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TEN > SEC Filings for TEN > Form 10-Q on 7-May-2013All Recent SEC Filings

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Form 10-Q for TENNECO INC


7-May-2013

Quarterly Report


ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As you read the following review of our financial condition and results of operations, you should also read our 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®, XNOx™, Fonos™, DynoMax® and Thrush™ emission control products. We serve more than 63 different original equipment manufacturers and commercial vehicle engine manufacturers, and our products are included on all ten of the top 10 car models produced for sale in Europe and eight of the top 10 light truck models produced for sale in North America for 2012. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. As of December 31, 2012, we operated 89 manufacturing facilities worldwide and employed approximately 25,000 people to service our customers' demands.
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences to other vehicles in response to higher fuel costs and other economic and social factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the impact of any such cost increases through material substitutions, cost reduction initiatives and other methods.
For the first quarter of 2013, light vehicle production was up one percent in North America, 10 percent in China, 11 percent in Australia and eight percent in South America. Light vehicle production was down eight percent in Europe and six percent in India in the first quarter of 2013 when compared to the first quarter of 2012.
Total revenues for the first quarter of 2013 were $1,903 million, slightly down from $1,912 million in the first quarter of 2012. Excluding the impact of currency and substrate sales, revenue was up $21 million, or one percent, from $1,456 million to $1,477 million, driven primarily by strong OE light vehicle production volumes in China.
Cost of sales (exclusive of depreciation and amortization): Cost of sales for the first quarter of 2013 was $1,604 million, or 84.3 percent of sales, compared to $1,607 million, or 84.0 percent of sales in the first quarter of 2012. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Quarter ended March 31, 2012 $ 1,607
Volume and mix                    37
Material                         (20 )
Currency exchange rates          (26 )
Restructuring                      2
Other Costs                        4
Quarter ended March 31, 2013 $ 1,604

The decrease in cost of sales was due primarily to the year-over-year decrease in material costs and the impact of foreign currency exchange rates. Gross margin: Revenue less cost of sales for the first quarter of 2013 was $299 million, or 15.7 percent, versus $305 million, or 16.0 percent, in the first quarter of 2012. The effects on gross margin resulting from lower volumes, negative currency and higher restructuring costs were partially offset by better material cost management.
Engineering, research and development: Engineering, research and development expense was $35 million and $38 million in the first quarters of 2013 and 2012, respectively. Increased engineering cost recoveries drove the decrease in expense year-over-year.
Selling, general and administrative: Selling, general and administrative expense was up $1 million in the first quarter of 2013, at $119 million, compared to $118 million in the first quarter of 2012.
Depreciation and amortization: Depreciation and amortization expense in the first quarter of 2013 was $50 million, compared to $49 million in the first quarter of 2012.


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Earnings before interest expense, taxes and noncontrolling interests ("EBIT") were $93 million for the first quarter of 2013, a decrease of $3 million when compared to $96 million in the first quarter of the prior year. Lower volumes in Europe and North America Ride Performance, the related manufacturing absorption costs, costs in North America Ride Performance related to the resolution of an issue from late 2011 related to struts supplied to one particular OE platform, higher restructuring and related expenses and $2 million of negative currency were partially offset by higher production volumes in China for both product lines and effective operational cost management. Results from Operations
Net Sales and Operating Revenues for the Three Months Ended March 31, 2013 and 2012
The tables below reflect our revenues for the first quarters of 2013 and 2012. We show the component of our OE revenue represented by substrate sales. 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 - typically, precious metals such as platinum, palladium and rhodium. These 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. As the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business, these substrate components have been increasing as a percentage of our revenue. 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. Presenting revenues that exclude "substrates" used in catalytic converters and diesel particulate filters removes this impact.
Additionally, we present these reconciliations of revenues in order to reflect value-add revenues without the effect of changes in foreign currency rates. We have not reflected any currency impact in the 2012 table since this is the base period for measuring the effects of currency during 2013 on our operations. We believe investors find this information useful in understanding period-to-period comparisons in our revenues.


