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TEN > SEC Filings for TEN > Form 10-Q on 6-Aug-2013All Recent SEC Filings

Show all filings for TENNECO INC

Form 10-Q for TENNECO INC


6-Aug-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 second quarter of 2013, light vehicle production was up six percent in North America, 11 percent in China, one percent in Europe and 22 percent in South America. Light vehicle production was down six percent in India and one percent in Australia in the second quarter of 2013 when compared to the second quarter of 2012.
Total revenues for the second quarter of 2013 were $2,067 million, up from $1,920 million in the second quarter of 2012. Excluding the impact of currency and substrate sales, revenue was up $94 million, or six percent, from $1,491 million to $1,585 million, driven primarily by strong OE light vehicle production volumes in North America, South America and China.
Cost of sales (exclusive of depreciation and amortization): Cost of sales for the second quarter of 2013 was $1,736 million, or 84.0 percent of sales, compared to $1,595 million, or 83.1 percent of sales in the second quarter of 2012. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Quarter ended June 30, 2012 $ 1,595
Volume and mix                  144
Material                        (15 )
Currency exchange rates           3
Restructuring                     1
Other Costs                       8
Quarter ended June 30, 2013 $ 1,736

The increase in cost of sales was due primarily to the year-over-year increase in volume, higher other costs, mainly manufacturing costs, and the impact of currency exchange rates, partially offset by lower material costs. Gross margin: Revenue less cost of sales for the second quarter of 2013 was $331 million, or 16.0 percent, versus $325 million, or 16.9 percent, in the second quarter of 2012. The effects on gross margin resulting from higher volumes and better material cost management were partially offset by currency. Engineering, research and development: Engineering, research and development expense was $33 million and $28 million in the second quarters of 2013 and 2012, respectively. Increased spending to support customer programs, growth in emerging markets and decreased engineering cost recoveries drove the increase in expense year-over-year.
Selling, general and administrative: Selling, general and administrative expense was down $3 million in the second quarter of 2013, at $106 million, compared to $109 million in the second quarter of 2012.
Depreciation and amortization: Depreciation and amortization expense was $50 million in both the second quarter of 2013 and 2012.


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Earnings before interest expense, taxes and noncontrolling interests ("EBIT") were $141 million for the second quarter of 2013, an increase of $4 million when compared to $137 million in the second quarter of the prior year. Higher light vehicle production volumes in North America, South America and China and effective operational cost management were partially offset by lower commercial vehicle volumes in North America and their related costs, higher restructuring and related expenses and $8 million of negative currency.
Total revenues for the first six months of 2013 were up four percent to $3,970 million from $3,832 million for the first six months of 2012. Excluding the impact of currency and substrate sales, revenue was up $115 million, from $2,947 million to $3,062 million, driven primarily by strong OE light vehicle production volumes in North America, South America and China.

Cost of sales: Cost of sales for the first half of 2013 was $3,340 million, or 84.1 percent of sales, compared to $3,202 million, or 83.6 percent of sales in the first half of 2012. The following table lists the primary drivers behind the change in cost of sales ($ millions).

Six months ended June 30, 2012 $ 3,202
Volume and mix                     180
Material                           (35 )
Currency exchange rates            (25 )
Restructuring                        3
Other Costs                         15
Six months ended June 30, 2013 $ 3,340

The increase in cost of sales was due primarily to the year-over-year increase in volumes, higher restructuring and 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 first six months of 2013 was $630 million, or 15.9 percent, versus $630 million, or 16.4 percent in the first six months of 2012. The effect on gross margin resulting from higher volumes and better material cost management were offset by negative currency, higher restructuring expenses and higher manufacturing costs.
Engineering, research and development: Engineering, research and development expense was $68 million and $66 million in the first six months of 2013 and 2012, respectively.
Selling, general and administrative: Selling, general and administrative expense was $225 million and $227 million in the first half of 2013 and 2012, respectively.
Depreciation and amortization: Depreciation and amortization expense in the first six months of 2013 was $100 million, compared to $99 million in the first six months of 2012.
EBIT was $234 million for the first half of 2013, an improvement of $1 million, when compared to $233 million in the first half of 2012. Higher production volumes in China for both product lines and effective operational cost management were partially offset by 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 $8 million of negative currency.

Results from Operations
The tables below reflect our revenues for 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


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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.

Net Sales and Operating Revenues for the Three Months Ended June 30, 2013 and

2012
                                                             Three Months Ended June 30, 2013
                                                                                         Currency
                                                                                         Impact on
                                                                        Value-add        Value-add     Value-add Revenues
                                   Revenues       Substrate Sales        Revenues        Revenues      excluding Currency
                                                                        (Millions)
Clean Air Division
North America                    $      687     $             272     $        415     $         -     $            415
Europe, South America & India           516                   184              332              (4 )                336
Asia Pacific                            203                    32              171               4                  167
Total Clean Air Division              1,406                   488              918               -                  918
Ride Performance Division
North America                           324                     -              324               -                  324
Europe, South America & India           281                     -              281              (5 )                286
Asia Pacific                             56                     -               56              (1 )                 57
Total Ride Performance Division         661                     -              661              (6 )                667
Total Tenneco Inc.               $    2,067     $             488     $      1,579     $        (6 )   $          1,585


                                                               Three Months Ended June 30, 2012
                                                                                          Currency Impact
                                                                           Value-add       on Value-add     Value-add Revenues
                                    Revenues         Substrate Sales        Revenues         Revenues       excluding Currency
                                                                          (Millions)
Clean Air Division
North America                    $      671        $             269     $        402     $           -     $            402
Europe, South America & India           434                      137              297                 -                  297
Asia Pacific                            169                       23              146                 -                  146
Total Clean Air Division              1,274                      429              845                 -                  845
Ride Performance Division
North America                           325                        -              325                 -                  325
Europe, South America & India           276                        -              276                 -                  276
Asia Pacific                             45                        -               45                 -                   45
Total Ride Performance Division         646                        -              646                 -                  646
Total Tenneco Inc.               $    1,920        $             429     $      1,491     $           -     $          1,491


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                                                          Three Months Ended June 30, 2013
                                                      Versus Three Months Ended June 30, 2012
                                                       Dollar and Percent Increase (Decrease)
                                                                              Value-add
                                                                              Revenues
                                                                              excluding
                                            Revenues          Percent         Currency          Percent
                                                         (Millions Except Percent Amounts)
Clean Air Division
North America                             $       16              2  %      $        13             3  %
Europe, South America & India                     82             19  %               39            13  %
Asia Pacific                                      34             20  %               21            14  %
Total Clean Air Division                         132             10  %               73             9  %
Ride Performance Division
North America                                     (1 )            -  %               (1 )           -  %
Europe, South America & India                      5              2  %               10             4  %
Asia Pacific                                      11             24  %               12            27  %
Total Ride Performance Division                   15              2  %               21             3  %
Total Tenneco Inc.                        $      147              8  %      $        94             6  %

Light Vehicle Industry Production by Region for Three Months Ended June 30, 2013 and 2012 (According to IHS Automotive, July 2013)

                                                Three Months Ended June 30,
                                                                Increase     % Increase
                                         2013         2012     (Decrease)    (Decrease)
                                             (Number of Vehicles in Thousands)
North America                         4,221          3,986         235           6  %
Europe                                5,065          5,017          48           1  %
South America                         1,253          1,029         224          22  %
India                                   863            921         (58 )        (6 )%
Total Europe, South America & India   7,181          6,967         214           3  %
China                                 5,020          4,513         507          11  %
Australia                                55             56          (1 )        (1 )%

Clean Air revenue was up $132 million in the second quarter of 2013 compared to the second quarter of 2012, driven by higher sales in all the regions. The increase in North American revenues was driven by higher volumes, which accounted for $16 million of the year-over-year change in revenues. The increase in European, South American and Indian revenues was mostly driven by higher volumes of $87 million, mainly due to higher year-over-year OE light and commercial vehicle revenues. Currency had a $3 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 new platforms and higher light vehicle production volumes in China. Currency had a $5 million favorable impact on Asia Pacific revenues.
Ride Performance revenue was up $15 million in the second quarter of 2013 compared to the second quarter of 2012, primarily driven by higher volumes in Europe, South America and India and Asia Pacific regions, partially offset by lower volumes in North America. The decrease in North American revenues was driven by lower volumes, which accounted for $2 million of the year-over-year change in revenues, including lower commercial vehicle revenues. The increase in European, South American and Indian revenues was primarily driven by higher volumes of $7 million. Currency had a $5 million unfavorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was driven by higher volumes of $12 million, mostly due to new platforms in the region and higher light vehicle production volumes in China. Currency had a $1 million unfavorable impact on Asia Pacific revenues.


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Net Sales and Operating Revenues for the Six Months Ended June 30, 2013 and 2012

                                                      Six Months Ended June 30, 2013
                                                                                  Currency
                                                                                  Impact on
                                                                 Value-add        Value-add     Value-add Revenues
                           Revenues        Substrate Sales        Revenues        Revenues      excluding Currency
                                                                (Millions)
Clean Air Division
North America            $     1,333     $             532     $        801     $         -     $            801
Europe, South America &
India                            983                   353              630             (17 )                647
Asia Pacific                     386                    57              329               4                  325
Total Clean Air Division       2,702                   942            1,760             (13 )              1,773
Ride Performance
Division
North America                    631                     -              631              (1 )                632
Europe, South America &
India                            533                     -              533             (19 )                552
Asia Pacific                     104                     -              104              (1 )                105
Total Ride Performance
Division                       1,268                     -            1,268             (21 )              1,289
Total Tenneco Inc.       $     3,970     $             942     $      3,028     $       (34 )   $          3,062



                                                        Six Months Ended June 30, 2012
                                                                                Currency Impact
                                                                 Value-add        on Value-add     Value-add Revenues
                           Revenues        Substrate Sales        Revenues          Revenues       excluding Currency
                                                                  (Millions)
Clean Air Division
North America            $     1,340     $             546     $        794     $            -     $            794
Europe, South America &
India                            894                   290              604                  -                  604
Asia Pacific                     325                    49              276                  -                  276
Total Clean Air Division       2,559                   885            1,674                  -                1,674
Ride Performance
Division
North America                    642                     -              642                  -                  642
Europe, South America &
India                            548                     -              548                  -                  548
Asia Pacific                      83                     -               83                  -                   83
Total Ride Performance
Division                       1,273                     -            1,273                  -                1,273
Total Tenneco Inc.       $     3,832     $             885     $      2,947     $            -     $          2,947


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                                                      Six Months Ended June 30, 2013
                                                   Versus Six Months Ended June 30, 2012
                                                  Dollar and Percent Increase (Decrease)
                                                                           Value-add
                                                                           Revenues
                                                                           excluding
                                    Revenues            Percent            Currency            Percent
                                                     (Millions Except Percent Amounts)
Clean Air Division
North America                   $          (7 )              (1 )%      $           7                1  %
Europe, South America & India              89                10  %                 43                7  %
Asia Pacific                               61                19  %                 49               18  %
Total Clean Air Division                  143                 6  %                 99                6  %
Ride Performance Division
North America                             (11 )              (2 )%                (10 )             (2 )%
Europe, South America & India             (15 )              (3 )%                  4                1  %
Asia Pacific                               21                25  %                 22               27  %
Total Ride Performance Division            (5 )               -  %                 16                1  %
Total Tenneco Inc.              $         138                 4  %      $         115                4  %

Light Vehicle Industry Production by Region for Six Months Ended June 30, 2013 and 2012 (According to IHS Automotive, July 2013)

                                              Six Months Ended June 30,
                                                         Increase     % Increase
                                     2013      2012     (Decrease)    (Decrease)
                                          (Number of Vehicles in Thousands)
North America                        8,233     7,951          282         4  %
Europe                               9,885    10,271         (386 )      (4 )%
South America                        2,275     1,983          292        15  %
India                                1,874     1,998         (124 )      (6 )%
Total Europe, South America & India 14,034    14,252         (218 )      (2 )%
China                               10,130     8,994        1,136        13  %
Australia                              119       113            6         5  %

Clean Air revenue was up $143 million in the first six months of 2013 compared to the first six months of 2012, primarily driven by higher sales in the Europe, South America and India and Asia Pacific regions, partially offset by declines in the North American region. The decrease in North American revenues was driven by lower volumes, which accounted for $7 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 $114 million, mainly due to higher year-over-year OE light and commercial vehicle revenues. Currency had a $20 million unfavorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was primarily driven by higher volumes of $64 million, mostly due to new platforms and higher light vehicle production volumes in China. Currency had a $5 million favorable impact on Asia Pacific revenues.
Ride Performance revenue was down $5 million in the first six months of 2013 compared to the first six months of 2012, primarily driven by lower volumes in North America and Europe, South America and India, partially offset by higher volumes in the Asia Pacific region. The decrease in North American revenues was driven by lower volumes, which accounted for $12 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 $2 million and an unfavorable currency impact of $19 million. The increase in Asia Pacific revenues was driven by higher volumes of $22 million, mostly due to new platforms in the region and higher light vehicle production volumes in China. Currency had a $1 million unfavorable impact on year-over-year Asia Pacific revenues.

Earnings before Interest Expense, Income Taxes and Noncontrolling Interests ("EBIT") for the Three Months Ended June 30, 2013 and 2012


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