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 design, manufacture, market, and distribute products and services for light vehicle, commercial truck, off-highway, industrial, motorsport, and aftermarket customers. Our business consists of four operating segments, Motorparts, Performance Solutions,Clean Air , and Powertrain and serves both original equipment ("OE") manufacturers and the repair and replacement markets worldwide. We supply OE parts to vehicle manufacturers for use in light vehicles, commercial vehicles, and other mobility markets; and the global aftermarket with replacement parts that are sold to wholesalers, retailers, and installers, as well as original equipment service ("OES") parts to OE customers to support their service channels. We serve our customers through our brands, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, and Sealed Power®; and others.
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing and fulfillment footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, positioning the business to adapt to changes in vehicle electrification, 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, social or environmental 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 managing the availability of materials or 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.
Tenneco consists of four operating segments, Motorparts, Performance Solutions,Clean Air , and Powertrain: •The Motorparts segment designs, manufactures, sources, markets, and distributes a broad portfolio of brand-name products in the global vehicle aftermarket while also servicing the OES market. Motorparts products are organized into categories, including shocks and struts, steering and suspension, braking, sealing, emissions control, engine, and maintenance; •The Performance Solutions segment designs, manufactures, markets, and distributes a variety of products and systems designed to optimize the ride experience to a global OE customer base, including noise, vibration, and harshness performance materials, advanced suspension technologies, ride control, braking, and system protection. Performance Solutions is agnostic to powertrain technologies; •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 light vehicle, commercial truck, and off-highway OE customers; and •The Powertrain segment designs, manufactures, and distributes a variety of OE powertrain products for light vehicle, commercial truck, off-highway, and industrial applications to OE customers for use in new vehicle production and OES parts to support their service and distribution channels.
Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as "Corporate." See Note 14, "Segment Information", in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q for additional information.
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Proposed Merger
On
At the Effective Time, subject to the terms and conditions set forth in the
Merger Agreement, each RSU and each PSU of Tenneco that is outstanding
immediately prior to the Effective Time will automatically be cancelled and
converted into the holder's right to receive a cash amount (subject to any
applicable withholding taxes) calculated based on the per-share Merger
consideration of
The Company's Board of Directors and the sole member or board of directors, as
applicable, of Parent and Merger Sub have each unanimously approved the Merger
and the Merger Agreement. On
All conditions to closing under the Merger Agreement with respect to antitrust
and/or foreign direct investment laws have been satisfied or waived in
accordance with the terms and conditions of the Merger Agreement. Parent, Merger
Sub, and Tenneco expect to consummate the Merger in the middle of
The Company has incurred and will incur certain significant costs relating to the Merger, such as legal, accounting, financial advisory, printing and other professional services fees, as well as other customary payments.
Financial Results for the Nine Months Ended
Cost of sales were
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Results for the nine months endedSeptember 30, 2022 was a net loss of$151 million as compared to net income of$129 million for the nine months endedSeptember 30, 2021 . Contributing to the change from net income to a net loss are the following: •a decrease in equity in earnings (losses) of nonconsolidated affiliates, net of tax of$22 million , primarily attributable to the decrease in equity in earnings of nonconsolidated affiliates located inTurkey andChina ; •a non-cash gain on extinguishment of debt of$8 million that was recognized for the nine months endedSeptember 30, 2021 related to the discharge of the 4.875% euro floating rate notes due 2024 and 5.000% euro fixed rate notes due 2024; •an increase in interest expense of$27 million primarily due to higher average interest rates on variable debt, higher average outstanding borrowings on the revolver, along with overall higher interest rates on our senior secured notes, and an increase of$10 million in financing charges on sales of accounts receivable primarily driven by higher factoring balances and higher average interest rates. The increase was partially offset by the effect of lower average outstanding borrowing on term loans; and •an increase in income tax expense of$18 million primarily due to the effects of pre-tax income that is taxed at rates higher than theU.S. statutory rate and a disproportionate share of pre-tax losses in jurisdictions with valuation allowances for which no tax benefit is recognized, as well as a$7 million non-cash benefit related to the release of a valuation allowance during the nine months endedSeptember 30, 2022 .
