Acquisitions and Divestitures

Acquisition of Federal-Mogul

On October 1, 2018, the Company closed on the acquisition of all of the interests in Federal-Mogul (the "Acquisition") pursuant to the Membership Interest Purchase Agreement, dated as of April 10, 2018 (the "Purchase Agreement"), by and among the Company, Federal-Mogul, American Entertainment Properties Corp. ("AEP" and, together with certain affiliated entities, the "Sellers") and Icahn Enterprises L.P. ("IEP"). Total consideration was approximately $3.7 billion. Following the completion of the Acquisition, Federal-Mogul was merged with and into the Company, with the Company continuing as the surviving company.

Following the closing of the Acquisition, the Company has agreed to use its reasonable best efforts to pursue the separation of the combined company's powertrain technology business and its aftermarket and ride performance business into two new independent, publicly traded companies in a spin-off transaction that is expected to be treated as a tax-free reorganization for U.S. federal income tax purposes.

At the effective date of the Acquisition, the Company's certificate of incorporation was amended and restated (the "Amended and Restated Certificate of Incorporation") in order to create a new class of non-voting convertible common stock of the Company called "Class B Non-Voting Common Stock" ("Class B Common Stock") with 25,000,000 shares authorized, and to reclassify the Company's existing common stock as "Class A Voting Common Stock" ("Class A Common Stock" and, together with the Class B Common Stock, the “common stock”). See Note 17, Shareholders' Equity for additional information on the conversion features of the Class B Common Stock. On the same date, the Company also entered into a new credit facility in connection with the Acquisition. The new credit facility includes $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 and a seven-year $1.7 billion term loan B facility. See Note 11, Debt and Other Financing Arrangements, for additional information.

Under the Amended and Restated Certificate of Incorporation, the authorized number of shares was increased from 185,000,000 shares, divided into 135,000,000 shares of common stock, par value $0.01, and 50,000,000 shares of preferred stock, par value $0.01, to 250,000,000 shares, divided into 175,000,000 shares of Class A Common Stock, 25,000,000 shares of Class B Common Stock and 50,000,000 shares of preferred stock, par value $0.01.

The Company (i) paid to AEP an aggregate amount in cash equal to $800 million (the “Cash Consideration”) and (ii) issued and delivered to AEP an aggregate of 29,444,846 shares of common stock at $41.99 per share (the “Stock Consideration”). The $1.2 billion of common stock was comprised of: (a) 5,651,177 shares of Class A Common Stock, par value $0.01 equal to 9.9 percent of the aggregate number of shares of Class A Common Stock issued and outstanding immediately following the closing of the Acquisition, and (b) 23,793,669 shares of newly created Class B Common Stock, par value $0.01. The remaining consideration of approximately $1.7 billion was comprised primarily of the repayments of certain Federal-Mogul debt obligations.

Advisory costs associated with the Acquisition were $68 million for the year ended December 31, 2018 and were recognized as a component of selling, general, and administrative expenses in the consolidated statements of income.

The following table summarizes the purchase price (in millions, except for share data):



Tenneco shares issued for purchase of Federal-Mogul	29,444,846
Tenneco share price at October 1, 2018	$	41.99
Fair value of the Stock Consideration	1,236

Cash Consideration⁽¹⁾	811
Repayment of Federal-Mogul debt and accrued interest ⁽²⁾	1,660
Total consideration	$	3,707

⁽¹⁾Cash consideration also included $11 million in advisory fees paid to a third-party.

⁽²⁾Portion of the proceeds from the issuance of the $4.9 billion new credit facility that was used to repay Federal-Mogul’s term loan and revolver loan of $1,455 million and $200 million, respectively, and the related accrued interest of $5 million.

The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date:



	(Millions)
Cash, cash equivalents and restricted cash	$	277
Customer notes and accounts receivable	1,258
Other receivables	62
Inventories	1,551
Prepayments and other current assets	198
Property, plant and equipment	1,711
Long-term receivables	48
Goodwill	825
Intangibles	1,530
Investments in nonconsolidated affiliates	528
Deferred income taxes	166
Other assets	55
Total assets acquired	8,209

Short-term debt, including current maturities of long-term debt	130
Accounts payable	957
Accrued compensation and employee benefits	231
Accrued income taxes	49
Accrued expenses and other current liabilities	522
Long-term debt	1,315
Deferred income taxes	56
Pension and postretirement benefits	879
Deferred credits and other liabilities	124
Total liabilities assumed	4,263

Redeemable noncontrolling interests	96
Noncontrolling interests	143
Net assets and noncontrolling interests acquired	$	3,707

