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

Show all filings for TENNECO INC

Form 10-Q for TENNECO INC


7-Nov-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 third quarter of 2013, light vehicle production was up six percent in North America, nine percent in China, two percent in Europe, and four percent in both South America and India. Light vehicle production was down one percent in Australia in the third quarter of 2013 when compared to the third quarter of 2012.
Total revenues for the third quarter of 2013 were $1,963 million, up from $1,778 million in the third quarter of 2012. Excluding the impact of currency and substrate sales, revenue was up $149 million, or 11 percent, from $1,392 million to $1,541 million, driven primarily by strong OE light vehicle production volumes in North America, South America and China, stronger global commercial vehicle volumes, new light vehicle platform launches and higher aftermarket sales in Europe.
Cost of sales (exclusive of depreciation and amortization): Cost of sales for the third quarter of 2013 was $1,691 million, or 86.1 percent of sales, compared to $1,494 million, or 84.0 percent of sales in the third quarter of 2012. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Quarter ended September 30, 2012 $ 1,494
Volume and mix                       154
Material                             (13 )
Currency exchange rates               (2 )
Restructuring                         51
Other Costs                            7
Quarter ended September 30, 2013 $ 1,691

The increase in cost of sales was due primarily to the year-over-year increase in volume, higher restructuring costs, higher other costs, mainly manufacturing costs, partially offset by lower net material costs and the impact of currency exchange rates.
Gross margin: Revenue less cost of sales for the third quarter of 2013 was $272 million, or 13.9 percent, versus $284 million, or 16.0 percent, in the third quarter of 2012. The effect on gross margin resulting from higher restructuring cost, higher manufacturing costs and currency was partially offset by higher volumes and better material cost management.
Engineering, research and development: Engineering, research and development expense was $35 million and $28 million in the third quarters of 2013 and 2012, respectively. Increased spending to support customer programs and growth in emerging markets drove the increase in expense year-over-year.
Selling, general and administrative: Selling, general and administrative expense was up $18 million in the third quarter of 2013, at $112 million, compared to $94 million in the third quarter of 2012. The year-over-year increase is due to higher


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compensation related accruals, growth in emerging markets and a benefit of $5 million in the third quarter of 2012 from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996.
Depreciation and amortization: Depreciation and amortization expense was $51 million in the third quarter of 2013, compared to $49 million in the third quarter of 2012.
Earnings before interest expense, taxes and noncontrolling interests ("EBIT") were $72 million for the third quarter of 2013, a decrease of $39 million when compared to $111 million in the third quarter of the prior year. Higher restructuring and related expenses in Europe, $6 million negative currency and a benefit of $5 million in the third quarter of 2012 from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996 were partially offset by new light vehicle platforms and stronger volumes, higher year-over-year commercial vehicle revenue and higher aftermarket sales.
Total revenues for the first nine months of 2013 were up six percent to $5,933 million from $5,610 million for the first nine months of 2012. Excluding the impact of currency and substrate sales, revenue was up $264 million, from $4,339 million to $4,603 million, driven primarily by strong OE light vehicle production volumes in North America, South America and China and new light vehicle platform launches in Europe.

Cost of sales: Cost of sales for the first nine months of 2013 was $5,031 million, or 84.8 percent of sales, compared to $4,696 million, or 83.7 percent of sales in the first nine months of 2012. The following table lists the primary drivers behind the change in cost of sales ($ millions).

Nine months ended September 30, 2012 $ 4,696
Volume and mix                           334
Material                                 (48 )
Currency exchange rates                  (27 )
Restructuring                             54
Other Costs                               22
Nine months ended September 30, 2013 $ 5,031

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 net material costs and the impact of foreign currency exchange rates.
Gross margin: Revenue less cost of sales for the first nine months of 2013 was $902 million, or 15.2 percent, versus $914 million, or 16.3 percent in the first nine months of 2012. The effect on gross margin resulting from higher restructuring expenses, higher manufacturing costs and negative currency was partially offset by higher volumes and better material cost management. Engineering, research and development: Engineering, research and development expense was $103 million and $94 million in the first nine months of 2013 and 2012, respectively. Increased spending to support customer programs, growth in emerging markets and decreased engineering costs recoveries drove the year-over-year increase.
Selling, general and administrative: Selling, general and administrative expense was $337 million and $321 million in the first nine months of 2013 and 2012, respectively. The year-over-year increase is due to higher compensation related accruals, growth in emerging markets and a benefit of $5 million in the third quarter of 2012 from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996.
Depreciation and amortization: Depreciation and amortization expense in the first nine months of 2013 was $151 million, compared to $148 million in the first nine months of 2012.
EBIT was $306 million for the first nine months of 2013, a decrease of $38 million, when compared to $344 million in the first nine months of 2012. Higher restructuring and related expenses, $14 million of negative currency and a benefit of $5 million in the third quarter of 2012 from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996 were partially offset by higher light vehicle production volumes in North America and China for both product lines, new light vehicle platforms, higher commercial vehicle volumes in Europe, South America and China and higher European Ride Performance aftermarket sales.

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


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

and 2012
                                                          Three Months Ended September 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                    $      648     $             246     $        402     $         -     $            402
Europe, South America & India           470                   152              318              (1 )                319
Asia Pacific                            210                    33              177               3                  174
Total Clean Air Division              1,328                   431              897               2                  895
Ride Performance Division
North America                           321                     -              321              (2 )                323
Europe, South America & India           258                     -              258              (7 )                265
Asia Pacific                             56                     -               56              (2 )                 58
Total Ride Performance Division         635                     -              635             (11 )                646
Total Tenneco Inc.               $    1,963     $             431     $      1,532     $        (9 )   $          1,541


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                                                           Three Months Ended September 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                    $      592     $             227     $        365     $           -     $            365
Europe, South America & India           414                   139              275                 -                  275
Asia Pacific                            179                    20              159                 -                  159
Total Clean Air Division              1,185                   386              799                 -                  799
Ride Performance Division
North America                           299                     -              299                 -                  299
Europe, South America & India           245                     -              245                 -                  245
Asia Pacific                             49                     -               49                 -                   49
Total Ride Performance Division         593                     -              593                 -                  593
Total Tenneco Inc.               $    1,778     $             386     $      1,392     $           -     $          1,392


                                                              Three Months Ended September 30, 2013
                                                          Versus Three Months Ended September 30, 2012
                                                             Dollar and Percent Increase (Decrease)
                                                                                             Value-add
                                                                                             Revenues
                                                                                             excluding
                                                     Revenues                 Percent        Currency        Percent
                                                                (Millions Except Percent Amounts)
Clean Air Division
North America                             $         56                             9 %     $        37           10 %
Europe, South America & India                       56                            14 %              44           16 %
Asia Pacific                                        31                            17 %              15            9 %
Total Clean Air Division                           143                            12 %              96           12 %
Ride Performance Division
North America                                       22                             7 %              24            8 %
Europe, South America & India                       13                             5 %              20            8 %
Asia Pacific                                         7                            14 %               9           18 %
Total Ride Performance Division                     42                             7 %              53            9 %
Total Tenneco Inc.                        $        185                            10 %     $       149           11 %

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

                                                     Three Months Ended September 30,
                                                                      Increase       % Increase
                                             2013         2012       (Decrease)      (Decrease)
                                                     (Number of Vehicles in Thousands)
North America                                3,896        3,667          229              6  %
Europe                                       4,453        4,352          101              2  %
South America                                1,219        1,168           51              4  %
India                                          897          859           38              4  %
Total Europe, South America & India          6,569        6,379          190              3  %
China                                        4,760        4,385          375              9  %
Australia                                       61           62           (1 )           (1 )%

Clean Air revenue was up $143 million in the third quarter of 2013 compared to the third 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 $58 million of the year-over-year change in revenues. The increase in European, South American and Indian revenues was


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mostly driven by higher volumes of $54 million, mainly due to higher year-over-year OE light and commercial vehicle revenues. Currency had a $3 million favorable 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 and commercial vehicle volumes in China. Currency had a $3 million favorable impact on Asia Pacific revenues. Ride Performance revenue was up $42 million in the third quarter of 2013 compared to the third quarter of 2012, primarily driven by higher volumes in all the regions. The increase in North American revenues was primarily driven by higher volumes of $22 million. Currency had a $2 million unfavorable impact on North American revenues. The increase in European, South American and Indian revenues was primarily driven by higher volumes of $15 million. Currency had a $7 million unfavorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was driven by higher volumes of $10 million, mostly due to higher light vehicle production volumes in China. Currency had a $2 million unfavorable impact on Asia Pacific revenues.

Net Sales and Operating Revenues for the Nine Months Ended September 30, 2013

and 2012
                                                    Nine Months Ended September 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            $     1,981       $             778     $      1,203     $         -     $          1,203
Europe, South America &
India                          1,453                     505              948             (18 )                966
Asia Pacific                     596                      90              506               7                  499
Total Clean Air Division       4,030                   1,373            2,657             (11 )              2,668
Ride Performance
Division
North America                    952                       -              952              (3 )                955
Europe, South America &
India                            791                       -              791             (26 )                817
Asia Pacific                     160                       -              160              (3 )                163
Total Ride Performance
Division                       1,903                       -            1,903             (32 )              1,935
Total Tenneco Inc.       $     5,933       $           1,373     $      4,560     $       (43 )   $          4,603



                                                       Nine Months Ended September 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            $     1,932          $             773     $      1,159     $            -     $          1,159
Europe, South America &
India                          1,308                        429              879                  -                  879
Asia Pacific                     504                         69              435                  -                  435
Total Clean Air Division       3,744                      1,271            2,473                  -                2,473
Ride Performance
Division
North America                    941                          -              941                  -                  941
Europe, South America &
India                            793                          -              793                  -                  793
Asia Pacific                     132                          -              132                  -                  132
Total Ride Performance
Division                       1,866                          -            1,866                  -                1,866
Total Tenneco Inc.       $     5,610          $           1,271     $      4,339     $            -     $          4,339


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                                                     Nine Months Ended September 30, 2013
                                                  Versus Nine Months Ended September 30, 2012
                                                    Dollar and Percent Increase (Decrease)
                                                                                Value-add
                                                                                 Revenues
                                                                                excluding
                                     Revenues               Percent              Currency           Percent
                                                       (Millions Except Percent Amounts)
Clean Air Division
North America                   $           49                   3  %        $           44               4 %
Europe, South America & India              145                  11  %                    87              10 %
Asia Pacific                                92                  18  %                    64              15 %
Total Clean Air Division                   286                   8  %                   195               8 %
Ride Performance Division
North America                               11                   1  %                    14               1 %
Europe, South America & India               (2 )                 -  %                    24               3 %
Asia Pacific                                28                  21  %                    31              23 %
Total Ride Performance Division             37                   2  %                    69               4 %
Total Tenneco Inc.              $          323                   6  %        $          264               6 %

Light Vehicle Industry Production by Region for Nine Months Ended September 30, 2013 and 2012 (According to IHS Automotive, October 2013)

                                               Nine Months Ended September 30,
                                                                 Increase     % Increase
                                         2013          2012     (Decrease)    (Decrease)
                                              (Number of Vehicles in Thousands)
North America                         12,165          11,618          547         5  %
Europe                                14,408          14,623         (215 )      (1 )%
South America                          3,491           3,151          340        11  %
India                                  2,777           2,876          (99 )      (3 )%
Total Europe, South America & India   20,676          20,650           26         -  %
China                                 14,886          13,379        1,507        11  %
Australia                                158             174          (16 )      (9 )%

Clean Air revenue was up $286 million in the first nine months of 2013 compared to the first nine months of 2012, primarily driven by higher sales in all the regions. The increase in North American revenues was driven by higher volumes, which accounted for $51 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 $168 million, mainly due to higher year-over-year OE light and commercial vehicle revenues. Currency had a $17 million unfavorable impact on European, South American and Indian revenues. The increase in Asia Pacific . . .

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