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TEN > SEC Filings for TEN > Form 10-Q on 5-Aug-2014All Recent SEC Filings

Show all filings for TENNECO INC

Form 10-Q for TENNECO INC


5-Aug-2014

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 clean air and ride performance products and systems for light vehicle, commercial truck and off-highway 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 performance products and Walker®, XNOx™, Fonos™, DynoMax®, and Thrush™ clean air products. We serve more than 65 different original equipment manufacturers and commercial truck and off-highway engine manufacturers, and our products are included on nine 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 2013. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. As of December 31, 2013, we operated 89 manufacturing facilities worldwide and employed approximately 26,000 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 2014, light vehicle production was up four percent in North America, 11 percent in China and two percent in Europe. Light vehicle production was down 24 percent in South America, 20 percent in Australia and unchanged in India in the second quarter of 2014 when compared to the second quarter of 2013.
Total revenues for the second quarter of 2014 were $2,241 million, up from $2,067 million in the second quarter of 2013. Excluding the impact of currency and substrate sales, revenue was up $152 million, or 10 percent, from $1,579 million to $1,731 million, driven primarily by stronger OE light vehicle volumes in North America and China, higher OE commercial truck, off-highway and other revenue in North America, Europe and China and increased aftermarket Ride Performance sales in North America and South America.
Cost of sales (exclusive of depreciation and amortization): Cost of sales for the second quarter of 2014 was $1,851 million, or 82.6 percent of sales, compared to $1,736 million, or 84.0 percent of sales in the second quarter of 2013. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Quarter ended June 30, 2013 $ 1,736
Volume and mix                  122
Material                         (1 )
Currency exchange rates          (7 )
Restructuring                    (1 )
Other Costs                       2
Quarter ended June 30, 2014 $ 1,851

The increase in cost of sales was due to the year-over-year increase in volume and higher costs, mainly manufacturing, partially offset by lower restructuring costs, lower net material costs and the impact of currency exchange rates. Gross margin: Revenue less cost of sales for the second quarter of 2014 was $390 million, or 17.4 percent, versus $331 million, or 16.0 percent, in the second quarter of 2013. The effect on gross margin resulted from higher volumes, lower restructuring expenses and favorable currency.
Engineering, research and development: Engineering, research and development expense was $42 million and $33 million in the second quarters of 2014 and 2013, respectively. Increased spending to support customer programs and lower recoveries drove the year-over-year increase.


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Selling, general and administrative (SG&A): SG&A expense was up $33 million in the second quarter of 2014, at $139 million, compared to $106 million in the second quarter of 2013. The year-over-year increase is due to higher compensation related accruals, higher legal costs related to the ongoing anti-trust investigation, growth in emerging markets and other corporate expenses.
Depreciation and amortization: Depreciation and amortization expense was $52 million in the second quarter of 2014, compared to $50 million in the second quarter of 2013.
Earnings before interest expense, taxes and noncontrolling interests ("EBIT") were $156 million for the second quarter of 2014, an increase of $15 million when compared to $141 million in the second quarter of the prior year. Higher light vehicle volumes globally, commercial truck and off-highway revenue growth, new platforms and an increase in commercial vehicle content, higher aftermarket sales, strong operational performance and $5 million favorable currency were partially offset by higher SG&A and engineering expenses.
Total revenues for the first six months of 2014 were $4,335 million, up from $3,970 million for the first six months of 2013. Excluding the impact of currency and substrate sales, revenue was up $336 million, or 11 percent, from $3,028 million to $3,364 million, driven primarily by stronger OE light vehicle volumes in North America and China, higher OE commercial truck, off-highway and other revenue in North America, Europe and China and increased aftermarket Ride Performance sales in North America, Europe and South America.
Cost of sales (exclusive of depreciation and amortization): Cost of sales for the first half of 2014 was $3,605 million, or 83.2 percent of sales, compared to $3,340 million, or 84.1 percent of sales in the first half of 2013. The following table lists the primary drivers behind the change in cost of sales ($ millions).

Six months ended June 30, 2013 $ 3,340
Volume and mix                     285
Material                            (8 )
Currency exchange rates            (22 )
Restructuring                        2
Other Costs                          8
Six months ended June 30, 2014 $ 3,605

