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| TEN > SEC Filings for TEN > Form 10-Q on 7-Aug-2012 | All Recent SEC Filings |
7-Aug-2012
Quarterly Report
As you read the following review of our financial condition and results of operations, you should also read our condensed consolidated financial statements and related notes beginning on page 6.
Executive Summary
We are one of the world's leading manufacturers of emission control and ride control products and systems for light, commercial and specialty vehicle applications. We serve both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe ®, Rancho®, Clevite® Elastomers, Marzocchi®, Axios™, Kinetic™ and Fric-Rot™ ride control products and Walker ®, Fonos™, DynoMax®, Thrush™ and Lukey™ emission control products. We serve more than 64 different original equipment manufacturers and commercial vehicle engine manufacturers, and our products are included on nine of the top 10 car models produced for sale in Europe and nine of the top 10 light truck models produced for sale in North America for 2011. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. As of December 31, 2011, we operated 87 manufacturing facilities worldwide and employed approximately 24,000 people to service our customers' demands.
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences in response to higher fuel costs and other economic and social factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the impact of any such cost increases through material substitutions, cost reduction initiatives and other methods.
For the second quarter of 2012, light vehicle production was up 27 percent in North America, four percent in India and 14 percent in China. Light vehicle production was down in the second quarter of 2012 when compared to the second quarter of 2011 by seven percent in Europe, nine percent in South America and 12 percent in Australia.
We have a substantial amount of indebtedness. As such, our ability to generate cash - both to fund operations and service our debt - is also a significant area of focus for our Company. See "Liquidity and Capital Resources" below for further discussion of cash flows and Item 1A, "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Total revenues for the second quarter of 2012 were $1,920 million a two percent increase from $1,888 million in the second quarter of 2011. Excluding the impact of currency and substrate sales, revenue was up $134 million, or nine percent, from $1,453 million to $1,587 million, driven primarily by strong OE light vehicle production volumes in North America and China and incremental commercial vehicle business revenues globally.
Cost of sales: Cost of sales for the second quarter of 2012 was $1,595 million, or 83.1 percent of sales, compared to $1,565 million, or 82.9 percent of sales in the second quarter of 2011. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Quarter ended June 30, 2011 $ 1,565
Volume and mix 118
Material (4 )
Currency exchange rates (94 )
Other Costs 10
Quarter ended June 30, 2012 $ 1,595
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The increase in cost of sales was due primarily to the year-over-year increase in production volumes, other costs, mainly manufacturing, partially offset by lower material costs and the impact of foreign currency exchange rates.
Gross margin: Revenue less cost of sales for the second quarter of 2012 was $325 million, or 16.9 percent, versus $323 million, or 17.1 percent in the second quarter of 2011. The effects on gross margin resulting from higher volumes and material cost management were more than offset by a higher mix of OE revenues, negative currency and higher manufacturing costs.
Engineering, research and development: Engineering, research and development expense was $28 million and $35 million in the second quarters of 2012 and 2011, respectively. Increased engineering cost recoveries and a stronger U.S. dollar drove the decrease in expense year-over-year.
Selling, general and administrative: Selling, general and administrative expense was down $9 million in the second quarter of 2012, at $109 million, compared to $118 million in the second quarter of 2011. Reduced stock-indexed compensation and lower aftermarket changeover costs and a stronger U.S. dollar primarily drove the decrease in expense year-over-year.
Depreciation and amortization: Depreciation and amortization expense in the second quarter of 2012 was $50 million, compared to $54 million in the second quarter of 2011 primarily due to a stronger U.S. dollar.
Goodwill impairment: There were no goodwill impairment charges in either second quarter of 2012 or 2011.
