrain Otomotiv A.S.
$
42

 
$
104

 
$
2

Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti.
$
—

 
$
5

 
$
—

Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S.
$
2

 
$
8

 
$
—

Federal-Mogul TP Liners, Inc.
$
8

 
$
—

 
$
1

Frenos Hidraulicos Auto
$
1

 
$
—

 
$
—

Montagewerk Abgastechnik Emden GmbH
$
2

 
$
—

 
$
—



48

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)



The following table is a summary of amounts due to and from the Company's related parties as of June 30, 2019 and December 31, 2018 :
 
June 30, 2019
 
December 31, 2018
 
Receivables
 
Payables and accruals
 
Receivables
 
Payables and accruals
Icahn Automotive Group LLC
$
54

 
$
2

 
$
60

 
$
12

Anqing TP Goetze Piston Ring Company Limited
$
2

 
$
22

 
$
1

 
$
22

Anqing TP Powder Metallurgy Company Limited
$
—

 
$
1

 
$
1

 
$
1

Dongsuh Federal-Mogul Industrial Co., Ltd.
$
—

 
$
2

 
$
1

 
$
2

Federal-Mogul Powertrain Otomotiv A.S.
$
12

 
$
27

 
$
9

 
$
16

Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti.
$
—

 
$
1

 
$
—

 
$
1

Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S.

$
—

 
$
3

 
$
—

 
$
—

Federal-Mogul TP Liners, Inc.
$
2

 
$
7

 
$
2

 
$
7

Farloc Argentina SAIC
$
1

 
$
1

 
$
—

 
$
—

Montagewerk Abgastechnik Emden GmbH

$
—

 
$
—

 
$
—

 
$
—




49

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


19. Supplemental Guarantor Condensed Consolidating Financial Statements

Basis of Presentation
Substantially all of the Company's existing and future material domestic 100% owned subsidiaries (which are referred to as the Guarantor Subsidiaries) fully and unconditionally guarantee its senior notes on a joint and several basis. However, a subsidiary’s guarantee may be released in certain customary circumstances such as a sale of the subsidiary or all or substantially all of its assets in accordance with the indenture applicable to the notes. The Guarantor Subsidiaries are combined in the presentation below.

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

The accompanying supplemental guarantor consolidating financial statements have been updated to reflect the revision as described in Note 2, Summary of Significant Accounting Policies .

As discussed in Note 3, Acquisitions and Divestitures , the allocation of the purchase price to the assets acquired and liabilities assumed, including the entities to which it is allocated, is preliminary and subject to change during the measurement period.

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

50

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended June 30, 2019
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net sales and operating revenues:
 
 
 
 
 
 
 
 
 
External
$
1,690

 
$
2,814

 
$
—

 
$
—

 
$
4,504

Affiliated companies
235

 
283

 
—

 
(518
)
 
—

 
1,925

 
3,097

 
—

 
(518
)
 
4,504

Costs and expenses
 
 
 
 
 
 
 
 
 
Cost of sales
1,618

 
2,692

 
1

 
(518
)
 
3,793

Restructuring charges and asset impairments
43

 
18

 
—

 
—

 
61

Engineering, research, and development
30

 
48

 
—

 
—

 
78

Selling, general, and administrative
148

 
143

 
(3
)
 
—

 
288

Depreciation and amortization
81

 
88

 
—

 
—

 
169

 
1,920

 
2,989

 
(2
)
 
(518
)
 
4,389

Other expense (income)
 
 
 
 
 
 
 
 
 
Non-service postretirement benefit costs
(1
)
 
5

 
—

 
—

 
4

Equity in (income) losses of nonconsolidated affiliates, net of tax
(1
)
 
(16
)
 
—

 
—

 
(17
)
Other (income) expense, net
30

 
(43
)
 
—

 
—

 
(13
)
 
28

 
(54
)
 
—

 
—

 
(26
)
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
(23
)
 
162

 
2

 
—

 
141

Interest expense:
 
 
 
 
 
 
 
 
 
External, net of interest capitalized
(6
)
 
12

 
76

 
—

 
82

Affiliated companies, net of interest income
(6
)
 
11

 
(5
)
 
—

 
—

Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
(11
)
 
139

 
(69
)
 
—

 
59

Income tax expense (benefit)
—

 
27

 
(13
)
 
—

 
14

Equity in net income (loss) from affiliated companies
93

 
—

 
82

 
(175
)
 
—

Net income (loss)
82

 
112

 
26

 
(175
)
 
45

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

 
19

 
—

 
—

 
19

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

 
$
93

 
$
26

 
$
(175
)
 
$
26

Comprehensive income (loss) attributable to Tenneco Inc.
$
51

 
$
67

 
$
(86
)
 
$
(28
)
 
$
4



51

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 
Three Months Ended June 30, 2018
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net sales and operating revenues:
 
 
 
 
 
 
 
 
 
External
$
1,028

 
$
1,505

 
$
—

 
$
—

 
$
2,533

Affiliated companies
134

 
156

 
—

 
(290
)
 
—

 
1,162

 
1,661

 
—

 
(290
)
 
2,533

Costs and expenses
 
 
 
 
 
 
 
 
 
Cost of sales
984

 
1,440

 
—

 
(290
)
 
2,134

Restructuring charges and asset impairments
2

 
27

 
—

 
—

 
29

Engineering, research, and development
19

 
20

 
—

 
—

 
39

Selling, general, and administrative
82

 
72

 
—

 
—

 
154

Depreciation and amortization
24

 
36

 
—

 
—

 
60

 
1,111

 
1,595

 
—

 
(290
)
 
2,416

Other expense (income)
 
 
 
 
 
 
 
 
 
Non-service postretirement benefit costs
3

 
—

 
—

 
—

 
3

Other (income) expense, net
15

 
(22
)
 
—

 
10

 
3

 
18

 
(22
)
 
—

 
10

 
6

Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
33

 
88

 
—

 
(10
)
 
111

Interest expense:
 
 
 
 
 
 
 
 
 
External, net of interest capitalized
10

 
3

 
9

 
—

 
22

Affiliated companies, net of interest income
(4
)
 
—

 
4

 
—

 
—

Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
27

 
85

 
(13
)
 
(10
)
 
89

Income tax (benefit) expense
(2
)
 
28

 
—

 
—

 
26

Equity in net income (loss) from affiliated companies
37

 
—

 
60

 
(97
)
 
—

Net income (loss)
66

 
57

 
47

 
(107
)
 
63

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

 
16

 
—

 
—

 
16

Net income (loss) attributable to Tenneco Inc.
$
66

 
$
41

 
$
47

 
$
(107
)
 
$
47

Comprehensive income (loss) attributable to Tenneco Inc.
$
66

 
$
41

 
$
(41
)
 
$
(107
)
 
$
(41
)



52

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Six Months Ended June 30, 2019
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net sales and operating revenues:
 
 
 
 
 
 
 
 
 
External
$
3,381

 
$
5,607

 
$
—

 
$
—

 
$
8,988

Affiliated companies
453

 
564

 
—

 
(1,017
)
 
—

 
3,834

 
6,171

 
—

 
(1,017
)
 
8,988

Costs and expenses
 
 
 
 
 
 
 
 
 
Cost of sales
3,294

 
5,380

 
—

 
(1,017
)
 
7,657

Restructuring charges and asset impairments
51

 
34

 
—

 
—

 
85

Goodwill impairment charge
33

 
27

 
—

 
—

 
60

Engineering, research, and development
69

 
101

 
—

 
—

 
170

Selling, general, and administrative
326

 
278

 
—

 
—

 
604

Depreciation and amortization
164

 
174

 
—

 
—

 
338

 
3,937

 
5,994

 
—

 
(1,017
)
 
8,914

Other expense (income)
 
 
 
 
 
 
 
 
 
Non-service postretirement benefit costs
(1
)
 
7

 
—

 
—

 
6

Equity in losses of nonconsolidated affiliates, net of tax
(2
)
 
(31
)
 
—

 
—

 
(33
)
Other (income) expense, net
23

 
(39
)
 
—

 
—

 
(16
)
 
20

 
(63
)
 
—

 
—

 
(43
)
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
(123
)
 
240

 
—

 
—

 
117

Interest expense:
 
 
 
 
 
 
 
 
 
External, net of interest capitalized
5

 
17

 
141

 
—

 
163

Affiliated companies, net of interest income
(14
)
 
19

 
(5
)
 
—

 
—

Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
(114
)
 
204

 
(136
)
 
—

 
(46
)
Income tax expense (benefit)
(18
)
 
57

 
(25
)
 
—

 
14

Equity in net income (loss) from affiliated companies
72

 
—

 
20

 
(92
)
 
—

Net income (loss)
(24
)
 
147

 
(91
)
 
(92
)
 
(60
)
Less: Net income (loss) attributable to noncontrolling interests
—

 
31

 
—

 
—

 
31

Net income (loss) attributable to Tenneco Inc.
$
(24
)
 
$
116

 
$
(91
)
 
$
(92
)
 
$
(91
)
Comprehensive income (loss) attributable to Tenneco Inc.
$
(17
)
 
$
128

 
$
(79
)
 
$
(111
)
 
$
(79
)


53

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


 
Six Months Ended June 30, 2018
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
Net sales and operating revenues:
 
 
 
 
 
 
 
 
 
External
$
2,060

 
$
3,054

 
$
—

 
$
—

 
$
5,114

Affiliated companies
257

 
312

 
—

 
(569
)
 
—

 
2,317

 
3,366

 
—

 
(569
)
 
5,114

Costs and expenses
 
 
 
 
 
 
 
 
 
Cost of sales
1,991

 
2,905

 
—

 
(569
)
 
4,327

Restructuring charges and asset impairments
3

 
38

 
—

 
—

 
41

Engineering, research, and development
37

 
42

 
—

 
—

 
79

Selling, general, and administrative
155

 
150

 
—

 
—

 
305

Depreciation and amortization
47

 
73

 
—

 
—

 
120

 
2,233

 
3,208

 
—

 
(569
)
 
4,872

Other expense (income)
 
 
 
 
 
 
 
 
 