The increase in cost of sales was due primarily to the year-over-year increase in volume, higher restructuring costs and other costs, mainly manufacturing, partially offset by lower net material costs and the impact of currency exchange rates.
Gross margin: Revenue less cost of sales for the first six months of 2014 was $730 million, or 16.8 percent, versus $630 million, or 15.9 percent, in the first six months of 2013. The effect on gross margin resulting from higher volumes and favorable currency was partially offset by higher restructuring expenses and other costs, mainly manufacturing.
Engineering, research and development: Engineering, research and development expense was $84 million and $68 million in the first six months of 2014 and 2013, respectively. Increased spending to support customer programs and lower recoveries drove the year-over-year increase.
Selling, general and administrative: SG&A expense was up $46 million in the first half of 2014, at $271 million, compared to $225 million in the first half of 2013. The year-over-year increase is due to higher compensation related accruals, higher legal costs related to the ongoing anti-trust investigation, growth in emerging markets and other corporate expenses.
Depreciation and amortization: Depreciation and amortization expense was $103 million in the first six months of 2014, compared to $100 million in the first six months of 2013.
EBIT was $269 million for the first half of 2014, an increase of $35 million when compared to $234 million in the first half of the prior year. Higher light vehicle volumes globally, commercial truck and off-highway revenue growth, new platforms and an increase in commercial vehicle content, higher Ride Performance aftermarket sales and strong operational performance were partially offset by higher restructuring and related expenses, higher engineering expense and a $7 million adjustment to workers' compensation reserves. Currency had no impact on EBIT for the first half of 2014.
Results from Operations
The tables below reflect our revenues for 2014 and 2013. 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


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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.
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 2013 table since this is the base period for measuring the effects of currency during 2014 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, 2014 and

2013
                                                             Three Months Ended June 30, 2014
                                                                                         Currency
                                                                                         Impact on
                                                                        Value-add        Value-add     Value-add Revenues
                                   Revenues       Substrate Sales        Revenues        Revenues      excluding Currency
                                                                        (Millions)
Clean Air Division
North America                    $      755     $             285     $        470     $        (1 )   $            471
Europe, South America & India           523                   174              349               9                  340
Asia Pacific                            263                    56              207              (3 )                210
Total Clean Air Division              1,541                   515            1,026               5                1,021
Ride Performance Division
North America                           364                     -              364              (4 )                368
Europe, South America & India           280                     -              280              (5 )                285
Asia Pacific                             56                     -               56              (1 )                 57
Total Ride Performance Division         700                     -              700             (10 )                710
Total Tenneco Inc.               $    2,241     $             515     $      1,726     $        (5 )   $          1,731


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                                                               Three Months Ended June 30, 2013
                                                                                          Currency Impact
                                                                           Value-add       on 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                 -                  332
Asia Pacific                            203                       32              171                 -                  171
Total Clean Air Division              1,406                      488              918                 -                  918
Ride Performance Division
North America                           324                        -              324                 -                  324
Europe, South America & India           281                        -              281                 -                  281
Asia Pacific                             56                        -               56                 -                   56
Total Ride Performance Division         661                        -              661                 -                  661
Total Tenneco Inc.               $    2,067        $             488     $      1,579     $           -     $          1,579


                                                            Three Months Ended June 30, 2014
                                                        Versus Three Months Ended June 30, 2013
                                                         Dollar and Percent Increase (Decrease)
                                                                                   Value-add
                                                                                    Revenues
                                                                                   excluding
                                             Revenues            Percent            Currency        Percent
                                                           (Millions Except Percent Amounts)
Clean Air Division
North America                             $        68               10  %        $         56           13 %
Europe, South America & India                       7                1  %                   8            2 %
Asia Pacific                                       60               30  %                  39           23 %
Total Clean Air Division                          135               10  %                 103           11 %
Ride Performance Division
North America                                      40               12  %                  44           14 %
Europe, South America & India                      (1 )              -  %                   4            1 %
Asia Pacific                                        -                -  %                   1            2 %
Total Ride Performance Division                    39                6  %                  49            7 %
Total Tenneco Inc.                        $       174                8  %        $        152           10 %

Light Vehicle Industry Production by Region for Three Months Ended June 30, 2014 and 2013 (According to IHS Automotive, July 2014)

                                              Three Months Ended June 30,
                                                            Increase     % Increase
                                       2014        2013    (Decrease)    (Decrease)
                                           (Number of Vehicles in Thousands)
North America                        4,413        4,258         155           4  %
Europe                               5,254        5,154         100           2  %
South America                          947        1,251        (304 )       (24 )%
India                                  865          869          (4 )         -  %
Total Europe, South America & India  7,066        7,274        (208 )        (3 )%
China                                5,564        5,014         550          11  %
Australia                               44           55         (11 )       (20 )%

Clean Air revenue was up $135 million in the second quarter of 2014 compared to the second quarter of 2013 with higher revenues in all regions. The increase in North American revenues was driven by higher light vehicle volumes, new platform