These unfavorable effects were partially offset by:
•a decrease in selling, general, and administrative expenses of
Recent Trends and Market Conditions
Recent events affecting our business include the COVID-19 global pandemic
(including the implementation of government lockdowns in
We use various raw materials, including steel and other metals. We obtain steel
from a number of sources pursuant to various contractual and other arrangements.
Due to recent supply chain constraints within the automotive industry, which may
be exacerbated by the conflict in
We are experiencing other supply chain challenges, along with the effects of
inflation on commodities, including raw materials and energy, other purchases,
and labor. Further, unfavorable conditions such as a general slowdown of the
global or
Additionally, the
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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 four primary factors: the number of vehicles in operation (VIO); the average age of vehicles; vehicle usage trends (primarily miles driven); and component failure and wear rates.
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. The extent of the effects of the COVID-19 pandemic will depend on a number of factors, including the duration and severity of the pandemic or subsequent resurgence of the outbreaks, the effects and extent of COVID-19 variants, related government responses, the rate of economic recovery from the pandemic, vaccination rates, and the effectiveness of available vaccines. There continues to be many uncertainties that remain related to COVID-19 that could negatively affect our results of operations, financial position, and cash flows.
The uncertain nature, magnitude, and duration of hostilities stemming from
Global vehicle production levels
Global light vehicle production levels (According to IHS Markit, October, 2022)
For the three months ended
For the nine months ended
Global commercial truck production levels (According to IHS Markit, August,
2022)
For the three months ended
For the nine months ended
Fuel efficiency, powertrain evolution, and vehicle electrification Various jurisdictions around the world have announced plans to limit the production of new diesel and gasoline powered vehicles in the future. Major vehicle manufacturers have announced their intention to reduce and phase out production of diesel and gasoline powered vehicles during the next two decades. However, for the foreseeable future, it is expected that the majority of the powertrains for light and commercial vehicles will be gasoline and diesel engines (including hybrids, which combine a battery electric drive with a combustion engine). While we see similar electrification trends for light vehicle and commercial vehicle, we expect light vehicles will experience those trends in advance of commercial vehicles. We expect to monitor those trends and adopt our business strategy accordingly.
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Business Strategy We are a leading diversified, global supplier of innovative products and services to light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. Our strategy focuses on addressing the evolving needs of our OE and aftermarket customers around the world to drive growth. As discussed in more detail in our 2021 Form 10-K, the key components of our business strategy are as follows: •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; •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; and •Adapt cost structure to economic realities. 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. As discussed in more detail in our 2021 Form 10-K, the key components of our OE strategy are as follows: •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; •Maintain technological leadership to drive further growth from secular market trends (our performance solutions division will leverage its innovative technology, NVH performance materials, differentiated products, and advanced system capabilities to provide innovative solutions; as well as, accelerate the development of advanced technology suspension solutions, while also fast-tracking time to market); •Invest in applications that benefit from global light vehicle battery electric vehicle (BEV) adoption (we have prioritized investments in light vehicle product lines and applications that have content growth opportunities in light vehicle BEV and are agnostic to an anticipated increase in adoption rates); and •Penetrate adjacent market segments (aggressively leverage our technology and engineering leadership in powertrain, clean air, performance solutions and aftermarket into adjacent sales opportunities for commercial trucks, buses, agricultural equipment, construction machinery, and other vehicles in other regions around the world).
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 our key competitive strengths: a leading portfolio of products and brands; extensive global manufacturing, distribution and service capabilities; and market intelligence gathered from our distributors, installers, and consumers.
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 localized strategies to address the key success factors of our customers. As discussed in more detail in our 2021 Form 10-K, the key components of our aftermarket strategy are as follows: •Leverage the strength of our global aftermarket leading brands positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities for global growth; •Continue to strengthen our aftermarket capabilities and product offerings in mature markets, includingNorth America andEurope ; and •Increase aftermarket position in high-growth regions, notably inAsia Pacific . Critical Accounting Estimates Refer to our 2021 Form 10-K.
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
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RESULTS OF OPERATIONS
For the Three and Nine Months Ended
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