Non-service postretirement benefit costs
6

 
—

 
—

 
—

 
6

Other (income) expense, net
24

 
(31
)
 
—

 
10

 
3

 
30

 
(31
)
 
—

 
10

 
9

Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
54

 
189

 
—

 
(10
)
 
233

Interest expense:

 

 

 

 

External, net of interest capitalized
20

 
6

 
19

 
—

 
45

Affiliated companies, net of interest income
(7
)
 
—

 
7

 
—

 
—

Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies
41

 
183

 
(26
)
 
(10
)
 
188

Income tax (benefit) expense
(1
)
 
52

 
—

 
—

 
51

Equity in net income (loss) from affiliated companies
85

 
—

 
133

 
(218
)
 
—

Net income (loss)
127

 
131

 
107

 
(228
)
 
137

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

 
30

 
—

 
—

 
30

Net income (loss) attributable to Tenneco Inc.
$
127

 
$
101

 
$
107

 
$
(228
)
 
$
107

Comprehensive income (loss) attributable to Tenneco Inc.
$
127

 
$
101

 
$
41

 
$
(228
)

$
41





54

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


  BALANCE SHEETS
 
June 30, 2019
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:

 

 

 

 


Cash and cash equivalents
$
216

 
$
165

 
$
3

 
$
—

 
$
384

Restricted cash
—

 
6

 
—

 
—

 
6

Receivables, net
965

 
1,882

 
—

 
—

 
2,847

Inventories, net
927

 
1,280

 
—

 
—

 
2,207

Prepayments and other current assets
193

 
329

 
28

 
—

 
550

Total current assets
2,301

 
3,662

 
31

 
—

 
5,994

Property, plant and equipment, net
1,142

 
2,418

 
9

 
—

 
3,569

Investment in affiliated companies
1,637

 
—

 
5,204

 
(6,841
)
 
—

Long-term receivables, net
9

 
1

 
—

 
—

 
10

Goodwill
470

 
329

 
—

 
—

 
799

Intangibles, net
971

 
678

 
—

 
—

 
1,649

Investments in nonconsolidated affiliates
42

 
489

 
—

 
—

 
531

Deferred income taxes
256

 
212

 
12

 
—

 
480

Other assets
150

 
396

 
14

 
—

 
560

Total assets
$
6,978

 
$
8,185

 
$
5,270

 
$
(6,841
)
 
$
13,592

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
1

 
$
154

 
$
15

 
$
—

 
$
170

Accounts payable
904

 
1,821

 
—

 
—

 
2,725

Accrued compensation and employee benefits
87

 
304

 
—

 
—

 
391

Accrued income taxes
—

 
—

 
—

 
—

 
—

Accrued expenses and other current liabilities
426

 
542

 
56

 
—

 
1,024

Total current liabilities
1,418

 
2,821

 
71

 
—

 
4,310

Long-term debt
250

 
11

 
5,247

 
—

 
5,508

Intercompany due to (due from)
1,905

 
(196
)
 
(1,709
)
 
—

 
—

Deferred income taxes
—

 
110

 
—

 
—

 
110

Pension, postretirement benefits and other liabilities
817

 
835

 
23

 
—

 
1,675

Commitments and contingencies

 

 

 

 

Total liabilities
4,390

 
3,581

 
3,632

 
—

 
11,603

Redeemable noncontrolling interests
—

 
145

 
—

 
—

 
145

Tenneco Inc. shareholders’ equity
2,588

 
4,253

 
1,638

 
(6,841
)
 
1,638

Noncontrolling interests
—

 
206

 
—

 
—

 
206

Total equity
2,588

 
4,459

 
1,638

 
(6,841
)
 
1,844

Total liabilities, redeemable noncontrolling interests and equity
$
6,978

 
$
8,185

 
$
5,270

 
$
(6,841
)
 
$
13,592


55

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


BALANCE SHEETS
 
December 31, 2018
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
329

 
$
364

 
$
4

 
$
—

 
$
697

Restricted cash
—

 
5

 
—

 
—

 
5

Receivables, net
943

 
1,629

 
—

 
—

 
2,572

Inventories, net
958

 
1,287

 
—

 
—

 
2,245

Prepayments and other current assets
254

 
311

 
25

 
—

 
590

Total current assets
2,484

 
3,596

 
29

 
—

 
6,109

Property, plant and equipment, net
1,131

 
2,361

 
9

 
—

 
3,501

Investment in affiliated companies
1,421

 
—

 
4,856

 
(6,277
)
 
—

Long-term receivables, net
9

 
1

 
—

 
—

 
10

Goodwill
263

 
383

 
223

 
—

 
869

Intangibles, net
1,007

 
510

 
2

 
—

 
1,519

Investments in nonconsolidated affiliates
43

 
501

 
—

 
—

 
544

Deferred income taxes
255

 
200

 
12

 
—

 
467

Other assets
48

 
180

 
—

 
(15
)
 
213

Total assets
$
6,661

 
$
7,732

 
$
5,131

 
$
(6,292
)
 
$
13,232

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Short-term debt, including current maturities of long-term debt
$
1

 
$
152

 
$
—

 
$
—

 
$
153

Accounts payable
858

 
1,894

 
7

 
—

 
2,759

Accrued compensation and employee benefits
88

 
255

 
—

 
—

 
343

Accrued income taxes
—

 
52

 
27

 
(15
)
 
64

Accrued expenses and other current liabilities
436

 
488

 
77

 
—

 
1,001

Total current liabilities
1,383

 
2,841

—

111

 
(15
)
 
4,320

Long-term debt
3

 
32

 
5,305

 
—

 
5,340

Intercompany due to (due from)
2,726

 
(215
)
 
(2,511
)
 
—

 
—

Deferred income taxes
—

 
88

 
—

 
—

 
88

Postretirement benefits and other liabilities
225

 
705

 
500

 
—

 
1,430

Commitments and contingencies


 


 


 


 


Total liabilities
4,337

 
3,451

 
3,405

 
(15
)
 
11,178

Redeemable noncontrolling interests
—

 
138

 
—

 
—

 
138

Tenneco Inc. shareholders’ equity
2,324

 
3,953

 
1,726

 
(6,277
)
 
1,726

Noncontrolling interests
—

 
190

 
—

 
—

 
190

Total equity
2,324

 
4,143

 
1,726

 
(6,277
)
 
1,916

Total liabilities, redeemable noncontrolling interests and equity
$
6,661

 
$
7,732

 
$
5,131

 
$
(6,292
)
 
$
13,232



56

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


STATEMENT OF CASH FLOWS

 
Six Months Ended June 30, 2019
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(8
)
 
$
(2
)
 
$
(90
)
 
$
—

 
$
(100
)
Investing Activities
 
 
 
 
 
 
 
 
 
Acquisition of business, net of cash acquired
—

 
(158
)
 
—

 
—

—

(158
)
Proceeds from sale of assets
1

 
4

 
—

 
—

 
5

Cash payments for property, plant and equipment
(118
)
 
(261
)
 
—

 
—

 
(379
)
Net proceeds from sale of business
6

 
16

 
—

 
—

 
22

Other
1

 
(2
)
 
—

 
—

 
(1
)
Proceeds from deferred purchase price of factored receivables
—

 
147

 
—

 
—

 
147

Net cash used in investing activities
(110
)
 
(254
)
 
—

 
—

 
(364
)
Financing Activities
 
 
 
 
 
 
 
 
 
Cash dividends
—

 
—

 
(20
)
 
—

 
(20
)
Repayment of term loans and notes
—

 
(139
)
 
(51
)
 
—

 
(190
)
Proceeds from term loans and notes
—

 
111

 
—

 
—

 
111

Issuance (repurchase) of common shares
—

 
—

 
(2
)
 
—

 
(2
)
Decrease in bank overdrafts
—

 
(8
)
 
—

 
—

 
(8
)
Borrowings on revolving lines of credit
4,047

 
117

 
361

 
—

 
4,525

Payments on revolving lines of credit
(3,797
)
 
(111
)
 
(346
)
 
—

 
(4,254
)
Other
—

 
(1
)
 
—

 
—

 
(1
)
Intercompany dividends and net (decrease) increase in intercompany obligations
(245
)
 
98

 
147

 
—

 
—

Distribution to noncontrolling interests partners
—

 
(20
)
 
—

 
—

 
(20
)
Net cash (used in) provided by financing activities
5

 
47

 
89

 
—

 
141

Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
—

 
11

 
—

 
—

 
11

Increase (decrease) in cash, cash equivalents and restricted cash
(113
)
 
(198
)
 
(1
)
 
—

 
(312
)
Cash, cash equivalents and restricted cash, January 1
329

 
369

 
4

 
—

 
702

Cash, cash equivalents and restricted cash, June 30
$
216

 
$
171

 
$
3

 
$
—

 
$
390



57

TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)


STATEMENT OF CASH FLOWS
 
Six Months Ended June 30, 2018
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Tenneco Inc.
(Parent
Company)
 
Reclass
& Elims
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
79

 
$
13

 
$
(5
)
 
$
(9
)
 
$
78

Investing Activities
 
 
 
 
 
 
 
 
 
Proceeds from sale of assets
1

 
4

 
—

 
—

 
5

Cash payments for property, plant and equipment
(77
)
 
(97
)
 
—

 
—

 
(174
)
Proceeds from deferred purchase price of factored receivables
—

 
66

 
—

 
—

 
66

Other
2

 
—

 
—

 
—

 
2

Net cash used in investing activities
(74
)
 
(27
)
 
—

 
—

 
(101
)
Financing Activities
 
 
 
 
 
 
 
 
 
Proceeds from term loans and notes
—

 
9

 
—

 
—

 
9

Repayments of term loans and notes
(10
)
 
(18
)
 
—

 
—

 
(28
)
Borrowings on revolving lines of credit
2,349

 
45

 
275

 
—

 
2,669

Payments on revolving lines of credit
(2,315
)
 
(38
)
 
(261
)
 
—

 
(2,614
)
Issuance (repurchase) of common shares
—

 
—

 
(1
)
 
—

 
(1
)
Cash dividends
—

 
—

 
(25
)
 
—

 
(25
)
Net increase (decrease) in bank overdrafts
—

 
(7
)
 
—

 
—

 
(7
)
Distribution to noncontrolling interests partners
—

 
(28
)
 
—

 
—

 
(28
)
Other
(2
)
 
(20
)
 
—

 
—

 
(22
)
Intercompany dividends and net (decrease) increase in intercompany obligations
(32
)
 
6

 
17

 
9

 
—

Net cash (used in) provided by financing activities
(10
)
 
(51
)
 
5

 
9

 
(47
)
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
—

 
(11
)
 
—

 
—

 
(11
)
Increase (decrease) in cash, cash equivalents and restricted cash
(5
)
 
(76
)
 
—

 
—

 
(81
)
Cash, cash equivalents and restricted cash, January 1
7

 
311

 
—

 
—

 
318

Cash, cash equivalents and restricted cash, June 30
$
2

 
$
235

 
$
—

 
$
—

 
$
237








58


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

References herein to "Tenneco", the "Company", "we", "us", and "our" refer to Tenneco Inc. and its consolidated subsidiaries. Unless otherwise stated, all comparisons of June 30, 2019 financial results are to June 30, 2018 financial results.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1 of this quarterly report on Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 , which was filed with the Securities and Exchange Commission ("SEC") on March 18, 2019 (the " 2018 Form 10-K").