Earnings before interest expense, taxes and noncontrolling interests ("EBIT") were $137 million for the second quarter of 2012, an improvement of $24 million, when compared to $113 million in the second quarter of the prior year. Stronger light vehicle production volumes, the related fixed manufacturing cost absorption, incremental commercial vehicle business, decreased material costs net of recoveries, lower stock-indexed compensation, higher engineering cost recoveries and reduced aftermarket changeover costs drove the year-over-year increase to EBIT. Partially offsetting the increase were increased manufacturing costs and $13 million of negative currency driven mostly by $6 million in negative swings in currency transactions in North America and the impact of translating earnings on our European business at the strong U.S. dollar exchange rate this year compared to 2011.
Total revenues for the first six months of 2012 were up five percent to $3,832 million from $3,648 million for the first six months of 2011. Excluding the impact of currency and substrate sales, revenue was up $296 million, from $2,790 million to $3,086 million, driven by higher year-over-year OE vehicle production levels, incremental commercial vehicle revenue and higher North American aftermarket sales.
Cost of sales: Cost of sales for the first half of 2012 was $3,202 million, or 83.6 percent of sales, compared to $3,031 million, or 83.1 percent of sales in the first half of 2011. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Six months ended June 30, 2011 $ 3,031
Volume and mix 276
Material 2
Currency exchange rates (138 )
Other Costs 31
Six months ended June 30, 2012 $ 3,202
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The increase in cost of sales was due primarily to the year-over-year increase in production volumes, and higher material and other costs, mainly manufacturing, partially offset by the impact of foreign currency exchange rates.
Gross margin: Revenue less cost of sales for the first six months of 2012 was $630 million, or 16.4 percent, versus $617 million, or 16.9 percent in the first six months of 2011. The effect on gross margin resulting from higher volumes were more than offset by a higher mix of OE revenues, unfavorable pricing, primarily related to contractual price reductions, negative currency and higher manufacturing costs.
Engineering, research and development: Engineering, research and development expense was $66 million and $70 million in the first six months of 2012 and 2011, respectively. Increased spending to support customer programs, technology applications, and growth in emerging markets were more than offset by increased engineering cost recoveries and a strong U.S. dollar which drove the decrease in expense year-over-year.
Selling, general and administrative: Selling, general and administrative expense was even in the first half of 2012, at $227 million, with the first half of 2011. Increased costs due to investments in new facilities in China and Thailand were offset by reduced stock-indexed compensation and lower aftermarket changeover costs.
Depreciation and amortization: Depreciation and amortization expense in the first six months of 2012 was $99 million, compared to $105 million in the first six months of 2011 primarily due to a stronger U.S. dollar.
Goodwill impairment: There were no goodwill impairment charges in the first six months of 2012 or 2011.
EBIT was $233 million for the first half of 2012, an improvement of $26 million, when compared to $207 million in the first half of 2011. Higher light vehicle OE production volumes, the related fixed manufacturing cost absorption, incremental commercial vehicle business, higher North American aftermarket sales, and increased engineering cost recoveries drove the year-over-year increase to EBIT. Partially offsetting the increase were increased costs due to investments in new facilities in China and Thailand, unfavorable pricing, primarily related to contractual price reductions, higher manufacturing and freight expenses and negative currency of $17 million.
Results from Operations
Net Sales and Operating Revenues for the Three Months Ended June 30, 2012 and 2011
The following tables reflect our revenues for 2012 and 2011. We present these reconciliations of revenues in order to reflect the trend in our sales in various product lines and geographic regions separately from the effects of doing business in currencies other than the U.S. dollar. We have not reflected any currency impact in the 2011 table since this is the base period for measuring the effects of currency during 2012 on our operations. We believe investors find this information useful in understanding period-to-period comparisons in our revenues.
Additionally, we show the component of our revenue represented by substrate sales in the following tables. While we generally have primary design, engineering and manufacturing responsibility for OE emission control systems, we do not manufacture substrates. Substrates are porous ceramic filters coated with a catalyst - precious metals such as platinum, palladium and rhodium. These are supplied to us by Tier 2 suppliers as directed by our OE customers. We generally earn a small margin, intended to cover handling costs, on these
components of the system. As the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel after treatment business, these substrate components have been increasing as a percentage of our revenue. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system. We view the growth of substrates as a key indicator that our value-add content in an emission control system is moving toward the higher technology hot-end gas and diesel business.
