References herein to "Tenneco", the "Company", "we", "us", and "our" refer to Tenneco Inc. and its consolidated subsidiaries. Unless otherwise stated, all comparisons of June 30, 2020 financial results are to June 30, 2019 financial results.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1 of this quarterly report on Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the Securities and Exchange Commission ("SEC") on March 2, 2020 (the "2019 Form 10-K").



EXECUTIVE OVERVIEW
Our Business
We are one of the world's leading manufacturers of clean air, powertrain, and
ride performance products and systems for light vehicle, commercial truck,
off-highway, industrial, and aftermarket customers. Both original equipment
("OE") vehicle designers and manufacturers and the repair and replacement
markets, or aftermarket, are served globally through leading brands, including
Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®,
Rancho®, Thrush®, National®, and Sealed Power®, among others.

Tenneco consists of four operating segments, Clean Air, Powertrain, Ride
Performance, and Motorparts:
•      The Clean Air segment designs, manufactures, and distributes a variety of
       products and systems designed to reduce pollution and optimize engine
       performance, acoustic tuning, and weight on a vehicle for OE customers;


•      The Powertrain segment focuses on original equipment powertrain products
       for automotive, heavy duty, and industrial applications;


•      The Ride Performance segment designs, manufactures, markets, and
       distributes a variety of ride performance solutions and systems to a
       global OE customer base, including noise, vibration, and harshness
       performance materials, advanced suspension technologies, ride control, and
       braking; and


•      The Motorparts segment engineers, manufactures, sources, and distributes a
       broad portfolio of products in the global vehicle aftermarket while also
       servicing the original equipment and original equipment servicers market
       with products, including vehicle braking systems and a wide variety of
       chassis, engine, sealing, wiper, filter, lighting, and other general
       maintenance applications.


The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. We have responded quickly to protect our team members' health and safety while taking aggressive actions to mitigate the financial effect of the pandemic on us. In response to the pandemic, we expanded on structural cost reductions, and implemented a range of temporary cost reductions including plant closures, deferment of discretionary spending, and the reduction of capital expenditures. In addition, on April 15, 2020, our Board of Directors adopted a shareholder rights plan designed to protect the availability of our tax assets in the current volatile market environment and, on May 5, 2020, we entered into a third amendment to our credit agreement to increase the maximum leverage ratio and decrease the minimum interest coverage ratio. There are many uncertainties related to COVID-19 that could negatively affect our results of operations, financial position, and cash flows. After considering the effect of COVID-19 on our 2020 forecast, we believe we will comply with our financial covenants, as required by our amended credit agreement and we believe our liquidity position continues to be adequate based on our current estimates and forecasts.

Other factors that we expect will 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 effect of any such cost increases through material substitutions, cost reduction initiatives, and other methods.




                                       45

--------------------------------------------------------------------------------

Beginning in the third quarter of 2020, the Motorparts segment will initiate a rationalization of its supply chain and distribution network to achieve supply chain efficiencies and improve throughput to its customers. As a result, certain assets including inventory, real estate, and personal property will no longer be utilized. As such, during the three and six months ended June 30, 2020, the Motorparts segment recognized an $82 million non-cash charge to write-down inventory to its net realizable value, a $16 million impairment charge to write-down property, plant, and equipment to its fair value, and a $9 million impairment charge to its operating lease right-of-use assets. Additionally, the Motorparts segment recognized $4 million in restructuring charges related to cash severance expected to be paid.

Separation Transaction We have previously announced our review of a full range of strategic options to enhance shareholder value creation, including a potential separation of the Company into an Aftermarket and Ride Performance company and a new Powertrain Technology company. Current end-market conditions and the effects of the ongoing COVID-19 pandemic are affecting our ability to complete a separation. In light of these ongoing conditions, we are pursuing additional options to optimize shareholder value creation, including a focus on operational improvements, reducing structural costs, lowering capital intensity, and reducing debt.

Financial Results for the Six Months Ended June 30, 2020 Consolidated revenues were $6,473 million, a decrease of $2,515 million, or 28%, for the six months ended June 30, 2020. The primary driver of the decrease is lower sales volume and mix of $2,229 million, largely attributable to the effects of COVID-19. The remaining decrease is attributable to a decrease in revenues of $60 million, or less than 1%, related to the net effects of acquisitions and divestitures, the unfavorable effects of foreign currency exchange of $205 million, and the net unfavorable effects of other of $21 million.