EXECUTIVE OVERVIEW
Our Business
We are one of the world's leading manufacturers of clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. Both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, are served globally through leading brands, including Monroe ® , Champion ® , Öhlins ® , MOOG ® , Walker ® , Fel-Pro ® , Wagner ® , Ferodo ® , Rancho ® , Thrush ® , National ® , and Sealed Power ® , among others.

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

Öhlins Intressenter AB Acquisition
On January 10, 2019, we completed the acquisition of a 90.5% ownership interest in Öhlins Intressenter AB (the "Öhlins Acquisition"), a Swedish technology company that develops premium suspension systems and components for the automotive and motorsport industries. The purchase price was $162 million . See Note 3, Acquisitions and Divestitures , of our condensed consolidated financial statements for additional information.

Federal-Mogul Acquisition
On October 1, 2018, we completed the acquisition of a 100% ownership interest in Federal-Mogul LLC (the "Federal-Mogul Acquisition", and together with the Öhlins Acquisition, the "Acquisitions"). See Note 3, Acquisitions and Divestitures , of our condensed consolidated financial statements for additional information.

Spin-Off Transaction and Change in Reportable Segments
Following the closing of the Federal-Mogul Acquisition, we agreed to use our reasonable best efforts to pursue the separation of the combined company. As such, we expect to separate our businesses to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company ("DRiV") and a new Powertrain Technology company ("New Tenneco"). We currently expect the separation of the business to occur mid-2020 through a spin-off transaction of DRiV. In the first quarter of 2019, we began to manage and report our DRiV businesses through two new operating segments as compared to the three operating segments we had previously reported. The DRiV operating segments consist of Motorparts and Ride Performance. The new Motorparts operating segment consists of the previously reported Aftermarket operating segment as well as the aftermarket portion of the previously reported Motorparts operating segment. The Ride Performance operating segment consists of the previously reported Ride Performance operating segment as well as the OE Braking business that was included in the previously reported Motorparts operating segment. As such, prior period operating segment results and related disclosures have been conformed to reflect our current operating segments. The future New Tenneco consists of two existing operating segments, Powertrain and Clean Air. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as "Corporate."

See Note 17, Segment Information , of our condensed consolidated financial statements for additional information.


59


Financial Results for the Six Months Ended June 30, 2019
Consolidated revenues were $8,988 million , an increase of $3,874 million , or 76% , for the six months ended June 30, 2019 . The Acquisitions increased revenues by $3,816 million , or 75% . The remaining increase in revenues was primarily driven by the net favorable effects of organic growth from higher sales volume and mix of $251 million and the favorable effect of other of $8 million , partially offset by the unfavorable effects of foreign currency exchange of $201 million .

Cost of sales was $7,657 million , an increase of $3,330 million , or 77% , for the six months ended June 30, 2019 . The Acquisitions increased cost of sales by $3,202 million , or 74%. The remaining increase in cost of sales was primarily driven by incremental costs related to higher sales volume and mix of $256 million , the unfavorable effects of materials sourcing of $9 million , and an increase in other costs of $25 million , which was partially offset by a favorable effect of foreign currency exchange of $162 million .

Net income decreased by $197 million to a net loss of $60 million for the six months ended June 30, 2019 as compared to $137 million of net income for the six months ended June 30, 2018 . The decrease was primarily driven by:
•
an increase in selling, general, and administrative costs primarily due to the effect of the Acquisitions of $289 million and an increase in acquisition and spin related costs of $33 million ;
•
an increase in depreciation and amortization of $218 million primarily due to the Acquisitions;
•
an increase in engineering, research and development of $91 million primarily due to the Acquisitions;
•
an increase in restructuring charges of $44 million related to higher costs for facility closure and other costs;
•
a goodwill impairment charge of $60 million as a result of our change in operating segments; and
•
an increase in interest expense and other financing charges of $118 million .
These unfavorable effects were partially offset by:
•
an increase in equity earnings in nonconsolidated affiliates of $33 million , which was the result of the Federal-Mogul Acquisition; and
•
a reduction in income tax expense of $37 million .

Recent Trends and Market Conditions
There is inherent uncertainty in the continuation of the trends discussed below. In addition, there may be other factors or trends that can have an effect on our business. Our business and operating results are affected by the relative strength of:

General economic conditions
Our OE business is directly related to automotive vehicle production by our customers. Automotive production levels depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by three primary factors: the number of vehicles in operation; the average age of vehicles; and vehicle usage trends (primarily distance traveled).

Global light vehicle production levels (According to IHS Markit, July, 2019)
Global light vehicle production decreased by 8% for the three months ending June 30, 2019 compared to the same period in the prior year. Production levels were down in the major markets in which we operate. North and South American light vehicle production decreased by 2% in each region. European production decreased by 7%, while China decreased by 16% and India decreased by 12%.

Global light vehicle production decreased by 7% for the first half of 2019 compared to the same period in the prior year. North and South American light vehicle production decreased 3% in each region. European production decreased by 6%, while China decreased by 13% and India decreased by 7%.

Global commercial vehicle production decreased by 4% for the three months ending June 30, 2019 compared to the same period in the prior year. Consistent with the first quarter of 2019, commercial vehicle production increased in North America, Brazil and Europe, while production in China and India declined. Commercial vehicle production in North America was up 6%, production in Brazil rose 4% and European commercial vehicle production increased 1%. China posted a decrease for the second quarter of 2019 of 9% and India experienced a decrease of 12%.

Global commercial vehicle production decreased by 4% for the first half of 2019 compared to the same period in the prior year. Production in North America was up 6%, production in Brazil rose 4% and European commercial vehicle production increased 1%. Commercial vehicle production decreased in China by 9% and in India by 13%.


60


Part replacement trends
The strength of our aftermarket business is influenced by several key drivers. These include the vehicle population (or "parc"), average vehicle age, fuel prices, and vehicle distance traveled. The vehicle parc is estimated to have expanded in most major markets, including the U.S., China, and Germany.  Average vehicle ages also increased, despite growth in new vehicle sales, in most regions. Vehicle distance traveled varies by region and is sensitive to several factors, including fuel prices, and transportation alternatives.

Geopolitical risk
We conduct business globally, which subjects us to numerous risks and uncertainties including, without limitation, “Brexit” implications, joint ventures in unstable regions, and substantial new tariffs. For example, we have operations in the U.K. which may be materially affected by the U.K.'s referendum to leave the European Union, which has created uncertainty in both the U.K. and Europe. We also have an interest in a Turkish joint venture, which may be affected by recent turmoil in that region. In addition, we do business in Mexico and China where there could be potential changes in trade agreements (e.g., the North American Free Trade Agreement) and new or changed tariffs in the U.S. (such as those relating to China).

Foreign currencies
Given the global nature of our operations, we are subject to fluctuations in foreign exchanges rates and there has been significant volatility in foreign currency rates.

Strategy
The key components of our strategy are as follows:

Continue to optimize our operations by aggressively pursuing cost competitiveness in all business segments and continuing to drive productivity in existing operations
We operate within competitive industries and our management teams continuously analyze opportunities to reduce costs and improve productivity. We assess individual opportunities to execute our strategy based upon estimated sales and margin growth, cost reduction potential, internal investment returns, and other criteria, to make investment decisions on a case-by-case basis.

We will continue to focus on operational excellence by optimizing our manufacturing footprint, further developing our engineering capabilities, managing the complexities of our global supply chain to realize purchasing economies of scale while satisfying diverse and global requirements, and supporting our businesses with robust information technology systems. We will make investments in our operations and infrastructure as required to achieve our strategic goals.

We seek to continue optimizing our performance through enhanced efficiencies to meet the world-class delivery performance our customers increasingly require. We have made investments in our global distribution network, through our new multi-product distribution centers, the implementation of automated picking technology, and a more efficient replenishment system with the objective of improving inventory visibility and availability, and lowering costs.

Execute a Spin-Off Transaction in mid-2020
We completed the Federal-Mogul Acquisition on October 1, 2018. We will continue to seek synergies to optimize the two independent companies in preparation for the anticipated separation. This optimization should present additional opportunities for cost reduction, increased profitability, and cash flow.

Assess focused acquisition and investment opportunities that provide product line expansion, technological advancements, geographic positioning, penetration of emerging markets and market share growth
We completed the Öhlins Acquisition, a Swedish technology company that develops premium suspension systems and components for the automotive and motorsport industries. We intend to continue to explore strategic alliances, joint ventures, acquisitions and other transactions that complement, expand or enhance our existing products, technology, systems development efforts, customer base and/or global presence.

Adapt cost structure to economic realities
We aggressively respond to difficult economic environments, executing comprehensive restructuring and cost-reduction initiatives, and realigning our operations to any resulting reductions in production levels and replacement demand. Suppliers must also continually identify and implement product innovation and cost reduction activities to fund customer annual price concession expectations to retain current business and be competitively positioned for future new business opportunities.


61


Original Equipment Specific Strategies
We strive to strengthen our global position by designing, manufacturing, delivering and marketing technologically innovative products and systems for OE manufacturers. The key components of our OE strategy are as follows:

Maintain technological leadership to drive further growth from secular market trends
OE manufacturers are responding to changing end customer trends and preferences alongside their own challenging cost structures by reducing design and production complexities, and investing in advanced technologies that enable vehicle electrification and autonomy. We anticipate OE suppliers with high technology capabilities in vehicle system integration will be able to enable a more seamless transition to next-generation electric vehicles and become preferred suppliers to OE manufacturers. In order to maintain our strong market positions, we are focused on meeting these changing requirements and keeping up with new OE trends. In addition, our suite of solutions represents an opportunity to drive greater partnership with OE manufacturers, capturing growth with higher value content per vehicle.

Penetrate adjacent market segments
We seek to penetrate a variety of adjacent sales opportunities and achieve growth in higher-margin businesses by leveraging our technology and engineering leadership in powertrain, clean air, ride performance and aftermarket into adjacent sales opportunities for heavy-duty trucks, buses, agricultural equipment, construction machinery and other vehicles in other regions around the world.

Aftermarket Specific Strategies
We expect the demand for replacement parts to increase steadily as a result of the anticipated significant increase in vehicles in operation (“VIO”) through 2040, the increase in the average age of VIO, and the increase in the average miles driven per year. The characteristics of aftermarket sales and distribution are defined regionally, which require regionally focused strategies to address the key success factors of our customers. The key components of our aftermarket strategy are described below:

Leverage the strength of our global aftermarket leading brands positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities
Our aftermarket business has a portfolio of leading brands with strong product offerings. We will build upon our brand strengths and grow our global aftermarket business by leveraging our broad product coverage and extensive distribution network. We intend to capitalize on aftermarket trends and expand in established markets (North America, Europe, Australia) as well as high-growth regions (China, South America, India, Southeast and Northeast Asia). Important focus areas are enhancing our presence in high-growth markets; leveraging our portfolio and strong presence in suspension to expand our business globally; and diversifying outside of chassis with our sealing, engine, and underhood products, as well as other components.

Continue to strengthen our aftermarket capabilities and product offerings in mature markets, including North America and Europe
The scale of our aftermarket business allows for strong distribution channels that significantly enhance our go-to-market capabilities across mature markets in North America and Europe. The North America and Europe go-to-market capabilities will be defined by positioning our distribution and installer partners for success. We believe this will require maintaining a vast catalog of products to provide the ability to address customer requirements quickly and easily. This requires an understanding of the composition of the car parc within the regions including wear patterns, typical replacement rates based on weather, road quality, and average miles driven annually, which differ significantly by region.

We have launched a series of ‘Tech First’ initiatives to provide online, on demand, and onsite technical training and support to vehicle repair technicians who use and install our products in North America, Europe and China and plan to expand into South America. This initiative included Garage Gurus™, a network of technical support centers that provide some of the most comprehensive training programs in the industry that educate our partners and customers with emerging vehicle technologies and vehicle repair operational skills. We believe it is key to our strategy to provide aftermarket parts that are simple to install and to make sure our customers have the resources to know how to install these parts properly.

Increase aftermarket position in high-growth regions, notably in Asia Pacific
The Asia Pacific region, particularly the high-growth markets of China and India, presents a significant opportunity for us to expand our business. We have made investments in distribution and in our sales force in both China and the rest of Asia to help drive growth in this increasingly important region, where the aftermarket industry is fragmented with a large number of small distributors and installers. Distribution in smaller volumes will require us to have a hub and spoke warehousing approach to compete on the basis of optimal “Order to Delivery” timeliness while maintaining a broad range of products. Additionally, buying online is the preferred purchase method for many smaller distribution and installer partners. The sophistication of the existing online marketplaces in Asia Pacific will require us to develop adaptive and flexible omnichannel tools in order to compete effectively.

62



Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2018 , which was filed with the Securities and Exchange Commission on March 18, 2019. Also refer to Note 6, Goodwill and Other Intangible Assets , for additional discussion on our goodwill.

Non-GAAP Measures
As a result of the Federal-Mogul Acquisition, we changed our key performance measure. We now utilize EBITDA including noncontrolling interests as the key performance measure in our financial and operational decision making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. Prior period results have been conformed to reflect the change in our key performance measure. EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with US GAAP and should not be considered an alternative to net income. EBITDA including noncontrolling interests, as determined and measured by us, should not be compared to similarly titled measures reported by other companies.

63


RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2019 compared to the Three and Six Months Ended June 30, 2018
Consolidated Results of Operations
The following table presents our condensed consolidated results of operations and reflects the revisions discussed in Item 1 — Condensed Consolidated Financial Statements (Unaudited).
 
Three Months Ended June 30,
 
Increase / (Decrease)
 
Six Months Ended June 30,
 
Increase / (Decrease)
 
2019
 
2018
 
$ Change
 
% Change (1)
 
2019
 
2018
 
$ Change
 
% Change (1)
 
(millions, except percent, share, and per share amounts)
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales and operating revenues
$
4,504

 
$
2,533

 
$
1,971

 
78
 %
 
$
8,988

 
$
5,114

 
$
3,874

 
76
 %
Costs and expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
3,793

 
2,134

 
1,659

 
78
 %
 
7,657

 
4,327

 
3,330

 
77
 %
Selling, general, and administrative
288

 
154

 
134

 
87
 %
 
604

 
305

 
299

 
98
 %
Depreciation and amortization
169

 
60

 
109

 
182
 %
 
338

 
120

 
218

 
182
 %
Engineering, research, and development
78

 
39

 
39

 
100
 %
 
170

 
79

 
91

 
115
 %
Restructuring charges and asset impairments
61

 
29

 
32

 
110
 %
 
85

 
41

 
44

 
107
 %
Goodwill impairment charge
—

 
—

 
—

 
n/m

 
60

 
—

 
60

 
n/m

 
4,389

 
2,416

 
1,973

 
82
 %
 
8,914

 
4,872

 
4,042

 
83
 %
Other expense (income)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-service pension and other postretirement benefit costs (credits)
4

 
3

 
1

 
33
 %
 
6

 
6

 
—

 
—
 %
Equity in (earnings) losses of nonconsolidated affiliates, net of tax
(17
)
 
—

 
(17
)
 
n/m

 
(33
)
 
—

 
(33
)
 
n/m

Other expense (income), net
(13
)
 
3

 
(16
)
 
n/m

 
(16
)
 
3

 
(19
)
 
n/m

 
(26
)
 
6

 
(32
)
 
n/m

 
(43
)
 
9

 
(52
)
 
n/m

Earnings (loss) before interest expense, income taxes, and noncontrolling interests
141

 
111

 
30

 
27
 %
 
117

 
233

 
(116
)
 
(50
)%
Interest expense
82

 
22

 
60

 
273
 %
 
163

 
45

 
118

 
262
 %
Earnings (loss) before income taxes and noncontrolling interests
59

 
89

 
(30
)
 
(34
)%
 
(46
)
 
188

 
(234
)
 
(124
)%
Income tax expense (benefit)
14

 
26

 
(12
)
 
(46
)%
 
14

 
51

 
(37
)
 
(73
)%
Net income (loss)
45

 
63

 
(18
)
 
(29
)%
 
(60
)
 
137

 
(197
)
 
(144
)%
Less: Net income (loss) attributable to noncontrolling interests
19

 
16

 
3

 
19
 %
 
31

 
30

 
1

 
3
 %
Net income (loss) attributable to Tenneco Inc.
$
26

 
$
47

 
$
(21
)
 
(45
)%
 
$
(91
)
 
$
107

 
$
(198
)
 
(185
)%
Earnings (loss) per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
$
0.32

 
$
0.92

 
 
 
 
 
$
(1.13
)
 
$
2.08

 
 
 
 
Weighted average shares outstanding
80,920,825

 
51,258,668

 
 
 
 
 
80,897,731

 
51,232,639

 
 
 
 
Diluted earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per share
$
0.32

 
$
0.92

 
 
 
 
 
$
(1.13
)
 
$
2.07

 
 
 
 
Weighted average shares outstanding
80,920,825

 
51,607,224

 
 
 
 
 
80,897,731

 
51,546,015

 
 
 
 
 
(1) Percentages above denoted as "n/m" are not meaningful to present in the table.


64


Revenues
Three-months ended: Revenues increased by $1,971 million , or 78% , as compared to the three months ended June 30, 2018 . The Acquisitions increased revenues by $1,881 million , or 74% . The remaining increase in revenues was primarily driven by the net favorable effects of organic growth from higher sales volume and mix of $162 million and the favorable effect of other of $2 million , partially offset by the unfavorable effects of foreign currency exchange of $74 million .

The table below reflects our consolidated revenues for the three months ended June 30, 2019 and 2018 (amounts in millions):
Three-months ended June 30, 2018
$
2,533

Acquisitions
1,881

Drivers in the change of organic revenues:


Volume and mix
162

Currency exchange rates
(74
)
Others
2

Three-months ended June 30, 2019
$
4,504


Six-months ended: Revenues increased by $3,874 million , or 76% , as compared to the six months ended June 30, 2018 . The Acquisitions increased revenues by $3,816 million , or 75% . The remaining increase in revenues was primarily driven by the net favorable effects of organic growth from higher sales volume and mix of $251 million and the favorable effect of other of $8 million , partially offset by the unfavorable effects of foreign currency exchange of $201 million .

The table below reflects our consolidated revenues for the six months ended June 30, 2019 and 2018 (amounts in millions):
Six months ended June 30, 2018
$
5,114

Acquisitions
3,816

Drivers in the change of organic revenues:


Volume and mix
251

Currency exchange rates
(201
)
Others
8

Six months ended June 30, 2019
$
8,988


Cost of Sales
Three-months ended: Cost of sales increased by $1,659 million , or 78% , as compared to the three months ended June 30, 2018 . The Acquisitions increased cost of sales by $1,569 million , or 74% . The remaining increase in cost of sales was primarily driven by incremental costs related to higher sales volume and mix of $164 million and the unfavorable effects of materials sourcing of $2 million , partially offset by a favorable effect of foreign currency exchange of $61 million and a decrease in other costs of $15 million .

