References herein to "Tenneco", the "Company", "we", "us", and "our" refer to
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
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
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
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
Cost of sales were
Net loss increased by$1,106 million to a net loss of$1,166 million for the six months endedJune 30, 2020 as compared to a net loss of$60 million for the six months endedJune 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 endedJune 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
The decline in value-add revenue for the three and six months ended
Cost reductions and other responses to COVID-19
Global light vehicle production levels (According to IHS Markit, July, 2020)
For the three months ended
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
Global commercial truck production levels (According to IHS Markit, August,
2020)
For the three months ended
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
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
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
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
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,
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.,
Continue to strengthen our aftermarket capabilities and product offerings in
mature markets, including
The
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
Increase aftermarket position in high-growth regions, notably in Asia Pacific
The Asia Pacific region, particularly the high-growth markets of
The
50
--------------------------------------------------------------------------------
Additionally, buying online is the preferred purchase method for many smaller
distribution and installer partners. The sophistication of the existing online
marketplaces in
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year ended
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