Cost of sales were $5,837 million, a decrease of $1,834 million, or 24%, for the six months ended June 30, 2020. The primary driver of the decrease is from lower sales volume of $1,618 million, largely attributable to the effects of COVID-19. The remaining decrease is attributable to a decrease in cost of sales of $55 million, or less than 1%, related to the net effects of acquisitions and divestitures, the favorable effects of materials sourcing of $22 million, the favorable effects of foreign currency exchange of $181 million, and the net favorable effects of other costs of $40 million. This was partially offset by a non-cash charge of $82 million related to the write-down of inventory in the Motorparts segment in connection with its initiative to rationalize its supply chain and distribution network.



Net loss increased by $1,106 million to a net loss of $1,166 million for the six
months ended June 30, 2020 as compared to a net loss of $60 million for the six
months ended June 30, 2019. The increase was primarily driven by:
•      an increase in restructuring charges, net and asset impairments of $540
       million primarily related to the impairment of long-lived asset groups
       triggered by the effects of the COVID-19 global pandemic on the Company's
       projected financial information, global headcount and cost reduction
       initiatives, and other actions to optimize our distribution footprint and
       warehousing locations; and


•      an increase in goodwill and intangible impairment charges of $323 million,
       which was comprised of an increase in goodwill impairment charges of $207
       million, $65 million of definite-lived intangible asset impairments, and
       $51 million of indefinite-lived intangible asset impairments.


These unfavorable effects were partially offset by:
•      a decrease in selling, general, and administrative costs of $166 million,
       primarily due to $41 million in lower acquisition and expected separation
       costs, and the favorable effects of cost reduction initiatives implemented
       in response to the effects of COVID-19, including unpaid furloughs, net
       pay decreases, temporary support programs, and other compensation related
       expenses;


•      a decrease in engineering, research, and development of $38 million
       primarily due to the effects of COVID-19 and cost reduction initiatives;
       and


•      an increase in income tax benefit of $209 million primarily resulting from
       the impairment charges recognized in the six months ended June 30, 2020.


Recent Trends and Market Conditions There is inherent uncertainty in the continuation of the trends discussed below. In addition, there may be other factors or trends that can have an effect on our business. Our business and operating results are affected by the relative strength of:

General economic conditions Our OE business is directly related to automotive vehicle production by our customers. Automotive production levels depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by three primary factors: the number of vehicles in operation; the average age of vehicles; and vehicle usage trends (primarily distance traveled).



                                       46

--------------------------------------------------------------------------------

In late 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. COVID-19 has resulted in suspension or reduction of operations, supply chain disruptions, restrictions on domestic and international travel, and a decrease in consumer traffic. These measures have adversely affected workforces, customers, economies, and financial markets, and, along with decreased consumer spending, reductions in revenue, and delays in payments from customers and partners, have led to an economic downturn in many of our markets.

The decline in value-add revenue for the three and six months ended June 30, 2020 was $1,713 million and $2,355 million which is largely attributable to the effects of the COVID-19 global pandemic. We expect the effects of the COVID-19 outbreak will likely continue during the second half of our fiscal year and, accordingly, we cannot predict the extent to which COVID-19 will ultimately affect our business, results of operations or financial condition. As customer demand increases, we expect to face periods where payments will become due to suppliers for our existing and additional inventories to support renewed production before we have generated new receivables from customers from that renewed production. It is our intent to maintain a consistent balance between our payables and receivables during this time.

Cost reductions and other responses to COVID-19 The Company has implemented a range of actions aimed at temporarily reducing costs and preserving liquidity in response to the effects and anticipated effects to our business resulting from COVID-19 as described under "Liquidity and Capital Resources - Liquidity and Financing Arrangements". The Company will continue to evaluate further ways to manage costs in line with reduced revenue.

Global light vehicle production levels (According to IHS Markit, July, 2020) For the three months ended June 30, 2020, global light vehicle production was down across most major markets in which we operate and down 45% overall compared to same period in the prior year. Production levels in North America declined 69%, production in South America was down 82%, Europe production decreased 62%, and India declined 86%, while China light vehicle production improved 9%.

Global light vehicle production decreased by 33% overall for the first half of 2020 compared to the same period in the prior year. There were significant declines globally, notably, a 40% decline in both North America and Europe, a 51% decline in both South America and India, and a decline in China of 20%.