The table below reflects our consolidated cost of sales for the three months ended June 30, 2019 and 2018 (amounts in millions):
Three months ended June 30, 2018
$
2,134

Acquisitions
1,569

Drivers in the change of organic revenues:


Volume and mix
164

Material
2

Currency exchange rates
(61
)
Others
(15
)
Three months ended June 30, 2019
$
3,793


Six-months ended: Cost of sales increased by $3,330 million , or 77% , as compared to the six months ended June 30, 2018 . The Acquisitions increased cost of sales by $3,202 million , or 74%. The remaining increase in cost of sales was primarily driven by incremental costs related to higher sales volume and mix of $256 million , the unfavorable effects of materials sourcing of $9 million , and an increase in other costs of $25 million , which was partially offset by a favorable effect of foreign currency exchange of $162 million .





65




The table below reflects our consolidated cost of sales for the six months ended June 30, 2019 and 2018 (amounts in millions):
Six months ended June 30, 2018
$
4,327

Acquisitions
3,202

Drivers in the change of organic revenues:


Volume and mix
256

Material
9

Currency exchange rates
(162
)
Others
25

Six months ended June 30, 2019
$
7,657


Selling, general, and administrative (SG&A)
Three-months ended: SG&A increased by $134 million as compared to the three months ended June 30, 2018 . The increase was primarily due to the effect of the Acquisitions of $141 million and an increase in acquisition and spin related costs of $7 million , partially offset by a decrease of $7 million in cost reduction initiatives.

Six-months ended: SG&A increased by $299 million as compared to the six months ended June 30, 2018 . The increase was primarily due to the effect of the Acquisitions of $289 million , an increase in acquisition and spin related costs of $33 million , and an increase related to spending for cost reduction initiatives of $1 million .

Depreciation and amortization
Three-months ended: Depreciation and amortization increased by $109 million as compared to the three months ended June 30, 2018 . The increase was due primarily to the effect of the Acquisitions.

Six-months ended: Depreciation and amortization increased by $218 million as compared to the six months ended June 30, 2018 . The increase was due primarily to the effect of the Acquisitions.

Engineering, research, and development
Three-months ended: Engineering, research, and development increased by $39 million as compared to the three months ended June 30, 2018 . The increase was due primarily to the effect of the Acquisitions.

Six-months ended: Engineering, research, and development increased by $91 million as compared to the six months ended June 30, 2018 . The increase was due primarily to the effect of the Acquisitions.

Restructuring charges and asset impairments
Three-months ended: Restructuring charges increased by $32 million as compared to the three months ended June 30, 2018 . The increase is primarily attributable to higher costs related to facility closure and other costs incurred during the three months ended June 30, 2019 .

Six-months ended: Restructuring charges increased by $44 million as compared to the six months ended June 30, 2018 . The increase is primarily attributable to higher costs related to facility closure and other costs incurred during the six months ended June 30, 2019 .

Goodwill impairment charge
Three-months ended: There was no goodwill impairment charge recorded in the three months ended June 30, 2019 , and resulted in no change as compared to the three months ended June 30, 2018 .

Six-months ended: During the six months ended June 30, 2019 , there was reorganization of reporting units within the Aftermarket, Ride Performance, and Motorparts segments, which resulted in a goodwill impairment of $60 million , all of which was within the Ride Performance segment.

Non-service pension and postretirement benefit costs (credits)
Three-months ended: Non-service pension and postretirement benefit costs (credits) increased $1 million for the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 . The Federal-Mogul Acquisition increased non-service pension and postretirement benefit costs by $3 million, which was partially offset by the recognition of $2 million in prior service credits during the three months ended June 30, 2019 , as a result of the plan amendment recognized at December 31, 2018 for one of our postretirement medical benefits plan.

66



Six-months ended: Non-service pension and postretirement benefit costs (credits) remained consistent for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018 . The Federal-Mogul Acquisition increased non-service pension and postretirement benefit costs by $5 million, which was partially offset by the recognition of $4 million in prior service credits during the six months ended June 30, 2019 , as a result of the plan amendment recognized at December 31, 2018 for one of our postretirement medical benefit plans.

Equity in (earnings) losses of nonconsolidated affiliates, net of tax
Three-months ended: Equity in (earnings) losses of nonconsolidated affiliates, net of tax increased by $17 million as compared to the three months ended June 30, 2018 . The increase was due to the Federal-Mogul Acquisition.

Six-months ended: Equity in (earnings) losses of nonconsolidated affiliates, net of tax increased by $33 million as compared to the six months ended June 30, 2018 . The increase was due to the Federal-Mogul Acquisition.

Other expense (income), net
Three-months ended: Other income, net increased by $16 million as compared to the three months ended June 30, 2018 . The Acquisitions increased other income, net by $7 million. Excluding the Acquisitions, the increase was primarily attributable to income from an Environmental Protection Agency ("EPA") mandate to which we were a party.

Six-months ended: Other income, net increased by $19 million as compared to the six months ended June 30, 2018 . The Acquisitions increased other income, net by $12 million. Excluding the Acquisitions, the increase was primarily attributable to income from an EPA mandate to which we were a beneficiary.

Interest expense
Three-months ended: Interest expense increased by $60 million as compared to the three months ended June 30, 2018 . The increase was primarily attributable to higher interest expense pertaining to the five-year $1,700 million term loan A facility and the seven-year $1,700 million term loan B facility that were entered into in connection with the Federal-Mogul Acquisition, and interest expense on the debt assumed in the Federal-Mogul Acquisition.

Interest expense includes financing charges on sales of accounts receivable, which increased by $4 million as compared to the three months ended June 30, 2018 . The increase is primarily attributable to the Federal-Mogul Acquisition.

Six-months ended: Interest expense increased by $118 million as compared to the six months ended June 30, 2018 . The increase was primarily attributable to higher interest expense pertaining to the five-year $1,700 million term loan A facility and the seven-year $1,700 million term loan B facility that were entered into in connection with the Federal-Mogul Acquisition, and interest expense on the debt assumed in the Federal-Mogul Acquisition.

Interest expense includes financing charges on sales of accounts receivable, which increased by $9 million as compared to the six months ended June 30, 2018 . The increase is primarily attributable to the Federal-Mogul Acquisition.

Income tax expense (benefit)
Three-months ended: Income tax expense decreased by $12 million as compared to the three months ended June 30, 2018 . The decrease was primarily attributable to a decrease in pre-tax earnings.

Six-months ended: Income tax expense decreased by $37 million as compared to the six months ended June 30, 2018 . The decrease was primarily attributable to a decrease in pre-tax earnings.

Net income (loss)
Three-months ended: Net income decreased by $18 million to $45 million for the three months ended June 30, 2019 as compared to $63 million of net income for the three months ended June 30, 2018 , as result of the aforementioned items.

Six-months ended: Net income decreased by $197 million to a net loss of $60 million for the six months ended June 30, 2019 as compared to $137 million of net income for the six months ended June 30, 2018 , as result of the aforementioned items.



67


Earnings (loss) before interest expense, income taxes, noncontrolling interests, and depreciation and amortization (“EBITDA including noncontrolling interests”)
The following table presents the reconciliation from net income (loss) attributable to Tenneco Inc. to EBITDA including noncontrolling interests for the three and six months ended June 30, 2019 and 2018 (amounts in millions):
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Total EBITDA including noncontrolling interests
$
310

 
$
171

 
$
455

 
$
353

Depreciation and amortization
(169
)
 
(60
)
 
(338
)
 
(120
)
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
141

 
111

 
117

 
233

Interest expense
(82
)
 
(22
)
 
(163
)
 
(45
)
Income tax (expense) benefit
(14
)
 
(26
)
 
(14
)
 
(51
)
Net income (loss)
45

 
63

 
(60
)
 
137

Less: Net income (loss) attributable to noncontrolling interests
19

 
16

 
31

 
30

Net income (loss) attributable to Tenneco Inc.
$
26

 
$
47

 
$
(91
)
 
$
107


Three-months ended: EBITDA including noncontrolling interests increased by $139 million as compared to the three months ended June 30, 2018 , as a result of the aforementioned items. See "Non-GAAP Measures" for further discussion on the use of non-GAAP measures.

Six-months ended: EBITDA including noncontrolling interests increased by $102 million as compared to the six months ended June 30, 2018 , as a result of the aforementioned items. See "Non-GAAP Measures" for further discussion on the use of non-GAAP measures.


68


Segment Results of Operations

Overview of Net Sales and Operating Revenues
Our Clean Air segment has substrate sales. Substrates are porous ceramic filters coated with a catalyst - typically, precious metals such as platinum, palladium and rhodium. We do not manufacture substrates, as they are supplied to us by Tier 2 suppliers generally as directed by our OE customers. We generally earn a small margin on these components of the system. These substrate components have been increasing as a percentage of our revenue as the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system.

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

We disclose substrate sales amounts because we believe investors utilize this information to understand the effect of this portion of our revenues on our overall business and because it removes the effect of potentially volatile precious metals pricing from our revenues. While our OE customers generally assume the risk of precious metals pricing volatility, it affects our reported revenues.

The table below reflects our segment revenues for the three months ended June 30, 2019 and 2018 (amounts in millions):

Segment Revenue

New Tenneco
 
DRiV
 

 


Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Revenues
Three months ended June 30,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Revenues
$
1,827

 
$
1,694

 
$
1,133

 
$
—

 
$
709

 
$
506

 
$
835

 
$
333

 
$
4,504

 
$
2,533


—

 

 

 

 

 

 

 

 

 

Value-add revenues
1,050

 
1,073

 
1,133

 
—

 
709

 
506

 
835

 
333

 
3,727

 
1,912

Currency effect on value-add revenue
(31
)
 
—

 
—

 
—

 
(20
)
 
—

 
(8
)
 
—

 
(59
)
 
—

Value-add revenue excluding currency
$
1,081

 
$
1,073

 
$
1,133

 
$
—

 
$
729

 
$
506

 
$
843

 
$
333

 
$
3,786

 
$
1,912


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Substrate sales
$
777

 
$
621

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
777

 
$
621

Effect of Acquisitions
$
—

 
$
—

 
$
1,133

 
$
—

 
$
221

 
$
—

 
$
527

 
$
—

 
$
1,881

 
$
—



The table below reflects our segment revenues for the six months ended June 30, 2019 and 2018 (amounts in millions):
 
Segment Revenue
 
New Tenneco
 
DRiV
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total Revenues
Six months ended June 30,
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Revenues
$
3,606

 
$
3,450

 
$
2,308

 
$
—

 
$
1,442

 
$
1,019

 
$
1,632

 
$
645

 
$
8,988

 
$
5,114

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Value-add revenues
2,123

 
2,177

 
2,308

 
—

 
1,442

 
1,019

 
1,632

 
645

 
7,505

 
3,841

Currency effect on value-add revenue
(82
)
 
—

 
—

 
—

 
(51
)
 
—

 
(26
)
 
—

 
(159
)
 
—

Value-add revenue excluding currency
$
2,205

 
$
2,177

 
$
2,308

 
$
—

 
$
1,493

 
$
1,019

 
$
1,658

 
$
645

 
$
7,664

 
$
3,841

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Substrate sales
$
1,483

 
$
1,273

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
1,483

 
$
1,273

Effect of Acquisitions
$
—

 
$
—

 
$
2,308

 
$
—

 
$
465

 
$
—

 
$
1,043

 
$
—

 
$
3,816

 
$
—



69


Segment Revenue
Clean Air
Three-months ended: Clean Air revenue increased $133 million , or 8% , as compared to the three months ended June 30, 2018 . Higher light vehicle sales and commercial truck revenues contributed $183 million to the increase, while foreign currency exchange had a $46 million unfavorable effect on Clean Air revenues.

Six-Months ended: Clean Air revenue increased $156 million , or 5% , as compared to the six months ended June 30, 2018 . Higher light vehicle and commercial truck sales contributed $287 million to the increase, while foreign currency exchange had a $124 million unfavorable effect on Clean Air revenues.

Powertrain
Three and Six-months ended: As a result of the Federal-Mogul Acquisition, Powertrain revenue was $1,133 million and $2,308 million for the three and six months ended June 30, 2019, respectively.

Ride Performance
Three-months ended: Ride Performance revenue increased $203 million , or 40% , as compared to the three months ended June 30, 2018 . The Acquisitions increased revenue by $221 million . Excluding the Acquisitions, revenue decreased by $18 million due to the unfavorable effects of foreign currency exchange of $20 million and net unfavorable volume and mix of $1 million, partially offset by net favorable other of $3 million.

Six-months ended: Ride Performance revenue increased $423 million , or 42% , as compared to the six months ended June 30, 2018 . The Acquisitions increased revenue by $465 million . Excluding the Acquisitions, revenue decreased by $42 million due to the unfavorable effects of foreign currency exchange of $51 million, partially offset by net favorable volume and mix of $5 million and $4 million favorable other.

Motorparts
Three-months ended: Motorparts revenue increased $502 million , or 151% , as compared to the three months ended June 30, 2018 . The Federal-Mogul Acquisition increased revenue by $527 million . Excluding the Federal-Mogul Acquisition, revenue decreased by $25 million due to the net unfavorable effects of $20 million from lower volume and the unfavorable effects of foreign currency exchange of $8 million, partially offset by $3 million favorable other.

Six-months ended: Motorparts revenue increased $987 million , or 153% , as compared to the six months ended June 30, 2018 . The Federal-Mogul Acquisition increased revenue by $1,043 million . Excluding the Federal-Mogul Acquisition, revenue decreased by $56 million which was due to unfavorable volume and mix of $41 million and the unfavorable effects of foreign currency exchange of $26 million, partially offset by $11 million of other.

Earnings before Interest Expense, Income Taxes, Noncontrolling Interests and Depreciation and Amortization (“EBITDA including noncontrolling interests”)
The following table presents EBITDA including noncontrolling interests by segment for the three and six months ended June 30, 2019 and 2018 (amounts in millions):
 
Three Months Ended June 30,
 
Six Months Ended
June 30,
 
Three Months
 
Six Months
 
2019
 
2018
 
2019
 
2018
 
2019 vs 2018
 
2019 vs 2018
 
(Millions)
EBITDA including noncontrolling interests by Segments:
 
 
 
 
 
 
 
 
 
 
 
Clean Air
$
152

 
$
142

 
$
283

 
$
299

 
$
10

 
$
(16
)
Powertrain
100

 
—

 
213

 
—

 
100

 
213

Ride Performance
26

 
20

 
(19
)
 
44

 
6

 
(63
)
Motorparts
110

 
55

 
155

 
100

 
55

 
55

Corporate
(78
)
 
(46
)
 
(177
)
 
(90
)
 
(32
)
 
(87
)
Total EBITDA including noncontrolling interests
$
310

 
$
171

 
$
455

 
$
353

 
$
139

 
$
102

(1) See "Non-GAAP Measures" for further discussion on the use of non-GAAP measures.

Clean Air
Three-months ended: Clean Air EBITDA including noncontrolling interests increased $10 million as compared to the three months ended June 30, 2018 . The increase is primarily attributable to strong light vehicle and commercial truck sales, lower selling, general and administrative costs and improved operating efficiencies, offset by unfavorable foreign exchange.

70



Six-months ended: Clean Air EBITDA including noncontrolling interests decreased $16 million as compared to the six months ended June 30, 2018 . The decrease is primarily attributable to unfavorable operating performance, incremental costs for process harmonization, higher restructuring costs, and unfavorable effects of foreign currency exchange, partially offset by stronger light vehicle and commercial truck sales and lower selling, general and administrative costs.

Powertrain
Three and Six-months ended: As a result of the Federal-Mogul Acquisition, Powertrain EBITDA including noncontrolling interests was $100 million and $213 million for the three and six months ended June 30, 2019, respectively.

Ride Performance
Three-Months ended: Ride Performance EBITDA including noncontrolling interests increased $6 million as compared to the three months ended June 30, 2018 . The Acquisitions contributed $9 million of additional EBITDA, thus resulting in a total decrease of $3 million without Acquisitions. The decrease is primarily attributable to incremental restructuring costs and the unfavorable effects of foreign currency, partially offset by net favorable volume and mix and lower one-time selling, general and administrative costs.

Six-Months ended: Ride Performance EBITDA including noncontrolling interests decreased $63 million as compared to the six months ended June 30, 2018 . While the Acquisitions contributed $17 million of additional EBITDA, this increase is more than offset by a goodwill impairment charge of $60 million taken in the six months ended June 30, 2019 as a result of an operating segment reorganization. Also contributing to the decrease in EBITDA was unfavorable operating performance, higher selling, general, administrative and engineering costs, and the unfavorable effects of foreign currency, which were partially offset by net favorable volume and mix.

Motorparts
Three-months ended: Motorparts EBITDA including noncontrolling interests increased $55 million compared to the three months ended June 30, 2018 . The Federal-Mogul Acquisition contributed $75 million of EBITDA including noncontrolling interests to the second quarter 2019 results. The increase in EBITDA attributable to the acquisition was offset primarily by an unfavorable warranty charge, incremental purchase accounting charges, unfavorable operating performance, net unfavorable volume and mix and incremental restructuring charges.

Six-months ended: Motorparts EBITDA including noncontrolling interests increased $55 million as compared to the six months ended June 30, 2018 . The Federal-Mogul Acquisition contributed $142 million of EBITDA including noncontrolling interests to the results for the six months ended June 30, 2019. The increase in EBITDA attributable to the acquisition was offset primarily by purchase accounting charges, unfavorable performance, net unfavorable volume and mix, incremental costs associated with a warranty charge, and costs associated with process harmonization.

Corporate
Three-months ended: Corporate EBITDA including noncontrolling interests decreased $32 million as compared to the three months ended June 30, 2018 . The decrease is primarily attributable to higher acquisition and spin costs and higher corporate costs post Federal-Mogul Acquisition, offset by lower selling, general and administrative costs.

Six-months ended: Corporate EBITDA including noncontrolling interests decreased $87 million as compared to the six months ended June 30, 2018 . The decrease is primarily attributable to higher acquisition and spin costs and higher corporate costs post Federal-Mogul Acquisition, offset by lower selling, general and administrative costs.


71


The EBITDA including noncontrolling interests results shown in the preceding table include the following items, certain of which may have an effect on the comparability of EBITDA including noncontrolling interests results between periods (amounts in millions):
 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs to achieve synergies (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring related to synergy initiatives
$
—

 
$
1

 
$
(1
)
 
$
4

 
$
4

 
$
—

 
$
—

 
$
4

Other cost to achieve synergies
—

 
1

 
—

 
—

 
1

 
2

 
—

 
3

Total costs to achieve synergies
—

 
2

 
(1
)
 
4

 
5

 
2

 
—

 
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and related expenses
 
 
 
 
 
 
 
 


 
 
 
 
 


Other restructuring charges
14

 
16

 
23

 
2

 
55

 
—

 
—

 
55

Asset impairments
1

 
—

 
—

 
1

 
2

 
—

 
—

 
2

Total restructuring and related expenses
15

 
16

 
23

 
3

 
57

 
—

 
—

 
57

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost reduction initiatives (2)
—

 
—

 
—

 
—

 
—

 
2

 
—

 
2

Acquisition and expected spin costs (3)
—

 
—

 
—

 
1

 
1

 
26

 
—

 
27

Process harmonization (4)
1

 
—

 
—

 
—

 
1

 
—

 
—

 
1

Purchase accounting charges (5)
—

 
—

 
2

 
1

 
3

 
—

 
—

 
3

Warranty charge (7)
—

 
—

 
—

 
7

 
7

 
—

 
—

 
7

Total adjustments
$
16

 
$
18

 
$
24

 
$
16

 
$
74

 
$
30

 
$
—

 
$
104


 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs to achieve synergies (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring related to synergy initiatives
$
6