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                                                            Three Months Ended March 31, 2013
                                                                                         Currency
                                                                                        Impact on
                                                                        Value-add       Value-add     Value-add Revenues
                                   Revenues       Substrate Sales        Revenues        Revenues     excluding Currency
                                                                       (Millions)
Clean Air Division
North America                    $      646     $             260     $        386     $        -     $            386
Europe, South America & India           467                   169              298            (13 )                311
Asia Pacific                            183                    25              158              -                  158
Total Clean Air Division              1,296                   454              842            (13 )                855
Ride Performance Division
North America                           307                     -              307             (1 )                308
Europe, South America & India           252                     -              252            (14 )                266
Asia Pacific                             48                     -               48              -                   48
Total Ride Performance Division         607                     -              607            (15 )                622
Total Tenneco Inc.               $    1,903     $             454     $      1,449     $      (28 )   $          1,477


                                                               Three Months Ended March 31, 2012
                                                                                           Currency Impact
                                                                            Value-add       on Value-add     Value-add Revenues
                                     Revenues         Substrate Sales        Revenues         Revenues       excluding Currency
                                                                           (Millions)
Clean Air Division
North America                    $      669         $             277     $        392     $           -     $            392
Europe, South America & India           460                       153              307                 -                  307
Asia Pacific                            156                        26              130                 -                  130
Total Clean Air Division              1,285                       456              829                 -                  829
Ride Performance Division
North America                           317                         -              317                 -                  317
Europe, South America & India           272                         -              272                 -                  272
Asia Pacific                             38                         -               38                 -                   38
Total Ride Performance Division         627                         -              627                 -                  627
Total Tenneco Inc.               $    1,912         $             456     $      1,456     $           -     $          1,456


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                                                          Three Months Ended March 31, 2013
                                                      Versus Three Months Ended March 31, 2012
                                                       Dollar and Percent Increase (Decrease)
                                                                              Value-add
                                                                               Revenues
                                                                              excluding
                                            Revenues          Percent          Currency          Percent
                                                          (Millions Except Percent Amounts)
Clean Air Division
North America                             $      (23 )           (3 )%      $         (6 )          (2 )%
Europe, South America & India                      7              2  %                 4             1  %
Asia Pacific                                      27             17  %                28            22  %
Total Clean Air Division                          11              1  %                26             3  %
Ride Performance Division
North America                                    (10 )           (3 )%                (9 )          (3 )%
Europe, South America & India                    (20 )           (7 )%                (6 )          (2 )%
Asia Pacific                                      10             26  %                10            26  %
Total Ride Performance Division                  (20 )           (3 )%                (5 )          (1 )%
Total Tenneco Inc.                        $       (9 )            -  %      $         21             1  %

Light Vehicle Industry Production by Region for Three Months Ended March 31, 2013 and 2012 (According to IHS Automotive, April 2013)

                                               Three Months Ended March 31,
                                                               Increase     % Increase
                                         2013         2012    (Decrease)    (Decrease)
                                             (Number of Vehicles in Thousands)
North America                         3,984          3,964          20          1  %
Europe                                4,826          5,243        (417 )       (8 )%
South America                         1,026            954          72          8  %
India                                 1,011          1,077         (66 )       (6 )%
Total Europe, South America & India   6,863          7,274        (411 )       (6 )%
China                                 4,939          4,481         458         10  %
Australia                                63             57           6         11  %

Clean Air revenue was up $11 million in the first quarter of 2013 compared to the first quarter of 2012, primarily driven by higher sales in Asia Pacific segment and European, South American and Indian region, partially offset by declines in the North American region. The decrease in North American revenues was driven by lower volumes, which accounted for $23 million of the year-over-year change in revenues, including lower commercial vehicle revenues. The increase in European, South American and Indian revenues was mostly driven by higher volumes of $27 million, mainly due to higher year-over-year commercial vehicle revenues. Currency had a $17 million unfavorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was primarily driven by higher volumes of $32 million, mostly due to higher light vehicle production volumes in China.
Ride Performance revenue was down $20 million in the first quarter of 2013 compared to the first quarter of 2012, primarily driven by lower volumes in North America and Europe, South America and India, partially offset by higher volumes in Asia Pacific region. The decrease in North American revenues was driven by lower volumes, which accounted for $10 million of the year-over-year change in revenues, including lower commercial vehicle revenues. Currency had a $1 million unfavorable impact on year-over-year North American revenues. The decrease in European, South American and Indian revenues was primarily driven by lower volumes of $9 million and an unfavorable currency impact of $14 million. The increase in Asia Pacific revenues was driven by higher volumes of $10 million, mostly due to higher light vehicle production volumes in China.

Earnings before Interest Expense, Income Taxes and Noncontrolling Interests ("EBIT") for the Three Months Ended March 31, 2013 and 2012


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                                    Three Months Ended March 31,
                                      2013                  2012         Change
                                                   (Millions)
Clean Air Division
North America                   $         49           $         48     $    1
Europe, South America & India             11                     16         (5 )
Asia Pacific                              15                     12          3
Total Clean Air Division                  75                     76         (1 )
Ride Performance Division
North America                             25                     35        (10 )
Europe, South America & India             10                     10          -
Asia Pacific                               4                     (2 )        6
Total Ride Performance Division           39                     43         (4 )
Other                                    (21 )                  (23 )        2
Total Tenneco Inc.              $         93           $         96     $   (3 )

The EBIT results shown in the preceding table include the following items, certain of which are discussed below under "Restructuring and Other Charges," which have an effect on the comparability of EBIT results between periods:

                                            Three Months Ended March 31,
                                                   2013                     2012
                                                     (Millions)
Clean Air Division
Europe, South America & India
Restructuring and related expenses $           1                           $   -
Asia Pacific
Restructuring and related expenses             2                               -
 Total Clear Air Division          $           3                           $   -
Ride Performance Division
Europe, South America & India
Restructuring and related expenses             1                               1
 Total Ride Performance Division   $           1                           $   1

EBIT for the Clean Air division was $75 million in the first quarter of 2013 compared to $76 million in the first quarter a year ago. EBIT for North America increased $1 million to $49 million in the first three months of 2013 versus the first three months of 2012. The benefits to EBIT from solid aftermarket performance and operational cost management were partially offset by lower OE revenues, their related manufacturing absorption costs and negative currency. Europe, South America and India's EBIT decreased $5 million in the first quarter of 2013 to $11 million from $16 million in the first quarter of 2012. The decrease was driven by lower aftermarket volumes, increased restructuring and related expenses and negative currency partially offset by operational cost management. EBIT from Asia Pacific increased $3 million to $15 million in the first quarter of 2013 from $12 million in the first quarter of 2012. The benefits to EBIT from higher production volumes in China, operational cost management and positive currency were partially offset by higher restructuring and related expenses. For the Clean Air division, restructuring and related expenses of $3 million were included in EBIT for the first quarter of 2013. Currency had a $2 million unfavorable impact on EBIT of the Clean Air division for 2013 when compared to last year.
EBIT for the Ride Performance division was $39 million in the first quarter of 2013 compared to $43 million in the first quarter a year ago. EBIT for North America decreased $10 million in the first three months of 2013 to $25 million from $35 million in the first three months of 2012. The decrease was driven by lower OE and aftermarket volumes, the related manufacturing absorption costs, costs related to the resolution of an issue from late 2011 related to struts supplied to one particular OE platform and negative currency partially offset by operational cost management. Europe, South America and India's EBIT was $10 million in the first quarter of 2013, flat with the prior year's first quarter. The benefits to EBIT from operational cost management and restructuring savings were offset by volume declines in both the OE and aftermarket businesses. EBIT from Asia Pacific increased $6 million to $4 million in the first quarter of 2013 from a loss of $2 million in the first quarter of 2012. EBIT benefited from higher production volumes in China, positive currency and operational


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improvements. For the Ride Performance division, restructuring and related expenses of $1 million were included in EBIT for the first quarters of both 2013 and 2012.
Currency had a $2 million unfavorable impact on overall company EBIT for the first quarter of 2013 as compared to the prior year's first quarter. EBIT as a Percentage of Revenue for the Three Months Ended March 31, 2013 and

2012
                                  Three Months Ended March 31,
                                  2013               2012
Clean Air Division
North America                      8 %                7  %
Europe, South America & India      2 %                3  %
Asia Pacific                       8 %                8  %
Total Clean Air Division           6 %                6  %
Ride Performance Division
North America                      8 %               11  %
Europe, South America & India      4 %                4  %
Asia Pacific                       8 %               (5 )%
Total Ride Performance Division    6 %                7  %
Total Tenneco Inc.                 5 %                5  %