The preliminary allocation of the purchase price to 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. Measurement period adjustments are recorded in the period identified. 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. 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 and other assets and liabilities are reflected in the Powertrain and Motorparts segments and are located in all geographic areas. The goodwill resulting from this Acquisition consists largely of the Company's expected future economic benefits to arise from expected future product sales and synergies from combining Federal-Mogul with the Company's existing portfolio of products. Goodwill of $388 million was allocated to the Powertrain segment and $437 million was allocated to the Motorparts segment. None of the goodwill is deductible for tax purposes. Other intangible assets acquired include the following:



	Estimated Fair Value		Weighted-Average Useful Lives
	(Millions)
Definite-lived intangible assets:
Customer platforms and relationships	$	964	10 years
Technology rights	69		10 years
Packaged kits know-how	36		10 years
Licensing agreements	66		4.5 years
Land use rights	30		42.8 years
Total definite-lived intangible assets	1,165		10.5 years

Indefinite-lived intangible assets:
Trade names and trademarks	365
Total	$	1,530

The Company also recorded a $152 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation and recognized $105 million as a non-cash charge to cost of goods sold during the fourth quarter of 2018 related to the amortization of this step-up, as the acquired inventory was sold. The Company expects to recognize the remaining amortization of the inventory step-up during 2019.

The Company's consolidated statements of income for the year ended December 31, 2018 included net sales and operating revenues of $1,886 million and net loss of $69 million associated with the operating results of Federal-Mogul from October 1, 2018 to December 31, 2018.

Pro Forma Results (Unaudited)

The following table summarizes, on a pro forma basis, the combined results of operations of the Company and Federal-Mogul business as though the Acquisition and the related financing had occurred as of January 1, 2017. The pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition of Federal-Mogul occurred on December 31, 2016 or of future consolidated operating results.



	For the Year Ended December 31
	2018		2017
	(In millions, except per share amounts)
Net sales and operating revenues	$	17,860	$	17,153
Earnings before income taxes and noncontrolling interests	$	488	$	235
Net income attributable to Tenneco Inc.	$	275	$	372
Basic earnings per share of common stock	$	3.41	$	4.52
Diluted earnings per share of common stock	$	3.40	$	4.51

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 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.

In 2018, the Company incurred $96 million of acquisition related costs. These expenses are included in Selling, general, and administrative on the Company's consolidated statements of income for the year ended December 31, 2018. These expenses, as well as $4 million of expenses incurred by Federal-Mogul in 2018 prior to the acquisition, are reflected in the pro forma earnings for the year ended December 31, 2017, in the table above.

Other Matters Related to the Acquisition

On March 3, 2017, and May 1, 2017, certain purported former stockholders of Federal-Mogul Holdings Corporation (“FMHC”) filed a petition in the Delaware Court of Chancery seeking an appraisal of the value of common stock they claim to have held at the time of the January 23, 2017 merger of IEH FM Holdings, LLC into FMHC. IEH FM Holdings, LLC was a wholly owned subsidiary of American Entertainment Properties Corp. and a subsidiary of Icahn Enterprises L.P. The two cases were consolidated on May 10, 2017 into: “In re Appraisal of Federal-Mogul Holdings LLC, C.A. No. 2017-0158-AGB.”

Federal-Mogul received a capital contribution of $56 million on June 29, 2018 from its then-parent, IEP, in connection with this matter. At October 1, 2018, Federal-Mogul’s litigation reserve was $55 million, along with accrued interest of $6 million, which was assumed as part of the Acquisition. On October 19, 2018, the Company reached an agreement with the plaintiffs to settle their claims for $12.01 per share, inclusive of interest payable, or an aggregate of approximately $61 million. The Company paid this settlement in the fourth quarter of 2018.

Assets Held for Sale

The Company classifies assets and liabilities as held for sale (“disposal group”) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate it is unlikely significant changes to the plan will be made or the plan will be withdrawn.

In December 2018, the Company entered into a stock and asset purchase agreement to sell certain assets and liabilities related to its wipers business in the Motorparts segment for a sale price of $29 million, subject to adjustment based on terms of the sale agreement. As of December 31, 2018, proceeds from the sale would have been $22 million. The related assets and liabilities were classified as held for sale as of December 31, 2018. The transaction closed on March 1, 2019.

There were no disposal groups classified as held for sale as of December 31, 2017. The assets and liabilities classified as held for sale as of December 31, 2018 were as follows:



	December 31
	2018
	(Millions)
Assets
Inventories	$	33
Other current assets	5
Long-lived assets	23
Total assets held for sale	$	61
Liabilities
Accounts payable	$	21
Accrued liabilities	7
Other liabilities	11
Total liabilities held for sale	$	39

The assets and liabilities held for sale are recorded in “Prepayments and other current assets” and “Accrued expenses and other current liabilities” in the consolidated balance sheets as of December 31, 2018.