Global commercial truck production levels (According to IHS Markit, August, 2020) For the three months ended June 30, 2020, global commercial truck production was down across most major markets in which we operate and down 32% overall compared to the same period in the prior year. Production decreased 73% in North America, production in Brazil was down 71%, Europe production was down 55%, and India declined 90%, while China was up 18%.

Global commercial truck production decreased by 29% overall for the first half of 2020 compared to the same period in the prior year. There were significant declines globally, notably, a 48% decline in North America, a 35% decline in Brazil, a 39% decline in Europe, a 1% decline in China, and a decline in India of 74%.

Part replacement trends The strength of our aftermarket business is influenced by several key drivers. These include the vehicle population (or "VIO", vehicles in operation), average vehicle age, fuel prices, and vehicle distance traveled. The VIO is estimated to have expanded in most major markets, including the U.S., China, and Germany over recent years. Average vehicle ages also increased, despite growth in new vehicle sales, in most regions. Vehicle distance traveled varies by region and is sensitive to several factors, including fuel prices, and transportation alternatives.

Geopolitical risk We conduct business globally, which subjects us to numerous risks and uncertainties including, without limitation, "Brexit" implications, joint ventures in unstable regions, and substantial new tariffs. For example, we have operations in the U.K. which may be materially affected by the U.K.'s referendum to leave the European Union, which has created uncertainty in both the U.K. and Europe. We also have an interest in a Turkish joint venture, which may be affected by recent turmoil in that region. In addition, we do business in Mexico and China where there could be potential changes in trade agreements (e.g., the North American Free Trade Agreement) and new or changed tariffs in the U.S. (such as those relating to China).




                                       47

--------------------------------------------------------------------------------

Foreign currencies Given the global nature of our operations, we are subject to fluctuations in foreign exchange rates and there has been significant volatility in foreign currency rates.

Business Strategy Many of the key components of our business strategy are described below. As we continue to monitor and respond to the COVID-19 global pandemic, we expect that certain of these business strategies will be secondary to our attention to the pandemic and our response and mitigation measures worldwide.

Continue to optimize operational performance by aggressively pursuing cost competitiveness in all business segments and continuing to drive cash flow generation and meet capital allocation objectives As we continue to expand our distribution and service capabilities globally, we seek to continue optimizing our performance through enhanced efficiencies in order to meet the world-class delivery performance our customers increasingly require. We have made and will continue to make investments in our global distribution network to maximize our manufacturing footprint and manage complexities of our supply chain. By achieving efficiency gains and cost competitiveness, we strive to generate strong cash flow and meet our capital allocation objectives, including deleveraging our balance sheet.

From a design perspective, we will bring a lean mindset to our portfolio to ensure standardization, remove redundancies, reduce transit costs, leverage economies of scale, and optimize manufacturing productivity. We will also continually look for ways to innovate and leverage cross- and up-sell opportunities to the market through a customer-centric product development process. From a manufacturing perspective, we will maintain a continuous improvement philosophy by streamlining plant operations and our network, and executing projects to improve efficiency.

Serving our customers also requires that we compete effectively at the unit cost level, in particular with OE customers. We are making concerted and systematic efforts to continuously improve our position on the cost curve for each of our component part categories. In doing so, we will continue to be a preferred supplier to our customers.

We will be mindful of the changing market conditions that might necessitate adjustments to our resources and manufacturing capacity around the world. We will also remain committed to protecting the environment as well as the health and safety of our employees.

Pursue focused transactional opportunities, consistent with our capital allocation priorities, product line enhancements, technological advancements, geographic positioning, penetration of emerging markets and market share growth Throughout our history, we have successfully identified and capitalized on acquisitions, alliances, and divestitures to achieve strategic growth and alignment. Through these transactions, we have (1) expanded our product portfolio with complementary technologies; (2) realized incremental business from existing customers; (3) gained access to new customers; (4) achieved leadership positions in geographic regions outside North America; and (5) re-focused on areas that will contribute to our profitable growth.

We intend to continue to explore strategic alliances, joint ventures, acquisitions, divestitures, and other transactions that complement, expand, enhance or realign our existing products, technology, systems development efforts, customer base and/or global presence. We are committed to developing a broader ecosystem-based approach that allows us to work with new and existing customers, suppliers, and entrants to provide timely and leading-edge solutions across the mobility market. We will align with companies that have proven products, proprietary technology, advanced research capabilities, broad geographic reach, and/or strong market positions to further strengthen our product leadership, technology position, global reach, and customer relationships.