 
$
—

 
$
—

 
$
—

 
$
6

 
$
2

 
$
—

 
$
8

Other cost to achieve synergies
—

 
—

 
—

 
1

 
1

 
—

 
—

 
1

Total costs to achieve synergies
6

 
—

 
—

 
1

 
7

 
2

 
—

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and related expenses
 
 
 
 
 
 
 
 


 
 
 
 
 


Other restructuring charges
11

 
—

 
8

 
2

 
21

 
—

 
—

 
21

Asset impairments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total restructuring and related expenses
11

 
—

 
8

 
2

 
21

 
—

 
—

 
21

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost reduction initiatives
—

 
—

 
10

 
—

 
10

 
—

 
—

 
10

Acquisition and expected spin costs (3)
 
 
—

 
—

 
 
 
—

 
18

 
—

 
18

Environmental charge (6)
—

 
—

 
—

 
—

 
—

 
4

 
—

 
4

Total adjustments
$
17

 
$
—

 
$
18

 
$
3

 
$
38

 
$
24

 
$
—

 
$
62


(1) Cost to achieve synergies related to the Acquisitions.
(2) Costs related to cost reduction initiatives.
(3) Costs related to the Acquisitions and expected spin.
(4) Change due to process harmonization.
(5) This primarily relates to a non-cash charge to cost of goods sold for the amortization of the inventory fair value step-up recorded as part of the Acquisitions.
(6) Not used in the table above.
(7) Charge related to warranty. Although we regularly incur warranty costs, this specific charge is of an unusual nature in the period incurred.
(8) Environmental charge related to an acquired site whereby an indemnification reverted back to the Company resulting from a 2009 bankruptcy filing of Mark IV Industries.

72



 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs to achieve synergies (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring related to synergy initiatives
$
1

 
$
1

 
$
2

 
$
7

 
$
11

 
$
—

 
$
—

 
$
11

Other cost to achieve synergies
—

 
1

 
—

 
—

 
1

 
2

 
—

 
3

Total costs to achieve synergies
1

 
2

 
2

 
7

 
12

 
2

 
—

 
14

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and related expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other restructuring charges
18

 
17

 
33

 
3

 
71

 
1

 
—

 
72

Asset impairments
1

 
—

 
—

 
1

 
2

 
—

 
—

 
2

Total restructuring and related expenses
19

 
17

 
33

 
4

 
73

 
1

 
—

 
74

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost reduction initiatives (2)
—

 
—

 
—

 
—

 
—

 
10

 
—

 
10

Acquisition and expected spin costs (3)
—

 
—

 
—

 
1

 
1

 
66

 
—

 
67

Process harmonization (4)
5

 
—

 
—

 
5

 
10

 
—

 
—

 
10

Purchase accounting charges (5)
—

 
2

 
5

 
37

 
44

 
—

 
—

 
44

Goodwill impairment charge (6)
—

 
—

 
60

 
—

 
60

 
—

 
—

 
60

Warranty charge (7)
—

—

—

 
—

 
7

 
7

 
—

 
—

 
7

Total adjustments
$
25

 
$
21

 
$
100

 
$
61

 
$
207

 
$
79

 
$
—

 
$
286


 
Reportable Segments
 
 
 
 
 
Clean Air
 
Powertrain
 
Ride Performance
 
Motorparts
 
Total
 
Corporate
 
Reclass & Elims
 
Total
Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs to achieve synergies (1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring related to synergy initiatives
$
6

 
$
—

 
$
—

 
$
—

 
$
6

 
$
2

 
$
—

 
$
8

Other cost to achieve synergies
—

 
—

 
—

 
1

 
1

 
—

 
—

 
1

Total costs to achieve synergies
6

 
—

 
—

 
1

 
7

 
2

 
—

 
9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restructuring and related expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other restructuring charges
12

 
—

 
17

 
4

 
33

 
—

 
—

 
33

Asset impairments
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total restructuring and related expenses
12

 
—

 
17

 
4

 
33

 
—

 
—

 
33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost reduction initiatives (2)
—

 
—

 
10

 
—

 
10

 
 
 
—

 
10

Warranty charge (3)
—

 
—

 
5

 
—

 
5

 
 
 
 
 
5

Environmental charge (6)
—

 
—

 
—

 
—

 
—

 
4

 
—

 
4

Acquisition and expected spin costs (3)
—

 
—

 
—

 
—

 
—

 
31

 
—

 
31

Total adjustments
$
18

 
$
—

 
$
32

 
$
5

 
$
55

 
$
37

 
$
—

 
$
92


(1) Cost to achieve synergies related to the Acquisitions.
(2) Costs related to cost reduction initiatives.
(3) Costs related to the Acquisitions and expected spin.
(4) Change due to process harmonization.
(5) This primarily relates to a non-cash charge to cost of goods sold for the amortization of the inventory fair value step-up recorded as part of the Acquisitions.
(6) Post segment reorganization impairment of goodwill.
(7) Charge related to warranty. Although we regularly incur warranty costs, this specific charge is of an unusual nature in the period incurred.
(8) Environmental charge related to an acquired site whereby an indemnification reverted back to the Company resulting from a 2009 bankruptcy filing of Mark IV Industries.


73


Liquidity and Capital Resources

Liquidity and Financing Arrangements
The table below shows our borrowing capacity on credit facilities as of June 30, 2019 (amounts in billions):
 
Credit Facilities as of June 30, 2019
 
Term
 
Available (b)
Tenneco Inc. revolving credit facility (a)
2023
 
$
1.2

Tenneco Inc. Term Loan A
2023
 
—

Tenneco Inc. Term Loan B
2025
 
—

Subsidiaries’ credit agreements
2020
 
0.2

 
 
 
$
1.4

(a)  
We are required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment.
(b)  
Letters of credit reduce the available borrowings under the revolving credit facility. As of June 30, 2019 , the revolving credit facility had $20 million in letters of credit outstanding.

In addition, we had cash and cash equivalents of $384 million and $697 million as of June 30, 2019 and December 31, 2018 .

Term Loans
We entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the "New Credit Facility") in connection with the Federal-Mogul Acquisition. The New Credit Facility consists of $4.9 billion of total debt financing, consisting of a five -year $1.5 billion revolving credit facility, a five -year $1.7 billion term loan A facility ("Term Loan A") and a seven -year $1.7 billion term loan B facility ("Term Loan B").

Senior Notes
We have outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). We also have outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 (" 5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 (" 4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").

New Credit Facility — Other Terms and Conditions — The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility) as of the end of each fiscal quarter of not greater than 4.0 to 1 through September 30, 2019, 3.75 to 1 through September 30, 2020 and 3.5 to 1 thereafter; and a requirement to maintain a consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1. 

The financial ratios required under the New Credit Facility and the actual ratios we calculated as of June 30, 2019 for the second quarter of 2019, are as follows: leverage ratio of 3.39 actual versus 4.00 (maximum) required; and interest coverage ratio of 5.77 actual versus 2.75 (minimum) required.

Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions — The Senior Unsecured Notes and Senior Secured Notes contain covenants that will, among other things, limit our ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require, 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, as well as containing restrictions on its operations, including limitations on: (i) incurring additional indebtedness; (ii) paying 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 its Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed our Senior Notes to make distributions to us.

As of June 30, 2019 , we were in compliance with all of our financial covenants.


74


Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — We have securitization programs for some of our accounts receivable, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at June 30, 2019 and December 31, 2018 are as follows (amounts in millions):
 
 
June 30, 2019
 
December 31, 2018
Borrowings on securitization programs
 
$
4

 
$
6


Off-Balance Sheet Arrangements — We have an accounts receivable factoring program in the U.S. with a commercial bank. Under this program we sell receivables from certain of our U.S. OE customers at a rate that is favorable versus our senior credit facility. This arrangement is uncommitted and provides for cancellation by the commercial bank with no less than 30 days prior written notice. In addition, we have two other receivable factoring programs in the U.S. with commercial banks under which we sell receivables from certain of our aftermarket customers to whom we have extended payment terms. Both arrangements are uncommitted and may be terminated with 10 days prior notice for one program and 30 days prior notice for the other program.

We also have subsidiaries in several countries in Europe that are parties to accounts receivable factoring facilities. The commitments for these arrangements are generally for one year, but some may be canceled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon notification. Certain of these programs in Europe include deferred purchase price arrangements.

These 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 agreement. If we were not able to factor receivables under these programs, our borrowings under our revolving credit agreement might increase, although this could be partially mitigated by exercising our right to shorten payment terms with certain of the aftermarket customers whose receivables we sell under the U.S. factoring programs in the event that those factoring programs are terminated.

In the U.S and Canada, we participate in supply chain financing programs with certain of our aftermarket customers to whom we have extended payment terms whereby the accounts receivable are satisfied through the early receipt of negotiable financial instruments that are payable at a later date when payments from our customers are due. We sell these financial instruments before their maturity date to various financial institutions at a discount.

If these supply chain financing programs were terminated or the financial institutions that currently participate in these programs were to reduce their purchases of drafts, our borrowings under our revolving credit agreement might increase, although this could be partially mitigated by exercising our right to shorten payment terms with certain of the aftermarket customers whose drafts we sell under the U.S. and Canadian programs in the event that those programs are terminated or otherwise reduced.

The accounts receivables under the programs described above are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under these factoring programs approximates the fair value of such receivables. We are the servicer of the receivables under some of these arrangements and are responsible for performing all accounts receivable administration functions. Where we receive a fee to service and monitor these transferred accounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.

The amounts outstanding for these factoring and drafting arrangements as of June 30, 2019 and December 31, 2018 are as follows (amounts in billions):
 
June 30, 2019
 
December 31, 2018
Accounts receivable outstanding and derecognized
$
1.1

 
$
1.0


The deferred purchase price receivable as of June 30, 2019 and December 31, 2018 is as follows (amounts in millions):
 
June 30, 2019
 
December 31, 2018
Deferred purchase price receivable
$
52

 
$
154



75


Proceeds from the factoring of accounts receivable qualifying as sales are as follows (amounts in billions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Proceeds from factoring qualifying as sales
$
1.3

 
$
0.7

 
$
2.5

 
$
1.5


Financing charges associated with the factoring of receivables are as follows (amounts in millions):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2019
 
2018
 
2019
 
2018
Financing charges on sale of receivables (a)
$
6

 
$
2

 
$
14

 
$
5

(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss).
 
 
 
 

Supply Chain Financing
Certain of our suppliers participate in supply chain financing programs under which they securitize their accounts receivables from us. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from our suppliers at any time. If the financial institutions did not continue to purchase receivables or drafts from our suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with us which in turn could cause our borrowings under our revolving credit facility to increase.

Capital Requirements
We believe cash flows from operations, combined with our cash on hand (subject to our proportionate share and any applicable withholding taxes upon repatriation of cash balances from our foreign operations) and available borrowing capacity described above (assuming we maintain compliance with the financial covenants and other requirements of our senior credit facility agreement) will be sufficient to meet our future capital requirements, including debt amortization, capital expenditures, pension contributions, and other operational requirements, for the following year. Our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. In the event we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. Such actions include additional restructuring initiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, issuance of equity and other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame.

Cash Flows
Operating Activities
Operating activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
 
Six Months Ended June 30,
 
2019
 
2018
Operational cash flow before changes in operating assets and liabilities
$
312

 
$
267

 
 
 
 
Changes in operating assets and liabilities:
 
 
 
Receivables
(401
)
 
(233
)
Inventories
101

 
(51
)
Payables and accrued expenses
48

 
206

Accrued interest and income taxes
(66
)
 
(2
)
Other assets and liabilities
(94
)
 
(109
)
Total change in operating assets and liabilities
(412
)
 
(189
)
Net cash provided (used) by operating activities
$
(100
)
 
$
78


Cash used by operations for the six months ended June 30, 2019 was $100 million , a decrease of $178 million compared to the six months ended June 30, 2018 . The net decrease was primarily the result of:
•
cash flows used by the operations of the Federal-Mogul Acquisition, of approximately $75 million ; and
•
a net decrease of $ 103 million due to unfavorable changes in working capital items and performance (excluding the Federal-Mogul Acquisition).


76


Investing Activities
Investing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
 
Six Months Ended June 30,
 
2019
 
2018
Proceeds from sale of assets
$
5

 
$
5

Net proceeds from sale of business
22

 
—

Cash payments for property, plant, and equipment
(379
)
 
(174
)
Acquisition of business, net of cash acquired
(158
)
 
—

Proceeds from deferred purchase price of factored receivables
147

 
66

Other
(1
)
 
2

Net cash used by investing activities
$
(364
)
 
$
(101
)

Cash used by investing activities for the six months ended June 30, 2019 included cash paid for the Ohlins Acquisition of $158 million and proceeds from the sale of the wipers business of $22 million , included in our Motorparts segment. See Note 3, Acquisitions and Divestitures for additional details. In addition, there was an increase in proceeds from deferred purchase price of factored receivables of $81 million , primarily attributable to the Federal-Mogul Acquisition.

Cash payments for property, plant, and equipment were $379 million and $174 million for the six months ended June 30, 2019 and 2018 . The increase is primarily attributable to the Federal-Mogul Acquisition. These cash payments were primarily related to capital expenditures to invest in new facilities, upgrade existing products, continue new product launches, and infrastructure and equipment at our facilities to support our manufacturing, distribution, and cost reduction efforts, as well as software-related expenditures.

Financing Activities
Financing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
 
Six Months Ended June 30,
 
2019
 
2018
Proceeds from term loans and notes
$
111

 
$
9

Repayments of term loans and notes
(190
)
 
(28
)
Borrowings on revolving lines of credit
4,525

 
2,669

Payments on revolving lines of credit
(4,254
)
 
(2,614
)
Issuance (repurchase) of common shares
(2
)
 
(1
)
Cash dividends
(20
)
 
(25
)
Net increase (decrease) in bank overdrafts
(8
)
 
(7
)
Other
(1
)
 
(22
)
Distributions to noncontrolling interest partners
(20
)
 
(28
)
Net cash provided (used) by financing activities
$
141

 
$
(47
)

Cash flow provided by financing activities was $141 million for the six months ended June 30, 2019 . This included net repayments on term loans of $79 million , net borrowings on revolving lines of credit of $271 million , and $1 million in borrowings on accounts receivable securitization programs.

Cash flow used by financing activities was $47 million for the six months ended June 30, 2018 . This included net repayments on term loans of $19 million , net borrowings on revolving lines of credit of $55 million , and $22 million in borrowings on accounts receivable securitization programs.

Dividends on Common Stock
We suspended the quarterly dividend in the second quarter of 2019. For the six months ended June 30, 2019 , a dividend of $0.25 per share was paid, or $20 million in the aggregate. The first quarter dividend was a decrease of $5 million as compared to the six months ended June 30, 2018 , due to the suspension of the dividend program in the second quarter 2019.

Environmental Matters, Legal Proceedings and Product Warranties
Note 13, Commitments and Contingencies in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.


77



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rate Risk
We manufacture and sell our products in North America, South America, Asia, Europe, and Africa. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, Mexican peso, and Canadian dollar.

Foreign Currency Forward Contracts — 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. In managing our foreign currency exposures, we identify and aggregates existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The gain or loss on these contracts is recorded as foreign currency gains (losses) within cost of sales in the condensed consolidated statements of income (loss). The fair value of foreign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the condensed consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at June 30, 2019 and December 31, 2018 .

The following table summarizes by position the notional amounts for foreign currency forward contracts as of June 30, 2019 (all of which mature in 2019):
 
Notional Amount
Long position
$
(26
)
Short position
$
26


Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facility to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from five to ten years. On June 30, 2019 , we had $1.6 billion par value of fixed rate debt and $4.0 billion par value of floating rate debt. Of the fixed rate debt, $472 million is fixed through 2022, $623 million is fixed through 2024, and $500 million is fixed through 2026. We also had $4.0 billion of principal amounts in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources” earlier in this Management’s Discussion and Analysis and Note 10, Debt and Other Financing Arrangements in our condensed consolidated financial statements located in Part I, Item I of this Form 10-Q.

We estimate that the fair value of our long-term debt at June 30, 2019 was about 96% percent of its book value. A one percentage point increase or decrease in interest rates related to our variable interest rate debt would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $40 million.

Equity Prices
We also utilize an equity swap arrangement to offset changes in liabilities related to the equity market risks of our arrangements for deferred compensation and restricted stock unit awards. Gain or losses from changes in fair value of these equity swaps are generally offset by the losses or gains on the related liabilities. In May 2019, we entered into an amended and restated equity swap agreement with a financial institution. We selectively use cash-settled share swaps to reduce market risk associated with our deferred liabilities. These equity compensation liabilities increase as our stock price increases and decrease as our stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a stated amount. As of June 30, 2019 , we had hedged the deferred liability related to approximately 250,000 common share equivalents.


78


ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), as the end of the quarter covered by this report. Based on their evaluation, our Co-Chief Executive Officers and Chief Financial Officer have concluded the Company’s disclosure controls and procedures were effective to ensure information required to be disclosed by our Company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended June 30, 2019 , that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

79


PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Note 13, Commitments and Contingencies , in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
We are exposed to certain risks and uncertainties that could have a material adverse effect on our business, financial condition and operating results. There have been no material changes to the Risk Factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. The risks described herein or in our Annual Report on Form 10-K are not the only risks facing us. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the effect such risk factors might have on our business, financial condition and operating results, or the extent to which any such risk factor or combination of risk factors may affect our business, financial condition and operating results.



80


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not applicable.
(c) Purchase of equity securities by the issuer and affiliated purchasers.  The following table provides information relating to our purchase of shares of our common stock in the second quarter of 2019 . These purchases reflect shares withheld upon vesting of restricted stock for tax withholding obligations. We generally intend to continue to satisfy tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares.
In February 2017, our Board of Directors authorized the repurchase of up to $400 million of our then outstanding common stock over the next three years, including $112 million that remained authorized under earlier repurchase programs. We generally acquire the shares through open market or privately negotiated transactions and have historically used cash from operations. The repurchase program does not obligate us to repurchase shares within any specific time. We did not repurchase any shares through this program in the six months ended June 30, 2019 .
Period
Total Number of
Shares Purchased (1)
 
Average
Price Paid
 
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
 
Maximum Value of
Shares That
May Yet be
Purchased
Under
These Plans
or Programs
(Millions)
April 2019
—

 
$
—

 
—

 
$
231

May 2019
2,183

 
11.61

 
—

 
231

June 2019
—

 
—

 
—

 
231

Total
2,183

 
$
11.61

 
—

 
$
231

(1)
Shares withheld upon vesting of restricted stock and share settled restricted stock units in the second quarter of 2019.

81


ITEM 6. EXHIBITS
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2019
 
Exhibit
Number
 
Description
 
 
 
—
Certification of Brian J. Kesseler under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
Certification of Roger J. Wood under Section 302 of the Sarbanes-Oxley Act of 2002.



 
 
 
—
Certification of Jason M. Hollar under Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
—
Certification of Brian J. Kesseler, Roger J. Wood and Jason M. Hollar under Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
*101.INS
—
Inline XBRL Instance Document. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
 
 
 
*101.SCH
—
Inline XBRL Taxonomy Extension Schema Document.
 
 
 
*101.CAL
—
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
*101.DEF
—
Inline XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
*101.LAB
—
Inline XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
*101.PRE
—
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
*
Filed herewith.




82


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Tenneco Inc. has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
TENNECO INC.
 
 
 
By:
 
/ S /    JASON M. HOLLAR
 
 
Jason M. Hollar
 
 
Executive Vice President and Chief Financial
Officer (on behalf of the Registrant)
 
 
                        
TENNECO INC.
 
 
By:
/s/    JOHN S. PATOUHAS
 
John S. Patouhas
 
Vice President and Chief Accounting Officer (principal accounting officer)
 
Dated: August 6, 2019

83
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