In the Clean Air division, EBIT as a percentage of revenues for the first quarter of 2013 was even when compared to last year's first quarter. In North America, EBIT as a percentage of revenues for the first quarter of 2013 was up one percentage point from last year's first quarter due to solid aftermarket performance and operational cost management which were partially offset as a percentage of revenue by lower OE revenues, their related manufacturing absorption costs and negative currency. Europe, South America and India's EBIT as a percentage of revenues for the first quarter of 2013 decreased one percentage point from the prior year's first quarter, driven by lower aftermarket volumes, increased restructuring and related expenses and negative currency which were offset partially as a percentage of revenue by operational cost management. EBIT as a percentage of revenues for Asia Pacific was even in the first quarter of 2013 when compared to the first quarter of 2012 due to higher production volumes in China, operational cost management and positive currency, which were offset as a percentage of revenue by higher restructuring and related expenses.

In the Ride Performance division, EBIT as a percentage of revenues was down one percentage point from the prior year's first quarter. In the first quarter of 2013, EBIT as a percentage of revenues for North America decreased three percentage points when compared to the first quarter of 2012 driven by lower OE and aftermarket volumes, the related manufacturing absorption costs, costs related to the resolution of an issue from late 2011 related to struts supplied to one particular OE platform and negative currency which were offset partially as a percentage of revenue by operational cost management. EBIT as a percentage of revenues in Europe, South America and India was flat in the first quarter of 2013 when compared to the prior year's first quarter due to the benefits to EBIT from operational cost management and restructuring savings offset as a percentage of revenue by volume declines in both the OE and aftermarket businesses. In Asia Pacific, EBIT as a percentage of revenues for the first quarter of 2013 was up 13 percentage points from last year's first quarter due to higher production volumes in China, positive currency and operational improvements.
Interest Expense, Net of Interest Capitalized We reported interest expense in the first quarter of 2013 of $20 million ($19 million in our U.S. operations and $1 million in our foreign operations) net of interest capitalized of $1 million, down from $42 million (all in our U.S. operations) net of interest capitalized of $1 million in the first quarter of 2012. Included in the first quarter of 2012 was $17 million of expense related to our refinancing activities. Excluding the refinancing expenses, interest expense decreased in the first quarter of 2013 compared to the prior year's first quarter as a result of lower rates due to last year's debt refinancing transactions.
On March 31, 2013, we had $734 million in long-term debt obligations that have fixed interest rates. Of that amount, $500 million is fixed through December 2020, $225 million is fixed through August 2018, and the remainder is fixed from 2015 through 2025. We also have $518 million in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to "Liquidity and Capital Resources - Capitalization" later in this Management's Discussion and Analysis.


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Income Taxes
We reported an income tax expense of $12 million for the first quarter of 2013. The tax expense recorded in 2013 includes a net tax benefit of $13 million for tax adjustment primarily related to recognizing a U.S. tax benefit for foreign taxes. Income tax expense was $18 million for the first quarter of 2012. The tax expense recorded for 2012 differs from a statutory rate of 35 percent due to a net tax benefit of $1 million primarily related to U.S. taxable income with no associated tax expense due to our net operating loss carryforward and income generated in lower tax jurisdictions, partially offset by the impact of recording a valuation allowance against the tax benefit for losses in certain foreign jurisdictions.
The U.S. tax benefit for foreign taxes is driven by our ability to claim a U.S. foreign tax credit beginning in 2013. The U.S. foreign tax credit regime provides for a credit against U.S. taxes otherwise payable for foreign taxes paid with regard to dividends, interest and royalties paid to us in the U.S. In 2008, given our historical losses in the U.S., we concluded that our ability to fully utilize our federal and state net operating loss carryforward ("NOL") was limited. As a result, we recorded a valuation allowance against all of our U.S. deferred tax assets except for our tax planning strategies which had not yet been implemented and which did not depend upon generating future taxable income. Prior to the reversal of the valuation allowance in the third quarter of 2012, we carried a deferred tax asset in the U.S. of $90 million relating to the . . .

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