Our value-add content in an emission control system includes designing the system to meet environmental regulations through integration of the substrates into the system, maximizing use of thermal energy to heat up the catalyst quickly, efficiently managing airflow to reduce back pressure as the exhaust stream moves past the catalyst, managing the expansion and contraction of the emission control system components due to temperature extremes experienced by an emission control system, using advanced acoustic engineering tools to design the desired exhaust sound, minimizing the opportunity for the fragile components of the substrate to be damaged when we integrate it into the emission control system and reducing unwanted noise, vibration and harshness transmitted through the emission control system.
We present these substrate sales separately in the following table because we believe investors utilize this information to understand the impact of this portion of our revenues on our overall business and because it removes the impact of potentially volatile precious metals pricing from our revenues. While our original equipment customers generally assume the risk of precious metals pricing volatility, it impacts our reported revenues. Excluding substrate catalytic converter and diesel particulate filter sales removes this impact.
Three Months Ended June 30, 2012
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original
Equipment
Ride Control $ 173 $ (2 ) $ 175 $ - $ 175
Emission Control 617 - 617 269 348
Total North America Original
Equipment 790 (2 ) 792 269 523
North America Aftermarket
Ride Control 152 $ - 152 - 152
Emission Control 54 - 54 - 54
Total North America
Aftermarket 206 - 206 - 206
Total North America 996 (2 ) 998 269 729
Europe Original Equipment
Ride Control 130 (19 ) 149 - 149
Emission Control 351 (55 ) 406 139 267
Total Europe Original
Equipment 481 (74 ) 555 139 416
Europe Aftermarket
Ride Control 57 (10 ) 67 - 67
Emission Control 30 (4 ) 34 - 34
Total Europe Aftermarket 87 (14 ) 101 - 101
South America & India 142 (30 ) 172 21 151
Total Europe, South America &
India 710 (118 ) 828 160 668
Asia 177 3 174 20 154
Australia 37 (2 ) 39 3 36
Total Asia Pacific 214 1 213 23 190
Total Tenneco $ 1,920 $ (119 ) $ 2,039 $ 452 $ 1,587
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Three Months Ended June 30, 2011
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original
Equipment
Ride Control $ 161 $ - $ 161 $ - $ 161
Emission Control 520 - 520 246 274
Total North America Original
Equipment 681 - 681 246 435
North America Aftermarket
Ride Control 145 - 145 - 145
Emission Control 48 - 48 - 48
Total North America
Aftermarket 193 - 193 - 193
Total North America 874 - 874 246 628
Europe Original Equipment
Ride Control 151 - 151 - 151
Emission Control 385 - 385 133 252
Total Europe Original
Equipment 536 - 536 133 403
Europe Aftermarket
Ride Control 70 - 70 - 70
Emission Control 44 - 44 - 44
Total Europe Aftermarket 114 - 114 - 114
South America & India 167 - 167 29 138
Total Europe, South America &
India 817 - 817 162 655
Asia 155 - 155 24 131
Australia 42 - 42 3 39
Total Asia Pacific 197 - 197 27 170
Total Tenneco $ 1,888 $ - $ 1,888 $ 435 $ 1,453
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Three Months Ended June 30, 2012
Versus Three Months Ended June 30, 2011
Dollar and Percent Increase (Decrease)
Revenues
Excluding
Currency and
Substrate
Revenues Percent Sales Percent
(Millions Except Percent Amounts)
North America Original Equipment
Ride Control $ 12 7 % $ 14 8 %
Emission Control 97 18 % 74 27 %
Total North America Original Equipment 109 16 % 88 20 %
North America Aftermarket
Ride Control 7 6 % 7 5 %
Emission Control 6 11 % 6 11 %
Total North America Aftermarket 13 7 % 13 7 %
Total North America 122 14 % 101 16 %
Europe Original Equipment
Ride Control (21 ) (13 )% (2 ) (1 )%
Emission Control (34 ) (9 )% 15 6 %
Total Europe Original Equipment (55 ) (10 )% 13 4 %
Europe Aftermarket
Ride Control (13 ) (19 )% (3 ) (5 )%
Emission Control (14 ) (32 )% (10 ) (22 )%
Total Europe Aftermarket (27 ) (24 )% (13 ) (12 )%
South America & India (25 ) (16 )% 13 9 %
Total Europe, South America & India (107 ) (13 )% 13 2 %
Asia 22 14 % 23 17 %
Australia (5 ) (9 )% (3 ) (3 )%
Total Asia Pacific 17 9 % 20 13 %
Total Tenneco $ 32 2 % $ 134 9 %
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Light Vehicle Industry Production by Region for Three Months Ended June 30, 2012 and 2011(According to IHS Automotive, July 2012)
Three Months Ended June 30,
Increase
2012 2011 (Decrease) % Increase
(Number of Vehicles in Thousands)
North America 3,971 3,124 847 27 %
Europe 4,930 5,313 (383 ) (7 )%
South America 1,036 1,138 (102 ) (9 )%
India 895 864 31 4 %
Total Europe, South America & India 6,861 7,315 (454 ) (6 )%
China 4,526 3,974 552 14 %
Australia 50 57 (7 ) (12 )%
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Total revenues for the second quarter of 2012 were $1,920 million ($344 million in aftermarket revenues and $1,576 million in original equipment revenues), a two percent increase from $1,888 million ($363 million in aftermarket revenues and $1,525 million in original equipment revenues).
North American light vehicle production increased 27 percent, while industry Class 8 commercial vehicle production was up five percent and industry Class 4-7 commercial vehicle production was up 10 percent in the second quarter of 2012 when compared to the second quarter of last year. Revenues from our North American operations increased in 2012 compared to last year's second quarter due to higher OE and aftermarket sales of both product lines. The increase in North American OE revenues was primarily driven by improved production volumes, which accounted for $102 million of the year-over-year change in revenues, on Tenneco-supplied vehicles. Also contributing to the increase was a 38 percent increase in commercial vehicle OE revenues year-over-year. The increase in aftermarket revenue for North America was primarily due to higher volumes and price increases in both product lines which resulted in a combined increase in revenue of $12 million.
Our European, South American and Indian segment's revenues decreased in the second quarter of 2012 compared to the second quarter of last year, due to decreased sales in our European ride control business, both European Aftermarket product lines as well as in South America. In the second quarter of 2012, total European light vehicle industry production was down seven percent, and industry Class 8 commercial vehicle production was down six percent while industry Class 4-7 commercial vehicle production was down three percent when compared to the second quarter of 2011. Currency negatively impacted Europe OE revenues by $74 million and also negatively impacted European Aftermarket revenues by $14 million year-over-year. Excluding currency, Europe OE revenues improved due to higher volumes of $20 million as well as the beginning of the ramp-up on commercial vehicle programs. Excluding currency, European ride control aftermarket revenues were down compared to last year due to lower sales volumes which had a $4 million impact. Excluding currency, European emission control aftermarket sales were down mainly due to volumes which accounted for $10 million of the decline, primarily related to weak market conditions. Light vehicle production decreased nine percent in South America but increased four percent in India for the second quarter of 2012 when compared to the second quarter of 2011. Excluding the negative impact of currency, the South American revenue decline was more than offset by higher revenues in India in the second quarter of 2012 when compared to the prior year's second quarter.
Industry light vehicle production in the second quarter of 2012 increased 14 percent year-over-year in China but decreased 12 percent year-over-year in Australia. Revenues from our Asia Pacific segment increased mainly due to higher sales in China. Excluding positive foreign currency, Asian revenues for the second quarter of 2012 improved from the second quarter of last year, primarily due to $22 million from higher volumes and strong platform mix, particularly in China, on key Tenneco-supplied platforms. Excluding $2 million in unfavorable foreign currency, lower OE production volumes in Australia drove a $3 million . . .
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