Adapt cost structure to economic realities We aggressively respond to difficult economic environments, aligning our operations to any resulting reductions in production levels and replacement demand and executing comprehensive restructuring and cost-reduction initiatives. Suppliers must continually identify and implement product innovation and cost reduction activities to fund customer annual price concession expectations in order to retain current business as well as to be competitively positioned for future new business opportunities.



                                       48

--------------------------------------------------------------------------------

Original Equipment Specific Strategies The converging forces of connectivity, autonomy, electrification, and shared mobility are spawning a new age of automotive autonomy and a unique opportunity to position our business for significant growth and profitability. We strive to strengthen our global position by designing, manufacturing, delivering, and marketing technologically innovative products and solutions for OE manufacturers. The key components of our OE strategy are described below:

Capitalize on our breadth of technology, differentiated products, and global reach to support and strengthen relationships with existing and emerging OE customers across the world We conduct business with nearly all of the major automotive OE customers around the world. Within the highly competitive automotive parts industry, we seek to extend the significant advantages that come from our world-class global manufacturing, engineering and distribution footprint and global sourcing capabilities. This footprint enables the design, production and delivery of premium parts emphasizing quality, safety and reliability virtually anywhere in the world and also supports the continual innovation of new products, technologies, and solutions for new and existing OE customers.

Maintain technological leadership to drive further growth from secular market trends In order to maintain our strong market positions, we are focused on meeting changing performance requirements and keeping up with emerging OE trends such as connectivity, autonomy, shared mobility, and electrification. In pursuit of delivering the ideal ride characteristics for any application, our ride performance division will leverage its innovative technology, NVH performance materials, differentiated products, and advanced system capabilities to provide innovative solutions. Aligning product lines and technical capabilities creates an ideal foundation to meet changing performance requirements for comfort and safety and again ultimately reinventing the ride of the future. The addition of Öhlins to the portfolio will accelerate the development of advanced technology suspension solutions, while also fast-tracking time to market. That acquisition is yet another example of our strategy to leverage key technologies that will better position us to take advantage of secular trends. It also enhances our portfolio in broader mobility markets through the addition of Öhlins' range of premium OE and aftermarket automotive and motorsports performance products. In addition, our suite of mobility solutions under development represents an opportunity to drive greater partnership with OE manufacturers and broader mobility ecosystem players, creating and capturing value, and growth with higher value content per vehicle.

OE manufacturers are responding to changing end customer trends and preferences alongside their own challenging cost structures by reducing design and production complexities and investing in advanced technologies that enable vehicle electrification and autonomy. We anticipate that OE suppliers with high technology capabilities in vehicle system integration will be able to enable a more seamless transition to next-generation electric vehicles and become preferred suppliers to OE manufacturers. Though many vehicle and customer requirements will evolve, we believe one of the remaining characteristics that will continue to provide differentiated experience and value in the future of mobility is the ride experience. By leveraging our deep component level expertise as well as working with partners across the broader mobility ecosystem, our intent is to lead in the next generation development of motion management products, systems and solutions to engineer the ideal ride for any customer.

Penetrate adjacent market segments We seek to penetrate a variety of adjacent sales opportunities and achieve growth in higher-margin businesses by applying our design, engineering and manufacturing capabilities. For example, we aggressively leverage our technology and engineering leadership in powertrain, clean air, ride performance and aftermarket into adjacent sales opportunities for heavy-duty trucks, buses, agricultural equipment, construction machinery, and other vehicles in other regions around the world.

We design and launch clean air products for commercial vehicle customers such as Caterpillar, for whom we are their global diesel clean air system integrator, John Deere, Navistar, Deutz, Daimler Trucks, Scania, Weichai Power, FAW Group, and Kubota. We also engineer and build modular NOx-reduction systems for large engines that meet standards of the International Maritime Organization, among others.

Aftermarket Specific Strategies Our aftermarket business strategy incorporates a go-to-market model that we believe differentiates us from our competitors and creates structural support for sustained revenue growth. The model is designed to drive revenue growth by capitalizing on three of the company's key competitive strengths: a leading portfolio of products and brands; extensive global manufacturing, distribution and service capabilities; and market intelligence gathered from the company's distributors, installers and consumers.