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launches and increased off-highway and aftermarket revenues, which accounted for $72 million of the year-over-year change in revenues. Currency had a $1 million unfavorable impact on North American revenues. The increase in European, South American and Indian revenues was mostly driven by higher light vehicle and commercial truck and off-highway vehicle revenues in Europe, offset by lower year-over-year light vehicle and commercial truck and off-highway vehicle revenues in South America, with total volumes down $9 million. Currency had a $16 million favorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was primarily driven by higher volumes of $67 million, mostly due to higher light vehicle production, new programs and commercial truck volumes in China. Currency had $3 million unfavorable impact on Asia Pacific revenues.
Ride Performance revenue was up $39 million in the second quarter of 2014 compared to the second quarter of 2013, primarily driven by higher volumes in North America. The increase in North American revenues was primarily driven by higher volumes and mix of $45 million due to light vehicle and commercial truck volume growth and higher aftermarket sales. Currency had a $4 million unfavorable impact on North American revenues. European, South American and Indian revenues were flat. Higher volumes in Europe driven by light vehicle and commercial truck increase was offset by lower volumes in South America and India. Currency had a $5 million unfavorable impact on European, South American and Indian revenues. Asia Pacific revenues were also flat. Higher volumes of $3 million mostly due to higher light vehicle production volumes in China were partially offset by lower volumes in Australia. Currency had a $1 million unfavorable impact on Asia Pacific revenues.

Net Sales and Operating Revenues for the Six Months Ended June 30, 2014 and 2013

                                                             Six Months Ended June 30, 2014
                                                                                         Currency
                                                                                        Impact on
                                                                        Value-add       Value-add     Value-add Revenues
                                   Revenues       Substrate Sales        Revenues        Revenues     excluding Currency
                                                                       (Millions)
Clean Air Division
North America                    $    1,453     $             549     $        904     $       (2 )   $            906
Europe, South America & India         1,029                   346              683              8                  675
Asia Pacific                            503                   104              399             (3 )                402
Total Clean Air Division              2,985                   999            1,986              3                1,983
Ride Performance Division
North America                           699                     -              699             (8 )                707
Europe, South America & India           543                     -              543            (20 )                563
Asia Pacific                            108                     -              108             (3 )                111
Total Ride Performance Division       1,350                     -            1,350            (31 )              1,381
Total Tenneco Inc.               $    4,335     $             999     $      3,336     $      (28 )   $          3,364


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                                                                Six Months Ended June 30, 2013
                                                                                        Currency Impact
                                                                         Value-add       on 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                 -                  630
Asia Pacific                             386                    57              329                 -                  329
Total Clean Air Division               2,702                   942            1,760                 -                1,760
Ride Performance Division
North America                            631                     -              631                 -                  631
Europe, South America & India            533                     -              533                 -                  533
Asia Pacific                             104                     -              104                 -                  104
Total Ride Performance Division        1,268                     -            1,268                 -                1,268
Total Tenneco Inc.                $    3,970     $             942     $      3,028     $           -     $          3,028


                                                             Six Months Ended June 30, 2014
                                                          Versus Six Months Ended June 30, 2013
                                                         Dollar and Percent Increase (Decrease)
                                                                                     Value-add
                                                                                     Revenues
                                                                                     excluding
                                                 Revenues             Percent        Currency        Percent
                                                            (Millions Except Percent Amounts)
Clean Air Division
North America                             $       120                      9 %     $       105           13 %
Europe, South America & India                      46                      5 %              45            7 %
Asia Pacific                                      117                     30 %              73           22 %
Total Clean Air Division                          283                     10 %             223           13 %
Ride Performance Division
North America                                      68                     11 %              76           12 %
Europe, South America & India                      10                      2 %              30            6 %
Asia Pacific                                        4                      4 %               7            7 %
Total Ride Performance Division                    82                      6 %             113            9 %
Total Tenneco Inc.                        $       365                      9 %     $       336           11 %

Light Vehicle Industry Production by Region for Six Months Ended June 30, 2014 and 2013 (According to IHS Automotive, July 2014)

                                              Six Months Ended June 30,
                                                         Increase     % Increase
                                     2014      2013     (Decrease)    (Decrease)
                                          (Number of Vehicles in Thousands)
North America                        8,618     8,273          345          4  %
Europe                              10,470     9,974          496          5  %
South America                        1,889     2,271         (382 )      (17 )%
India                                1,788     1,895         (107 )       (6 )%

Total Europe, South America & India 14,147 14,140 7 - % China 11,130 10,125 1,005 10 % Australia 87 101 (14 ) (14 )%

Clean Air revenue was up $283 million in the first six months of 2014 compared to the first six months of 2013, driven by higher sales in all the regions. The increase in North American revenues was driven by higher light vehicle volumes, new platform launches and increased off-highway revenues, which accounted for $131 million of the year-over-year change in


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revenues. Currency had a $2 million unfavorable impact on North American revenues. The increase in European, South American and Indian revenues was mostly driven by higher volumes of $29 million, mainly due to higher year-over-year light vehicle and commercial truck and off-highway vehicle revenues in Europe offset by lower revenues in South America and India. Currency had an $18 million favorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was primarily driven by higher . . .

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