                                       49

--------------------------------------------------------------------------------

We expect this distinctive go-to-market model will result in a sustainable competitive advantage, particularly as the industry trends previously mentioned disrupt the traditional aftermarket landscape and business practices. We expect the demand for replacement parts to increase as a result of the increase in the average age of VIO and the increase in the average miles driven per year. The characteristics of aftermarket sales and distribution are defined regionally, which require regionally focused strategies to address the key success factors of our customers. The key components of our aftermarket strategy are described below:

Leverage the strength of our global aftermarket leading brands positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities Our aftermarket business includes multiple leading brands with strong product offerings. Our portfolio includes the industry's most well-respected and enduring brands.

We will leverage our go-to-market model to build upon our brand strengths and grow our global aftermarket business by consistently delivering differentiated benefits, by growing our brand equity among our target end-customers, and by leveraging our broad product coverage and extensive distribution network. We are in an outstanding position to capitalize on aftermarket trends and expand in mature markets (e.g., North America, Europe, and Australia) as well as high-growth regions (i.e. China, South America, India, and Southeast and Northeast Asia). Important focus areas are enhancing our presence in high-growth markets; leveraging our portfolio and strong presence in suspension to expand our business globally; and diversifying outside of chassis with our sealing, engine and underhood products, as well as other components.

Continue to strengthen our aftermarket capabilities and product offerings in mature markets, including North America and Europe The scale of our aftermarket business allows for strong distribution channels that significantly enhance our go-to-market capabilities across mature markets in North America and Europe. We continually rationalize our already strong distribution networks with the goal of improved customer service at a lower cost. This is achieved by continually harnessing and leveraging market intelligence and sharing information with our channel partners to drive best practices in go-to-market, manufacturing and distribution processes.

The North America and Europe go-to-market capabilities will be defined by positioning our distribution and installer partners for success. We believe this will require maintaining an extensive catalog of products to provide the ability to address customer requirements quickly and easily. Managing a large and complex catalog of products requires an understanding of the composition of the car parc within the regions including wear patterns, typical replacement rates based on weather, road quality, and average miles driven annually. These compositions differ significantly by region, which will affect the range and frequency of replacement part requirements. The understanding of these regional dynamics will help us provide the right parts when they are needed and achieve the industry's best "Order to Delivery" times. We will continue to innovate product solutions that will be cost competitive and reliable, reduce install time, reduce the number of unique parts that installers need to inventory on-site, reduce the number of unique installer tools and equipment required, and improve installer safety.

In addition to having a comprehensive product offering, we also strive to maintain very close relationships with our customers and help position them for success. We have launched a series of "Tech First" initiatives to provide online, on demand, and onsite technical training and support to vehicle repair technicians who use and install our products in North America, Europe, and China and plan to expand into South America. This initiative included Garage Gurus™, a network of technical support centers that provide some of the most comprehensive training programs in the industry to educate our partners and customers with emerging vehicle technologies and vehicle repair operational skills. We believe it is key to our strategy to provide aftermarket parts that are simple to install and to make sure our customers have the resources to know how to install these parts properly. In having the right products and resources for our customers, we believe we will continue to be a preferred aftermarket supplier and continue to drive growth in the Americas and emerging economic areas.

Increase aftermarket position in high-growth regions, notably in Asia Pacific The Asia Pacific region, particularly the high-growth markets of China and India, presents a significant opportunity for us to expand our business. We have made investments in distribution and in our sales force in both China and the rest of Asia to help drive growth in this increasingly important region. We must take into account the different operational requirements in Asia Pacific in order to drive aftermarket growth in this region.

The Asia Pacific light vehicle and commercial vehicle aftermarket industry is fragmented with a large number of small distributors and installers that require different strategies and solutions than more mature consolidated markets. Distribution in smaller volumes will require us to have a hub and spoke warehousing approach to compete on the basis of optimal "Order to Delivery" timeliness while maintaining a broad range of products.




                                       50

--------------------------------------------------------------------------------

Additionally, buying online is the preferred purchase method for many smaller distribution and installer partners. The sophistication of the existing online marketplaces in Asia Pacific will require us to develop adaptive and flexible omnichannel tools in order to compete effectively. We believe that developing a competitive online platform for our Asia Pacific customers will be the foundation for us to build a digital platform that will improve our competitiveness globally.

Critical Accounting Estimates Refer to our Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 2, 2020.

Non-GAAP Measures We use EBITDA including noncontrolling interests as the key performance measure of segment profitability and use the measure in our financial and operational decision-making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with US GAAP and should not be considered an alternative to net income. EBITDA including noncontrolling interests, as determined and measured by us, should not be compared to similarly titled measures reported by other companies.



                                       51

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses