UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)10-K
(Mark One)
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162018
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 1-12387
TENNECO INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 76-0515284 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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500 North Field Drive Lake Forest, IL (Address of principal executive offices) | | 60045 (Zip Code) |
Registrant’s telephone number, including area code: (847) 482-5000
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class | | Name of each Exchange on which registered |
| Class A Voting Common Stock, par value $.01 per share | | New York and Chicago Stock ExchangesExchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer þ | | Accelerated filer ¨ |
Non-accelerated filer ¨ | | Smaller reporting company ¨ |
| | | (Do not check if a smaller reporting company) | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2016,2018, computed by reference to the price at which the registrant's common stock was last sold on the New York Stock Exchange on June 30, 2016,2018, was approximately $2.6$2.2 billion.
The number of shares of Class A Voting Common Stock, par value $.01$0.01 per share,share: 57,126,127 shares outstanding as of February 17, 2017 was 54,300,982.March 11, 2019. The number of shares of Class B Non-Voting Common Stock, par value $0.01 per share: 23,793,669 shares outstanding as of March 11, 2019.
Documents Incorporated by Reference:
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| Document | | Part of the Form 10-K into which incorporated |
Portions of Tenneco Inc.’s Definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 17, 201715, 2019 | | Part III |
EXPLANATORY NOTE
Tenneco Inc. (together with its subsidiaries, "Tenneco," the "Company," "we" and "our") is filing this Amendment No. 1 on Form 10-K/A (the “Form 10-K/A”) to its Annual Report on Form 10-K for the year ended December 31, 2016, originally filed with the Securities and Exchange Commission on February 24, 2017 (the “Original Filing”), to make the certain changes as described below.
In preparing the consolidated financial statements for the quarter ended June 30, 2017, the Company identified deficiencies in its internal control over financial reporting. These deficiencies, when aggregated together, resulted in a material weakness in the Company’s internal control over financial reporting in China as of June 30, 2017. Specifically, the Company did not have people with appropriate authority and experience in key positions in China to ensure adherence to Company policies and US GAAP. Additionally, we did not have adequate international oversight to prevent the intentional mischaracterization of the nature of accounting transactions related to payments received from suppliers by certain purchasing and accounting personnel at the Company’s China subsidiaries.
The material weakness identified as of June 30, 2017 caused us to reevaluate our previous conclusions on internal control over financial reporting as of December 31, 2016, and we have now concluded that the material weakness relating to our internal control over financial reporting in China existed as of December 31, 2016. As a result, we have restated our December 31, 2016 report on internal control over financial reporting, and we have also concluded that our disclosure controls and procedures were not effective as of December 31, 2016.
The material weakness described above resulted in immaterial errors impacting our previously issued consolidated financial statements for the years ended December 31, 2016, 2015 and 2014, each interim and year-to-date period in those respective years, and the first interim period in 2017. We evaluated these errors and concluded that they did not, individually or in the aggregate, result in a material misstatement of our previously issued consolidated financial statements and that such financial statements may continue to be relied upon.
This Form 10-K/A amends Management's Report on Internal Control Over Financial Reporting for the year ended December 31, 2016 as set forth in the Original Filing. This Form 10-K/A also amends the Original Filing to correct the immaterial errors to the consolidated financial statements, arising from the foregoing, an unrelated immaterial error relating to our accrual for certain substrate liabilities and certain previously known adjustments relating to revenue reporting for transactions where we earned a fee as an agent, as described in more detail in Note 16 thereto. Revisions to the Original Filing have been made to the following items solely as a result of and to reflect these revisions:
Item 1 - Business
Item 1A - Risk Factors
Item 6 - Selected Financial Data
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 8 - Financial Statements and Supplementary Data
Item 9A - Controls and Procedures
Item 15 - Exhibits, Financial Statement Schedules
As required by Rule 12b-15 under the Securities Exchange Act of 1934, the Company’s principal executive officer and principal financial officer are providing new currently dated certifications. In addition, the Company is filing a new consent from PricewaterhouseCoopersLLP. Accordingly, this Form 10-K/A amends Part IV - Item 15 in the Original Filing to reflect the filing of the new certifications and consent.
Except as described above, this Form 10-K/A does not amend, update or change any other items or disclosures in the Original Filing and does not purport to reflect any information or events subsequent to the filing thereof. As such, this Form 10-K/A speaks only as of the date the Original Filing was filed, and the Company has not undertaken herein to amend, supplement or update any information contained in the Original Filing to give effect to any subsequent events. Accordingly, this Form 10-K/A should be read in conjunction with the Company’s filings made with the Securities and Exchange Commission subsequent to the filing of the Original Filing, including any amendment to those filings.
Concurrently with the filing of this Form 10-K/A, we are also filing an amendment to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2017. Future Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q will reflect the revisions for financial information included in this Form 10-K/A and the Form 10-Q/A for the quarter ended March 31, 2017.
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, our prospects and business strategies. These forward-looking statements are included in various sections of this report, including the section entitled “Outlook” appearing in Item 7 of this report. The words “may,” “will,” “believe,” “should,” “could,” “plan,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:
general economic, business and market conditions;
our ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices;
the cost and outcome of existing and any future claims, legal proceedings or investigations, including, but not limited to, any of the foregoing arising in connection with the ongoing global antitrust investigation, product performance, product safety or intellectual property rights;
changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from historically higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements, and the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector and the impact of vehicle parts' longer product lives;
changes in consumer demand for our OE or aftermarket products, or changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, due to difficult economic conditions and/or regulatory or legal changes affecting internal combustion engines and/or aftermarket products;
our dependence on certain large customers, including the loss of any of our large original equipment manufacturer (“OE”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OE customers or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;
new technologies that reduce the demand for certain of our products or otherwise render them obsolete;
our ability to introduce new products and technologies that satisfy customers' needs in a timely fashion;
the overall highly competitive nature of the automotive and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes over the life of the applicable program);
changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt;
changes in consumer demand, prices and our ability to havecomply with the covenants contained in our products included on top selling vehicles, including any shifts in consumer preferences away from light trucks, which tend to be higher margin products for debt instruments;
our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements;
changes in consumer demand for our automotive, commercial or aftermarket products, or changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, due to difficult economic conditions;
the overall highly competitive nature of the automobile and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes over the life of the applicable program);
the loss of any of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;working capital requirements;
our ability to successfully execute cash management and other cost reduction plans, and to realize the anticipated benefits from these plans;
risks inherent in operating a multi-national company, including economic conditions, such as currency exchange rateand inflation rates, and political conditions in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability, and tax and other laws, and potential disruptions of production and supply;
increasing competition from lower cost, private-label products;
damage to the reputation of one or more of our leading brands;
the impact of improvements in automotive parts on aftermarket demand for some of our products;
industrywide strikes, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers;
increases in the costs of raw materials,developments relating to our intellectual property, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery and other methods;
the negative impact of fuel price volatility on transportation and logistics costs, raw material costs, discretionary purchases of vehicles or aftermarket products and demand for off-highway equipment;
the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector and the impact of vehicle parts’ longer product lives;changes in technology;
costs related to product warranties and other customer satisfaction actions;
the failure or breach of our information technology systems, including the consequences of any misappropriation, exposure or corruption of sensitive information stored on such systems and the interruption to our business that such failure or breach may cause;
the impact of consolidation among vehicle parts suppliers and customers on our ability to compete;compete in the highly competitive automotive and commercial vehicle supplier industry;
changes in distribution channels or competitive conditions in the markets and countries where we operate, including operate;
the impact of increasing competition from lower cost, private-label products on our aftermarket business;evolution towards autonomous vehicles and car and ride sharing;
customer acceptance of new products;
new technologies that reduce the demand for certain of our products or otherwise render them obsolete;
our ability to introduce new products and technologies that satisfy customers' needs in a timely fashion;
our ability to realize our business strategy of improving operating performance;
our ability to successfully integrate, and benefit from, any acquisitions that we complete andcomplete;
our ability to effectively manage our joint ventures and other third-party relationships;
the potential impairment in the carrying value of our long-lived assets, goodwill, other intangible assets or our deferred tax assets;
the negative impact of fuel price volatility on transportation and logistics costs, raw material costs, discretionary purchases of vehicles or aftermarket products and demand for off-highway equipment;
increases in the costs of raw materials or components, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery and other methods;
changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
changes in accounting estimates and assumptions, including changes based on additional information;
any changes by the International Organization for Standardization (ISO) or other such committees in their certification protocols for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market;
the impact of the extensive, increasing and changing laws and regulations to which we are subject, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved;
the potential impairment in the carrying valuereserved or increased costs or loss of our long-lived assets and goodwill or our deferred tax assets;revenues relating to products subject to changing regulation;
potential volatility in our effective tax rate;
natural disasters, such as fires, earthquakes and flooding, and any resultant disruptions in the supply or production of goods or services to us or by us, or in demand by our customers;customers or in the operation of our system, disaster recovery capabilities or business continuity capabilities;
acts of war and/or terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the impact of these acts on economic, financial and social conditions in the countries where we operate;
pension obligations and other postretirement benefits;
our hedging activities to address commodity price fluctuations; and
the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.
In addition, important factors related to the acquisition of Federal-Mogul LLC ("Federal-Mogul") and the planned separation of our company into a powertrain technology company and an aftermarket and ride performance company that could cause actual results to differ materially from the expectations reflected in the forward-looking statements, including:
the risk that the benefits of the acquisition of Federal-Mogul, including synergies, may not be fully realized or may take longer to realize than expected;
the risk that the acquisition of Federal-Mogul may not advance our business strategy;
the risk that we may experience difficulty integrating or separating employees or operations;
the risk that the transaction may have an adverse impact on existing arrangements with us, including those related to transition, manufacturing and supply services and tax matters, our ability to retain and hire key personnel or our ability to maintain relationships with customers, suppliers or other business partners;
the risk that the company may not complete a separation of its powertrain technology business and its aftermarket and ride performance business (or achieve some or all of the anticipated benefits of such a separation);
the risk that the combined company and each separate company following the spin-off will underperform relative to our expectations;
the ongoing transaction costs and risk that we may incur greater costs following the spin-off; and
the risk that the spin-off is determined to be a taxable transaction.
The risks included here are not exhaustive. Refer to “Part I, Item 1A — Risk Factors” of this report for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk
factors, nor to assess the impact such risk factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Unless otherwise indicated in this report, the forward-looking statements in this report are made as of the date of this report, and, except as required by law, the Company does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements.
TABLE OF CONTENTS
FORM 10-K/A10-K
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| PART I |
| Item 1. | | |
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| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 4.1. | | |
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| PART II |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
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| PART III |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV |
| Item 15. | | |
| Item 16. | | |
PART I
ITEM 1.BUSINESS.
TENNECO INC.
General
Our company, Tenneco Inc., designs, manufactures and distributes highly engineeredsells innovative products and services for light vehicle, commercial truck, off-highway, industrial and aftermarket customers. We serve both original equipment vehicle manufacturers (“OEMs”OEM”) and the repair and replacement markets or aftermarket, worldwide. We are one of the world’s largest producersleading manufacturers of clean air, powertrain and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial and other vehicle applications.aftermarket customers. As used herein, the term “Tenneco,” “we,” “us,” “our,” or the “Company” refers to Tenneco Inc. and its consolidated subsidiaries.
We were incorporated in Delaware in 1996. In 2005, we changed our name from Tenneco Automotive Inc. to Tenneco Inc. The name Tenneco better represents the expanding number of markets we serve through our commercial truck and off-highway businesses. Building a stronger presence in these markets complements our core businesses of supplying ride performance and clean air products and systems to original equipment and aftermarket customers worldwide. Our common stockClass A Voting Common Stock is traded on the New York Stock Exchange (“NYSE”) and the Chicago Stock Exchange under the symbol “TEN.”
Corporate Governance
On October 1, 2018, we completed the acquisition of Federal-Mogul LLC ("Federal-Mogul"), a global supplier of technology and Available Information
We have established a comprehensive approach to corporate governanceinnovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems. Federal-Mogul serves the purposeworld’s foremost OEM and servicers (“OES”, and together with OEM, “OE”) of defining responsibilities, setting high standards of professionalautomotive, light, medium and personal conductheavy-duty commercial vehicles, off road, agricultural, marine, rail, aerospace, power generation and assuring compliance with such responsibilities and standards. As part of its annual review process, the Board of Directors monitors developments in the area of corporate governance. Listed below are some of the key elements of our corporate governance policies.
For more information about these matters, see our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 2017.
Independence of Directors
Eight of our ten directors are independent under the NYSE listing standards.
Independent directors are scheduled to meet separately in executive session after every regularly scheduled Board of Directors meeting.
We have a lead independent director, Mr. Paul T. Stecko.
Audit Committee
All members meet the independence standards for audit committee membership under the NYSE listing standards and applicable Securities and Exchange Commission (“SEC”) rules.
Two members of the Audit Committee, Mr. Dennis J. Letham and Mr. Thomas C. Freyman, have been designated by the Board as “audit committee financial experts,” as defined in the SEC rules, and all members of the Audit Committee satisfy the NYSE’s financial literacy requirements.
The Audit Committee operates under a written charter which governs its duties and responsibilities, including its sole authority to appoint, review, evaluate and replace our independent auditors.
The Audit Committee has adopted policies and procedures governing the pre-approval of all audit, audit-related, tax and other services provided by our independent auditors.
Compensation/Nominating/Governance Committee
All members meet the independence standards for compensation and nominating committee membership under the NYSE listing standards and applicable SEC rules.
The Compensation/Nominating/Governance Committee operates under a written charter that governs its duties and responsibilities, including the responsibility for executive compensation.
We have an Executive Compensation Subcommittee which has the responsibility to consider and approve compensation for our executive officers which is intended to qualify as “performance based compensation” under Section 162(m) of the Internal Revenue Code.
Corporate Governance Principles
We have adopted Corporate Governance Principles, including qualification and independence standards for directors.
Stock Ownership Guidelines
We have adopted Stock Ownership Guidelines to align the interests of our executives with the interests of stockholders and promote our commitment to sound corporate governance.
The Stock Ownership Guidelines apply to the independent directors, the Chairman and Chief Executive Officer, and all other officers with a rank of Vice President or higher.
Communication with Directors
The Audit Committee has established a process for confidential and anonymous submission by our employees,industrial equipment, as well as submissions by other interested parties, regarding questionable accounting or auditing matters.
Additionally, the Boardworldwide aftermarket. We expect to separate our businesses to form two new independent, publicly traded companies, an Aftermarket and Ride Performance company and a new Powertrain Technology company, in the second half of Directors has established a process for stockholders to communicate with the Board of Directors, as a whole, or any independent director.
Codes of Business Conduct2019. See Note 3—Acquisitions and Ethics
We have adopted a Code of Ethical Conduct for Financial Managers, which appliesDivestitures to our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Controllerconsolidated financial statements in Item 8 — “Financial Statements and other key financial managers. This code is filed as Exhibit 14 to this report.Supplementary Data" for additional information.
We also operate under
As a Coderesult of Conduct that applies to all directors, officers and employees and includes provisions ranging from restrictions on gifts to conflicts of interests. All salaried employees are required to affirm annually their acceptance of, and compliance with, the Code of Conduct.
Related Party Transactions Policy
We have adopted a Policy and Procedure for Transactions With Related Persons, under which our Audit Committee must generally pre-approve transactions involving more than $120,000 with our directors, executive officers, five percent or greater stockholders and their immediate family members.
Equity Award Policy
We have adopted a written policy for all issuances by our company of compensatory awards inAcquisition, the formnumber of our common stock or any derivativereportable segments increased from three to five segments, consisting of the following: our common stock.historical Clean Air, Ride Performance and Aftermarket segments and the newly acquired Powertrain and Motorparts segments.
Clawback Policy
We have adoptedOn January 10, 2019, we closed on our acquisition of Öhlins Racing A.B. (“Öhlins”), a clawback policy under which we will, in specified circumstances, require reimbursement of annualSweden-based company. Öhlins offers suspension systems and long-term incentives paidcomponents to an executive officer. We will continue to review this policy as final rulemaking is adopted regarding clawbacks under the Dodd-Frank Wall Street Reformautomotive, and Consumer Protection Act.
Personal Loans to Executive Officers and Directors
We comply with and operate in a manner consistent with the legislation outlawing extensions of credit in the form of a personal loan to or for our directors or executive officers.motorsport industries.
Our Internet address is http://www.tenneco.com. We make our proxy statements, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as filed with or furnished to the SEC,Securities and Exchange Commission (SEC), available free of charge on our Internet website as soon as reasonably practicable after submission to the SEC. Securities ownership reports on Forms 3, 4 and 5 are also available free of charge on our website as soon as reasonably practicable after submission to the SEC. The contents of our website are not, however, a part of this report. All such statements and reports can also be found at the internet site maintained by the SEC at http://www.sec.gov.
Available Information
Our Audit Committee, Compensation/Nominating/GovernanceCompensation Committee and Executive Compensation SubcommitteeNominating and Governance Committee Charters, Corporate Governance Principles, Stock Ownership Guidelines, Audit Committee policy regarding accounting complaints, Code of Ethical Conduct for Financial Managers, Code of Conduct, Policy and Procedures for Transactions with Related Persons, Equity Award Policy, Clawback Policy, Insider Trading Policy, policy for communicating with the Board of Directors, and Audit Committee policy regarding the pre-approval of audit, non-audit, tax and other services are available free of charge on our website at www.tenneco.com. In addition, we will make a copy of any of these documents available to any person, without charge, upon written request to Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to, or waivers of, our Code of Ethical Conduct for Financial Managers and Code of Conduct by posting this information on our website at www.tenneco.com.
CONTRIBUTIONS OF MAJOR BUSINESSES
For information concerning our operating segments, geographic areas and major products or groups of products, see Note 11 to the consolidated financial statements of Tenneco Inc. included in Item 8. The following tables summarize for each of our reportable segments for the periods indicated: (i) net sales and operating revenues; (ii) earnings before interest expense, income taxes and noncontrolling interests (“EBIT”); and (iii) expenditures for plant, property and equipment. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 for information about certain costs and charges included in our results; our current six operating segments (North America Clean Air, North America Ride Performance, Europe, South America and India Clean Air, Europe, South America and India Ride Performance, Asia Pacific Clean Air and Asia Pacific Ride Performance); and management's announced reportable segment changes on February 7, 2017 that our Clean Air and Ride Performance product lines in India, which have been reported as part of the Europe, South America and India segments, will now be reported with their respective product lines in the Asia Pacific segments, bringing the high growth markets in India and China both under the Asia Pacific segments, effective with the first quarter of 2017. Within each geographical area, each operating segment manufactures and distributes either clean air or ride performance products primarily for the original equipment and aftermarket industries. Each of the six operating segments constitutes a reportable segment. Costs related to other business activities, primarily corporate headquarters functions, are disclosed separately from the six operating segments as "Other". We evaluate segment performance based primarily on earnings before interest expense, income taxes, and noncontrolling interests. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products.
Net Sales and Operating Revenues:
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| | 2016 | | 2015 | | 2014 |
| | (Dollar Amounts in Millions) |
| Clean Air Division | | | | | | | | | | | |
| North America | $ | 3,016 |
| | 35 | % | | $ | 2,839 |
| | 35 | % | | $ | 2,801 |
| | 34 | % |
| Europe, South America & India | 2,081 |
| | 24 | % | | 1,935 |
| | 23 | % | | 2,088 |
| | 25 | % |
| Asia Pacific | 1,080 |
| | 13 | % | | 1,037 |
| | 13 | % | | 1,022 |
| | 12 | % |
| Intergroup sales | (108 | ) | | (1 | )% | | (116 | ) | | (1 | )% | | (139 | ) | | (2 | )% |
| Total Clean Air Division | 6,069 |
| | 71 | % | | 5,695 |
| | 70 | % | | 5,772 |
| | 69 | % |
| Ride Performance Division | | | | | | | | | | | |
| North America | 1,243 |
| | 14 | % | | 1,323 |
| | 16 | % | | 1,361 |
| | 16 | % |
| Europe, South America & India | 1,045 |
| | 12 | % | | 972 |
| | 12 | % | | 1,070 |
| | 13 | % |
| Asia Pacific | 323 |
| | 4 | % | | 275 |
| | 3 | % | | 269 |
| | 3 | % |
| Intergroup sales | (81 | ) | | (1 | )% | | (84 | ) | | (1 | )% | | (91 | ) | | (1 | )% |
| Total Ride Performance Division | 2,530 |
| | 29 | % | | 2,486 |
| | 30 | % | | 2,609 |
| | 31 | % |
| Total Tenneco Inc. | $ | 8,599 |
| | 100 | % | | $ | 8,181 |
| | 100 | % | | $ | 8,381 |
| | 100 | % |
EBIT:
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| | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (Dollar Amounts in Millions) |
| Clean Air Division | | | | | | | | | | | |
| North America | $ | 220 |
| | 43 | % | | $ | 244 |
| | 48 | % | | $ | 237 |
| | 49 | % |
| Europe, South America & India | 103 |
| | 20 | % | | 52 |
| | 10 | % | | 59 |
| | 12 | % |
| Asia Pacific | 145 |
| | 28 | % | | 111 |
| | 22 | % | | 99 |
| | 20 | % |
| Total Clean Air Division | 468 |
| | 91 | % | | 407 |
| | 80 | % | | 395 |
| | 81 | % |
| Ride Performance Division | | | | | | | | | | | |
| North America | 157 |
| | 30 | % | | 155 |
| | 31 | % | | 143 |
| | 29 | % |
| Europe, South America & India | 25 |
| | 5 | % | | (5 | ) | | (1 | )% | | 40 |
| | 8 | % |
| Asia Pacific | 54 |
| | 10 | % | | 38 |
| | 7 | % | | 35 |
| | 7 | % |
| Total Ride Performance Division | 236 |
| | 45 | % | | 188 |
| | 37 | % | | 218 |
| | 44 | % |
| Other | (188 | ) | | (36 | )% | | (87 | ) | | (17 | )% | | (124 | ) | | (25 | )% |
| Total Tenneco Inc. | $ | 516 |
| | 100 | % | | $ | 508 |
| | 100 | % | | $ | 489 |
| | 100 | % |
Expenditures for Plant, Property and Equipment:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (Dollar Amounts in Millions) |
| Clean Air Division | | | | | | | | | | | |
| North America | $ | 103 |
| | 30 | % | | $ | 95 |
| | 32 | % | | $ | 83 |
| | 26 | % |
| Europe, South America & India | 76 |
| | 22 | % | | 74 |
| | 25 | % | | 84 |
| | 26 | % |
| Asia Pacific | 46 |
| | 13 | % | | 43 |
| | 15 | % | | 56 |
| | 18 | % |
| Total Clean Air Division | 225 |
| | 65 | % | | 212 |
| | 72 | % | | 223 |
| | 70 | % |
| Ride Performance Division | | | | | | | | | | | |
| North America | 55 |
| | 16 | % | | 34 |
| | 12 | % | | 35 |
| | 11 | % |
| Europe, South America & India | 50 |
| | 15 | % | | 42 |
| | 14 | % | | 47 |
| | 15 | % |
| Asia Pacific | 9 |
| | 3 | % | | 6 |
| | 2 | % | | 10 |
| | 3 | % |
| Total Ride Performance Division | 114 |
| | 34 | % | | 82 |
| | 28 | % | | 92 |
| | 29 | % |
| Other | 4 |
| | 1 | % | | 1 |
| | — | % | | 2 |
| | 1 | % |
| Total Tenneco Inc. | $ | 343 |
| | 100 | % | | $ | 295 |
| | 100 | % | | $ | 317 |
| | 100 | % |
Interest expense, income taxes, and noncontrolling interests that were not allocated to our operating segments are:
|
| | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | (Millions) |
| Interest expense (net of interest capitalized) | $ | 92 |
| | $ | 67 |
| | $ | 91 |
|
| Income tax expense | — |
| | 146 |
| | 131 |
|
| Noncontrolling interests | 68 |
| | 54 |
| | 42 |
|
DESCRIPTION OF OUR BUSINESS
We design, manufacture and sell clean airinnovative products and ride performance systems and productsservices for light vehicle, commercial truck, off-highway, industrial and other applications,aftermarket customers, and generated revenues of $8.6$11.8 billion in 2016.2018. We serve both original equipment (OE) manufacturers (OEMs) and replacement markets worldwide through leadingworldwide. Our portfolio of the industry’s most well-respected enduring brands including Monroe®include Monroe®, Rancho®Champion®, Clevite® Elastomers, Axios™Öhlins®, Kinetic®MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, and Fric-Rot™ ride performanceSealed Power®, among others. We seek to leverage our OE product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. We effectively manage the life cycle of a broad range of products and Walker®, XNOx®, Fonos™, DynoMax® and Thrush® clean air products.to a diverse customer base.
As a parts supplier, we produce individual component parts for vehicles as well as groups of components that are combined as modules or systems within vehicles. These parts, modules, and systems are sold globally to mostthe world's leading OEMs,light vehicle and commercial truck manufacturers as well as aftermarket customers, including independent warehouse distributors, distributors, engine rebuilders, retail parts stores, mass merchants, and off-highway engine manufacturers,service chains.
On October 1, 2018, we closed the acquisition of Federal-Mogul, (the "Acquisition") pursuant to the Membership Interest Purchase Agreement, dated as of April 10, 2018, by and among us, Federal-Mogul, American Entertainment Properties Corp. (“AEP”) and Icahn Enterprises L.P. (“IEP”). We agreed to use our reasonable best efforts to pursue the separation of the combined company’s aftermarket distribution channels.and ride performance business and its powertrain technology business into two new independent, publicly traded companies in a spin-off transaction that is expected to be treated as a tax-free reorganization for U.S. federal income tax purposes. We expect the spin-off to be completed in the second half of 2019.
OverviewAs a result of Partsthe Acquisition, the number of our reportable segments increased from three to five segments, consisting of the following: our historical Clean Air, Ride Performance and Aftermarket segments and the newly acquired Powertrain and Motorparts segments.
Our Industry for Vehicles and Engines
The parts industry for vehicles and engines is generally separated into two categories: categories, both of which we operate within:(1) “original equipment” or “OE” parts that are sold in large quantities directly for use by manufacturers of light vehicles and commercial trucks and off-highway engines;vehicles and (2) “aftermarket” or replacement parts that are sold in varying quantities to wholesalers, retailers and installers. In the OE category, parts suppliers are generally divided into tiers — “Tier 1” suppliers that provide their products directly to OEMs, and “Tier 2” or “Tier 3” suppliers that sell their products principally to other suppliers for combination into those other suppliers’ own product offerings.
“Light vehicles”vehicles are comprised of: (1)of passenger cars and (2) light trucks, which include sport-utility vehicles (SUVs), crossover vehicles (CUVs), pick-up trucks, vans and multi-purpose passenger vehicles. Commercial vehicles include commercial trucks and off-highway equipment.
Global OE Industry
Products for the global OE industry are sold directly to OE manufacturers that use these parts, which include components, systems, subsystems, and modules, in the manufacture of new light and commercial vehicles. Demand for component parts in the OE light vehicle automotive partsmarket is generally a function of the number of new vehiclesvehicles/engines produced, which in turn depends on prevailing economicis driven by macroeconomic conditions and other factors such as fuel prices, consumer preferences.confidence, employment trends, regulatory requirements, and trade agreements. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow revenues by increasing their product content per vehicle, by further expanding business with existing customers and by serving new customers in existing or new markets.vehicle. Companies, like us, with a global presence, leading technology and innovation, and advanced technology,product, engineering, manufacturing, and customer support capabilities such as our company, are betterbest positioned to take advantage of these opportunities.
Increasing vehicle emissions regulations are driving opportunities for increasing clean air content on vehicles and engines. Additionally,Key Industry Trends Affecting the increase and expansion in mandated diesel emission control and noise regulations or standards in North America, Europe, China, Japan, Brazil, Russia, India and South Korea have enabled suppliers such as us to serve customers beyond light vehicles. Certain parts suppliers that have traditionally supplied the automotive industry also develop and produce components and integrated systems for commercial truck, off-highway and other applications, such as medium- and heavy-duty trucks, buses, stationary engines, agricultural and construction equipment, locomotive and marine engines and recreational two-wheelers and all-terrain vehicles. We foresee this diversification of content and applications as a source of future growth.Global OE Industry
Demand for aftermarket products is driven by general economic conditions, the number of vehicles in operation, the age and distance driven of the vehicle fleet, and the average useful life and quality of vehicle parts. Although more vehicles are on the road than ever before, the aftermarket has experienced longer replacement cycles due to the improved quality and increased average useful life of vehicle parts that has come to pass as a result of technological innovation. Parts suppliers are increasingly being required to deliver innovative aftermarket products to drive increased aftermarket demand. Global economic downturns generally impact aftermarket sales less adversely than OE sales, as customers forego new vehicle purchases and keep their vehicles longer, thereby increasing demand for repair and maintenance parts and services.
Industry Trends
As the dynamics of the customers we serve change, so do the roles, responsibilities and relationships of the participants. Key trends that we believe are affecting parts suppliers include:
General Economic Factors andLight Vehicle Production Levels
Global light vehicle production has increased atis expected to grow by approximately 2% annually from 2018 to 2025, reaching nearly 109 million units by 2025, according to leading forecasting company IHS Markit. In 2018, global light vehicle production declined 1% versus the previous year, including a steady pace over the past three years, increasing1% decline in North America, 1% decline in Europe and 4% decline in China, with increases of 3% in 2014,South America and 6% in India. Global light vehicle production increased 2% in 20152017 and 5% in 2016. The overall rate of growth in 2016 was primarily driven by the 14% growth in China, while partially offset by declines in South America and Japan/Korea, down 10% and 3%, respectively. IHS Markit projects global light vehicle production will grow 2% in 2017. Production of commercial trucks globally and off-highway equipment in regulated regions has weakened over the past three years with production about flat in 2014, declining 8% in 2015, and declining 2% in 2016. IHS and Power Systems Research forecast these markets to increase 2% in 2017.
Increasing Environmental Standards
OE manufacturers and their parts suppliers are designing and developing products to respond to increasingly stringent environmental requirements, growth in engines using diesel and alternative fuels, and increased demand for better fuel economy. Government regulations require substantial reductions in vehicle tailpipe criteria pollutant emissions, longer warranty periods for a vehicle’s pollution control equipment and additional equipment to control fuel vapor emissions. The products that our clean air
divisionIntelligent Suspension, Autonomous Driving and Mobility
There are a number of trends that are driving “Auto 2.0,” defined as the transformation of cars into hybrid systems, electric and fully autonomous vehicles, the business model shift from individual car ownership to ride-sharing, and multi-model forms of mobility. For instance, higher levels of autonomy will drive increased passenger expectations for a comfortable ride, which, in turn, will create additional content opportunities per vehicle and heighten demand for advanced suspension products, including full-corner/around-the-wheel intelligent suspension systems.
Advanced suspension technology is expected to grow with adoption led by global OE manufacturers. Increased connectivity also presents additional prospects for active suspension systems, predictive vehicle diagnostics, and system-based integration within the vehicle as well as broader vehicle to everything (“V2X”) communications. The addition of Öhlins to the portfolio is expected to accelerate the development of advanced OE intelligent suspension solutions, while also fast-tracking time to market. This acquisition is yet another example of our strategy to leverage key technologies that will better position us to take advantage of secular trends. It will also enhance our portfolio in broader mobility markets through the addition of Öhlins’ range of premium OE and aftermarket automotive and motorsports performance products.
Maturing powertrain technology, including the increased adoption of hybrid and fully electric powertrains, will create further opportunities for increased ride performance and noise, vibration and harshness (“NVH”) capabilities, as consumers look for smoother, quieter and more efficient rides. Our capability in both the suspension and NVH performance materials categories provide the opportunity to maximize driving comfort and ride performance for motorists worldwide.
Shared mobility describes a range of transportation options that involve the shared use of a vehicle, motorcycle, scooter, bicycle or other travel mode; it provides users with short-term access to a transportation mode on an as-needed basis. Shared mobility may reduce vehicle volumes in established markets, but it also provides an opportunity for us to develop higher-mileage, durable solutions to meet the tailpipeneeds of new mobility fleets. Additionally, ride comfort and durability will become increasingly important differentiators as consumers increasingly take advantage of the sharing economy.
Focus on Fuel Economy, Reduced Emissions and Alternative Energy Sources
Increased fuel economy and decreased vehicle emissions are of criteria pollutants. In addition,great importance to OE suppliers, as customers, consumers and legislators continue to demand more efficient and cleaner operating vehicles. Increasingly stringent fuel economy standards and environmental regulations have been adoptedare driving OE customers to regulate greenhouse gas emissions of carbon dioxide. Reducing CO2 emissions requires improving fuel economy; as a result improved combustion efficiency and reduction of vehicle mass have become priorities. Manufacturers are responding to all of these regulations withfocus on new technologies for gasoline-including downsized, higher-output and diesel-fueled vehicles that minimize pollutionturbocharged gasoline and improvediesel engines, and hybrid electric and pure electric powertrains, such as fuel economy.
As a leading supplier of clean air systems with strong technical capabilities, we are well positioned to benefit from the more rigorous environmental standards being adopted around the world.cell and battery powered cars. We continue to expand our investment around the world, in regions such as North America, Europe, China, India, and Japan to capitalize on the growing demand for environmentally friendly solutions for light vehicle, commercial truck and off-highway applications driven by environmental regulations in these regions.
To meet stricterThe products that our clean air quality regulations, we have developed and sold diesel particulate filters (DPFs) in Europe, for example, forsegment provides reduce the Audi A4, BMW 1 series passenger cars and Scania trucks and in North America for GM Duramax engine applications, the Ford Super Duty, the Chrysler Ram Heavy Duty, and off-highway applications for Caterpillar and John Deere in North America and Europe, and Kubota in Japan. These particulate filters, coupled with converters, reducetailpipe emissions of particulate matter by up to 90 percent.criteria pollutants. In addition, regulations have been adopted to regulate greenhouse gas emissions of carbon dioxide. Reducing CO2 emissions requires improving fuel economy; as a result improved combustion efficiency and reduction of vehicle mass have become priorities. As a leading supplier of clean air systems with strong technical capabilities, we have development and production contractsbelieve we are well positioned to benefit from the more rigorous environmental standards being adopted around the world.
The demand for smaller but more powerful engines requires more technology per engine to withstand the higher output requirements, which we estimate will result in an increase in content per engine for our selective catalytic reduction (SCR) systems with light and commercial vehicle manufacturers. These SCR systems reduce emissions of nitrogen oxides by up to 95 percent. In China, South America, Europe, and Japan,powertrain business. With a global manufacturing presence, we have development and production contracts for complete turnkey SCR systems that include the urea dosing technology acquired in 2007 and now sold globally under the name XNOx®. Regulations in the U.S. and European markets, which require reductions in carbon dioxide emissions and improvements in fuel economy,believe we are creating increased demand for our fabricated manifolds, maniverters, integrated turbocharger/manifold modules, electronic exhaust valves, and lightweight components. Lastly, for various off-highway customers, we offer emission aftertreatment systems designedwell-positioned to meet environmental regulations or their equivalent outsideexpectations of our global customers. For the U.S. Both commercial truckforeseeable future, it is expected that gasoline and off-highway customersdiesel engines will remain the dominant powertrain for cars (including hybrids), heavy-duty, and industrial applications. We are embracing the conceptequally capable of turnkey aftertreatment systems which require aftertreatment electronic control units (ECUs) as well as related control software which we have developedproviding components for both gasoline and sold to several customers.diesel engines.
Increasing Technologically Sophisticated Content
As end users and consumers continue to demand vehicles with improved performance, safety and functionality at competitive prices, the components and systems in these vehicles are becoming technologically more advanced and sophisticated. Mechanical functions are being replaced with electronics; and mechanical and electronic devices are being integrated into single systems. More stringent emission and other regulatory standards are increasing the complexity of the systems as well.
To remain competitive as a parts and systems supplier, we invest in engineering, research and development, spending $154 million in 2016, $146 million in 2015, and $169 million in 2014, net of customer reimbursements. Such expenses reimbursed by our customers totaled $137 million in 2016, $145 million in 2015, and $159 million in 2014, including building prototypes and incurring other costs on behalf of our customers.development. We also fund and sponsor university and other independent research to advance our clean air and ride performance development efforts.
By investing in technology, we have been able to expand our product offerings and penetrate new markets. For example, we developed DPFs which were first sold in Europe and then offered in North America. Since these original innovations, we have developed T.R.U.E-Clean® systems with our partners, a product used to regenerate DPFs. We have also built prototypes
Table of urea SCR systems for locomotive and marine engines. We expanded our suite of NOx-reduction technologies, developing prototypes of SCR systems using gaseous ammonia, absorbed on a solid salt, as the reductant or a hydrocarbon lean NOx catalyst (HC-LNC for NOx reduction) that relies on hydrocarbons, ethanol, or other reductants instead of urea. We successfully developed and sold fabricated manifolds, previously used only on gasoline engines, into the passenger car diesel segment. We developed our prototype aftertreatment system for large engines, up to 4500 horsepower, used in line haul locomotives. On the ride performance side of our business, we co-developed with Öhlins Racing AB a continuously controlled electronic suspension system offered by OEMs such as Volvo, Audi, Ford, VW, Mercedes Benz and BMW.Contents
Enhanced Vehicle Safety and Handling
To serve the needs of their customers and meet government mandates, OEMsOE manufacturers are seeking parts suppliers that invest in new technologies, capabilities and products that advance vehicle safety and handling, such as roll-over protection systems, computerized electronicintelligent suspension, and safer, more durable materials. Those suppliers, such as us, that are able to offer such innovative products and technologies have a distinct competitive advantage.
Tenneco offers We offer adjustable and adaptive damping as well as semi-active suspension systems designed to improve vehicle stability, handling safety and control.
We also are a global leader in the development of leading friction formulas that improve vehicle stopping distances and performance. As the commercial truck customers migrate to air disc brake systems, we remain at the forefront of providing the brake friction necessary for these new systems.
Many of our aftermarket products directly affect vehicle performance. Product quality, reliability, and consistency are paramount to our end-customers, the majority of whom are professional service technicians. Our systems are based on various technologiesengineering prowess and product capabilities from chassis to braking allow us to provide a complete around-the-wheel offering.Additionally, we have a number of braking products including DRiV™ digital valve, Continuously Variable Semi-Active (CVSA) dampingdisc pads for passenger cars, motorcycles and Kinetic® roll control,commercial vehicles; drum brake shoes and Actively Controlled Car (ACOCAR™). In the aftermarket, we supply premium Monroe® branded brakes that complement our ride performance offerings. In addition, we continue to promote the Safety Triangle™ of Steering-Stopping-Stability to educate consumers about the detrimental effect of worn shock absorbers on vehicle steeringCV drum brake lining; and stopping distances.brake accessories including rotors, drums, hydraulics, hardware and brake fluid.
Sourcing by OE Manufacturers
As OE manufacturers expand their reach, many are looking for suppliers with a global footprint and the capability to supply them with full system integration and solutions, rather than individual standalone products.
11
TableBecause of Contentsthese trends, OE manufacturers are increasingly seeking suppliers capable of supporting vehicle platforms on a global basis. They want suppliers like us with design, production, engineering and logistics capabilities that can be accessed not just in North America and Europe but also in emerging markets such as India and China. OE manufacturers have standardized on global platforms, designing basic mechanical structures suitable for a number of similar vehicle models and are able to accommodate different features across regions. This standardization will drive growth in production of light vehicles designed on global platforms. Accordingly, global platforms, identified as platforms produced in more than one region, are expected to grow.
OutsourcingAs OE manufacturers look to simplify and Demand for Systemsstreamline design, they are also increasingly selecting suppliers like us that provide fully-engineered, integrated systems and Modules
OEMssolutions. OE manufacturers have steadily outsourced more of the design and manufacturing of vehicle parts and systems to simplify the assembly process, lower costs and reduce development times. Furthermore, they have demanded from their parts suppliers fully integrated, functional modules and systems made possible with the development of advanced electronics in addition to innovative, individual vehicle components and parts that may not readily interface together.
ModulesGlobal Aftermarket Industry
Products for the global aftermarket are sold directly to a wide range of distributors, retail parts stores, and systems being producedmass merchants that distribute these products to professional service providers, “do-it-yourself” consumers, and in some cases, directly to service chains. Demand for aftermarket products historically has been driven by parts suppliersfour primary factors: (i) the number of vehicles in operation (“VIO”); (ii) the average age of VIO; (iii) vehicle usage trends; and (iv) component failure and wear rates. These factors, while applicable in all regions, vary depending on the composition of VIO and other factors.
Key trends affecting the Global Aftermarket Industry
Growth in the Number of VIO in both Mature and Emerging Markets
The global number of VIO is expected to grow, with the number of VIO in emerging markets such as China expected to increase substantially. The number of VIO in mature markets, such as North America and Europe, is also expected to grow, though at a lesser pace than the emerging markets. We have strong aftermarket positions in North America, Europe and South America and a growing aftermarket position in Asia. We expect there to be aftermarket growth opportunities in emerging markets such as China and India where the VIO are described as follows:
“Modules”expected to increase and are groups of component parts arranged in close physical proximityinvesting to each other within a vehicle. Modules are often assembled by the supplier and shipped to the OEM for installation in a vehicleposition ourselves as a unit. Integrated shock and spring units, seats, instrument panels, axles and door panelsleading aftermarket supplier in these regions. We are examples.
“Systems” are groups of component parts located throughout a vehicle which operate together to provide a specific vehicle functionality. Emission control systems, anti-lock braking systems, safety restraint systems, roll control systems and powertrain systems are examples.
This shift towards fully integrated modules and systems created the role of the Tier 1 systems integrator, a supplier responsible for executing a broad array of activities, including design, development, engineering, and testing of component parts, modules and systems. As an established Tier 1 supplier, we have produced modules and systems for various vehicle platforms produced worldwide, supplying ride performance modules for the Chevrolet Silverado, GMC Sierra, Chevrolet Malibu, Chevrolet Impala and Chevrolet Cruze and emission control systems for the Chevrolet Colorado, GMC Canyon, Ford Super Duty, Ford Focus, Chevrolet Silverado, GMC Sierra, Chevrolet Malibu, Opel Astra, and VW Golf. In addition, we continue to design other modules and systems for platforms yet to be introduced to the global marketplace.
Global Reach of OE Customers
Changing market dynamics are driving OEMs and their parts suppliers to expand their global reach:
Growing Importance of Growth Markets: Because the North American and Western European automotive regions areleveraging our market-leading capabilities from mature OEMs are increasingly focusing on other markets for growth opportunities, such as India, China and Thailand. As OEMs have penetrated new regions, growth opportunities for suppliers have emerged.
Governmental Tariffs and Local Parts Requirements: Many governments around the world require vehicles sold within their country to contain specified percentages of locally produced parts. Additionally, some governments place high tariffs on imported parts.
Location of Production Closer to End Markets: As OEMs and parts suppliers have shifted production globally to be closer to their end markets, suppliers have expanded their reach, capturing sales in other markets and taking advantage where possibleinvesting to develop the right distributor base, drive brand recognition, increase product coverage, build the supply chain and promote our experience as an OE-quality supplier.
Increase in the Average Age of relatively low labor costs.
Vehicles in OperationGlobal RationalizationThe average age of OE Vehicle Platforms (described below).
Because of these trends, OEMs are increasingly seeking suppliers capable of supporting vehicle platforms on a global basis. They want suppliers like Tenneco with design, production, engineering and logistics capabilities that can be accessed not justVIO in North America and Europe but alsohas increased significantly this century, and is expected to increase further. Increases in many other regionsthe average age of the world.
Global Rationalization of OE Vehicle Platforms
OEMs have standardized on global platforms designing basic mechanical structures that are suitable for a number of similar vehicle models and able to accommodate different features for more than one region. This standardizationVIO will drive productionthe need for maintenance and repair work, thereby increasing the overall demand for aftermarket replacement parts in North America and Europe. The average age of light vehicles designed on global platforms to grow. Accordingly light vehicle platforms whose annual production exceed one million units areVIO in China is expected to grow from 52 percentincrease, which we believe will lead to continuing significant growth in the China aftermarket.
With such global platforms, OEMs realize significant economies of scale by limiting variations in items such as steering columns, brake systems, transmissions, axles, exhaust systems, support structures and power window and door lock mechanisms. The shift towards standardization can also benefit parts suppliers. They can experience greater economies of scale, lower material costs, and reduced development costs.
Extended Product Life of Automotive Parts
The average useful life of automotive parts, both OE and replacement, has steadily increased in recent years due to technological innovations including longer-lasting materials. As a result, although there are more vehicles on the road than ever before, the global aftermarket has not kept pace with that growth. Accordingly, aftermarketbefore. Aftermarket suppliers haveare focused on reducing costs and providing product differentiation through advanced technology and recognized brand names. With our long history of technological innovation, strongiconic brands and operational effectiveness,efficiency, we believe we are well positionedwell-positioned to leverage our products and technology.
Managing Complexity
We operate in a highly fragmented and dynamic industry and are among the few large aftermarket-focused suppliers globally. The increasing global vehicle population, brand and vehicle complexity, and need for rapid new part introduction, as well as new distribution channels (including online) continue to drive significant SKU proliferation and business complexity. Our recent investments in our supply chain and information technology capabilities are designed to manage this complexity, which we believe will be an important competitive differentiator.
12Channel Consolidation
Changing Aftermarket Distribution ChannelsNorth America and Increased Competition from Lower cost, Private-Label Products
From 2003 to 2016, the number of traditional jobber stores declinedEurope, there has been increasing consolidation in the U.S. Major aftermarket distribution channel with larger aftermarket distributors and retailers suchgaining market share. These distributors generally require larger, more capable suppliers that have the ability to provide world-class product expertise, category management capabilities, brand management and supply chain support, as AutoZonewell as a competitive manufacturing and Advance Auto Parts,sourcing network. We have continued their workundertaken many initiatives to support the value of our branded products to end-market consumers and diversify our revenue base.
Growth of Online Capabilities
Reaching consumers directly through online capabilities, including e-commerce, is expected to have an increasing effect on the global aftermarket industry and how aftermarket products are marketed and sold. The establishment of a robust online presence will be critical for suppliers regardless of whether they intend to participate directly in e-commerce. We invested heavily in online initiatives to improve our capabilities and connectivity to our end-customers, including a new online order management system, customer relationship management tools, global brand websites, and data analytics capabilities. We will continue to invest in these competencies. Additionally, consumers increasingly are utilizing online research prior to making buying or repair decisions. We will continue to expand their retail outlets and commercial distribution strategiesour online presence in order to sell directlyconnect with our customers and more effectively to parts installers, which historically had purchasedcommunicate the majorityvalue of their needs from local warehouseour premium aftermarket brands.
Increase in Lower Cost, Private Label Brands
In many of our markets, there has been an increase in private label or store brands sold by retailers and distributors and jobbers. The size and number of consolidations as well as key customer distribution center footprint expansions have increased in the lastat a few years, including Advance Auto Parts' purchase of Carquest (which included WorldPac), Auto Zone's purchase of Interamerican Motor Company, O'Reilly Auto Parts' purchase of V.I.P., and more recently Bond Auto, to expand their entrance into the Northeast U.S. market, and Icahn Enterprises L.P.'s agreement to acquire Pep Boys. We are well positioned to respond to these trends and feel our strategy and portfolio of customers are in line with the market changes and opportunities. We make and sell high-quality products marketed underlower price point than premium brands that appealof the same products. However, in many cases, retailers or wholesale distributors creating private label brands still rely on established suppliers, like us, to aftermarket retailersdesign and the customers they serve. In addition, our breadth of suspension and emissions controlmanufacture their private label products and, a reputation for customer service provide benefitsin some cases, utilize co-branding to both wholesalers and retailers.support their private label offerings.
More recently, our aftermarket business is facing increasing competition from lower cost, private-label products and there is growing pressure to expand our entry level product lines so that retailers may offer a greater range of price points to their consumer customers.
Analysis of Revenues
The table below provides, for eachWe have some of the years 2014 through 2016, information relating to our net salesstrongest and operating revenues, by primary product lines and customer categories.
|
| | | | | | | | | | | |
| | Net Sales Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (Millions) |
| Clean Air Products & Systems | | | | | |
| Aftermarket | $ | 305 |
| | $ | 318 |
| | $ | 318 |
|
| Original Equipment | | | | | |
| OE Value-add | 3,736 |
| | 3,489 |
| | 3,559 |
|
| OE Substrate(1) | 2,028 |
| | 1,888 |
| | 1,895 |
|
| | 5,764 |
| | 5,377 |
| | 5,454 |
|
| | 6,069 |
| | 5,695 |
| | 5,772 |
|
| Ride Performance Products & Systems | | | | | |
| Aftermarket | 937 |
| | 941 |
| | 976 |
|
| Original Equipment | 1,593 |
| | 1,545 |
| | 1,633 |
|
| | 2,530 |
| | 2,486 |
| | 2,609 |
|
| Total Revenues | $ | 8,599 |
| | $ | 8,181 |
| | $ | 8,381 |
|
| |
(1) | See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 for a discussion of substrate sales. |
Brands
We have two of the most recognized brands in the industry: Monroe® used for ride control productsautomotive aftermarket. In addition, we expect to continue to invest in product innovation, marketing and Walker® for exhaust products. Webrand support that differentiate our premium branded products for their quality while also supporting lower priced, mid- grade offerings. Additionally, we expect to continue to drive productivity and their value propositioncost reduction efforts and enhance our already strong global sourcing capabilities to remain competitive in each product tier.
Resilience during Economic Downturn
Aftermarket products are largely stable, non-discretionary and less susceptible to cyclicality as customers often have no choice but to replace automotive parts that are worn. During the 2008 economic downturn, the number of consumers with our brands:
| |
• | Monroe®, Kinetic®, Fric-Rot™,Gas-Matic®,Sensa-Trac®, OESpectrum®, and Quick-Strut® for ride performance products,
|
| |
• | Walker®,Fonos™, XNOx®, Mega-Flow®, Quiet-Flow®, and Tru-Fit® forclean air products,
|
| |
• | DynoMax® and Thrush® for performance clean air products,
|
| |
• | Rancho® for suspension products for high performance light trucks, and
|
| |
• | Clevite® Elastomers and Axios™ for noise, vibration and harshness (NVH) control components.
|
the automotive aftermarket industry is exhibited by the fact that the U.S. light vehicle aftermarket has grown every year for the last 20 years, except for 2009 when industry sales declined by approximately 1.4% according to Automotive Aftermarket Suppliers Association (AASA).
Customers
We strive to develop long-standing business relationships with our customers around the world. In each of our operating segments, weWe work collaboratively with our OE customers in all stages of production, including design, development, component sourcing, quality assurance, manufacturing and delivery. For both OE and aftermarket customers, we provide timely delivery of quality products at competitive prices and deliver customer service. With our diverse product mix and numerous facilities in major markets worldwide, we believe we are well positioned to meet customer needs.
In 2016, we served more than 80 different OEMs and commercial truck and off-highway engine manufacturers worldwide, and our products were included on nine of the top 10 passenger car models produced for sale in Europe and eight of the top 10 light truck models produced for sale in North America for 2016.
During 2016, our OE customers included the following manufacturers of light vehicles, commercial trucks and off-highway equipment and engines:
|
| | | | |
North America | | Europe | | Asia |
AM General | | Agco Corp | | Austem |
BMW | | AvtoVAZ | | Beijing Automotive |
Caterpillar | | BMW | | BMW |
CNH Industrial | | Caterpillar | | Brilliance Automobile |
Daimler AG | | CNH Industrial (Iveco) | | Chang'an Automotive |
FCA | | Daimler AG | | China National Heavy-Duty Truck Group |
Ford Motor | | Deutz AG | | Daimler AG |
General Motors | | Ford Motor | | Dongfeng Motor |
Harley-Davidson | | Geely Automobile | | FCA |
Honda Motors | | General Motors | | First Auto Works |
Hyundai Motor | | John Deere | | Ford Motor |
John Deere | | Mazda Motor | | Geely Automobile |
Navistar International | | McLaren Automotive | | General Motors |
Nissan Motor | | Nissan Motor | | Great Wall Motor |
Paccar | | Paccar | | Isuzu Motor Company |
Toyota Motor | | PSA Peugeot Citroen | | Jiangling Motors |
Volkswagen Group | | Renault | | JND |
Volvo Global Truck | | Suzuki Motor | | Kubota |
| | Tata Motors | | Nissan Motor |
| | Toyota Motor | | SAIC Motor |
| | Volkswagen Group | | Tata Motors |
| | Volvo Global Truck | | Toyota Motor |
| | | | Weichai Power |
| | | | Yuchai Group |
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Australia | | South America | | India |
Ford Motor | | Agrale S.A. | | Ashok Leyland |
General Motors | | CNH Industrial (Iveco) | | BMW |
Toyota Motor | | Daimler AG | | Daimler AG |
| | FCA | | Ford Motor |
| | Ford Motor | | General Motors |
| | General Motors | | Mahindra & Mahindra |
| | Navistar International | | Nissan Motor |
| | Nissan Motor | | Suzuki Motor |
| | PSA Peugeot Citroen | | Tata Motors |
| | Randon S.A. | | Toyota Motor |
| | Renault | | Volkswagen Group |
| | Toyota Motor | | |
| | Volkswagen Group | | |
Our OE customers consist of automotive and commercial manufacturers as well as agricultural, off-highway, marine, railroad, aerospace, high performance, and power generation and industrial application manufacturers. We have well-established relationships with substantially all major American, European, and Asian automotive OE manufacturers.The following customers accounted for 10 percent10% or more of our net sales in any of the last three years.
| | | Customer | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| General Motors Company | 17 | % | | 15 | % | | 15 | % | 12 | % | | 14 | % | | 17 | % |
| Ford Motor Company | 13 | % | | 14 | % | | 13 | % | 12 | % | | 13 | % | | 13 | % |
During 2016, ourOur aftermarket customers were comprised of full-line and specialtyinclude independent warehouse distributors retailers, jobbers, installer chainsthat redistribute products to local parts suppliers, distributors, engine rebuilders, retail parts stores, mass merchants and car dealers. These customers included National Auto Parts Association (NAPA), Advance Auto Parts, Uni-Select, O’Reilly Auto Parts, Aftermarket Auto Parts Alliance, and AutoZone in North America; Temot Autoteile GmbH, Autodistribution International, Group Auto Union, Auto Teile Ring and AP United in Europe; and Rede Presidente in South America. We believe our aftermarket revenue mix is balanced, with our top 10 aftermarket customers accounting for 63 percentservice chains. The breadth of our net aftermarket sales and our aftermarket sales representing 14 percentproduct lines, the strength of our total netleading marketing expertise, a sizable sales force, and supply chain and logistics capabilities are central to our success in 2016.the aftermarket. We have a large and diverse aftermarket customer base.
Competition
We operate in highly competitive markets. Customer loyalty is a key element of competition in these markets and is developed through long-standing relationships, customer service, high quality value-added products and timely delivery. Product pricing and services provided are other important competitive factors.
As a supplier of OE and aftermarket parts, we compete with the vehicle manufacturers, some of which are also customers of ours, and numerous independent suppliers. For OE sales, weWe believe that we rank among the top two suppliers for certain key clean air and ride performance products and systems in many regions of the world. In the aftermarket, we believe that we are a leader in supplying clean airmeeting these competitive challenges by developing leading technologies, efficiently integrating and ride performance products for light vehicles for the key applications we serve throughout the world.expanding our manufacturing and distribution operations, widening our product coverage within our core businesses, restructuring our operations and transferring production to best cost countries, and utilizing our worldwide technical centers to develop and provide value-added solutions to our customers.
Seasonality
Our OE and aftermarket businesses are somewhat seasonal. OE production is historically higher in the first half of the year compared to the second half. It typically decreases in the third quarter due to OE plant shutdowns for model changeovers and European holidays, and softens further in the fourth quarter due to reduced production during the end-of-year holiday season in North America and Europe generally.Europe. Shut-down periods in the rest of the world generally vary by country. Our aftermarket operations also affected by seasonality, experience relatively higher demand during the spring as vehicle owners prepare for the summer driving season.
While seasonality does impact our business, actual results may vary from the above trends due to global and local economic dynamics as well as industry-specific platform launches and other production-related events. During periods of economic recession, OE sales traditionally decline due to reduced consumer demand for automobiles and other capital goods. Aftermarket sales tend not to be as adversely affected during periods of economic downturn, as consumers foregoforgo new vehicle purchases and keep their vehicles longer, thereby increasing demand for repair and maintenance services. By participating
The aftermarket is affected by changes in both theeconomic conditions, volatility in fuel prices, and expanding focus on environmental and energy conservation.
Order Fulfillment
For OE and aftermarket segments,customers, we generally seereceive long-term production contracts for specific products supplied for particular vehicles. These supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions, and do not require the customer to purchase a smaller revenue decline during economic downturns thanminimum quantity. In addition to customary commercial terms and conditions, long-term production contracts generally provide for annual price reductions based upon expected productivity improvements and other factors. Customers typically retain the overallright to terminate long-term production contracts, but we generally cannot terminate long-term production contracts. OE order fulfillment is typically manufactured in response to customer purchase order releases, and we ship directly from a manufacturing location to the customer for use in vehicle production and assembly. Accordingly, our manufacturing locations turn finished goods inventory relatively quickly, producing from on-hand raw materials and work-in-process inventory within relatively short manufacturing cycles. Significant risks to us include a change in vehicle or engine production, lower than expected vehicle or engine production by one or more of our OE production.customers, or termination of the business based upon perceived or actual shortfalls in delivery, quality or value.
For our global aftermarket customers, we generally establish product line arrangements that encompass substantially all parts offered within a particular product line. In some cases, we will enter into agreements with terms ranging from one to three years that cover one or more product lines with fixed prices. Pricing is market responsive and subject to adjustment based upon competitive pressures, material costs, and other commercial factors. Global aftermarket order fulfillment is largely performed from finished goods inventory stocked in our worldwide distribution network. Inventory stocking levels in our distribution centers are established based upon historical and anticipated future customer demand.
Although customer programs typically extend to future periods, and although there is an expectation we will supply certain levels of OE production over such periods, we believe outstanding purchase orders and product line arrangements do not constitute firm
Clean Air Systems
Vehicle emission control productsorders. Firm orders are limited to specific and systems play a critical role in safely conveying noxious exhaust gases awayauthorized customer purchase order releases placed with our manufacturing and distribution centers for actual production and order fulfillment. Firm orders are typically fulfilled as promptly as possible from the passenger compartmentconversion of available raw materials and reducing the level of pollutantswork-in-process inventory for OE orders, and engine exhaust noise emitted to acceptable levels. Precise engineering of the exhaust system — which extends from the manifold that connects an engine’s exhaust ports to an exhaust pipe, to the catalytic converter that eliminates pollutants from the exhaust, and to the muffler that modulates noise emissions — leads to a pleasantly tuned engine sound, reduced pollutants and optimized engine performance.
We design, manufacture and distribute a variety of products and systems designed to reduce pollution and optimize engine performance, acoustic tuning and weight, including the following:
Catalytic converters and diesel oxidation catalysts — Devices consisting of a substrate coated with precious metals enclosed in a steel casing used to reduce harmful gaseous emissions such as carbon monoxide;
Diesel Particulate Filters (DPFs) — Devices to capture and regenerate particulate matter emitted from diesel engines;
Burner systems — Devices which actively combust fuel and air inside the exhaust system to create extra heatcurrent on-hand finished goods inventory for DPF regeneration, or to improve the efficiency of SCR systems;
Lean NOx traps — Devices which reduce nitrogen oxide (NOx) emissions from diesel powertrains using capture and store technology;
Hydrocarbon vaporizers and injectors — Devices to add fuel to a diesel exhaust system in order to regenerate particulate filters or Lean NOx traps;
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• | Selective Catalytic Reduction (SCR) systems — Devices which reduce NOx emissions from diesel powertrains using urea mixers and injected reductants such as Verband der Automobil industrie e.V.'s AdBlue® or Diesel Exhaust Fluid (DEF);
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SCR-coated diesel particulate filters (SDPF) systems — Lightweight and compact devices combining the SCR catalyst and the particulate filter onto the same substrate for reducing NOx and particulate matter emissions;
Urea dosing systems — Systems comprised of a urea injector, pump, and control unit, among other parts, that dose liquid urea onto SCR catalysts;
Four-way catalysts — Devices that combine a three-way catalyst and a particulate filter onto a single device by having the catalyst coating of a converter directly applied onto a particulate filter;
Alternative NOx reduction technologies — Devices which reduce NOx emissions from diesel powertrains, by using, for example, alternative reductants such as diesel fuel, E85 (85% ethanol, 15% gasoline), or solid forms of ammonia;
Mufflers and resonators — Devices to provide noise elimination and acoustic tuning;
Fabricated exhaust manifolds — Components that collect gases from individual cylinders of a vehicle’s engine and direct them into a single exhaust pipe. Fabricated manifolds can form the core of an emissions module that includes an integrated catalytic converter (maniverter) and/or turbocharger;
Pipes — Utilized to connect various parts of both the hot and cold ends of an exhaust system;
Hydroformed assemblies — Forms in various geometric shapes, such as Y-pipes or T-pipes, which provide optimization in both design and installation as compared to conventional pipes;
Elastomeric hangers and isolators — Used for system installation and elimination of noise and vibration, and for the improvement of useful life; and
Aftertreatment control units — Computerized electronic devices that utilize embedded software to regulate the performance of active aftertreatment systems, including the control of sensors, injectors, vaporizers, pumps, heaters, valves, actuators, wiring harnesses, relays and other mechatronic components.
For the catalytic converters, SCR system and other substrate-based devices we sell, we need to procure substrates coated with precious metals or in the case of catalytic converter systems only, purchase the complete systems. We obtain these components and systems from third parties, often at the OEM's direction, or directly from OE vehicle and engine manufacturers. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on our sales of these products.
We supply our clean air offerings to approximately 30 light vehicle manufacturers for use on approximately 225 light vehicle models, including six of the top 10 passenger car models produced in Europe and seven of the top 10 light truck models produced in North America for 2016. We also supply clean air products to approximately 30 manufacturers of commercial trucks, off-highway equipment and engines, and other vehicles including BMW Motorcycle, Caterpillar, CNHTC, Daimler Trucks, Deutz, FAW Truck, Ford, Harley-Davidson, John Deere, Kubota, Scania and Weichai Power.
We acquired our original clean air product line in 1967 with the acquisition of Walker Manufacturing Company, which was founded in 1888, and became one of Europe’s leading OE clean air systems suppliers with the acquisition of Heinrich Gillet GmbH & Co. in 1994. Throughout this document, the term “Walker” refers to our subsidiaries and affiliates that produce clean air products and systems.
In the aftermarket we manufacture, market and distribute replacement mufflers for virtually all North American, European, and Asian light vehicle models under brand names including Quiet-Flow® and Tru-Fit® in addition to offering a variety of other related products such as pipes and catalytic converters (Walker® Perfection). We also serve the specialty exhaust aftermarket with offerings that include Mega-Flow® exhaust products for heavy-duty vehicle applications and DynoMax® high performance exhaust products. We continue to emphasize product-value differentiation with other aftermarket brands such as Walker®, Thrush® and Fonos™.
Ride Performance Systems
Superior ride control is governed by a vehicle’s suspension system, including shock absorbers and struts. Shock absorbers and struts maintain the vertical loads placed on vehicle tires, helping keep the tires in contact with the road. Vehicle steering, braking, acceleration and safety depend on maintaining contact between the tires and the road. Worn shocks and struts can allow excessive transfer of the vehicle’s weight — from side to side, known as “roll;” from front to rear, called “pitch;” or up and down, “bounce.” Because shock absorbers and struts are designed to control the vertical loads placed on tires, they provide resistance to excessive roll, pitch and bounce.
We design, manufacture and distribute a variety of ride performance products and systems including:
Shock absorbers — A broad range of mechanical shock absorbers and related components for light- and heavy-duty vehicles, including twin-tube and monotube shock absorbers;
Struts — A complete line of struts and strut assemblies for light vehicles;
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• | Vibration control components (Clevite® Elastomers, Axios™) — Generally, rubber-to-metal bushings and mountings to reduce vibration between metal parts of a vehicle. Offerings include a broad range of suspension arms, rods and links for light- and heavy-duty vehicles;
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• | Monroe® Intelligent Suspension Portfolio:
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◦ | Kinetic® suspension technology — A suite of roll-control and nearly equal wheel-loading systems ranging from simple mechanical systems to complex hydraulic systems featuring proprietary and patented technology. We have won the PACE Award for our Kinetic® suspension technology;
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◦ | Dual-mode suspension - An adaptive suspension solution used for small- and medium-sized vehicles that provides drivers a choice of two suspension modes such as comfort and sport; |
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◦ | Semi-active and active suspension systems — Shock absorbers and suspension systems such as CVSAe and ACOCAR™ that electronically adjust a vehicle’s performance based on certain inputs such as steering and braking; and
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◦ | Kinetic H2/CVSA Continuously Variable Semi Active suspension system (Formerly known as CES) — In 2011, we won the Supplier of the Year award from Vehicle Dynamics International magazine, which recognizes outstanding achievement in global automotive suspension and chassis engineering, for the Kinetic H2/CVSA Continuously Variable Semi Active suspension system installed on the McLaren MP4-12C; and
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Other — We also offer other ride performance products such as load assist products, springs, steering stabilizers, adjustable suspension systems, suspension kits and modular assemblies.
We supply our ride performance offerings to approximately 30 light vehicle manufacturers for use on over 200 light vehicle models, includingsix of the top 10 passenger car models produced in Europe and eight of the top 10 light truck models produced in North America for 2016. We also supply ride performance products and systems to over 40 manufacturers of commercial truck, off-highway and other vehicles including Caterpillar, Daimler Trucks, John Deere, Navistar, Paccar, Scania and Volvo Truck.
In the ride performance aftermarket, we manufacture, market and distribute replacement shock absorbers for virtually all North American, European and Asian light vehicle models under several brand names including Gas-Matic®, Sensa-Trac®, Monroe® Reflex® and Monroe® Adventure™, Quick-Strut®, as well as Clevite® Elastomers and Axios™ for elastomeric vibration control components. We also sell ride performance offerings for commercial truck and other aftermarket segments, such as our Gas-Magnum® shock absorbers for the North American commercial category.
We entered the ride performance product line in 1977 with the acquisition of Monroe Auto Equipment Company, which was founded in 1916 and which introduced the world’s first modern tubular shock absorber in 1930. When the term “Monroe” is used in this document it refers to our subsidiaries and affiliates that produce ride performance products and systems.
Financial Information About Geographic Areas
Refer to Note 11 of the consolidated financial statements of Tenneco Inc. included in Item 8 of this report for financial information about geographic areas.
Sales, Marketing and Distribution
We have separate and distinct sales and marketing efforts for our OE and aftermarket businesses.
For OE sales, our sales and marketing team is an integrated group of professionals, including skilled engineers and program managers, who are organized by customer and product type (e.g., ride performance and clean air). Our sales and marketing teams are centered on meeting the customer's needs with products and services on time; maximizing profit for our investors while financing continued growth and product development; and developing a common system approach to create a superior customer experience. Our teams provide the appropriate mix of operational and technical expertise needed to interface successfully with the OEMs. Our business capture process involves working closely with the OEM platform engineering and purchasing teams. Bidding on OE automotive platforms typically encompasses many months of engineering and business development activity. Throughout the process, our sales team, program managers and product engineers assist the OE customer in defining the project’s technical and business requirements. A normal part of the process includes our engineering and sales personnel working on customers’ integrated product teams, and assisting with developing component/system specifications and test procedures. Given that the OE business involves long-term production contracts awarded on a platform-by-platform basis, our strategy is to leverage our engineering expertise and strong customer relationships to target and win new business and increase operating margins.
For aftermarket sales and marketing, our sales force is generally organized by customer and region and covers multiple product lines. We sell aftermarket products through four primary channels of distribution: (1) the traditional three-step distribution system of full-line warehouse distributors, jobbers and installers; (2) the specialty two-step distribution system of specialty warehouse distributors that carry only specified automotive product groups and installers; (3) direct sales to retailers; and (4) direct sales to installer chains. Our aftermarket sales and marketing representatives cover all levels of the distribution channel, stimulating interest in our products and helping our products move through the distribution system. Also, to generate demand for our products from end-users, we run print, online and outdoor advertisements and offer pricing promotions. We offer business-to-business services to customers with TA-Direct, an on-line order entry and customer service tool. In addition, we maintain detailed web sites for each of our Walker®, Monroe®, Rancho®, DynoMax®, and Monroe® brake brands and our heavy-duty products.
Manufacturing and Engineering
We focus on achieving superior product quality at the lowest delivered cost possible using productive, reliable and safe manufacturing processes to achieve that goal. Our manufacturing strategy is a component of our Tenneco Business System (TBS) which is a holistic approach to how we work that creates standardized processes and gives us a common business language across business units and geographies. By driving speed and predictability, the Tenneco Business System enables us to accelerate growth, achieve cost leadership and create high-performance teams. Manufacturing Operations is one of the value streams that comprise the Tenneco Business System. It is focused on optimizing operations across all Tenneco manufacturing facilities to drive predictable performance and become the global benchmark. Within the Manufacturing Operations value stream, there are nine principles: health and safety; environmental management; continuous improvement; design for manufacturing; total quality management; material control; visual management; total productive maintenance; and high performance teams. Our goal is to have zero accidents, zero problems with deliveries, zero quality issues, and zero waste. When we eliminate these issues, we will deliver better service to our customers because we'll have better quality and better cost. We'll have a safer environment for our employees, and we'll become more predictable. We deploy new technology to differentiate our products from our competitors’ and to achieve higher quality and productivity. We continue to adapt our capacity to customer demand, both expanding capabilities in growth areas as well as reallocating capacity away from segments in decline.orders.
Clean Air Segment
We operate 6364 clean air manufacturing facilities worldwide, of which 1617 facilities are located in North and South America, 2420 in Europe South America and India, and 2327 in Asia Pacific. We operate 16 of the manufacturing facilities in Asia Pacific through joint ventures in which we hold a controlling interest. We operate five clean air engineering and technical facilities worldwide and share three other such facilities with our ride performance operations. Of the five clean air engineering and technical facilities, one is located in North America, two in Europe, and two in Asia Pacific. In addition, twoone joint venturesventure in which we hold a noncontrolling interest operate a total of twooperates one manufacturing facilitiesfacility in Europe.
Within eachThrough the recent acquisition of Federal-Mogul Powertrain, combined with our clean air manufacturing facilities, operationsClean Air emissions expertise, we are organized by component (e.g., muffler, catalytic converter, pipe, resonatorfocused on delivering an optimized trade-off between fuel economy and manifold). Our manufacturingemission control from the cylinder to the tailpipe. Specifically, Clean Air products and systems incorporate cell-based designs, allowing work-in-processare designed to move through the operation with greater speedhelp global OE manufacturers in light vehicle, commercial truck and flexibility. We continueoff-highway markets to invest in plant and equipment to stay competitivemeet global emissions regulations anywhere in the industry. For instance,world. With significant investment in our Smithville, Tennessee, OE manufacturing facility,core sciences and technical capabilities, including combustion and thermal management, materials science and thermoelectrical energy, we have developed a muffler assembly cellare able to provide advance emissions solutions that utilizes laser welding. This allows for quicker change-over times in the process as well as less material usedsolve unique technical challenges.
Our technologies are broken into four key product areas:
Emissions Control Products — includes Dosing Systems, Advanced Mixers, Selective Catalytic Reduction, Gasoline and less weightDiesel Particulate Filters and Catalytic Converters;
Lightweighting and Thermal Management — includes Rankine Cycle Power Pack, Thermo-electric Generators, Thermoacoustic Converters, Heat Exchangers, Lightweight Aftertreatment Systems and Fabricated Manifolds;
Table of ContentsAcoustic Products — includes Muffler and Resonator Tuning Devices. Active Noise Cancellation, Signature Sound, Smart Sound and Electronic and Passive Valves; and
Noise, Vibration and Harshness — includes Exhaust System Isolators, Lightweight Hanger Solutions and Modular Exhaust Dampers.
for the product. There is also a reduced cycle time compared to traditional joining and increased manufacturing precision for superior durability and performance. In 2007, we introduced the Measured and Matched Converter technique in North America. This allows us to maintain the optimum GBD (Gap Bulk Density) in our converter manufacturing operations with Tenneco proprietary processing. This process, coupled with cold spinning of the converter body, versus traditional cone to can welding, allows for more effective use of material through reduced welding, lower cost, and better performance of the product. In 2009, we introduced low-cost fabricated diesel manifolds in Europe which utilize advanced manufacturing processes such as deep drawing, laser welding, and furnace brazing.
To strengthen our position as a Tier 1 OE systems supplier, we have developed some of our clean air manufacturing operations into “just-in-time” or “JIT” systems. In this system, a JIT facility located close to our OE customer’s manufacturing plant receives product components from both our manufacturing operations and independent suppliers, and then assembles and ships products to the OEMs on an as-needed basis. To manage the JIT functions and material flow, we have advanced computerized material requirements planning systems linked with our customers’ and supplier partners’ resource management systems. We have 25 clean air JIT assembly facilities worldwide, of which two facilities are located in North America, ten in Europe and India, and 13 in Asia Pacific.
Our engineering capabilities include advanced predictive design tools, advanced prototyping processes and state-of-the-art testing equipment. These technological capabilities make us a “full system” integrator and supplier to the OEMs,OE manufacturers, supplying completeoptimized emission control systems from the manifold to the tailpipe, to provide fullwhile delivering emission regulatory compliance and acoustic noise control. We expanded our engineering capabilities with acquisitions in 2007 and 2012Our technology includes the use of Combustion Component Associates’ technology for use in mobile emission and stationary engine applications, respectively. That technology, with its urea and hydrocarbon injectors, electronic controls and software is marketed and sold globally under the XNOx® name for use in selective catalytic reduction (SCR) and other exhaust aftertreatmentafter-treatment systems. We also offer a complete suite of alternative full system NOx aftertreatment technologies, including the Hydrocarbon Lean NOx Catalyst (HC-LNC) technology under joint development with General Electric,technology.
Vehicle emission control products and Solid SCR™ technology licensedsystems play a critical role in safely conveying noxious exhaust gases away from Amminex, anthe passenger compartment and reducing the level of pollutants and engine exhaust noise emitted to acceptable levels. Precise engineering and manufacturing company located in Denmark. We also developed advanced predictive engineering tools, including KBM&E (Knowledge Based Manufacturing & Engineering). The innovation of our KBM&E (which we call TEN-KBM&E) is a modular toolbox set of CAD embedded applications for manufacturing and engineering compliant design. The encapsulated TEN-KBM&E content is driven by an analytical method which continuously captures and updates the knowledge of our main manufacturing and engineering processes. Our global engineering capabilities are standardized through the use of the ATLAS Global PDM (Product Data Management)exhaust system enabling- which extends from the manifold that connects an engine’s exhaust ports to an exhaust pipe, to the catalytic converter that eliminates pollutants from the exhaust, and to the muffler that modulates noise emissions - leads to a pleasantly tuned engine sound, reduced pollutants and optimized engine performance.
We design, manufacture and distribute a variety of clean air products and systems. The following table sets forth a description of the largest product lines sold by our Clean Air segment:
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| Product | Description |
| Catalytic converters and diesel oxidation catalysts | Devices consisting of a substrate coated with precious metals enclosed in a steel casing used to reduce harmful gaseous emissions such as carbon monoxide. |
| Diesel particulate filters (DPFs) | Devices to capture and regenerate particulate matter emitted from diesel engines. |
| Burner systems | Devices which actively combust fuel and air inside the exhaust system to create extra heat for DPF regeneration, or to improve the efficiency of SCR systems. |
| Lean NOx traps | Devices which reduce nitrogen oxide (NOx) emissions from diesel powertrains using capture and store technology. |
| Hydrocarbon vaporizers and injectors | Devices to add fuel to a diesel exhaust system in order to regenerate particulate filters or Lean NOx traps. |
| SCR systems | Devices which reduce NOx emissions from diesel powertrains using urea mixers and injected reductants such as Verband der Automobil industrie e.V.'s AdBlue® or Diesel Exhaust Fluid (DEF). |
| SCR-coated diesel particulate filters (SDPF) systems | Lightweight and compact devices combining the SCR catalyst and the particulate filter onto the same substrate for reducing NOx and particulate matter emissions. |
| Urea dosing systems | Systems comprised of a urea injector, pump, and control unit, among other parts, that dose liquid urea onto SCR catalysts. |
| Four-way catalysts | Devices that combine a three-way catalyst and a particulate filter onto a single device by having the catalyst coating of a converter directly applied onto a particulate filter. |
| Alternative NOx reduction technologies | Devices which reduce NOx emissions from diesel powertrains, by using, for example, alternative reductants such as diesel fuel, E85 (85% ethanol, 15% gasoline), or solid forms of ammonia. |
| Mufflers and resonators | Devices to provide noise elimination and acoustic tuning. |
| Fabricated exhaust manifolds | Components that collect gases from individual cylinders of a vehicle’s engine and direct them into a single exhaust pipe. Fabricated manifolds can form the core of an emissions module that includes an integrated catalytic converter (maniverter) and/or turbocharger. |
| Pipes | Utilized to connect various parts of both the hot and cold ends of an exhaust system. |
| Hydroformed assemblies | Forms in various geometric shapes, such as Y-pipes or T-pipes, which provide optimization in both design and installation as compared to conventional pipes. |
| Elastomeric hangers and isolators | Used for system installation and elimination of noise and vibration, and for the improvement of useful life. |
| Aftertreatment control units | Computerized electronic devices that utilize embedded software to regulate the performance of active aftertreatment systems, including the control of sensors, injectors, vaporizers, pumps, heaters, valves, actuators, wiring harnesses, relays and other mechatronic components. |
For the catalytic converters, SCR systems and other substrate-based devices we sell, we need to procure substrates coated with precious metals or in the case of catalytic converter systems only, purchase the complete systems. We obtain these components and systems from third parties, often at the OE manufacturer's direction, or directly from OE vehicle and engine manufacturers. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more efficient transferinformation on our sales of knowledge aroundthese products.
Powertrain Segment
We operate 85 manufacturing sites in 19 countries, serving a large number of major automotive, heavy-duty, marine and industrial customer worldwide. Powertrain has also invested globally in nonconsolidated affiliates that have multiple manufacturing sites, mainly in Turkey and China.
Powertrain offers its customers a diverse array of market-leading products for OE applications, including pistons, piston rings, piston pins, cylinder liners, valvetrain products, valve seats and guides, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, rigid heat shields, engine bearings, industrial bearings, bushings and washers, systems protection sleeves, acoustic shielding and flexible heat shields.
We design, manufacture and distribute a variety of powertrain products and systems. The following table sets forth a description of the world.largest product lines sold by our Powertrain segment:
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| Product | Description |
| Pistons | Pistons convert the energy created by the combustion event into mechanical energy to drive a car; Pistons can be made from aluminum or steel, both casted and forged; Highly efficient engines impose high demands on pistons in terms of rigidity and temperature resistance. |
| Piston rings | Piston rings are mounted on the piston to seal the combustion chamber while the piston is moving up and down; Modern rings need to resist high temperature and very abrasive environments without significant wear; Rings are critical for low oil consumptions. |
| Cylinder liners | Cylinder liners, or sleeves, are specially engineered where surfaces formed within the engine block, working in tandem with the piston and ring, as the chamber in which the thermal energy of the combustion process is converted into mechanical energy. |
| Valve seats and guides | Valve seats and guides are produced from powdered metal based on sophisticated metal-ceramic structures to meet extreme requirements for hardness. |
| Bearings | Bearings provide the low-friction environment for rotating components like crankshafts and camshafts; Modern bearings are able to deal with very low viscosity oil even in highly repetitive motions like in stop/start-conditions. |
| Spark plugs | Modern spark plugs for engines fueled by gasoline or natural gas have to ignite fuel even at very high combustion pressure and with very clean fuel-air mixture - combined with extended life expectation well over 100,000 miles for turbo-charged engines. |
| Valvetrain products | Valvetrain products include mainly engine valves but also retainers, rotators, cotters, and tappets for use in both diesel and gas engines; the most demanding applications require sodium-filled hollow valves for fast heat dissipation. |
| System protection | System protection products include protection sleeves for wire harness and for oil and water tubes as well as acoustic and EMI/RFI shielding, heat and abrasion protection, and safety/ crash protection for cables and tubes for engines and cars. |
| Seals and gaskets | Cylinder-head gaskets and other hot and cold gaskets are sealing engines and engine components; dynamic and static seals protecting rotating engine and transmission components against oil and gas leakages. Such seals and gaskets are made from high-alloyed steel as well as from sophisticated rubber and polymers. |
Ride Performance Segment
We operate 2825 ride performance manufacturing facilities worldwide, of which nine10 facilities are located in North and South America, 13seven in Europe and South AmericaAfrica, and India, and sixeight in Asia Pacific. We operate two of the facilities through joint ventures in which we hold a controlling interest, one in Europe and another one in Asia. We operate seven engineering and technical facilities worldwide and share three other such facilities with our clean air operations. Of the seven ride performance engineering and technical facilities, two are located in North America, fourthree in Europe and South America, and India, and onetwo in Asia Pacific.
Within each of our ride performance manufacturing facilities, operations are organized by product (e.g., shocks, struts and vibration control products) and include computer numerically controlled and conventional machine centers; tube milling and drawn-over-mandrel manufacturing equipment; metal inert gas and resistance welding; powdered metal pressing and sintering; chrome plating; stamping; and assembly/test capabilities. Our manufacturing systems incorporate cell-based designs, allowing work-in-process to move through the operation with greater speed and flexibility.
To strengthen our position as a Tier 1 OE module supplier, we have developed four of our ride performance manufacturing facilities into JIT assembly facilities located in Europe and India.
In designing our shock absorbers and struts, we use advanced engineering and test capabilities to provide product reliability, endurance and performance. Our engineering capabilities feature advanced computer-aided design equipment and testing facilities. Our dedication to innovative solutions has led to such technological advances as:
Adaptive damping systems — adapt to the vehicle’s motion to better control undesirable vehicle motions;
Electronically adjustable suspensions — change suspension performance based on a variety of inputs such as steering, braking, vehicle height, and velocity; and
Air leveling systems — manually or automatically adjust the height of the vehicle.
ConventionalSuperior ride control is governed by a vehicle’s suspension system, including shock absorbers and struts. Shock absorbers and struts maintain the vertical loads placed on vehicle tires, helping keep the tires in contact with the road. Vehicle steering, braking, acceleration and safety depend on maintaining contact between the tires and the road. Worn shocks and struts can allow excessive transfer of the vehicle’s weight - from side to side, known as “roll;” from front to rear, called “pitch;” or up and down, “bounce.” Because shock absorbers and struts generally develop an appropriate compromise between ride comfortare designed to control the vertical loads placed on tires, they provide resistance to excessive roll, pitch and handling. Our innovative gas-charged shock absorbers and struts provide both ride comfort and vehicle control, resulting in improved handling, reduced vibration and a wider range of vehicle control. This technology can be found in our premium quality OESpectrum® shock absorbers. We further enhanced this technology by adding the SafeTech™ fluon banded piston, which improves shock absorber performance and durability. We introduced the Monroe® Reflex® shock absorber, which incorporates ourbounce.
Impact Sensor™ device. ThisWe design, manufacture and distribute a variety of ride performance products and systems. The following table sets forth a description of the largest product lines sold by our Ride Performance segment:
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| Product | Description |
| Shock absorbers and struts | A broad range of mechanical shock absorbers and related components for light- and heavy-duty vehicles, including twin-tube and monotube shock absorbers and a complete line of struts and strut assemblies for light vehicles. Shock absorbers and struts maintain the vertical loads placed on vehicle tires, helping keep tires in contact with the road. |
| Monroe® intelligent suspension portfolio | An extensive product portfolio of advanced electronically controlled ride performance technology, which improve ride quality and vehicle handling:
Kinetic ® suspension technology - A suite of roll-control and nearly equal wheel-loading systems ranging from simple mechanical systems to complex hydraulic systems featuring proprietary and patented technology. We have won the PACE Award for our Kinetic ® suspension technology;
Dual-mode suspension - An adaptive suspension solution used for small- and medium-sized vehicles that provides drivers a choice of two suspension modes such as comfort and sport;
DRiV— A digital electronic adaptive suspension system that adapts to road surfaces and vehicle control data through sensors, valves and intelligence located within the damper.
CVSAe Continuously Variable 1 valve semi active suspension systems — Shock absorbers and suspension systems that electronically adjust a vehicle’s performance based on certain inputs such as steering, braking and other chassis control data
CVSA2/Kinetic — Continuously Variable 2 valve semi active damping systems with hydraulic roll control (Kinetic H2) or hydraulic roll and pitch control (Kinetic X2). |
| NVH performance materials | Highly-engineered elastomer performance materials designed to reduce noise, vibration and harshness. Generally, rubber-to-metal bushings and mountings to reduce vibration between metal parts of a vehicle. Offerings include a broad range of suspension arms, rods and links for light- and heavy-duty vehicles. |
On January 10, 2019, we closed on our acquisition of Öhlins Racing A.B. (“Öhlins”), a Sweden-based company. Öhlins offers suspension systems and components to automotive and motorsport industries.
Aftermarket Segment
We operate five Aftermarket production facilities worldwide, two in North America, one in Europe, and two in Asia Pacific. We share engineering testing facilities with our clean air and ride performance operations. In addition, we operate 22 distribution centers worldwide, four in North America, one in South America, 14 in Europe, and three in Asia Pacific. Eight of these are third party logistics providers.
The following table sets forth a description of the largest product categories sold by our Aftermarket segment:
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| Product | Description | Select Brands |
| Ride control | Ride Control parts include a broad range of mechanical shock absorbers and related components as well as struts and strut assemblies. Shock absorbers and struts maintain the vertical loads placed on vehicle tires, helping keep the tires in contact with the road. | Monroe®, Monroe® Reflex® Monroe® Adventure™, Rancho®, Quick-Strut®, Gas-Matic®, Sensa-Trac®, Quick-Strut® andGas-Magnum® |
| NVH performance materials | Highly-engineered elastomer performance materials designed to reduce noise, vibration and harshness. Generally, rubber-to-metal bushings and mountings to reduce vibration between metal parts of a vehicle. Offerings include a broad range of suspension arms, rods and links for light- and heavy-duty vehicles. | Clevite® Elastomers and AxiosTM |
| Emission control | Mufflers provide noise elimination and acoustic tuning. Pipes that connect various parts of the hot and cold exhaust system and catalytic converters. In addition, specialty exhaust products for heavy-duty and high performance vehicle applications. | Walker®, Walker® Perfection, Quiet-Flow®, Tru-Fit®, Thush®, Fonos TM Mega-Flow® and DynoMax® |
Motorparts Segment
We operate 31 manufacturing sites in 14 countries, 36 distribution centers and warehouses in 10 countries, 11 engineering and technical centers in 6 countries, and 11 technical service centers in two countries.
We engineer, manufacture, source, and distribute a broad portfolio of products in the global vehicle aftermarket while also servicing the OE/OES markets with products including braking, wipers, and a limited range of chassis components. Motorparts' products are designed to enhance safety, durability, and vehicle performance, while providing ease of installation. Motorparts' products are utilized in vehicle braking systems and also include a wide variety of chassis, engine, sealing, wiper, filter, lighting, and other general maintenance applications. Motorparts uses market analytics, supply chain expertise, brand and product line management, innovative technology, permitsmanufacturing, sourcing, and distribution capabilities to satisfy its customers' requirements. On March 1, 2019, we completed the shock absorber to automatically switch insale of substantially all of the global OE and aftermarket wipers business.
The following table sets forth a matterdescription of milliseconds between firmthe largest product categories sold by our Motorparts segment:
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| Product | Description | Select Brands |
| Chassis | Chassis parts include ball joints, tie rod ends, sway bar links, hub assemblies, anti-friction bearings and universal joints, strut assemblies, idler arms, pitman arms, and control arms. These components affect vehicle steering and vehicle ride quality. | MOOG®, QuickSteer® and National® |
| Braking | Braking products include disc pads for passenger cars, motorcycles and commercial vehicles; drum brake shoes and CV drum brake lining; and brake accessories including rotors, drums, hydraulics, hardware and brake fluid. These products provide stopping ability, a safety feature on all vehicles. | Wagner®, Ferodo®, Jurid®, Beck Arnley® and Abex® |
| Sealing and Engine | Gaskets and seals create a barrier between two surfaces to contain fluids, pressure, and gases while keeping out dust and other contaminants. There are numerous areas of application including engine covers, oil pans, intake manifolds, shaft seals, transmission covers, and differential covers. | Fel-Pro®, Payen®, Goetze® and National® |
| Maintenance and Other | Filtration - Filtration parts include oil, air, cabin, fuel, and other filters for both light and commercial vehicles. These components prevent harmful contaminants contained in liquids and gases from passing through vehicle components and potentially leading to premature wear or failure.
Lighting - Lighting products include forward lighting capsules, miniature light bulbs, LED lighting and sealed beams for virtually every application on cars, trucks, commercial vehicles and other off-road vehicles. Lighting improves driver visibility and safety.
Ignition - Ignition products include spark plugs, glow plugs, ignition coils, wires, harnesses, and accessories for automotive, commercial, lawn and garden, marine, and industrial applications. | Interfil®, Champion® and Beru® |
Sales, Marketing and soft compression damping when the vehicle encounters rough road conditions, and thus maintaining better tire-to-road contact and improving handling and safety. We developed the Quick-Strut® which simplifies and shortens the installation of aftermarket struts. This technology combines the spring and upper mount into a single, complete module, eliminating the need for special tools and skills required previously. Distribution
We have also developed an innovative computerized electronic suspension system, which features dampers developed by Tennecoseparate and electronic valves designed by Öhlins Racing AB. The Continuously Variable Semi Active ("CVSA") electronic suspension ride performance system is featured on Audi, Volvo, Ford, Volkswagen, BMW,distinct sales and Mercedes Benz vehicles. To help make electronic suspension more affordable to a wider range of vehicles, we are designing an innovative, electronically-controlled DRiV™ suspension system that features hydraulic valve technology we purchased in 2014 from Sturman Industries.marketing efforts for our OE and aftermarket customers.
Quality Management
Tenneco's Quality Management SystemFor OE sales, our sales and marketing team is an importantintegrated group of sales professionals, including skilled engineers and program managers, who are organized globally by customer business unit and product type (e.g., Ride Performance, Clean Air, and Powertrain). Our sales and marketing teams are focused on meeting and exceeding our customer's needs by delivering engineered products and services on time; maximizing profit for our investors while financing continued growth and product development; and developing a common system approach to create a superior customer experience. Our teams provide the appropriate mix of operational and technical expertise needed to interface successfully with the OE manufacturers. Our business capture process involves targeting select programs and working closely with the OE manufacturer platform engineering and purchasing teams. Bidding on OE automotive platforms typically encompasses many months of engineering and business development activity. Throughout the process, our sales team, program managers and product engineers assist the OE customer in defining the project’s technical and business requirements. A normal part of the process includes our engineering and sales personnel working on customers’ integrated product teams, creating a statement of requirements, and processassisting our customers with full system or component design and development concepts that deliver expectations and validation. Design engineers establish performance and reliability standards in the product's design stage, and use prototypes to confirmcreate value for OE manufacturer customers. Given that the component/Clean Air, Ride Performance and Powertrain operations typically involve long-term production contracts awarded on a platform-by-platform basis, our strategy is to leverage our engineering expertise and strong customer relationships to target and win new business and increase operating margins.
For aftermarket sales and marketing, our sales force is generally organized by region and customer and covers multiple product lines. We sell aftermarket products through five primary channels of distribution: (1) traditional three-step distribution system can be manufacturedof full-line warehouse distributors, jobbers and service providers; (2) two-step distribution system of warehouse distributors that distribute directly to specifications. Quality Management is also integrated into the launchservice providers; (3) direct sales to retailers; (4) direct sales to service provider chains and manufacturing process, with team members at every stage(5) direct sales through online channels. Our aftermarket sales and marketing representatives cover all levels of the work-in-process, ensuring finished goods are being fabricateddistribution channel, stimulating interest in our products and helping our products move through the distribution system. Also, to meet customers' requirements.
The Quality Management System isgenerate demand for our products, we run print, online and outdoor advertisements and training conducted by our field sales force along with E-training courses. In addition, we maintain detailed in Tenneco's Global Business Policy Manual. The Global Business Policy Manual complies with the ISO/TS 16949:2009, ISO 9001:2008 specifications, and customers' specific requirements. We continue to monitor all new and proposed standards and are planning to implement required new standards in advance of their due date. All of Tenneco's manufacturing facilities, where it has been determined that certification is necessary to serve the customer, or would provide an advantage in securing additional business, have successfully achieved the applicable standard's requirements. Each employee is expected to follow the relevant standards, policies, and procedures contained in the Global Business Policy Manual.
Global Procurement Management
Our direct and indirect material costs represent a significant componentweb sites for certain of our cost structure. To ensure that our material acquisition process provides both a local and global competitive advantage, in addition to meeting regional legislative requirements, we have designed globally integrated standard processes which are managed by global teams of commodity specialists. Each global commodity strategy is tailored to regional requirements while leveraging our global scale to deliver the most cost effective solutions at a local level.brands.
Business Strategy
We strive to strengthen ourare a leading diversified, global market position by designing, manufacturing, delivering and marketing technologicallysupplier of innovative clean air and ride performance products and systems for OEMsservices to light vehicle, commercial truck, off-highway, industrial and aftermarket customers. Our strategy focuses on addressing the aftermarket. We work toward achieving a balanced mixevolving needs of products, marketsour OE and aftermarket customers by capitalizing on emerging trends, specific regional preferences and changing customer requirements. We target both mature and developing markets for light vehicles, commercial trucks, off-highway engines and other vehicle or engine applications. We further enhance our operations by focusing on operational excellence in all functional areas.around the world to drive growth.
The key components of our business strategy are described below:
Develop
Continue to optimize our operations by aggressively pursuing cost competitiveness in all business segments and Commercialize Advanced Technologiescontinuing to driveproductivity in existing operations
We develop and commercialize technologies that allow usAs we continue to expand into new, fast-growing market segmentsour distribution and serveservice capabilities globally, we seek to continue optimizing our existing customers. By anticipating customer needs and preferences, we design advanced technologies thatperformance through enhanced efficiencies in order to meet global market needs. For example, to helpthe world-class delivery performance our customers meetincreasingly require. We have made investments in our global distribution network, through our new multi-product distribution centers, and through the increasingly stringent emissions regulations being introduced around the world, we offer several technologies designed to reduce NOx emissions from passenger, commercial truck and off-highway vehicles. These technologies include an integrated Selective Catalytic Reduction (SCR) system that incorporates our XNOx®implementation of automated picking technology electrical valves for diesel-powered vehicles with low-pressure exhaust gas recirculation systems, and diesel and gasoline particulate filters. We also offer a NOx absorber and a hydrocarbon lean NOx catalystmore efficient replenishment system thermal management solutions, such as our T.R.U.E.-Clean® active diesel particulate filter systemwith the objective of improving inventory visibility and through a consortium, thermoelectric generators that convert waste exhaust heat into electrical energy.
We expect demand for our products to continue to rise over the next several years. Advanced aftertreatment exhaust systems are required to comply with emissions regulations that affect light, commercial truckavailability and off-highway vehicles as well as locomotive, marine and stationary engines. In addition, vehicle manufacturers are offering greater comfort, handling and safety features with products such as electronic suspension and adjustable dampers. Our CVSA electronic suspension dampers, which we co-developed with Öhlins Racing AB, are now sold to Volvo, Audi, Mercedes, VW, BMW, and Ford, among others, and our Clevite® engineered elastomers to manufacturers with unique NVH requirements. Our newest electronic suspension product
DRiV™ is the first industry example of multiple digital valves coupled with smart switching for use in ride performance products that results in faster response, lighter weight, and reduced power consumption compared to existing analog products.lowering costs.
We will continue to focus on introducing highly engineered systems and complex assemblies and modules that provide value-added solutions tooperational excellence by optimizing our customers and increase our content on vehicles. Having many of our engineering and manufacturing facilities integrated electronically, we believe, has helped our products continue to be selected for inclusion in top-selling vehicles. In addition, our just-in-time and in-line sequencing manufacturing processes and distribution capabilities have enabled us to be more responsive to our customers’ needs.
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 clean air and ride performance 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 truck and off-highway 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 engineer and build modular NOx-reduction systems for large engines that meet standards of the International Maritime Organization, among others. In 2015, we received three Product Design Assessment (PDA) certificates from the American Bureau of Shipping, one of the world's leading ship-classification societies, and two Approved-In-Principle (AIP) certificates from DNV GL, another leading global classification society and recognized advisor of the maritime industry.
Our revenues generated by our commercial truck, off-highway and other business sectors were 11 percent of our total annual OE revenues in 2016 and 12 percent in 2015.
Expand and Adjust Manufacturing Footprint and Engineering Capabilities
We continue to expand and adjust our global footprint, to serve OE and aftermarket customers, building our capabilities to engineer and produce cost competitive, cutting-edge products around the world. In 2014, we opened our clean air research and development facility in Kunshan, China to enhancefurther developing our engineering capabilities, and develop China-specific solutions. In 2015, we opened new facilities in Jeffersonville, Indiana, Sanand, India, Stanowice, Poland and Suzhou, China. We also expanded our manufacturing operations in Celaya, Mexico that produce dampers and other ride performance products for light vehicles and commercial trucks and in Tredegar, U.K. to support growth on significant incremental new business. In addition, we built out our engineering capabilities in Poland, as well asmanaging the expansioncomplexities of our testing capabilities in Germany. In 2016, we opened new facilities in Spring Hill, Tennessee and Lansing, Michigan to support our customers' growth. We also expanded our manufacturing operations in Puebla, Mexico and Birmingham, UK to support growth on significant incremental business. In addition, we built out our testing capabilities in Zwickau, Germany.
Besides expanding our manufacturing footprint and engineering capabilities to serve new customers or markets, we are re-aligning our production,global supply chain to realize purchasing economies of scale while satisfying diverse and other operational functionsglobal requirements, and supporting our businesses with robust information technology systems. We will make investments in our operations and infrastructure as required to achieve our strategic goals.
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. AdjustingWe will also continually look for ways to customer volumesinnovate and leverage cross- and up-sell opportunities to the market through a customer-centric product development process. From a manufacturing perspective, we closedwill maintain a continuous improvement philosophy by streamlining plant operations and our assembly plantnetwork, and executing projects to improve efficiency.
Serving our customers also requires that we compete effectively at the unit cost level, in St. Petersburg, Russia in 2016.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.
Maintain Our Aftermarket Leadership
We manufacture, market and sell leading, brand-name products to a diversified and global aftermarket customer base. Twowill be mindful of the most recognized brand-name products inchanging market conditions that might necessitate adjustments to our resources and manufacturing capacity around the automotive parts industry areworld. We will also remain committed to protecting the environment as well as the health and safety of our Monroe® ride performance products and Walker® clean air products, whichemployees.
Further execute on attaining synergies from the acquisition of Federal-Mogul
We completed the acquisition of Federal-Mogul on October 1, 2018. While we have been offeredundertaken significant integration subsequent to consumers sinceclosing the 1930s. We believe our brand equity in the aftermarket is a key asset especially as customers consolidate and distribution channels converge.
We provide value differentiation by creating product extensions bearing our various brands. For example,Federal-Mogul acquisition, we offer Monroe® Reflex® and Monroe® OESpectrum® dampers, Walker® Quiet-Flow® mufflers, Rancho® ride performance products, DynoMax® exhaust products and Walker Ultra® catalytic converters, and in Europe, Walker and Aluminox Pro™ mufflers. Further, we market Monroe® Springs, Monroe® Steering and Suspension, and Monro-Magnum® (bus and truck shock line) in Europe and continue to grow our Monroe® Brake pads in North America. We continueseek to explore otheroptimize the combined operations. This optimization should present additional opportunities for developing newcost reduction, increased profitability and cash flow.
Assess focused acquisition and investment opportunities that provide product lines that will be marketed under our existing, well-known brands.
We strive to gain additionalline expansion, technological advancements, geographic positioning, penetration of emerging markets and market share in the aftermarket business by adding new product offerings and increasinggrowth
Throughout our market coverage of existing brands and products. For one,history, we offer an innovative ride performance product, the Quick-Strut®, that combines the dampers, spring and upper mount into a single, complete module that simplifies and shortens the installation process, eliminating the need for the special tools and skills required previously. Additionally, we find ways to benefit from the
consolidation of, and the regional expansion by, our customers and gain business from our competitors given our strength and understanding in the markets and channels in which we do business.
Our success in the aftermarket strengthens our competitive position with OEMs, and vice versa. We gain timely market and product knowledge that can be used to modify and enhance our offerings for greater customer acceptance. We also can readily introduce aftermarket products by leveraging our experience in the OE market. An example of such is our suite of manifold converters and diesel particulate filters which were first sold in the OE market and then tailored for the aftermarket.
Execute Focused Transactions
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 have a licensing agreement for T.R.U.E.-Clean®, an exhaust aftertreatment technology used for automatic and active regeneration of Diesel Particulate Filters (DPFs), with Woodward Governor Company. This is an example of a technology which complements our array of existing clean air products, allowing us to provide integrated exhaust aftertreatment systems to commercial truck, off-highway and other vehicle manufacturers.
In February 2014, we secured the exclusive rights to the digital valve technology used in our DRiV™ suspension systems from Sturman Industries, Inc. DRiV™ systems feature electronically controlled dampers with hydraulic valves that can be used in a variety of vehicle damping applications.
In July 2015, we announced our intention to discontinue our Marzocchi motorcycle fork suspension product line and our mountain bike suspension product line, and liquidate our Marzocchi operations. In November 2015, we closed on the sale of certain assets related to our Marzocchi mountain bike suspension product line to the affiliates of Fox Factory Holding Corp.; and in December 2015, we closed on the sale of the Marzocchi motorcycle fork product line to an Italian company, VRM S.p.A.
In March 2016, we completed the disposition of the Gijon, Spain plant and signed an agreement to transfer ownership of the manufacturing facility in Gijon to German private equity fund Quantum Capital Partners A.G. (QCP). The transfer to QCP was effective March 31, 2016 and under a three year manufacturing agreement, QCP will also continue as a supplier to Tenneco.
We intend to continue to pursueexplore strategic alliances, joint ventures, acquisitions and other transactions that complement, expand or enhance our existing products, technology, systems development efforts, customer base and/or global presence. 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 Structurecost structure to Economic Realitieseconomic 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.
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 systems for OE manufacturers.
The key components of our OE strategy are described below:
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 new OE trends such as mobility, electrification and autonomous driving. 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. In addition, our suite of solutions represents an opportunity to drive greater partnership with OE manufacturers, capturing 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.
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, on January 31, 2013, we announcedaggressively leverage our intent to reduce structural coststechnology and engineering leadership in Europe by approximately $60 million annually. Withpowertrain, 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 dispositionworld.
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 Gijon, Spain plant, which was completed atInternational Maritime Organization, among others.
Our revenues generated by commercial truck, off-highway and industrial customers were 16% of our total revenues in 2018 and 12% in 2017.
Aftermarket Specific Strategies
We expect the enddemand for replacement parts to increase steadily as a result of the first quarteranticipated significant increase in VIO through 2040, the increase in the average age of 2016,VIO and the annualized rate essentially reached our targetincrease in the average miles driven per year. The characteristics of $55 million, ataftermarket sales and distribution are defined regionally, which require regionally focused strategies to address the current exchange rates. In November 2015, we closed on the sale of certain assets related to our Marzocchi mountain bike suspension product line to the affiliates of Fox Factory Holding Corp.; and in December 2015, we closed on the sale of the Marzocchi motorcycle fork product line to an Italian company, VRM S.p.A. These actions were a partkey success factors of our ongoing efforts to optimizecustomers.
The key components of our Ride Performance product line globally while continuously improving our operations and increasing profitability.aftermarket strategy are described below:
Strengthen Operational Excellence
We will continue to focus on operational excellence by optimizing our manufacturing footprint, enhancing our Six Sigma processes and Lean productivity tools, developing further our engineering capabilities, managingLeverage the complexitiesstrength of our global supply chain to realize purchasing economies of scale while satisfying diverseaftermarket leading brands positions, product portfolio and global requirements,range, marketing and supporting our businessesselling expertise, and distribution and logistics capabilities
Our aftermarket business houses multiple leading brands with robust information technology systems.strong product offerings. We will make investmentsbuild upon our brand strengths and grow our global aftermarket business by leveraging our broad product coverage and extensive distribution network. We intend to capitalize on aftermarket trends and expand in our operations and infrastructure as required to achieve our strategic goals. We will be mindful of the changing market conditions that might necessitate adjustments to our resources and manufacturing capacity around the world. We will remain committed to protecting the environmentestablished markets (North America, Europe, Australia) as well as the healthhigh-growth regions (China, South America, India, Southeast and safetyNortheast 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 employees.sealing, electronic 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 constantly sharing information across channels on best practices in go-to-market, manufacturing and distribution capabilities.
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 a vast catalog of products to provide the ability to address customer requirements quickly and easily. Managing vast 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 impact 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, 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 catalog, 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 that 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.
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.
Environmental Matters
We estimate that we and our subsidiaries will make expenditures for plant, property and equipment for environmental matters of approximately $5 million in 2017 and $3 million in 2018.
For additional information regarding environmental matters, see Item 3, “Legal Proceedings,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”Environmental Matters” and Note 12 to15—Commitments and Contingencies of the consolidated financial statements of Tenneco Inc. included in Item 8.8, "Financial Statements and Supplementary Data."
Employees
As of December 31, 2016,2018, we had approximately 31,00081,000 employees of whom approximately 43 percent48% were covered by collective bargaining agreements. European works councils cover 15 percentWith the exception of two facilities in the U.S., most of our total employees,unionized manufacturing facilities have their own contracts with their own expiration dates and, as a majority of whom are also included under collective bargaining agreements. Several of our existing labor agreements in Mexico andresult, no contract expiration date affects more than one in the United States are scheduled for renegotiation in 2017. In addition, agreements covering plants in Argentina, Brazil, Europe, India and Thailand are expiring in 2017. We regard our employee relations as satisfactory.facility.
Other
We purchase various raw materials and component parts for use in our manufacturing processes, including ferrous and non-ferrous metals, non-metallic raw materials, stampings, castings and forgings. We also purchase parts manufactured by other manufacturers for sale in the aftermarket. The principal raw material that we use is steel. We obtain steel from a number of sources pursuant to various contractual and other arrangements. We believe that an adequate supply of steel can presently be obtained from a number of different domestic and foreign suppliers. We address price increases by evaluating alternative materials and processes, reviewing material substitution opportunities, increasing component sourcing and parts assembly in best
cost countries, strategically pursuing regional and global purchasing strategies for specific commodities, and aggressively negotiating with our customers to allow us to recover these higher costs from them.
We hold a number of domestic and foreign patents and trademarks relating to our products and businesses. Through our acquisition of Federal-Mogul, we acquired in excess of 6,900 patents and more than 6,700 active trademark registrations and applications worldwide. We manufacture and distribute our aftermarket products primarily under the Walker® and Monroe®a number of brand names whichthat are well-recognized in the marketplace and some of are registered trademarks. We also market certain of our clean air products to OE manufacturers under the names Solid SCR™ and XNOx®. The patents, trademarks and other intellectual property owned by or licensed to us are important in the manufacturing, marketing and distribution of our products. However, we do not materially rely on any single patent, nor will the expiration of any single patent materially affect our business. Our current patents expire over various periods into the year 2040. We are actively introducing and patenting new technology to replace formerly patented technology before the expiration of the existing patents. In the aggregate, our worldwide patent portfolio is materially important to our business because it enables us to achieve technological differentiation from our competitors.
ITEM 1A.RISK FACTORS.
Future deterioration or prolonged difficulty in economic conditions could have a material adverse impact on our business, financial position and liquidity.
We are a global company and, as such, our businesses are affected by economic conditions in the various geographic regions in which we do business. Economic difficulties generally lead to tightening of credit and liquidity. These conditions often lead to low consumer confidence, which in turn results in delayed and reduced purchases of durable goods such as automobiles and other vehicles. As a result, during difficult economic times our OEMOE customers can significantly reduce their production schedules. For example, light vehicle production declined significantly during the economic crisis in 2008 and 2009 in North America and Europe, and European production remains below pre-crisis levels.Europe. More recently, light vehicle and commercial truckvehicle production has declined significantly in South America in 2014, 2015 and 2016 and persistent challenges in the Chinese economy goingin 2018 and continuing into 20172019 may result in lower-than-anticipated growth in both light and commercial vehicles in the region. Additionally, production of off-highway equipment with our content on them continues to behave been weak in certain product applications, such as agricultural and construction equipment in the United StatesNorth America and Europe. Any deterioration or prolonged difficulty in economic conditions in any region in which we do business could have a material adverse effect on our business, financial position and liquidity.
In addition, economic difficulties often lead to disruptions in the financial markets, which may adversely impact the availability and cost of credit which could materially and negatively affect our company. Future disruptions in the capital and credit markets could adversely affect our customers’ and our ability to access the liquidity that is necessary to fund operations on terms that are acceptable to us or at all.
In addition, financial or other difficulties at any of our major customers could have a material adverse impact on us, including as a result of lost revenues, significant write downs of accounts receivable, significant impairment charges or additional restructuringsrestructuring beyond our current global plans. Severe financial or other difficulties at any of our major suppliers could have a material adverse effect on us if we are unable to obtain on a timely basis on similar economic terms the quantity and quality of components we require to produce our products.
Moreover, severe financial or operating difficulties at any automotive,light vehicle or commercial truck and off-highway vehicle manufacturer or other supplier could have a significant disruptive effect on the entire industry, leading to supply chain disruptions and labor unrest, among other things. These disruptions could force original equipment manufacturers and, in turn, other suppliers, including us, to shut down production at plants. While the issues that our customers and suppliers face during economic difficulties may be primarily financial in nature, other difficulties, such as an inability to meet increased demand as conditions recover, could also result in supply chain and other disruptions.
We are subject to, and could be further subject to, investigations by antitrust regulators and related lawsuits by other third parties. Developments in these investigations and related matters could have a material adverse effect on our consolidated financial position, results of operations or liquidity.
We are subject to a variety of laws and regulations that govern our business both in the United States and internationally, including antitrust laws. Violations of antitrust laws can result in significant penalties being imposed by antitrust authorities. Costs, charges and liabilities arising out of or related to these investigations and related claims can also be significant.
Antitrust authorities in various jurisdictions are investigating possible violations of antitrust laws by multiple automotive parts suppliers, including Tenneco. In addition, Tenneco and certain of its competitors are currently subject to civil putative class action lawsuits in the U.S., which allege anti-competitive conduct related to the activities subject to these investigations. More related lawsuits may be filed, including in other jurisdictions. Antitrust law investigations and related lawsuits often continue for several years and can result in significant penalties and liability. At this point, we cannot estimate the ultimate impact on our company from investigations into our antitrust compliance and related lawsuits. In light of the uncertainties and many variables involved in such investigations and related lawsuits, we cannot assure you that the ultimate resolution of these and other investigations and related lawsuits will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
Factors that reduce demand for our products or reduce prices could materially and adversely impact our financial condition and results of operations.
Demand for and pricing of our products are subject to economic conditions and other factors present in the various domestic and international markets where our products are sold. Demand for our OE products is subject to the level of consumer demand for new vehicles that are equipped with our parts. The level of new light vehicle, commercial truck and off-highway vehicle purchases is cyclical, affected by such factors as general economic conditions, interest rates and availability of credit, consumer confidence, patterns of consumer spending, industrial construction levels, fuel costs, government incentives
and vehicle replacement cycles. Consumer preferences and government regulations also impact the demand for new light vehicle purchases.purchases equipped with our products. For example, if consumers increasingly prefer electric vehicles, demand for the vehicles equipped with our clean air products would decrease.
Demand for our aftermarket, or replacement, products varies based upon such factors as general economic conditions; the level of new vehicle purchases, which initially displaces demand for aftermarket products; the severity of winter weather, which increases the demand for certain aftermarket products; the number of vehicles in operation; and other factors, including the average useful life of parts and number of miles driven.
The highly cyclical nature of the automotive and commercial vehicle industry presents a risk that is outside our control and that cannot be accurately predicted. Decreases in demand for automobiles and commercial vehicles and vehicle parts generally, or in the demand for our products in particular, could materially and adversely impact our financial condition and results of operations.
In addition, we believe that increasingly stringent environmental standards for emissions have presented and will continue to present an important opportunity for us to grow our clean air product line. We cannot assure you, however, that environmental standards for emissions will continue to become more stringent or that the adoption of any new standards will not be delayed beyond our expectations.
We are dependent on certain large customers for future revenue. The loss of all or a substantial portion of our sales torevenues from any of these customers or the loss of market share by these customers could have a material adverse impact on us.
We depend on major vehicle manufacturers for a substantial portion of our net sales.revenues. For example, during the fiscal year ended December 31, 2016, GM2018, General Motors and Ford accounted for 17 percent12% and 13 percent12% of our net sales, respectively. Following the Federal-Mogul acquisition, we are increasingly dependent on certain major aftermarket customers for our revenues. The loss of all or a substantial portion of our sales torevenues from any of our large-volume customers could have a material adverse effect on our financial condition and results of operations by reducing cash flows and our ability to spread costs over a larger revenue base. We may make fewer sales toexperience decreased revenues from these customers for a variety of reasons, including but not limited to: (1)(i) in the case of our OE customers, loss of awarded business; (2) reduced or delayed customer requirements; (3) strikes or other work stoppages affecting production by the customers; or (4)platforms, reduced demand for our customers’ products.products, and work stoppages or other disruptions impacting OE production, and (ii) in the case of our aftermarket customers, reduced or delayed consumer requirements and competition from other brands or lower-cost alternatives. Further, our aftermarket customers are generally able to change suppliers more quickly than OE customers, which exacerbates these risks with respect to our aftermarket business. For all of our customers, we face the risk of their failure to pay us for a variety of reasons, including their respective financial conditions.
In addition, our OE customers compete intensively against each other and other OE manufacturers.other. The loss of market share by any of our significant OEmajor customers could have a material adverse effect on our business unless we are able to achieve increased sales to other OE manufacturers.major customers.
We are subject to, and could be further subject to, government investigations or actions by other third parties.
We are subject to a variety of laws and regulations that govern our business both in the United States and internationally, including antitrust laws, violations of which can involve civil or criminal sanctions. Responding to governmental investigations or other actions may be both time-consuming and disruptive to our operations and could divert the attention of our management and key personnel from our business operations.
For example, antitrust authorities in various jurisdictions are investigating possible violations of antitrust laws by multiple automotive parts suppliers, including Tenneco. In addition, Tenneco and certain of its competitors are currently subject to civil putative class action lawsuits in the United States, which allege anti-competitive conduct related to the activities subject to these investigations. More related lawsuits may be filed, including in other jurisdictions.
While we have established a reserve that we believe is adequate to resolve Tenneco’s antitrust matters globally, we cannot, however, assure you that the reserve will not change materially from time to time or that the costs, charges and liabilities associated with these matters will not exceed any amounts reserved for them in our consolidated financial statements.
We may be unable to realize sales represented by our awarded business, which could materially and adversely impact our financial condition and results of operations.
The realization of future sales from awarded business is inherently subject to a number of important risks and uncertainties, including the number of vehicles that our OE customers will actually produce, the timing of that production and the mix of options that our OE customers and consumers may choose. For example, light vehicle production declined significantly during the economic crisis in 2008 and 2009 in North America and Europe, and European production remains below pre-crisis levels.Europe. More recently, light vehicle and commercial truck production has declined significantly in South America in 2014, 2015 and 2016 and persistent challenges in the Chinese economy in 2018 and going into 20172019 may result in lower-than-anticipated growth in both light and commercial vehicles in the region. In addition to the risks inherent in the cyclicality of vehicle production, our customers generally have the right to replace us with another supplier at any time for a variety of reasons and have demanded price decreases over the life of awarded business. Accordingly, we cannot assure you that we will in fact realize any or all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition, results of operations, and liquidity.
In many cases, we must commit substantial resources in preparation for production under awarded OE business well in advance of the customer’s production start date. In certain instances, the terms of our OE customer arrangements permit us to recover these pre-production costs if the customer cancels the business through no fault of our company. Although we have been successful in recovering these costs under appropriate circumstances in the past, we can give no assurance that our results of operations will not be materially impacted in the future if we are unable to recover these types of pre-production costs in the event of an OE customer’s cancellation of awarded business.
Our level of debt, which increased in amount and percentage of floating rate debt as a result of the Acquisition, makes us more sensitive to the effects of economic downturns; and provisions in our debt agreements could constrain our ability to react to changes in the economy or our industry.
Our leverage increased as a result of the Acquisition. As of December 31, 2018, we had approximately $3.3 billion of indebtedness outstanding under our new senior credit facility, $2.0 billion of outstanding notes and approximately $100 million of other debt. In addition, as a result of the Acquisition we have increased exposure to interest rate fluctuations because our percentage of floating rate debt increased.
Our level of debt makes us more vulnerable to changes in our results of operations because a significant portion of our cash flow from operations is dedicated to servicing our debt and is not available for other purposes and our level of debt could impair our ability to raise additional capital if necessary. Further underincreases in interest rates will increase the amount of cash required for debt service. Under the terms of our existing senior secured credit facility, the indentures governing our notes and the agreements governing our other indebtedness, we are able to incur significant additional indebtedness in the future. The more we become leveraged, the more we, and in turn our security holders, become exposed to many of the risks described herein.
Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service, capital investment and working capital requirements, we may need to reduce or cease our repurchase of shares or payments of dividends, seek additional financing or sell assets. If we require such financing and are unable to obtain it, we could be forced to sell assets under unfavorable circumstances and we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.
In addition, our senior credit facility and our other debt agreements contain covenants that limit our flexibility in planning for or reacting to changes in our business and our industry, including limitations on incurringour ability to:
declare dividends or redeem or repurchase capital stock;
prepay, redeem or purchase other debt;
incur liens;
make loans, guarantees, acquisitions and investments;
incur additional indebtedness, making investments, granting liens, selling assetsindebtedness;
amend or otherwise alter debt and mergingother material agreements;
engage in mergers, acquisitions or consolidatingasset sales; and
engage in transactions with other companies.affiliates.
Our failure to comply with the covenants contained in our debt instruments, including as a result of events beyond our control, could result in an event of default, which could materially and adversely affect our operating results and our financial condition.
Our senior credit facility and receivables securitization program in the U.S.other agreements governing financings we enter into from time to time require us to maintain certain financial ratios. Our senior credit facility and our other debtfinancing instruments require us to comply with various operational and other covenants. If there were an event of default under any of our debtfinancing instruments that was not cured or waived, the holders of the defaulted debtfinancing could cause all amounts outstanding with respect to that debtfinancing to be due and payable immediately (which, in turn, could also result in an event of default under one or more of our other financing arrangements). If such event occurs, the lenders under our senior credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets and we could lose access to our securitization program.factoring and supply chain financing programs. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debtfinancing instruments, either upon maturity or if accelerated, upon an event of default, or that we would be able to refinance or restructure the payments on those debtfinancing instruments. This would have a material adverse impact on our liquidity, financial position and results of operations, and on our ability to effect our share repurchase and dividend programs. For example, as a result of the economic downturn in 2008 and 2009, we needed to amend our senior credit agreement to revise the financial ratios we arewere required to maintain. Even though we were able to obtain that amendment, we cannot assure you that we would be able to obtain an amendment on commercially reasonable terms, or at all, if required in the future.
Our working capital requirements may negatively affect our liquidity and capital resources.
Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers’ worldwide vehicle production and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing
arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.
We may be unable to realize the expected benefits of our business strategy of improvinginitiatives to improve operating performance and generatinggenerate cost savings and improvements.
We regularly implement strategic and other initiatives designed to improve our operating performance. For example, in 2013 we announced a cost reduction initiative in Europe to significantly reduce our annual structural costs in the region. Our inability to implement these initiatives in accordance with our plans or our failure to achieve the goals of these initiatives could have a material adverse effect on our business. We rely on these initiatives to offset pricing pressures from our suppliers and our customers, as described above, as well as to manage the impacts of production cuts, such as the significant production decreases we experienced during 2008 and 2009 as a result of the global economic crisis, and the lingering effects this crisis had in Europe in particular, where light vehicle production declined in 2012 and continues to remain below pre-crisis level.cuts. Our implementation of announced initiatives is from time to time subject to legal challenge in certain non-U.S. jurisdictions (where applicable employment laws differ from those in the United States). Furthermore, the terms of our senior credit facility and the indentures governing our notes may restrict the types of initiatives we undertake. In the past we have been successful in obtaining the consent of our senior lenders where appropriate in connection with our initiatives. We cannot assure you, however, that we will be able to pursue, successfully implement or realize the expected benefits of any initiative or that we will be able to sustain improvements made to date.
Exchange rate fluctuations could cause a decline in our financial condition and results of operations.
As a result of our international operations, we are subject to increased risk because we generate a significant portion of our net sales and incur a significant portion of our expenses in currencies other than the U.S. dollar. For example, where we have a greater portion of costs than revenues generated in a foreign currency, we are subject to risk if the foreign currency in which our costs are paid appreciates against the currency in which we generate revenue because the appreciation effectively increases our cost in that country.
The financial condition and results of operations of some of our operating entities are reported in foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating profit while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating profit. For example, our consolidated results of operations were negatively impacted in 2016 primarily due to the strengthening of the U.S. dollar against the euro, Chinese yuan, Canadian dollar, Argentine peso, and the Brazilian real.
We do not generally seek to mitigate the impact of currency through the use of derivative financial instruments. To the extent we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in that currency could have a material adverse effect on our business.
The hourly workforce in the industriesindustry in which we participate is highly unionized and our business could be adversely affected by labor disruptions.
A portion of our hourly workforce in North America and the majority of our hourly workforce in other regions are unionized. Although we consider our current relations with our employees to be satisfactory, if major work disruptions were to occur, our business could be adversely affected by, for instance, a loss of revenues, increased costs or reduced profitability. We have not experienced a material labor disruption in our recent history, but there can be no assurance that we will not experience a material labor disruption at one of our facilities in the future in the course of renegotiation of our labor arrangements or otherwise.
In addition, substantially all of the hourly employees of General Motors, Ford and Fiat Chrysler Automobiles in North America and many of their other suppliers are represented by the United Automobile, Aerospace and Agricultural Implement Workers of America under collective bargaining agreements. Vehicle manufacturers, their suppliers and their respective employees in other countries are also subject to labor agreements. A work stoppage or strike at one of our production facilities, at those of a customer, or impacting a supplier of ours or any of our customers, such as the 2008 strike at American Axle which resulted in 30 GM facilities in North America being idled for several months, could have an adverse impact on us by disrupting demand for our products and/or our ability to manufacture our products.
From time to time we experience significant increases and fluctuations in raw materials pricing and increases in certain lead times; and future changes in the prices of raw materials or utility services, or future increases in lead times, could have a material adverse impact on us.
Significant increases in the cost of certain raw materials used in our products, mainly steel, oil and rubber, or the cost of utility services required to produce our products, to the extent they are not timely reflected in the price we charge our customers or are otherwise mitigated, could materially and adversely impact our results. For example, in March 2018, the current U.S. administration imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports and throughout 2018, and announced additional tariffs on goods imported from China specifically, as well as certain other countries. In addition, during 20162017, carbon steel prices as well as raw material prices (such as ferrochrome, iron ore, scrap and coking coal) to produce carbon steel and stainless steel increased significantly, with market pricing for carbon steel increasing up to 50% throughoutremained at high levels after the year driven by thesharp increases in coking coal pricing and iron ore which doubled throughout 2016. In addition, both the European Union as well as the
United States have imposedcontinue to impose a variety of anti-dumping duties on carbon steel as well as stainless steel varying from 22% to 265% depending on the country of origin.steel. This not only results in higher domestic pricing but limits opportunities in terms of off shore buying. Carbon steel prices in North America increased further in the fourth quarter of 2017 in the run-up to the mandated "232 Section Investigations" against the import deadline of mid January 2018.
We attempt to mitigate price increases by evaluating alternative materials and processes, reviewing material substitution opportunities, increasing component sourcing and parts assembly in best cost countries, and strategically pursuing regional and global purchasing strategies for specific commodities. We also aggressively negotiate to recover these higher costs from our customers, and in some cases, such as with respect to steel surcharges, we have the contractual right to recover some or all of these higher costs from certain of our customers. However, if we are successful in recovering these higher costs, we may not receive that recovery in the same period that the costs were incurred and the benefit of the recovery may not be evenly distributed throughout the year.
We also continue to pursue productivity initiatives and other opportunities to reduce costs through restructuring activities. During periods of economic recovery, the cost of raw materials and utility services generally rise. Accordingly, we cannot ensure that we will not face further increased prices in the future or, if we do, whether our actions will be effective in containing them.
With TennecoBy entering into new product lines and employing new technologies, our ability to produce certain of these products may be constrained due to longer lead times for our facilities, as well as those of our suppliers. We attempt to mitigate the negative effects of these longer lead times by improving the accuracy of our long term planning; however, we cannot provide any certainty that we will always be successful in avoiding disruptions to our delivery schedules.
We may incur costs related to product warranties, environmental and regulatory matters, legal proceedings and other claims, which could have a material adverse impact on our financial condition and results of operations.
From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to bear costs of repair or replacement of certain of our products. Vehicle manufacturers require their outside suppliers to guarantee or warrant their products and to be responsible for the operation of these component products in new vehicles sold to consumers. Warranty claims may range from individual customer claims to full recalls of all products in the field. We cannot assure you that costs associated with providing product warranties will not be material, or that those costs will not exceed any amounts reserved in our consolidated financial statements. For a description of our accounting policies regarding warranty reserves, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” included in Item 7.
We areOur global operations subject us to extensive governmentgovernmental regulations worldwide. Foreign, federal, state and local laws and regulations may change from time to time and our compliance with new or amended laws and regulations in the future may materially increase our costs and could adversely affect our results of operations and competitive position. For example, we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Soil and groundwater remediation activities are being conducted at certain of our current and former real properties. We record liabilities for these activities when environmental assessments indicate that the remedial efforts are probable and the costs can be reasonably estimated. On this basis, we have established reserves that we believe are adequate for the remediation activities at our current and former real properties for which we could be held responsible. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. In future periods, we could incur cash costs or charges to earnings if we are required to undertake remediation efforts as the result of ongoing analysis of the environmental status of our properties. In addition, violations of the laws and regulations we are subject to could result in civil and criminal fines, penalties and sanctions against us, our officers or our employees, as well as prohibitions on the conduct of our business, and could also materially affect our reputation, business and results of operations.
We also from time to time are involved in a variety of legal proceedings, claims or investigations. These matters typically are incidental to the conduct of our business. Some of these matters involve allegations of damages against us relating to environmental liabilities, intellectual property matters, personal injury claims, taxes, employment matters or commercial or contractual disputes or allegations relating to legal compliance by us or our employees. For example, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. Many of these cases also involve numerous defendants, with the number of defendants in some cases exceeding 100 defendants from a variety of industries. As major asbestos manufacturers or other companies that used asbestos in their manufacturing processes continue to go out of business, we may experience an increased number of these claims.
We vigorously defend ourselves in connection with all of the matters described above. We cannot, however, assure you that the costs, charges and liabilities associated with these matters will not be material, or that those costs, charges and liabilities will not exceed any amounts reserved for them in our consolidated financial statements. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental and Legal Contingencies” included in Item 7.
Developments relating to our intellectual property could materially impact our business.
We and others in our industry hold a number of patents and other intellectual property rights, including licenses, thatwhich are critical to our respective businesses and competitive positions. Notwithstanding our intellectual property portfolio, our competitors may develop similar or superior proprietary technologies. Further, as we expand into regions where the protection of intellectual property rights is less robust, the risk of others replicating our proprietary technologies increases, which could result in a deterioration of our competitive position. On occasion, we may assert claims against third parties who are taking actions that we believe are infringing on our intellectual property rights. Similarly, third parties may assert claims against us and our customers and distributors alleging our products infringe upon third party intellectual property rights. These claims, regardless of their merit or resolution, are frequently costly to prosecute, defend or settle and divert the efforts and attention of our management and employees. Claims of this sort also could harm our relationships with our customers and might deter future customers from doing business with us. If any such claim were to result in an adverse outcome, we could be required to take actions which may include: expending significant resources to develop or license non-infringing products; paying substantial damages to third parties, including to customers to compensate them for their discontinued use or replacing infringing technology with non-infringing technology; or cessation of the manufacture, use or sale of the infringing products. Any of the foregoing results could have a material adverse effect on our business, financial condition, results of operations or our competitive position.
We are increasingly dependent on information technology, and if we are unable to protect against service interruptions or security breaches, our business could be adversely affected.
Our operations rely on a number of information technologies to manage, store, and support business activities. Some of these technologies are managed by third-party service providers and are not under our direct control. We have put in place a number of systems, processes, and practices designed to protect against the failure of our systems, as well as the misappropriation, exposure or corruption of the information stored thereon. Unintentional service disruptions or intentional actions such as intellectual property theft, cyber-attacks, unauthorized access or malicious software, may lead to such misappropriation, exposure or corruption if our, or our service providers’, protective measures prove to be inadequate. Further, these events may cause operational impediments or otherwise adversely affect our product sales, financial condition and/or results of operations. We could also encounter violations of applicable law or reputational damage from the disclosure of confidential information belonging to us or our employees, customers or suppliers. In addition, the disclosure of non-public information could lead to the loss of our intellectual property and/or diminished competitive advantages. Should any of the foregoing events occur, we may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future. In addition, evolving and expanding compliance and operational requirements under the privacy laws of the jurisdictions in which we operate, such as the EU General Data Protection Regulation, or GDPR, which took effect in May 2018, impose significant costs that are likely to increase over time.
We may have difficulty competing favorably in the highly competitive automotive partslight vehicle and commercial vehicle supplier industry.
The light vehicle and commercial vehicle supplier automotive parts industry is highly competitive. Although the overall number of competitors has decreased due to ongoing industry consolidation, we face significant competition within each of our major product areas, including from new competitors entering the markets which we serve. The principal competitive factors include price, quality, service, product performance, design and engineering capabilities, new product innovation, global presence and timely delivery. As a result, many suppliers have established or are establishing themselves in emerging, low-cost markets to reduce their costs of production and be more conveniently located for customers. Although we are also pursuing a best-cost country production strategy and otherwise continue to seek process improvements to reduce costs, we cannot assure you that we will be able to continue to compete favorably in this competitive market or that increased competition will not have a material adverse effect on our business by reducing our ability to increase or maintain sales or profit margins.
In addition, our competitors may foresee the course of market development more accurately than we do, develop products that are superior to ours, adapt more quickly than we do to new technologies or evolving customer requirements or develop or introduce new products or solutions before we do, particularly in respect of potential transformative technologies such as autonomous driving solutions. As a result, our products may not be able to compete successfully with their products. These trends may adversely affect our sales as well as the profit margins on our products. Failure to innovate and to develop or acquire new and compelling products that capitalize on new technologies could have a material adverse impact on our results of operations.
Furthermore, due to the cost focus of our major OE customers, we have been, and expect to continue to be, requested to reduce prices as part of our initial business quotations and over the life of OE vehicle platforms we have been awarded. We cannot be certain that we will be able to generate cost savings and operational improvements in the future that are sufficient to offset price reductions requested by existing OE customers and necessary to win additional business. OE customers also direct us into suppliers for component purchases not allowing us to leverage our own supply base and realize cost reductions on this directed spend.
The decreasing number of automotive parts customers and suppliers in our industry could make it more difficult for us to compete favorably.
Our financial condition and results of operations could be adversely affected because the customer base for automotiveour parts and services is decreasing in both the original equipmentOE market and aftermarket. As a result, we are competing for business from fewer customers. Furthermore, consolidation and bankruptcies among automotive parts suppliers have resulted in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future with these larger companies, our financial condition and results of operations could be adversely affected due to a reduction of, or inability to increase, sales.
Our aftermarket sales may be negatively impacted by increasing competition from lower cost, private-label products.
Distribution channels in the aftermarket have continued to consolidate and, as a result, our sales to large retail customers represent a significant portion of our aftermarket business. Private-label aftermarket products, which are typically manufactured at a lower cost, often containing little or no premium technology, and are branded with a store or other private-label brand, are increasingly available to these large retail customers. Our aftermarket business is facing increasing competition from these lower cost, private-label products and there is growing pressure to expand our entry-level product lines so that retailers may offer a greater range of price points to their consumer customers. We cannot assure you that we will be able to maintain or increase our aftermarket sales to these large retail customers or that increased competition from these lower cost, private-label aftermarket products will not have an adverse impact on our aftermarket business.
Longer product livesIf the reputation of one or more of our leading brands is harmed, aftermarket sales may be negatively impacted.
Our aftermarket sales are dependent on the reputation and success of our brands, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, Sealed Power® and others. Product liability claims or recalls could result in negative publicity that could harm the reputation of our brands. If one or more of our leading brands suffers damage to its reputation due to real or perceived quality or safety issues, our financial results could be adversely affected.
Improvements in automotive parts are adversely affecting aftermarket demand for some of our products.
The average useful life of automotive parts has steadily increased in recent years due to innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. As a result, a portion of sales in the aftermarket has been displaced. In addition, advancements in technology may lead to enhancements in aftermarket product performance that render our product obsolete. This has adversely impacted, and could continue to adversely impact, our aftermarket sales. Also, any additional increases in the average useful lives of automotive parts or other enhancements in aftermarket performance would further adversely affect the demand for our aftermarket products. Aftermarket sales represented approximately 14 percent
If we do not respond appropriately, the evolution towards autonomous vehicles and car and ride sharing could adversely affect our business.
The light vehicle industry is increasingly focused on the development of our net salesadvanced driver assistance technologies, with the goal of developing and introducing a commercially viable, fully automated driving experience. There has also been an increase in consumer preferences for car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the fiscal years ended December 31, 2016number of vehicles per capita. These evolving areas have also attracted increased competition from entrants outside the traditional light vehicle industry. Failure to innovate and 15 percentto develop or acquire new and compelling products that capitalize upon new technologies in the fiscal year ended December 31, 2015.response to OE and consumer preferences could have a material adverse impact on our results of operations.
We may not be able to respond quickly enough to changes in technology and to develop our intellectual property into commercially viable products.
Changes in competitive technologies may render certain of our products obsolete or less attractive. Our ability to anticipate changes in technology and to successfully develop and introduce new and enhanced products on a timely basis are significant factors in our ability to remain competitive and to maintain or increase our revenues.
We cannot provide assurance that certain of our products will not become obsolete or that we will be able to achieve the technological advances that may be necessary for us to remain competitive and maintain or increase our revenues in the future. We are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in product development or production, and failure of products to operate properly. If we are unable to react to changes in the marketplace, including the potential introduction of technologies such as autonomous driving solutions, our financial performance could be adversely affected.
Any acquisitions we make could disrupt our business and seriously harm our financial condition.
We may, from time to time, consider acquisitions of complementary companies, products or technologies. Acquisitions involve numerous risks, including difficulties in the assimilation of the acquired businesses, the diversion of our management’s attention from other business concerns and potential adverse effects on existing business relationships with customers and suppliers. In addition, any acquisitions could involve the incurrence of substantial additional indebtedness. We cannot assure you that we will be able to successfully integrate any acquisitions that we pursue or that such acquisitions, and the potential related synergies, will perform as planned or prove to be beneficial to our operations and cash flow.flow, or deliver any anticipated strategic benefits. Any such failure could seriously harm our business, financial condition and results of operations.
Certain of our operations are conducted through joint ventures, which have unique risks.
Certain of our operations particularly in China, are conducted through joint ventures. Our joint ventures are governed by mutually established agreements that we entered into with our partners, and, as such, we do not unilaterally control the joint ventures. There is a risk that our partners' objectives for the joint ventures may not be aligned with ours, leading to potential disagreements over management of the joint ventures. At some of our joint ventures, our joint venture partner is also affiliated with the largest customer of the joint venture, which may create a conflict between the interests of our partner and the joint venture. Also, our ability to sell our interest in a joint venture may be subject to contractual and other limitations.
Additional risks associated with joint ventures include our partners failing to satisfy contractual obligations, conflicts arising between us and any of our partners, a change in the ownership of any of our partners and our limited ability to control compliance with applicable rules and regulations. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.
We are subject to risks related to operating a multi-national company.
We have manufacturing and distribution facilities in many regions and countries, including Australia, Asia, North America, Europe, South Africa and South America, and sell our products worldwide.across six continents. For the fiscal year ended December 31, 2016, approximately 51 percent2018, a significant portion of our net sales were derived from operations outside North America. Current events including tax reform proposals and the possibility of renegotiated trade deals and international tax law treaties, create a level of uncertainty, and potentially increased complexity, for multi-national companies. These uncertainties could have a material adverse effect on our business and our results of operations and financial condition. In addition, international operations are subject to various risks which could have a material adverse effect on those operations or our business as a whole, including:
currency exchange rate fluctuations;
exposure to local economic conditions and labor issues;
exposure to local political conditions, including the risk of seizure of assets by a foreign government;
exposure to local social unrest,conditions, including corruption and any resultant acts of war, terrorism or similar events;
exposure to local public health issues and the resultant impact on economic and political conditions;
hyperinflationinflation in certain foreign countries;
controlslimitations on the repatriation of cash, including imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;
exportretaliatory tariffs and import restrictions limiting free movement of goods and an unfavorable trade environment, including as a result of political conditions and changes in the laws in the United States and elsewhere;elsewhere and as described in more details below;
the impact of uncertainties surrounding the implementation of Brexit; and
requirements for manufacturers to use locally produced goods.
Entering new markets poses new competitive threats and commercial risks.
As we have expanded into markets beyond light vehicles, we expect to diversify our product sales by leveraging technologies being developed for the light vehicle segment. Such diversification requires investments and resources which may not be available as needed. We cannot guarantee that we will be successful in leveraging our capabilities into new markets and thus, in meeting the needs of these new customers and competing favorably in these new markets. Further, a significant portion of our growth potential is dependent on our ability to increase sales to commercial truck and off-highway vehicle customers. While we believe that we can achieve our growth targets with the production contracts that have been or will be awarded to us, our future prospects will be negatively affected if those customers underlying these contracts experience reduced demand for their products, or financial difficulties.
ImpairmentWe have recorded a significant amount of long lived assets, goodwill, and other intangible assets, which may become impaired in the carrying value of long-lived assetsfuture and goodwill could negatively affect our operating results.
We have recorded a significant amount of long-livedlong lived assets, goodwill, and other identifiable intangibles assets, including customer relationships, trademarks and brand names, and developed technologies due to the acquisition of Federal-Mogul. Long lived assets, goodwill, onand other identifiable intangible assets were approximately $4,078 million as of December 31, 2018, or 30% of our consolidated balance sheet.total assets. Under generally accepted accounting principles in the United States, long-lived assets, excluding goodwill and indefinite lived intangible assets, are required to be reviewedevaluated for impairment whenever adverse events or
changes in circumstances indicate a possible impairment. If business conditions or other factors cause profitability and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill and indefinite lived intangible assets must be evaluated for impairment annually or more frequently if events indicate it is warranted. If the carrying valueImpairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our reporting units exceeds their current fair value as determined based on the discounted future cash flows of the related business, the goodwill is considered impaired and is reduced to fair value by a non-cash charge to earnings. Events andperformance, adverse market conditions, that could result in impairment in the value of our long-lived assets and goodwill include changes in the industries in which we operate, particularly the impact of a downturn in the global economy, as well as competition and advances in technology, adverse changes in applicable laws or regulations, including changes that restrict the regulatory environment,activities of or affect the products sold by our business, and a variety of other factors. The amount of any quantified impairment must be expensed immediately and subjects us to financial statement risk in the event that long lived assets, goodwill or other factors leading to reduction in expected long-term sales or profitability. We did not record any non-cash
asset impairment charges during the fiscal years ended December 31, 2016, 2015 or 2014.identifiable intangible assets become impaired.
The value of our deferred tax assets could become impaired,may not be realized, which could materially and adversely affect our operating results.
As of December 31, 2016,2018, we had approximately $188$379 million in net deferred tax assets. These deferred tax assets include net operating loss carryovers and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our results of operations.
Our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors.
Our overall effective tax rate is equal to our total tax expense as a percentage of our total profit or loss before tax. However, tax expenses and benefits are determined separately for each tax paying entity or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions may provide no current financial statement tax benefit. As a result, changes in the mix of profits and losses between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.
Changes in tax law or trade agreements and new or changed tariffs could have a material adverse effect on us.
Changes in U.S. political, regulatory and economic conditions and/or changes in laws and policies governing U.S. tax laws, foreign trade (including trade agreements and tariffs), manufacturing, and development and investment in the territories and countries where we and/or our customers operate could adversely affect our operating results and business.
For example, on December 22, 2017, the U.S. President signed into law new legislation that significantly revises the U.S. Internal Revenue Code. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, a one-time transition tax on offshore earnings at reduced tax rates regardless of whether the earnings are repatriated, elimination of U.S. tax on foreign dividends (subject to certain important exceptions), new taxes on certain foreign earnings, a new minimum tax related to payments to foreign subsidiaries and affiliates, immediate deductions for certain new investments as opposed to deductions for depreciation expense over time, and the modification or repeal of many business deductions and credits.
In addition, the United States, Mexico and Canada have renegotiated the North American Free Trade Agreement ("NAFTA"). The revised agreement, the US-Mexico-Canada Agreement ("USMCA"), contains new and revised provisions that alter the prior rules governing when imports and exports of autos and auto parts are eligible for duty-free treatment. Generally these new rules require a higher percentage of the overall content of the auto or autopart to originate in one of the USMCA's countries (the U.S., Mexico or Canada). The U.S. Congress must approve the USMCA provisions before they can become effective. Our manufacturing facilities in the U.S., Mexico and Canada are dependent on duty-free trade within the USMCA region. We have identified a material weakness in our internal control over financial reporting whichsignificant movement of goods within NAFTA region, and the imposition of customs duties on imports could if not remediated, result in material misstatements innegatively impact our financial statements.performance.
Management is responsibleMoreover, in March 2018, the U.S. government imposed a 25% ad valorem tariff on certain steel imports and a 10% ad valorem tariff on certain aluminum imports. There was a short exemption period from the steel and aluminum tariffs for establishingCanada, Mexico and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. As disclosed in Part I, Item 4, management identified a material weakness in internal control over financial reporting related to the accounting for payments received from suppliers by certain purchasing and accounting personnel at the Company’s China subsidiaries. A material weakness (as defined in Rule 12b-2) is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detectedEuropean Union, which ended on a timely basis.June 1, 2018. As a result of thisthe tariffs, countries such as, Canada, China and Mexico have implemented retaliatory actions with respect to U.S. imports into their countries, which could adversely affect our business, financial condition or results of operations.
In addition, on three separate occasions in 2018, the U.S. government imposed additional tariffs on products from China. Specifically, on July 6, 2018, an additional 25% ad valorem tariff was imposed on certain imports from China. On August 23, 2018, an additional group of Chinese imports were assessed an additional 25% ad valorem tariff, and finally on September 24, 2018, a third group of Chinese imports were assessed an additional 10% ad valorem tariff (set to increase to 25% on March 2, 2019, if no resolution is reached with China by that date). The Administration has signaled that additional Chinese products may be targeted with additional tariffs. China has retaliated with tariffs on certain U.S. imports.
The imposition of the steel and aluminum tariffs, or any future imposition of tariffs or duties, is expected to have a pervasive impact on the metals market in which we operate and could result in a decrease in imports and higher prices for those imports which are sold into the U.S. When we buy metals internationally, we may be unable to pass through the higher costs to our customers, which could adversely impact our financial condition and operating results. In addition, a decrease in imports could cause a disruption or shortage in the availability of the raw materials that we buy, which could limit our ability to meet customer demand or purchase material weakness, management concludedat competitive prices. This could cause the Company to lose sales, incur additional costs, or suffer harm to our reputation, all of which may adversely affect operating results.
Further, in May 2018, the U.S. government announced that internal control over financial reporting was not effective basedit is considering potential additional tariffs to be imposed on criteria set forthimported automobiles and automotive parts. Certain aspects of our business depend on the importation of automotive parts from outside of the U.S. If these or other similar tariffs are imposed, our business and results of operations could be materially adversely affected.
The Company's pension obligations and other postretirement benefits assumed as a result of the Acquisition could adversely affect the Company’s operating margins and cash flows.
Following completion of the Acquisition, pension and other postretirement benefit obligations have increased. The automotive industry, like other industries, continues to be affected by the Committeerising cost of Sponsoring Organizationsproviding pension and other postretirement benefits. In addition, the Company sponsors certain defined benefit plans worldwide that are underfunded and will require cash payments. If the performance of the Treadway Commissionassets in “Internal Control-An Integrated Framework (2013).” Thisthe pension plans does not meet the Company’s expectations, or other actuarial assumptions are modified, the Company’s required contributions may be higher than it expects.
The Company’s hedging activities to address commodity price fluctuations may not be successful in offsetting future increases in those costs or may reduce or eliminate the benefits of any decreases in those costs.
In order to mitigate short-term variation in operating results due to the aforementioned commodity price fluctuations, the Company hedged a portion of near-term exposure to certain raw materials used in production processes, primarily copper, nickel, tin, zinc, high-grade aluminum and aluminum alloy. The results of this hedging practice could be positive, neutral or negative in any period depending on price changes in the hedged exposures.
Our hedging activities are not designed to mitigate long-term commodity price fluctuations and, therefore, will not protect from long-term commodity price increases. Our future hedging positions may not correlate to actual raw materials costs, which would accelerate the recognition in our operating results of unrealized gains and losses on hedging positions.
If we cannot attract, retain, and motivate employees, we may be unable to compete effectively, and lose the ability to improve and expand our businesses.
Our success and ability to grow depend, in part, on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve clients and expand our business in many locations around the world. We face intense competition for highly qualified, specialized technical, managerial and other personnel. Recruiting, training, retention, and benefit costs place significant demands on our resources. The inability to attract qualified employees in sufficient numbers to meet particular demands or the loss of key management employees or a significant number of our employees could have an adverse effect on us.
Risks Relating to the Acquisition and Planned Spin-off
We may fail to realize all of the anticipated benefits of the Acquisition or those benefits may take longer to realize than expected. We and, following the planned Spin-off, each separate company may also encounter significant difficulties in integrating the business of Federal-Mogul.
The success of the transaction will depend, in part, on our ability (and the ability of each separate company following the planned Spin-off) (defined below) to realize the anticipated benefits of the Acquisition and planned Spin-off (the “Transaction”) and on our (and each separate company’s) ability to integrate Federal-Mogul’s business in an effective and efficient manner, which is a complex, costly and time-consuming process. The integration process may disrupt business and, if we are unable to successfully integrate Federal-Mogul’s business, we (and each separate company) could fail to realize the anticipated benefits of the Transaction. The failure to meet the challenges involved in the integration process and realize the anticipated benefits of the Transaction could cause an interruption of, or a loss of momentum in, our operations and could have a material weakness resultedadverse effect on our (and each separate company’s) business, financial condition and results of operations.
In addition, the integration of Federal-Mogul may result in material unanticipated challenges, expenses, liabilities, competitive responses and loss of customers and other business relationships. Additional integration challenges include:
diversion of management’s attention to integration matters;
difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the Transaction;
difficulties in the integration of operations and systems;
difficulties in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures;
difficulties in the assimilation of employees;
difficulties in managing the expanded operations of a significantly larger and more complex company;
challenges in attracting and retaining key personnel;
the impact of potential liabilities the Company may be inheriting from Federal-Mogul; and
coordinating a geographically dispersed organization.
Many of these factors are outside of our control and could result in increased costs, decreases in the amount of anticipated revenues and diversion of management’s time and energy, each of which could adversely affect our (and each separate company’s) business, financial condition and results of operations.
In addition, even if the integration of Federal-Mogul’s business is successful, we (and each separate company) may not realize all of the anticipated benefits of the Transaction, including the synergies, cost savings, or sales or growth opportunities. These benefits may not be achieved within the anticipated time frame, or at all. Further, additional unanticipated costs may be incurred in the integration process. All of these factors could cause reductions in earnings per share, decrease or delay the expected accretive effect of the transaction and negatively impact the price of shares of our Common Stock (or each separate company’s stock). As a result, it cannot be assured that the Transaction will result in the realization of the anticipated benefits and potential synergies.
Our current stockholders may have reduced ownership and voting interests following the exercise of certain rights under the Purchase Agreement and exercise less influence over management.
We have granted certain registration rights to AEP for the resale of the shares issued in connection with the Acquisition. These registration rights would facilitate the resale of such shares into the public market, and any such resale would increase the number of shares of our Class A Common Stock available for public trading. Sales of a substantial number of shares of our Class A Common Stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our Class A Common Stock.
If AEP transfers any shares of its Class B Common Stock to a third-party, the shares of Class B Common Stock so transferred will automatically convert in shares of Class A Common Stock and as a result, our current stockholders will experience a proportionate reduction in voting power.
The market price of our Class A Common Stock may be affected by factors different from those affecting the shares of our Common Stock prior to the completion of the Acquisition.
Our historical business differs from that of Federal-Mogul. Accordingly, our results of operations and the market price of our Common Stock following the completion of the Acquisition may be affected by factors that differ from those that previously affected the independent results of operations of each of Tenneco and Federal-Mogul and the market price of our existing common stock prior to the completion of the Acquisition.
The planned Spin-Off following the transaction is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.
We intend to separate the combined company’s businesses to create two new independent, publicly traded companies in a revisionplanned Spin-Off transaction. The planned Spin‑Off is intended to be treated as a tax-free reorganization for U.S. federal income tax purposes. There can be no assurance that the planned Spin-Off will be completed at all or that the planned Spin-Off will be tax-free for U.S. federal income purposes. We expect that the process of completing the planned Spin-Off will be time consuming and involve significant costs and expenses, which may be significantly higher than what we currently anticipate and may not yield a benefit if the planned Spin-Off is not completed. We may encounter unforeseen impediments to the completion of the planned Spin-Off that render it impossible or impracticable.
If the planned Spin-Off is not completed, our business, financial condition and results of operations may be materially adversely affected and the market price of our Common Stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the planned Spin-Off will be completed. If the completion of the planned Spin-Off is delayed, including by the receipt of an acquisition proposal, our business, financial condition and results of operations may be materially adversely affected.
The tendency of the planned Spin-Off and impact of the Transaction could adversely affect our business, financial results and operations.
The announcement and tendency of the planned Spin-Off could cause disruptions and create uncertainty surrounding our business and affect our relationships with our customers, suppliers and employees.
As a result of the Transaction, some customers, suppliers or strategic partners may terminate their business relationship with us. Potential customers, suppliers or strategic partners may delay entering into, or decide not to enter into, a business relationship with us because of the Transaction. If customer or supplier relationships or strategic alliances are adversely affected by the Transaction, our (and each separate company’s after the planned Spin-Off) business, financial condition and results of operations following the Acquisition or planned Spin-Off could be adversely affected.
We are dependent on the experience and industry knowledge of our officers and other key employees to execute our business plans. Our success after and in implementing the Transaction depends in part upon the ability to retain key management personnel and other key employees. Current and prospective employees of the Company may experience uncertainty about their roles with the combined company following the Acquisition or either separate company following the planned Spin-Off, or concerns regarding operations following the Transaction, any of which may have an adverse effect on the ability to attract or retain key management and other key personnel. Accordingly, no assurance can be given that we (or each separate company after the planned Spin-Off) will be able to attract or retain key management personnel and other key employees following the Transaction to the extent that we have previously been able to attract or retain such employees.
In addition, we have diverted, and will continue to divert, significant management resources to complete the Transaction, which could adversely impact our ability to manage existing operations or pursue alternative strategic transactions, which could adversely affect our business, financial condition and results of operations.
The planned Spin-Off may not achieve some or all of the anticipated benefits.
We may not realize some or all of the anticipated strategic, financial, operational or other benefits from the planned Spin-Off. As new independent, publicly traded companies, the two companies will be smaller, less diversified companies with a narrower business focus. As a result, the two companies may be more vulnerable to changing market conditions, which could result in increased volatility in their cash flows, working capital and financing requirements and could have a material adverse effect on the respective business, financial condition and results of operations of each company. Further, there can be no assurance that the combined value of the common stock of the two companies will be equal to or greater than what the value of our common stock would have been had the planned Spin-Off not occurred.
The combined company prior to the planned Spin-Off and, if the planned Spin-Off is completed, each separate company following the Spin-Off may underperform relative to our consolidatedexpectations.
Following completion of the Transaction, the combined company or each separate company may not be able to maintain the growth rate, levels of revenue, earnings or operating efficiency that we and Federal-Mogul have achieved or might achieve separately. The failure to do so could have a material adverse effect on our business, financial statementscondition and results of operations or, following the planned Spin-Off, the business, financial condition and results of operations of each separate company.
We have incurred, and will continue to incur, significant transaction costs in connection with the Transaction that could adversely affect our results of operations.
We have incurred, and will continue to incur, significant costs in connection with integrating the business and operations of Federal-Mogul with our business and operations and effectuating the planned Spin-Off. We may also incur additional unanticipated costs in the separation processes. These could adversely affect our business, financial condition and results of operations, or the business, financial condition and results of operations of each company following the planned Spin-Off, in the period in which such expenses are recorded, or the cash flows, in the period in which any related costs are actually paid.
Furthermore, we and each company following the planned Spin-Off may incur material restructuring charges in connection with integration activities or the planned Spin-Off, which may adversely affect operating results for the period in which such expenses are recorded, or cash flows in the period in which any related costs are actually paid.
We may incur greater costs following the planned Spin-Off, which could decrease our profitability.
Our businesses are operating in conjunction with one another, allowing us in certain circumstances to take advantage of the combined businesses’ size and purchasing power in procuring certain goods and services. After the planned Spin-Off, we may be unable to obtain goods and services at prices or on terms as favorable to us as those we obtained prior to the planned Spin-Off. Our businesses also benefit from certain shared functions and services. Following the planned spin-off, we will retain some of December 31, 2016, 2015these functions and 2014, each quarterly and year-to-date periods in those respective years,services, and the first quarterly period in 2017. We are actively engaged in developingentity to be spun off (“DRiV Incorporated” or "DRiVTM") will retain some of these functions and implementingservices. As to those functions and services DRiV retains, DRiV will provide certain of them to us on a remediation plan designed to address this material weakness. If remedial measures are insufficient to addressshort-term transitional basis after the material weakness, or if additional material weaknesses in internal control are discovered or occur in the future, our consolidated financial statements may contain material misstatementsplanned Spin-Off, and we couldwill be required to restateestablish the necessary infrastructure and systems to provide these functions and services on an ongoing basis. As to those functions and services we retain, we will provide DRiV certain transition services on a short-term transitional basis after the planned Spin-Off. We may not be able to replace the services provided by DRiV in a timely manner or on terms and conditions as favorable as those we receive from DRiV, and it may cost us more to provide services to DRiV than DRiV pays us for those services. If functions previously performed by DRiV, or services provided by us to DRiV, cost us more than the amounts reflected in our historical financial results.statements, our profitability could decrease.
We could incur substantial additional costs and experience temporary business interruptions to transition information technology infrastructure in connection with the planned Spin-Off.
We may incur temporary interruptions in business operations if we and DRiV cannot transition effectively from the existing transactional and operational systems and data centers retained by the other, or from the transition services that support these functions. We may not be successful in implementing new systems and transitioning data, and we may incur substantially higher costs for implementation than currently anticipated. Our failure to avoid operational interruptions as we implement any necessary new systems, our failure to implement any new systems and replace services successfully, or the insufficiency of our business continuity and disaster recovery capabilities in the event of a disruption of our information technology services, could disrupt our business and have a material adverse effect on our profitability. In addition, if we are unable to replicate or transition certain systems, our ability to comply with regulatory requirements could be impaired.
DRiV may not satisfy its obligations under various agreements that have been or will be executed as part of the planned Spin-Off.
In connection with the planned spin-off, we and DRiV will enter various agreements that govern the allocation of assets and liabilities between the two company and other matters. Included among these agreements will be a Separation and Distribution Agreement, Employee Matters Agreement, Transition Services Agreement, Tax Matters Agreement, Intellectual Property Matters Agreement and certain other agreements. Certain of these agreements will provide for the performance of services by each company for the benefit of the other for a period of time after the planned Spin-Off. We will rely on DRiV to satisfy its performance and payment obligations under these agreements. If DRiV is unable to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties or losses.
There could be significant liability if the planned Spin-Off is determined to be a taxable transaction.
A condition to the planned spin-off is our receipt of an opinion from certain tax advisors with respect to certain U.S. federal income tax consequences of the DRiV spin-off, each of which is in substance and form satisfactory to us. The opinion is expected to conclude that the planned spin-off of 100% of the outstanding DRiV shares to our stockholders and certain related transactions will qualify as tax-free to us and our stockholders under Sections 355 and 368 of the Internal Revenue Code, except to the extent of any cash received in lieu of fractional shares of DRiV’s common stock. Any such opinion is not binding on the U.S. Internal Revenue Service (“IRS”). Accordingly, the IRS may reach conclusions with respect to the DRiV that are different from the conclusions reached in the opinion. The opinion will rely on certain facts, assumptions, representations and undertakings from us and DRiV regarding the past and future conduct of the companies’ respective businesses and other matters, which, if incomplete, incorrect or not satisfied, could alter the conclusions of the party giving such opinion or ruling.
If the planned Spin-Off ultimately is determined to be taxable, the Spin-Off could be treated as a taxable dividend to our stockholders for U.S. federal income tax purposes, and our stockholders could incur significant U.S. federal income tax liabilities. In addition, we would recognize a taxable gain to the extent that the fair market value of DRiV common stock
exceeds our tax basis in such stock on the date of the planned Spin-Off. The Tax Matters Agreement we will enter into with DRiV will address which company is responsible for any taxes imposed as a result of the planned Spin-Off.
ITEM 1B.UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.PROPERTIES.
We lease our principal executive offices, which are located at 500 North Field Drive, Lake Forest, Illinois, 60045.
|
| | | | | | | | | | | | | | | | | |
| | Reportable Segments |
| | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Total |
| Manufacturing plants: | | | | | | | | | | | |
| North America | 15 |
| | 7 |
| | 2 |
| | 23 |
| | 10 |
| | 57 |
|
| Europe | 20 |
| | 7 |
| | 1 |
| | 33 |
| | 13 |
| | 74 |
|
| South America | 2 |
| | 3 |
| | — |
| | 5 |
| | 3 |
| | 13 |
|
| Asia Pacific | 27 |
| | 8 |
| | 2 |
| | 24 |
| | 5 |
| | 66 |
|
| | 64 |
| | 25 |
| | 5 |
| | 85 |
| | 31 |
| | 210 |
|
| Engineering and technical facilities | 5 |
| | 7 |
| | — |
| | 14 |
| | 11 |
| | 37 |
|
Shared engineering and technical facilities (1) | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
| Distribution centers and warehouses | — |
| | — |
| | 22 |
| | — |
| | 36 |
| | 58 |
|
| Total as of December 31, 2018 | 69 |
| | 35 |
| | 27 |
| | 99 |
| | 78 |
| | 308 |
|
| | | | | | | | | | | | |
| Lease | 38 |
| | 9 |
| | 23 |
| | 25 |
| | 45 |
| | 140 |
|
| Own | 31 |
| | 26 |
| | 4 |
| | 74 |
| | 33 |
| | 168 |
|
| Total | 69 |
| | 35 |
| | 27 |
| | 99 |
| | 78 |
| | 308 |
|
(1) Clean Air product line operates 63 manufacturing facilities worldwide, of which 16 facilities are located in North America, 24 in Europe, South America and India, and 23 in Asia Pacific. Clean Air also operatesfiveshares three engineering and technical facilities worldwide and shares three other such facilities with Ride Performance. Twenty-five of these manufacturing plants are JIT facilities. In addition, two joint ventures in which we hold a noncontrolling interest operate a total of two manufacturing facilities in Europe, all of which are JIT facilities.
Our Ride Performance product line operates 28 manufacturing facilities worldwide, of which nine facilities are located in North America, 13 in Europe, South America and India, and six in Asia Pacific. Ride Performance also operates seven engineering and technical facilities worldwide and shares three other such facilities with Clean Air. Four of these manufacturing plants are JIT facilities located in Europe and India.
The above-described manufacturing locations are located in Argentina, Australia, Belgium, Brazil, Canada, China, Czech Republic, Denmark, France, Germany, Hungary, India, Italy, Japan, Mexico, Morocco, Philippines, Poland, Portugal, Russia, Romania, Spain, South Africa, South Korea, Sweden, Thailand, Turkey, the United Kingdom, and the United States. We also have a sales office located in Singapore.States and Vietnam.
We own 48 and lease 62 of the properties described above. We hold 1835 of the above-described international manufacturing facilities through eight joint ventures in which we own a controlling interest. In addition, twofive joint ventures in which we hold a noncontrolling interest operate a total of twoeight manufacturing facilities in Europe. Europe, Asia and North America, which are not included in the table above.
We also have warehouses and distribution facilities at our manufacturing sites and at a few off-site locations, substantially all of which we lease.lease, and a network of 11 technical support centers that provide some of the most comprehensive training programs in the industry that educate our partners and customers with emerging vehicle technologies and vehicle repair operational skills.
We believe that substantially all of our plants and equipment are, in general, well maintained and in good operating condition. They are considered adequate for present needs and, as supplemented by planned construction, are expected to remain adequate for the near future.
We also believe that we generally have generally satisfactory title to the properties owned and used in our respective businesses. In the United States, substantially all of our owned real property is pledged to secure our obligations under our senior credit facility.
ITEM 3.LEGAL PROCEEDINGS.
We are involved in environmental remediation matters, legal proceedings, claims investigations(including warranty claims) and warranty obligations.investigations. These matters are typically incidental to the conduct of our business and create the potential for contingent losses. We accrue for potential contingent losses when our review of available facts indicates that it is probable a loss has been incurred and the amount of the loss is reasonably estimable. Each quarter we assess our loss contingencies based upon currently available facts, existing technology, presently enacted laws and regulations and taking into consideration the likely effects of inflation and other societal and economic factors and record adjustments to these reserves as required. As an example, we consider all available evidence, including prior experience in remediation of contaminated sites, other companies’ cleanup experiences and data released by the United StatesU.S. Environmental Protection Agency or other organizations when we evaluate our environmental remediation contingencies. All of our loss contingency estimates are subject to revision in future periods based on actual costs or new information. With respect to our environmental liabilities, where future cash flows are fixed or reliably determinable, we have discounted those liabilities. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our consolidated financial statements.
Environmental Matters
We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We have been notified by the U.S. Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies that we may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities. Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on us under CERCLA and some of the other laws pertaining to these sites, our share of the total waste sent to these sites generally has been small. We believe our exposure for liability at these sites is limited.
On a global basis, we have also identified certain other present and former properties at which we may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments and/or federal or state environmental laws. We are actively seeking to resolve these actual and potential statutory, regulatory, and contractual obligations.
We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense costs related to an existing condition caused by past operations that do not contribute to current or future revenue generation.regulations. As of December 31, 2016,2018, we have the obligation to remediate or contribute towards the remediation of certain sites, including one Federal Superfund site. At December 31, 2016, ourthe sites discussed above at which we may be a PRP. Our aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $15$40 million as of December 31, 2018, of which $2$12 million is recorded in accrued expenses and other current liabilities and $13$28 million is recorded in deferred credits and other liabilities in our consolidated balance sheet.sheets. For those locations where the liability was discounted, the weighted average discount rate used was 2.4 percent.2.9%. The undiscounted value of the estimated remediation costs was $18 million.$46 million as of December 31, 2018. Our expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately $10 million in 2019, $6 million in 2020, $3 million in both 2021 and 2022, $2 million in 2017, $1 million each year beginning 2018 through 20212023 and $12$16 million in aggregate thereafter.
In addition to amounts described above, we estimate that we will make expenditures for property, plant and equipment for environmental matters of approximately $14 million in 2019 and $7 million in 2020.
Based on information known to us from site investigations and the professional judgment of consultants, we have established reserves that we believe are adequate for these costs. Although we believe these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates, difficult to quantify based on the complexity of the issues, and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, certain environmental statutes provide that our liability could be joint and several, meaning that we could be required to pay amounts in excess of our share of remediation costs. Our understanding of theThe financial strength of other potentially responsible partiesPRPs at these sites has been considered, where appropriate, in our determination of our estimated liability. We do not believe that any potential costs associated with our current status as a potentially responsible party in the Federal Superfund site,PRP, or as a liable party at the other locations referenced herein, will be material to our annual consolidated financial position, results of operations, or liquidity.
Antitrust Investigations and Litigation
On March 25, 2014, representatives of the European Commission (EC) were at Tenneco GmbH's Edenkoben, Germany administrative facility to gather information in connection with an ongoing global antitrust investigation concerning multiple automotive suppliers. On March 25, 2014,the same date, we also received a related subpoena from the U.S. Department of Justice (“DOJ”).
On November 5, 2014, the DOJ granted us conditional leniency to Tenneco, its subsidiaries and its 50% affiliates as of such date ("2014 Tenneco Entities") pursuant to an agreement we entered into under the Antitrust Division’sDivision's Corporate Leniency Policy. This agreement provides us with important benefits to the 2014 Tenneco Entities in exchange for our self- reportingself-reporting of matters to the DOJ and our continuing full cooperation with the DOJ’sDOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against us,the 2014 Tenneco Entities, nor seek any criminal fines or penalties, in connection with the matters we reported to the DOJ. Additionally, there are limits on ourthe liability of the 2014 Tenneco Entities related to any follow onfollow-on civil antitrust litigation in the U.S.United States. The limits include single rather than treble damages, as well as relief from joint and several antitrust liability with other relevant civil antitrust action defendants. These limits are subject to ourus satisfying the DOJ and any court presiding over such follow onfollow-on civil litigation.
On April 27, 2017, we received notification from the EC that it has administratively closed its global antitrust inquiry regarding the production, assembly, and supply of complete exhaust systems. No charges against us or any other competitor were initiated at any time and the EC inquiry is now closed.
Certain other competition agencies are also investigating possible violations of antitrust laws relating to products supplied by us and our company.subsidiaries, including Federal-Mogul. We have cooperated and continue to cooperate fully with all of these antitrust investigations, and takehave taken other actions to minimize our potential exposure.
TennecoThe Company and certain of its competitors are also currently defendants in civil putative class action litigation, and are subject to similar claims filed by other plaintiffs, in the United States.States and Canada. More related lawsuits may be filed, including in other jurisdictions. Plaintiffs in these cases generally allege that defendants have engaged in anticompetitive conduct, in violation of federal and state laws, relating to the sale of automotive exhaust systems or components thereof. Plaintiffs seek to recover, on behalf of themselves and various purported classes of
purchasers, injunctive relief, damages and attorneys’ fees. However, as explained above, because we receivedthe DOJ granted conditional leniency fromto the DOJ,2014 Tenneco Entities, our civil liability in United States follow-on actions with respect to these follow on actionsentities is limited to single damages and we will not be jointly and severally liable with the other defendants, provided that we have satisfied our obligations under the DOJ leniency agreement and approval is granted by the presiding court. Typically, exposure for follow-on actions in Canada is less than the exposure for U.S. follow-on actions.
Antitrust law investigations,Following the EC’s decision to administratively close its antitrust inquiry into exhaust systems in 2017, receipt by the 2014 Tenneco Entities of conditional leniency from the DOJ and discussions during the third quarter of 2017 following the appointment of a special settlement master in the civil litigation, and related matters often continue for several years and can resultputative class action cases pending against the Company and/or certain of its competitors in significant penalties and liability. We intendthe United States, the Company continues to vigorously defend the Companyitself and/or take other actions to minimize ourits potential exposure. In lightexposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the many uncertaintiesCompany and variables involved,its stockholders. For example, in October 2017, we cannot estimatesettled an administrative action brought by Brazil's competition authority for an amount that was not material. In December 2018, we settled a separate administrative action brought by Brazil’s competition authority against a Federal-Mogul subsidiary, also for an amount that was not material.
Additionally, in February 2018, we settled civil putative class action litigation in the ultimate impactUnited States brought by classes of direct purchasers, end-payors and auto dealers. No other classes of plaintiffs have brought claims against us in the United States. Based upon earlier developments, including settlement discussions, we established a reserve of $132 million in our second quarter 2017 financial results for settlement costs that thesewere probable, reasonably estimable, and expected to be necessary to resolve our antitrust matters may have on our company. Further, there can be no assurance thatglobally, which primarily involves the ultimate resolution of these matters will not havecivil suits and related claims. Of the $132 million reserve that was established, $79 million was paid through December 31, 2018 resulting in a material adverse effect onremaining reserve of $53 million as of December 31, 2018, which is recorded in accrued expenses and other current liabilities in our consolidated financial position, resultsbalance sheets. While the Company, including its Federal-Mogul subsidiaries, continues to cooperate with certain competition agencies investigating possible violations of operations antitrust laws relating to products supplied by the Company, and the Company may be subject to other civil lawsuits and/or liquidity.related claims, no amount of this reserve is attributable to matters with the DOJ or the EC, and no such amount is expected based on current information.
Other Legal Proceedings, ClaimsOur reserve for antitrust matters is based upon all currently available information and Investigations
We are alsoan assessment of the probability of events for those matters where we can make a reasonable estimate of the costs to resolve such outstanding matters. Our estimate involves significant judgment, given the number, variety and potential outcomes of actual and potential claims, the uncertainty of future rulings and approvals by a court or other authority, the behavior or incentives of adverse parties or regulatory authorities, and other factors outside of our control. As a result, our reserve may change from time to time, involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of damages against us relating to environmental liabilities (including, toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warning issues, and other product liability related matters), taxes, unclaimed property, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance. While we vigorously defend ourselves against all of these legal proceedings, claims and investigations and take other actions to minimize our potential exposure, in future periods, we could be subject to cashactual costs or charges to earnings if any of these matters are resolved on unfavorable terms.may vary. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, except as described above under "Antitrust Investigations," we do not expect that any such change in the legal proceedings, claims or investigations currently pending against usreserve will have anya material adverse impact on our annual consolidated financial position, results of operations or liquidity.
In addition, for
Other Legal Proceedings, Claims and Investigations
For many years we have been and continue to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. Our current docket of active and inactive cases is less than 500 cases nationwide.in the United States and less than 50 in Europe.
With respect to the claims filed in the United States, the substantial majority of the claims are related to alleged exposure to asbestos in our line of Walker® exhaust automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. A small number of claims have been asserted against one of our subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. The substantial majority of the remaining claims are related to alleged exposure to asbestos in our automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. We believe, based on scientific and other evidence, it is unlikely that U.S. claimants were exposed to asbestos by our former products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number in some cases exceeding 100 defendants from a variety of industries. Additionally, in many cases the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages.
With respect to the claims filed in Europe, the substantial majority relate to occupational exposure claims brought by current and former employees of Federal-Mogul facilities in France and amounts paid out were not material. A small number of occupational exposure claims have also been asserted against Federal-Mogul entities in Italy and Spain.
As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolutions. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse impact on our futureannual consolidated financial position, results of operations or liquidity.
In connection with Federal-Mogul’s emergence from bankruptcy in 2008, trusts were funded and established to assume liability for and resolve Federal-Mogul’s legacy asbestos liabilities in the United States and United Kingdom. Accordingly, those legacy liabilities in the United States and United Kingdom have had no ongoing impact on Federal-Mogul, Tenneco or their operations.
We are also from time to time involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warning issues, and other product liability related matters), taxes, unclaimed property, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance.
While we vigorously defend ourselves against all of these legal proceedings, claims and investigations and take other actions to minimize our potential exposure, in future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved on unfavorable terms. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, except as described above under "Antitrust Investigations", we do not expect the legal proceedings, claims or investigations currently pending against us will have any material adverse impact on our annual consolidated financial position, results of operations or liquidity.
Warranty Matters
We provide warranties on some of our products. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified with our products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. We believe that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both "accrued expenses and other current liabilities" and "deferred credits and other liabilities" in the consolidated balance sheets.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 4.1.EXECUTIVE OFFICERS OF THE REGISTRANT.
The following provides information concerning the persons who serve as our executive officers as of February 24, 2017.March 15, 2019.
|
| | |
| Name and Age | | Offices Held |
| | | |
Gregg M. Sherrill (64)Brian J. Kesseler (52) | | Chairman and ChiefCo-Chief Executive Officer |
BrianRoger J. Kesseler (50)Wood (56) | | Chief OperatingCo-Chief Executive Officer |
Josep Fornos (64) | | Executive Vice President, Enterprise Business Initiatives |
Timothy E. Jackson (60) | | Executive Vice President, Technology, Strategy and Business Development |
Kenneth R. Trammell (56)Bradley S. Norton (55) | | Executive Vice President and Chief Financial OfficerPresident Original Equipment |
Henry Hummel (49)Peng (Patrick) Guo (53) | | Executive Vice President and President Clean Air |
Martin Hendricks (54)Rainer Jueckstock (59) | | Executive Vice President Ride Performanceand President Powertrain |
Peng (Patrick) Guo (51)Jason M. Hollar (45) | | Executive Vice President Asia PacificFinance and Chief Financial Officer |
Gregg Bolt (57)Kaled Awada (44) | | Senior Vice President Globaland Chief Human Resources and AdministrationOfficer |
James D. Harrington (56)Gregg A. Bolt (59) | | Senior Vice President Integration Office |
| Ben P. Patel (51) | | Senior Vice President and Chief Technology Officer |
| Brandon B. Smith (38) | | Senior Vice President, General Counsel and Corporate Secretary |
Joseph A. Pomaranski (61) | | Senior Vice President and General Manager, Global Aftermarket |
John E. KunzS. Patouhas (52) | | Vice President and ControllerChief Accounting Officer |
Gregg M. Sherrill — Mr. Sherrill was named the Chairman and Chief Executive Officer of Tenneco in January 2007. Mr. Sherrill joined us from Johnson Controls Inc., where he served since 1998, most recently as President, Power Solutions. From 2002 to 2003, Mr. Sherrill served as the Vice President and Managing Director of Europe, South Africa and South America for Johnson Controls’ Automotive Systems Group. Prior to joining Johnson Controls, Mr. Sherrill held various engineering and manufacturing assignments over a 22-year span at Ford Motor Company, including Plant Manager of Ford’s Dearborn, Michigan engine plant, Chief Engineer, Steering Systems and Director of Supplier Technical Assistance. Mr. Sherrill became a director of our company in January 2007. Effective May 17, 2017, Mr. Sherrill will become our Executive Chairman.
Brian J. Kesseler -— Mr. Kesseler became Co-Chief Executive Officer in October 2018. He was namedpreviously Chief Executive Officer from May 2017 to September 2018. He served as Chief Operating Officer infrom January 2015.2015 to May 2017. Prior to joining Tenneco, he spent more than 20 years working for Johnson Controls Inc., most recently serving as President of the Johnson Controls Power Solutions business. In 2013, he was elected a corporate officer, and was a member of the Johnson Controls executive operating team. Mr. Kesseler also served as the sponsor of Johnson Controls’ Manufacturing Operations Council. Mr. Kesseler joined JCI in 1994 and during his tenure held leadership positions in all of the company’s business units, including serving as Vice President and General Manager, Service-North America, Systems and Services Europe, and Unitary Products Group, for the Building Efficiency business. He began his career with the Ford Motor Company in 1989 and worked in North America Assembly Operations for five years, specializing in manufacturing management. Mr. Kesseler became a director of our company in October 2016. Effective May 17, 2017,
Roger J. Wood — Mr. Kesseler will become ourWood became Co-Chief Executive Officer in October 2018. Mr. Wood retired in 2015 as Dana Holding Corporation’s (now known as Dana Incorporated) President and Chief Executive Officer.
Josep Fornos -Officer, a position he held since 2011, when he joined Dana. Prior to joining Dana Holding Corporation, Mr. Fornos was named Executive Vice President, Enterprise Business Initiatives in September 2015. HeWood served as Executive Vice President Clean Air Division from October 2014 to September 2015. Prior to that,and Group President for the Engine Group at BorgWarner. In his 26-year career at BorgWarner, Mr. FornosWood served in various leadership roles with global operation responsibilities. He is a member of the board of directors of Brunswick Corporation and Executive Director of Fallbrook Technologies. Mr. Wood has been a director of our company since 2016.
Bradley S. Norton — Mr. Nortonjoined Tenneco as Executive Vice President Ride Performance Division from February 2013 toin October 2014, as Executive Vice President and General Manager, Europe, South America and India from March 2012 to February 2013 and as Senior Vice President and General Manager, Europe, South America and India from July 2010 to March 2012. Prior to that, he had served as Vice President and General Manager, Europe Original Equipment Emission Control since March 2007. Mr. Fornos joined Tenneco in July 2000 as Vice President and General Manager, Europe Original Equipment Ride Control.2018. Prior to joining Tenneco, Mr. Fornos spent a year at Lear Corporation as General ManagerNorton was Co-Chairman of the company’s seatingBoard and wireCo-Chief Executive Officer of Federal-Mogul Holdings LLC from March 2017 to September 2018, and harness businessChief Executive Officer, Federal-Mogul Motorparts from July 2014 to March 2017. He was also elected to the Board of Managers of Federal-Mogul LLC in France, following Lear’s acquisition of United Technologies Automotive.March 2017. Prior to that appointment, Mr. Fornos spent 16 years with United Technologies Automotive, holding several management positions in production, engineering and quality control in Spain and later having Europe-wide responsibility for engineering and quality control.
Timothy E. Jackson — Mr. Jackson has served as Executive Vice President, Technology, Strategy and Business Development since March 2012. He served as ourNorton was Senior Vice President, and Chief Technology Officer from March 2007 to March 2012. Prior to that, Mr. Jackson served as our Senior Vice President — Global Technology and General Manager, Asia Pacific sinceChassis & Service, Federal-Mogul Motorparts beginning in July 2005. From 2002 to 2005, Mr. Jackson served as Senior Vice President — Manufacturing, Engineering, and Global Technology. In August 2000, he was named Senior Vice President — Global Technology, a role he served in after joining us as Senior Vice President and General Manager — North American Original Equipment and Worldwide Program Management in June 1999. Mr. Jackson came to Tenneco from ITT Industries where he was President of that company’s Fluid Handling Systems Division. With over 30 years of management experience, 25 within the automotive industry, he had also served as Chief Executive Officer for HiSan, a joint venture between ITT Industries and Sanoh Industrial Company.
Mr. Jackson has also held senior management positions at BF Goodrich Aerospace and General Motors Corporation. Mr. Jackson will retire from the Company effective March 31, 2017.
Kenneth R. Trammell — Mr. Trammell has served as our Chief Financial Officer since September 2003. Mr. Trammell was a Senior Vice President from September 2003 until January 2006 when he became an Executive Vice President. He was our Vice President and Controller from September 1999 to September 2003 and Corporate Controller of Tenneco Inc. from April 1997 to November 1999. He joined Tenneco Inc. in May 1996 as Assistant Controller. Before joining Tenneco Inc., Mr. Trammell spent 12 years with the international public accounting firm of Arthur Andersen LLP, last serving as a senior manager.
Henry Hummel — Mr. Hummel became Executive Vice President, Clean Air in December 2016. Prior to that, Mr. Hummel was named Senior Vice President and General Manager, Clean Air Division in September 2015. He is responsible for leading Tenneco's Clean Air product line. Mr. Hummel joined Tenneco from GE Healthcare where, since October 2014, he had been serving as President and CEO of molecular imaging and computed tomography, leading the company's $3.5 billion global business focused on diagnostic imaging equipment and services. He had been with GE Healthcare for more than 20 years, managing global business and functions including operations, strategic planning, new product introductions, technology and business integration. In addition to his time with GE Healthcare, Mr. Hummel also spent time with Johnson Controls, Inc., serving as Vice President and General Manager Service North America and Covance, as Vice President and General Manager of the company's Madison, Wisconsin laboratories.
Martin Hendricks — Mr. Hendricks was named Executive Vice President, Ride Performance in February 2017. Mr. Hendricks joined Tenneco from Federal Mogul Corp. where he had been since May 2008, serving most recently as president, global braking and regional president, EMEA, based in Glinde, Germany. During his time at Federal Mogul, Mr. Hendricks has served in management and executive roles in both OE and aftermarket businesses and in the EMEA, North America and South America regions. His previous experience includes leadership positions with EurotaxGlass International AG, TRW and Robert Bosch. Mr. Hendricks has more than 25 years of experience with an extensive background in optimizing operations, driving sales and market share growth, integrating businesses and expanding in new markets.2014.
Peng (Patrick) Guo — Mr. Guo becamewas named Executive Vice President and President Clean Air in March 2017. Previously, Mr. Guo was Executive Vice President, Asia Pacific insince December 2016, and was Senior Vice President and General Manager, Asia Pacific from October 2014 until December 2016. Mr. Guo served as Vice President and Managing Director, China from 2007 until October 2014. From 1996 to 2003, Mr. Guo served as General Manager, Asia Aftermarket Operations while based in Beijing, China. He left Tenneco in October 2003 to become president of the AGC Automotive China Operations for the AshaiAsahi Glass Company. He returned to Tenneco in July 2007. Before joining Tenneco, Mr. Guo was an engineer at the Ford Motor Company, which included assignments in manufacturing, quality and product design.
Rainer Jueckstock — Mr. Jueckstockjoined Tenneco as Executive Vice President and President Powertrain in October 2018. Prior to joining Tenneco, Mr. Jueckstock was Co-Chairman of the Board and Co-Chief Executive Officer of Federal-Mogul LLC from 2014 to 2018, and Chief Executive Officer, Federal-Mogul Powertrain from 2012 to 2018. Prior to his Co-Chairman and Co-Chief Executive Officer positions, Mr. Jueckstock was Senior Vice President, Powertrain Energy from 2005 to 2012, a member of the Strategy Board from 2005 to 2012 and an officer of Federal-Mogul Corporation from 2005 to 2012. He is a director of Plexus Corp.
Jason M. Hollar — Mr. Hollar became Executive Vice President and Chief Financial Officer in July 2018. He joined Tenneco as Senior Vice President Finance and served from June 2017 to June 2018. Prior to joining Tenneco, Mr. Hollar was Chief Financial Officer of Sears Holdings Corporation beginning in October 2016 and has served as Senior Vice President, Finance of Sears since October 2014. Previously, he was with Delphi Automotive PLC, serving from December 2013 to September 2014 as Vice President and Corporate Controller and from April 2011 to November 2013 as CFO, Powertrain Systems and Delphi Europe, Middle East and Africa.
Kaled Awada — Mr. Awadajoined Tenneco as Senior Vice President and Chief Human Resources Officer in September 2018. Prior to joining Tenneco, Mr. Awada held Human Resources leadership positions of increasing responsibility at Aptiv PLC for three years, most recently Global Vice President, Human Resources, for the company's electrical distribution systems business. He previously held global Human Resources roles with Eaton Corporation, Textron Fastening Systems, and Faurecia Exhaust Systems.
Gregg A. Bolt — Mr. Bolt was named ourhas been the Senior Vice President Integration Office since September 2018. He served as Senior Vice President Global Human Resources and Administration infrom February 2013.2013 to August 2018. Prior to joining Tenneco, Mr. Bolt worked for Quad/Graphics, Inc. as Executive Vice President, Human Resources and Administration from March 2009 to January 2013. Previously, he was with Johnson Controls Inc. for more than 10 years, serving most recently as Vice President, Human Resources for JCI’s Building Efficiency division.
James D. HarringtonBen P. Patel — Dr. Patel has been the Senior Vice President and Chief Technology officer since October 2018; he served as the Vice President and Chief Technology Officer since March 2017. He served as Vice President, Global Research and Development, Clean Air from March 2012 to March 2017 and Vice President, Technology Development, Emission Control from January 2011 to February 2012. Prior to joining Tenneco in 2011, Dr. Patel worked at GE Global Research Center from July 1998 to December 2007, where he held the position of senior scientist. From January 2008 to December 2010 he served as technology portfolio manager for GE Technology Ventures, a division of General Electric's corporate trading and licensing group. He is a director of Lincoln Electric Holdings, Inc.
Brandon B. Smith — Mr. HarringtonSmith has served as our Senior Vice President, General Counsel and Corporate Secretary since June 2009February 2018 and is responsible for managing our worldwide legal affairs including corporate governance and compliance. Previously, he served as our Vice President, Deputy General Counsel and Assistant Secretary since November 2014 and Interim General Counsel since October 2017. Mr. HarringtonSmith also served as our Assistant General Counsel from April 2011 to November 2014 and as our Senior Corporate Counsel from November 2010 until April 2011. Mr. Smith joined usTenneco in January 2005July 2008 as Corporate Counsel and was named Vice President — Law in July 2007.Counsel. Prior to joining Tenneco, he worked at Mayer BrownMr. Smith was a corporate attorney with Kirkland & Ellis LLP, in the firm’srepresenting both public and private enterprises on a wide variety of corporate and securities practice.
Joseph A. Pomaranski - Mr. Pomaranski has served as our Senior Vice President and General Manager, Global Aftermarket since October 2014. Prior to this appointment, Mr. Pomaranski served as Vice President and General Manager, North America Aftermarket since November 2010. He served as Vice President, North America Aftermarket from August 2008 to November 2010. Prior to that, Mr. Pomaranski served as Vice President, North America Aftermarket Sales from May 1999 to August 2008. Mr. Pomaranski joined Tenneco in 1999 from Federal Mogul where he held the position of Director of Sales, Special Markets. Prior to that, he worked for Cooper Automotive as Vice President of Sales. He began his career with Champion Spark Plug where he held various positions from 1977 to 1998.engagements.
John E. KunzS. Patouhas — Mr. KunzPatouhas has served as our Vice President and ControllerChief Accounting Officer since MarchFebruary 2019. Mr. Patouhas served since 2015 and is our company's principal accounting officer with responsibility for Tenneco's corporate accounting and financial reporting globally. Prior to assuming his role as Controller, Mr. Kunz served as Vice President Treasurer and Tax, responsible for our company's global tax function.Chief Accounting Officer of Federal-Mogul (a subsidiary of Tenneco since October 2018). From 2011 to 2015, Mr. Kunz also oversaw our company's treasury, insurancePatouhas was Vice President and investment activities including buildingCorporate Controller at Altair Engineering, a product design and managing relationshipsdevelopment, engineering software and cloud computing software provider. He has over 20 years’ experience in financial reporting and corporate accounting at a variety of companies, and began his career as an auditor with the banking communityDeloitte. Mr. Patouhas is a CPA and rating agencies. Mr. Kunz joined Tenneco in 2004CGMA, and has an MBA from Great Lakes Chemical Corporation, where he rose through responsibility to become vice president and treasurer. Prior to joining Great Lakes in 1999, Mr. Kunz was director of corporate development at Weirton Steel Corporation, where he also held prior positions in capital planning, business development and financial analysis. Prior to that, Mr. Kunz spent four years with the international public accounting firm of KPMG.Wayne State University.
36
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our outstanding shares of common stock,Class A Common Stock, par value $.01$0.01 per share, are listed on the New York and Chicago Stock Exchanges. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the New York Stock Exchange Composite Transactions Tape.
|
| | | | | | | |
| | Sales Prices |
| Quarter | High | | Low |
| 2016 |
| |
|
| 1st | $ | 52.16 |
| | $ | 34.45 |
|
| 2nd | 57.73 |
| | 44.55 |
|
| 3rd | 58.97 |
| | 44.68 |
|
| 4th | 66.98 |
| | 51.09 |
|
| 2015 |
| |
|
| 1st | $ | 59.87 |
| | $ | 49.14 |
|
| 2nd | 61.73 |
| | 55.01 |
|
| 3rd | 58.20 |
| | 39.13 |
|
| 4th | 57.18 |
| | 44.15 |
|
As of February 17, 2017, there were approximately 15,237 holders of record of our common stock, including brokers and other nominees.
under the symbol "TEN". On February 1, 2017, we announced the reinstatement of a quarterly dividend program under which we expect to pay a quarterly dividend of $0.25 per share on our common stock, representing a planned annual dividend of $1.00 per share. The initial dividend is payable on March 23, 2017 to stockholders of record as of March 7, 2017.Company did not pay any dividends in fiscal year 2016. While we currently expect to pay comparable quarterly cash dividends in the near future, our dividend program and the payment of future cash dividends are subject to continued capital availability, the judgment of our Board of Directors and our continued compliance with the provisions pertaining to the payment of dividends under our debt agreements. The Company did not pay any dividends in fiscal years 2016, 2015 or 2014.Once the contemplated separation of our businesses through a spin-off occurs, each independent company will determine its own dividend policy.
For additional information concerning our payment of dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.
See “Security Ownership
As of Certain Beneficial OwnersMarch 11, 2019, there were approximately 10,100 holders of record of our class A common stock, including brokers and Managementother nominees and Related Stockholder Matters” included in Item 12 for information regarding securities authorized for issuance undertwo holders of record of our equity compensation plans.class B common stock.
Purchase of equity securities by the issuer and affiliated purchasers
The following table provides information relating to our purchase of shares of our class A common stock in the fourth quarter of 2016.2018. These purchases include shares withheld upon vesting of restricted stock for minimum tax withholding obligations. We generally intend to continue to satisfy statutory minimum tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares.
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Average Price
Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Value of Shares That May Yet be Purchased Under These Plans or Programs (Millions) |
| October 2016 | 560,073 |
| | $ | 56.28 |
| | 559,849 |
| | $ | 160 |
|
| November 2016 | 577,803 |
| | $ | 55.24 |
| | 576,500 |
| | $ | 128 |
|
| December 2016 | 263,200 |
| | $ | 62.21 |
| | 263,200 |
| | $ | 112 |
|
| Total | 1,401,076 |
| | $ | 56.96 |
| | 1,399,549 |
| | $ | 112 |
|
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased (1) | | Average Price
Paid | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Value of Shares That May Yet be Purchased Under These Plans or Programs (Millions) |
| October 2018 | 328 |
| | $ | 35.37 |
| | — |
| | $ | 231 |
|
| November 2018 | — |
| | $ | — |
| | — |
| | $ | 231 |
|
| December 2018 | — |
| | $ | — |
| | — |
| | $ | 231 |
|
| Total | 328 |
| | $ | 35.37 |
| | — |
| | $ | 231 |
|
| |
| (1) | Includes sharesShares withheld upon vesting of restricted stock in the amountfourth quarter of 224 in October 2016 and 1,303 in November 2016.2018. |
In OctoberDuring 2015, our Board of Directors expanded our company’sapproved a share repurchase program, authorizing theus to repurchase of an additional $200up to $550 million of our company'sthen outstanding common stock. This authorization wasstock over a three-year period ("2015 Program"). We purchased 4,182,613 shares in addition to the $3502016 through open market purchases, which were funded through cash from operations, at a total cost of $225 million, share repurchase programat an average price of $53.89 per share. These repurchased shares are held as part of our company announced in January 2015.treasury stock.
In February 2017, our Board of Directors authorized the repurchase of up to $400 million of the Company'sour then outstanding common stock over the next three years. This includes the remaining amountyears ("2017 Program"), this included $112 million that remained authorized under earlier repurchase programs. The Company anticipates acquiringthe 2015 Program. We generally acquire the shares through open market or privately negotiated transactions, which will be funded throughand have historically utilized cash from operations. The repurchase program does not obligate the Companyus to make repurchase shares within any specific time or situations,situations.
No new share repurchase programs were authorized by our Board of Directors in 2018 and opportunitieswe did not repurchase any shares under the 2017 Program in higher priority areas could affect2018. Since we announced the cadence of this program.repurchase program in January 2015, we have repurchased 11.3 million shares for $607 million through December 31, 2018.
Recent Sales of Unregistered Securities
None.
Share Performance
The following graph shows a five year comparison of the cumulative total stockholder return on Tenneco’s common stock as compared to the cumulative total return of two other indexes: a custom composite index (“Peer Group”) and the Standard & Poor’s 500 Composite Stock Price Index. The companies included in the Peer Group are: American Axle & Manufacturing Co., Borg WarnerBorgWarner Inc., Cummins Inc., Johnson Controls Inc.,International Plc, Lear Corp., Magna International Inc., and Meritor, Inc. These comparisons assume an initial investment of $100 and the reinvestment of dividends.
|
| | | | | | | | | | | | |
| | 12/31/2011 | 12/31/2012 | 12/31/2013 | 12/31/2014 | 12/31/2015 | 12/31/2016 |
| Tenneco Inc. | 100.00 |
| 117.90 |
| 189.96 |
| 190.09 |
| 154.16 |
| 209.77 |
|
| S&P 500 | 100.00 |
| 116.00 |
| 153.58 |
| 174.60 |
| 177.01 |
| 198.18 |
|
| Peer Group | 100.00 |
| 128.42 |
| 192.11 |
| 216.84 |
| 165.65 |
| 208.36 |
|
|
|
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31. |
|
| Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved. |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| Tenneco Inc. | $ | 100.00 |
| | $ | 100.07 |
| | $ | 81.16 |
| | $ | 110.43 |
| | $ | 105.25 |
| | $ | 50.40 |
|
| S&P 500 | 100.00 |
| | 113.69 |
| | 115.26 |
| | 129.05 |
| | 157.22 |
| | 150.33 |
|
| Peer Group | 100.00 |
| | 112.87 |
| | 86.23 |
| | 108.46 |
| | 128.12 |
| | 99.21 |
|
The graph and other information furnished in the section titled “Share Performance” under this Part II, Item 5 of this Form 10-K shall not be deemed to be “soliciting” material or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
ITEM 6. SELECTED FINANCIAL DATA.
The following data should be read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Operations” and our consolidated financial statements in Item 8 — “Financial Statements and Supplementary Data.” These items include discussions of factors affecting comparability of the information shown below.
We are organized and manage our business along our two major product lines (clean air and ride performance) and three geographic areas (North America; Europe, South America and India; and Asia Pacific), resulting in six operating segments (North America Clean Air, North America Ride Performance, Europe, South America and India Clean Air, Europe, South America and India Ride Performance, Asia Pacific Clean Air and Asia Pacific Ride Performance). Within each geographical area, each operating segment manufactures and distributes either clean air or ride performance products primarily forbelow, including the original equipment and aftermarket industries. Eachcompletion of the six operating segments constitutes a reportable segment. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the six operating segmentsAcquisition of Federal-Mogul on October 1, 2018 as "Other."discussed in Item 8 — Note 3, Acquisitions and Divestitures.
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
Significant Accounting Policies.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016(a) | | 2015(b) | | 2014(c) | | 2013(d) | | 2012(e) |
| | (Millions Except Share and Per Share Amounts) |
| Statements of Income Data: | | | | | | | | | |
| Net sales and operating revenues — | | | | | | | | | |
| Clean Air Division | | | | | | | | | |
| North America | $ | 3,016 |
| | $ | 2,839 |
| | $ | 2,801 |
| | $ | 2,626 |
| | $ | 2,469 |
|
| Europe, South America & India | 2,081 |
| | 1,935 |
| | 2,088 |
| | 2,045 |
| | 1,827 |
|
| Asia Pacific | 1,080 |
| | 1,037 |
| | 1,022 |
| | 853 |
| | 695 |
|
| Intergroup sales | (108 | ) | | (116 | ) | | (139 | ) | | (120 | ) | | (108 | ) |
| Total Clean Air Division | 6,069 |
| | 5,695 |
| | 5,772 |
| | 5,404 |
| | 4,883 |
|
| Ride Performance Division | | | | | | | | | |
| North America | 1,243 |
| | 1,323 |
| | 1,361 |
| | 1,265 |
| | 1,223 |
|
| Europe, South America & India | 1,045 |
| | 972 |
| | 1,070 |
| | 1,087 |
| | 1,094 |
|
| Asia Pacific | 323 |
| | 275 |
| | 269 |
| | 251 |
| | 213 |
|
| Intergroup sales | (81 | ) | | (84 | ) | | (91 | ) | | (83 | ) | | (93 | ) |
| Total Ride Performance Division | 2,530 |
| | 2,486 |
| | 2,609 |
| | 2,520 |
| | 2,437 |
|
| Total Tenneco Inc. | $ | 8,599 |
| | $ | 8,181 |
| | $ | 8,381 |
| | $ | 7,924 |
| | $ | 7,320 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests — | | | | | | | | | |
| Clean Air Division | | | | | | | | | |
| North America | $ | 220 |
| | $ | 244 |
| | $ | 237 |
| | $ | 229 |
| | $ | 202 |
|
| Europe, South America & India | 103 |
| | 52 |
| | 59 |
| | 57 |
| | 54 |
|
| Asia Pacific | 145 |
| | 111 |
| | 99 |
| | 82 |
| | 71 |
|
| Total Clean Air Division | 468 |
| | 407 |
| | 395 |
| | 368 |
| | 327 |
|
| Ride Performance Division | | | | | | | | | |
| North America | 157 |
| | 155 |
| | 143 |
| | 124 |
| | 122 |
|
| Europe, South America & India | 25 |
| | (5 | ) | | 40 |
| | (7 | ) | | 41 |
|
| Asia Pacific | 54 |
| | 38 |
| | 35 |
| | 22 |
| | 5 |
|
| Total Ride Performance Division | 236 |
| | 188 |
| | 218 |
| | 139 |
| | 168 |
|
| Other | (188 | ) | | (87 | ) | | (124 | ) | | (85 | ) | | (67 | ) |
| Total Tenneco Inc. | $ | 516 |
| | $ | 508 |
| | $ | 489 |
| | $ | 422 |
| | $ | 428 |
|
| Interest expense (net of interest capitalized) | 92 |
| | 67 |
| | 91 |
| | 80 |
| | 105 |
|
| Income tax expense | — |
| | 146 |
| | 131 |
| | 122 |
| | 19 |
|
| Net income | 424 |
| | 295 |
| | 267 |
| | 220 |
| | 304 |
|
| Less: Net income attributable to noncontrolling interests | 68 |
| | 54 |
| | 42 |
| | 38 |
| | 29 |
|
| Net income attributable to Tenneco Inc. | $ | 356 |
| | $ | 241 |
| | $ | 225 |
| | $ | 182 |
| | $ | 275 |
|
| Weighted average shares of common stock outstanding — | | | | | | | | | |
| Basic | 55,939,135 |
| | 59,678,309 |
| | 60,734,022 |
| | 60,474,492 |
| | 59,985,677 |
|
| Diluted | 56,407,436 |
| | 60,193,150 |
| | 61,782,508 |
| | 61,594,062 |
| | 61,083,510 |
|
| Basic earnings per share of common stock | $ | 6.36 |
| | $ | 4.05 |
| | $ | 3.70 |
| | $ | 3.02 |
| | $ | 4.58 |
|
| Diluted earnings per share of common stock | $ | 6.31 |
| | $ | 4.01 |
| | $ | 3.64 |
| | $ | 2.96 |
| | $ | 4.50 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (Millions Except Share and Per Share Amounts) |
| Statements of Income Data: | | | | | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
| | $ | 8,180 |
| | $ | 8,382 |
|
Earnings (loss) before interest expense, income taxes, and noncontrolling interests (a) | $ | 306 |
| | $ | 408 |
| | $ | 479 |
| | $ | 503 |
| | $ | 469 |
|
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
| | $ | 291 |
| | $ | 261 |
|
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | 347 |
| | $ | 237 |
| | $ | 219 |
|
| | | | | | | | | | |
| Basic earnings per share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
| | $ | 3.98 |
| | $ | 3.61 |
|
| Diluted earnings per share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
| | $ | 3.94 |
| | $ | 3.55 |
|
| Cash dividends declared | $ | 1.00 |
| | $ | 1.00 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
| Balance Sheet Data (at year end): | | | | | | | | | |
| Total assets | $ | 13,232 |
| | $ | 4,796 |
| | $ | 4,312 |
| | $ | 3,937 |
| | $ | 3,964 |
|
| Short-term debt | $ | 153 |
| | $ | 103 |
| | $ | 117 |
| | $ | 103 |
| | $ | 99 |
|
| Long-term debt | $ | 5,340 |
| | $ | 1,358 |
| | $ | 1,294 |
| | $ | 1,124 |
| | $ | 1,055 |
|
| Redeemable noncontrolling interests | $ | 138 |
| | $ | 42 |
| | $ | 40 |
| | $ | 41 |
| | $ | 34 |
|
| Total equity | $ | 1,916 |
| | $ | 682 |
| | $ | 573 |
| | $ | 425 |
| | $ | 497 |
|
(a)Includes restructuring and asset impairments for each year as follows: |
| | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (Millions Except Ratio and Percent Amounts) |
| Balance Sheet Data (at year end): | | | | | | | | | |
| Total assets(f) | $ | 4,346 |
| | $ | 3,970 |
| | $ | 3,996 |
| | $ | 3,817 |
| | $ | 3,593 |
|
| Short-term debt | 90 |
| | 86 |
| | 60 |
| | 83 |
| | 113 |
|
| Long-term debt(f) | 1,294 |
| | 1,124 |
| | 1,055 |
| | 1,006 |
| | 1,052 |
|
| Redeemable noncontrolling interests | 40 |
| | 41 |
| | 34 |
| | 20 |
| | 15 |
|
| Total Tenneco Inc. shareholders’ equity | 573 |
| | 425 |
| | 495 |
| | 432 |
| | 246 |
|
| Noncontrolling interests | 47 |
| | 39 |
| | 40 |
| | 39 |
| | 45 |
|
| Total equity | 620 |
| | 464 |
| | 535 |
| | 471 |
| | 291 |
|
| Statement of Cash Flows Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 489 |
| | $ | 517 |
| | $ | 341 |
| | $ | 503 |
| | $ | 365 |
|
| Net cash used by investing activities | (340 | ) | | (303 | ) | | (339 | ) | | (266 | ) | | (273 | ) |
| Net cash provided (used) by financing activities | (91 | ) | | (172 | ) | | 20 |
| | (175 | ) | | (89 | ) |
| Cash payments for plant, property and equipment | (325 | ) | | (286 | ) | | (328 | ) | | (244 | ) | | (256 | ) |
| Other Data: | | | | | | | | | |
| EBITDA including noncontrolling interests(g) | $ | 728 |
| | $ | 711 |
| | $ | 697 |
| | $ | 627 |
| | $ | 633 |
|
| Ratio of EBITDA including noncontrolling interests to interest expense | 7.91 |
| | 10.61 |
| | 7.66 |
| | 7.84 |
| | 6.03 |
|
| Ratio of net debt (total debt less cash and cash equivalents) to EBITDA including noncontrolling interests(h) | 1.42 |
| | 1.30 |
| | 1.19 |
| | 1.29 |
| | 1.49 |
|
| Ratio of earnings to fixed charges(i) | 4.55 |
| | 5.73 |
| | 4.38 |
| | 4.32 |
| | 3.55 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31 |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | | (Millions) |
| Restructuring and asset impairments, net | | $ | 112 |
| | $ | 47 |
| | $ | 30 |
| | $ | 63 |
| | $ | 49 |
|
NOTE: Our consolidated financial statements for the three years ended December 31, 2016, which are discussed in the following notes, are included in this Form 10-K/A under Item 8.
| |
(a) | 2016 includes $36 million in restructuring and related costs primarily related to manufacturing footprint improvements in North America Ride Performance, headcount reduction and cost improvement initiatives in Europe and China Clean Air, South America and Australia. Of the total $36 million we incurred in restructuring and related costs, $6 million was related to asset write-downs. 2016 also includes a net tax benefit of $110 million primarily relating to the recognition of a U.S. tax benefit for foreign taxes, $24 million in pre-tax interest charges related to the refinancing of our senior notes due in 2020 and $72 million in pension buyout charges. |
| |
(b) | 2015 includes $63 million of restructuring and related costs primarily related to the European cost reduction efforts, exiting the Marzocchi suspension business, headcount reductions in Australia and South America, and the closure of a JIT plant in Australia. Of the total $63 million we incurred in restructuring and related costs, $10 million was related to asset write-downs and $4 million was in charges related to pension benefits. |
| |
(c) | 2014 includes $49 million of restructuring and related costs primarily related to the European cost reduction efforts, headcount reductions in Australia and South America, the sale of a closed facility in Cozad, Nebraska and costs related to organizational changes. Of the total $49 million we incurred in restructuring and related costs, $3 million was related to non-cash asset write downs and $2 million was related to a non-cash charge on the sale of a closed facility. 2014 also includes $32 million in charges related to postretirement benefits, of which $21 million was a non-cash charge related to payments made to retirement plan participants out of pension assets and $11 million related to an adjustment to the postretirement medical liability, and $13 million in pre-tax interest charges related to the refinancing of our senior credit facility. |
| |
(d) | 2013 includes $78 million of restructuring and related costs primarily related to European cost reduction efforts including the planned closing of the ride performance plant in Gijon, Spain and intended reductions to the workforce at our ride performance plant in Sint-Truiden, our exit from the distribution of aftermarket exhaust products and ending production of leaf springs in Australia, headcount reductions in various regions, and the net impact of freezing our defined benefit plans in the United Kingdom. Of the total $78 million we incurred in restructuring and related costs, $3 million was related to non-cash asset write downs. |
| |
(e) | 2012 includes a $7 million asset impairment charge related to certain assets of our European Ride Performance business, a benefit of $5 million from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996 and $18 million in pre-tax interest charges related to the refinancing of our senior credit facility and senior notes. |
| |
(f) | In April 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. For public business entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the amendments in this update is permitted for financial statements that have not been previously issued. We adopted this standard for the first quarter of 2015 and applied retrospectively. The balance for unamortized debt issuance costs was $13 million, $12 million, $14 million, $13 million and $15 million at December 31, 2016, 2015, 2014, 2013 and 2012, respectively. |
| |
(g) | EBITDA including noncontrolling interests is a non-GAAP measure defined as net income before extraordinary items, cumulative effect of changes in accounting principle, interest expense, income taxes, depreciation and amortization and noncontrolling interests. We use EBITDA including noncontrolling interests, together with GAAP measures, to evaluate and compare our operating performance on a consistent basis between time periods and with other companies that compete in our markets but which may have different capital structures and tax positions, which can have an impact on the comparability of interest expense, noncontrolling interests and tax expense. We also believe that using this measure allows us to understand and compare operating performance both with and without depreciation expense. We believe EBITDA including noncontrolling interests is useful to our investors and other parties for these same reasons. |
EBITDA including noncontrolling interests should not be used as a substitute for net income or for net cash provided by operating activities prepared in accordance with GAAP. It should also be noted that EBITDA including noncontrolling interests may not be comparable to similarly titled measures used by other companies and, furthermore, that it excludes expenditures for debt financing, taxes and future capital requirements that are essential to our ongoing business operations. For these reasons, EBITDA including noncontrolling interests is of value to management and investors only as a supplement to, and not in lieu of, GAAP results. EBITDA including noncontrolling interests are derived from the statements of income (loss) as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (Millions) |
| Net income | $ | 356 |
| | $ | 241 |
| | $ | 225 |
| | $ | 182 |
| | $ | 275 |
|
| Noncontrolling interests | 68 |
| | 54 |
| | 42 |
| | 38 |
| | 29 |
|
| Income tax expense | — |
| | 146 |
| | 131 |
| | 122 |
| | 19 |
|
| Interest expense, net of interest capitalized | 92 |
| | 67 |
| | 91 |
| | 80 |
| | 105 |
|
| Depreciation and amortization of other intangibles | 212 |
| | 203 |
| | 208 |
| | 205 |
| | 205 |
|
| Total EBITDA including noncontrolling interests | $ | 728 |
| | $ | 711 |
| | $ | 697 |
| | $ | 627 |
| | $ | 633 |
|
| |
(h) | We present the ratio of net debt (total debt less cash and cash equivalents) to EBITDA including noncontrolling interests because management believes it is a useful measure of Tenneco’s credit position and progress toward reducing leverage. The calculation is limited in that we may not always be able to use cash to repay debt on a dollar-for-dollar basis. Net debt balances are derived from the balance sheets as follows: |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (Millions) |
| Total Debt | $ | 1,384 |
| | $ | 1,210 |
| | $ | 1,115 |
| | $ | 1,089 |
| | $ | 1,165 |
|
| Total Cash | 349 |
| | 288 |
| | 285 |
| | 280 |
| | 223 |
|
| Net Debt | $ | 1,035 |
| | $ | 922 |
| | $ | 830 |
| | $ | 809 |
| | $ | 942 |
|
| |
(i) | For purposes of computing this ratio, earnings generally consist of income before income taxes and fixed charges excluding capitalized interest. Fixed charges consist of interest expense, the portion of rental expense considered representative of the interest factor and capitalized interest. See Exhibit 12 to this Form 10-K for the calculation of this ratio. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
As you
You should read the following review of our financial conditiondiscussion and results of operations, you should also read ouranalysis in conjunction with the consolidated financial statements and related notes included in Item 8. — "Financial Statements and Supplementary Data." All references to "Tenneco," "we," "us," "our" and "the Company" refer to Tenneco Inc. and its consolidated subsidiaries. Notes referenced in this discussion and analysis refer to the notes to consolidated financial statements that are found in Item 8.—"Financial Statements and Supplementary Data—Notes to Consolidated Financial Statements."
Executive
The consolidated financial statements for the years ended December 31, 2017 and 2016 have been revised to correct for prior period errors as discussed in Item 8 — Note 2, Summary of Significant Accounting Policies. Accordingly, this Management's Discussion and Analysis of Financial Condition and Results of Operations reflect the effects of the revisions.
OVERVIEW
Our Company
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 off-highway applications. We serve bothaftermarket 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®Monroe®, Rancho®Champion®, Clevite® Elastomers, Axios™Öhlins®, Kinetic® MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, and Fric-Rot™ ride performance products and Walker®Sealed Power®, XNOx®, Fonos™, DynoMax® and Thrush®clean air products. We serve more than 80 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 2016. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers.among others. As of December 31, 2016,2018, we operated 91210 manufacturing facilities worldwide and employed approximately 31,00081,000 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(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,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 2016,2018, light vehicle production continuedwas slightly down compared to improve from recent years2017 in some of the geographic regions in which we operate. Light vehicle production was up two percentdown 1% in both North America three percentand Europe, and down 4% in Europe, 10 percentChina. Light vehicle production was up 6% in India and 14 percent3% in China. South America light vehicle productionAmerica.
Federal-Mogul Acquisition
On October 1, 2018, we closed the acquisition of Federal-Mogul LLC ("Federal-Mogul"), (the "Acquisition" or the “Federal-Mogul Acquisition”) pursuant to the Membership Interest Purchase Agreement, dated as of April 10, 2018 (the “Purchase Agreement”), by and among us, Federal-Mogul, American Entertainment Properties Corp. (“AEP”) and Icahn Enterprises L.P. (“IEP”). Total consideration was down 10 percentapproximately $3.7 billion. See Note 3, Acquisitions and Australia was down eight percentDivestitures to our consolidated financial statements for additional information.
As a result of the Federal-Mogul Acquisition, the number of our reportable segments increased from 2015 levels.three to five segments, consisting of: our historical Clean Air, Ride Performance, and Aftermarket segments and the newly acquired Powertrain and Motorparts segments. Segment information for periods prior to the Federal-Mogul Acquisition do not include amounts for the Federal-Mogul operations.
Our reportable segments, which are also our operating segments, align with how the Chief Operating Decision Maker allocates resources and assesses performance against our key growth strategies. We evaluate segment performance based primarily on earnings before interest expense, income taxes, noncontrolling interests, depreciation and amortization (EBITDA including noncontrolling interests).
Financial Executive Summary
We are organized and manage our business along our two major product lines (clean air and ride performance) and three geographic areas (North America; Europe, South America and India; and Asia Pacific), resulting in six operating segments (North America Clean Air, North America Ride Performance, Europe, South America and India Clean Air, Europe, South America and India Ride Performance, Asia Pacific Clean Air and Asia Pacific Ride Performance). Within each geographical area, each operating segment manufactures and distributes either clean air or ride performance products primarily for the original equipment and aftermarket industries. Each of the six operating segments constitutes a reportable segment. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the six operating segments as "Other."
Totalreported total revenue for 2016 was $8,5992018 of $11,763 million, a five percent increaseup 27% from $8,181$9,274 million in 2015, on strong global light vehicle2017. The Federal-Mogul acquisition increased revenues by approximately $1,886 million, or 20%, in 2018. The remaining increase in our revenues of $603 million, or 7%, was driven by both the growth in Clean Air and Ride Performance product lines.segments. Excluding the impact of currency and substrate sales, organic revenue was up $460$292 million, or 4%, from $6,293$7,087 million to $6,753 million. The increase in revenue$7,379 million, which was driven primarily driven by stronger OE light vehicle volumes, in North America Clean Air, Europe, South America and India and China and increased aftermarket Ride Performance sales in Europe and South America, new platforms in North America, Europe and China as well as higher commercial truck, off-highway and other Clean Air revenue, which were partially offset by lowervehicle revenues and new platforms.
Earnings before interest expense, income taxes, and noncontrolling interests (EBIT) was $306 million for 2018, a decrease of $102 million, when compared to $408 million in 2017. Excluding the Federal-Mogul acquisition, EBIT decreased compared to 2017, as higher light vehicle volumes, increased commercial truck, off-highway and other vehicle revenues and new platforms were more than offset by unfavorable mix, price reductions, higher depreciation and amortization expenses, higher restructuring and related expenses, costs related to the Acquisition and expected spin, loss on extinguishment of debt, a litigation settlement charge, and continued investments in growth for new programs. EBIT in 2017 also included a $132 million antitrust settlement accrual, a $11 million goodwill impairment charge and $13 million in charges related to pension derisking and the acceleration of restricted stock vesting. See “Segment Results of Operations” for further information on EBIT including noncontrolling interests.
RESULTS OF OPERATIONS
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
Consolidated Results of Operations
The following table presents our consolidated results of operations and reflects the revisions as discussed in Item 8 — Note 2, Summary of Significant Accounting Policies: |
| | | | | | | | | | | | | | |
| | Year Ended December 31 | | Increase / (Decrease) |
| | 2018 | | 2017 | | $ Change | | % Change (1) |
| | (Millions Except Percent, Share and Per Share Amounts) |
| Revenues | | | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 9,274 |
| | $ | 2,489 |
| | 27 | % |
| Costs and expenses | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 10,071 |
| | 7,812 |
| | 2,259 |
| | 29 | % |
| Selling, general, and administrative | 794 |
| | 638 |
| | 156 |
| | 24 | % |
| Depreciation and amortization | 345 |
| | 226 |
| | 119 |
| | 53 | % |
| Engineering, research, and development | 204 |
| | 158 |
| | 46 |
| | 29 | % |
| Goodwill impairment charge | 3 |
| | 11 |
| | (8 | ) | | (73 | )% |
| | 11,417 |
| | 8,845 |
| | 2,572 |
| | 29 | % |
| Other expense (income) | | | | | | | |
| Loss on sale of receivables | 16 |
| | 5 |
| | 11 |
| | 220 | % |
| Non-service pension and postretirement benefit costs | 20 |
| | 16 |
| | 4 |
| | 25 | % |
| Loss on extinguishment of debt | 10 |
| | 1 |
| | 9 |
| | n/m |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (18 | ) | | 1 |
| | (19 | ) | | n/m |
|
| Other expense (income), net | 12 |
| | (2 | ) | | 14 |
| | n/m |
|
| | 40 |
| | 21 |
| | 19 |
| | 90 | % |
| Earnings before interest expense, income taxes, and noncontrolling interests | 306 |
| | 408 |
| | (102 | ) | | (25 | )% |
| Interest expense | 132 |
| | 72 |
| | 60 |
| | 83 | % |
| Earnings before income taxes and noncontrolling interests | 174 |
| | 336 |
| | (162 | ) | | (48 | )% |
| Income tax expense (benefit) | 63 |
| | 71 |
| | (8 | ) | | (11 | )% |
| Net income | 111 |
| | 265 |
| | (154 | ) | | (58 | )% |
| Less: Net income attributable to noncontrolling interests | 56 |
| | 67 |
| | (11 | ) | | (16 | )% |
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | (143 | ) | | (72 | )% |
| Earnings per share | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | |
| Basic | 58,625,087 |
| | 52,796,184 |
| | 5,828,903 |
| | 11 | % |
| Diluted | 58,758,732 |
| | 53,026,911 |
| | 5,731,821 |
| | 11 | % |
| Basic earnings per share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | (2.82 | ) | | (75 | )% |
| Diluted earnings per share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | (2.80 | ) | | (75 | )% |
| Cash dividends declared per share | $ | 1.00 |
| | $ | 1.00 |
| | $ | — |
| | — | % |
| Percent of revenues | | | | | | | |
| Cost of sales | 86 | % | | 84 | % | | 2 | % | | |
| Selling, general, and administrative | 7 | % | | 7 | % | | — | % | | |
| EBIT | 3 | % | | 4 | % | | (1 | )% | | |
| Net income attributable to Tenneco Inc. | — | % | | 2 | % | | (2 | )% | | |
(1) Percentages above denoted as "n/m" are not meaningful to present in the table.
Revenues
Total revenue for 2018 was $11,763 million, up 27% from $9,274 million in 2017. The Federal-Mogul Acquisition increased revenues by approximately $1,886 million, or 20%, in 2018. Excluding the Acquisition, organic revenues increased $603 million, or 7%, driven by the growth in Clean Air and Ride Performance segments. Excluding the impact of currency and substrate sales, organic revenue mainlywas up $292 million, or 4%, from $7,087 million to $7,379 million, which was driven primarily by stronger light vehicle volumes, higher commercial truck, off-highway and other vehicle revenues and new platforms. The following table lists the primary drivers behind the change in North America and Europe and lower aftermarket revenue in North America.revenues ($ millions).
|
| | | |
| Year ended December 31, 2017 | $ | 9,274 |
|
| Federal-Mogul Acquisition | 1,886 |
|
| Drivers in the change of organic revenues: | |
| Volume and mix | 597 |
|
| Currency exchange rates | 12 |
|
| Others | (6 | ) |
| Year ended December 31, 2018 | $ | 11,763 |
|
Cost of sales: sales
Cost of sales for 20162018 was $7,123$10,071 million, or 82.8 percent86% of sales, compared to $6,828$7,812 million, or 83.5 percent84% of sales in 2015.2017. Excluding the Acquisition, organic cost of sales for 2018 was $8,434 million or 85% of organic sales. The following table lists the primary drivers behind the change in cost of sales ($ millions).
|
| | | |
| Year ended December 31, 2015 | $ | 6,828 |
|
| Volume and mix | 618 |
|
| Material | (131 | ) |
| Currency exchange rates | (179 | ) |
| Restructuring | (36 | ) |
| Other Costs | 23 |
|
| Year ended December 31, 2016 | $ | 7,123 |
|
|
| | | |
| Year ended December 31, 2017 | $ | 7,812 |
|
| Federal-Mogul Acquisition | 1,637 |
|
| Drivers in the change of organic cost of sales: | |
| Volume and mix | 556 |
|
| Material | 13 |
|
| Currency exchange rates | 6 |
|
| Restructuring and cost to achieve synergies | 28 |
|
| Other costs | 19 |
|
| Year ended December 31, 2018 | $ | 10,071 |
|
The impact of the Federal-Mogul Acquisition increased the cost of sales by $1,637 million in 2018. The remaining increase in our organic cost of sales was mainly due to the year-over-year increase in volume, higher material costs, higher restructuring and costs to achieve synergies, higher manufacturing and impact of currency. Also refer to section below "Restructuring charges."
Selling, general and administrative (SG&A)
SG&A was up $156 million in 2018, at $794 million, compared to $638 million in 2017. The increase was due primarily to the impact of the Federal-Mogul Acquisition. Excluding the Acquisition, included in 2018 was $92 million of Acquisition and expected spin costs, $25 million of costs to achieve synergies, $18 million of cost reduction initiatives and $10 million of litigation settlement, while 2017 included a $132 million antitrust settlement accrual and $22 million of cost reduction initiatives. Also refer to section below "Restructuring charges."
Depreciation and amortization
Depreciation and amortization expense was $345 million and $226 million for 2018 and 2017, respectively. The increase was due primarily to the impact of the Federal-Mogul Acquisition.
Engineering, research, and development
Engineering, research, and development expense was $204 million and $158 million in 2018 and 2017, respectively. The increase was due primarily to the impact of the Federal-Mogul Acquisition. Also refer to section below "Restructuring charges."
Goodwill impairment charge
As a result of our goodwill impairment assessment in the fourth quarter of 2018, we determined the fair value of the North America Ride Performance reporting unit was lower than its carrying value. Accordingly, we recorded a full goodwill impairment charge of $3 million in the fourth quarter of 2018. This compared to an $11 million goodwill impairment charge in the fourth quarter of 2017, which related to our Europe and South America Aftermarket and Ride Performance reporting units.
Non-service pension and postretirement benefit costs
Non-service pension and postretirement benefit costs was up $4 million in 2018 at $20 million compared to $16 million at 2017.
Loss on extinguishment of debt
Loss on extinguishment of debt was $10 million in 2018 related to the repayment of our revolver and term loan A and the new refinancing in connection with the Federal-Mogul Acquisition. This compared to a $1 million charge recognized in 2017.
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
Equity in earnings (losses) of nonconsolidated affiliates, net of tax was up $19 million in 2018, at $18 million, compared to a loss of $1 million in 2017. The increase was due to the impact of Federal-Mogul Acquisition.
Interest expense, net of interest capitalized
Interest expense in 2018 was $132 million (substantially all in our U.S. operations) net of interest capitalized of $5 million, and $72 million (substantially all in our U.S. operations) net of interest capitalized of $8 million in 2017. The $60 million increase was primarily due to higher interest expense pertaining to the five-year $1,700 million term loan A facility and the seven-year
$1,700 million term loan B facility that were entered into in connection with the Acquisition and the interest expense on Federal-Mogul debt obligations assumed in the Acquisition, partially offset by the lower interest expense as a result of the retirement of the Company's term loan A and revolver borrowings on October 1, 2018 related to the Acquisition.
For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources -Capitalization” later in this Management’s Discussion and Analysis.
Income Taxes
Income tax expense was $63 million on earnings before income taxes and noncontrolling interests of $174 million in 2018 as compared to income tax expense of $71 million on earnings before income taxes and noncontrolling interests of $336 million in 2017. The tax expense recorded in 2018 included tax benefits of $10 million relating to a valuation allowance release at our Australian entities and $11 million of tax expense for changes in the toll tax as discussed below. The tax expense recorded in 2017 includes a net provisional tax expense of $43 million for one-time transition tax on deemed repatriation of previously deferred foreign earnings under the Tax Cuts and Jobs Act ("TCJA") as discussed below. The Company remeasured U.S. deferred taxes from an applicable federal rate of 35% to the new statutory rate of 21% at which they are expected to be utilized, recording a $51 million provisional expense. The tax expense recorded in 2017 included a net tax benefit of $74 million relating to recognizing a U.S. tax benefit for foreign taxes.
Net Income
Net income was $111 million for 2018, as compared to $265 million for 2017, a decrease of $154 million, as result of the aforementioned items.
Earnings before Interest Expense, Income Taxes, Noncontrolling Interests and Depreciation and Amortization (“EBITDA including noncontrolling interests”)
EBITDA including noncontrolling interests was $651 million for 2018, an increase of $17 million, when compared to
$634 million in 2017, as a result of the aforementioned items. See “Segment Results of Operations” for further information on EBITDA including noncontrolling interests.
Restructuring Charges
The increase in costclassification of sales was dueour restructuring charges, including costs to the year-over-year increase in volumeachieve synergies and higher other costs, mainly manufacturing, partially offset by the impact of currency exchange rates, lower net material costs and lower restructuring.
Gross margin: Revenue less cost of sales for 2016 was $1,476 million, or 17.2 percent of sales, versus $1,353 million, or 16.5 percent of sales in 2015. The effect on gross margin resulting from year-over-year increase in volume, lower net material costs and lower restructuring costs was partially offset by higher other costs, mainly manufacturing, and unfavorable currency impact.
Engineering, research and development: Engineering, research and development expense was $154 million and $146 million in 2016 and 2015, respectively, mainly due to currency impact and the timing of customers' recoveries.
Selling, general and administrative (SG&A): Selling, general and administrative expense was up $98 million in 2016, at $589 million, compared to $491 million in 2015, mostly due to $72 million in pension buyout charges in 2016.
Depreciation and amortization: Depreciation and amortization expense was $212 million and $203 million for 2016 and 2015, respectively.
Earnings before interest expense, taxes and noncontrolling interests (“EBIT”) was $516 million for 2016, an increase of $8 million, when compared to $508 millionactions, in the prior year. Higher OE light vehicle volumes in North America Clean Air, Europe, South Americaconsolidated statements of income is as follows:
|
| | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| Cost of sales | $ | 66 |
| | $ | 41 |
|
| Engineering, research, and development | 4 |
| | — |
|
| Selling, general, and administrative | 40 |
| | 6 |
|
| Other expense | 2 |
| | — |
|
| | $ | 112 |
| | $ | 47 |
|
See to Item 8 — Note 4, Restructuring Charges and India and China, increased aftermarket Ride Performance sales in Europe and South America, new platforms in North America, Europe and China, higher commercial truck, off-highway and other Clean Air revenue, the benefitAsset Impairments, Net for further information of our product cost leadership initiatives, lower restructuring and related expenses and savings from previous restructuring activities were partially offset by lower commercial truck, off-highway and other Ride Performance revenue mainly in North America and Europe, lower aftermarket revenue in North America, higher SG&A and engineering expenses and $33 millioninitiatives.
Segment Results fromof Operations
Overview of Net Sales and Operating Revenues for Years 2016 and 2015
The tables below reflect our revenues for 2016 and 2015. We show the component of our OE revenue represented byOur Clean Air segment has 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. TheseWe do not manufacture substrates, they 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. AsThese substrate components have been increasing as a percentage of our revenue as the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business, these substrate components have been increasing as a percentage of our revenue.business. 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 equipmentOE 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,
Finally, 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 2015 table since this isbase period of the base periodcomparisons for measuring the effects of currency during 2016 onin the subsequent year.
The tables below reflects our operations. We believe investors find this information useful in understanding period-to-period comparisons in our revenues.segment revenues for 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | Year Ended December 31, 2017 |
| | Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency | | Revenues | | Substrate Sales | | Value-add Revenues |
| | (Millions) | | (Millions) |
| Clean Air | $ | 6,707 |
| | $ | 2,500 |
| | $ | 4,207 |
| | $ | 31 |
| | $ | 4,176 |
| | $ | 6,216 |
| | $ | 2,187 |
| | $ | 4,029 |
|
| Ride Performance | 1,949 |
| | — |
| | 1,949 |
| | (4 | ) | | 1,953 |
| | 1,807 |
| | — |
| | 1,807 |
|
| Aftermarket | 1,221 |
| | — |
| | 1,221 |
| | (29 | ) | | 1,250 |
| | 1,251 |
| | — |
| | 1,251 |
|
| Powertrain | 1,112 |
| | — |
| | 1,112 |
| | — |
| | 1,112 |
| | — |
| | — |
| | — |
|
| Motorparts | 774 |
| | — |
| | 774 |
| | — |
| | 774 |
| | — |
| | — |
| | — |
|
| Total Tenneco Inc. | $ | 11,763 |
| | $ | 2,500 |
| | $ | 9,263 |
| | $ | (2 | ) | | $ | 9,265 |
| | $ | 9,274 |
| | $ | 2,187 |
| | $ | 7,087 |
|
|
| | | | | | | | | | | | | |
| | Year Ended December 31, 2018
Versus Year Ended December 31, 2017
Dollar and Percent Increase (Decrease) |
| | Revenues | | Percent | | Value-add Revenues excluding Currency | | Percent |
| | (Millions Except Percent Amounts) |
| Clean Air | $ | 491 |
| | 8 | % | | $ | 147 |
| | 4 | % |
| Ride Performance | 142 |
| | 8 | % | | 146 |
| | 8 | % |
| Aftermarket | (30 | ) | | (2 | )% | | (1 | ) | | — | % |
| Powertrain | 1,112 |
| | n/m |
| | 1,112 |
| | n/m |
|
| Motorparts | 774 |
| | n/m |
| | 774 |
| | n/m |
|
| Total Tenneco Inc. | $ | 2,489 |
| | 27 | % | | $ | 2,178 |
| | 31 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| | (Millions) |
| Clean Air Division | | | | | | | | | |
| North America | $ | 3,003 |
| | $ | 1,052 |
| | $ | 1,951 |
| | $ | (1 | ) | | $ | 1,952 |
|
| Europe, South America & India | 1,989 |
| | 735 |
| | 1,254 |
| | (60 | ) | | 1,314 |
|
| Asia Pacific | 1,077 |
| | 241 |
| | 836 |
| | (41 | ) | | 877 |
|
| Total Clean Air Division | 6,069 |
| | 2,028 |
| | 4,041 |
| | (102 | ) | | 4,143 |
|
| Ride Performance Division | | | | | | | | | |
| North America | 1,234 |
| | — |
| | 1,234 |
| | (13 | ) | | 1,247 |
|
| Europe, South America & India | 1,019 |
| | — |
| | 1,019 |
| | (51 | ) | | 1,070 |
|
| Asia Pacific | 277 |
| | — |
| | 277 |
| | (16 | ) | | 293 |
|
| Total Ride Performance Division | 2,530 |
| | — |
| | 2,530 |
| | (80 | ) | | 2,610 |
|
| Total Tenneco Inc. | $ | 8,599 |
| | $ | 2,028 |
| | $ | 6,571 |
| | $ | (182 | ) | | $ | 6,753 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| | (Millions) |
| Clean Air Division | | | | | | | | | |
| North America | $ | 2,823 |
| | $ | 979 |
| | $ | 1,844 |
| | $ | — |
| | $ | 1,844 |
|
| Europe, South America & India | 1,835 |
| | 664 |
| | 1,171 |
| | — |
| | 1,171 |
|
| Asia Pacific | 1,037 |
| | 245 |
| | 792 |
| | — |
| | 792 |
|
| Total Clean Air Division | 5,695 |
| | 1,888 |
| | 3,807 |
| | — |
| | 3,807 |
|
| Ride Performance Division | | | | | | | | | |
| North America | 1,313 |
| | — |
| | 1,313 |
| | — |
| | 1,313 |
|
| Europe, South America & India | 944 |
| | — |
| | 944 |
| | — |
| | 944 |
|
| Asia Pacific | 229 |
| | — |
| | 229 |
| | — |
| | 229 |
|
| Total Ride Performance Division | 2,486 |
| | — |
| | 2,486 |
| | — |
| | 2,486 |
|
| Total Tenneco Inc. | $ | 8,181 |
| | $ | 1,888 |
| | $ | 6,293 |
| | $ | — |
| | $ | 6,293 |
|
|
| | | | | | | | | | | | | |
| | Year Ended December 31, 2016
Versus Year Ended December 31, 2015
Dollar and Percent Increase (Decrease) |
| | Revenues | | Percent | | Value-add Revenues excluding Currency | | Percent |
| | (Millions Except Percent Amounts) |
| Clean Air Division | | | | | | | |
| North America | $ | 180 |
| | 6 | % | | $ | 108 |
| | 6 | % |
| Europe, South America & India | 154 |
| | 8 | % | | 143 |
| | 12 | % |
| Asia Pacific | 40 |
| | 4 | % | | 85 |
| | 11 | % |
| Total Clean Air Division | 374 |
| | 7 | % | | 336 |
| | 9 | % |
| Ride Performance Division | | | | | | | |
| North America | (79 | ) | | (6 | )% | | (66 | ) | | (5 | )% |
| Europe, South America & India | 75 |
| | 8 | % | | 126 |
| | 13 | % |
| Asia Pacific | 48 |
| | 21 | % | | 64 |
| | 28 | % |
| Total Ride Performance Division | 44 |
| | 2 | % | | 124 |
| | 5 | % |
| Total Tenneco Inc. | $ | 418 |
| | 5 | % | | $ | 460 |
| | 7 | % |
Light Vehicle Industry Production by Region for Years Ended December 31, 20162018 and 20152017 (According to IHS Automotive, January 2017)Markit, February 2019)
| | | | Year Ended December 31, | Year Ended December 31 |
| | 2016 | | 2015 | | Increase
(Decrease) | | % Increase
(Decrease) | 2018 | | 2017 | | Increase
(Decrease) | | % Increase
(Decrease) |
| | (Number of Vehicles in Thousands) | (Number of Vehicles in Thousands) |
| North America | 17,849 |
| | 17,495 |
| | 354 |
| | 2 | % | 16,952 |
| | 17,064 |
| | (112 | ) | | (1 | )% |
| Europe | 21,515 |
| | 20,936 |
| | 579 |
| | 3 | % | 21,971 |
| | 22,216 |
| | (245 | ) | | (1 | )% |
| South America | 2,772 |
| | 3,073 |
| | (301 | ) | | (10 | )% | 3,394 |
| | 3,291 |
| | 103 |
| | 3 | % |
| China | | 26,608 |
| | 27,726 |
| | (1,118 | ) | | (4 | )% |
| India | 4,171 |
| | 3,807 |
| | 364 |
| | 10 | % | 4,720 |
| | 4,459 |
| | 261 |
| | 6 | % |
| Total Europe, South America & India | 28,458 |
| | 27,816 |
| | 642 |
| | 2 | % | |
| China | 26,975 |
| | 23,679 |
| | 3,296 |
| | 14 | % | |
| Australia | 156 |
| | 169 |
| | (13 | ) | | (8 | )% | |
Segment Revenue
Clean Air revenue was up $374$491 million to $6,707 million in 20162018 compared to 2015 with higher volumes$6,216 million in all segments. In North America, higher2017. Higher volumes drove a $218$486 million revenue increase due to increased OEhigher light vehicle sales and new platforms offset partially by lower commercial truck, off-highway and other vehicle revenue and lower aftermarket revenue. Currency had a $1 million unfavorable impact on North American revenues. In the European, South American and Indian segment, higher volumes drove a $251 million increase in revenues, mainly due to increased OE light vehicle sales across the region, higher commercial truck, off-highway and other vehicle revenue andsales, as well as new platforms, partially offset by price reductions and the negative impact of the end of OE customer production in Europe. Currency had an $87 million unfavorable impact on European, South American and Indian revenues. In Asia Pacific, higher volumes of $121 million were mainly driven by increased OE light vehicle sales and new programs in China and higher commercial truck, off-highway and other vehicle revenue in China and Japan.Australia. Currency had a $52$45 million unfavorablefavorable impact on Asia PacificClean Air revenues.
Ride Performance revenue was up $44$142 million to $1,949 million in 20162018 compared to 2015. In North America, lower volumes of $100 million were driven by lower volumes in OE light vehicle, commercial truck and aftermarket revenues net of favorable mix. Currency had a $13 million unfavorable impact on North American revenues. In the European, South American and Indian segment, higher volumes of $127 million were driven by increases in light vehicle sales across the region and higher aftermarket sales in Europe and South America, which were partially offset by lower commercial truck and off-highway vehicle revenues in Europe reflecting the sale of the Marzocchi specialty business. Currency had a $51 million unfavorable impact on European, South American and Indian revenues. In Asia Pacific, higher volumes of $66 million were mainly driven by increased OE light vehicle volumes in China. Currency had a $16 million unfavorable impact on Asia Pacific revenues.
Net Sales and Operating Revenues for Years 2015 and 2014
The following tables reflect our revenues for the years of 2015 and 2014. See “Net Sales and Operating Revenues for Years 2016 and 2015” for a description of why we present these reconciliations of revenue.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| | (Millions) |
| Clean Air Division | | | | | | | | | |
| North America | $ | 2,823 |
| | $ | 979 |
| | $ | 1,844 |
| | $ | (5 | ) | | $ | 1,849 |
|
| Europe, South America & India | 1,835 |
| | 664 |
| | 1,171 |
| | (236 | ) | | 1,407 |
|
| Asia Pacific | 1,037 |
| | 245 |
| | 792 |
| | (28 | ) | | 820 |
|
| Total Clean Air Division | 5,695 |
| | 1,888 |
| | 3,807 |
| | (269 | ) | | 4,076 |
|
| Ride Performance Division | | | | | | | | | |
| North America | 1,313 |
| | — |
| | 1,313 |
| | (29 | ) | | 1,342 |
|
| Europe, South America & India | 944 |
| | — |
| | 944 |
| | (195 | ) | | 1,139 |
|
| Asia Pacific | 229 |
| | — |
| | 229 |
| | (15 | ) | | 244 |
|
| Total Ride Performance Division | 2,486 |
| | — |
| | 2,486 |
| | (239 | ) | | 2,725 |
|
| Total Tenneco Inc. | $ | 8,181 |
| | $ | 1,888 |
| | $ | 6,293 |
| | $ | (508 | ) | | $ | 6,801 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| | Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| | (Millions) |
| Clean Air Division | | | | | | | | | |
| North America | $ | 2,776 |
| | $ | 1,006 |
| | $ | 1,770 |
| | $ | — |
| | $ | 1,770 |
|
| Europe, South America & India | 1,974 |
| | 668 |
| | 1,306 |
| | — |
| | 1,306 |
|
| Asia Pacific | 1,022 |
| | 221 |
| | 801 |
| | — |
| | 801 |
|
| Total Clean Air Division | 5,772 |
| | 1,895 |
| | 3,877 |
| | — |
| | 3,877 |
|
| Ride Performance Division | | | | | | | | | |
| North America | 1,351 |
| | — |
| | 1,351 |
| | — |
| | 1,351 |
|
| Europe, South America & India | 1,032 |
| | — |
| | 1,032 |
| | — |
| | 1,032 |
|
| Asia Pacific | 226 |
| | — |
| | 226 |
| | — |
| | 226 |
|
| Total Ride Performance Division | 2,609 |
| | — |
| | 2,609 |
| | — |
| | 2,609 |
|
| Total Tenneco Inc. | $ | 8,381 |
| | $ | 1,895 |
| | $ | 6,486 |
| | $ | — |
| | $ | 6,486 |
|
|
| | | | | | | | | | | | | |
| | Year Ended December 31, 2015
Versus Year Ended December 31, 2014
Dollar and Percent Increase (Decrease) |
| | Revenues | | Percent | | Value-add Revenues excluding Currency | | Percent |
| | (Millions Except Percent Amounts) |
| Clean Air Division | | | | | | | |
| North America | $ | 47 |
| | 2 | % | | $ | 79 |
| | 4 | % |
| Europe, South America & India | (139 | ) | | (7 | )% | | 101 |
| | 8 | % |
| Asia Pacific | 15 |
| | 1 | % | | 19 |
| | 2 | % |
| Total Clean Air Division | (77 | ) | | (1 | )% | | 199 |
| | 5 | % |
| Ride Performance Division | | | | | | | |
| North America | (38 | ) | | (3 | )% | | (9 | ) | | (1 | )% |
| Europe, South America & India | (88 | ) | | (9 | )% | | 107 |
| | 10 | % |
| Asia Pacific | 3 |
| | 1 | % | | 18 |
| | 8 | % |
| Total Ride Performance Division | (123 | ) | | (5 | )% | | 116 |
| | 4 | % |
| Total Tenneco Inc. | $ | (200 | ) | | (2 | )% | | $ | 315 |
| | 5 | % |
Light Vehicle Industry Production by Region for Years Ended December 31, 2015 and 2014 (Updated according to IHS Automotive, January 2017)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 | | Increase
(Decrease) | | % Increase
(Decrease) |
| | (Number of Vehicles in Thousands) |
| North America | 17,495 |
| | 17,029 |
| | 466 |
| | 3 | % |
| Europe | 20,936 |
| | 20,151 |
| | 785 |
| | 4 | % |
| South America | 3,073 |
| | 3,818 |
| | (745 | ) | | (20 | )% |
| India | 3,807 |
| | 3,594 |
| | 213 |
| | 6 | % |
| Total Europe, South America & India | 27,816 |
| | 27,563 |
| | 253 |
| | 1 | % |
| China | 23,679 |
| | 22,610 |
| | 1,069 |
| | 5 | % |
| Australia | 169 |
| | 175 |
| | (6 | ) | | (3 | )% |
Clean Air revenue was down $77$1,807 million in 2015 compared to 2014. In North America, higher OE light vehicle and aftermarket volumes were partially offset by lower commercial truck and off-highway vehicle volumes and unfavorable mix, which accounted for $92 million of the year-over-year increase in revenues. Currency had a $5 million unfavorable impact on North American revenues. In the European, South American and Indian region, higher2017. Higher volumes drove a $230$138 million increase in revenues mainly due to higher light vehicle volumes, higher commercial truck, off-highway and other vehicle volumes and new platforms in Europe, partially offset by lower year-over-year volumes in South America and lower aftermarket volumes in Europe. Currency had a $358 million unfavorable impact on European, South American and Indian revenues. The increase in Asia Pacific revenues was primarily driven by higher volumes of $70 million, mostly due to higher light vehicle production in China and new programs in China and Japan, partially offset by lower commercial truck vehicle volumes in China. Currency had a $36 million unfavorable impact on Asia Pacific revenues.
Ride Performance revenue was down $123 million in 2015 compared to 2014. In North America, lower volumes of $2 million driven by lowerincreased light vehicle and commercial truck, off-highway and other vehicle sales and new platforms. Currency had a $4 million unfavorable impact on Ride Performance revenues.
Aftermarket revenue was down $30 million to $1,221 million in 2018 compared to $1,251 million in 2017 due to lower volumes wereand unfavorable mix, partially offset by higher aftermarket sales.favorable pricing. Currency had a $29 million unfavorable impact on North AmericanAftermarket revenues. In
As a result of the European, South AmericanFederal-Mogul Acquisition, Powertrain revenue was $1,112 million and Indian region, higher volumes of $104Motorparts revenue was $774 million were driven by light vehicle and aftermarket increases in the region and higher commercial truck and off-highway vehicle revenues and new platforms in Europe. Currency had a $195 million unfavorable impact on European, South American and Indian revenues. In the Asia Pacific region, higher volumes of $19 million, mostly due to higher light vehicle production volumes in China, were partially offset by lower volumes in Australia. Currency had a $15 million unfavorable impact on Asia Pacific revenues.2018.
Earnings before Interest Expense, Income Taxes, and Noncontrolling Interests (“EBIT”) for Years 2016 and 2015Depreciation and Amortization (“EBITDA including noncontrolling interests”)
The following table presents the reconciliation from net income attributable to Tenneco Inc. to EBITDA including noncontrolling interests by segment:
|
| | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2016 | | 2015 | |
| | (Millions) |
| Clean Air Division | | | | | |
| North America | $ | 220 |
| | $ | 244 |
| | $ | (24 | ) |
| Europe, South America & India | 103 |
| | 52 |
| | 51 |
|
| Asia Pacific | 145 |
| | 111 |
| | 34 |
|
| Total Clean Air Division | 468 |
| | 407 |
| | 61 |
|
| Ride Performance Division | | | | | |
| North America | 157 |
| | 155 |
| | 2 |
|
| Europe, South America & India | 25 |
| | (5 | ) | | 30 |
|
| Asia Pacific | 54 |
| | 38 |
| | 16 |
|
| Total Ride Performance Division | 236 |
| | 188 |
| | 48 |
|
| Other | (188 | ) | | (87 | ) | | (101 | ) |
| Total Tenneco Inc. | $ | 516 |
| | $ | 508 |
| | $ | 8 |
|
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | | | 2018 EBITDA including noncontrolling interest as a % of Revenues | | 2017 EBITDA including noncontrolling interest as a % of Revenues |
| | 2018 | | 2017 | | 2018 vs 2017 Change | | |
| | (Millions) | | | | |
| EBITDA including noncontrolling interests by Segments: | | | | | | | | | |
| Clean Air | $ | 597 |
| | $ | 562 |
| | $ | 35 |
| | 9 | % | | 9 | % |
| Ride Performance | 66 |
| | 124 |
| | (58 | ) | | 3 | % | | 7 | % |
| Aftermarket | 169 |
| | 193 |
| | (24 | ) | | 14 | % | | 15 | % |
| Powertrain | 92 |
| | — |
| | 92 |
| | 8 | % | |
|
|
| Motorparts | (39 | ) | | — |
| | (39 | ) | | (5 | )% | |
|
|
| Other | (234 | ) | | (245 | ) | | 11 |
| | | | |
| Total EBITDA including noncontrolling interests | 651 |
| | 634 |
| | $ | 17 |
| | 6 | % | | 7 | % |
| Depreciation and amortization | (345 | ) | | (226 | ) | |
|
| | | | |
| Earnings before interest expense, income taxes, and noncontrolling interests | 306 |
| | 408 |
| | | | | | |
| Less: Interest expense | 132 |
| | 72 |
| |
|
| | | | |
| Less: Income tax expense (benefit) | 63 |
| | 71 |
| |
|
| | | | |
| Net income | 111 |
| | 265 |
| | | | | | |
| Net Income attributable to noncontrolling interests | 56 |
| | 67 |
| |
|
| | | | |
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| |
|
| | | | |
| | | | | | | | | | |
| Revenue by Segments: | | | | | | | | | |
| Clean Air | $ | 6,707 |
| | $ | 6,216 |
| | | | | | |
| Ride Performance | 1,949 |
| | 1,807 |
| | | | | | |
| Aftermarket | 1,221 |
| | 1,251 |
| | | | | | |
| Powertrain | 1,112 |
| | — |
| | | | | | |
| Motorparts | 774 |
| | — |
| | | | | | |
| Total | $ | 11,763 |
| | $ | 9,274 |
| | | | | | |
| | | | | | | | | | |
| Other data | | | | | | | | | |
| EBITDA including noncontrolling interests (1) | $ | 651 |
| | $ | 634 |
| | 17 |
| | 6 | % | | 7 | % |
(1) As a result of the Federal-Mogul Acquisition, we changed our key performance measure. We now use EBITDA including noncontrolling interests as the key performance 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. Prior period results have been retrospectively recast to reflect the change in our key performance measure. This non-GAAP measure is accompanied by a reconciliation to the comparable US GAAP measure, net income, in the table above. 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.
The EBITEBITDA including noncontrolling interests results shown in the preceding table include the following items, certain of which are discussed below under “Restructuring and Other Charges,“Adjustments,” which may have an effect on the comparability of EBITEBITDA including noncontrolling interests results between periods:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (Millions) |
| Clean Air Division | | | |
| Europe, South America & India | | | |
| Restructuring and related expenses | $ | 3 |
| | $ | 6 |
|
| Asia Pacific | | | |
| Restructuring and related expenses | 4 |
| | 4 |
|
| Total Clean Air Division | $ | 7 |
| | $ | 10 |
|
| Ride Performance Division | | | |
| North America | | | |
| Restructuring and related expenses | $ | 6 |
| | $ | 2 |
|
| Europe, South America & India | | | |
| Restructuring and related expenses | 20 |
| | 49 |
|
| Asia Pacific | | | |
| Restructuring and related expenses | 1 |
| | 2 |
|
| Total Ride Performance Division | $ | 27 |
| | $ | 53 |
|
| Other | | | |
| Restructuring and related expenses | $ | 2 |
| | $ | — |
|
| Pension/Postretirement charges (1) | 72 |
| | 4 |
|
| Total Other | $ | 74 |
| | $ | 4 |
|
| |
(1) | Charges related to pension derisking. |
EBIT for the Clean Air division was $468 million in 2016 compared to $407 million in 2015. EBIT for North America decreased $24 million, to $220 million, in 2016 versus 2015. The benefit from higher OE light vehicle sales, new platforms and favorable currency was more than offset by lower aftermarket revenue, lower commercial truck and off-highway vehicle revenue, higher manufacturing costs and higher SG&A expense. Europe, South America and India's EBIT was $103 million in 2016 and $52 million in 2015. The benefit from higher light vehicle volumes, higher commercial truck, off-highway and other vehicle revenue, favorable mix and new platforms in Europe as well as lower restructuring and related expenses and year-over-year restructuring savings was partially offset by negative currency. EBIT for Asia Pacific increased $34 million to $145 million in 2016 from $111 million in 2015. EBIT benefited from increased OE light vehicle sales and new platforms in China, higher commercial truck, off-highway and other vehicle revenue in China and Japan as well as strong operational cost management, partially offset by higher SG&A expense and negative currency. For the Clean Air division, $7 million
restructuring and related expenses were included in EBIT for 2016, whereas $10 million were included for 2015. EBIT for Clean Air division also benefited from the timing of a customer recovery in China of $5 million in 2015. Currency had a $23 million unfavorable impact on EBIT of the Clean Air division for 2016 when compared to 2015.
EBIT for the Ride Performance division was $236 million in 2016 compared to $188 million in 2015. EBIT for North America increased $2 million in 2016 to $157 million from $155 million in 2015. The benefit of improved operational cost management was partially offset by lower volumes in light vehicle, commercial truck and aftermarket revenues net of favorable mix, higher restructuring and related expenses and negative currency. Europe, South America and India's EBIT was $25 million in 2016 and negative $5 million in 2015. The benefit from higher light vehicle sales in the region, higher aftermarket sales in Europe and South America, lower restructuring and related expenses and savings from prior restructuring activities was partially offset by unfavorable mix in Europe, lower commercial truck, off-highway and other vehicle revenue in Europe reflecting the sale of the Marzocchi specialty business and negative currency. EBIT for Asia Pacific increased to $54 million in 2016 from $38 million in 2015, mainly driven by higher light vehicle volumes in China and lower restructuring and related expenses which were partially offset by higher SG&A and engineering expenses and negative currency. For the Ride Performance division, restructuring and related expenses of $27 million were included in EBIT for 2016 and $53 million for 2015. Currency had a $10 million unfavorable impact on EBIT of the Ride Performance division for 2016 when compared to 2015.
Currency had a $33 million unfavorable impact on overall company EBIT for 2016 as compared to 2015.
EBIT for Years 2015 and 2014 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | | | |
| | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Total | | Other | | Total |
| | (Millions) |
| Year Ended December 31, 2018 | | | | | | | | | | | | | | | |
| Adjustments: | | | | | | | | | | | | | | | |
Costs to achieve synergies (1): | | | | | | | | | | | | | | | |
| Restructuring related to synergy initiatives | $ | 3 |
| | $ | 5 |
| | $ | 9 |
| | $ | — |
| | $ | 31 |
| | $ | 48 |
| | $ | 7 |
| | $ | 55 |
|
| Other cost to achieve synergies | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 2 |
| | 5 |
| | 7 |
|
| Total costs to achieve synergies | 3 |
| | 6 |
| | 10 |
| | — |
| | 31 |
| | 50 |
| | 12 |
| | 62 |
|
| | | | | | | | | | | | | | | | |
| Restructuring and related expenses: | | | | | | | | | | | | | | | |
| Other restructuring charges | 11 |
| | 43 |
| | 7 |
| | (2 | ) | | — |
| | 59 |
| | (2 | ) | | 57 |
|
| Asset impairments | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | 2 |
| | 5 |
|
| Total restructuring and related expenses | 11 |
| | 46 |
| | 7 |
| | (2 | ) | | — |
| | 62 |
| | — |
| | 62 |
|
| | | | | | | | | | | | | | | | |
Cost reduction initiatives (2) | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | 8 |
| | 18 |
|
Warranty charge (3) | — |
| | 5 |
| | — |
| | — |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Litigation settlement accrual | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
| | 1 |
| | 10 |
|
Acquisition and expected spin costs (4) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 96 |
| | 96 |
|
Loss on extinguishment of debt (5) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | 10 |
|
Environmental charge (6) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | 4 |
|
Anti-dumping duty charge (7) | — |
| | — |
| | — |
| | — |
| | 16 |
| | 16 |
| | — |
| | 16 |
|
Pension charges (8) | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Purchase accounting adjustments (9) | — |
| | — |
| | — |
| | 44 |
| | 62 |
| | 106 |
| | — |
| | 106 |
|
Goodwill impairment charge (10) | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Total adjustments | $ | 14 |
| | $ | 82 |
| | $ | 17 |
| | $ | 42 |
| | $ | 109 |
| | $ | 264 |
| | $ | 131 |
| | $ | 395 |
|
| | | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 | | | | | | | | | | | | | | | |
| Adjustments: | | | | | | | | | | | | | | | |
| Restructuring and related expenses | $ | 23 |
| | $ | 16 |
| | $ | 7 |
| | $ | — |
| | $ | — |
| | $ | 46 |
| | $ | 1 |
| | $ | 47 |
|
Cost reduction initiatives (2) | 4 |
| | 12 |
| | 3 |
| | — |
| | — |
| | 19 |
| | 3 |
| | 22 |
|
Loss on extinguishment of debt (5) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Warranty settlement (11) | — |
| | 7 |
| | — |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Goodwill impairment charge (10) | — |
| | 7 |
| | 4 |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Pension charges/ stock vesting charges (12) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
Antitrust settlement accrual (13) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 132 |
| | 132 |
|
| Gain on sale of unconsolidated JV | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (5 | ) |
| Total adjustments | $ | 27 |
| | $ | 42 |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | 83 |
| | $ | 145 |
| | $ | 228 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2015 | | 2014 | |
| | (Millions) |
| Clean Air Division | | | | | |
| North America | $ | 244 |
| | $ | 237 |
| | $ | 7 |
|
| Europe, South America & India | 52 |
| | 59 |
| | (7 | ) |
| Asia Pacific | 111 |
| | 99 |
| | 12 |
|
| Total Clean Air Division | 407 |
| | 395 |
| | 12 |
|
| Ride Performance Division | | | | | |
| North America | 155 |
| | 143 |
| | 12 |
|
| Europe, South America & India | (5 | ) | | 40 |
| | (45 | ) |
| Asia Pacific | 38 |
| | 35 |
| | 3 |
|
| Total Ride Performance Division | 188 |
| | 218 |
| | (30 | ) |
| Other | (87 | ) | | (124 | ) | | 37 |
|
| Total Tenneco Inc. | $ | 508 |
| | $ | 489 |
| | $ | 19 |
|
(1) Costs to achieve synergies related to the Acquisition.
(2) Costs related to cost reduction initiatives and related incentive and retention bonus programs.
51
The EBIT results shownan unusual nature in the preceding table includeperiod incurred.
(4) Costs related to the following items, certainAcquisition and expected spin.
(5) Loss on extinguishment of which are discussed below under “Restructuringdebt as a result of the refinancing of the revolving credit loan and tranche A term loan as a result of the Federal-Mogul Acquisition. See Note 11, Debt and Other Charges,” which have an effect on the comparability of EBIT results between periods:Financing Arrangements for additional information.
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
| | (Millions) |
| Clean Air Division | | | |
| North America | | | |
| Restructuring and related expenses | $ | — |
| | $ | 1 |
|
| Europe, South America & India | | | |
| Restructuring and related expenses | 6 |
| | 10 |
|
| Bad debt charge (1) | — |
| | 4 |
|
| Asia Pacific | | | |
| Restructuring and related expenses | 4 |
| | 6 |
|
| Total Clean Air Division | $ | 10 |
| | $ | 21 |
|
| Ride Performance Division | | | |
| North America | | | |
| Restructuring and related expenses | $ | 2 |
| | $ | 5 |
|
| Pension/Postretirement charges (2) | — |
| | 1 |
|
| Europe, South America & India | | | |
| Restructuring and related expenses | 49 |
| | 22 |
|
| Asia Pacific | | | |
| Restructuring and related expenses | 2 |
| | 1 |
|
| Total Ride Performance Division | $ | 53 |
| | $ | 29 |
|
| Other | | | |
| Restructuring and related expenses | $ | — |
| | $ | 4 |
|
| Pension/Postretirement charges (2) | 4 |
| | 31 |
|
| Total Other | $ | 4 |
| | $ | 35 |
|
| |
(1) | Charge related to the bankruptcy of an aftermarket customer in Europe. |
| |
(2) | Charges related to pension derisking and the correction of postretirement census data. |
EBIT for the Clean Air division was $407 million in 2015 compared to $395 million in 2014. EBIT for North America increased $7 million to $244 million in 2015 versus 2014. The benefit from higher light vehicle and aftermarket sales and operational cost management was partially offset by lower volumes in commercial truck and off-highway vehicle, unfavorable mix and negative currency. Europe, South America and India's EBIT was $52 million in 2015 compared to $59 million in 2014. The benefit from higher light vehicle volumes, higher commercial truck, off-highway and other vehicle volumes and new platforms in the Europe, lower restructuring and related expenses, year-over-year restructuring savings and a(6) Environmental charge related to a site whereby an indemnification reverted back to the Company resulting from a 2009 bankruptcy filing of an European aftermarket customer in prior year was more than offset by lower volumes in South America, lower aftermarket volumes in Europe, unfavorable mix, higher SG&A and engineering expenses and negative currency. EBIT for Asia Pacific increased $12 millionMark IV Industries.
(7) Charges due to $111 million in 2015 from $99 million in 2014. EBIT benefited from higher light vehicle volumes in China, new platforms in China and Japan, strong operational cost management, lower restructuring and related expenses and year-over-year savings from prior restructuring activities, partially offset by lower commercial truck revenue in China. For the Clean Air division, restructuring and related expensesretroactive application of $10 million were included in EBIT for 2015 and $17 million in 2014. EBIT for Clean Air division also benefited from the timing ofanti-dumping duty on a customer recovery in China of $5 million in 2015. EBIT for Clean Air division included a charge of $4 millionsupplier's products.
(8) Charges related to the bankruptcycurtailments and settlements of an aftermarket customer in Europe in 2014. Currency had a $22 million unfavorable impact on EBIT of the Clean Air division in 2015 when compared to 2014.
EBIT for the Ride Performance division was $188 million in 2015 compared to $218 million in 2014. EBIT for North America increased $12 million in 2015 to $155 million from $143 million in 2014. The benefit from increased aftermarket volumes, lower restructuring and related expenses and improved operational cost management was partially offset by lower light vehicle volumes, lower commercial truck, off-highwayour pension and other vehicle volumes and negative currency. Europe, South America and India's EBIT was a loss of $5 millionpostretirement benefit plans in 2015 compared to an income of $40 million in 2014. The benefit from higher light vehicle and aftermarket volumes in the region, higher commercial truck, off-highway and other vehicle volumes and new platforms in Europe and savings from priorconnection with our restructuring activities was more than offset by higher restructuring and
related expenses, higher SG&A and engineering expenses, unfavorable mix and negative currency. EBIT for Asia Pacific increased $3 million to $38 million in 2015 from $35 million in 2014. EBIT benefited from higher light vehicle volumes in China and operational cost management, partially offset by lower volumes in Australia and unfavorable currency. For the Ride Performance division, restructuring and related expenses of $53 million were included in EBIT in 2015 and $28 million in 2014. EBIT for the Ride Performance division included a charge of $1 million related to postretirement medical true-up in 2014. Currency had a $42 million unfavorable impact on EBIT of the Ride Performance division for 2015 when compared to last year. EBIT for the Ride Performance division also included a $7 million expense to adjust workers' compensation reserves in 2014.
Currency had a $64 million unfavorable impact on overall company EBIT in 2015 as compared to 2014.
EBIT as a Percentage of Revenue for Years 2016, 2015 and 2014
|
| | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Clean Air Division | | | | | |
| North America | 7% | | 9% | | 9% |
| Europe, South America & India | 5% | | 3% | | 3% |
| Asia Pacific | 13% | | 11% | | 10% |
| Total Clean Air Division | 8% | | 7% | | 7% |
| Ride Performance Division | | | | | |
| North America | 13% | | 12% | | 11% |
| Europe, South America & India | 2% | | (1)% | | 4% |
| Asia Pacific | 19% | | 17% | | 15% |
| Total Ride Performance Division | 9% | | 8% | | 8% |
| Total Tenneco Inc. | 6% | | 6% | | 6% |
In the Clean Air division, EBIT as a percentage of revenues for 2016 was up one percentage point compared to 2015. In North America, EBIT as a percentage of revenues for 2016 was down two percentage points compared to 2015. The benefit from higher OE light vehicle sales, new platforms and favorable currency was more than offset by lower aftermarket revenue, lower commercial truck and off-highway vehicle revenue, higher manufacturing costs and higher SG&A expense. Europe, South America and India's EBIT as a percentage of revenues for 2016 was up two percentage points compared to 2015. The benefit from higher light vehicle volumes, higher commercial truck, off-highway and other vehicle revenue, favorable mix and new platforms in Europe as well as lower restructuring and related expenses and year-over-year restructuring savings was partially offset by negative currency. EBIT as a percentage of revenues for Asia Pacific in 2016 was up two percentage points compared to 2015. EBIT benefited from increased OE light vehicle sales and new platforms in China, higher commercial truck, off-highway and other vehicle revenue in China and Japan as well as strong operational cost management, partially offset by higher SG&A expense, negative currency and the timing of a customer recovery in China.
In the Ride Performance division, EBIT as a percentage of revenues was up one percentage point compared to 2015. In 2016, EBIT as a percentage of revenues for North America was up one percentage point compared to 2015. The benefit of improved operational cost management was partially offset by lower volumes in light vehicle, commercial truck and aftermarket revenues net of favorable mix, higher restructuring and related expenses and negative currency. EBIT as a percentage of revenues in Europe, South America and India was up three percentage points compared to 2015. The benefit from higher light vehicle sales in the region, higher aftermarket sales in Europe and South America, lower restructuring and related expenses and savings from prior restructuring activities was partially offset by unfavorable mix in Europe, lower commercial truck, off-highway and other vehicle revenue in Europe reflecting the sale of the Marzocchi specialty business and negative currency. In Asia Pacific, EBIT as a percentage of revenues for 2016 was up two percentage points compared to 2015, mainly driven by higher light vehicle volumes in China and lower restructuring and related expenses which were partially offset by higher SG&A and engineering expenses and negative currency.
In the Clean Air division, EBIT as a percentage of revenues in 2015 was even compared to 2014. In North America, EBIT as a percentage of revenues in 2015 was even compared to 2014. The benefit from higher light vehicle and aftermarket sales and operational cost management was offset by lower volumes in commercial truck and off-highway vehicle, unfavorable mix and negative currency. Europe, South America and India's EBIT as a percentage of revenues in 2015 was even compared to 2014. The benefit from higher light vehicle volumes, higher commercial truck, off-highway and other vehicle volumes and new platforms in Europe, lower restructuring and related expenses, year-over-year restructuring savings and a charge related to the bankruptcy of an European aftermarket customer in prior year was offset by lower volumes in South America, lowerinitiatives.
aftermarket volumes(9) This primarily relates to a non-cash charge to cost of goods sold for the amortization of the inventory fair value step-up recorded as part of the Federal-Mogul Acquisition.
(10) Non-cash asset impairment charge related to goodwill.
(11) Warranty settlement with customer.
(12) Charges related to pension derisking and the acceleration of restricted stock vesting in Europe, unfavorable mix, higher SG&Aaccordance with the long-term incentive plan.
(13) Charges related to establishing a reserve for settlement costs necessary to resolve the Company's antitrust matters globally.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Consolidated Results of Operations
The following table presents our consolidated results of operations and engineering expenses and negative currency. EBITreflects the revisions as a percentagediscussed in Item 8 — Note 2, Summary of revenuesSignificant Accounting Policies: |
| | | | | | | | | | | | | | |
| | Year Ended December 31 | | Increase / (Decrease) |
| | 2017 | | 2016 | | $ Change | | % Change |
| | (Millions Except Percent, Share and Per Share Amounts) |
| Revenues | | | | | | | |
| Net sales and operating revenues | $ | 9,274 |
| | $ | 8,597 |
| | $ | 677 |
| | 8 | % |
| Costs and expenses | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 7,812 |
| | 7,126 |
| | 686 |
| | 10 | % |
| Selling, general, and administrative | 638 |
| | 514 |
| | 124 |
| | 24 | % |
| Depreciation and amortization | 226 |
| | 213 |
| | 13 |
| | 6 | % |
| Engineering, research, and development | 158 |
| | 153 |
| | 5 |
| | 3 | % |
| Goodwill impairment charge | 11 |
| | — |
| | 11 |
| | n/m |
|
| | 8,845 |
| | 8,006 |
| | 839 |
| | 10 | % |
| Other expense (income) | | | | | | | |
| Loss on sale of receivables | 5 |
| | 5 |
| | — |
| | — | % |
| Non-service pension and postretirement benefit costs | 16 |
| | 84 |
| | (68 | ) | | (81 | )% |
| Loss on extinguishment of debt | 1 |
| | 24 |
| | (23 | ) | | (96 | )% |
| Equity in losses of nonconsolidated affiliates | 1 |
| | — |
| | 1 |
| | — | % |
| Other expense (income), net | (2 | ) | | (1 | ) | | (1 | ) | | 100 | % |
| | 21 |
| | 112 |
| | (91 | ) | | (81 | )% |
| Earnings before interest expense, income taxes, and noncontrolling interests | 408 |
| | 479 |
| | (71 | ) | | (15 | )% |
| Interest expense | 72 |
| | 68 |
| | 4 |
| | 6 | % |
| Earnings before income taxes and noncontrolling interests | 336 |
| | 411 |
| | (75 | ) | | (18 | )% |
| Income tax expense (benefit) | 71 |
| | (4 | ) | | 75 |
| | n/m |
|
| Net income | 265 |
| | 415 |
| | (150 | ) | | (36 | )% |
| Less: Net income attributable to noncontrolling interests | 67 |
| | 68 |
| | (1 | ) | | (1 | )% |
| Net income attributable to Tenneco Inc. | $ | 198 |
| | $ | 347 |
| | $ | (149 | ) | | (43 | )% |
| Earnings per share | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | |
| Basic | 52,796,184 |
| | 55,939,135 |
| | (3,142,951 | ) | | (6 | )% |
| Diluted | 53,026,911 |
| | 56,407,436 |
| | (3,380,525 | ) | | (6 | )% |
| Basic earnings per share of common stock | $ | 3.75 |
| | $ | 6.20 |
| | $ | (2.45 | ) | | (40 | )% |
| Diluted earnings per share of common stock | $ | 3.73 |
| | $ | 6.15 |
| | $ | (2.42 | ) | | (39 | )% |
| Cash dividends declared per share | $ | 1.00 |
| | $ | — |
| | $ | 1.00 |
| | — | % |
| Percent of revenues | | | | | | | |
| Cost of sales | 84 | % | | 83 | % | | 1 | % | | |
| Selling, general, and administrative | 7 | % | | 6 | % | | 1 | % | | |
| EBIT | 4 | % | | 6 | % | | (2 | )% | | |
| Net income attributable to Tenneco Inc. | 2 | % | | 4 | % | | (2 | )% | | |
(1) Percentages above denoted as "n/m" are not meaningful to present in the table.
Revenues
Total revenue for Asia Pacific2017 was $9,274 million, up 8% from $8,597 million in 2015 was up one percentage point compared to 2014. The benefit from higher2016, on strong global light vehicle volumes in China, new platforms in China and Japan, strong operational cost management, lower restructuring and related expenses, year-over-year savings from prior restructuring activities and the timing of a customer recovery in China was partially offset by lower commercial truck revenue in China.
In the Ride Performance division, EBIT as a percentage of revenues was even compared to 2014. In 2015, EBIT as a percentage of revenues for North America was up one percentage point compared to 2014. The benefit from increased aftermarket volumes, lower restructuring and related expenses and improved operational cost management was partially offset by lower light vehicle volumes, lower commercial truck, off-highway and other vehicle volumesrevenues, driven by the Clean Air and negative currency. EBIT as a percentageRide Performance product lines. Excluding the impact of currency and substrate sales, revenue was up $449 million from $6,569 million to $7,018 million. The increase in revenues in Europe, South America and India was down five percentage points compared to 2014. The benefit from higherdriven primarily by stronger OE light vehicle and aftermarket volumes in the region,and higher commercial truck, off-highway and other vehicle volumesrevenues in all regions as well as new platforms.
The following table lists the primary drivers behind the change in revenues ($ millions).
|
| | | |
| Year ended December 31, 2016 | $ | 8,597 |
|
| Volume and mix | 611 |
|
| Currency exchange rates | 86 |
|
| Others | (20 | ) |
| Year ended December 31, 2017 | $ | 9,274 |
|
Cost of sales
Cost of sales for 2017 was $7,812 million, or 84% of sales, compared to $7,126 million, or 83% of sales in 2016. The following table lists the primary drivers behind the change in cost of sales ($ millions).
|
| | | |
| Year ended December 31, 2016 | $ | 7,126 |
|
| Volume and mix | 553 |
|
| Material | 29 |
|
| Currency exchange rates | 75 |
|
| Restructuring | 25 |
|
| Other costs | 4 |
|
| Year ended December 31, 2017 | $ | 7,812 |
|
The increase in cost of sales was mainly due to the year-over-year increase in volume, higher net material costs, higher other costs, mainly manufacturing, higher restructuring costs and new platformsthe impact of currency exchange rates. Also refer to section below "Restructuring charges."
Selling, general and administrative (SG&A)
SG&A was up $124 million in 2017, at $638 million, compared to $514 million in 2016. Included in 2017 was $132 million antitrust settlement accrual. Also refer to section below "Restructuring charges."
Depreciation and amortization
Depreciation and amortization expense was $226 million and $213 million for 2017 and 2016, respectively.
Engineering, research, and development
Engineering, research, and development expense was $158 million and $153 million in 2017 and 2016, respectively. Also refer to section below "Restructuring charges."
Goodwill impairment charge
As a result of our goodwill impairment assessment in the fourth quarter of 2017, we determined the estimated fair value of the Europe and savings from prior restructuring activitiesSouth America Ride Performance and Aftermarket reporting unit was morelower than offset by higher restructuringits carrying value. Accordingly, we recorded a goodwill impairment charge of $11 million in the fourth quarter of 2017.
Non-service pension and related expenses, higher SG&Apostretirement benefit costs
Non-service pension and engineering expenses, unfavorable mix and negative currency. In Asia Pacific, EBITpostretirement benefit costs was down $68 million in 2017 at $16 million compared to $84 million at 2016. Included in 2016 were $72 million in pension buyout charges.
Loss on extinguishment of debt
Loss on extinguishment of debt was $1 million in 2017, as a percentage of revenuescompared to $24 million in 2015 was up two percentage points from 2014. The benefit from higher light vehicle volumes in China and operational cost management was partially offset by lower volumes in Australia and unfavorable currency.2016.
Interest Expense, Net of Interest Capitalized
We reported interest expense in 20162017 of $92$72 million (substantially all in our U.S. operations) net of interest capitalized of $6$8 million, and $67$68 million (substantially all in our U.S. operations) net of interest capitalized of $6 million in 2015. Included in 2016 was $24 million2016.
We reported interest expense in 2015 of $67 million (substantially all in our U.S. operations) net of interest capitalized of $6 million, and $91 million (substantially all in our U.S. operations) net of interest capitalized of $5 million in 2014. Included in 2014 was $13 million of expense related to our refinancing activities. The decrease was due to lower interest rates from the refinancing completed in December 2014 where we extended maturities, increased the size of our senior secured credit facility and reduced the rates on the credit facility and refinanced the senior unsecured notes with new maturity dates bearing lower interest rates.
On December 31, 2016, we had $740 million in long-term debt obligations that have fixed interest rates. Of that amount, $500 million is fixed through July 2026, $225 million is fixed through December 2024 and the remainder is fixed from 2016 through 2025. We also have $573 million in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” later in this Management’s Discussion and Analysis.
Income Taxes
We reported income tax expense of less than $1$71 million on earnings before income taxes and noncontrolling interests of $336 million in 2017, as compared to an income tax benefit of $4 million in earnings before income taxes and noncontrolling interests of $411 million in 2016. The tax expense recorded in 2017 included a tax benefit of $12 million primarily relating to valuation allowance releases, a provisional amount of $43 million for a one-time transition tax on deemed repatriation of previously deferred foreign earnings under the Tax Cuts and Jobs Act. We remeasured U.S. deferred taxes from an applicable federal rate of 35% to the new statutory rate of 21% at which they are expected to be utilized, recording a $46 million provisional expense. The tax expense recorded in 2017 included a net tax benefit of $74 million relating to recognizing a U.S. tax benefit for foreign taxes. In addition, the 2017 tax expense included a $50 million tax benefit related to an antitrust settlement accrual. We reported an income tax benefit of $4 million in 2016. The tax benefit recorded in 2016 included a net tax benefit of $110 million primarily relating to recognizing a U.S. tax benefit for foreign taxes. In
Net Income
Net income was $265 million for 2017 as compared to $415 million for 2016, we completed our detailed analysisa decrease of our ability150 million, as result of the aforementioned items.
EBITDA including noncontrolling interests
EBITDA including noncontrolling interests was $634 million for 2017, a decrease of $58 million, when compared to recognize and utilize foreign tax credits within the carryforward period. As a result, we amended our U.S. federal tax returns for the years 2006 to 2012 to claim foreign tax credits in lieu of deducting foreign taxes paid. The U.S. foreign tax credit law provides for a credit against U.S. taxes otherwise payable for foreign taxes paid with regard to dividends, interest and royalties paid to us in the U.S. Income tax expense also decreased$692 million in 2016 as a result of the mixaforementioned items. See “Segment Results of earningsOperations” for further information on EBITDA including noncontrolling interests.
Restructuring Charges
The classification of our restructuring charges in our various tax jurisdictions. We reported income tax expense of $146 million in 2015. The tax expense recorded in 2015 included a net tax benefit of $15 million primarily relating to prior year U.S. research and development tax credits, changes to uncertain tax positions, and prior year income tax adjustments. We reported an income tax expense of $131 million for 2014. The tax expense recorded in 2014 includes a net tax benefit of $11 million for prior year tax adjustments primarily relating to changes to uncertain tax positions and prior year income tax estimates.
Our uncertain tax position at December 31, 2016 and 2015 included exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believe it is reasonably possible that a decrease of up to $17 million in unrecognized tax benefits related to the expiration of U.S. and foreign statute of limitations and the conclusionconsolidated statements of income tax examinations may occur within the next twelve months.is as follows:
Our federal net operating loss ("NOL") has been fully utilized prior |
| | | | | | | |
| | Year Ended December 31 |
| | 2017 | | 2016 |
| | (Millions) |
| Cost of sales | $ | 41 |
| | $ | 17 |
|
| Engineering, research, and development | — |
| | 1 |
|
| Selling, general, and administrative | 6 |
| | 12 |
|
| | $ | 47 |
| | $ | 30 |
|
See to 2014 as a resultItem 8 — Note 4, Restructuring Charges and Asset Impairments, Net for further information of amending our U.S. federal tax returns for years 2006 to 2012. The state NOLs expire in various tax years through 2031.
Restructuring and Other Charges
Over the past several years, we have adopted plans to restructure portions of our operations. These plans were approved by our Board of Directors and were designed to reduce operational and administrative overhead costs throughout the business.restructuring initiatives.
In 2014,Segment Results of Operations
Revenues
The following tables reflect our revenues for the years of 2017 and 2016. See “Overview of Net Sales and Operating Revenues” for a description of why we incurred $49 millionpresent these reconciliations of revenue. We have not reflected any currency impact in restructuring and related costs including non-cash chargesthe 2016 table since this is the base period for measuring the effects of $5 million, primarily relatedcurrency during 2017 on our operations. Revenues in 2017 have been adjusted to European cost reduction efforts, headcount reductions in Australia and South America, the sale ofreflect a closed facility in Cozad, Nebraska and costs related to organizational changes, of which $28 million was recorded in cost of sales, $9 million in SG&A, $7 million in engineering expense, $4 million in other expenses and $1 million in depreciation and amortization. In 2015, we incurred $63 million in restructuring and related costs including asset write-downs of $10 million, primarily related to European cost reduction efforts, exiting the Marzocchi suspension business, headcount reductions in Australia and South America, and the closure of a JIT plant in Australia, of which $46 million was recorded in cost of sales, $11 million in SG&A, $1 million in engineering expense, $1 million in other expense and $4 million in depreciation and amortization expense. In 2016, we incurred $36 million in restructuring and related costs including asset write-downs of $6 million, primarily related to manufacturing footprint improvements in North America Ride Performance, headcount reduction and cost improvement initiatives in Europe and China Clean Air, South America and Australia, of which $17 million was recorded in cost of sales, $12 million in SG&A, $1 million in engineering, $2 million in other expense and $4 million in depreciation and amortization expense.
Amounts related to activities that are part of our restructuring plans are as follows:consistent currency exchange rate with 2016.
|
| | | | | | | | | | | | | | | | |
| | December 31, 2015 Restructuring Reserve | | 2016 Expenses | | 2016 Cash Payments | | Impact of Exchange Rates | | December 31, 2016 Restructuring Reserve |
| | (Millions) |
| Employee Severance, Termination Benefits and Other Related Costs | $ | 30 |
| | 30 |
| | (45 | ) | | — |
| | $ | 15 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 | | Year Ended December 31, 2016 |
| | Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency | | Revenues | | Substrate Sales | | Value-add Revenues |
| | (Millions) | | (Millions) |
| Clean Air | $ | 6,216 |
| | $ | 2,187 |
| | $ | 4,029 |
| | $ | 32 |
| | $ | 3,997 |
| | $ | 5,764 |
| | $ | 2,028 |
| | $ | 3,736 |
|
| Ride Performance | 1,807 |
| | — |
| | 1,807 |
| | 27 |
| | 1,780 |
| | 1,593 |
| | — |
| | 1,593 |
|
| Aftermarket | 1,251 |
| | — |
| | 1,251 |
| | 10 |
| | 1,241 |
| | 1,240 |
| | — |
| | 1,240 |
|
| Total Tenneco Inc. | $ | 9,274 |
| | $ | 2,187 |
| | $ | 7,087 |
| | $ | 69 |
| | $ | 7,018 |
| | $ | 8,597 |
| | $ | 2,028 |
| | $ | 6,569 |
|
On January
|
| | | | | | | | | | | | | |
| | Year Ended December 31, 2017
Versus Year Ended December 31, 2016
Dollar and Percent Increase (Decrease) |
| | Revenues | | Percent | | Value-add Revenues excluding Currency | | Percent |
| | (Millions Except Percent Amounts) |
| Clean Air | $ | 452 |
| | 8 | % | | $ | 261 |
| | 7 | % |
| Ride Performance | 214 |
| | 13 | % | | 187 |
| | 12 | % |
| Aftermarket | 11 |
| | 1 | % | | 1 |
| | — | % |
| Total Tenneco Inc. | $ | 677 |
| | 8 | % | | $ | 449 |
| | 7 | % |
Light Vehicle Industry Production by Region for Years Ended December 31, 2013, we announced our intent2017 and 2016 (Updated according to reduce structural costs in Europe by approximately $60IHS Markit, February 2019)
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2017 | | 2016 | | Increase
(Decrease) | | % Increase
(Decrease) |
| | (Number of Vehicles in Thousands) |
| North America | 17,064 |
| | 17,837 |
| | (773 | ) | | (4 | )% |
| Europe | 22,216 |
| | 21,540 |
| | 676 |
| | 3 | % |
| South America | 3,291 |
| | 2,737 |
| | 554 |
| | 20 | % |
| China | 27,726 |
| | 27,064 |
| | 662 |
| | 2 | % |
| India | 4,459 |
| | 4,175 |
| | 284 |
| | 7 | % |
Segment Revenue
Clean Air revenue was up $452 million annually. During the first quarter of 2016, we reached an annualized run rate on this cost reduction initiative of $49 million.
With the disposition of the Gijon plant, which was completed at the end of the first quarter, the annualized rate essentially reached our target of $55 million at the current exchange rates at that time. In 2014, we incurred $49to $6,216 million in restructuring and related costs, of which $31 million was related2017 compared to this initiative including $3 million for non-cash asset write downs. In 2015, we incurred $63$5,764 million in restructuring and related costs, of which $222016. Higher volumes drove a $432 million was relatedincrease due to this initiative. In 2016, we incurred $36 million in restructuring and related costs, of which $20 million was related to this initiative and certain ongoing matters. For example, we closed the Gijon plant in 2013, but subsequently re-opened it in July 2014 with about half of its prior
workforce after the employees' works council successfully filed suit challenging the closure decision. Pursuant to an agreement
we entered into with employee representatives, we engaged in a sales process for the facility. In March of 2016, we signed an
agreement to transfer ownership of the aftermarket shock absorber manufacturing facility in Gijon, Spain to German private
equity fund Quantum Capital Partners A.G. (QCP). The transfer to QCP was effective March 31, 2016 and under a three year manufacturing agreement, QCP will also continue as a supplier to Tenneco.
On July 22, 2015, we announced our intention to discontinue our Marzocchi motorcycle fork suspension product line and our mountain bike suspension product line, and liquidate our Marzocchi operations. These actions were subject to a consultation process with the employee representatives and in total eliminated approximately 138 jobs. We employed 127 people at the Marzocchi plant in Bologna, Italy and an additional 11 people in our operations in North America and Taiwan. In November 2015, we closed on the sale of certain assets related to our Marzocchi mountain bike suspension product line to the affiliates of Fox Factory Holding Corp.; and in December 2015, we closed on the sale of the Marzocchi motorcycle fork product line to an Italian company, VRM S.p.A. These actions were a part of our ongoing efforts to optimize our Ride Performance product line globally while continuously improving our operations and increasing profitability. We recorded charges of $29 million in 2015 related to severancehigher light vehicle, commercial truck, off-highway and other employee related costs, asset write-downs and other expenses related to the closure.
Under the terms of our amended and restated senior credit agreement that took effect on December 8, 2014, we are allowed to exclude up to $150 million in the aggregate of all costs, expenses, fees, fines, penalties, judgments, legal settlements and other amounts associated with any restructuring, litigation, claim, proceeding or investigation related to or undertaken by us or any of our subsidiaries, together with any related provision for taxes, incurred after December 8, 2014 in the calculation of the financial covenant ratios required under our senior credit facility. As of December 31, 2016, we had excluded $83 million of allowable charges relating to restructuring initiatives against the $150 million available under the terms of the senior credit facility.
Earnings Per Share
We reported net income attributable to Tenneco Inc. of $356 million or $6.31 per diluted common share for 2016. Included in the results for 2016 were positive impacts from a net tax benefit associated with the recognition of a U.S. tax benefit for foreign taxesvehicle sales as well as new platforms, partially offset by negative impacts from expenses relatedunfavorable pricing and mix. Currency had a $49 million favorable impact on Clean Air revenues.
Ride Performance revenue was up $214 million to our restructuring activities, costs related$1,807 million in 2017 compared to our refinancing activities$1,593 million in 2016. Higher volumes drove a $192 million increase due to higher light vehicle, commercial truck, off-highway and settlement charges relatedother vehicle sales as well as new platforms. Currency had a $27 million favorable impact on Ride Performance revenues.
Aftermarket revenue was up $11 million to pension buyout. The total impact of these items increased$1,251 million in 2017 compared to $1,240 million in 2016. Lower volumes drove a $30 million decrease, which was more than offset by favorable mix and pricing and a $10 million favorable currency impact.
Earnings before Interest Expense, Income Taxes, Noncontrolling Interests and Depreciation and Amortization (“EBITDA including noncontrolling interests”)
The following table presents the reconciliation from net income attributable to Tenneco Inc. to EBITDA including noncontrolling interests by segments:
|
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31 | | | | 2017 EBITDA including noncontrolling interest as a % of Revenues | | 2016 EBITDA including noncontrolling interest as a % of Revenues |
| | 2017 | | 2016 | | 2017 vs 2016 Change | | |
| | (Millions) | | | | |
| EBITDA including noncontrolling interests by Segments: | | | | | | | | | |
| Clean Air | $ | 562 |
| | $ | 561 |
| | $ | 1 |
| | 9 | % | | 10 | % |
| Ride Performance | 124 |
| | 153 |
| | (29 | ) | | 7 | % | | 10 | % |
| Aftermarket | 193 |
| | 207 |
| | (14 | ) | | 15 | % | | 17 | % |
| Other | (245 | ) | | (229 | ) | | (16 | ) | | | | |
| Total EBITDA including noncontrolling interests | 634 |
| | 692 |
| | $ | (58 | ) | | 7 | % | | 8 | % |
| Depreciation and amortization | (226 | ) | | (213 | ) | | | | | | |
| Earnings before interest expense, income taxes, and noncontrolling interests | 408 |
| | 479 |
| | | | | | |
| Less: Interest expense | 72 |
| | 68 |
| | | | | | |
| Less: Income tax expense (benefit) | 71 |
| | (4 | ) | | | | | | |
| Net income | 265 |
| | 415 |
| | | | | | |
| Net Income attributable to noncontrolling interests | 67 |
| | 68 |
| | | | | | |
| Net income attributable to Tenneco Inc. | $ | 198 |
| | $ | 347 |
| | | | | | |
| | | | | | | | | | |
| Revenue by Segments: | | | | | | | | | |
| Clean Air | $ | 6,216 |
| | $ | 5,764 |
| | | | | | |
| Ride Performance | 1,807 |
| | 1,593 |
| | | | | | |
| Aftermarket | 1,251 |
| | 1,240 |
| | | | | | |
| Total | $ | 9,274 |
| | $ | 8,597 |
| | | | | | |
| Other data | | | | | | | | | |
| EBITDA including noncontrolling interests (1) | $ | 634 |
| | $ | 692 |
| | $ | (58 | ) | | 7 | % | | 8 | % |
(1) As a result of the Federal-Mogul Acquisition, we changed our key performance measure. We now use EBITDA including noncontrolling interests as the key performance 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 per diluted sharebefore interest expense, income taxes, noncontrolling interests, and depreciation and amortization. Prior period results have been retrospectively recast to reflect the change in our key performance measure. This non-GAAP measure is accompanied by $0.29.a reconciliation to the comparable US GAAP measure, net income, in the table above. 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.
The EBITDA including noncontrolling interests results shown in the preceding table include the following items, certain of which are discussed below under “Adjustments,” which may have an effect on the comparability of EBITDA including noncontrolling interests results between periods: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | | | |
| | Clean Air | | Ride Performance | | Aftermarket | | Total | | Other | | Total |
| | (Millions) |
| Year Ended December 31, 2017 | | | | | | | | | | | |
| Adjustments: | | | | | | | | | | | |
| Restructuring charges | $ | 23 |
| | $ | 16 |
| | $ | 7 |
| | $ | 46 |
| | $ | 1 |
| | $ | 47 |
|
| Cost reduction initiatives (1) | 4 |
| | 12 |
| | 3 |
| | 19 |
| | 3 |
| | 22 |
|
| Loss on extinguishment of debt (2) | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Warranty settlement (3) | — |
| | 7 |
| | — |
| | 7 |
| | — |
| | 7 |
|
| Goodwill impairment charge (4) | — |
| | 7 |
| | 4 |
| | 11 |
| | — |
| | 11 |
|
| Pension charges/ stock vesting charges (5) | — |
| | — |
| | — |
| | — |
| | 13 |
| | 13 |
|
| Antitrust settlement accrual (6) | — |
| | — |
| | — |
| | — |
| | 132 |
| | 132 |
|
| Gain on sale of unconsolidated JV | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (5 | ) |
| Total adjustments | $ | 27 |
| | $ | 42 |
| | $ | 14 |
| | $ | 83 |
| | $ | 145 |
| | $ | 228 |
|
| | | | | | | | | | | | |
| Year Ended December 31, 2016 | | | | | | | | | | | |
| Adjustments: | | | | | | | | | | | |
| Restructuring charges | | | | | | | | | | | |
| Other restructuring charges | $ | 6 |
| | $ | 13 |
| | $ | 9 |
| | $ | 28 |
| | $ | 2 |
| | $ | 30 |
|
| Asset impairments | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Total restructuring and related expenses | 6 |
| | 15 |
| | 9 |
| | 30 |
| | 2 |
| | 32 |
|
| | | | | | | | | | | | |
| Pension charges/ stock vesting charges (5) | — |
| | — |
| | — |
| | — |
| | 72 |
| | 72 |
|
| Total adjustments | $ | 6 |
| | $ | 15 |
| | $ | 9 |
| | $ | 30 |
| | $ | 74 |
| | $ | 104 |
|
(1) Costs related to cost reduction initiatives and related incentive and retention bonus programs.
(2) Loss on extinguishment of debt. See Note 11, Debt and Other Financing Arrangements for additional information.
(3) Warranty settlement with a customer.
(4) Non-cash asset impairment charge related to goodwill.
(5) Charges related to pension derisking and the acceleration of restricted stock vesting in accordance with the long-term incentive plan.
(6) Charges related to establishing a reserve for settlement costs necessary to resolve the Company's antitrust matters globally.
LIQUIDITY AND CAPITAL RESOURCES
Capitalization
|
| | | | | | | | | | |
| | Year Ended December 31 | | % Change |
| | 2018 | | 2017 | |
| | (Millions) |
| Short-term debt and maturities classified as current | $ | 153 |
| | $ | 103 |
| | 49 | % |
| Long-term debt | 5,340 |
| | 1,358 |
| | 293 | % |
| Total debt | 5,493 |
| | 1,461 |
| | 276 | % |
| Total redeemable noncontrolling interests | 138 |
| | 42 |
| | 229 | % |
| Total noncontrolling interests | 190 |
| | 46 |
| | 313 | % |
| Tenneco Inc. shareholders’ equity | 1,726 |
| | 636 |
| | 171 | % |
| Total equity | 1,916 |
| | 682 |
| | 181 | % |
| Total capitalization | $ | 7,547 |
| | $ | 2,185 |
| | 245 | % |
Short-term debt, which includes maturities classified as current, borrowings by the parent company and foreign subsidiaries, and borrowings under our accounts receivable securitization programs, were $153 million and $103 million as of December 31, 2018 and December 31, 2017. We reportedhad no borrowings under our revolving credit facilities, which are classified as long-term debt, at December 31, 2018 and were $244 million at December 31, 2017.
The 2018 year-to-date increase in our shareholders' equity primarily resulted from net income attributable to Tenneco Inc. of $241$55 million, or $4.01 per dilutedan increase of $143 million in noncontrolling interest equity resulting from the Federal-Mogul Acquisition, and a $1.2 billion increase in premium on common sharestock and other capital surplus relating to the new common stock issued for 2015. Included in the results for 2015 were negative impacts from expenses related to our restructuring activities and charges related to pension derisking, which wereFederal-Mogul Acquisition, partially offset by net tax benefits. a $132 million decrease caused by the effect of changes in foreign exchange rates on the translation of financial statements of our foreign subsidiaries into U.S. dollars and cash dividend payments of $59 million.
Financing Arrangements
The table below shows our borrowing capacity on committed credit facilities as of December 31, 2018:
|
| | | | | | | | | | | | | | | | | |
| | Committed Credit Facilities(a) as of December 31, 2018 |
| | Term | | Commitments | | Borrowings | | Letters of Credit(b) | | Available |
| | (Millions) |
| Tenneco Inc. revolving credit agreement | 2023 | | $ | 1,500 |
| | $ | — |
| | $ | 24 |
| | $ | 1,476 |
|
| Tenneco Inc. Term Loan A | 2023 | | 1,700 |
| | 1,700 |
| | — |
| | — |
|
| Tenneco Inc. Term Loan B | 2025 | | 1,700 |
| | 1,700 |
| | — |
| | — |
|
| Subsidiaries’ credit agreements | 2018-2028 | | 154 |
| | 51 |
| | 3 |
| | 100 |
|
| | | | $ | 5,054 |
| | $ | 3,451 |
| | $ | 27 |
| | $ | 1,576 |
|
| |
| (a) | We are generally required to pay commitment fees on the unused portion of the total commitment. |
| |
| (b) | Letters of credit reduce the available borrowings under the revolving credit agreement. |
New Credit Facility - General
On October 1, 2018, we entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the “New Credit Facility”) in connection with the acquisition of Federal-Mogul. The New Credit Facility consists of $4.9 billion of total impactdebt financing, consisting of these items decreased earnings per diluted sharea five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility ("Term Loan A") and a seven-year $1.7 billion term loan B facility ("Term Loan B"). Proceeds from the New Credit Facility were used to finance the cash consideration portion of the Acquisition purchase price, to refinance our then existing senior credit facilities, inclusive of the revolver and the tranche term loan A then outstanding (the "Old Credit Facility"), certain senior credit facilities of Federal-Mogul, to pay Acquisition fees and expenses, and the financing thereof. The remainder, including future borrowings under the revolving credit facility, will be used for general corporate purposes.
We and our wholly-owned subsidiary, Tenneco Automotive Operating Company Inc., are borrowers under the New Credit Facility, and we are the sole borrower under the Term Loan A and Term Loan B facilities. The New Credit Facility is guaranteed on a senior basis by $0.76. We reported net income attributablecertain of our material domestic subsidiaries. Drawings under the revolving credit facility may be in U.S. dollars, British pounds or euros.
The New Credit Facility is secured by substantially all of our domestic assets, our subsidiary guarantors, and by pledges of up to Tenneco Inc.66% of $225 million or $3.64 per diluted common sharethe stock of certain first-tier foreign subsidiaries. The security for 2014. Includedthe New Credit Facility will be pari passu with the security for outstanding senior secured notes of Federal-Mogul that we assumed in connection with the Acquisition. If any of our foreign subsidiaries is added to the revolving credit facility as a borrower, the obligations of such foreign borrower will be secured by the assets of such foreign borrower, and also will be secured by the assets of, and guaranteed by, the domestic borrowers and domestic guarantors as well as certain of our foreign subsidiaries in the resultschain of ownership of such foreign borrower.
As a result of the refinancing of the revolving credit loan and tranche A term loan under the Old Credit Facility, we recorded a loss on extinguishment of debt of $10 million for 2014 were negative impacts from expenses related to our restructuring activities, a badthe year ended December 31, 2018, primarily consisting of debt charge,issuance costs incurred at the transaction date and write-off of deferred debt issuance costs related to our refinancing activitiesthe refinanced revolving credit loan and chargestranche A term loan. We also recorded $1 million of loss on extinguishment of debt for the year ended December 31, 2017 related to amendment and restatement of the Old Credit Facility and the write off of deferred debt issuance costs related to the Old Credit Facility.
New Credit Facility - Interest Rates and Fees
The interest rate on borrowings under the revolving credit facility and the term loan A facility will initially be LIBOR plus 1.75%, which interest rate will be subject to change if our consolidated net leverage ratio changes. Initially, and so long as our corporate family rating is Ba3 (with a stable outlook) or higher from Moody’s Investors Service, Inc. (“Moody’s”) and BB- (with a stable outlook) or higher from Standard & Poor’s Financial Services LLC (“S&P”), the interest rate on borrowings under the term loan B facility will be LIBOR plus 2.75%; at any time the foregoing conditions are not satisfied, the interest rate on the term loan B facility will be LIBOR plus 3.00%. When the term loan B facility is no longer outstanding and we and our subsidiaries have no other secured indebtedness (with certain exceptions set forth in the New Credit Facility), and upon our achieving and maintaining two or more corporate credit and/or corporate family ratings higher than or equal to BBB- from S&P, BBB- from Fitch Ratings Inc. (“Fitch”) and/or Baa3 from Moody’s (in each case, with a stable or positive outlook), the collateral under the New Credit Facility may be released.
New Credit Facility - Other Terms and Conditions
The New Credit Facility contains representations and warranties, and covenants which are customary for debt facilities of this type. The covenants limit our ability and the ability of our restricted subsidiaries to, among other things, to (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to our stockholders, (iii) purchase or redeem our equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with our affiliates, (vii) sell assets and (viii) merge or consolidate with, or dispose of substantially all of our assets to, other companies.
The New Credit Facility includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if we fail to comply with the terms of the New Credit Facility or if other customary events occur.
The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the term loan A facility including (x) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility) as of the end of each fiscal quarter of not greater than 4.0 to 1 through September 30, 2019, 3.75 to 1 through September 30, 2020 and 3.5 to 1 thereafter; and (y) a requirement to maintain consolidated interest coverage ratio (as defined in the New Credit Facility) for any period of four consecutive fiscal quarters of not less than 2.75 to 1.
The financial ratios required under the New Credit Facility and the actual ratios we calculated as of December 31, 2018 for the fourth quarter of 2018, are as follows: leverage ratio of 2.74 actual versus 4.00 (maximum) required; and interest coverage ratio of 6.50 actual versus 2.75 (minimum) required.
The covenants in our New Credit Facility generally prohibit us from repaying or refinancing our senior unsecured notes. So long as no default exists, we would, however, under our New Credit Facility, be permitted to repay or refinance our senior unsecured notes (i) with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (ii) in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after October 1, 2018 and (iii) in exchange for qualified capital stock issued after October 1, 2018; and (iv) with additional payments provided that such additional payments are capped as follows based on a pro forma consolidated leverage ratio after giving effect to such additional payments:
|
| | | | | |
Pro forma Consolidated
Leverage Ratio | Prior to Spin-Off | | Post Spin-Off |
| | (Millions) |
| Greater than or equal to 2.25x | $ | 360 |
| | $360 x Post Spin-Off EBITDA/Pre Spin-Off EBITDA |
| Less than 2.25x | unlimited |
| | unlimited |
Although the New Credit Facility agreement would permit us to repay or refinance our senior notes under the conditions described above, any repayment or refinancing of our outstanding notes would be subject to market conditions and either the voluntary participation of note holders or our ability to redeem the notes under the terms of the applicable note indenture. For example, while the New Credit Facility agreement would allow us to repay our outstanding notes via a direct exchange of the notes for either permitted refinancing indebtedness or for shares of our common stock, we do not, under the terms of the agreements governing our outstanding notes, have the right to refinance the notes via any type of direct exchange.
The New Credit Facility agreement also contains other restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the New Credit Facility agreement); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; and
(viii) refinancing of the senior notes. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the New Credit Facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans.
As of December 31, 2018, we were in compliance with all the financial covenants and operational restrictions of the New Credit Facility.
Senior Notes
A summary of our senior unsecured and secured notes as of December 31, 2018 are as follows:
|
| | | | | | | | | | |
| | 2018 |
| | Principal | | Carrying Amount(1) | | Effective Interest Rate |
| Senior Unsecured Notes | | | (Millions) | | |
| $225 million of 5.375% Senior Notes due 2024 | $ | 225 |
| | $ | 222 |
| | 5.609 | % |
| $500 million of 5.000% Senior Notes due 2026 | $ | 500 |
| | $ | 493 |
| | 5.219 | % |
| Senior Secured Notes | | | | | |
| €415 million 4.875% Euro Fixed Rate Notes due 2022 | $ | 476 |
| | $ | 496 |
| | 3.599 | % |
| €300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024 | $ | 344 |
| | $ | 349 |
| | 4.620 | % |
| €350 million of 5.000% Euro Fixed Rate Notes due 2024 | $ | 401 |
| | $ | 427 |
| | 3.823 | % |
(1)Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $90 million as of December 31, 2018. Total unamortized debt (premium) discount, net was $(49) million as of December 31, 2018.
Senior Unsecured Notes
Our outstanding 5.375% senior notes due December 15, 2024 ("2024 Senior Notes") and 5% senior notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes") at December 31, 2018. We are permitted to redeem some or all of the outstanding Senior Unsecured Notes, at specified redemption prices that decline to par over a specified period, at any time (a) on or after December 15, 2019, in the case of the 2024 Senior Notes and (b) on or after July 15, 2021, in the case of the 2026 Senior Notes. In addition, the Senior Unsecured Notes may also be redeemed at a price generally equal to 100% of the principal amount thereof plus a premium based on the present values of the remaining payments due to the note holders. Further, we may redeem up to 35% of each Senior Unsecured Notes with the proceeds of certain equity offerings on or before July 15, 2019 at a redemption price equal to 105%, in the case of the 2026 Senior Notes.
If we experience specified kinds of changes in control, we must offer to repurchase the Senior Unsecured Notes at 101% of the principal amount thereof plus accrued and unpaid interest. In addition, if we sell certain of our assets and do not apply the proceeds from the sale in a certain manner within 365 days of the sale, we must offer to repurchase the 2024 Senior Unsecured Notes at 100% of the principal amount thereof plus accrued and unpaid interest.
Senior Secured Notes
In connection with the Acquisition of Federal-Mogul on October 1, 2018, we assumed an aggregate principal amount of €350 million ($401 million) 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), an aggregate principle amount of €415 million ($476 million) 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and aggregate principal amount of €300 million ($344 million) floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", and together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Rate Notes, the "Senior Unsecured Notes"). The Senior Secured Notes will rank equally in right of payment to all our indebtedness under our New Credit Facility.
We are permitted to redeem some or all of the outstanding Senior Secured Notes at specified redemption prices that decline to par over a specified period, at any time (a) on or after July 15, 2020, in the case of the 5.000% Euro Fixed Rate Notes, (b) on or after April 15, 2019, in the case of the 4.875% Euro Fixed Rate Notes and (c) on or after April 15, 2018, in the case of the Euro Floating Rate Notes. In addition, the Senior Secured Notes may also be redeemed at a price generally equal to 100% of the principal amount thereof plus a premium based on the present values of the remaining payments due to the note holders. Further, we may also redeem up to 40% of the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Rate Notes with the proceeds of certain equity offerings at any time prior to (a) July 15, 2020 at a redemption price of 105.0% in the case of the 5.000% Euro Fixed Rate Notes, and (b) April 15, 2019 at a redemption price of 104.875% in the case of the 4.875% Euro Fixed Rate Notes.
If we experience specified kinds of changes in control, we must offer to repurchase the Senior Secured Notes at 101% of the principal amount thereof plus accrued and unpaid interest. In addition, if we sell certain of our assets and do not apply the proceeds from the sale in a certain manner within 365 days of the sale, we must offer to repurchase the Senior Secured Notes at 100% of the principal amount thereof plus accrued and unpaid interest.
We have designated a portion of the Senior Secured Notes as a net investment hedge of our European operations. As such, the fluctuations in foreign currency exchange rates on the value of the notes is recorded to cumulative translation adjustment. See Note 9, Derivatives and Hedging Activitiesfor further details.
Senior Unsecured Notes and Senior Secured Notes - Other Terms and Conditions
Our Senior Notes contain covenants that will, among other things, limit our ability to create liens and enter into sale and leaseback transactions. Our Senior Secured Notes and 2024 Senior Unsecured Notes also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00, as well as containing restrictions on its operations, including limitations on: (i) incurring additional indebtedness; (ii) paying dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations.
Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee our Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us.
As of December 31, 2018, we were in compliance with the covenants and restrictions of these indentures.
Other Debt
We have approximately $106 million of other debt, which consists primarily of foreign debt with maturities of one year or less.
On-Balance Sheet Arrangements
We have securitization programs for some of our accounts receivable, with limited recourse provisions. Borrowings on these securitization programs are recorded in short-term debt.
Borrowings on these securitization programs at December 31, 2018 and 2017 are as follows:
|
| | | | | | | | |
| | | As of December 31 |
| | | 2018 | | 2017 |
| | | (Millions) |
| Borrowings on securitization programs | | $ | 6 |
| | $ | 30 |
|
In the U.S., we had an accounts receivable securitization program with three commercial banks, comprised of a first priority facility and a second priority facility, which we terminated in October 2018. We securitized original equipment and aftermarket receivables on a daily basis under this program. Both facilities monetized accounts receivable generated in the U.S. that met certain eligibility requirements and the second priority facility also monetized certain accounts receivable generated in the U.S. that would otherwise have been ineligible under the first priority securitization facility. The amount of outstanding third-party investments in our securitized accounts receivable under this U.S. program was $30 million, recorded in short-term debt, at December 31, 2017.
Off-Balance Sheet Arrangements
On December 14, 2017, we entered into a new accounts receivable factoring program in the U.S. with a commercial bank. Under this program we sell receivables from certain of our U.S. OE customers at a rate that is favorable versus our senior credit facility. This arrangement is uncommitted and provides for cancellation by the commercial bank with no less than 30 days prior written notice. The amount of outstanding third-party investments in our accounts receivable sold under this program was $130 million and $107 million at December 31, 2018 and 2017.
The Company has two other receivable factoring programs in the U.S. with commercial banks under which we sell receivables from certain of our aftermarket customers to whom we have extended payment terms. Both arrangements are uncommitted and may be terminated with 10 days prior notice for one program and 30 days prior notice for the other program. The amount of outstanding third-party investments in our accounts receivable sold under these programs was $387 million at December 31, 2018.
The Company also has subsidiaries in several countries in Europe that are parties to accounts receivable factoring facilities. The commitments for these arrangements are generally for one year, but some may be canceled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon notification. The amount of outstanding third-party investments in our accounts receivable sold under programs in Europe was $361 million and $218 million at December 31, 2018 and 2017.
These factoring programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreement. If we were not able to factor receivables under either the European or U.S. programs, our borrowings under our revolving credit agreement might increase, although this could be partially mitigated by exercising our right to shorten payment terms with certain of the aftermarket customers whose receivables we sell under the U.S. factoring programs in the event that those factoring programs are terminated.
In the U.S and Canada we participate in supply chain financing programs with certain of our aftermarket customers to whom we have extended payment terms whereby the accounts receivable are satisfied through the early receipt of negotiable financial instruments that are payable at a later date when payments from our customers are due. We sell these financial instruments before their maturity date to various financial institutions at a discount. Such financial instruments sold to financial institutions with outstanding maturity dates totaled $133 million and $81 million at December 31, 2018 and 2017.
If these drafting programs were terminated or the financial institutions that currently participate in these programs were to reduce their purchases of drafts, our borrowings under our revolving credit agreement might increase, although this could be partially mitigated by exercising our right to shorten payment terms with certain of the aftermarket customers whose drafts we sell under the U.S. and Canadian programs in the event that those programs are terminated or otherwise reduced.
The amounts outstanding for these factoring and drafting arrangements as of December 31, 2018 and 2017 are as follows:
|
| | | | | | | |
| | As of December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| Accounts receivable outstanding and derecognized | $ | 1,011 |
| | $ | 406 |
|
| Deferred purchase price receivable | $ | 154 |
| | $ | 114 |
|
Proceeds from the factoring of accounts receivable qualifying as sales and drafting programs, and expenses associated with these arrangements for the years ended December 31, 2018, 2017, and 2016 are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Proceeds from factoring qualifying as sales | $ | 3,390 |
| | $ | 1,984 |
| | $ | 1,770 |
|
| Loss on sale of receivables | $ | 16 |
| | $ | 5 |
| | $ | 5 |
|
Supply Chain Financing
Certain of our suppliers participate in supply chain financing programs under which they securitize their accounts receivables from us. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from our suppliers at any time. If the financial institutions did not continue to purchase receivables or drafts from our suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with us which in turn could cause our borrowings under our revolving credit facility to increase.
Capital Requirements
We believe that cash flows from operations, combined with our cash on hand, subject to any applicable withholding taxes upon repatriation of cash balances from our foreign operations where most of our cash balances are located, and available borrowing capacity described above, assuming that we maintain compliance with the financial covenants and other requirements of our senior credit facility agreement, will be sufficient to meet our future capital requirements, including debt amortization, capital expenditures, pension deriskingcontributions, and postretirement medical true-up,other operational requirements, for the following year. Our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. In the event that
we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. Such actions include additional restructuring initiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, reduction or cessation of our share repurchase and dividend programs, issuance of equity and other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame.
Cash Flows
Operating Activities
As summarized in the table below, net cash provided by operating activities for the years ended December 31, 2018, 2017, and 2016 were partially as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Operational cash flow before changes in operating assets and liabilities | $ | 449 |
| | $ | 507 |
| | $ | 596 |
|
| | | | | | |
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (190 | ) | | (81 | ) | | (325 | ) |
| Inventories | 27 |
| | (94 | ) | | (55 | ) |
| Payables and accrued expenses | 291 |
| | 136 |
| | 140 |
|
| Accrued interest and income taxes | (19 | ) | | 1 |
| | 13 |
|
| Other assets and liabilities | (119 | ) | | 48 |
| | 5 |
|
| Total change in operating assets and liabilities | (10 | ) | | 10 |
| | (222 | ) |
| Net cash provided by operating activities | $ | 439 |
| | $ | 517 |
| | $ | 374 |
|
Cash provided by operations for the year ended December 31, 2018 decreased by $78 million compared to the year ended December 31, 2017. The net decrease was primarily the result of:
cash flows provided by the operations of Federal-Mogul, which was acquired in the fourth quarter, of approximately $234 million, this included a cash outflow of $61 million related to the settlement of a litigation matter that was assumed as part of the Federal-Mogul Acquisition (see Note 3, Acquisitions and Divestitures for further information);
offset by net tax benefits.a $88 million outflow in working capital items (excluding changes in working capital of the acquired Federal-Mogul operations);
an increase in cash payments for interest of $36 million; and
other one-time charges of approximately $180 million, including, among other items, transactional related costs and advisory fees in connection with the Federal-Mogul Acquisition, and an antitrust settlement payment.
Cash provided by operations for the year ended December 31, 2017 increased by $143 million compared to the year ended December 31, 2016. The net impactincrease was primarily the result of:
increase in cash provided by working capital of these items decreased earnings$201 million; and
decrease in cash taxes paid of $18 million.
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Federal-Mogul acquisition, net of cash acquired | $ | (2,194 | ) | | $ | — |
| | $ | — |
|
| Proceeds from sale of assets | 9 |
| | 8 |
| | 6 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| | — |
|
| Cash payments for plant, property, and equipment | (507 | ) | | (419 | ) | | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | 174 |
| | 112 |
| | 110 |
|
| Other | 4 |
| | (10 | ) | | — |
|
| Net cash used by investing activities | $ | (2,514 | ) | | $ | (300 | ) | | $ | (229 | ) |
In 2018, cash used for the Federal-Mogul Acquisition, net of cash acquired, was $2,194 million. See “Note 3, Acquisitions and Divestitures” for additional details.
Capital expenditures were $507 million, $419 million, and $345 million for the years ended December 31, 2018, 2017, and 2016. These capital expenditures were primarily related to investing in new facilities, upgrading existing products, continuing new product launches, and infrastructure and equipment at our facilities (including investments in software-related intangible assets) to support our manufacturing, distribution, and cost reduction efforts. For 2019, we expect our capital expenditures to be between $730 million and $780 million, depending on timing of expenditures, as we continue to invest in our strategic priorities and growth.
Proceeds from deferred purchase price of factored receivables was $174 million, $112 million, and $110 million for the years ended December 31, 2018, 2017, and 2016. This increase in 2018 as compared to 2017 is primarily attributable to the Federal-Mogul Acquisition.
Financing Activities
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Proceeds from term loans and notes | $ | 3,426 |
| | $ | 160 |
| | $ | 529 |
|
| Repayments of term loans and notes | (453 | ) | | (36 | ) | | (545 | ) |
| Borrowings on revolving lines of credit | 5,149 |
| | 6,664 |
| | 5,417 |
|
| Payments on revolving lines of credit | (5,405 | ) | | (6,737 | ) | | (5,221 | ) |
| Issuance (repurchase) of common shares | (1 | ) | | (1 | ) | | 13 |
|
| Cash dividends | (59 | ) | | (53 | ) | | — |
|
| Debt issuance cost of long-term debt | (95 | ) | | (8 | ) | | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | (169 | ) | | (225 | ) |
| Net increase (decrease) in bank overdrafts | (5 | ) | | (7 | ) | | 10 |
|
| Other | (30 | ) | | — |
| | — |
|
| Distributions to noncontrolling interest partners | (51 | ) | | (64 | ) | | (55 | ) |
| Net cash provided (used) by financing activities | $ | 2,476 |
| | $ | (251 | ) | | $ | (86 | ) |
Cash flow from financing activities was $2,476 million for the year ended December 31, 2018. On October 1, 2018, we issued an aggregate principal amount of $3,400 million as a part of our New Credit Facility entered into in conjunction with the Federal-Mogul Acquisition. As a part of this New Credit facility we refinanced the revolving credit agreement and tranche A term loan under the Old Credit facility. In 2018, we paid a dividend of $0.25 per diluted share by $0.99.in each quarter, or $59 million in the aggregate. We also had distributions to noncontrolling interest partners of $51 million.
Cash flow used in financing activities was $251 million for the year ended December 31, 2017. This included borrowings under term loans of $160 million, repayments of term loans of $36 million, and net repayments under revolving lines of credit of $73 million. We also had distributions to noncontrolling interest partners of $64 million.
Cash flow used in financing activities was $86 million for the year ended December 31, 2016. This included $529 million borrowings under term loans and $545 million repayment of terms loans. We also had distributions to noncontrolling interest partners of $55 million.
We did not repurchase any shares during 2018. During 2017, we repurchased 2,936,950 shares of our outstanding common stock for $169 million at an average price of $57.57 per share. During 2016, we repurchased 4,182,613 shares of our outstanding common stock for $225 million at an average price of $53.89 per share. Since announcing our share repurchase program in 2015, we have repurchased a total of approximately 11.3 million shares for $607 million, representing 19% of the shares outstanding at that time. In February 2017, the Board authorized the repurchase of up to $400 million of common stock over the next three years. This amount includes the remaining $112 million amount authorized under earlier repurchase programs. As of December 31, 2018, we had $231 million remaining on the share repurchase authorization. Borrowings under our revolving credit facility were $0 million at December 31, 2018 and $244 million at December 31, 2017. There was $0 million borrowed under the U.S. accounts receivable securitization programs at both the period ending December 31, 2018 and December 31, 2017.
Dividends on Common Stock
On February 1, 2017, Tennecowe announced the reinstatement of a quarterly dividend program. We expect to pay a quarterly dividendIn 2018, we paid dividends of $0.25 per share on our common stock, representing a planned annual dividendin each of $1.00the quarters, or $59 million in the aggregate. In 2017, we paid dividends of $0.25 per share. The initial dividend is payable on March 23, 2017 to shareholdersshare in each of record as of March 7, 2017.the quarters, or $53 million in the aggregate. While we currently expect that comparable quarterly cash dividends will continue to be paid in the near future, our dividend program and the payment of future cash dividends under the program are subject to continued capital availability, the judgment of our Board of Directors and our continued compliance with the provisions pertaining to the payment of dividends under ourits debt agreements. We did not pay any dividends in fiscal years 2016, 2015 or 2014.Once the contemplated separation of our businesses through a spin-off occurs, each independent company will determine its own dividend policy.
Cash Flows for 2016 and 2015
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (Millions) |
| Cash provided (used) by: | | | |
| Operating activities | $ | 489 |
| | $ | 517 |
|
| Investing activities | (340 | ) | | (303 | ) |
| Financing activities | (91 | ) | | (172 | ) |
Operating Activities
For 2016, operating activities provided $489 million in cash compared to $517 million cash provided during 2015. The lower cash from operations was primarily due to the timing of revenue growth at the end of the year and the resulting impact on accounts receivable. For 2016, cash used for working capital was $126 million versus $9 million of cash used for working capital in 2015. Receivables were a use of cash of $215 million for 2016 compared to a use of cash of $90 million in 2015. Inventory represented a cash outflow of $57 million for 2016 and a cash outflow of $36 million during 2015. Accounts payable provided $114 million of cash for the year ended December 31, 2016, compared to $90 million of cash provided for the year ended December 31, 2015. Cash taxes were $113 million for 2016 compared to $105 million in 2015, net of a US tax refund of $25 million for overpayment in 2014.
Investing Activities
Cash used for investing activities was $37 million higher in 2016 compared to 2015. Cash payments for plant, property and equipment were $325 million in 2016 versus payments of $286 million in 2015, an increase of $39 million. Cash payments for software-related intangible assets were $20 million in 2016 compared to $23 million in 2015. Change in restricted cash was a use of cash of $1 million in 2016 compared to a source of cash of $2 million in 2015.
Financing Activities
Cash flow from financing activities was an outflow of $91 million for the year ended December 31, 2016 compared to an outflow of $172 million for the year ended December 31, 2015. During 2016, we repurchased 4,182,613 shares of our outstanding common stock for $225 million at an average price of $53.89 per share. During 2015, we repurchased 4,228,633 shares of our outstanding common stock for $213 million at an average price of $50.32 per share as part of the previously announced stock buyback plan of up to $350 million. Since announcing our share repurchase program in 2015, we have repurchased a total of approximately 8.4 million shares for $438 million, representing 14 percent of the shares outstanding at that time. On February 1, 2017, our Board of Directors declared a cash dividend of $0.25, payable on March 23, 2017 to shareholders of record as of March 7, 2017. In addition, the Board authorized the repurchase of up to $400 million of common stock over the next three years. This amount includes the remaining $112 million amount authorized under earlier repurchase programs. In 2016, refinancing activities included the issuance of $500 million of new 5 percent senior secured notes due 2026 to refinance our existing 6 7/8 percent senior notes due 2020.
Borrowings under our revolving credit facility were $300 million at December 31, 2016 and $105 million at December 31, 2015. There was $30 million borrowed under the U.S. accounts receivable securitization programs at each of the period ending December 31, 2016 and December 31, 2015.
Cash Flows for 2015 and 2014
|
| | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2014 |
| | (Millions) |
| Cash provided (used) by: | | | |
| Operating activities | $ | 517 |
| | $ | 341 |
|
| Investing activities | (303 | ) | | (339 | ) |
| Financing activities | (172 | ) | | 20 |
|
Operating Activities
For 2015, operating activities provided $517 million in cash compared to $341 million cash provided during 2014. The higher cash from operations was primarily driven by higher earnings, working capital improvements, lower interest payments and lower tax payments. For 2015, cash used for working capital was $9 million versus $137 million of cash used for working capital in 2014. Receivables were a use of cash of $90 million for 2015 compared to a use of cash of $83 million in 2014. Inventory represented a cash outflow of $36 million for 2015 and a cash outflow of $74 million during 2014. Accounts payable provided $90 million of cash for the year ended December 31, 2015, compared to $94 million of cash provided for the year ended December 31, 2014. Cash taxes were $105 million for 2015, net of a US tax refund of $25 million for overpayment in 2014, compared to $136 million in 2014.
Investing Activities
Cash used for investing activities was $36 million lower in 2015 compared to 2014. Cash payments for plant, property and equipment were $286 million in 2015 versus payments of $328 million in 2014, a decrease of $42 million. Cash payments for software-related intangible assets were $23 million in 2015 compared to $13 million in 2014. Change in restricted cash was a source of cash of $2 million in each 2015 and 2014.
Financing Activities
Cash flow from financing activities was an outflow of $172 million for the year ended December 31, 2015 compared to an inflow of $20 million for the year ended December 31, 2014. During 2015, we repurchased 4,228,633 shares of our outstanding common stock for $213 million at an average price of $50.32 per share as part of the previously announced stock buyback plan of up to $350 million. Additionally, on October 23, 2015, we announced that our Board of Directors has expanded our repurchase program, authorizing the repurchase of an additional $200 million of common stock. During 2014, we completed a previously announced stock buyback plan, repurchasing 400,000 shares of our outstanding common stock for $22 million, at an average price of $56.06 per share.
In 2014, refinancing activities included raising a new senior secured credit facility consisting of a 5-year revolving credit facility and a 5-year Tranche A Term Facility. Proceeds from the new credit facility were used to refinance our existing senior secured credit facility, which included an $850 million revolving credit facility due 2017 and a $213 million Tranche A Term Facility due 2017. In conjunction with this transaction, we also raised $225 million of new 10-year senior unsecured notes priced at 5 3/8 percent to refinance the existing 7 3/4 percent notes due 2018.
Borrowings under our revolving credit facility were $105 million at December 31, 2015 and no borrowings at December 31, 2014. There was $30 million borrowed under the North American accounts receivable securitization programs at December 31, 2015 and no borrowings at December 31, 2014. In 2014, we received $4 million for selling a 45 percent equity interest in Tenneco Fusheng (Chengdu) Automobile Parts Co., Ltd. to a third party partner.
Outlook
All our forward looking revenue estimates reflect constant currency.
First Quarter 2017
We expect constant currency total revenue growth of seven percent in the first quarter 2017, outpacing forecasted light vehicle industry production growth of three percent. We expect to better the industry with four percent organic growth, driven by incremental content to meet Tier 3 and Euro 6 emissions regulations, the ramp up of recently launched programs and our strong position on light vehicle platforms globally. We also expect a slight increase in commercial truck and off-highway revenues and a solid contribution from the global aftermarket. We anticipate a currency headwind in the first quarter of approximately two percent based on current exchange rates.
Full Year 2017
We expect constant currency total revenue to growth to outpace light vehicle industry production by four percentage points, resulting in five percent growth in 2017 driven by:
•An outstanding position on light vehicle platforms globally;
•Regulatory-driven Clean Air content;
•Increasing demand for advanced suspension systems, and;
•Our global aftermarket leadership.
Our revenue growth estimate assumes light vehicle industry production growth of one percent, global commercial truck production growth of about two percent, and growth in off-highway engine production in regulated regions (North America and Europe) of about two percent.
In 2018 and 2019, we expect continued constant currency revenue growth, outpacing industry production by three to five percentage points each year.
On February 1, 2017, our Board of Directors initiated a quarterly cash dividend of $0.25 with the initial dividend payable on March 23, 2017 to shareholders of record as of March 7, 2017. While the Company currently expects that comparable quarterly cash dividends will continue to be paid in the future, our dividend program and the payment of future cash dividends under the program are subject to continued capital availability and our Board of Directors' continuing determination that the dividend program and the declaration of dividends thereunder are in the best interests of our stockholders and are in compliance with all laws and agreements of Tenneco applicable to the declaration and payment of cash dividends. In addition, the Board authorized the repurchase of up to $400 million of common stock over the next three years. This amount includes the remaining $112 million amount authorized under earlier repurchase programs.
Tenneco's revenue estimates presented in this “Outlook” are based on current and projected customer production schedules as well as aggregate industry production, which includes IHS Automotive January 2017 global light vehicle production forecasts, Power Systems Research (PSR) January 2017 forecast for global commercial truck and buses, PSR off-highway engine production in North America and Europe and Tenneco estimates. Tenneco’s revenue estimates are also based on original equipment manufacturers’ programs that have been formally awarded to us, programs where we are highly confident that we will be awarded business based on informal customer indications consistent with past practices, and our status as supplier for the existing programs and our relationships and experience with our customers. The revenue estimates are also based on anticipated vehicle production levels and pricing, including precious metals pricing and the impact of material cost changes. Unless otherwise indicated, our revenue estimate methodology does not attempt to forecast currency fluctuation, and accordingly reflects constant currency. See “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” and Item 1A, “Risk Factors.”
We expect our capital expenditures for 2017 to be between $360 million and $390 million, our 2017 interest expense to be about $70 million, our 2017 cash taxes to be between $125 million and $140 million and our 2017 tax rate to be between 29 percent to 31 percent.
Liquidity and Capital Resources
Capitalization
|
| | | | | | | | | | |
| | Year Ended December 31, | | % Change |
| | 2016 | | 2015 | |
| | (Millions) |
| Short-term debt and maturities classified as current | $ | 90 |
| | $ | 86 |
| | 5 | % |
| Long-term debt | 1,294 |
| | 1,124 |
| | 15 |
|
| Total debt | 1,384 |
| | 1,210 |
| | 14 |
|
| Total redeemable noncontrolling interests | 40 |
| | 41 |
| | (2 | ) |
| Total noncontrolling interests | 47 |
| | 39 |
| | 21 |
|
| Tenneco Inc. shareholders’ equity | 573 |
| | 425 |
| | 35 |
|
| Total equity | 620 |
| | 464 |
| | 34 |
|
| Total capitalization | $ | 2,044 |
| | $ | 1,715 |
| | 19 | % |
General. Short-term debt, which includes maturities classified as current, borrowings by parent company and foreign subsidiaries, and borrowings under our North American accounts receivable securitization program, were $90 million and $86 million as of December 31, 2016 and December 31, 2015, respectively. Borrowings under our revolving credit facilities, which are classified as long-term debt, were $300 million and $105 million at December 31, 2016 and December 31, 2015, respectively.
The 2016 year-to-date increase in Tenneco Inc. shareholders' equity primarily resulted from net income attributable to Tenneco Inc. of $356 million, a $17 million increase in premium on common stock and other capital surplus relating to common stock issued pursuant to benefit plans and a $41 million increase related to pension and postretirement benefits, partially offset by a $41 million decrease caused by the impact of changes in foreign exchange rates on the translation of financial statements of our foreign subsidiaries into U.S. dollars and a $225 million increase in treasury stock as a result of purchases of common stock under our share purchase program.
Overview. Our financing arrangements are primarily provided by a committed senior secured financing arrangement with a syndicate of banks and other financial institutions. The arrangement is secured by substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries, as well as guarantees by our material domestic subsidiaries.
On December 8, 2014, we completed an amendment and restatement of our senior credit facility by increasing the amounts and extending the maturity dates of our revolving credit facility and our Tranche A Term Facility. The amended and restated facility replaces our former $850 million revolving credit facility and $213 million Tranche A Term Facility. The proceeds from this refinancing transaction were used to repay the $213 million Tranche A Term Facility, to fund the fees and expenses associated with the purchase and redemption of our $225 million 7 3/4 percent senior notes due in 2018 and for general corporate purposes. As of December 31, 2016, the senior credit facility provides us with a total revolving credit facility size of $1,200 million and a $270 million Tranche A Term Facility, both of which will mature on December 8, 2019. Funds may be borrowed, repaid and re-borrowed under the revolving credit facility without premium or penalty (subject to any customary LIBOR breakage fees). The revolving credit facility is reflected as debt on our balance sheet only if we borrow money under this facility or if we use the facility to make payments for letters of credit. Outstanding letters of credit reduce our availability to borrow revolving loans under the facility. We are required to make quarterly principal payments under the Tranche A Term Facility of $5.625 million beginning March 31, 2017 through December 31, 2017, $7.5 million beginning March 31, 2018 through September 30, 2019 and a final payment of $195 million is due on December 8, 2019. We have excluded the required payments, within the next twelve months, under the Tranche A Term Facility totaling $23 million from current liabilities as of December 31, 2016, because we have the intent and ability to refinance the obligations on a long-term basis by using our revolving credit facility.
On November 20, 2014, we announced a cash tender offer to purchase our outstanding $225 million 7 3/4 percent senior notes due in 2018 and a solicitation of consents to certain proposed amendments to the indenture governing these notes. We received tenders and consents representing $181 million aggregate principal amount of the notes and, on December 5, 2014, we purchased the tendered notes at a price of 104.35 percent of the principal amount (which includes a consent payment of three percent of the principal amount), plus accrued and unpaid interest, and amended the related indenture. On December 22, 2014, we redeemed the remaining outstanding $44 million aggregate principal amount of senior notes that were not purchased pursuant to the tender offer at a price of 103.88 percent of the principal amount, plus accrued and unpaid interest. The additional liquidity provided by the new $1,200 million revolving credit facility and the new $300 million Tranche A Term Facility was used in part to fund the fees and expenses of the tender offer and redemption.
We recorded $13 million of pre-tax charges in December 2014 related to the refinancing of our senior credit facility, the repurchase and redemption of our 7 3/4 percent senior notes due in 2018 and the write-off of deferred debt issuance costs relating to those notes.
On June 6, 2016, we announced a cash tender offer to purchase our outstanding $500 million 67/8 percent senior notes due in 2020. We received tenders representing $325 million aggregate principal amount of the notes and, on June 13, 2016, we purchased the tendered notes at a price of 103.81 percent of the principal amount, plus accrued and unpaid interest. On July 13, 2016, we redeemed the remaining outstanding $175 million aggregate principal amount of the notes that were not purchased pursuant to the tender offer at a price of 103.438 percent of the principal amount, plus accrued and unpaid interest. We used the proceeds of the issuance of our 5 percent senior notes due 2026 to fund the purchase and redemption. The senior credit facility was used to fund the fees and expenses of the tender offer and redemption.
We recorded $16 million and $8 million of pre-tax interest charges in June and July of 2016, respectively, related to the repurchase and redemption of our 67/8 percent senior notes due in 2020 and the write-off of deferred debt issuance costs relating to those notes.
At December 31, 2016, of the $1,200 million available under the revolving credit facility, we had unused borrowing capacity of $900 million with $300 million in outstanding borrowings and zero in outstanding letters of credit. As of December 31, 2016, our outstanding debt also included (i) $270 million of a term loan which consisted of a $269 million net carrying amount including a $1 million debt issuance cost related to our Tranche A Term Facility which is subject to quarterly principal payments as described above through December 8, 2019, (ii) $225 million of notes which consisted of a $221 million net carrying amount including a $4 million debt issuance cost of 53/8 percent senior notes due December 15, 2024, (iii) $500 million of notes which consisted of a $492 million net carrying amount including a $8 million debt issuance cost of 5 percent senior notes due July 15, 2026, and (iv) $102 million of other debt.
Senior Credit Facility — Interest Rates and Fees. Beginning December 8, 2014, our Tranche A Term Facility and revolving credit facility bear interest at an annual rate equal to, at our option, either (i) London Interbank Offered Rate (“LIBOR”) plus a margin of 175 basis points, or (ii) a rate consisting of the greater of (a) the JPMorgan Chase prime rate plus a margin of 75 basis points, (b) the Federal Funds rate plus 50 basis points plus a margin of 75 basis points, and (c) the one month LIBOR plus 100 basis points plus a margin of 75 basis points. The margin we pay on these borrowings will be increased by a total of 25 basis points above the original margin following each fiscal quarter for which our consolidated net leverage ratio is equal to or greater than 2.25 and less than 3.25, and will be increased by a total of 50 basis points above the original margin following each fiscal quarter for which our consolidated net leverage ratio is equal to or greater than 3.25. In addition, the margin we pay on these borrowings will be reduced by a total of 25 basis points below the original margin if our consolidated net leverage ratio is less than 1.25. We also pay a commitment fee equal to 30 basis points that will be reduced to 25 basis points or increased to up to 40 basis points depending on consolidated net leverage ratio changes as set forth in the senior credit facility.
Senior Credit Facility — Other Terms and Conditions. Our senior credit facility requires that we maintain financial ratios equal to or better than the following consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA, as defined in the senior credit facility agreement), and consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as defined in the senior credit facility agreement) at the end of each period indicated. Failure to maintain these ratios will result in a default under our senior credit facility. The financial ratios required under the amended and restated senior credit facility and the actual ratios we calculated for the four quarters of 2016, are as follows (the ratios in the table reflect the revisions made to the financial statements in this Form 10-K/A; these revisions would result in immaterial changes to the actual ratios reported to our lenders in prior periods, with such changes being less than .03 and .23 to each leverage ratio and interest coverage ratio, respectively):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | December 31, 2016 | | September 30, 2016 | | June 30, 2016 | | March 31, 2016 |
| | Req. | | Act. | | Req. | | Act. | | Req. | | Act. | | Req. | | Act. |
| Leverage Ratio (maximum) | 3.50 |
| | 1.47 |
| | 3.50 |
| | 1.53 |
| | 3.50 |
| | 1.47 |
| | 3.50 |
| | 1.55 |
|
| Interest Coverage Ratio (minimum) | 2.75 |
| | 14.70 |
| | 2.75 |
| | 14.14 |
| | 2.75 |
| | 13.74 |
| | 2.75 |
| | 13.75 |
|
The senior credit facility includes a maximum leverage ratio covenant of 3.50 and a minimum interest coverage ratio of 2.75, in each case through December 8, 2019.
The covenants in our senior credit facility agreement generally prohibit us from repaying or refinancing our senior notes. So long as no default existed, we would, however, under our senior credit facility agreement, be permitted to repay or refinance our senior notes (i) with the net cash proceeds of permitted refinancing indebtedness (as defined in the senior credit facility agreement) or with the net cash proceeds of our common stock, in each case issued within 180 days prior to such repayment;
(ii) with the net cash proceeds of the incremental facilities (as defined in the senior credit facility agreement) and certain indebtedness incurred by our foreign subsidiaries; (iii) with the proceeds of the revolving loans (as defined in the senior credit facility agreement); (iv) with the cash generated by our operations; (v) in an amount equal to the net cash proceeds of qualified capital stock (as defined in the senior credit facility agreement) issued by us after December 8, 2014; and (vi) in exchange for permitted refinancing indebtedness or in exchange for shares of our common stock; provided that such purchases are capped as follows (with respect to clauses (iii), (iv) and (v) based on a pro forma consolidated leverage ratio after giving effect to such purchase, cancellation or redemption):
|
| | | |
| Pro forma Consolidated Leverage Ratio | Aggregate Senior Note Maximum Amount |
| | (Millions) |
| Greater than or equal to 3.0x | $ | 20 |
|
| Greater than or equal to 2.5x | $ | 100 |
|
| Greater than or equal to 2.0x | $ | 200 |
|
| Less than 2.0x | no limit |
|
Although the senior credit facility agreement would permit us to repay or refinance our senior notes under the conditions described above, any repayment or refinancing of our outstanding notes would be subject to market conditions and either the voluntary participation of note holders or our ability to redeem the notes under the terms of the applicable note indenture. For example, while the senior credit facility agreement would allow us to repay our outstanding notes via a direct exchange of the notes for either permitted refinancing indebtedness or for shares of our common stock, we do not, under the terms of the agreements governing our outstanding notes, have the right to refinance the notes via any type of direct exchange.
The senior credit facility agreement also contains other restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the senior credit facility agreement); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; and (viii) refinancing of the senior notes. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans.
As of December 31, 2016, we were in compliance with all the financial covenants and operational restrictions of the senior credit facility. Our senior credit facility does not contain any terms that could accelerate payment of the facility or affect pricing under the facility as a result of a credit rating agency downgrade.
Senior Notes. As of December 31, 2016, our outstanding senior notes also included $225 million of 53/8 percent senior notes due December 15, 2024 which consisted of $221 million net carrying amount including a $4 million debt issuance cost and $500 million of 5 percent senior notes due July 15, 2026 which consisted of $492 million net carrying amount including a $8 million debt issuance cost. Under the indentures governing the notes, we are permitted to redeem some or all of the remaining senior notes at specified prices that decline to par over a specified period, (a) on or after July 15, 2021, in the case of the senior notes due 2026, and (b) on or after December 15, 2019, in the case of the senior notes due 2024. In addition, the notes may also be redeemed in whole or in part at a redemption price generally equal to 100 percent of the principal amount thereof plus a premium based on the present values of the remaining payments due to the note holders. Further, the indentures governing the notes also permit us to redeem up to 35 percent of the senior notes with the proceeds of certain equity offerings, (a) on or before July 15, 2019 at a redemption price equal to 105 percent, in the case of the senior notes due 2026 and (b) on or before December 15, 2017 at a redemption price equal to 105.375 percent, in the case of the senior notes due 2024. If we sell certain of our assets or experience specified kinds of changes in control, we must offer to repurchase the notes due 2026 and 2024 at 101 percent of the principal amount thereof plus accrued and unpaid interest.
Our senior notes due December 15, 2024 and July 15, 2026, respectively, contain covenants that will, among other things, limit our ability to create liens and enter into sale and leaseback transactions. Our senior notes due 2024 also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00, as well as containing restrictions on our operations, including limitations on: (i) incurring additional indebtedness; (ii) dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations. Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee our senior notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notes to make distributions to us. As of December 31, 2016, we were in compliance with the covenants and restrictions of these indentures.
Accounts Receivable Securitization. We securitize some of our accounts receivable on a limited recourse basis in the U.S. and Europe. As servicer under these accounts receivable securitization programs, we are responsible for performing all
accounts receivable administration functions for these securitized financial assets including collections and processing of customer invoice adjustments. In the U.S., we have an accounts receivable securitization program with three commercial banks comprised of a first priority facility and a second priority facility. We securitize original equipment and aftermarket receivables on a daily basis under the bank program. In March 2015, the U.S. program was amended and extended to April 30, 2017. The first priority facility continues to provide financing of up to $130 million and the second priority facility, which is subordinated to the first priority facility, provides up to an additional $50 million of financing. Both facilities monetize accounts receivable generated in the U.S. that meet certain eligibility requirements. The second priority facility also monetizes certain accounts receivable generated in the U.S. that would otherwise be ineligible under the first priority securitization facility. The amount of outstanding third-party investments in our securitized accounts receivable under the U.S. program was $30 million at both December 31, 2016 and 2015.
Each facility contains customary covenants for financings of this type, including restrictions related to liens, payments, mergers or consolidations and amendments to the agreements underlying the receivables pool. Further, each facility may be terminated upon the occurrence of customary events (with customary grace periods, if applicable), including breaches of covenants, failure to maintain certain financial ratios, inaccuracies of representations and warranties, bankruptcy and insolvency events, certain changes in the rate of default or delinquency of the receivables, a change of control and the entry or other enforcement of material judgments. In addition, each facility contains cross-default provisions, where the facility could be terminated in the event of non-payment of other material indebtedness when due and any other event which permits the acceleration of the maturity of material indebtedness.
We also securitize receivables in our European operations with regional banks in Europe under various separate facilities. The commitments for these arrangements are generally for one year, but some may be cancelled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon notification. The amount of outstanding third-party investments in our securitized accounts receivable in Europe was $160 million and $174 million at December 31, 2016 and December 31, 2015, respectively.
If we were not able to securitize receivables under either the U.S. or European securitization programs, our borrowings under our revolving credit agreement might increase. These accounts receivable securitization programs provide us with access to cash at costs that are generally favorable to alternative sources of financing, and allow us to reduce borrowings under our revolving credit agreement.
In our U.S. accounts receivable securitization programs, we transfer a partial interest in a pool of receivables and the interest that we retain is subordinate to the transferred interest. Accordingly, we account for our U.S. securitization program as a secured borrowing. In our European programs, we transfer accounts receivables in their entirety to the acquiring entities and satisfy all of the conditions established under ASC Topic 860, “Transfers and Servicing,” to report the transfer of financial assets in their entirety as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under our European securitization programs approximates the fair value of such receivables. We recognized $3 million in interest expense for the year ended 2016 and $2 million in interest expense for each of the years ended 2015 and 2014, relating to our U.S. securitization program. In addition, we recognized a loss of $3 million for the each of the years ended 2016 and 2015 and a $4 million loss for 2014, on the sale of trade accounts receivable in our European accounts receivable securitization programs, representing the discount from book values at which these receivables were sold to our banks. The discount rate varies based on funding costs incurred by our banks, which averaged approximately two percent for all years ended 2016, 2015 and 2014.
Financial Instruments. One of our European subsidiaries receives payment from one of its customers whereby the accounts receivable are satisfied through the early delivery of financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets. Such financial instruments held by our European subsidiary totaled less than $1 million at both December 31, 2016 and December 31, 2015.
In certain instances, several of our Chinese subsidiaries receive payment from customers through the receipt of financial instruments on the date the customer payments are due. Several of our Chinese subsidiaries also satisfy vendor payments through the delivery of financial instruments on the date the payments are due. Financial instruments issued to satisfy vendor payables and not redeemed totaled $12 million and $15 million at December 31, 2016 and December 31, 2015, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $5 million and $8 million at December 31, 2016 and December 31, 2015, respectively. We classify financial instruments received from our customers as other current assets if issued by a financial institution of our customers or as customer notes and accounts if issued by our customer. We classified $5 million and $8 million in other current assets at December 31, 2016 and December 31, 2015, respectively.
The financial instruments received by one of our European subsidiaries and some of our Chinese subsidiaries are drafts drawn that are payable at a future date and, in some cases, are negotiable and/or are guaranteed by banks of the customers. The
use of these instruments for payment follows local commercial practice. Because certain of such financial instruments are guaranteed by our customers’ banks, we believe they represent a lower financial risk than the outstanding accounts receivable that they satisfy which are not guaranteed by a bank.
Supply Chain Financing. Certain of our suppliers participate in supply chain financing programs under which they securitize their accounts receivables from Tenneco. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from Tenneco's suppliers at any time. If the financial institutions did not continue to purchase receivables or drafts from Tenneco's suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with Tenneco which in turn would cause our borrowings under our revolving credit facility to increase.
Capital Requirements. We believe that cash flows from operations, combined with our cash on hand, subject to any applicable withholding taxes upon repatriation of cash balances from our foreign operations where most of our cash balances are located, and available borrowing capacity described above, assuming that we maintain compliance with the financial covenants and other requirements of our loan agreement, will be sufficient to meet our future capital requirements, including debt amortization, capital expenditures, pension contributions, and other operational requirements, for the following year. Our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. In the event that we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. Such actions include additional restructuring initiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, reduction or cessation of our share repurchase and dividend programs, issuance of equity and other alternatives to enhance our financial and operating position. Should we be required to implement any of these actions to meet our cash flow needs, we believe we can do so in a reasonable time frame.
Contractual Obligations.Obligations
Our remaining required debt principal amortization and payment obligations under lease and certain other financial commitments as of December 31, 20162018 are shown in the following table:
| | | | Payments due in: | Payments due by period: |
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | Beyond 2021 | | Total | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| | (Millions) | (Millions) |
| Obligations: | | | | | | | | | | | | | | |
| Revolver borrowings | $ | — |
| | $ | — |
| | $ | 300 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 300 |
| |
| Senior term loans | 22 |
| | 30 |
| | 218 |
| | — |
| | — |
| | — |
| | 270 |
| $ | 3,400 |
| | $ | 102 |
| | $ | 247 |
| | $ | 1,436 |
| | $ | 1,615 |
|
| Senior notes | — |
| | — |
| | — |
| | — |
| | — |
| | 725 |
| | 725 |
| 1,946 |
| | — |
| | — |
| | 476 |
| | 1,470 |
|
| Other long term debt (including maturities classified as current) | 2 |
| | 2 |
| | 3 |
| | — |
| | — |
| | — |
| | 7 |
| 106 |
| | 73 |
| | 21 |
| | 10 |
| | 2 |
|
| Other subsidiary debt and capital lease obligations | 1 |
| | 2 |
| | 1 |
| | 1 |
| | 1 |
| | 2 |
| | 8 |
| |
| Short-term debt | 87 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 87 |
| |
| Debt and capital lease obligations | 112 |
| | 34 |
| | 522 |
| | 1 |
| | 1 |
| | 727 |
| | 1,397 |
| |
| Short-term debt (including bank overdrafts) | | 80 |
| | 80 |
| | — |
| | — |
| | — |
|
| Total debt obligations | | 5,532 |
| | 255 |
| | 268 |
| | 1,922 |
| | 3,087 |
|
| Pension obligations | | 1,075 |
| | 96 |
| | 200 |
| | 201 |
| | 578 |
|
| Operating leases | 39 |
| | 25 |
| | 18 |
| | 15 |
| | 12 |
| | 17 |
| | 126 |
| 483 |
| | 120 |
| | 186 |
| | 123 |
| | 54 |
|
| Purchase obligations | 188 |
| | 34 |
| | — |
| | — |
| | — |
| | — |
| | 222 |
| |
Purchase obligations (a) | | 260 |
| | 260 |
| | — |
| | — |
| | — |
|
| Interest payments | 39 |
| | 57 |
| | 58 |
| | 37 |
| | 37 |
| | 161 |
| | 389 |
| 1,402 |
| | 276 |
| | 578 |
| | 400 |
| | 148 |
|
| Capital commitments | 112 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 112 |
| 181 |
| | 181 |
| | — |
| | — |
| | — |
|
| Total payments | $ | 490 |
| | $ | 150 |
| | $ | 598 |
| | $ | 53 |
| | $ | 50 |
| | $ | 905 |
| | $ | 2,246 |
| $ | 8,933 |
| | $ | 1,188 |
| | $ | 1,232 |
| | $ | 2,646 |
| | $ | 3,867 |
|
(a) Short-term, ordinary course payment obligations have been excluded.
If we do not maintain compliance with the terms of our senior credit facilityNew Credit Facility or senior notes indentures described above, all amounts under those arrangements could, automatically or at the option of the lenders or other debt holders, become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute a default under the other facility, allowing the acceleration of all amounts due. We currently expectexpects to maintain compliance with the terms of all of our various credit agreements for the foreseeable future.
Included in our contractual obligations is the amount of interest to be paid on our long-term debt. As our debt structure contains both fixed and variable rate obligations, we have made assumptions in calculating the amount of future interest payments. Interest on our senior notes is calculated using the fixed rates of 5 3/8 percent5.375% and 5 percent,5%, respectively. Interest on our variable rate debt is calculated as LIBOR plus the applicable margin in effect at December 31, 20162018 for the Eurodollar and
Term Loan A loan and prime plus the applicable margin in effect on December 31, 20162018 on the prime-based loans. We have assumed that both LIBOR and the prime rate will remain unchanged for the outlying years. See “— Capitalization.”
We have also included an estimate of expenditures required after December 31, 20162018 to complete the projects authorized at December 31, 2016,2018, in which we have made substantial commitments in connection with purchasing property, plant property and equipment for our operations. For 2017,2019, we expect our capital expenditures to be between $360$730 million and $390$780 million.
We have included an estimate of the expenditures necessary after December 31, 20162018 to satisfy purchase requirements pursuant to certain ordinary course supply agreements that we have entered into. With respect to our other supply agreements, they generally do not specify the volumes we are required to purchase. In many cases, if any commitment is provided, the agreements state only the minimum percentage of our purchase requirements we must buy from the supplier. As a result, these purchase obligations fluctuate from year-to-year and we are not able to quantify the amount of our future obligations.
We have not included material cash requirements for unrecognized tax benefits or taxes. It is difficult to estimate taxes to be paid as changes in where we generate income can have a significant impact onits future tax payments. We have also not included cash requirements for funding pension and postretirement benefit costs. Based upon current estimates, we believe we will be required to make contributions of approximately $42$97 million to those plans in 2017.2019. Pension and postretirement contributions beyond 20172019 will be required but those amounts will vary based upon many factors, including the performance of ourits pension fund investments during 20172019 and future discount rate changes. For additional information relating to the funding of our pension and other postretirement plans, refer to Note 1013 of ourthe consolidated financial statements. In addition, we have not included cash requirements for environmental remediation. Based upon current estimates, we believe we will be required to spend approximately $18$46 million over the next 30 years. However, due to possible modifications in remediation processes and other factors, it is difficult to determine the actual timing of the payments. See “— Environmental and Other Matters.”
We occasionally provide guarantees that could require usit to make future payments in the event that the third party primary obligor does not make its required payments. We areThe Company is not required to record a liability for any of these guarantees.
Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic subsidiaries fully and unconditionally guarantee our senior credit facilityits New Credit Facility and ourits senior notes on a joint and several basis. The senior credit facilityNew Credit Facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent66% of the stock of certain first-tier foreign subsidiaries. No assets or capital stock secureAs described above, certain of our senior notes. You should also readnotes are secured by pledges of stock and assets. See Note 1323 of the consolidated financial statements of Tenneco Inc., where we presentthe Company presents the Supplemental Guarantor Consolidating Financial Statements.
We have two performance guarantee agreements in the U.K. between Tenneco Management (Europe) Limited (“TMEL”) and the two Walker Group Retirement Plans, the Walker Group Employee Benefit Plan and the Walker Group Executive Retirement Benefit Plan (the “Walker Plans”), whereby TMEL will guarantee the payment of all current and future pension contributions in event of a payment default by the sponsoring or participating employers of the Walker Plans. The Walker Plans are comprised of employees from Tenneco Walker (U.K.) Limited and our Futaba-Tenneco U.K. joint venture. Employer contributions are funded by both Tenneco Walker (U.K.) Limited, as the sponsoring employer and Futaba-Tenneco U.K., as a participating employer. The performance guarantee agreements are expected to remain in effect until all pension obligations for the Walker Plans’ sponsoring and participating employers have been satisfied. The maximum amount payable for these pension performance guarantees that is not attributable to Tenneco is approximately $7 million as of December 31, 2016 which is determined by taking 105 percent of the liability of the Walker Plans calculated under section 179 of the U.K. Pension Act of 2004 offset by plan assets multiplied by the ownership percentage in Futaba-Tenneco U.K. that is attributable to Futaba Industrial Co. Ltd. We did not record an additional liability for this performance guarantee since Tenneco Walker (U.K.) Limited, as the sponsoring employer of the Walker Plans, already recognizes 100 percent of the pension obligation calculated based on U.S. GAAP, for all of the Walker Plans’ participating employers on its balance sheet, which was $19 million and $11 million at December 31, 2016 and December 31, 2015, respectively. At December 31, 2016, all pension contributions under the Walker Plans were current for all of the Walker Plans’ sponsoring and participating employers.
In June 2011, we entered into an indemnity agreement between TMEL and Futaba Industrial Co. Ltd. which requires Futaba to indemnify TMEL for any cost, loss or liability which TMEL may incur under the performance guarantee agreements relating to the Futaba-Tenneco U.K. joint venture. The maximum amount reimbursable by Futaba to TMEL under this indemnity agreement is equal to the amount incurred by TMEL under the performance guarantee agreements multiplied by Futaba’s shareholder ownership percentage of the Futaba-Tenneco U.K. joint venture. At December 31, 2016, the maximum amount reimbursable by Futaba to TMEL is approximately $7 million.69
We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of December 31, 2016, we have $31 million in letters of credit to support some of our subsidiaries’ insurance arrangements, foreign employee benefit programs, environmental remediation activities and cash management and capital requirements.
Critical Accounting Policies and EstimatesCRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our consolidated financial statements in accordance with generally accepted accounting principlesAmerica ("U.S. GAAP"), which requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thedisclosures in our consolidated financial statementsstatements. These estimates are subject to an inherent degree of uncertainty and the reported amountsactual results could differ from our estimates. Our significant accounting policies have been disclosed in Note 2, Summary of revenues and expenses during the reporting period.Significant Accounting Policies. The following paragraphs include a discussion of some critical areas where estimates are required.
Revenue Recognition
Goodwill and Other Indefinite-Lived Intangible Assets
We recognize revenuereview goodwill for sales toimpairment annually, during the fourth quarter, or more frequently if events or circumstances indicate goodwill might be impaired. We perform assessments at the reporting unit level. We compare the estimated fair value of our original equipment and aftermarket customers when title and risk of loss passesreporting units with goodwill to the customers undercarrying value of the termsreporting unit to determine if a goodwill impairment exists. If the carrying value of our arrangements with those customers, whichreporting units exceeds the fair value, the goodwill is usually atconsidered impaired. Our assessment of fair value utilizes a combination of the timeincome approach, market approach, and, in instances where a reporting unit's free cash flows do not support the value of shipment fromthe underlying assets, an asset approach. In our plants or distribution centers. Generally, in connection withassessment, for reporting units where the salefree cash flows support the value of exhaust systemsthe underlying assets, we apply a 75% weighting to certain original equipment manufacturers, we purchase catalytic convertersthe income approach and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of our customers which area 25% weighting to the market approach. Assumptions used in the assembled system. These substratesdiscounted cash flow analysis that have the most significant effect on the estimated fair value of our reporting units are included inthe weighted average cost of capital and revenue growth-rates.
We have nine reporting units that have goodwill as of December 31, 2018, four of which are as a result of the acquisition of Federal-Mogul. Based on our inventory and “passed through”2018 annual impairment analysis, each of the five reporting units that have goodwill unrelated to the customerFederal-Mogul acquisition have at least an excess of 18% between the reporting unit’s fair value and carrying value. Additionally, for the reporting units assessed, sensitivity analyses were completed indicating that a one percent increase in the discount rate, a one percent decrease in the long-term operating margin, or a one percent decrease in the long-term revenue growth rate assumptions would not result in the carrying value exceeding the fair value. Goodwill recorded as a result of our cost, plus a small margin, since we take titleacquisition of Federal-Mogul is based on preliminary estimates and assumptions, as well as other information compiled by us. We will continue to the inventory and are responsible for both the delivery and qualityevaluate available information prior to finalization of the finished product. Revenues recognizedamounts and these values may be adjusted in the measurement period.
We will review our trade names and trademarks for substrate sales were $2,028 million, $1,888 million and $1,895 million in 2016, 2015 and 2014, respectively. For our aftermarket customers, we provide for promotional incentives and returns atimpairment annually, during the timefourth quarter, or more frequently if events or circumstances indicated the assets might be impaired. We will perform a quantitative assessment of sale. Estimates areestimating fair values based upon the termsprospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The primary, and most sensitive, input utilized in determining fair values of trade names and trademarks is branded product sales. These trademarks and brand names were fair valued as part of our acquisition of Federal-Mogul and are based on preliminary estimates and assumptions, as well as other information compiled by us. While we believe these preliminary estimates provide a reasonable basis for estimating the fair value of these assets, we will continue to evaluate available information prior to finalization of the incentivesamounts and historical experience with returns. Certain taxes assessed by governmental authorities on revenue producing transactions, such asthese values may be adjusted in the measurement period.
Due to the many variables inherent in estimating fair value added taxes, are excluded from revenue and recorded on a net basis. Shipping and handling costs billed to customers are included in revenues and the relative size of the goodwill and indefinite-lived intangible assets, differences in assumptions could have a material effect on the results of our analysis.
Refer to Note 7, Goodwill and Other Intangible Assets in Item 8, "Financial Statements and Supplementary Data" for more information regarding our goodwill and indefinite-lived intangible assets.
Impairment of Long-Lived Assets, Definite-Lived Intangible Assets, and Changes to Expected Useful Lives
We monitor our long-lived and definite-lived intangible assets for impairment indicators on an on-going basis. If impairment indicators exist, we perform the required impairment analysis by comparing the undiscounted cash flows expected to be generated from the long-lived assets to the related costsnet book values. If the net book value exceeds the undiscounted cash flows, an impairment loss is recognized. Even if an impairment charge is not recognized, a reassessment of the useful lives over which depreciation or amortization is being recognized may be appropriate based on our assessment of the recoverability of these assets.
We estimate cash flows and fair value using internal budgets based on recent sales data, independent automotive production volume estimates, and customer commitments. The key factors that affect our estimates are included(1) future production estimates; (2) customer preferences and decisions; (3) product pricing; (4) manufacturing and material cost estimates; and (5) product life / business retention. Any differences in actual results from the estimates could result in fair values different from the estimated fair values, which could materially affect our future results of operations and financial condition. We believe the projections of
anticipated future cash flows and fair value assumptions are reasonable; however, changes in assumptions underlying these estimates could affect our valuations.
Pension and Other Postretirement Benefits
The Company sponsors defined benefit pension and postretirement benefit plans for certain employees and retirees around the world. Its defined benefit plans are accounted for on an actuarial basis, which requires the selection of various assumptions, including an expected long-term rate of return, discount rate, mortality rates of participants, expected rates of mortality improvement, and health care cost trend rates.
The approach to establishing the discount rate assumption for both our domestic and international plans is based on high-quality corporate bonds. The weighted-average discount rates used to calculate net periodic benefit cost for 2018 and year-end obligations as of salesDecember 31, 2018 were as follows:
|
| | | | | | | | |
| | Pension Benefits | | Other Postretirement |
| | U.S. | | Non-U.S. | |
| | Plans | | Plans | | Benefits |
| Used to calculate net periodic benefit cost | 4.1 | % | | 2.4 | % | | 4.2 | % |
| Used to calculate benefit obligations | 4.2 | % | | 2.6 | % | | 4.3 | % |
Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and is adjusted for any expected changes in the long-term outlook for the equity and fixed income markets and for changes in the composition of pension plan assets. As a result, our Statementsestimate of Income.the weighted average long-term rate of return on plan assets for all of our pension plans was loweredto 5.2% in 2018 from 5.5% in 2017.
Our pension plans generally do not require employee contributions. Our policy is to fund these pension plans in accordance with applicable domestic and international government regulations. At December 31, 2018, all legal funding requirements had been met.
The following table illustrates the sensitivity to a change in certain assumptions for our pension and postretirement benefit plan obligations. The changes in these assumptions have no effect on our funding requirements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | Other Postretirement Benefits |
| | U.S. Plans | Non-U.S. Plans |
| | Change in 2019 pension expense | | Change in PBO | | Change in 2019 pension expense | | Change in PBO | | Change in 2019 pension expense | | Change in PBO |
| | (Millions) |
| 25 basis point ("bp") decrease in discount rate | $ | — |
| | $ | 31 |
| | $ | (1 | ) | | $ | 35 |
| | $ | — |
| | $ | 8 |
|
| 25 bp increase in discount rate | $ | 1 |
| | $ | (30 | ) | | $ | 1 |
| | $ | (33 | ) | | $ | — |
| | $ | (8 | ) |
| 25 bp decrease in return on assets rate | $ | 2 |
| | n/a |
| | $ | 1 |
| | n/a |
| | n/a |
| | n/a |
|
| 25 bp increase in return on assets rate | $ | (2 | ) | | n/a |
| | $ | (1 | ) | | n/a |
| | n/a |
| | n/a |
|
The assumed health care trend rate affects the amounts reported for our postretirement benefit plan obligations. The following table illustrates the sensitivity to a change in the assumed health care trend rate:
|
| | | | | | | |
| | Total service and interest cost | | APBO |
| | (Millions) |
| 100 bp increase in health care cost trend rate | $ | 1 |
| | $ | 23 |
|
| 100 bp decrease in health care cost trend rate | $ | (1 | ) | | $ | (20 | ) |
Refer to Note 13, Pension Plans, Postretirement and Other Employee Benefits in Item 8, "Financial Statements and Supplementary Data" for more information regarding our pension and other postretirement employee benefit costs and assumptions.
Warranty Reserves
Where we have offered product warranty weand also provide for warranty costs. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims and upon specific warranty issues as they arise. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impacteffect on our consolidated financial statements.
Engineering, Research and Development
We expense engineering, research, and development costs as they are incurred. Engineering, research, and development expenses were $154 million for 2016, $146 million for 2015 and $169 million for 2014, net of reimbursements from our customers. Of these amounts, $15 million in 2016, $17 million in 2015 and $26 million in 2014 relate to research and development, which includes the research, design, and development of a new unproven product or process. Additionally, $128 million, $111 million and $118 million of engineering, research, and development expense for 2016, 2015 and 2014, respectively, relates to engineering costs we incurred for application of existing products and processes to vehicle platforms. The remainder of the expenses in each year relate to improvements and enhancements to existing products and processes. Further, our customers reimburse us for engineering, research, and development costs on some platforms when we prepare prototypes and incur costs before platform awards. Our engineering, research, and development expense for 2016, 2015 and 2014 has been reduced by $137 million, $145 million and $159 million, respectively, for these reimbursements.
Pre-production Design and Development and Tooling Assets
We expense pre-production design and development costs as incurred unless we have a contractual guarantee for reimbursement from the original equipment customer. Unbilled pre-production design and development costs recorded in prepayments and other and long-term receivables totaled $22 million and $21 million on December 31, 2016 and 2015, respectively. In addition, plant, property and equipment included $62 million and $64 million at December 31, 2016 and 2015, respectively, for original equipment tools and dies that we own, and prepayments and other included $97 million and $107 million at December 31, 2016 and 2015, respectively, for in-process tools and dies that we are building for our original equipment customers.
Income Taxes
We recognize deferred tax assets and liabilities on the basis of the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax values, and net operating losses (“NOL”) and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and
liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from the currently applicable 35% rate to a new 21% rate, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactment. The TCJA also includes an anti-deferral provision (the Global Intangible Low-Taxed Income tax) effective starting in 2018 wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of non-U.S. corporations.
We evaluate our deferred income taxestax assets quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
Valuation allowances are established for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of our deferred tax assets and the need for a valuation allowance:
Future reversals of existing taxable temporary differences;
Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;
Tax-planning strategies; and
Taxable income in prior carryback years if carryback is permitted under the relevant tax law.
The valuation allowances recorded against deferred tax assets in certain foreign jurisdictions will impact our provision for income taxes until the valuation allowances are released. Our provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
Goodwill, net
MARKET RISK SENSITIVITY
We evaluate goodwill for impairmentare exposed to certain global market risks, including foreign currency exchange risk, commodity price risk, interest rate risk associated with our debt, and equity price risk associated with our share-based compensation awards.
Foreign Currency Exchange Rate Risk
We manufacture and sell our products in North America, South America, Asia, Europe, and Africa. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, and Mexican peso.
Foreign Currency Forward Contracts — We enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. In managing our foreign currency exposures, we identify and aggregates existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The gain or loss on these contracts is recorded as foreign currency gains (losses) within cost of sales in the fourth quarterconsolidated statements of each year, or more frequently if events indicate it is warranted.income. The goodwill impairment test consists of a two-step process. In step one, we compare the estimated fair value of our reporting units with goodwill toforeign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the carryingconsolidated balance sheets. The fair value of the unit’s assetsCompany's foreign currency forward contracts was a net asset position of less than $1 million at December 31, 2018 and liabilitiesa net liability position of less than $1 million at December 31, 2017.
The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of December 31, 2018 (all of which mature in 2019):
|
| | | |
| | Notional Amount in Foreign Currency |
| | (Millions) |
| Canadian dollars | —Sell | (2 | ) |
| European euro | —Purchase | 1 |
|
| —Sell | (8 | ) |
| Polish zloty | —Purchase | 35 |
|
| Mexican pesos | —Purchase | 211 |
|
| U.S. dollars | —Purchase | 2 |
|
| —Sell | (11 | ) |
A hypothetical 10% adverse change in the U.S. relative to determine if impairment exists within the recorded balanceall other currencies would not materially affect our consolidated financial position, results of goodwill. We estimateoperations or cash flows with regard to changes in the fair valuevalues of each reporting unit using the income approach which is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors, including estimates of market trends, forecasted revenues and expenses, capital expenditures, weighted average cost of capital and other variables. A separate discount rate derived by a combination of published sources, internal estimates and weighted based on our debt to equity ratio, was used to calculate the discounted cash flows for each of our reporting units. These estimates are based on assumptions that we believe to be reasonable, but which are inherently uncertain and outside of the control of management. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist which requires step two to be performed to measure the amount of the impairment loss. The amount of impairment is determined by comparing the implied fair value of a reporting unit’s goodwill to its carrying value.foreign currency forward contracts.
At December 31, 2016, accumulated goodwill impairment charges include $306 million related to our North America Ride Performance reporting unit, $32 million related to our Europe, South America & India Ride Performance reporting unit and $11 million related to our Asia Pacific Ride Performance reporting unit.
In the fourth quarter of 2016, 2015 and 2014, as a result of our annual goodwill impairment testing, the estimated fair value of each of our reporting units substantially exceeded the carrying value of their assets and liabilities as of the testing date.
Pension and Other Postretirement Benefits
We have various defined benefit pension plans that cover someare exposed to foreign currency risk due to translation of our employees. We also have postretirement health care and life insurance plans that cover some of our domestic employees. Our pension and postretirement health care and life insurance expenses and valuations are dependent on assumptions used by our actuaries in calculating those amounts. These assumptions include discount rates, health care cost trend rates, long-term return on plan assets, retirement rates, mortality rates and other factors. Health care cost trend rate assumptions are developed based on historical cost data and an assessment of likely long-term trends. Retirement rates are based primarily on actual plan experience while mortality rates are based upon the general population experience which is not expected to differ materially from our experience.
Our approach to establishing the discount rate assumption for both our domestic and foreign plans is generally based on the yield on high-quality corporate fixed-income investments. At the end of each year, the discount rate is determined using the results of bond yield curve models basedcertain international operations into U.S. dollars as part of the consolidation process. Fluctuations in foreign currency exchange rates can therefore create volatility in the results of operations and may adversely affect our financial condition.
The following table summarizes the amounts of foreign currency translation and transaction losses:
|
| | | | | | | | |
| | | Years Ended December 31 |
| | | 2018 | | 2017 |
| | | (Millions) |
| Translation gains (losses) recorded in accumulated other comprehensive income (loss) | | $ | (134 | ) | | $ | 106 |
|
| Transaction gains (losses) recorded in earnings | | $ | (4 | ) | | $ | 1 |
|
Senior Secured Notes — We have foreign currency denominated debt, €752 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of ours. As such, an adverse change in foreign currency exchange rates will have no effect on earnings. For the portion not designated as a portfolio of high quality bonds matching the notional cash inflows with the expected benefit payments for each significant benefit plan. Based on this approach,net investment hedge, we loweredthe weighted average discount rate for all our pension plans to 3.3 percenthave other natural hedges in 2016 from 3.9 percentplace that will offset any adverse change in 2015. The discount rate for postretirement benefits was lowered to 4.2 percent in 2016 from 4.3 percent in 2015.foreign currency exchange rates.
Our approach
A hypothetical 10% adverse change in foreign exchange rates between the euro and U.S. dollar would increase the amount of cash required to determining expected returnsettle the these notes by approximately $122 million as of December 31, 2018.
Commodity Price Risk
Commodity rate price forward contracts are executed to offset a portion of our exposure to the potential change in prices for raw materials including copper, nickel, tin, zinc, and aluminum. The fair value of our commodity price forward contracts was a liability of $2 million on plan asset assumptions evaluates both historical returnsan equivalent notional amount of $27 million as well as estimates of future returns, and is adjusted for any expectedDecember 31, 2018. A hypothetical 10% adverse change in commodity prices would not materially affect our consolidated financial position, results of operations or cash flows with regard to changes in the fair values of commodity forward contracts.
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facilities to finance our short-term and long-term outlookcapital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from four to ten years. On December 31, 2018, we had $1.6 billion par value of fixed rate debt and $3.7 billion par value of floating rate debt. Of the fixed rate debt, $476 million is fixed through 2022, $626 million is fixed through 2024, and $500 million is fixed through 2026. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” earlier in this Management’s Discussion and Analysis.
We estimate the fair value of our long-term debt at December 31, 2018 was about 102% of its book value. A hypothetical one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $7 million.
Equity Price Risk
We also utilize an equity swap arrangement to offset changes in liabilities related to the equity market risks of our arrangements for deferred compensation and fixed income markets. As a result,restricted stock unit awards. Gain or losses from changes in the fair value of these equity swaps are generally offset by the losses or gains on the related liabilities. We selectively use cash-settled equity swaps to reduce market risk associated with our estimatedeferred compensation liabilities. These equity compensation liabilities increase as our stock price increases and decrease as our stock price decreases. In contrast, the value of the weighted average long-term rate of return on plan assets for all of our pension plans was loweredto 6.1 percent in 2016 from 6.6 percent in 2015.
Exceptswap agreement moves in the U.K.,opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a certain amount. The fair value of the equity swap agreement was an asset of $4 million related to approximately 250,000 common share equivalents as of December 31, 2018. A hypothetical 10% adverse change in share prices would not materially affect our pension plans generally do not require employee contributions.consolidated financial position, results of operations or cash flows with regard to the equity swaps as an offsetting change would be applied to the related deferred compensation liability.
ENVIRONMENTAL MATTERS, LEGAL PROCEEDINGS AND PRODUCT WARRANTIES
Note 15—Commitments and Contingencies of the consolidated financial statements located in Part II Item 8 — Financial Statements and Supplemental Data is incorporated herein by reference.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by Item 7A appears in Note 2 - “Summary of Significant Accounting Policies,” Note 9 - “Derivatives and Hedging Activities” and Note 10 - “Fair value of Financial Instruments” of Part II, Item 8 "Financial Statements and Supplementary Data." Other information required by Item 7A is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our policyinternal control over financial reporting is a process designed to fund our pension plansprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with applicable U.S. and foreign government regulations andgenerally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to make additional payments as fundsfuture periods are availablesubject to achieve full fundingthe risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the accumulated benefit obligation. AtCompany’s internal control over financial reporting as of December 31, 2016,2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on our assessment management concluded the Company’s internal control over financial reporting was effective as of December 31, 2018.
Management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Total assets and total revenues of the acquired Federal-Mogul business represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included herein.
March 15, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tenneco Inc. and its subsidiaries(the “Company”) as of December 31, 2018and 2017,and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all legal funding requirements had been met.material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Refer
Change in Accounting Principles
As discussed in Note 2 to Note 10the consolidated financial statements, the Company changed the manner in which it accounts for certain components of ournet periodic pension and postretirement benefit costs and the manner in which it accounts for the cash received to settle the deferred purchase price of factored receivables in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Federal-Mogul from our audit of internal control over financial reporting. Federal-Mogul's total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 15, 2019
We have served as the Company’s auditor since 2010.
TENNECO INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions Except Share and Per Share Amounts) |
| Revenues | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
|
| Costs and expenses | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 10,071 |
| | 7,812 |
| | 7,126 |
|
| Selling, general, and administrative | 794 |
| | 638 |
| | 514 |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Engineering, research, and development | 204 |
| | 158 |
| | 153 |
|
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| | 11,417 |
| | 8,845 |
| | 8,006 |
|
| Other expense (income) | | | | | |
| Loss on sale of receivables | 16 |
| | 5 |
| | 5 |
|
| Non-service pension and postretirement benefit costs | 20 |
| | 16 |
| | 84 |
|
| Loss on extinguishment of debt | 10 |
| | 1 |
| | 24 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (18 | ) | | 1 |
| | — |
|
| Other expense (income), net | 12 |
| | (2 | ) | | (1 | ) |
| | 40 |
| | 21 |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | 306 |
| | 408 |
| | 479 |
|
| Interest expense | 132 |
| | 72 |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | 174 |
| | 336 |
| | 411 |
|
| Income tax expense (benefit) | 63 |
| | 71 |
| | (4 | ) |
| Net income | 111 |
| | 265 |
| | 415 |
|
| Less: Net income attributable to noncontrolling interests | 56 |
| | 67 |
| | 68 |
|
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | 347 |
|
| Earnings per share | | | | | |
| Weighted average shares of common stock outstanding — | | | | | |
| Basic | 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Diluted | 58,758,732 |
| | 53,026,911 |
| | 56,407,436 |
|
| Basic earnings per share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
|
| Diluted earnings per share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | |
| Foreign currency translation adjustment | (134 | ) | | 106 |
| | (56 | ) |
| Defined benefit plans | (22 | ) | | 17 |
| | 51 |
|
| | (156 | ) | | 123 |
| | (5 | ) |
| Comprehensive income (loss) | (45 | ) | | 388 |
| | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 54 |
| | 69 |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | $ | (99 | ) | | $ | 319 |
| | $ | 346 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of comprehensive income (loss).
TENNECO INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 697 |
| | $ | 315 |
|
| Restricted cash | 5 |
| | 3 |
|
| Receivables: | | | |
| Customer notes and accounts, net | 2,487 |
| | 1,294 |
|
| Other | 85 |
| | 27 |
|
| Inventories | 2,245 |
| | 820 |
|
| Prepayments and other current assets | 590 |
| | 288 |
|
| Total current assets | 6,109 |
| | 2,747 |
|
| Property, plant and equipment, net | 3,501 |
| | 1,691 |
|
| Long-term receivables, net | 10 |
| | 9 |
|
| Goodwill | 869 |
| | 49 |
|
| Intangibles, net | 1,519 |
| | 22 |
|
| Investments in nonconsolidated affiliates | 544 |
| | 2 |
|
| Deferred income taxes | 467 |
| | 213 |
|
| Other assets | 213 |
| | 63 |
|
| Total assets | $ | 13,232 |
| | $ | 4,796 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Short-term debt, including current maturities of long-term debt | $ | 153 |
| | $ | 103 |
|
| Accounts payable | 2,759 |
| | 1,582 |
|
| Accrued compensation and employee benefits | 343 |
| | 141 |
|
| Accrued income taxes | 64 |
| | 27 |
|
| Accrued expenses and other current liabilities | 1,001 |
| | 424 |
|
| Total current liabilities | 4,320 |
| | 2,277 |
|
| Long-term debt | 5,340 |
| | 1,358 |
|
| Deferred income taxes | 88 |
| | 11 |
|
| Pension and postretirement benefits | 1,167 |
| | 268 |
|
| Deferred credits and other liabilities | 263 |
| | 158 |
|
| Commitments and contingencies |
| |
|
| Total liabilities | 11,178 |
| | 4,072 |
|
| Redeemable noncontrolling interests | 138 |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | |
| Preferred stock—$0.01 par value; none issued | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | 1 |
| | 1 |
|
| Class B non-voting convertible common stock—$0.01 par value; 2018—23,793,669 shares issued | — |
| | — |
|
| Additional paid-in capital | 4,360 |
| | 3,112 |
|
| Accumulated other comprehensive loss | (692 | ) | | (538 | ) |
| Accumulated deficit | (1,013 | ) | | (1,009 | ) |
| | 2,656 |
| | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | (930 | ) | | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | 1,726 |
| | 636 |
|
| Noncontrolling interests | 190 |
| | 46 |
|
| Total equity | 1,916 |
| | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 13,232 |
| | $ | 4,796 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Operating Activities | | | | | |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Deferred income taxes | (65 | ) | | (8 | ) | | (84 | ) |
| Stock-based compensation | 14 |
| | 14 |
| | 14 |
|
| Restructuring charges and asset impairments, net of cash paid | 49 |
| | 8 |
| | (13 | ) |
| Change in pension and postretirement benefit plans | (8 | ) | | (15 | ) | | 47 |
|
| Equity in earnings of nonconsolidated affiliates | (18 | ) | | 1 |
| | — |
|
| Cash dividends received from nonconsolidated affiliates | 2 |
| | — |
| | — |
|
| Loss on sale of assets | 16 |
| | 5 |
| | 4 |
|
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (190 | ) | | (81 | ) | | (325 | ) |
| Inventories | 27 |
| | (94 | ) | | (55 | ) |
| Payables and accrued expenses | 291 |
| | 136 |
| | 140 |
|
| Accrued interest and income taxes | (19 | ) | | 1 |
| | 13 |
|
| Other assets and liabilities | (119 | ) | | 48 |
| | 5 |
|
| Net cash provided by operating activities | 439 |
| | 517 |
| | 374 |
|
| Investing Activities | | | | | |
| Federal-Mogul acquisition, net of cash acquired | (2,194 | ) | | — |
| | — |
|
| Proceeds from sale of assets | 9 |
| | 8 |
| | 6 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| | — |
|
| Cash payments for plant, property, and equipment | (507 | ) | | (419 | ) | | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | 174 |
| | 112 |
| | 110 |
|
| Other | 4 |
| | (10 | ) | | — |
|
| Net cash used by investing activities | (2,514 | ) | | (300 | ) | | (229 | ) |
| Financing Activities | | | | | |
| Proceeds from term loans and notes | 3,426 |
| | 160 |
| | 529 |
|
| Repayments of term loans and notes | (453 | ) | | (36 | ) | | (545 | ) |
| Borrowings on revolving lines of credit | 5,149 |
| | 6,664 |
| | 5,417 |
|
| Payments on revolving lines of credit | (5,405 | ) | | (6,737 | ) | | (5,221 | ) |
| Issuance (repurchase) of common shares | (1 | ) | | (1 | ) | | 13 |
|
| Cash dividends | (59 | ) | | (53 | ) | | — |
|
| Debt issuance cost of long-term debt | (95 | ) | | (8 | ) | | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | (169 | ) | | (225 | ) |
| Net increase (decrease) in bank overdrafts | (5 | ) | | (7 | ) | | 10 |
|
| Other | (30 | ) | | — |
| | — |
|
| Distributions to noncontrolling interest partners | (51 | ) | | (64 | ) | | (55 | ) |
| Net cash provided (used) by financing activities | 2,476 |
| | (251 | ) | | (86 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (17 | ) | | 3 |
| | 2 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 384 |
| | (31 | ) | | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 318 |
| | 349 |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 702 |
| | $ | 318 |
| | $ | 349 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for interest | $ | 143 |
| | $ | 78 |
| | $ | 76 |
|
| Cash paid during the year for income taxes, net of refunds | $ | 113 |
| | $ | 95 |
| | $ | 113 |
|
| Non-cash Investing and Financing Activities | | | | | |
| Period end balance of trade payables for plant, property, and equipment | $ | 135 |
| | $ | 59 |
| | $ | 68 |
|
| Deferred purchase price of receivables factored in period | $ | 154 |
| | $ | 114 |
| | $ | 109 |
|
| Stock issued for acquisition of Federal-Mogul | $ | (1,236 | ) | | $ | — |
| | $ | — |
|
| Stock transferred for acquisition of Federal-Mogul | $ | 1,236 |
| | $ | — |
| | $ | — |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of cash flows.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tenneco Inc. Shareholders' equity | | |
| | $0.01 Par Value Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Treasury Stock | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
| | (Millions) |
| Balance as of December 31, 2015 | $ | 1 |
| | $ | 3,081 |
| | $ | (658 | ) | | $ | (1,501 | ) | | $ | (536 | ) | | $ | 387 |
| | $ | 39 |
| | $ | 426 |
|
| Net income | — |
| | — |
| | — |
| | 347 |
| | — |
| | 347 |
| | 32 |
| | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | — |
| | — |
| | (52 | ) | | — |
| | — |
| | (52 | ) | | (2 | ) | | (54 | ) |
| Defined benefit plans | — |
| | — |
| | 51 |
| | — |
| | — |
| | 51 |
| | — |
| | 51 |
|
| Comprehensive income |
| | | | | | | |
| | 346 |
| | 30 |
| | 376 |
|
| Stock-based compensation expense | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (225 | ) | | (225 | ) | | — |
| | (225 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | (22 | ) |
| Balance as of December 31, 2016 | 1 |
| | 3,098 |
| | (659 | ) | | (1,154 | ) | | (761 | ) | | 525 |
| | 47 |
| | 572 |
|
| Net income | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
| | 31 |
| | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
| | (1 | ) | | 103 |
|
| Defined benefit plans | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Comprehensive income |
| | | | | | | |
| | 319 |
| | 30 |
| | 349 |
|
Stock-based compensation expense
| — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) | | — |
| | (53 | ) |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (169 | ) | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Balance as of December 31, 2017 | 1 |
| | 3,112 |
| | (538 | ) | | (1,009 | ) | | (930 | ) | | 636 |
| | 46 |
| | 682 |
|
| Net income | — |
| | — |
| | — |
| | 55 |
| | — |
| | 55 |
| | 27 |
| | 82 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | (132 | ) | | — |
| | — |
| | (132 | ) | | — |
| | (132 | ) |
| Defined benefit plans | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Comprehensive income |
| | | | | | | |
| | (99 | ) | | 27 |
| | (72 | ) |
Adjustments to adopt new accounting standards (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued | — |
| | 1,236 |
| | — |
| | — |
| | — |
| | 1,236 |
| | — |
| | 1,236 |
|
| Federal-Mogul Acquisition | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 143 |
| | 143 |
|
| Stock-based compensation expense | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (59 | ) | | — |
| | (59 | ) | | — |
| | (59 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| |
| | — |
| | — |
| | (26 | ) | | (26 | ) |
| Balance as of December 31, 2018 | $ | 1 |
| | $ | 4,360 |
| | $ | (692 | ) | | $ | (1,013 | ) | | $ | (930 | ) | | $ | 1,726 |
| | $ | 190 |
| | $ | 1,916 |
|
(1) The cumulative effect of the adoption of ASU 2016-16 was an increase to accumulated deficit of $1 million, and the cumulative effect of the adoption of ASC 606 was a decrease to accumulated deficit of $1 million.
The accompanying notes to the consolidated financial statements are an integral
part of these statements of changes in shareholders’ equity.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Tenneco Inc. ("Tenneco" or "the Company") was formed under the laws of Delaware in 1996. Tenneco designs, manufactures, and sells products and services for light vehicle, commercial truck, off-highway, industrial and aftermarket customers. The Company is one of the world’s leading manufacturers of clean air, powertrain, and ride performance products and systems, and serves both original equipment manufacturers (“OEM”) and replacement markets worldwide.
Effective October 1, 2018, the Company completed the acquisition (the "Acquisition") of Federal-Mogul LLC ("Federal-Mogul"), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems. Federal-Mogul serves the world’s foremost OEM and servicers (“OES”, and together with OEM, “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off road, agricultural, marine, rail, aerospace, power generation, and industrial equipment, as well as the worldwide aftermarket. The Company expects to separate its businesses to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company and a new Powertrain Technology company, in the second half of 2019.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
Revision of Previously Issued Financial Statements
The Company identified an error in the accounting for certain costs capitalized into inventory that did not constitute inventoriable costs in its historical financial statements. Costs incorrectly capitalized in ending inventory were $49 million and $42 million as of December 31, 2017 and 2016.
The Company evaluated the effect of this item as well as the items discussed below on prior periods under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality” and determined the amounts were not material, individually or in the aggregate, to previously issued financial statements. The Company also evaluated the effect of correcting these items through a cumulative adjustment to our financial statements and concluded, based on the guidance within SEC SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, it was appropriate to revise our previously issued financial statements to correct these errors. The Company also revised for other immaterial errors including (i) capitalization errors related to construction-in-process; (ii) errors related to the estimation of warranty and rebate liabilities; (iii) errors related to the cash flow presentation for borrowings and repayments on revolving lines of credit (net versus gross); (iv) errors related to currency on certain non-income tax transactions; and (v) errors surrounding the misclassification of translation adjustments within accumulated other comprehensive income. These adjustments related to various line items as shown in the tables below. As a result, certain amounts in the consolidated financial statements have been revised, and will be revised for interim periods in future filings, in order to correct for these errors. These revisions have also been reflected in Note 22, Quarterly Financial Data (Unaudited) to show the effects in the unaudited quarterly financial statements.
Reclassifications: Certain amounts in the prior years have been aggregated or disaggregated to conform to current year presentation. These reclassifications have no effect on previously reported earnings before income taxes and noncontrolling interests or net income, other comprehensive income (loss), current or total assets, current or total liabilities, and the cash provided (used) by operating, investing or financing activities within the consolidated statements of cash flows.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables present the effect of these reclassifications and revisions for the financial statement line items adjusted in the affected periods included within this annual financial report:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| | | (Millions, except per share amounts) |
| Consolidated statement of income | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 7,809 |
| | — |
| | 7,809 |
| | 3 |
| | 7,812 |
|
| Selling, general, and administrative | | 636 |
| | — |
| | 636 |
| | 2 |
| | 638 |
|
| Depreciation and amortization | | 224 |
| | — |
| | 224 |
| | 2 |
| | 226 |
|
| Engineering, research, and development | | 158 |
| | — |
| | 158 |
| | — |
| | 158 |
|
| Goodwill impairment charge | | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
| | | 8,838 |
| | — |
| | 8,838 |
| | 7 |
| | 8,845 |
|
| Other expense (income) | | | | | | | | | | |
| Loss on sale of receivables | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Non-service pension and postretirement benefit costs | | — |
| | 16 |
| | 16 |
| | — |
| | 16 |
|
| Loss on extinguishment of debt | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| Other expense (income), net | | 14 |
| | (17 | ) | | (3 | ) | | 1 |
| | (2 | ) |
| | | 19 |
| | 1 |
| | 20 |
| | 1 |
| | 21 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 417 |
| | (1 | ) | | 416 |
| | (8 | ) | | 408 |
|
| Interest expense | | 73 |
| | (1 | ) | | 72 |
| | — |
| | 72 |
|
| Earnings before income taxes and noncontrolling interests | | 344 |
| | — |
| | 344 |
| | (8 | ) | | 336 |
|
| Income tax expense (benefit) | | 70 |
| | — |
| | 70 |
| | 1 |
| | 71 |
|
| Net income | | 274 |
| | — |
| | 274 |
| | (9 | ) | | 265 |
|
| Less: Net income attributable to noncontrolling interests | | 67 |
| | | | 67 |
| | — |
| | 67 |
|
| Net income attributable to Tenneco Inc. | | $ | 207 |
| | $ | — |
| | $ | 207 |
| | $ | (9 | ) | | $ | 198 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic earnings per share of common stock | | $ | 3.93 |
| | $ | — |
| | $ | 3.93 |
| | $ | (0.18 | ) | | $ | 3.75 |
|
| Diluted earnings per share of common stock | | $ | 3.91 |
| | $ | — |
| | $ | 3.91 |
| | $ | (0.18 | ) | | $ | 3.73 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statement of comprehensive income | | (Millions) |
| Net income | | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | (9 | ) | | $ | 265 |
|
| Other comprehensive income (loss)—net of tax | | | | | | | | | | |
| Foreign currency translation adjustment | | 99 |
| | — |
| | 99 |
| | 7 |
| | 106 |
|
| Defined benefit plans | | 27 |
| | — |
| | 27 |
| | (10 | ) | | 17 |
|
| | | 126 |
| | — |
| | 126 |
| | (3 | ) | | 123 |
|
| Comprehensive income (loss) | | 400 |
| | — |
| | 400 |
| | (12 | ) | | 388 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 69 |
| | — |
| | 69 |
| | — |
| | 69 |
|
| Comprehensive income (loss) attributable to common shareholders | | $ | 331 |
| | $ | — |
| | $ | 331 |
| | $ | (12 | ) | | $ | 319 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| | | (Millions, except per share amounts) |
| Consolidated statement of income | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | | $ | 8,599 |
| | $ | — |
| | $ | 8,599 |
| | $ | (2 | ) | | $ | 8,597 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 7,116 |
| | — |
| | 7,116 |
| | 10 |
| | 7,126 |
|
| Selling, general, and administrative | | 513 |
| | — |
| | 513 |
| | 1 |
| | 514 |
|
| Depreciation and amortization | | 212 |
| | — |
| | 212 |
| | 1 |
| | 213 |
|
| Engineering, research, and development | | 154 |
| | — |
| | 154 |
| | (1 | ) | | 153 |
|
| | | 7,995 |
| | — |
| | 7,995 |
| | 11 |
| | 8,006 |
|
| Other expense (income) | | | | | | | | | | |
| Loss on sale of receivables | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Non-service pension and postretirement benefit costs | | — |
| | 84 |
| | 84 |
| | — |
| | 84 |
|
| Loss on extinguishment of debt | | — |
| | 24 |
| | 24 |
| | — |
| | 24 |
|
| Other expense (income), net | | 83 |
| | (84 | ) | | (1 | ) | | — |
| | (1 | ) |
| | | 88 |
| | 24 |
| | 112 |
| | — |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 516 |
| | (24 | ) | | 492 |
| | (13 | ) | | 479 |
|
| Interest expense | | 92 |
| | (24 | ) | | 68 |
| | — |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | | 424 |
| | — |
| | 424 |
| | (13 | ) | | 411 |
|
| Income tax expense (benefit) | | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Net income | | 424 |
| | — |
| | 424 |
| | (9 | ) | | 415 |
|
| Less: Net income attributable to noncontrolling interests | | 68 |
| | — |
| | 68 |
| | — |
| | 68 |
|
| Net income attributable to Tenneco Inc. | | $ | 356 |
| | $ | — |
| | $ | 356 |
| | $ | (9 | ) | | $ | 347 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic earnings per share of common stock | | $ | 6.36 |
| | $ | — |
| | $ | 6.36 |
| | $ | (0.16 | ) | | $ | 6.20 |
|
| Diluted earnings per share of common stock | | $ | 6.31 |
| | $ | — |
| | $ | 6.31 |
| | $ | (0.16 | ) | | $ | 6.15 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statement of comprehensive income | | (Millions) |
| Net income | | $ | 424 |
| | $ | — |
| | $ | 424 |
| | $ | (9 | ) | | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | | | | | | |
| Foreign currency translation adjustment | | (45 | ) | | — |
| | (45 | ) | | (11 | ) | | (56 | ) |
| Defined benefit plans | | 41 |
| | — |
| | 41 |
| | 10 |
| | 51 |
|
| | | (4 | ) | | — |
| | (4 | ) | | (1 | ) | | (5 | ) |
| Comprehensive income (loss) | | 420 |
| | — |
| | 420 |
| | (10 | ) | | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 64 |
| | — |
| | 64 |
| | — |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | | $ | 356 |
| | $ | — |
| | $ | 356 |
| | $ | (10 | ) | | $ | 346 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated balance sheet | | (Millions) |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 315 |
| | $ | — |
| | $ | 315 |
| | $ | — |
| | $ | 315 |
|
| Restricted cash | | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Receivables: | | | | | |
| |
| | |
| Customer notes and accounts, net | | 1,294 |
| | — |
| | 1,294 |
| | — |
| | 1,294 |
|
| Other | | 27 |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Inventories | | 869 |
| | — |
| | 869 |
| | (49 | ) | | 820 |
|
| Prepayments and other current assets | | 291 |
| | — |
| | 291 |
| | (3 | ) | | 288 |
|
| Total current assets | | 2,799 |
| | — |
| | 2,799 |
| | (52 | ) | | 2,747 |
|
| Property, plant and equipment, net | | 1,615 |
| | 79 |
| | 1,694 |
| | (3 | ) | | 1,691 |
|
| Long-term receivables, net | | 9 |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Goodwill | | 49 |
| | — |
| | 49 |
| | — |
| | 49 |
|
| Intangibles, net | | 22 |
| | — |
| | 22 |
| | — |
| | 22 |
|
| Investments in nonconsolidated affiliates | | — |
| | 2 |
| | 2 |
| | — |
| | 2 |
|
| Deferred income taxes | | 204 |
| | — |
| | 204 |
| | 9 |
| | 213 |
|
| Other assets | | 144 |
| | (81 | ) | | 63 |
| | — |
| | 63 |
|
| Total assets | | $ | 4,842 |
| | $ | — |
| | $ | 4,842 |
| | $ | (46 | ) | | $ | 4,796 |
|
| | | | | | | | | | | |
| Short-term debt, including current maturities of long-term debt | | $ | 83 |
| | $ | 20 |
| | $ | 103 |
| | $ | — |
| | $ | 103 |
|
| Accounts payable | | 1,705 |
| | (123 | ) | | 1,582 |
| | — |
| | 1,582 |
|
| Accrued compensation and employee benefits | | | | 141 |
| | 141 |
| | — |
| | 141 |
|
| Accrued income taxes | | 45 |
| | (20 | ) | | 25 |
| | 2 |
| | 27 |
|
| Accrued interest | | 14 |
| | (14 | ) | | — |
| | — |
| | — |
|
| Accrued liabilities | | 287 |
| | (287 | ) | | — |
| | — |
| | — |
|
| Other | | 132 |
| | (132 | ) | | — |
| | — |
| | |
| Accrued expenses and other current liabilities | | | | 415 |
| | 415 |
| | 9 |
| | 424 |
|
| Total current liabilities | | 2,266 |
| | — |
| | 2,266 |
| | 11 |
| | 2,277 |
|
| Long-term debt | | 1,358 |
| | — |
| | 1,358 |
| | — |
| | 1,358 |
|
| Deferred income taxes | | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
| Pension and postretirement benefits | | 268 |
| | — |
| | 268 |
| | — |
| | 268 |
|
| Deferred credits and other liabilities | | 155 |
| | — |
| | 155 |
| | 3 |
| | 158 |
|
| Commitments and contingencies | | | | | |
| |
| | |
| Total liabilities | | 4,058 |
| | — |
| | 4,058 |
| | 14 |
| | 4,072 |
|
| Redeemable noncontrolling interests | | 42 |
| | | | 42 |
| | — |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | | | | | | | | |
| Preferred stock—$0.01 par value; none issued | | — |
| | — |
| | — |
| | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Additional paid-in capital | | 3,112 |
| | — |
| | 3,112 |
| | — |
| | 3,112 |
|
| Accumulated other comprehensive loss | | (541 | ) | | — |
| | (541 | ) | | 3 |
| | (538 | ) |
| Accumulated deficit | | (946 | ) | | — |
| | (946 | ) | | (63 | ) | | (1,009 | ) |
| | | 1,626 |
| | — |
| | 1,626 |
| | (60 | ) | | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | | (930 | ) | | — |
| | (930 | ) | | — |
| | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | | 696 |
| | — |
| | 696 |
| | (60 | ) | | 636 |
|
| Noncontrolling interests | | 46 |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Total equity | | 742 |
| | — |
| | 742 |
| | (60 | ) | | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,842 |
| | $ | — |
| | $ | 4,842 |
| | $ | (46 | ) | | $ | 4,796 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statements of cash flow | | (Millions) |
| Operating Activities | | | | | | | | | | |
| Net income | | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | (9 | ) | | $ | 265 |
|
| Net cash provided by operating activities | | 517 |
| | — |
| | 517 |
| | — |
| | 517 |
|
| | | | | | | | | | | |
| Investing Activities | | | | | | | | | | |
| Net cash used by investing activities | | (300 | ) | | — |
| | (300 | ) | | — |
| | (300 | ) |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | |
| Proceeds from term loans and notes | | — |
| | 137 |
| | 137 |
| | 23 |
| | 160 |
|
| Repayments of term loans and notes | | — |
| | (19 | ) | | (19 | ) | | (17 | ) | | (36 | ) |
| Retirement of long-term debt | | (19 | ) | | 19 |
| | — |
| | — |
| | — |
|
| Issuance of long-term debt | | 137 |
| | (137 | ) | | — |
| | — |
| | — |
|
| Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 6,664 |
| | 6,664 |
|
| Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (6,737 | ) | | (6,737 | ) |
| Net increase (decrease) in revolver borrowings | | (67 | ) | | — |
| | (67 | ) | | 67 |
| | — |
|
| Net cash provided (used) by financing activities | | $ | (251 | ) | | $ | — |
| | $ | (251 | ) | | $ | — |
| | $ | (251 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statements of cash flow | | (Millions) |
| Operating Activities | | | | | | | | | | |
| Net income | | $ | 424 |
| | $ | — |
| | $ | 424 |
| | $ | (9 | ) | | $ | 415 |
|
| Net cash provided by operating activities | | 374 |
| | — |
| | 374 |
| | — |
| | 374 |
|
| | | | | | | | | | | |
| Investing Activities | | | | | | | | | | |
| Net cash used by investing activities | | (229 | ) | | — |
| | (229 | ) | | — |
| | (229 | ) |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | |
| Proceeds from term loans and notes | | — |
| | 509 |
| | 509 |
| | 20 |
| | 529 |
|
| Repayments of term loans and notes | | — |
| | (531 | ) | | (531 | ) | | (14 | ) | | (545 | ) |
| Retirement of long-term debt | | (531 | ) | | 531 |
| | — |
| | — |
| | — |
|
| Issuance of long-term debt | | 509 |
| | (509 | ) | | — |
| | — |
| | — |
|
| Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 5,417 |
| | 5,417 |
|
| Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (5,221 | ) | | (5,221 | ) |
| Net increase (decrease) in revolver borrowings | | 202 |
| | — |
| | 202 |
| | (202 | ) | | — |
|
| Net cash provided (used) by financing activities | | $ | (86 | ) | | $ | — |
| | $ | (86 | ) | | $ | — |
| | $ | (86 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Revisions | | As Revised |
| Consolidated statements of shareholders' equity | | (Millions) |
| Accumulated Deficit | | | | | | |
| Balance January 1 | | $ | (1,100 | ) | | $ | (54 | ) | | $ | (1,154 | ) |
| Net income attributable to Tenneco Inc. | | 207 |
| | (9 | ) | | 198 |
|
| Cash dividends declared | | (53 | ) | | — |
| | (53 | ) |
| Balance December 31 | | $ | (946 | ) | | $ | (63 | ) | | $ | (1,009 | ) |
| Accumulated Other Comprehensive Loss | | | | | | |
| Balance January 1 | | $ | (665 | ) | | $ | 6 |
| | $ | (659 | ) |
| Other comprehensive loss—net of tax: | |
|
| |
|
| |
|
|
| Foreign currency translation adjustment | | 97 |
| | 7 |
| | 104 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Balance December 31 | | $ | (541 | ) | | $ | 3 |
| | $ | (538 | ) |
| Total Tenneco Inc. Shareholders' Equity | | | | | | |
| Balance January 1 | | $ | 573 |
| | $ | (48 | ) | | $ | 525 |
|
| Net income attributable to Tenneco Inc. | | 207 |
| | (9 | ) | | 198 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | 97 |
| | 7 |
| | 104 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Comprehensive income | | 331 |
| | (12 | ) | | 319 |
|
| Stock-based compensation expense | | 14 |
| | — |
| | 14 |
|
| Cash dividends | | (53 | ) | | — |
| | (53 | ) |
| Treasury stock | | (169 | ) | | — |
| | (169 | ) |
| Balance December 31 | | $ | 696 |
| | $ | (60 | ) | | $ | 636 |
|
| Total Equity | | | | | | |
| Balance January 1 | | $ | 620 |
| | $ | (48 | ) | | $ | 572 |
|
| Net income | | 238 |
| | (9 | ) | | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | 96 |
| | 7 |
| | 103 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Comprehensive income | | 361 |
| | (12 | ) | | 349 |
|
| Stock-based compensation expense | | 14 |
| | — |
| | 14 |
|
| Cash dividends | | (53 | ) | | — |
| | (53 | ) |
| Treasury stock | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | | (31 | ) | | — |
| | (31 | ) |
| Balance December 31 | | $ | 742 |
| | $ | (60 | ) | | $ | 682 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Revisions | | As Revised |
| Consolidated statements of shareholders' equity | | (Millions) |
| Accumulated Deficit | | | | | | |
| Balance January 1 | | $ | (1,456 | ) | | $ | (45 | ) | | $ | (1,501 | ) |
| Net income attributable to Tenneco Inc. | | 356 |
| | (9 | ) | | 347 |
|
| Balance December 31 | | $ | (1,100 | ) | | $ | (54 | ) | | $ | (1,154 | ) |
| Accumulated Other Comprehensive Loss | | | | | | |
| Balance January 1 | | $ | (665 | ) | | $ | 7 |
| | $ | (658 | ) |
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (41 | ) | | (11 | ) | | (52 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Balance December 31 | | $ | (665 | ) | | $ | 6 |
| | $ | (659 | ) |
| Total Tenneco Inc. shareholders' equity | | | | | | |
| Balance January 1 | | $ | 425 |
| | $ | (38 | ) | | $ | 387 |
|
| Net income attributable to Tenneco Inc. | | 356 |
| | (9 | ) | | 347 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (41 | ) | | (11 | ) | | (52 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Comprehensive income | | 356 |
| | (10 | ) | | 346 |
|
| Stock-based compensation expense | | 17 |
| | — |
| | 17 |
|
| Treasury stock | | (225 | ) | | — |
| | (225 | ) |
| Balance December 31 | | $ | 573 |
| | $ | (48 | ) | | $ | 525 |
|
| Total Equity | | | | | | |
| Balance January 1 | | $ | 464 |
| | $ | (38 | ) | | $ | 426 |
|
| Net income | | 388 |
| | (9 | ) | | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (43 | ) | | (11 | ) | | (54 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Comprehensive income | | 386 |
| | (10 | ) | | 376 |
|
| Stock-based compensation expense | | 17 |
| | — |
| | 17 |
|
| Treasury stock | | (225 | ) | | — |
| | (225 | ) |
| Distribution declared to noncontrolling interests | | (22 | ) | | — |
| | (22 | ) |
| Balance December 31 | | $ | 620 |
| | $ | (48 | ) | | $ | 572 |
|
Summary of Significant Accounting Policies
Principles of Consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly owned subsidiaries, and any partially owned subsidiary it has the ability to control. Control generally equates to ownership percentage, whereby investments more information regarding our pensionthat 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. See Note 8, Investment in Nonconsolidated Affiliates.
The Company does not consolidate any entity for which it has a variable interest based solely on the power to direct the activities and significant participation in the entity's expected results that would not otherwise be consolidated based on control through voting interests. Further, its affiliates are businesses established and maintained in connection with its operating strategy and are not special purpose entities. All intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Cash and Cash Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. The carrying value of cash and cash equivalents approximate fair value.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Cash: The Company is required to provide cash collateral in connection with certain contractual arrangements and statutory requirements. The Company has $5 million and $3 million of restricted cash at December 31, 2018 and 2017 in support of these arrangements and requirements.
Notes and Accounts Receivable: Notes and accounts receivable are stated at net realizable value, which approximates fair value. Receivables are reduced by an allowance for amounts that may become uncollectible in the future. The allowance is an estimate based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts or notes receivable. A receivable is past due if payments have not been received within the agreed-upon invoice terms. Account balances are charged-off against the allowance when management determines the receivable will not be recovered.
The allowance for doubtful accounts on short-term and long-term accounts receivable was $17 million and $16 million at December 31, 2018 and 2017. The allowance for doubtful accounts on short-term and long-term notes receivable was zero at both December 31, 2018 and 2017.
Inventories: Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost methods. Work in process includes purchased parts such as substrates coated with precious metals. Cost of inventory includes direct materials, labor, and applicable manufacturing overhead costs. The value of inventories are reduced for excess and obsolescence based on management's review of on-hand inventories compared to historical and estimated future sales and usage. Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the products.
Redeemable Noncontrolling Interests: The Company has noncontrolling interests with redemption features. These redemption features could require the Company to make an offer to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of its subsidiaries. As a result of the Acquisition, the Company acquired $10 million in redeemable noncontrolling interests (exclusive of interests related to a subsidiary in India) and triggered the related redemption features which provide the holders the option to require the Company to redeem the noncontrolling interests. The noncontrolling interest partners have elected not to require the Company to redeem their shares. The redemption of these redeemable noncontrolling interests is not solely within the Company's control. Accordingly, these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As a result the noncontrolling interests have not been remeasured to redemption value.
In addition, the Company acquired $86 million in redeemable noncontrolling interests related to a subsidiary in India. The Company initiated the process to make a tender offer of the shares it does not own due to the change in control in accordance with local regulations triggered by the Acquisition. It is probable these shares will become redeemable during 2019 under the tender offer at a price that is representative of fair value and as a result the noncontrolling interest is presented in the temporary equity section of the Company’s consolidated balance sheets. At the Acquisition date, this redeemable noncontrolling interest was recorded at its estimated fair value based on the preliminary purchase price allocation. The carrying amount for this redeemable noncontrolling interest at December 31, 2018 is currently greater than the redemption value as evidenced by the tender offer price resulting in no adjustment to reflect the noncontrolling interest at redemption value.
At December 31, 2018, the Company had previously held redeemable noncontrolling interests of $35 million, for which the redemption is not solely within the Company's control and these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As such, the noncontrolling interests have not been remeasured to redemption value.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a rollforward of the activity in the redeemable noncontrolling interests for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | |
| | December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Balance January 1 | $ | 42 |
| | $ | 40 |
| | $ | 41 |
|
| Federal-Mogul acquisition | 96 |
| | — |
| | — |
|
| Net income attributable to redeemable noncontrolling interests | 29 |
| | 36 |
| | 36 |
|
| Other comprehensive (loss) income | (2 | ) | | 3 |
| | (2 | ) |
| Contributions received | 6 |
| | — |
| | — |
|
| Dividends declared | (33 | ) | | (37 | ) | | (35 | ) |
| Balance December 31 | $ | 138 |
| | $ | 42 |
| | $ | 40 |
|
Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets are recorded at cost or fair value established at acquisition. Definite-lived intangible assets include customer relationships and platforms, patented and unpatented technology, and licensing agreements. Long-lived asset groups are evaluated for impairment when impairment indicators exist. If the carrying value of a long-lived asset group is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset group exceeds its fair value. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the assets for financial reporting purposes. Expenditures for maintenance and repairs are expensed as incurred.
Goodwill, net: Goodwill is determined as the excess of fair value over amounts attributable to specific tangible and intangible assets. Goodwill is evaluated for impairment annually, during the fourth quarter, or more frequently, if impairment indicators exist. An impairment indicator exists when a reporting unit's carrying value exceeds its fair value. When performing the goodwill impairment testing, a reporting units' fair value is based on valuation techniques using the best available information. The assessment of fair value utilizes a combination of the income approach and market approach. The impairment charge is the excess of the goodwill carrying value over the implied fair value of goodwill using a one-step quantitative approach.
Trade names and trademarks: Trade names and trademarks are stated at fair value established at acquisition or cost. These indefinite-lived intangible assets will be evaluated for impairment annually during the fourth quarter, or more frequently, if impairment indicators exist. An impairment exists when a trade name and trademarks' carrying value exceeds its fair value. The fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The impairment charge is the excess of the assets carrying value over its fair value.
Pre-production Design and Development and Tooling Assets: The Company expenses pre-production design and development costs as incurred unless there is a contractual guarantee for reimbursement from the original equipment customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has title to the assets are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee for reimbursement or has the non-cancelable right to use the assets during the term of the supply arrangement from the customer are capitalized in prepayments and other current assets.
Prepayments and other current assets included $193 million and $142 million at December 31, 2018 and 2017, respectively, for in-process tools and dies being built for OE customers and unbilled pre-production design and development costs.
Internal Use Software Assets: Certain costs related to the purchase and development of software used in the business operations are capitalized. Costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology, and other economic factors. Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the consolidated statements of cash flows.
Income Taxes: Deferred tax assets and liabilities are recognized on the basis of the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and the respective tax values, and net operating losses ("NOL") and tax credit carryforwards on a taxing jurisdiction basis. Deferred tax assets and
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
liabilities are measured using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in the results of operations in the period that includes the enactment date under the law.
Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. Valuation allowances are established in certain jurisdictions based on a more likely than not standard. The ability to realize deferred tax assets depends on the Company's ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each tax jurisdiction. The Company considers the various possible sources of taxable income when assessing the realization of its deferred tax assets. The valuation allowances recorded against deferred tax assets generated by taxable losses in certain jurisdictions will effect the provision for income taxes until the valuation allowances are released. The Company's provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
The Company records uncertain tax positions on the basis of a two-step process whereby it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and for those tax positions that meet the more likely than not criteria, the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority is recognized.
The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.
Pension and other postretirement benefit plan obligations: Pensions and other postretirement employee benefit costs and assumptions.related liabilities and assets are dependent upon assumptions used in calculating such amounts. These assumptions include discount rates, long term rate of return on plan assets, health care cost trends, compensation, and other factors. Actual results that differ from the assumptions used are accumulated and amortized over future periods, and accordingly, generally affect recognized expense in future periods. The cost of benefits provided by defined benefit pension and other postretirement plans is recorded in the period employees provide service. Future pension expense for certain significant funded benefit plans is calculated using an expected return on plan asset methodology.
Investments with registered investment companies, common and preferred stocks, and certain government debt securities are valued at the closing price reported on the active market on which the securities are traded. Corporate debt securities are valued by third-party pricing sources using the multi-dimensional relational model using instruments with similar characteristics. Hedge funds and the collective trusts are valued at net asset value (NAV) per share which are provided by the respective investment sponsors or investment advisers.
Revenue Recognition: The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09 on January 1, 2018, which required it to recognize revenue when a customer obtains control rather than when substantially all risks and rewards of a good or service have been transferred. ASU 2014-09 was adopted by applying the modified retrospective method; see the Recently Adopted Accounting Standards section for additional information pertaining to the adoption of ASU 2014-09. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for those periods. The following accounting policies became effective upon the adoption of ASU 2014-09:
The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Revenue is recognized for sales to OE and aftermarket customers when transfer of control of the related good or service has occurred. Revenue from most OE and aftermarket goods and services is transferred to customers at a point in time. Contract terms with certain OE customers results in products and services being transferred over time due to the customized nature of some of the Company's products together with contractual provisions in certain customer contracts that provide the Company with an enforceable right to payment for performance completed to date. The Company considers an input measure (e.g., costs incurred to date relative to total estimated costs at completion) as a fair measure of progress for the recognition of over time revenue associated with these customized parts. A cost measure best depicts the means of transfer of goods to the customer, which occurs as the Company incurs costs to fulfill contracts.
The customer is invoiced once transfer of control has occurred and the Company has a right to payment. Typical payment
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
terms vary based on the customer and the type of goods and services in the contract. The period of time between invoicing and when payment is due is not significant. Amounts billed and due from customers are classified as receivables on the consolidated balance sheets. Standard payment terms are less than one year and the Company has elected the practical expedient to not assess whether a contract has a significant financing component if the payment terms are less than one year.
Performance Obligations: The majority of the Company's customer contracts with OE and aftermarket customers are long-term supply arrangements. The performance obligations are established by the enforceable contract, which is generally considered to be the purchase order but in some cases could be the delivery release schedule. The purchase order, or related delivery release schedule, is of a duration of less than one year. As such, the Company applies the practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Rebates: The Company accrues for rebates pursuant to specific arrangements with certain customers, primarily in the aftermarket. Rebates generally provide for payments to customers based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.
Product returns: Certain aftermarket contracts with customers include terms and conditions that result in a customer right of return that is accounted for on a gross basis. For these contracts the Company has recorded a refund liability and return asset within "Prepayments and other current assets."
Shipping and handling costs: Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in the consolidated statements of income.
Sales and sales related taxes: The Company collects and remits taxes assessed by various governmental authorities that are both imposed on and concurrent with revenue-producing transactions with its customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. The collection and remittance of these taxes is reported on a net basis.
Contract Balances: Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. There have been no impairment losses recognized related to any receivables or contract assets arising from the Company’s contracts with customers.
Engineering, Research, and Development: The Company records engineering, research, and development costs ("R&D") net of customer reimbursements as they are considered a recovery of cost.
Advertising and Promotion Expenses: The Company expenses advertising and promotional expenses as incurred and these expenses were $36 million, $40 million, and $40 million for the years ended December 31, 2018, 2017, and 2016.
Foreign currency translation: Exchange adjustments related to foreign currency transactions and translation adjustment for foreign subsidiaries whose functional currency is the U.S. dollar are reflected in the consolidated statements of income. Translation adjustments of foreign subsidiaries for which local currency is functional currency are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those intercompany balances which are designated as long-term investments. The amounts recorded in cost of sales in the consolidated statements of income for foreign currency transactions included $15 million of gains for the year ended December 31, 2018, $4 million of losses for the year ended December 31, 2017 and $1 million of gains for the year ended December 31, 2016.
Asset Retirement Obligations: The Company records asset retirement obligations (ARO) when liabilities are probable and amounts can be reasonably estimated. The Company's primary ARO activities relate to the removal of hazardous building materials at its facilities.
Derivative Financial Instruments: For derivative instruments to qualify as hedging instruments, they must be designated as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of a derivative financial instrument, determined using the hypothetical derivative method, is recognized in earnings immediately. The gain or loss related to derivative financial instruments not designated as hedges are recognized immediately in earnings. Cash flows related to hedging activities are included in the operating section of the consolidated statements of cash flows.
New Accounting PronouncementsAND CONSOLIDATED SUBSIDIARIES
Note 1 in our notes to the consolidated financial statements of Tenneco Inc. located in Item 8 — Financial Statements and Supplemental Data is incorporated herein by reference.
Derivative Financial Instruments
Foreign Currency Exchange Rate Risk
We use derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We manage counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. We do not enter into derivative financial instruments for speculative purposes.
In managing our foreign currency exposures, we identify and aggregate existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The fair value of our foreign currency forward contracts was a net liability position of less than $1 million at December 31, 2016 and is based on an internally developed model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. The following table summarizes by major currency the notional amounts for our foreign currency forward purchase and sale contracts as of December 31, 2016. All contracts in the following table mature in 2017.
|
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| Notional Amount
|
| | (Millions) |
British pounds | —Purchase | 9 |
|
Canadian dollars | —Sell | (2 | ) |
European euro | —Purchase | 21 |
|
| —Sell | (3 | ) |
Japanese yen | —Purchase | 388 |
|
| —Sell | (60 | ) |
South African rand | —Purchase | 131 |
|
| —Sell | (17 | ) |
U.S. dollars | —Purchase | 5 |
|
| —Sell | (45 | ) |
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facilities to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from four to ten years. On December 31, 2016, we had $740 million in long-term debt obligations that have fixed interest rates. Of that amount, $500 million is fixed through July 2026, $225 million is fixed through December 2024 and the remainder is fixed from 2017 through 2025. We also have $573 million in long-term debt obligations that are subject to variable interest rates. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” earlier in this Management’s Discussion and Analysis.
We estimate that the fair value of our long-term debt at December 31, 2016 was about 100 percent of its book value. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $7 million.
Environmental Matters, Legal Proceedings and Product Warranties
Note 12 to the consolidated financial statements of Tenneco Inc. located in Part II Item 8 — Financial Statements and Supplemental Data is incorporated herein by reference.
We expect to incur legal and related costs of $5 million or $6 million in 2017 pertaining to the ongoing antitrust investigation. Such costs may not be evenly distributed throughout the year.
Tenneco 401(k) Retirement Savings Plans
Effective January 1, 2012, the Tenneco Employee Stock Ownership Plan for Hourly Employees and the Tenneco Employee Stock Ownership Plan for Salaried Employees were merged into one plan called the Tenneco 401(k) Retirement Savings Plan (the “Retirement Savings Plan”). Under the plan, subject to limitations in the Internal Revenue Code, participants may elect to defer up to 75 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We match 100 percent of an employee's contributions up to three percent of the employee's salary and 50 percent of an employee's contributions that are between three percent and five percent of the employee's salary. In connection with freezing the defined benefit pension plans for nearly all U.S. based salaried and non-union hourly employees effective December 31, 2006, and the related replacement of those defined benefit plans with defined contribution plans, we are making additional contributions to the Employee Stock Ownership Plans. We recorded expense for these contributions of approximately $28 million, $27 million and $25 million in 2016, 2015, and 2014, respectively. Matching contributions vest immediately. Defined benefit replacement contributions fully vest on the employee’s third anniversary of employment.
Change in Reportable Segments
On February 7, 2017, the Company announced that we will be making a change in our reportable segments. Our Clean Air and Ride Performance product lines in India, which have been reported as part of the Europe, South America and India segments, will now be reported with their respective product lines in the Asia Pacific segments, effective with the first quarter of 2017. Such changes will bring the high growth markets in both India and China under the Asia Pacific segments. The change in reportable segments comes as a result of the change to the chief operating decision maker, who will assess business performance and allocation of resources through this structure.
The following table summarizes annual data for 2016, 2015 and 2014 for the go-forward segment reporting:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Clean Air Division | | Ride Performance Division | | | | | | |
| | North
America | | Europe & South America | | Asia
Pacific | | North
America | | Europe & South America | | Asia
Pacific | | Other | | Reclass & Elims | | Total |
| | (Millions) |
| At December 31, 2016, and for the Year Ended | | | | | | | | | | | | | | | | | |
| Revenues from external customers | $ | 3,003 |
| | $ | 1,939 |
| | $ | 1,127 |
| | $ | 1,234 |
| | $ | 909 |
| | $ | 387 |
| | $ | — |
| | $ | — |
| | $ | 8,599 |
|
| Intersegment revenues | 13 |
| | 92 |
| | 3 |
| | 9 |
| | 27 |
| | 48 |
| | — |
| | (192 | ) | | — |
|
| EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 220 |
| | 98 |
| | 150 |
| | 157 |
| | 16 |
| | 63 |
| | (188 | ) | | — |
| | 516 |
|
| Total assets | 1,356 |
| | 697 |
| | 683 |
| | 723 |
| | 488 |
| | 352 |
| | — |
| | 47 |
| | $ | 4,346 |
|
| At December 31, 2015, and for the Year Ended | | | | | | | | | | | | | | | | | |
| Revenues from external customers | $ | 2,823 |
| | $ | 1,792 |
| | $ | 1,080 |
| | $ | 1,313 |
| | $ | 846 |
| | $ | 327 |
| | $ | — |
| | $ | — |
| | $ | 8,181 |
|
| Intersegment revenues | 16 |
| | 100 |
| | — |
| | 10 |
| | 30 |
| | 46 |
| | — |
| | (202 | ) | | — |
|
| EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 244 |
| | 49 |
| | 114 |
| | 155 |
| | (11 | ) | | 44 |
| | (87 | ) | | — |
| | 508 |
|
| Total assets | 1,210 |
| | 680 |
| | 628 |
| | 692 |
| | 424 |
| | 304 |
| | — |
| | 32 |
| | 3,970 |
|
| At December 31, 2014, and for the Year Ended | | | | | | | | | | | | | | | | | |
| Revenues from external customers | $ | 2,776 |
| | $ | 1,930 |
| | $ | 1,066 |
| | $ | 1,351 |
| | $ | 938 |
| | $ | 320 |
| | $ | — |
| | $ | — |
| | $ | 8,381 |
|
| Intersegment revenues | 25 |
| | 114 |
| | — |
| | 10 |
| | 41 |
| | 43 |
| | — |
| | (233 | ) | | — |
|
| EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 237 |
| | 57 |
| | 101 |
| | 143 |
| | 37 |
| | 38 |
| | (124 | ) | | — |
| | 489 |
|
| Total assets | 1,156 |
| | 756 |
| | 624 |
| | 659 |
| | 438 |
| | 294 |
| | — |
| | 69 |
| | 3,996 |
|
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The section entitled “Derivative Financial Instruments” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
ITEM 8.Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on our assessment management concluded the Company’s internal control over financial reporting was effective as of December 31, 2018.
Management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Total assets and total revenues of the acquired Federal-Mogul business represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included herein.
March 15, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tenneco Inc. and its subsidiaries(the “Company”) as of December 31, 2018and 2017,and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for certain components of net periodic pension and postretirement benefit costs and the manner in which it accounts for the cash received to settle the deferred purchase price of factored receivables in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Federal-Mogul from our audit of internal control over financial reporting. Federal-Mogul's total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 15, 2019
We have served as the Company’s auditor since 2010.
TENNECO INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions Except Share and Per Share Amounts) |
| Revenues | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
|
| Costs and expenses | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 10,071 |
| | 7,812 |
| | 7,126 |
|
| Selling, general, and administrative | 794 |
| | 638 |
| | 514 |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Engineering, research, and development | 204 |
| | 158 |
| | 153 |
|
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| | 11,417 |
| | 8,845 |
| | 8,006 |
|
| Other expense (income) | | | | | |
| Loss on sale of receivables | 16 |
| | 5 |
| | 5 |
|
| Non-service pension and postretirement benefit costs | 20 |
| | 16 |
| | 84 |
|
| Loss on extinguishment of debt | 10 |
| | 1 |
| | 24 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (18 | ) | | 1 |
| | — |
|
| Other expense (income), net | 12 |
| | (2 | ) | | (1 | ) |
| | 40 |
| | 21 |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | 306 |
| | 408 |
| | 479 |
|
| Interest expense | 132 |
| | 72 |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | 174 |
| | 336 |
| | 411 |
|
| Income tax expense (benefit) | 63 |
| | 71 |
| | (4 | ) |
| Net income | 111 |
| | 265 |
| | 415 |
|
| Less: Net income attributable to noncontrolling interests | 56 |
| | 67 |
| | 68 |
|
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | 347 |
|
| Earnings per share | | | | | |
| Weighted average shares of common stock outstanding — | | | | | |
| Basic | 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Diluted | 58,758,732 |
| | 53,026,911 |
| | 56,407,436 |
|
| Basic earnings per share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
|
| Diluted earnings per share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | |
| Foreign currency translation adjustment | (134 | ) | | 106 |
| | (56 | ) |
| Defined benefit plans | (22 | ) | | 17 |
| | 51 |
|
| | (156 | ) | | 123 |
| | (5 | ) |
| Comprehensive income (loss) | (45 | ) | | 388 |
| | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 54 |
| | 69 |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | $ | (99 | ) | | $ | 319 |
| | $ | 346 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of comprehensive income (loss).
TENNECO INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 697 |
| | $ | 315 |
|
| Restricted cash | 5 |
| | 3 |
|
| Receivables: | | | |
| Customer notes and accounts, net | 2,487 |
| | 1,294 |
|
| Other | 85 |
| | 27 |
|
| Inventories | 2,245 |
| | 820 |
|
| Prepayments and other current assets | 590 |
| | 288 |
|
| Total current assets | 6,109 |
| | 2,747 |
|
| Property, plant and equipment, net | 3,501 |
| | 1,691 |
|
| Long-term receivables, net | 10 |
| | 9 |
|
| Goodwill | 869 |
| | 49 |
|
| Intangibles, net | 1,519 |
| | 22 |
|
| Investments in nonconsolidated affiliates | 544 |
| | 2 |
|
| Deferred income taxes | 467 |
| | 213 |
|
| Other assets | 213 |
| | 63 |
|
| Total assets | $ | 13,232 |
| | $ | 4,796 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Short-term debt, including current maturities of long-term debt | $ | 153 |
| | $ | 103 |
|
| Accounts payable | 2,759 |
| | 1,582 |
|
| Accrued compensation and employee benefits | 343 |
| | 141 |
|
| Accrued income taxes | 64 |
| | 27 |
|
| Accrued expenses and other current liabilities | 1,001 |
| | 424 |
|
| Total current liabilities | 4,320 |
| | 2,277 |
|
| Long-term debt | 5,340 |
| | 1,358 |
|
| Deferred income taxes | 88 |
| | 11 |
|
| Pension and postretirement benefits | 1,167 |
| | 268 |
|
| Deferred credits and other liabilities | 263 |
| | 158 |
|
| Commitments and contingencies |
| |
|
| Total liabilities | 11,178 |
| | 4,072 |
|
| Redeemable noncontrolling interests | 138 |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | |
| Preferred stock—$0.01 par value; none issued | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | 1 |
| | 1 |
|
| Class B non-voting convertible common stock—$0.01 par value; 2018—23,793,669 shares issued | — |
| | — |
|
| Additional paid-in capital | 4,360 |
| | 3,112 |
|
| Accumulated other comprehensive loss | (692 | ) | | (538 | ) |
| Accumulated deficit | (1,013 | ) | | (1,009 | ) |
| | 2,656 |
| | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | (930 | ) | | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | 1,726 |
| | 636 |
|
| Noncontrolling interests | 190 |
| | 46 |
|
| Total equity | 1,916 |
| | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 13,232 |
| | $ | 4,796 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Operating Activities | | | | | |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Deferred income taxes | (65 | ) | | (8 | ) | | (84 | ) |
| Stock-based compensation | 14 |
| | 14 |
| | 14 |
|
| Restructuring charges and asset impairments, net of cash paid | 49 |
| | 8 |
| | (13 | ) |
| Change in pension and postretirement benefit plans | (8 | ) | | (15 | ) | | 47 |
|
| Equity in earnings of nonconsolidated affiliates | (18 | ) | | 1 |
| | — |
|
| Cash dividends received from nonconsolidated affiliates | 2 |
| | — |
| | — |
|
| Loss on sale of assets | 16 |
| | 5 |
| | 4 |
|
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (190 | ) | | (81 | ) | | (325 | ) |
| Inventories | 27 |
| | (94 | ) | | (55 | ) |
| Payables and accrued expenses | 291 |
| | 136 |
| | 140 |
|
| Accrued interest and income taxes | (19 | ) | | 1 |
| | 13 |
|
| Other assets and liabilities | (119 | ) | | 48 |
| | 5 |
|
| Net cash provided by operating activities | 439 |
| | 517 |
| | 374 |
|
| Investing Activities | | | | | |
| Federal-Mogul acquisition, net of cash acquired | (2,194 | ) | | — |
| | — |
|
| Proceeds from sale of assets | 9 |
| | 8 |
| | 6 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| | — |
|
| Cash payments for plant, property, and equipment | (507 | ) | | (419 | ) | | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | 174 |
| | 112 |
| | 110 |
|
| Other | 4 |
| | (10 | ) | | — |
|
| Net cash used by investing activities | (2,514 | ) | | (300 | ) | | (229 | ) |
| Financing Activities | | | | | |
| Proceeds from term loans and notes | 3,426 |
| | 160 |
| | 529 |
|
| Repayments of term loans and notes | (453 | ) | | (36 | ) | | (545 | ) |
| Borrowings on revolving lines of credit | 5,149 |
| | 6,664 |
| | 5,417 |
|
| Payments on revolving lines of credit | (5,405 | ) | | (6,737 | ) | | (5,221 | ) |
| Issuance (repurchase) of common shares | (1 | ) | | (1 | ) | | 13 |
|
| Cash dividends | (59 | ) | | (53 | ) | | — |
|
| Debt issuance cost of long-term debt | (95 | ) | | (8 | ) | | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | (169 | ) | | (225 | ) |
| Net increase (decrease) in bank overdrafts | (5 | ) | | (7 | ) | | 10 |
|
| Other | (30 | ) | | — |
| | — |
|
| Distributions to noncontrolling interest partners | (51 | ) | | (64 | ) | | (55 | ) |
| Net cash provided (used) by financing activities | 2,476 |
| | (251 | ) | | (86 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (17 | ) | | 3 |
| | 2 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 384 |
| | (31 | ) | | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 318 |
| | 349 |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 702 |
| | $ | 318 |
| | $ | 349 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for interest | $ | 143 |
| | $ | 78 |
| | $ | 76 |
|
| Cash paid during the year for income taxes, net of refunds | $ | 113 |
| | $ | 95 |
| | $ | 113 |
|
| Non-cash Investing and Financing Activities | | | | | |
| Period end balance of trade payables for plant, property, and equipment | $ | 135 |
| | $ | 59 |
| | $ | 68 |
|
| Deferred purchase price of receivables factored in period | $ | 154 |
| | $ | 114 |
| | $ | 109 |
|
| Stock issued for acquisition of Federal-Mogul | $ | (1,236 | ) | | $ | — |
| | $ | — |
|
| Stock transferred for acquisition of Federal-Mogul | $ | 1,236 |
| | $ | — |
| | $ | — |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of cash flows.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tenneco Inc. Shareholders' equity | | |
| | $0.01 Par Value Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Treasury Stock | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
| | (Millions) |
| Balance as of December 31, 2015 | $ | 1 |
| | $ | 3,081 |
| | $ | (658 | ) | | $ | (1,501 | ) | | $ | (536 | ) | | $ | 387 |
| | $ | 39 |
| | $ | 426 |
|
| Net income | — |
| | — |
| | — |
| | 347 |
| | — |
| | 347 |
| | 32 |
| | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | — |
| | — |
| | (52 | ) | | — |
| | — |
| | (52 | ) | | (2 | ) | | (54 | ) |
| Defined benefit plans | — |
| | — |
| | 51 |
| | — |
| | — |
| | 51 |
| | — |
| | 51 |
|
| Comprehensive income |
| | | | | | | |
| | 346 |
| | 30 |
| | 376 |
|
| Stock-based compensation expense | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (225 | ) | | (225 | ) | | — |
| | (225 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | (22 | ) |
| Balance as of December 31, 2016 | 1 |
| | 3,098 |
| | (659 | ) | | (1,154 | ) | | (761 | ) | | 525 |
| | 47 |
| | 572 |
|
| Net income | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
| | 31 |
| | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
| | (1 | ) | | 103 |
|
| Defined benefit plans | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Comprehensive income |
| | | | | | | |
| | 319 |
| | 30 |
| | 349 |
|
Stock-based compensation expense
| — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) | | — |
| | (53 | ) |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (169 | ) | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Balance as of December 31, 2017 | 1 |
| | 3,112 |
| | (538 | ) | | (1,009 | ) | | (930 | ) | | 636 |
| | 46 |
| | 682 |
|
| Net income | — |
| | — |
| | — |
| | 55 |
| | — |
| | 55 |
| | 27 |
| | 82 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | (132 | ) | | — |
| | — |
| | (132 | ) | | — |
| | (132 | ) |
| Defined benefit plans | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Comprehensive income |
| | | | | | | |
| | (99 | ) | | 27 |
| | (72 | ) |
Adjustments to adopt new accounting standards (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued | — |
| | 1,236 |
| | — |
| | — |
| | — |
| | 1,236 |
| | — |
| | 1,236 |
|
| Federal-Mogul Acquisition | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 143 |
| | 143 |
|
| Stock-based compensation expense | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (59 | ) | | — |
| | (59 | ) | | — |
| | (59 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| |
| | — |
| | — |
| | (26 | ) | | (26 | ) |
| Balance as of December 31, 2018 | $ | 1 |
| | $ | 4,360 |
| | $ | (692 | ) | | $ | (1,013 | ) | | $ | (930 | ) | | $ | 1,726 |
| | $ | 190 |
| | $ | 1,916 |
|
(1) The cumulative effect of the adoption of ASU 2016-16 was an increase to accumulated deficit of $1 million, and the cumulative effect of the adoption of ASC 606 was a decrease to accumulated deficit of $1 million.
The accompanying notes to the consolidated financial statements are an integral
part of these statements of changes in shareholders’ equity.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Tenneco Inc. ("Tenneco" or "the Company") was formed under the laws of Delaware in 1996. Tenneco designs, manufactures, and sells products and services for light vehicle, commercial truck, off-highway, industrial and aftermarket customers. The Company is one of the world’s leading manufacturers of clean air, powertrain, and ride performance products and systems, and serves both original equipment manufacturers (“OEM”) and replacement markets worldwide.
Effective October 1, 2018, the Company completed the acquisition (the "Acquisition") of Federal-Mogul LLC ("Federal-Mogul"), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems. Federal-Mogul serves the world’s foremost OEM and servicers (“OES”, and together with OEM, “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off road, agricultural, marine, rail, aerospace, power generation, and industrial equipment, as well as the worldwide aftermarket. The Company expects to separate its businesses to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company and a new Powertrain Technology company, in the second half of 2019.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
Revision of Previously Issued Financial Statements
The Company identified an error in the accounting for certain costs capitalized into inventory that did not constitute inventoriable costs in its historical financial statements. Costs incorrectly capitalized in ending inventory were $49 million and $42 million as of December 31, 2017 and 2016.
The Company evaluated the effect of this item as well as the items discussed below on prior periods under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality” and determined the amounts were not material, individually or in the aggregate, to previously issued financial statements. The Company also evaluated the effect of correcting these items through a cumulative adjustment to our financial statements and concluded, based on the guidance within SEC SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, it was appropriate to revise our previously issued financial statements to correct these errors. The Company also revised for other immaterial errors including (i) capitalization errors related to construction-in-process; (ii) errors related to the estimation of warranty and rebate liabilities; (iii) errors related to the cash flow presentation for borrowings and repayments on revolving lines of credit (net versus gross); (iv) errors related to currency on certain non-income tax transactions; and (v) errors surrounding the misclassification of translation adjustments within accumulated other comprehensive income. These adjustments related to various line items as shown in the tables below. As a result, certain amounts in the consolidated financial statements have been revised, and will be revised for interim periods in future filings, in order to correct for these errors. These revisions have also been reflected in Note 22, Quarterly Financial Data (Unaudited) to show the effects in the unaudited quarterly financial statements.
Reclassifications: Certain amounts in the prior years have been aggregated or disaggregated to conform to current year presentation. These reclassifications have no effect on previously reported earnings before income taxes and noncontrolling interests or net income, other comprehensive income (loss), current or total assets, current or total liabilities, and the cash provided (used) by operating, investing or financing activities within the consolidated statements of cash flows.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.- (Continued)
INDEX
The following tables present the effect of these reclassifications and revisions for the financial statement line items adjusted in the affected periods included within this annual financial report:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| | | (Millions, except per share amounts) |
| Consolidated statement of income | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 7,809 |
| | — |
| | 7,809 |
| | 3 |
| | 7,812 |
|
| Selling, general, and administrative | | 636 |
| | — |
| | 636 |
| | 2 |
| | 638 |
|
| Depreciation and amortization | | 224 |
| | — |
| | 224 |
| | 2 |
| | 226 |
|
| Engineering, research, and development | | 158 |
| | — |
| | 158 |
| | — |
| | 158 |
|
| Goodwill impairment charge | | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
| | | 8,838 |
| | — |
| | 8,838 |
| | 7 |
| | 8,845 |
|
| Other expense (income) | | | | | | | | | | |
| Loss on sale of receivables | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Non-service pension and postretirement benefit costs | | — |
| | 16 |
| | 16 |
| | — |
| | 16 |
|
| Loss on extinguishment of debt | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| Other expense (income), net | | 14 |
| | (17 | ) | | (3 | ) | | 1 |
| | (2 | ) |
| | | 19 |
| | 1 |
| | 20 |
| | 1 |
| | 21 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 417 |
| | (1 | ) | | 416 |
| | (8 | ) | | 408 |
|
| Interest expense | | 73 |
| | (1 | ) | | 72 |
| | — |
| | 72 |
|
| Earnings before income taxes and noncontrolling interests | | 344 |
| | — |
| | 344 |
| | (8 | ) | | 336 |
|
| Income tax expense (benefit) | | 70 |
| | — |
| | 70 |
| | 1 |
| | 71 |
|
| Net income | | 274 |
| | — |
| | 274 |
| | (9 | ) | | 265 |
|
| Less: Net income attributable to noncontrolling interests | | 67 |
| | | | 67 |
| | — |
| | 67 |
|
| Net income attributable to Tenneco Inc. | | $ | 207 |
| | $ | — |
| | $ | 207 |
| | $ | (9 | ) | | $ | 198 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic earnings per share of common stock | | $ | 3.93 |
| | $ | — |
| | $ | 3.93 |
| | $ | (0.18 | ) | | $ | 3.75 |
|
| Diluted earnings per share of common stock | | $ | 3.91 |
| | $ | — |
| | $ | 3.91 |
| | $ | (0.18 | ) | | $ | 3.73 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statement of comprehensive income | | (Millions) |
| Net income | | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | (9 | ) | | $ | 265 |
|
| Other comprehensive income (loss)—net of tax | | | | | | | | | | |
| Foreign currency translation adjustment | | 99 |
| | — |
| | 99 |
| | 7 |
| | 106 |
|
| Defined benefit plans | | 27 |
| | — |
| | 27 |
| | (10 | ) | | 17 |
|
| | | 126 |
| | — |
| | 126 |
| | (3 | ) | | 123 |
|
| Comprehensive income (loss) | | 400 |
| | — |
| | 400 |
| | (12 | ) | | 388 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 69 |
| | — |
| | 69 |
| | — |
| | 69 |
|
| Comprehensive income (loss) attributable to common shareholders | | $ | 331 |
| | $ | — |
| | $ | 331 |
| | $ | (12 | ) | | $ | 319 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| | | (Millions, except per share amounts) |
| Consolidated statement of income | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | | $ | 8,599 |
| | $ | — |
| | $ | 8,599 |
| | $ | (2 | ) | | $ | 8,597 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 7,116 |
| | — |
| | 7,116 |
| | 10 |
| | 7,126 |
|
| Selling, general, and administrative | | 513 |
| | — |
| | 513 |
| | 1 |
| | 514 |
|
| Depreciation and amortization | | 212 |
| | — |
| | 212 |
| | 1 |
| | 213 |
|
| Engineering, research, and development | | 154 |
| | — |
| | 154 |
| | (1 | ) | | 153 |
|
| | | 7,995 |
| | — |
| | 7,995 |
| | 11 |
| | 8,006 |
|
| Other expense (income) | | | | | | | | | | |
| Loss on sale of receivables | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Non-service pension and postretirement benefit costs | | — |
| | 84 |
| | 84 |
| | — |
| | 84 |
|
| Loss on extinguishment of debt | | — |
| | 24 |
| | 24 |
| | — |
| | 24 |
|
| Other expense (income), net | | 83 |
| | (84 | ) | | (1 | ) | | — |
| | (1 | ) |
| | | 88 |
| | 24 |
| | 112 |
| | — |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 516 |
| | (24 | ) | | 492 |
| | (13 | ) | | 479 |
|
| Interest expense | | 92 |
| | (24 | ) | | 68 |
| | — |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | | 424 |
| | — |
| | 424 |
| | (13 | ) | | 411 |
|
| Income tax expense (benefit) | | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Net income | | 424 |
| | — |
| | 424 |
| | (9 | ) | | 415 |
|
| Less: Net income attributable to noncontrolling interests | | 68 |
| | — |
| | 68 |
| | — |
| | 68 |
|
| Net income attributable to Tenneco Inc. | | $ | 356 |
| | $ | — |
| | $ | 356 |
| | $ | (9 | ) | | $ | 347 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic earnings per share of common stock | | $ | 6.36 |
| | $ | — |
| | $ | 6.36 |
| | $ | (0.16 | ) | | $ | 6.20 |
|
| Diluted earnings per share of common stock | | $ | 6.31 |
| | $ | — |
| | $ | 6.31 |
| | $ | (0.16 | ) | | $ | 6.15 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statement of comprehensive income | | (Millions) |
| Net income | | $ | 424 |
| | $ | — |
| | $ | 424 |
| | $ | (9 | ) | | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | | | | | | |
| Foreign currency translation adjustment | | (45 | ) | | — |
| | (45 | ) | | (11 | ) | | (56 | ) |
| Defined benefit plans | | 41 |
| | — |
| | 41 |
| | 10 |
| | 51 |
|
| | | (4 | ) | | — |
| | (4 | ) | | (1 | ) | | (5 | ) |
| Comprehensive income (loss) | | 420 |
| | — |
| | 420 |
| | (10 | ) | | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 64 |
| | — |
| | 64 |
| | — |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | | $ | 356 |
| | $ | — |
| | $ | 356 |
| | $ | (10 | ) | | $ | 346 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated balance sheet | | (Millions) |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 315 |
| | $ | — |
| | $ | 315 |
| | $ | — |
| | $ | 315 |
|
| Restricted cash | | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Receivables: | | | | | |
| |
| | |
| Customer notes and accounts, net | | 1,294 |
| | — |
| | 1,294 |
| | — |
| | 1,294 |
|
| Other | | 27 |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Inventories | | 869 |
| | — |
| | 869 |
| | (49 | ) | | 820 |
|
| Prepayments and other current assets | | 291 |
| | — |
| | 291 |
| | (3 | ) | | 288 |
|
| Total current assets | | 2,799 |
| | — |
| | 2,799 |
| | (52 | ) | | 2,747 |
|
| Property, plant and equipment, net | | 1,615 |
| | 79 |
| | 1,694 |
| | (3 | ) | | 1,691 |
|
| Long-term receivables, net | | 9 |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Goodwill | | 49 |
| | — |
| | 49 |
| | — |
| | 49 |
|
| Intangibles, net | | 22 |
| | — |
| | 22 |
| | — |
| | 22 |
|
| Investments in nonconsolidated affiliates | | — |
| | 2 |
| | 2 |
| | — |
| | 2 |
|
| Deferred income taxes | | 204 |
| | — |
| | 204 |
| | 9 |
| | 213 |
|
| Other assets | | 144 |
| | (81 | ) | | 63 |
| | — |
| | 63 |
|
| Total assets | | $ | 4,842 |
| | $ | — |
| | $ | 4,842 |
| | $ | (46 | ) | | $ | 4,796 |
|
| | | | | | | | | | | |
| Short-term debt, including current maturities of long-term debt | | $ | 83 |
| | $ | 20 |
| | $ | 103 |
| | $ | — |
| | $ | 103 |
|
| Accounts payable | | 1,705 |
| | (123 | ) | | 1,582 |
| | — |
| | 1,582 |
|
| Accrued compensation and employee benefits | | | | 141 |
| | 141 |
| | — |
| | 141 |
|
| Accrued income taxes | | 45 |
| | (20 | ) | | 25 |
| | 2 |
| | 27 |
|
| Accrued interest | | 14 |
| | (14 | ) | | — |
| | — |
| | — |
|
| Accrued liabilities | | 287 |
| | (287 | ) | | — |
| | — |
| | — |
|
| Other | | 132 |
| | (132 | ) | | — |
| | — |
| | |
| Accrued expenses and other current liabilities | | | | 415 |
| | 415 |
| | 9 |
| | 424 |
|
| Total current liabilities | | 2,266 |
| | — |
| | 2,266 |
| | 11 |
| | 2,277 |
|
| Long-term debt | | 1,358 |
| | — |
| | 1,358 |
| | — |
| | 1,358 |
|
| Deferred income taxes | | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
| Pension and postretirement benefits | | 268 |
| | — |
| | 268 |
| | — |
| | 268 |
|
| Deferred credits and other liabilities | | 155 |
| | — |
| | 155 |
| | 3 |
| | 158 |
|
| Commitments and contingencies | | | | | |
| |
| | |
| Total liabilities | | 4,058 |
| | — |
| | 4,058 |
| | 14 |
| | 4,072 |
|
| Redeemable noncontrolling interests | | 42 |
| | | | 42 |
| | — |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | | | | | | | | |
| Preferred stock—$0.01 par value; none issued | | — |
| | — |
| | — |
| | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Additional paid-in capital | | 3,112 |
| | — |
| | 3,112 |
| | — |
| | 3,112 |
|
| Accumulated other comprehensive loss | | (541 | ) | | — |
| | (541 | ) | | 3 |
| | (538 | ) |
| Accumulated deficit | | (946 | ) | | — |
| | (946 | ) | | (63 | ) | | (1,009 | ) |
| | | 1,626 |
| | — |
| | 1,626 |
| | (60 | ) | | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | | (930 | ) | | — |
| | (930 | ) | | — |
| | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | | 696 |
| | — |
| | 696 |
| | (60 | ) | | 636 |
|
| Noncontrolling interests | | 46 |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Total equity | | 742 |
| | — |
| | 742 |
| | (60 | ) | | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,842 |
| | $ | — |
| | $ | 4,842 |
| | $ | (46 | ) | | $ | 4,796 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statements of cash flow | | (Millions) |
| Operating Activities | | | | | | | | | | |
| Net income | | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | (9 | ) | | $ | 265 |
|
| Net cash provided by operating activities | | 517 |
| | — |
| | 517 |
| | — |
| | 517 |
|
| | | | | | | | | | | |
| Investing Activities | | | | | | | | | | |
| Net cash used by investing activities | | (300 | ) | | — |
| | (300 | ) | | — |
| | (300 | ) |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | |
| Proceeds from term loans and notes | | — |
| | 137 |
| | 137 |
| | 23 |
| | 160 |
|
| Repayments of term loans and notes | | — |
| | (19 | ) | | (19 | ) | | (17 | ) | | (36 | ) |
| Retirement of long-term debt | | (19 | ) | | 19 |
| | — |
| | — |
| | — |
|
| Issuance of long-term debt | | 137 |
| | (137 | ) | | — |
| | — |
| | — |
|
| Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 6,664 |
| | 6,664 |
|
| Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (6,737 | ) | | (6,737 | ) |
| Net increase (decrease) in revolver borrowings | | (67 | ) | | — |
| | (67 | ) | | 67 |
| | — |
|
| Net cash provided (used) by financing activities | | $ | (251 | ) | | $ | — |
| | $ | (251 | ) | | $ | — |
| | $ | (251 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statements of cash flow | | (Millions) |
| Operating Activities | | | | | | | | | | |
| Net income | | $ | 424 |
| | $ | — |
| | $ | 424 |
| | $ | (9 | ) | | $ | 415 |
|
| Net cash provided by operating activities | | 374 |
| | — |
| | 374 |
| | — |
| | 374 |
|
| | | | | | | | | | | |
| Investing Activities | | | | | | | | | | |
| Net cash used by investing activities | | (229 | ) | | — |
| | (229 | ) | | — |
| | (229 | ) |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | |
| Proceeds from term loans and notes | | — |
| | 509 |
| | 509 |
| | 20 |
| | 529 |
|
| Repayments of term loans and notes | | — |
| | (531 | ) | | (531 | ) | | (14 | ) | | (545 | ) |
| Retirement of long-term debt | | (531 | ) | | 531 |
| | — |
| | — |
| | — |
|
| Issuance of long-term debt | | 509 |
| | (509 | ) | | — |
| | — |
| | — |
|
| Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 5,417 |
| | 5,417 |
|
| Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (5,221 | ) | | (5,221 | ) |
| Net increase (decrease) in revolver borrowings | | 202 |
| | — |
| | 202 |
| | (202 | ) | | — |
|
| Net cash provided (used) by financing activities | | $ | (86 | ) | | $ | — |
| | $ | (86 | ) | | $ | — |
| | $ | (86 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Revisions | | As Revised |
| Consolidated statements of shareholders' equity | | (Millions) |
| Accumulated Deficit | | | | | | |
| Balance January 1 | | $ | (1,100 | ) | | $ | (54 | ) | | $ | (1,154 | ) |
| Net income attributable to Tenneco Inc. | | 207 |
| | (9 | ) | | 198 |
|
| Cash dividends declared | | (53 | ) | | — |
| | (53 | ) |
| Balance December 31 | | $ | (946 | ) | | $ | (63 | ) | | $ | (1,009 | ) |
| Accumulated Other Comprehensive Loss | | | | | | |
| Balance January 1 | | $ | (665 | ) | | $ | 6 |
| | $ | (659 | ) |
| Other comprehensive loss—net of tax: | |
|
| |
|
| |
|
|
| Foreign currency translation adjustment | | 97 |
| | 7 |
| | 104 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Balance December 31 | | $ | (541 | ) | | $ | 3 |
| | $ | (538 | ) |
| Total Tenneco Inc. Shareholders' Equity | | | | | | |
| Balance January 1 | | $ | 573 |
| | $ | (48 | ) | | $ | 525 |
|
| Net income attributable to Tenneco Inc. | | 207 |
| | (9 | ) | | 198 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | 97 |
| | 7 |
| | 104 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Comprehensive income | | 331 |
| | (12 | ) | | 319 |
|
| Stock-based compensation expense | | 14 |
| | — |
| | 14 |
|
| Cash dividends | | (53 | ) | | — |
| | (53 | ) |
| Treasury stock | | (169 | ) | | — |
| | (169 | ) |
| Balance December 31 | | $ | 696 |
| | $ | (60 | ) | | $ | 636 |
|
| Total Equity | | | | | | |
| Balance January 1 | | $ | 620 |
| | $ | (48 | ) | | $ | 572 |
|
| Net income | | 238 |
| | (9 | ) | | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | 96 |
| | 7 |
| | 103 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Comprehensive income | | 361 |
| | (12 | ) | | 349 |
|
| Stock-based compensation expense | | 14 |
| | — |
| | 14 |
|
| Cash dividends | | (53 | ) | | — |
| | (53 | ) |
| Treasury stock | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | | (31 | ) | | — |
| | (31 | ) |
| Balance December 31 | | $ | 742 |
| | $ | (60 | ) | | $ | 682 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Revisions | | As Revised |
| Consolidated statements of shareholders' equity | | (Millions) |
| Accumulated Deficit | | | | | | |
| Balance January 1 | | $ | (1,456 | ) | | $ | (45 | ) | | $ | (1,501 | ) |
| Net income attributable to Tenneco Inc. | | 356 |
| | (9 | ) | | 347 |
|
| Balance December 31 | | $ | (1,100 | ) | | $ | (54 | ) | | $ | (1,154 | ) |
| Accumulated Other Comprehensive Loss | | | | | | |
| Balance January 1 | | $ | (665 | ) | | $ | 7 |
| | $ | (658 | ) |
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (41 | ) | | (11 | ) | | (52 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Balance December 31 | | $ | (665 | ) | | $ | 6 |
| | $ | (659 | ) |
| Total Tenneco Inc. shareholders' equity | | | | | | |
| Balance January 1 | | $ | 425 |
| | $ | (38 | ) | | $ | 387 |
|
| Net income attributable to Tenneco Inc. | | 356 |
| | (9 | ) | | 347 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (41 | ) | | (11 | ) | | (52 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Comprehensive income | | 356 |
| | (10 | ) | | 346 |
|
| Stock-based compensation expense | | 17 |
| | — |
| | 17 |
|
| Treasury stock | | (225 | ) | | — |
| | (225 | ) |
| Balance December 31 | | $ | 573 |
| | $ | (48 | ) | | $ | 525 |
|
| Total Equity | | | | | | |
| Balance January 1 | | $ | 464 |
| | $ | (38 | ) | | $ | 426 |
|
| Net income | | 388 |
| | (9 | ) | | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (43 | ) | | (11 | ) | | (54 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Comprehensive income | | 386 |
| | (10 | ) | | 376 |
|
| Stock-based compensation expense | | 17 |
| | — |
| | 17 |
|
| Treasury stock | | (225 | ) | | — |
| | (225 | ) |
| Distribution declared to noncontrolling interests | | (22 | ) | | — |
| | (22 | ) |
| Balance December 31 | | $ | 620 |
| | $ | (48 | ) | | $ | 572 |
|
Summary of Significant Accounting Policies
Principles of Consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly owned subsidiaries, and any partially owned subsidiary it has the ability to control. Control generally equates to ownership percentage, whereby investments more that 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. See Note 8, Investment in Nonconsolidated Affiliates.
The Company does not consolidate any entity for which it has a variable interest based solely on the power to direct the activities and significant participation in the entity's expected results that would not otherwise be consolidated based on control through voting interests. Further, its affiliates are businesses established and maintained in connection with its operating strategy and are not special purpose entities. All intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Cash and Cash Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. The carrying value of cash and cash equivalents approximate fair value.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Cash: The Company is required to provide cash collateral in connection with certain contractual arrangements and statutory requirements. The Company has $5 million and $3 million of restricted cash at December 31, 2018 and 2017 in support of these arrangements and requirements.
Notes and Accounts Receivable: Notes and accounts receivable are stated at net realizable value, which approximates fair value. Receivables are reduced by an allowance for amounts that may become uncollectible in the future. The allowance is an estimate based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts or notes receivable. A receivable is past due if payments have not been received within the agreed-upon invoice terms. Account balances are charged-off against the allowance when management determines the receivable will not be recovered.
The allowance for doubtful accounts on short-term and long-term accounts receivable was $17 million and $16 million at December 31, 2018 and 2017. The allowance for doubtful accounts on short-term and long-term notes receivable was zero at both December 31, 2018 and 2017.
Inventories: Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost methods. Work in process includes purchased parts such as substrates coated with precious metals. Cost of inventory includes direct materials, labor, and applicable manufacturing overhead costs. The value of inventories are reduced for excess and obsolescence based on management's review of on-hand inventories compared to historical and estimated future sales and usage. Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the products.
Redeemable Noncontrolling Interests: The Company has noncontrolling interests with redemption features. These redemption features could require the Company to make an offer to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of its subsidiaries. As a result of the Acquisition, the Company acquired $10 million in redeemable noncontrolling interests (exclusive of interests related to a subsidiary in India) and triggered the related redemption features which provide the holders the option to require the Company to redeem the noncontrolling interests. The noncontrolling interest partners have elected not to require the Company to redeem their shares. The redemption of these redeemable noncontrolling interests is not solely within the Company's control. Accordingly, these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As a result the noncontrolling interests have not been remeasured to redemption value.
In addition, the Company acquired $86 million in redeemable noncontrolling interests related to a subsidiary in India. The Company initiated the process to make a tender offer of the shares it does not own due to the change in control in accordance with local regulations triggered by the Acquisition. It is probable these shares will become redeemable during 2019 under the tender offer at a price that is representative of fair value and as a result the noncontrolling interest is presented in the temporary equity section of the Company’s consolidated balance sheets. At the Acquisition date, this redeemable noncontrolling interest was recorded at its estimated fair value based on the preliminary purchase price allocation. The carrying amount for this redeemable noncontrolling interest at December 31, 2018 is currently greater than the redemption value as evidenced by the tender offer price resulting in no adjustment to reflect the noncontrolling interest at redemption value.
At December 31, 2018, the Company had previously held redeemable noncontrolling interests of $35 million, for which the redemption is not solely within the Company's control and these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As such, the noncontrolling interests have not been remeasured to redemption value.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a rollforward of the activity in the redeemable noncontrolling interests for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | |
| | December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Balance January 1 | $ | 42 |
| | $ | 40 |
| | $ | 41 |
|
| Federal-Mogul acquisition | 96 |
| | — |
| | — |
|
| Net income attributable to redeemable noncontrolling interests | 29 |
| | 36 |
| | 36 |
|
| Other comprehensive (loss) income | (2 | ) | | 3 |
| | (2 | ) |
| Contributions received | 6 |
| | — |
| | — |
|
| Dividends declared | (33 | ) | | (37 | ) | | (35 | ) |
| Balance December 31 | $ | 138 |
| | $ | 42 |
| | $ | 40 |
|
Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets are recorded at cost or fair value established at acquisition. Definite-lived intangible assets include customer relationships and platforms, patented and unpatented technology, and licensing agreements. Long-lived asset groups are evaluated for impairment when impairment indicators exist. If the carrying value of a long-lived asset group is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset group exceeds its fair value. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the assets for financial reporting purposes. Expenditures for maintenance and repairs are expensed as incurred.
Goodwill, net: Goodwill is determined as the excess of fair value over amounts attributable to specific tangible and intangible assets. Goodwill is evaluated for impairment annually, during the fourth quarter, or more frequently, if impairment indicators exist. An impairment indicator exists when a reporting unit's carrying value exceeds its fair value. When performing the goodwill impairment testing, a reporting units' fair value is based on valuation techniques using the best available information. The assessment of fair value utilizes a combination of the income approach and market approach. The impairment charge is the excess of the goodwill carrying value over the implied fair value of goodwill using a one-step quantitative approach.
Trade names and trademarks: Trade names and trademarks are stated at fair value established at acquisition or cost. These indefinite-lived intangible assets will be evaluated for impairment annually during the fourth quarter, or more frequently, if impairment indicators exist. An impairment exists when a trade name and trademarks' carrying value exceeds its fair value. The fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The impairment charge is the excess of the assets carrying value over its fair value.
Pre-production Design and Development and Tooling Assets: The Company expenses pre-production design and development costs as incurred unless there is a contractual guarantee for reimbursement from the original equipment customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has title to the assets are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee for reimbursement or has the non-cancelable right to use the assets during the term of the supply arrangement from the customer are capitalized in prepayments and other current assets.
Prepayments and other current assets included $193 million and $142 million at December 31, 2018 and 2017, respectively, for in-process tools and dies being built for OE customers and unbilled pre-production design and development costs.
Internal Use Software Assets: Certain costs related to the purchase and development of software used in the business operations are capitalized. Costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology, and other economic factors. Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the consolidated statements of cash flows.
Income Taxes: Deferred tax assets and liabilities are recognized on the basis of the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and the respective tax values, and net operating losses ("NOL") and tax credit carryforwards on a taxing jurisdiction basis. Deferred tax assets and
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
liabilities are measured using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in the results of operations in the period that includes the enactment date under the law.
Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. Valuation allowances are established in certain jurisdictions based on a more likely than not standard. The ability to realize deferred tax assets depends on the Company's ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each tax jurisdiction. The Company considers the various possible sources of taxable income when assessing the realization of its deferred tax assets. The valuation allowances recorded against deferred tax assets generated by taxable losses in certain jurisdictions will effect the provision for income taxes until the valuation allowances are released. The Company's provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
The Company records uncertain tax positions on the basis of a two-step process whereby it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and for those tax positions that meet the more likely than not criteria, the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority is recognized.
The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.
Pension and other postretirement benefit plan obligations: Pensions and other postretirement employee benefit costs and related liabilities and assets are dependent upon assumptions used in calculating such amounts. These assumptions include discount rates, long term rate of return on plan assets, health care cost trends, compensation, and other factors. Actual results that differ from the assumptions used are accumulated and amortized over future periods, and accordingly, generally affect recognized expense in future periods. The cost of benefits provided by defined benefit pension and other postretirement plans is recorded in the period employees provide service. Future pension expense for certain significant funded benefit plans is calculated using an expected return on plan asset methodology.
Investments with registered investment companies, common and preferred stocks, and certain government debt securities are valued at the closing price reported on the active market on which the securities are traded. Corporate debt securities are valued by third-party pricing sources using the multi-dimensional relational model using instruments with similar characteristics. Hedge funds and the collective trusts are valued at net asset value (NAV) per share which are provided by the respective investment sponsors or investment advisers.
Revenue Recognition: The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09 on January 1, 2018, which required it to recognize revenue when a customer obtains control rather than when substantially all risks and rewards of a good or service have been transferred. ASU 2014-09 was adopted by applying the modified retrospective method; see the Recently Adopted Accounting Standards section for additional information pertaining to the adoption of ASU 2014-09. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for those periods. The following accounting policies became effective upon the adoption of ASU 2014-09:
The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Revenue is recognized for sales to OE and aftermarket customers when transfer of control of the related good or service has occurred. Revenue from most OE and aftermarket goods and services is transferred to customers at a point in time. Contract terms with certain OE customers results in products and services being transferred over time due to the customized nature of some of the Company's products together with contractual provisions in certain customer contracts that provide the Company with an enforceable right to payment for performance completed to date. The Company considers an input measure (e.g., costs incurred to date relative to total estimated costs at completion) as a fair measure of progress for the recognition of over time revenue associated with these customized parts. A cost measure best depicts the means of transfer of goods to the customer, which occurs as the Company incurs costs to fulfill contracts.
The customer is invoiced once transfer of control has occurred and the Company has a right to payment. Typical payment
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
terms vary based on the customer and the type of goods and services in the contract. The period of time between invoicing and when payment is due is not significant. Amounts billed and due from customers are classified as receivables on the consolidated balance sheets. Standard payment terms are less than one year and the Company has elected the practical expedient to not assess whether a contract has a significant financing component if the payment terms are less than one year.
Performance Obligations: The majority of the Company's customer contracts with OE and aftermarket customers are long-term supply arrangements. The performance obligations are established by the enforceable contract, which is generally considered to be the purchase order but in some cases could be the delivery release schedule. The purchase order, or related delivery release schedule, is of a duration of less than one year. As such, the Company applies the practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Rebates: The Company accrues for rebates pursuant to specific arrangements with certain customers, primarily in the aftermarket. Rebates generally provide for payments to customers based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.
Product returns: Certain aftermarket contracts with customers include terms and conditions that result in a customer right of return that is accounted for on a gross basis. For these contracts the Company has recorded a refund liability and return asset within "Prepayments and other current assets."
Shipping and handling costs: Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in the consolidated statements of income.
Sales and sales related taxes: The Company collects and remits taxes assessed by various governmental authorities that are both imposed on and concurrent with revenue-producing transactions with its customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. The collection and remittance of these taxes is reported on a net basis.
Contract Balances: Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. There have been no impairment losses recognized related to any receivables or contract assets arising from the Company’s contracts with customers.
Engineering, Research, and Development: The Company records engineering, research, and development costs ("R&D") net of customer reimbursements as they are considered a recovery of cost.
Advertising and Promotion Expenses: The Company expenses advertising and promotional expenses as incurred and these expenses were $36 million, $40 million, and $40 million for the years ended December 31, 2018, 2017, and 2016.
Foreign currency translation: Exchange adjustments related to foreign currency transactions and translation adjustment for foreign subsidiaries whose functional currency is the U.S. dollar are reflected in the consolidated statements of income. Translation adjustments of foreign subsidiaries for which local currency is functional currency are reflected in the consolidated balance sheets as a component of accumulated other comprehensive income (loss). Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those intercompany balances which are designated as long-term investments. The amounts recorded in cost of sales in the consolidated statements of income for foreign currency transactions included $15 million of gains for the year ended December 31, 2018, $4 million of losses for the year ended December 31, 2017 and $1 million of gains for the year ended December 31, 2016.
Asset Retirement Obligations: The Company records asset retirement obligations (ARO) when liabilities are probable and amounts can be reasonably estimated. The Company's primary ARO activities relate to the removal of hazardous building materials at its facilities.
Derivative Financial Instruments: For derivative instruments to qualify as hedging instruments, they must be designated as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of a derivative financial instrument, determined using the hypothetical derivative method, is recognized in earnings immediately. The gain or loss related to derivative financial instruments not designated as hedges are recognized immediately in earnings. Cash flows related to hedging activities are included in the operating section of the consolidated statements of cash flows.
AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING (restated)
Management of Tenneco Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(e)13a-15(f) and Rule 15d-15(e)15d-15(f) under the Securities Exchange Act of 1934, as amended)amended (the "Exchange Act")). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016.2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on thisour assessment our management identified control deficiencies as of December 31, 2016 which constituted a material weakness.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.
During the quarter ended June 30, 2017, the Company identified deficiencies that, when aggregated together, resulted in a material weakness inconcluded the Company’s internal control over financial reporting in China. Specifically, the Company did not have people with appropriate authority and experience in key positions in China to ensure adherence to Company policies and US GAAP. Additionally, we did not have adequate international oversight to prevent the intentional mischaracterizationwas effective as of the nature of accounting transactions related to payments received from suppliers by certain purchasing and accounting personnel at the Company’s Chinese subsidiaries.
The material weakness described above resulted in immaterial errors impacting previously issued consolidated financial statements for the years ended December 31, 2016, 2015 and 2014, and each interim and year-to-date period in those respective years. We evaluated these errors and concluded that they did not, individually or in the aggregate, result in a material misstatement2018.
Management has excluded Federal-Mogul from its assessment of our previously issued consolidated financial statements and that such financial statements may continue to be relied upon. However, the identified misstatements resulting from the intentional mischaracterizations discussed above would be material if corrected as an out-of-period adjustment. As a result, the Company has amended its Annual Report on Form 10-K for the year ended December 31, 2016 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 to correct the immaterial errors to the consolidated financial statements, as described in more detail in Notes 16 and 14 to the consolidated financial statements included in those reports, respectively.
Additionally, this material weakness could result in the misstatement of the relevant account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
In Management’s Report on Internal Control over Financial Reporting included in our original Annual Report on Form 10-K for the year ended December 31, 2016, our management previously concluded that we maintained effective internal control over financial reporting as of December 31, 2016, filed on February 24, 2017. Management subsequently concluded that2018 because it was acquired by the material weakness described above existedCompany in a purchase business combination during 2018. Total assets and total revenues of the acquired Federal-Mogul business represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2016. As a result, we have concluded that we did not maintain effective2018.
The effectiveness of our internal control over financial reporting as of December 31, 2016, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013). Accordingly, management has restated its report on internal control over financial reporting.
Our internal control over financial reporting as of December 31, 20162018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included herein.
September 8, 2017March 15, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion,We have audited the accompanying consolidated balance sheets of Tenneco Inc. and its subsidiaries(the “Company”) as of December 31, 2018and 2017,and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Tenneco, Inc. and its subsidiaries as of December 31, 2016 and 2015 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018in conformity with accounting principles generally accepted in the United States of America. In addition,Also in our opinion, the financial statement schedule listed in the index under Item 15 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Management and we previously concluded that the Company maintained, effective internal control over financial reporting as of December 31, 2016. However, management has subsequently determined that a material weakness in internal control over financial reporting related to the accounting for payments received from suppliers by certain purchasing and accounting personnel at the Company’s Chinese subsidiaries existed as of that date. Accordingly, management’s report has been restated and our present opinion on internal control over financial reporting, as presented herein, is different from that expressed in our previous report. In our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) because a material weaknessCOSO.
Change in internal control over financial reporting relatedAccounting Principles
As discussed in Note 2 to the accounting for payments received from suppliers by certain purchasing and accounting personnel at the Company’s Chinese subsidiaries existed as of that date. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interimconsolidated financial statements, will not be prevented or detected on a timely basis. The material weakness referredthe Company changed the manner in which it accounts for certain components of net periodic pension and postretirement benefit costs and the manner in which it accounts for the cash received to above is describedsettle the deferred purchase price of factored receivables in the accompanying Management's Report on Internal Control over Financial Reporting. We considered this material weakness2018.
Basis for Opinions
in determining the nature, timing, and extent of audit tests applied in our audit of the 2016 consolidatedfinancial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidatedfinancial statements. The Company's management is responsible for these consolidated financial statements, and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in management's report referred to above.the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these the Company’s consolidatedfinancial statements on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits (which were integrated auditsaudits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in 2016accordance with the U.S. federal securities laws and 2015). the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidatedfinancial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidatedfinancial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Federal-Mogul from our audit of internal control over financial reporting. Federal-Mogul's total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
/S/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 15, 2019
February 24, 2017, except forWe have served as the effects of the revision discussed in Note 16 to the consolidated financial statements and the matter discussed in the penultimate paragraph of Management’s Report on Internal Control over Financial ReportingCompany’s auditor since 2010., as to which the date is September 8, 2017
TENNECO INC.
CONSOLIDATED STATEMENTS OF INCOME
| | | | Year Ended December 31, | Year Ended December 31 |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (Millions Except Share and Per Share Amounts) | (Millions Except Share and Per Share Amounts) |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | $ | 8,599 |
| | $ | 8,181 |
| | $ | 8,381 |
| $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization shown below) | 7,123 |
| | 6,828 |
| | 6,989 |
| |
| Cost of sales (exclusive of depreciation and amortization) | | 10,071 |
| | 7,812 |
| | 7,126 |
|
| Selling, general, and administrative | | 794 |
| | 638 |
| | 514 |
|
| Depreciation and amortization | | 345 |
| | 226 |
| | 213 |
|
| Engineering, research, and development | 154 |
| | 146 |
| | 169 |
| 204 |
| | 158 |
| | 153 |
|
| Selling, general, and administrative | 589 |
| | 491 |
| | 519 |
| |
| Depreciation and amortization of other intangibles | 212 |
| | 203 |
| | 208 |
| |
| Goodwill impairment charge | | 3 |
| | 11 |
| | — |
|
| | 8,078 |
| | 7,668 |
| | 7,885 |
| 11,417 |
| | 8,845 |
| | 8,006 |
|
| Other income (expense) | | | | | | |
| Other expense (income) | | | | | | |
| Loss on sale of receivables | (5 | ) | | (4 | ) | | (4 | ) | 16 |
| | 5 |
| | 5 |
|
| Other expense | — |
| | (1 | ) | | (3 | ) | |
| Non-service pension and postretirement benefit costs | | 20 |
| | 16 |
| | 84 |
|
| Loss on extinguishment of debt | | 10 |
| | 1 |
| | 24 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | | (18 | ) | | 1 |
| | — |
|
| Other expense (income), net | | 12 |
| | (2 | ) | | (1 | ) |
| | (5 | ) | | (5 | ) | | (7 | ) | 40 |
| | 21 |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | 516 |
| | 508 |
| | 489 |
| 306 |
| | 408 |
| | 479 |
|
| Interest expense | 92 |
| | 67 |
| | 91 |
| 132 |
| | 72 |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | 424 |
| | 441 |
| | 398 |
| 174 |
| | 336 |
| | 411 |
|
| Income tax expense | — |
| | 146 |
| | 131 |
| |
| Income tax expense (benefit) | | 63 |
| | 71 |
| | (4 | ) |
| Net income | 424 |
| | 295 |
| | 267 |
| 111 |
| | 265 |
| | 415 |
|
| Less: Net income attributable to noncontrolling interests | 68 |
| | 54 |
| | 42 |
| 56 |
| | 67 |
| | 68 |
|
| Net income attributable to Tenneco Inc. | $ | 356 |
| | $ | 241 |
| | $ | 225 |
| $ | 55 |
| | $ | 198 |
| | $ | 347 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic | 55,939,135 |
| | 59,678,309 |
| | 60,734,022 |
| 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Diluted | 56,407,436 |
| | 60,193,150 |
| | 61,782,508 |
| 58,758,732 |
| | 53,026,911 |
| | 56,407,436 |
|
| Basic earnings per share of common stock | $ | 6.36 |
| | $ | 4.05 |
| | $ | 3.70 |
| $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
|
| Diluted earnings per share of common stock | $ | 6.31 |
| | $ | 4.01 |
| | $ | 3.64 |
| $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Tenneco Inc. | | Noncontrolling interests | | Total |
| | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) |
| | (Millions) |
| Net Income | | | $ | 356 |
| | | | $ | 68 |
| | | | $ | 424 |
|
| Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
| Cumulative Translation Adjustment | | | | | | | | | | | |
| Balance January 1 | $ | (297 | ) | | | | $ | (1 | ) | | | | $ | (298 | ) | | |
| Translation of foreign currency statements, net of tax | (41 | ) | | (41 | ) | | (4 | ) | | (4 | ) | | (45 | ) | | (45 | ) |
| Balance December 31 | (338 | ) | | | | (5 | ) | | | | (343 | ) | | |
| Adjustment to the Liability for Pension and Postretirement Benefits | | | | | | | | | | | |
| Balance January 1 | (368 | ) | | | | — |
| | | | (368 | ) | | |
| Adjustment to the Liability for Pension and Postretirement benefits, net of tax | 41 |
| | 41 |
| | — |
| | — |
| | 41 |
| | 41 |
|
| Balance December 31 | (327 | ) | | | | — |
| | | | (327 | ) | | |
| Balance December 31 | $ | (665 | ) | | | | $ | (5 | ) | | | | $ | (670 | ) | | |
| Other comprehensive loss | | | — |
| | | | (4 | ) | | | | (4 | ) |
| Comprehensive Income | | | $ | 356 |
| | | | $ | 64 |
| | | | $ | 420 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | |
| Foreign currency translation adjustment | (134 | ) | | 106 |
| | (56 | ) |
| Defined benefit plans | (22 | ) | | 17 |
| | 51 |
|
| | (156 | ) | | 123 |
| | (5 | ) |
| Comprehensive income (loss) | (45 | ) | | 388 |
| | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 54 |
| | 69 |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | $ | (99 | ) | | $ | 319 |
| | $ | 346 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of comprehensive income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Tenneco Inc. | | Noncontrolling interests | | Total |
| | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) |
| | (Millions) |
| Net Income | | | $ | 241 |
| | | | $ | 54 |
| | | | $ | 295 |
|
| Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
| Cumulative Translation Adjustment | | | | | | | | | | | |
| Balance January 1 | $ | (166 | ) | | | | $ | 3 |
| | | | $ | (163 | ) | | |
| Translation of foreign currency statements, net of tax | (131 | ) | | (131 | ) | | (4 | ) | | (4 | ) | | (135 | ) | | (135 | ) |
| Balance December 31 | (297 | ) | | | | (1 | ) | | | | (298 | ) | | |
| Adjustment to the Liability for Pension and Postretirement Benefits | | | | | | | | | | | |
| Balance January 1 | (379 | ) | | | | — |
| | | | (379 | ) | | |
| Adjustment to the Liability for Pension and Postretirement benefits, net of tax | 11 |
| | 11 |
| | — |
| | — |
| | 11 |
| | 11 |
|
| Balance December 31 | (368 | ) | | | | — |
| | | | (368 | ) | | |
| Balance December 31 | $ | (665 | ) | | | | $ | (1 | ) | | | | $ | (666 | ) | | |
| Other comprehensive loss | | | (120 | ) | | | | (4 | ) | | | | (124 | ) |
| Comprehensive Income | | | $ | 121 |
| | | | $ | 50 |
| | | | $ | 171 |
|
The accompanying notes to consolidated financial statements are an integral
part of these statements of comprehensive income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| | Tenneco Inc. | | Noncontrolling interests | | Total |
| | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income (Loss) |
| | (Millions) |
| Net Income | | | $ | 225 |
| | | | $ | 42 |
| | | | $ | 267 |
|
| Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
| Cumulative Translation Adjustment | | | | | | | | | | | |
| Balance January 1 | $ | (61 | ) | | | | $ | 5 |
| | | | $ | (56 | ) | | |
| Translation of foreign currency statements, net of tax | (105 | ) | | (105 | ) | | (2 | ) | | (2 | ) | | (107 | ) | | (107 | ) |
| Balance December 31 | (166 | ) | | | | 3 |
| | | | (163 | ) | | |
| Adjustment to the Liability for Pension and Postretirement Benefits | | | | | | | | | | | |
| Balance January 1 | (299 | ) | | | | — |
| | | | (299 | ) | | |
| Adjustment to the Liability for Pension and Postretirement benefits, net of tax | (80 | ) | | (80 | ) | | — |
| | — |
| | (80 | ) | | (80 | ) |
| Balance December 31 | (379 | ) | | | | — |
| | | | (379 | ) | | |
| Balance December 31 | $ | (545 | ) | | | | $ | 3 |
| | | | $ | (542 | ) | | |
| Other comprehensive loss | | | (185 | ) | | | | (2 | ) | | | | (187 | ) |
| Comprehensive Income | | | $ | 40 |
| | | | $ | 40 |
| | | | $ | 80 |
|
The accompanying notes to consolidated financial statements are an integral
part of these statements of comprehensive income.
TENNECO INC.
CONSOLIDATED BALANCE SHEETS
| | | | December 31, | December 31 |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (Millions) | (Millions) |
ASSETS | | Current assets: | | | | | | |
| Cash and cash equivalents | $ | 347 |
| | $ | 287 |
| $ | 697 |
| | $ | 315 |
|
| Restricted cash | 2 |
| | 1 |
| 5 |
| | 3 |
|
| Receivables — | | | | |
| Receivables: | | | | |
| Customer notes and accounts, net | 1,272 |
| | 1,102 |
| 2,487 |
| | 1,294 |
|
| Other | 22 |
| | 10 |
| 85 |
| | 27 |
|
| Inventories | 730 |
| | 682 |
| 2,245 |
| | 820 |
|
| Prepayments and other | 229 |
| | 229 |
| |
| Prepayments and other current assets | | 590 |
| | 288 |
|
| Total current assets | 2,602 |
| | 2,311 |
| 6,109 |
| | 2,747 |
|
| Other assets: | | | | |
| Property, plant and equipment, net | | 3,501 |
| | 1,691 |
|
| Long-term receivables, net | 9 |
| | 13 |
| 10 |
| | 9 |
|
| Goodwill | 57 |
| | 60 |
| 869 |
| | 49 |
|
| Intangibles, net | 19 |
| | 22 |
| 1,519 |
| | 22 |
|
| Investments in nonconsolidated affiliates | | 544 |
| | 2 |
|
| Deferred income taxes | 199 |
| | 221 |
| 467 |
| | 213 |
|
| Other | 103 |
| | 100 |
| |
| | 387 |
| | 416 |
| |
| Plant, property, and equipment, at cost | 3,548 |
| | 3,418 |
| |
| Less — Accumulated depreciation and amortization | (2,191 | ) | | (2,175 | ) | |
| | 1,357 |
| | 1,243 |
| |
| Total Assets | $ | 4,346 |
| | $ | 3,970 |
| |
| Other assets | | 213 |
| | 63 |
|
| Total assets | | $ | 13,232 |
| | $ | 4,796 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | Current liabilities: | | | | | | |
| Short-term debt (including current maturities of long-term debt) | $ | 90 |
| | $ | 86 |
| |
| Short-term debt, including current maturities of long-term debt | | $ | 153 |
| | $ | 103 |
|
| Accounts payable | 1,501 |
| | 1,376 |
| 2,759 |
| | 1,582 |
|
| Accrued taxes | 39 |
| | 37 |
| |
| Accrued interest | 15 |
| | 4 |
| |
| Accrued liabilities | 285 |
| | 250 |
| |
| Other | 43 |
| | 41 |
| |
| Accrued compensation and employee benefits | | 343 |
| | 141 |
|
| Accrued income taxes | | 64 |
| | 27 |
|
| Accrued expenses and other current liabilities | | 1,001 |
| | 424 |
|
| Total current liabilities | 1,973 |
| | 1,794 |
| 4,320 |
| | 2,277 |
|
| Long-term debt | 1,294 |
| | 1,124 |
| 5,340 |
| | 1,358 |
|
| Deferred income taxes | 7 |
| | 7 |
| 88 |
| | 11 |
|
| Postretirement benefits | 273 |
| | 318 |
| |
| Pension and postretirement benefits | | 1,167 |
| | 268 |
|
| Deferred credits and other liabilities | 139 |
| | 222 |
| 263 |
| | 158 |
|
| Commitments and contingencies |
| |
|
| |
|
| Total liabilities | 3,686 |
| | 3,465 |
| 11,178 |
| | 4,072 |
|
| Redeemable noncontrolling interests | 40 |
| | 41 |
| 138 |
| | 42 |
|
| Tenneco Inc. Shareholders’ equity: | | | | |
| Common stock | 1 |
| | 1 |
| |
| Premium on common stock and other capital surplus | 3,098 |
| | 3,081 |
| |
| Tenneco Inc. shareholders’ equity: | | | | |
| Preferred stock—$0.01 par value; none issued | | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | | 1 |
| | 1 |
|
| Class B non-voting convertible common stock—$0.01 par value; 2018—23,793,669 shares issued | | — |
| | — |
|
| Additional paid-in capital | | 4,360 |
| | 3,112 |
|
| Accumulated other comprehensive loss | (665 | ) | | (665 | ) | (692 | ) | | (538 | ) |
| Retained earnings (accumulated deficit) | (1,100 | ) | | (1,456 | ) | |
| Accumulated deficit | | (1,013 | ) | | (1,009 | ) |
| | 1,334 |
| | 961 |
| 2,656 |
| | 1,566 |
|
| Less — Shares held as treasury stock, at cost | 761 |
| | 536 |
| |
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | | (930 | ) | | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | 573 |
| | 425 |
| 1,726 |
| | 636 |
|
| Noncontrolling interests | 47 |
| | 39 |
| 190 |
| | 46 |
|
| Total equity | 620 |
| | 464 |
| 1,916 |
| | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 4,346 |
| | $ | 3,970 |
| $ | 13,232 |
| | $ | 4,796 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| | | | | | | | | | | |
| | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (Millions) |
| Operating Activities | | | | | |
| Net income | $ | 424 |
| | $ | 295 |
| | $ | 267 |
|
| Adjustments to reconcile net income to cash provided by operating activities — | | | | | |
| Depreciation and amortization of other intangibles | 212 |
| | 203 |
| | 208 |
|
| Deferred income taxes | (80 | ) | | (2 | ) | | (1 | ) |
| Stock-based compensation | 14 |
| | 15 |
| | 13 |
|
| Loss on sale of assets | 4 |
| | 4 |
| | 6 |
|
| Changes in components of working capital — | | | | | |
| (Increase) decrease in receivables | (215 | ) | | (90 | ) | | (83 | ) |
| (Increase) decrease in inventories | (57 | ) | | (36 | ) | | (74 | ) |
| (Increase) decrease in prepayments and other current assets | (8 | ) | | 37 |
| | (81 | ) |
| Increase (decrease) in payables | 114 |
| | 90 |
| | 94 |
|
| Increase (decrease) in accrued taxes | 2 |
| | (1 | ) | | — |
|
| Increase (decrease) in accrued interest | 12 |
| | 1 |
| | (6 | ) |
| Increase (decrease) in other current liabilities | 26 |
| | (10 | ) | | 13 |
|
| Change in long-term assets | 6 |
| | 3 |
| | 12 |
|
| Change in long-term liabilities | 33 |
| | 8 |
| | (10 | ) |
| Other | 2 |
| | — |
| | (17 | ) |
| Net cash provided by operating activities | 489 |
| | 517 |
| | 341 |
|
| Investing Activities | | | | | |
| Proceeds from sale of assets | 6 |
| | 4 |
| | 3 |
|
| Cash payments for plant, property, and equipment | (325 | ) | | (286 | ) | | (328 | ) |
| Cash payments for software related intangible assets | (20 | ) | | (23 | ) | | (13 | ) |
| Cash payments for net assets purchased | — |
| | — |
| | (3 | ) |
| Change in restricted cash | (1 | ) | | 2 |
| | 2 |
|
| Net cash used by investing activities | (340 | ) | | (303 | ) | | (339 | ) |
| Financing Activities | | | | | |
| Retirement of long-term debt | (531 | ) | | (37 | ) | | (462 | ) |
| Issuance of long-term debt | 509 |
| | 1 |
| | 570 |
|
| Debt issuance costs of long-term debt | (9 | ) | | (1 | ) | | (12 | ) |
| Purchase of common stock under the share repurchase program | (225 | ) | | (213 | ) | | (22 | ) |
| Issuance of common stock | 18 |
| | 6 |
| | 19 |
|
| Tax impact from stock-based compensation | (10 | ) | | 6 |
| | 26 |
|
| Increase (decrease) in bank overdrafts | 10 |
| | (22 | ) | | 6 |
|
| Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | 202 |
| | 102 |
| | (70 | ) |
| Net increase (decrease) in short-term borrowings secured by accounts receivable | — |
| | 30 |
| | (10 | ) |
| Capital contribution from noncontrolling interest partner | — |
| | — |
| | 5 |
|
| Distribution to noncontrolling interest partners | (55 | ) | | (44 | ) | | (30 | ) |
| Net cash provided (used) by financing activities | (91 | ) | | (172 | ) | | 20 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents | 2 |
| | (37 | ) | | (15 | ) |
| Increase in cash and cash equivalents | 60 |
| | 5 |
| | 7 |
|
| Cash and cash equivalents, January 1 | 287 |
| | 282 |
| | 275 |
|
| Cash and cash equivalents, December 31 (Note) | $ | 347 |
| | $ | 287 |
| | $ | 282 |
|
| | | | | | |
|
| | | | | | | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for interest | $ | 76 |
| | $ | 68 |
| | $ | 93 |
|
| Cash paid during the year for income taxes (net of refunds) | 113 |
| | 105 |
| | 136 |
|
| Non-cash Investing and Financing Activities | | | | | |
| Period end balance of trade payables for plant, property, and equipment | $ | 68 |
| | $ | 50 |
| | $ | 41 |
|
|
| |
Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Operating Activities | | | | | |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Deferred income taxes | (65 | ) | | (8 | ) | | (84 | ) |
| Stock-based compensation | 14 |
| | 14 |
| | 14 |
|
| Restructuring charges and asset impairments, net of cash paid | 49 |
| | 8 |
| | (13 | ) |
| Change in pension and postretirement benefit plans | (8 | ) | | (15 | ) | | 47 |
|
| Equity in earnings of nonconsolidated affiliates | (18 | ) | | 1 |
| | — |
|
| Cash dividends received from nonconsolidated affiliates | 2 |
| | — |
| | — |
|
| Loss on sale of assets | 16 |
| | 5 |
| | 4 |
|
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (190 | ) | | (81 | ) | | (325 | ) |
| Inventories | 27 |
| | (94 | ) | | (55 | ) |
| Payables and accrued expenses | 291 |
| | 136 |
| | 140 |
|
| Accrued interest and income taxes | (19 | ) | | 1 |
| | 13 |
|
| Other assets and liabilities | (119 | ) | | 48 |
| | 5 |
|
| Net cash provided by operating activities | 439 |
| | 517 |
| | 374 |
|
| Investing Activities | | | | | |
| Federal-Mogul acquisition, net of cash acquired | (2,194 | ) | | — |
| | — |
|
| Proceeds from sale of assets | 9 |
| | 8 |
| | 6 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| | — |
|
| Cash payments for plant, property, and equipment | (507 | ) | | (419 | ) | | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | 174 |
| | 112 |
| | 110 |
|
| Other | 4 |
| | (10 | ) | | — |
|
| Net cash used by investing activities | (2,514 | ) | | (300 | ) | | (229 | ) |
| Financing Activities | | | | | |
| Proceeds from term loans and notes | 3,426 |
| | 160 |
| | 529 |
|
| Repayments of term loans and notes | (453 | ) | | (36 | ) | | (545 | ) |
| Borrowings on revolving lines of credit | 5,149 |
| | 6,664 |
| | 5,417 |
|
| Payments on revolving lines of credit | (5,405 | ) | | (6,737 | ) | | (5,221 | ) |
| Issuance (repurchase) of common shares | (1 | ) | | (1 | ) | | 13 |
|
| Cash dividends | (59 | ) | | (53 | ) | | — |
|
| Debt issuance cost of long-term debt | (95 | ) | | (8 | ) | | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | (169 | ) | | (225 | ) |
| Net increase (decrease) in bank overdrafts | (5 | ) | | (7 | ) | | 10 |
|
| Other | (30 | ) | | — |
| | — |
|
| Distributions to noncontrolling interest partners | (51 | ) | | (64 | ) | | (55 | ) |
| Net cash provided (used) by financing activities | 2,476 |
| | (251 | ) | | (86 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (17 | ) | | 3 |
| | 2 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 384 |
| | (31 | ) | | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 318 |
| | 349 |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 702 |
| | $ | 318 |
| | $ | 349 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for interest | $ | 143 |
| | $ | 78 |
| | $ | 76 |
|
| Cash paid during the year for income taxes, net of refunds | $ | 113 |
| | $ | 95 |
| | $ | 113 |
|
| Non-cash Investing and Financing Activities | | | | | |
| Period end balance of trade payables for plant, property, and equipment | $ | 135 |
| | $ | 59 |
| | $ | 68 |
|
| Deferred purchase price of receivables factored in period | $ | 154 |
| | $ | 114 |
| | $ | 109 |
|
| Stock issued for acquisition of Federal-Mogul | $ | (1,236 | ) | | $ | — |
| | $ | — |
|
| Stock transferred for acquisition of Federal-Mogul | $ | 1,236 |
| | $ | — |
| | $ | — |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of cash flows.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount |
| | (Millions Except Share Amounts) |
| Common Stock | | | | | | | | | | | |
| Balance January 1 | 65,067,132 |
| | $ | 1 |
| | 64,454,248 |
| | $ | 1 |
| | 63,714,728 |
| | $ | 1 |
|
| Issued pursuant to benefit plans | 292,514 |
| | — |
| | 335,766 |
| | — |
| | 62,334 |
| | — |
|
| Stock options exercised | 532,284 |
| | — |
| | 277,118 |
| | — |
| | 677,186 |
| | — |
|
| Balance December 31 | 65,891,930 |
| | 1 |
| | 65,067,132 |
| | 1 |
| | 64,454,248 |
| | 1 |
|
| Premium on Common Stock and Other Capital Surplus | | | | | | | | | | | |
| Balance January 1 | | | 3,081 |
| | | | 3,059 |
| | | | 3,014 |
|
| Premium on common stock issued pursuant to benefit plans | | | 17 |
| | | | 22 |
| | | | 45 |
|
| Balance December 31 | | | 3,098 |
| | | | 3,081 |
| | | | 3,059 |
|
| Accumulated Other Comprehensive Loss | | | | | | | | | | | |
| Balance January 1 | | | (665 | ) | | | | (545 | ) | | | | (360 | ) |
| Other comprehensive loss | | | — |
| | | | (120 | ) | | | | (185 | ) |
| Balance December 31 | | | (665 | ) | | | | (665 | ) | | | | (545 | ) |
| Retained Earnings (Accumulated Deficit) | | | | | | | | | | | |
| Balance January 1 | | | (1,456 | ) | | | | (1,697 | ) | | | | (1,922 | ) |
| Net income attributable to Tenneco Inc. | | | 356 |
| | | | 241 |
| | | | 225 |
|
| Balance December 31 | | | (1,100 | ) | | | | (1,456 | ) | | | | (1,697 | ) |
| Less — Common Stock Held as Treasury Stock, at Cost | | | | | | | | | | | |
| Balance January 1 | 7,473,325 |
| | 536 |
| | 3,244,692 |
| | 323 |
| | 2,844,692 |
| | 301 |
|
| Purchase of common stock through stock repurchase program | 4,182,613 |
| | 225 |
| | 4,228,633 |
| | 213 |
| | 400,000 |
| | 22 |
|
| Balance December 31 | 11,655,938 |
| | 761 |
| | 7,473,325 |
| | 536 |
| | 3,244,692 |
| | 323 |
|
| Total Tenneco Inc. shareholders’ equity | | | $ | 573 |
| | | | $ | 425 |
| | | | $ | 495 |
|
| Noncontrolling interests: | | | | | | | | | | | |
| Balance January 1 | | | 39 |
| | | | 40 |
| | | | 39 |
|
| Net income | | | 32 |
| | | | 22 |
| | | | 20 |
|
| Other comprehensive loss | | | (2 | ) | | | | (3 | ) | | | | (1 | ) |
| Dividends declared | | | (22 | ) | | | | (20 | ) | | | | (18 | ) |
| Balance December 31 | | | $ | 47 |
| | | | $ | 39 |
| | | | $ | 40 |
|
| Total equity | | | $ | 620 |
| | | | $ | 464 |
| | | | $ | 535 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tenneco Inc. Shareholders' equity | | |
| | $0.01 Par Value Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Treasury Stock | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
| | (Millions) |
| Balance as of December 31, 2015 | $ | 1 |
| | $ | 3,081 |
| | $ | (658 | ) | | $ | (1,501 | ) | | $ | (536 | ) | | $ | 387 |
| | $ | 39 |
| | $ | 426 |
|
| Net income | — |
| | — |
| | — |
| | 347 |
| | — |
| | 347 |
| | 32 |
| | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | — |
| | — |
| | (52 | ) | | — |
| | — |
| | (52 | ) | | (2 | ) | | (54 | ) |
| Defined benefit plans | — |
| | — |
| | 51 |
| | — |
| | — |
| | 51 |
| | — |
| | 51 |
|
| Comprehensive income |
| | | | | | | |
| | 346 |
| | 30 |
| | 376 |
|
| Stock-based compensation expense | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (225 | ) | | (225 | ) | | — |
| | (225 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | (22 | ) |
| Balance as of December 31, 2016 | 1 |
| | 3,098 |
| | (659 | ) | | (1,154 | ) | | (761 | ) | | 525 |
| | 47 |
| | 572 |
|
| Net income | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
| | 31 |
| | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
| | (1 | ) | | 103 |
|
| Defined benefit plans | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Comprehensive income |
| | | | | | | |
| | 319 |
| | 30 |
| | 349 |
|
Stock-based compensation expense
| — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) | | — |
| | (53 | ) |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (169 | ) | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Balance as of December 31, 2017 | 1 |
| | 3,112 |
| | (538 | ) | | (1,009 | ) | | (930 | ) | | 636 |
| | 46 |
| | 682 |
|
| Net income | — |
| | — |
| | — |
| | 55 |
| | — |
| | 55 |
| | 27 |
| | 82 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | (132 | ) | | — |
| | — |
| | (132 | ) | | — |
| | (132 | ) |
| Defined benefit plans | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Comprehensive income |
| | | | | | | |
| | (99 | ) | | 27 |
| | (72 | ) |
Adjustments to adopt new accounting standards (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued | — |
| | 1,236 |
| | — |
| | — |
| | — |
| | 1,236 |
| | — |
| | 1,236 |
|
| Federal-Mogul Acquisition | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 143 |
| | 143 |
|
| Stock-based compensation expense | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (59 | ) | | — |
| | (59 | ) | | — |
| | (59 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| |
| | — |
| | — |
| | (26 | ) | | (26 | ) |
| Balance as of December 31, 2018 | $ | 1 |
| | $ | 4,360 |
| | $ | (692 | ) | | $ | (1,013 | ) | | $ | (930 | ) | | $ | 1,726 |
| | $ | 190 |
| | $ | 1,916 |
|
(1) The cumulative effect of the adoption of ASU 2016-16 was an increase to accumulated deficit of $1 million, and the cumulative effect of the adoption of ASC 606 was a decrease to accumulated deficit of $1 million.
The accompanying notes to the consolidated financial statements are an integral
part of these statements of changes in shareholders’ equity.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTSWarranty Reserves
1.Summary of Accounting Policies
ConsolidationWhere we have offered product warranty and Presentation
Our consolidated financial statements include all majority-owned subsidiaries. We carry investments in 20 percentalso provide for warranty costs. Provisions for estimated expenses related to 50 percent owned companies in which the Company does not have a controlling interest, as equity method investments, at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. We have eliminated intercompany transactions. We have evaluated all subsequent events through the date our financial statements were issued.
Revision of Previously Issued Financial Statements
For the periods from April 1, 2013 through March 31, 2017, we identified approximately $34 million in lump sum payments from our suppliers that were incorrectly recorded upon receipt as a reduction to cost of sales. The errors resulted from the intentional mischaracterization by certain purchasing and accounting personnelproduct warranty are made at the Company’s China subsidiaries oftime products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, of the accounting transactions related to the payments received from suppliers. These payments should have been deferredfrequency, and amortized over the life of the underlying supplier agreements. The deferred amount related to these payments was $23 million and $16 million at December 31, 2016 and 2015, respectively, and recorded within deferred credit and other liabilities. In addition, we identified an unrelated error of approximately $7 million of substrate liabilities that should have been accrued during the periods from January 1, 2016 through March 31, 2017, understating cost of sales in each of these periods. With this revision, we are including previously known adjustments impacting revenues and cost of sales for the periods from January 1, 2012 to September 30, 2015, to reflect a correction from gross revenue reporting to net revenue reporting for certain transactions where it was determined that we earned a fee as an agent. These previously known adjustments reduced both revenue and cost of sales by $28 million and $39 million for years ended December 31, 2015 and 2014, respectively. We evaluated the impact of these items on prior periods under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality” and determined that the amounts were not material to previously issued financial statements. As a result, we have revised and will revise for annual and interim periods in future filings, for certain amounts in the consolidated financial statements in order to correct these errors. See Note 16 in our notes to consolidated financial statements located in Part II Item 8 of this Form 10-K/A.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include among others, allowances for doubtful receivables, promotional and product returns, income taxes, pension and postretirement benefit plans, and contingencies. These items are covered in more detail elsewhere in Note 1, Note 7, Note 10, and Note 12 of the consolidated financial statements of Tenneco Inc. Actual results could differ from those estimates.
Redeemable Noncontrolling Interests
We have noncontrolling interests in five joint ventures with redemption features that could require us to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of our subsidiaries. We do not believe that it is probable that the redemption features in any of these joint venture agreements will be triggered. However, the redemption of these shares is not solely within our control. Accordingly, the related noncontrolling interests are presented as “Redeemable noncontrolling interests” in the temporary equity section of our consolidated balance sheets.
In May 2014, we sold a 45 percent equity interest in Tenneco Fusheng (Chengdu) Automobile Parts Co., Ltd., to a third party for $4 million. As a result of the sale, our equity ownership of Tenneco Fusheng (Chengdu) Automobile Parts Co., Ltd. changed to 55 percent from 100 percent.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a rollforward of activity in our redeemable noncontrolling interests for the years ending December 31, 2016, 2015 and 2014, respectively:
|
| | | | | | | | | | | |
| 2016 |
| 2015 |
| 2014 |
| | (Millions) |
| Balance January 1 | $ | 41 |
| | $ | 34 |
| | $ | 20 |
|
| Net income attributable to redeemable noncontrolling interests | 36 |
| | 32 |
| | 22 |
|
| Sale of 45 percent equity interest from Tenneco Inc | — |
| | — |
| | 4 |
|
| Capital Contributions | — |
| | — |
| | 1 |
|
| Other comprehensive loss | (2 | ) | | (1 | ) | | — |
|
| Dividends declared | (35 | ) | | (24 | ) | | (13 | ) |
| Balance December 31 | $ | 40 |
| | $ | 41 |
| | $ | 34 |
|
Inventories
At December 31, 2016 and 2015, inventory by major classification was as follows:
|
| | | | | | | |
| | 2016 | | 2015 |
| | (Millions) |
| Finished goods | $ | 284 |
| | $ | 257 |
|
| Work in process | 245 |
| | 233 |
|
| Raw materials | 137 |
| | 135 |
|
| Materials and supplies | 64 |
| | 57 |
|
| | $ | 730 |
| | $ | 682 |
|
Our inventories are stated at the lower of cost or market value using the first-in, first-out (“FIFO”) or average cost methods. Work in process includes purchased parts such as substrates coated with precious metals.
Goodwill and Intangibles, net
We evaluate goodwill for impairment in the fourth quarter of each year, or more frequently if events indicate it is warranted. The goodwill impairment test consists of a two-step process. In step one, we compare the estimated fair value of our reporting units with goodwill to the carrying value of the unit’s assets and liabilities to determine if impairment exists within the recorded balance of goodwill. We estimate the fair value of each reporting unit using the income approach which is based on the present value of estimated future cash flows. The income approach is dependent on a number of factors, including estimates of market trends, forecasted revenues and expenses, capital expenditures, weighted average cost of capitalwarranty claims and other variables. A separate discount rate derived by a combinationupon specific warranty issues as they arise. The warranty terms vary but range from one year up to limited lifetime warranties on some of published sources, internalour premium aftermarket products. While we have not experienced any material differences between these estimates and weighted basedour actual costs, it is reasonably possible that future warranty issues could arise that could have a significant effect on our debt to equity ratio, was used to calculate the discounted cash flows for each of our reporting units. These estimates are based on assumptions that we believe to be reasonable, but which are inherently uncertain and outside of the control of management. If the carrying value of the reporting unit is higher than its fair value, there is an indication that impairment may exist which requires step two to be performed to measure the amount of the impairment loss. The amount of impairment is determined by comparing the implied fair value of a reporting unit’s goodwill to its carrying value.
At December 31, 2016, accumulated goodwill impairment charges include $306 million related to our North America Ride Performance reporting unit, $32 million related to our Europe, South America & India Ride Performance reporting unit and $11 million related to our Asia Pacific Ride Performance reporting unit.
In the fourth quarter of 2016, 2015 and 2014, as a result of our annual goodwill impairment testing, the estimated fair value of each of our reporting units exceeded the carrying value of their assets and liabilities as of the testing date.consolidated financial statements.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The changes in the net carrying amount of goodwill for the years ended December 31, 2016, 2015 and 2014 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | Clean Air Division | | Ride Performance Division | | |
| | North
America | | Europe, South America & India | | Asia
Pacific | | North
America | | Europe, South America & India | | Asia
Pacific | | Total |
| (Millions) |
| Balance at December 31, 2014 | $ | 14 |
| | $ | 12 |
| | $ | — |
| | $ | 10 |
| | $ | 29 |
| | $ | — |
| | $ | 65 |
|
| Translation Adjustment | — |
| | (1 | ) | | — |
| | — |
| | (4 | ) | | — |
| | (5 | ) |
| Balance at December 31, 2015 | 14 |
| | 11 |
| | — |
| | 10 |
| | 25 |
| | — |
| | 60 |
|
| Translation Adjustment | — |
| | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Balance at December 31, 2016 | 14 |
| | 11 |
| | — |
| | 10 |
| | 22 |
| | — |
| | 57 |
|
We have capitalized certain intangible assets, primarily technology rights, trademarks and patents, based on their estimated fair value at the date we acquired them. We amortize our finite useful life intangible assets on a straight-line basis over periods ranging from 3 to 50 years. Amortization of intangibles amounted to $3 million in 2016, $5 million in 2015, and $4 million in 2014, and are included in the statements of income caption “Depreciation and amortization of intangibles.” The carrying amount and accumulated amortization of our finite useful life intangible assets were as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Gross Carrying
Value | | Accumulated
Amortization | | Gross Carrying
Value | | Accumulated
Amortization |
| | (Millions) | | (Millions) |
| Customer contract | $ | 8 |
| | $ | (5 | ) | | $ | 8 |
| | $ | (4 | ) |
| Patents | 1 |
| | (1 | ) | | 2 |
| | (2 | ) |
| Technology rights | 29 |
| | (21 | ) | | 29 |
| | (19 | ) |
| Other | 9 |
| | (1 | ) | | 10 |
| | (2 | ) |
| Total | $ | 47 |
| | $ | (28 | ) | | $ | 49 |
| | $ | (27 | ) |
Estimated amortization of intangible assets over the next five years is expected to be $5 million in 2017, $4 million in 2018, $4 million in 2019, $3 million in 2020 and $2 million in 2021.
Plant, Property, and Equipment, at Cost
At December 31, 2016 and 2015, plant, property, and equipment, at cost, by major category were as follows:
|
| | | | | | | |
| | 2016 | | 2015 |
| | (Millions) |
| Land, buildings, and improvements | $ | 568 |
| | $ | 561 |
|
| Machinery and equipment | 2,638 |
| | 2,569 |
|
| Other, including construction in progress | 342 |
| | 288 |
|
| $ | 3,548 |
| | $ | 3,418 |
|
We depreciate these properties excluding land on a straight-line basis over the estimated useful lives of the assets. Useful lives range from 10 to 50 years for buildings and improvements and from 3 to 25 years for machinery and equipment.
Notes and Accounts Receivable and Allowance for Doubtful Accounts
Receivables consist of amounts billed and currently due from customers and unbilled pre-production design and development costs. Short and long-term accounts receivable outstanding were $1,293 million and $1,126 million at December 31, 2016 and 2015, respectively. The allowance for doubtful accounts on short-term and long-term accounts receivable was $16 million at both December 31, 2016 and 2015. Short and long-term notes receivable outstanding were $4 million and $5 million at December 31, 2016 and 2015, respectively. The allowance for doubtful accounts on short-term and long-term notes receivable was zero at both December 31, 2016 and 2015.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Pre-production Design and Development and Tooling Assets
We expense pre-production design and development costs as incurred unless we have a contractual guarantee for reimbursement from the original equipment customer. Unbilled pre-production design and development costs recorded in prepayments and other and long-term receivables were $22 million and $21 million at December 31, 2016 and 2015, respectively. In addition, plant, property and equipment included $62 million and $64 million at December 31, 2016 and 2015, respectively, for original equipment tools and dies that we own, and prepayments and other included $97 million and $107 million at December 31, 2016 and 2015, respectively, for in-process tools and dies that we are building for our original equipment customers.
Internal Use Software Assets
We capitalize certain costs related to the purchase and development of software that we use in our business operations. We amortize the costs attributable to these software systems over their estimated useful lives, ranging from 3 to 12 years, based on various factors such as the effects of obsolescence, technology, and other economic factors. Capitalized software development costs, net of amortization, were $66 million and $58 million at December 31, 2016 and 2015, respectively, and are recorded in other long-term assets. Amortization of software development costs was approximately $12 million for the year ended December 31, 2016, $13 million for the year ended December 31, 2015 and $15 million for the year ended December 31, 2014, and is included in the statements of income (loss) caption “Depreciation and amortization of intangibles.” Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the statements of cash flows.
Accounts Payable
Accounts payable included $99 million and $93 million at December 31, 2016 and December 31, 2015, respectively, for accrued compensation and $27 million and $17 million at December 31, 2016 and December 31, 2015, respectively, for bank overdrafts at our European subsidiaries.
Income Taxes
We recognize deferred tax assets and liabilities on the basis of the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax values, and net operating losses ("NOL"(“NOL”) and tax credit carryforwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from the currently applicable 35% rate to a new 21% rate, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactment. The TCJA also includes an anti-deferral provision (the Global Intangible Low-Taxed Income tax) effective starting in 2018 wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of non-U.S. corporations.
We evaluate our deferred income taxestax assets quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
Valuation allowances have beenare established in certain foreign jurisdictions for deferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We have consideredconsider the following possible sources of taxable income when assessing the realization of our deferred tax assets:assets and the need for a valuation allowance:
Future reversals of existing taxable temporary differences;
Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;
Tax-planning strategies; and
Taxable income in prior carryback years if carryback is permitted under the relevant tax law.
The valuation allowances recorded against deferred tax assets generated by taxable losses in certain foreign jurisdictions will impact our provision for income taxes until the valuation allowances are released. Our provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
Revenue Recognition
We recognize revenue for sales to our original equipment and aftermarket customers when title and risk of loss passes to the customers under the terms of our arrangements with those customers, which is usually at the time of shipment from our plants or distribution centers. Generally, in connection with the sale of exhaust systems to certain original equipment
MARKET RISK SENSITIVITY
We are exposed to certain global market risks, including foreign currency exchange risk, commodity price risk, interest rate risk associated with our debt, and equity price risk associated with our share-based compensation awards.
Foreign Currency Exchange Rate Risk
We manufacture and sell our products in North America, South America, Asia, Europe, and Africa. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, and Mexican peso.
Foreign Currency Forward Contracts — We enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. In managing our foreign currency exposures, we identify and aggregates existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The gain or loss on these contracts is recorded as foreign currency gains (losses) within cost of sales in the consolidated statements of income. The fair value of foreign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at December 31, 2018 and a net liability position of less than $1 million at December 31, 2017.
The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of December 31, 2018 (all of which mature in 2019):
|
| | | |
| | Notional Amount in Foreign Currency |
| | (Millions) |
| Canadian dollars | —Sell | (2 | ) |
| European euro | —Purchase | 1 |
|
| —Sell | (8 | ) |
| Polish zloty | —Purchase | 35 |
|
| Mexican pesos | —Purchase | 211 |
|
| U.S. dollars | —Purchase | 2 |
|
| —Sell | (11 | ) |
A hypothetical 10% adverse change in the U.S. relative to all other currencies would not materially affect our consolidated financial position, results of operations or cash flows with regard to changes in the fair values of foreign currency forward contracts.
We are exposed to foreign currency risk due to translation of the results of certain international operations into U.S. dollars as part of the consolidation process. Fluctuations in foreign currency exchange rates can therefore create volatility in the results of operations and may adversely affect our financial condition.
The following table summarizes the amounts of foreign currency translation and transaction losses:
|
| | | | | | | | |
| | | Years Ended December 31 |
| | | 2018 | | 2017 |
| | | (Millions) |
| Translation gains (losses) recorded in accumulated other comprehensive income (loss) | | $ | (134 | ) | | $ | 106 |
|
| Transaction gains (losses) recorded in earnings | | $ | (4 | ) | | $ | 1 |
|
Senior Secured Notes — We have foreign currency denominated debt, €752 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of ours. As such, an adverse change in foreign currency exchange rates will have no effect on earnings. For the portion not designated as a net investment hedge, we have other natural hedges in place that will offset any adverse change in foreign currency exchange rates.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A hypothetical 10% adverse change in foreign exchange rates between the euro and U.S. dollar would increase the amount of cash required to settle the these notes by approximately $122 million as of December 31, 2018.
Commodity Price Risk
Commodity rate price forward contracts are executed to offset a portion of our exposure to the potential change in prices for raw materials including copper, nickel, tin, zinc, and aluminum. The fair value of our commodity price forward contracts was a liability of $2 million on an equivalent notional amount of $27 million as of December 31, 2018. A hypothetical 10% adverse change in commodity prices would not materially affect our consolidated financial position, results of operations or cash flows with regard to changes in the fair values of commodity forward contracts.
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facilities to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from four to ten years. On December 31, 2018, we had $1.6 billion par value of fixed rate debt and $3.7 billion par value of floating rate debt. Of the fixed rate debt, $476 million is fixed through 2022, $626 million is fixed through 2024, and $500 million is fixed through 2026. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” earlier in this Management’s Discussion and Analysis.
We estimate the fair value of our long-term debt at December 31, 2018 was about 102% of its book value. A hypothetical one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $7 million.
Equity Price Risk
We also utilize an equity swap arrangement to offset changes in liabilities related to the equity market risks of our arrangements for deferred compensation and restricted stock unit awards. Gain or losses from changes in the fair value of these equity swaps are generally offset by the losses or gains on the related liabilities. We selectively use cash-settled equity swaps to reduce market risk associated with our deferred compensation liabilities. These equity compensation liabilities increase as our stock price increases and decrease as our stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a certain amount. The fair value of the equity swap agreement was an asset of $4 million related to approximately 250,000 common share equivalents as of December 31, 2018. A hypothetical 10% adverse change in share prices would not materially affect our consolidated financial position, results of operations or cash flows with regard to the equity swaps as an offsetting change would be applied to the related deferred compensation liability.
ENVIRONMENTAL MATTERS, LEGAL PROCEEDINGS AND PRODUCT WARRANTIES
Note 15—Commitments and Contingencies of the consolidated financial statements located in Part II Item 8 — Financial Statements and Supplemental Data is incorporated herein by reference.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by Item 7A appears in Note 2 - (Continued)“Summary of Significant Accounting Policies,” Note 9 - “Derivatives and Hedging Activities” and Note 10 - “Fair value of Financial Instruments” of Part II, Item 8 "Financial Statements and Supplementary Data." Other information required by Item 7A is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
manufacturers, weITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on our assessment management concluded the Company’s internal control over financial reporting was effective as of December 31, 2018.
Management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase catalytic convertersbusiness combination during 2018. Total assets and diesel particulate filters or components thereof including precious metals (“substrates”) on behalftotal revenues of the acquired Federal-Mogul business represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
The effectiveness of our customersinternal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which are used inis included herein.
March 15, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the assembled system. These substrates are included in our inventoryBoard of Directors and “passed through” toShareholders of Tenneco Inc.
Opinions on the customer at our cost, plus a small margin, since we take title toFinancial Statements and Internal Control over Financial Reporting
We have audited the inventoryaccompanying consolidated balance sheets of Tenneco Inc. and are responsible for both its subsidiaries(the delivery “Company”) as of December 31, 2018and quality of the finished product. Revenues recognized for substrate sales were $2,028 million, 2017,$1,916 million and $1,934 million in 2016, 2015 and 2014, respectively. For our aftermarket customers, we provide for promotional incentives and returns at the time of sale. Estimates are based upon the terms of the incentives and historical experience with returns. Certain taxes assessed by governmental authorities on revenue producing transactions, such as value added taxes, are excluded from revenue and recorded on a net basis. Shipping and handling costs billed to customers are included in revenues and the related costs are included in cost of sales in our consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for certain components of net periodic pension and postretirement benefit costs and the manner in which it accounts for the cash received to settle the deferred purchase price of factored receivables in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Federal-Mogul from our audit of internal control over financial reporting. Federal-Mogul's total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 15, 2019
We have served as the Company’s auditor since 2010.
TENNECO INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions Except Share and Per Share Amounts) |
| Revenues | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
|
| Costs and expenses | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 10,071 |
| | 7,812 |
| | 7,126 |
|
| Selling, general, and administrative | 794 |
| | 638 |
| | 514 |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Engineering, research, and development | 204 |
| | 158 |
| | 153 |
|
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| | 11,417 |
| | 8,845 |
| | 8,006 |
|
| Other expense (income) | | | | | |
| Loss on sale of receivables | 16 |
| | 5 |
| | 5 |
|
| Non-service pension and postretirement benefit costs | 20 |
| | 16 |
| | 84 |
|
| Loss on extinguishment of debt | 10 |
| | 1 |
| | 24 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (18 | ) | | 1 |
| | — |
|
| Other expense (income), net | 12 |
| | (2 | ) | | (1 | ) |
| | 40 |
| | 21 |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | 306 |
| | 408 |
| | 479 |
|
| Interest expense | 132 |
| | 72 |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | 174 |
| | 336 |
| | 411 |
|
| Income tax expense (benefit) | 63 |
| | 71 |
| | (4 | ) |
| Net income | 111 |
| | 265 |
| | 415 |
|
| Less: Net income attributable to noncontrolling interests | 56 |
| | 67 |
| | 68 |
|
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | 347 |
|
| Earnings per share | | | | | |
| Weighted average shares of common stock outstanding — | | | | | |
| Basic | 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Diluted | 58,758,732 |
| | 53,026,911 |
| | 56,407,436 |
|
| Basic earnings per share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
|
| Diluted earnings per share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | |
| Foreign currency translation adjustment | (134 | ) | | 106 |
| | (56 | ) |
| Defined benefit plans | (22 | ) | | 17 |
| | 51 |
|
| | (156 | ) | | 123 |
| | (5 | ) |
| Comprehensive income (loss) | (45 | ) | | 388 |
| | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 54 |
| | 69 |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | $ | (99 | ) | | $ | 319 |
| | $ | 346 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of comprehensive income (loss).
TENNECO INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 697 |
| | $ | 315 |
|
| Restricted cash | 5 |
| | 3 |
|
| Receivables: | | | |
| Customer notes and accounts, net | 2,487 |
| | 1,294 |
|
| Other | 85 |
| | 27 |
|
| Inventories | 2,245 |
| | 820 |
|
| Prepayments and other current assets | 590 |
| | 288 |
|
| Total current assets | 6,109 |
| | 2,747 |
|
| Property, plant and equipment, net | 3,501 |
| | 1,691 |
|
| Long-term receivables, net | 10 |
| | 9 |
|
| Goodwill | 869 |
| | 49 |
|
| Intangibles, net | 1,519 |
| | 22 |
|
| Investments in nonconsolidated affiliates | 544 |
| | 2 |
|
| Deferred income taxes | 467 |
| | 213 |
|
| Other assets | 213 |
| | 63 |
|
| Total assets | $ | 13,232 |
| | $ | 4,796 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Short-term debt, including current maturities of long-term debt | $ | 153 |
| | $ | 103 |
|
| Accounts payable | 2,759 |
| | 1,582 |
|
| Accrued compensation and employee benefits | 343 |
| | 141 |
|
| Accrued income taxes | 64 |
| | 27 |
|
| Accrued expenses and other current liabilities | 1,001 |
| | 424 |
|
| Total current liabilities | 4,320 |
| | 2,277 |
|
| Long-term debt | 5,340 |
| | 1,358 |
|
| Deferred income taxes | 88 |
| | 11 |
|
| Pension and postretirement benefits | 1,167 |
| | 268 |
|
| Deferred credits and other liabilities | 263 |
| | 158 |
|
| Commitments and contingencies |
| |
|
| Total liabilities | 11,178 |
| | 4,072 |
|
| Redeemable noncontrolling interests | 138 |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | |
| Preferred stock—$0.01 par value; none issued | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | 1 |
| | 1 |
|
| Class B non-voting convertible common stock—$0.01 par value; 2018—23,793,669 shares issued | — |
| | — |
|
| Additional paid-in capital | 4,360 |
| | 3,112 |
|
| Accumulated other comprehensive loss | (692 | ) | | (538 | ) |
| Accumulated deficit | (1,013 | ) | | (1,009 | ) |
| | 2,656 |
| | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | (930 | ) | | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | 1,726 |
| | 636 |
|
| Noncontrolling interests | 190 |
| | 46 |
|
| Total equity | 1,916 |
| | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 13,232 |
| | $ | 4,796 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Operating Activities | | | | | |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Deferred income taxes | (65 | ) | | (8 | ) | | (84 | ) |
| Stock-based compensation | 14 |
| | 14 |
| | 14 |
|
| Restructuring charges and asset impairments, net of cash paid | 49 |
| | 8 |
| | (13 | ) |
| Change in pension and postretirement benefit plans | (8 | ) | | (15 | ) | | 47 |
|
| Equity in earnings of nonconsolidated affiliates | (18 | ) | | 1 |
| | — |
|
| Cash dividends received from nonconsolidated affiliates | 2 |
| | — |
| | — |
|
| Loss on sale of assets | 16 |
| | 5 |
| | 4 |
|
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (190 | ) | | (81 | ) | | (325 | ) |
| Inventories | 27 |
| | (94 | ) | | (55 | ) |
| Payables and accrued expenses | 291 |
| | 136 |
| | 140 |
|
| Accrued interest and income taxes | (19 | ) | | 1 |
| | 13 |
|
| Other assets and liabilities | (119 | ) | | 48 |
| | 5 |
|
| Net cash provided by operating activities | 439 |
| | 517 |
| | 374 |
|
| Investing Activities | | | | | |
| Federal-Mogul acquisition, net of cash acquired | (2,194 | ) | | — |
| | — |
|
| Proceeds from sale of assets | 9 |
| | 8 |
| | 6 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| | — |
|
| Cash payments for plant, property, and equipment | (507 | ) | | (419 | ) | | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | 174 |
| | 112 |
| | 110 |
|
| Other | 4 |
| | (10 | ) | | — |
|
| Net cash used by investing activities | (2,514 | ) | | (300 | ) | | (229 | ) |
| Financing Activities | | | | | |
| Proceeds from term loans and notes | 3,426 |
| | 160 |
| | 529 |
|
| Repayments of term loans and notes | (453 | ) | | (36 | ) | | (545 | ) |
| Borrowings on revolving lines of credit | 5,149 |
| | 6,664 |
| | 5,417 |
|
| Payments on revolving lines of credit | (5,405 | ) | | (6,737 | ) | | (5,221 | ) |
| Issuance (repurchase) of common shares | (1 | ) | | (1 | ) | | 13 |
|
| Cash dividends | (59 | ) | | (53 | ) | | — |
|
| Debt issuance cost of long-term debt | (95 | ) | | (8 | ) | | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | (169 | ) | | (225 | ) |
| Net increase (decrease) in bank overdrafts | (5 | ) | | (7 | ) | | 10 |
|
| Other | (30 | ) | | — |
| | — |
|
| Distributions to noncontrolling interest partners | (51 | ) | | (64 | ) | | (55 | ) |
| Net cash provided (used) by financing activities | 2,476 |
| | (251 | ) | | (86 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (17 | ) | | 3 |
| | 2 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 384 |
| | (31 | ) | | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 318 |
| | 349 |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 702 |
| | $ | 318 |
| | $ | 349 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for interest | $ | 143 |
| | $ | 78 |
| | $ | 76 |
|
| Cash paid during the year for income taxes, net of refunds | $ | 113 |
| | $ | 95 |
| | $ | 113 |
|
| Non-cash Investing and Financing Activities | | | | | |
| Period end balance of trade payables for plant, property, and equipment | $ | 135 |
| | $ | 59 |
| | $ | 68 |
|
| Deferred purchase price of receivables factored in period | $ | 154 |
| | $ | 114 |
| | $ | 109 |
|
| Stock issued for acquisition of Federal-Mogul | $ | (1,236 | ) | | $ | — |
| | $ | — |
|
| Stock transferred for acquisition of Federal-Mogul | $ | 1,236 |
| | $ | — |
| | $ | — |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of cash flows.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tenneco Inc. Shareholders' equity | | |
| | $0.01 Par Value Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Treasury Stock | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
| | (Millions) |
| Balance as of December 31, 2015 | $ | 1 |
| | $ | 3,081 |
| | $ | (658 | ) | | $ | (1,501 | ) | | $ | (536 | ) | | $ | 387 |
| | $ | 39 |
| | $ | 426 |
|
| Net income | — |
| | — |
| | — |
| | 347 |
| | — |
| | 347 |
| | 32 |
| | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | — |
| | — |
| | (52 | ) | | — |
| | — |
| | (52 | ) | | (2 | ) | | (54 | ) |
| Defined benefit plans | — |
| | — |
| | 51 |
| | — |
| | — |
| | 51 |
| | — |
| | 51 |
|
| Comprehensive income |
| | | | | | | |
| | 346 |
| | 30 |
| | 376 |
|
| Stock-based compensation expense | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (225 | ) | | (225 | ) | | — |
| | (225 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | (22 | ) |
| Balance as of December 31, 2016 | 1 |
| | 3,098 |
| | (659 | ) | | (1,154 | ) | | (761 | ) | | 525 |
| | 47 |
| | 572 |
|
| Net income | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
| | 31 |
| | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
| | (1 | ) | | 103 |
|
| Defined benefit plans | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Comprehensive income |
| | | | | | | |
| | 319 |
| | 30 |
| | 349 |
|
Stock-based compensation expense
| — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) | | — |
| | (53 | ) |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (169 | ) | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Balance as of December 31, 2017 | 1 |
| | 3,112 |
| | (538 | ) | | (1,009 | ) | | (930 | ) | | 636 |
| | 46 |
| | 682 |
|
| Net income | — |
| | — |
| | — |
| | 55 |
| | — |
| | 55 |
| | 27 |
| | 82 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | (132 | ) | | — |
| | — |
| | (132 | ) | | — |
| | (132 | ) |
| Defined benefit plans | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Comprehensive income |
| | | | | | | |
| | (99 | ) | | 27 |
| | (72 | ) |
Adjustments to adopt new accounting standards (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued | — |
| | 1,236 |
| | — |
| | — |
| | — |
| | 1,236 |
| | — |
| | 1,236 |
|
| Federal-Mogul Acquisition | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 143 |
| | 143 |
|
| Stock-based compensation expense | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (59 | ) | | — |
| | (59 | ) | | — |
| | (59 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| |
| | — |
| | — |
| | (26 | ) | | (26 | ) |
| Balance as of December 31, 2018 | $ | 1 |
| | $ | 4,360 |
| | $ | (692 | ) | | $ | (1,013 | ) | | $ | (930 | ) | | $ | 1,726 |
| | $ | 190 |
| | $ | 1,916 |
|
(1) The cumulative effect of the adoption of ASU 2016-16 was an increase to accumulated deficit of $1 million, and the cumulative effect of the adoption of ASC 606 was a decrease to accumulated deficit of $1 million.
The accompanying notes to the consolidated financial statements are an integral
part of these statements of changes in shareholders’ equity.
TENNECO INC.
Warranty Reserves
Where we have offered product warranty weand also provide for warranty costs. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims and upon specific warranty issues as they arise. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a significant impacteffect on our consolidated financial statements.
Earnings Per Share
Income Taxes
We compute basic earnings per share by dividing income available to common shareholders byrecognize deferred tax assets and liabilities on the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that we adjust the weighted-average number of shares outstanding to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, we adjust income available to common shareholders to include any changes in income or loss that would result from the assumed issuancebasis of the dilutive common shares. See Note 2future tax consequences attributable to temporary differences that exist between the consolidated financial statementsstatement carrying value of Tenneco Inc.
Engineering, Research and Development
We expense engineering, research, and development costs as they are incurred. Engineering, research, and development expenses were $154 million for 2016, $146 million for 2015, and $169 million for 2014, net of reimbursements from our customers. Our customers reimburse us for engineering, research, and development costs on some platforms when we prepare prototypes and incur costs before platform awards. Our engineering, research, and development expense for 2016, 2015 and 2014 has been reduced by $137 million, $145 million and $159 million, respectively, for these reimbursements.
Advertising and Promotion Expenses
We expense advertising and promotion expenses as they are incurred. Advertising and promotion expenses were $40 million, $54 million, and $57 million for the years ended December 31, 2016, 2015, and 2014, respectively.
Foreign Currency
We translate the consolidated financial statements of foreign subsidiaries into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and their respective tax values, and net operating losses (“NOL”) and tax credit carryforwards on a weighted-average exchangetaxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from the currently applicable 35% rate to a new 21% rate, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactment. The TCJA also includes an anti-deferral provision (the Global Intangible Low-Taxed Income tax) effective starting in 2018 wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of non-U.S. corporations.
We evaluate our deferred income tax assets quarterly to determine if valuation allowances are required or should be adjusted. U.S. GAAP requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a “more likely than not” standard. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
Valuation allowances are established for revenuesdeferred tax assets based on a “more likely than not” threshold. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of our deferred tax assets and expensesthe need for a valuation allowance:
Future reversals of existing taxable temporary differences;
Taxable income or loss, based on recent results, exclusive of reversing temporary differences and carryforwards;
Tax-planning strategies; and
Taxable income in each period. prior carryback years if carryback is permitted under the relevant tax law.
The valuation allowances recorded against deferred tax assets in certain foreign jurisdictions will impact our provision for income taxes until the valuation allowances are released. Our provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
MARKET RISK SENSITIVITY
We record translation adjustments for those subsidiaries whose local currency is their functional currency as a component of accumulated other comprehensive income (loss) in shareholders’ equity. We recognize transaction gains and losses arising from fluctuations inare exposed to certain global market risks, including foreign currency exchange rates on transactions denominated in currencies other than the functional currency in earnings as incurred, except for those intercompany balances which are designated as long-term investments. Our results include foreign currency transaction gains of $1 million in 2016risk, commodity price risk, interest rate risk associated with our debt, and losses of $6 million in 2015 and $1 million in 2014. The amounts are recorded in cost of sales.equity price risk associated with our share-based compensation awards.
Foreign Currency Exchange Rate Risk
We use derivativemanufacture and sell our products in North America, South America, Asia, Europe, and Africa. As a result, our financial instruments, principally foreign currency forward purchase and sales contracts with terms of less than one year, to hedge our exposure toresults could be significantly affected by factors such as changes in foreign currency exchange rates. Our primary exposure to changesrates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency rates results from intercompany loans made between affiliatesactivities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities and larger transactions through the need for borrowings from third parties. Additionally, weuse of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, and Mexican peso.
Foreign Currency Forward Contracts — We enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We manage counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. We do not enter into derivative financial instruments for speculative purposes. In managing our foreign currency exposures, we identify and aggregateaggregates existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The fair value of ourgain or loss on these contracts is recorded as foreign currency forward contracts was a net liability
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
position of less than $1 million at December 31, 2016 and a net asset position of $1 million at December 31, 2015 and is based on an internally developed model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. We record the change in fair value of these foreign exchange forward contracts as part of currency gains (losses) within cost of sales in the consolidated statements of income (loss).income. The fair value of foreign exchangecurrency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at December 31, 2018 and a net liability position of less than $1 million at December 31, 2017.
The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of December 31, 2018 (all of which mature in 2019):
|
| | | |
| | Notional Amount in Foreign Currency |
| | (Millions) |
| Canadian dollars | —Sell | (2 | ) |
| European euro | —Purchase | 1 |
|
| —Sell | (8 | ) |
| Polish zloty | —Purchase | 35 |
|
| Mexican pesos | —Purchase | 211 |
|
| U.S. dollars | —Purchase | 2 |
|
| —Sell | (11 | ) |
A hypothetical 10% adverse change in the U.S. relative to all other currencies would not materially affect our consolidated financial position, results of operations or cash flows with regard to changes in the fair values of foreign currency forward contracts.
We are exposed to foreign currency risk due to translation of the results of certain international operations into U.S. dollars as part of the consolidation process. Fluctuations in foreign currency exchange rates can therefore create volatility in the results of operations and may adversely affect our financial condition.
The following table summarizes the amounts of foreign currency translation and transaction losses:
|
| | | | | | | | |
| | | Years Ended December 31 |
| | | 2018 | | 2017 |
| | | (Millions) |
| Translation gains (losses) recorded in accumulated other comprehensive income (loss) | | $ | (134 | ) | | $ | 106 |
|
| Transaction gains (losses) recorded in earnings | | $ | (4 | ) | | $ | 1 |
|
Senior Secured Notes — We have foreign currency denominated debt, €752 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of ours. As such, an adverse change in foreign currency exchange rates will have no effect on earnings. For the portion not designated as a net investment hedge, we have other natural hedges in place that will offset any adverse change in foreign currency exchange rates.
A hypothetical 10% adverse change in foreign exchange rates between the euro and U.S. dollar would increase the amount of cash required to settle the these notes by approximately $122 million as of December 31, 2018.
Commodity Price Risk
Commodity rate price forward contracts are executed to offset a portion of our exposure to the potential change in prices for raw materials including copper, nickel, tin, zinc, and aluminum. The fair value of our commodity price forward contracts was a liability of $2 million on an equivalent notional amount of $27 million as of December 31, 2018. A hypothetical 10% adverse change in commodity prices would not materially affect our consolidated financial position, results of operations or cash flows with regard to changes in the fair values of commodity forward contracts.
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facilities to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from four to ten years. On December 31, 2018, we had $1.6 billion par value of fixed rate debt and $3.7 billion par value of floating rate debt. Of the fixed rate debt, $476 million is fixed through 2022, $626 million is fixed through 2024, and $500 million is fixed through 2026. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources — Capitalization” earlier in this Management’s Discussion and Analysis.
We estimate the fair value of our long-term debt at December 31, 2018 was about 102% of its book value. A hypothetical one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $7 million.
Equity Price Risk
We also utilize an equity swap arrangement to offset changes in liabilities related to the equity market risks of our arrangements for deferred compensation and restricted stock unit awards. Gain or losses from changes in the fair value of these equity swaps are generally offset by the losses or gains on the related liabilities. We selectively use cash-settled equity swaps to reduce market risk associated with our deferred compensation liabilities. These equity compensation liabilities increase as our stock price increases and decrease as our stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing us to fix a portion of the liabilities at a certain amount. The fair value of the equity swap agreement was an asset of $4 million related to approximately 250,000 common share equivalents as of December 31, 2018. A hypothetical 10% adverse change in share prices would not materially affect our consolidated financial position, results of operations or cash flows with regard to the equity swaps as an offsetting change would be applied to the related deferred compensation liability.
ENVIRONMENTAL MATTERS, LEGAL PROCEEDINGS AND PRODUCT WARRANTIES
Note 15—Commitments and Contingencies of the consolidated financial statements located in Part II Item 8 — Financial Statements and Supplemental Data is incorporated herein by reference.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by Item 7A appears in Note 2 - “Summary of Significant Accounting Policies,” Note 9 - “Derivatives and Hedging Activities” and Note 10 - “Fair value of Financial Instruments” of Part II, Item 8 "Financial Statements and Supplementary Data." Other information required by Item 7A is included in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS OF TENNECO INC.
AND CONSOLIDATED SUBSIDIARIES
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Tenneco Inc. is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013).
Based on our assessment management concluded the Company’s internal control over financial reporting was effective as of December 31, 2018.
Management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. Total assets and total revenues of the acquired Federal-Mogul business represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by PricewaterhouseCoopers LLP, our independent registered public accounting firm, as stated in their report, which is included herein.
March 15, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Tenneco Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Tenneco Inc. and its subsidiaries(the “Company”) as of December 31, 2018and 2017,and the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes and financial statement schedule listed in the index appearing under Item 15 (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018and 2017, and the results of itsoperations and itscash flows for each of the three years in the period ended December 31, 2018in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Change in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for certain components of net periodic pension and postretirement benefit costs and the manner in which it accounts for the cash received to settle the deferred purchase price of factored receivables in 2018.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Federal-Mogul from its assessment of internal control over financial reporting as of December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018. We have also excluded Federal-Mogul from our audit of internal control over financial reporting. Federal-Mogul's total assets and total revenues excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 41% and 16%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/S/ PRICEWATERHOUSECOOPERS LLP
Milwaukee, Wisconsin
March 15, 2019
We have served as the Company’s auditor since 2010.
TENNECO INC.
CONSOLIDATED STATEMENTS OF INCOME
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions Except Share and Per Share Amounts) |
| Revenues | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
|
| Costs and expenses | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 10,071 |
| | 7,812 |
| | 7,126 |
|
| Selling, general, and administrative | 794 |
| | 638 |
| | 514 |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Engineering, research, and development | 204 |
| | 158 |
| | 153 |
|
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| | 11,417 |
| | 8,845 |
| | 8,006 |
|
| Other expense (income) | | | | | |
| Loss on sale of receivables | 16 |
| | 5 |
| | 5 |
|
| Non-service pension and postretirement benefit costs | 20 |
| | 16 |
| | 84 |
|
| Loss on extinguishment of debt | 10 |
| | 1 |
| | 24 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (18 | ) | | 1 |
| | — |
|
| Other expense (income), net | 12 |
| | (2 | ) | | (1 | ) |
| | 40 |
| | 21 |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | 306 |
| | 408 |
| | 479 |
|
| Interest expense | 132 |
| | 72 |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | 174 |
| | 336 |
| | 411 |
|
| Income tax expense (benefit) | 63 |
| | 71 |
| | (4 | ) |
| Net income | 111 |
| | 265 |
| | 415 |
|
| Less: Net income attributable to noncontrolling interests | 56 |
| | 67 |
| | 68 |
|
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | 347 |
|
| Earnings per share | | | | | |
| Weighted average shares of common stock outstanding — | | | | | |
| Basic | 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Diluted | 58,758,732 |
| | 53,026,911 |
| | 56,407,436 |
|
| Basic earnings per share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
|
| Diluted earnings per share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of income.
TENNECO INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | |
| Foreign currency translation adjustment | (134 | ) | | 106 |
| | (56 | ) |
| Defined benefit plans | (22 | ) | | 17 |
| | 51 |
|
| | (156 | ) | | 123 |
| | (5 | ) |
| Comprehensive income (loss) | (45 | ) | | 388 |
| | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | 54 |
| | 69 |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | $ | (99 | ) | | $ | 319 |
| | $ | 346 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of comprehensive income (loss).
TENNECO INC.
CONSOLIDATED BALANCE SHEETS
|
| | | | | | | |
| | December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 697 |
| | $ | 315 |
|
| Restricted cash | 5 |
| | 3 |
|
| Receivables: | | | |
| Customer notes and accounts, net | 2,487 |
| | 1,294 |
|
| Other | 85 |
| | 27 |
|
| Inventories | 2,245 |
| | 820 |
|
| Prepayments and other current assets | 590 |
| | 288 |
|
| Total current assets | 6,109 |
| | 2,747 |
|
| Property, plant and equipment, net | 3,501 |
| | 1,691 |
|
| Long-term receivables, net | 10 |
| | 9 |
|
| Goodwill | 869 |
| | 49 |
|
| Intangibles, net | 1,519 |
| | 22 |
|
| Investments in nonconsolidated affiliates | 544 |
| | 2 |
|
| Deferred income taxes | 467 |
| | 213 |
|
| Other assets | 213 |
| | 63 |
|
| Total assets | $ | 13,232 |
| | $ | 4,796 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Short-term debt, including current maturities of long-term debt | $ | 153 |
| | $ | 103 |
|
| Accounts payable | 2,759 |
| | 1,582 |
|
| Accrued compensation and employee benefits | 343 |
| | 141 |
|
| Accrued income taxes | 64 |
| | 27 |
|
| Accrued expenses and other current liabilities | 1,001 |
| | 424 |
|
| Total current liabilities | 4,320 |
| | 2,277 |
|
| Long-term debt | 5,340 |
| | 1,358 |
|
| Deferred income taxes | 88 |
| | 11 |
|
| Pension and postretirement benefits | 1,167 |
| | 268 |
|
| Deferred credits and other liabilities | 263 |
| | 158 |
|
| Commitments and contingencies |
| |
|
| Total liabilities | 11,178 |
| | 4,072 |
|
| Redeemable noncontrolling interests | 138 |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | |
| Preferred stock—$0.01 par value; none issued | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | 1 |
| | 1 |
|
| Class B non-voting convertible common stock—$0.01 par value; 2018—23,793,669 shares issued | — |
| | — |
|
| Additional paid-in capital | 4,360 |
| | 3,112 |
|
| Accumulated other comprehensive loss | (692 | ) | | (538 | ) |
| Accumulated deficit | (1,013 | ) | | (1,009 | ) |
| | 2,656 |
| | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | (930 | ) | | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | 1,726 |
| | 636 |
|
| Noncontrolling interests | 190 |
| | 46 |
|
| Total equity | 1,916 |
| | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 13,232 |
| | $ | 4,796 |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated balance sheets.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Operating Activities | | | | | |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
| Adjustments to reconcile net income to cash provided by operating activities: | | | | | |
| Goodwill impairment charge | 3 |
| | 11 |
| | — |
|
| Depreciation and amortization | 345 |
| | 226 |
| | 213 |
|
| Deferred income taxes | (65 | ) | | (8 | ) | | (84 | ) |
| Stock-based compensation | 14 |
| | 14 |
| | 14 |
|
| Restructuring charges and asset impairments, net of cash paid | 49 |
| | 8 |
| | (13 | ) |
| Change in pension and postretirement benefit plans | (8 | ) | | (15 | ) | | 47 |
|
| Equity in earnings of nonconsolidated affiliates | (18 | ) | | 1 |
| | — |
|
| Cash dividends received from nonconsolidated affiliates | 2 |
| | — |
| | — |
|
| Loss on sale of assets | 16 |
| | 5 |
| | 4 |
|
| Changes in operating assets and liabilities: | | | | | |
| Receivables | (190 | ) | | (81 | ) | | (325 | ) |
| Inventories | 27 |
| | (94 | ) | | (55 | ) |
| Payables and accrued expenses | 291 |
| | 136 |
| | 140 |
|
| Accrued interest and income taxes | (19 | ) | | 1 |
| | 13 |
|
| Other assets and liabilities | (119 | ) | | 48 |
| | 5 |
|
| Net cash provided by operating activities | 439 |
| | 517 |
| | 374 |
|
| Investing Activities | | | | | |
| Federal-Mogul acquisition, net of cash acquired | (2,194 | ) | | — |
| | — |
|
| Proceeds from sale of assets | 9 |
| | 8 |
| | 6 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| | — |
|
| Cash payments for plant, property, and equipment | (507 | ) | | (419 | ) | | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | 174 |
| | 112 |
| | 110 |
|
| Other | 4 |
| | (10 | ) | | — |
|
| Net cash used by investing activities | (2,514 | ) | | (300 | ) | | (229 | ) |
| Financing Activities | | | | | |
| Proceeds from term loans and notes | 3,426 |
| | 160 |
| | 529 |
|
| Repayments of term loans and notes | (453 | ) | | (36 | ) | | (545 | ) |
| Borrowings on revolving lines of credit | 5,149 |
| | 6,664 |
| | 5,417 |
|
| Payments on revolving lines of credit | (5,405 | ) | | (6,737 | ) | | (5,221 | ) |
| Issuance (repurchase) of common shares | (1 | ) | | (1 | ) | | 13 |
|
| Cash dividends | (59 | ) | | (53 | ) | | — |
|
| Debt issuance cost of long-term debt | (95 | ) | | (8 | ) | | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | (169 | ) | | (225 | ) |
| Net increase (decrease) in bank overdrafts | (5 | ) | | (7 | ) | | 10 |
|
| Other | (30 | ) | | — |
| | — |
|
| Distributions to noncontrolling interest partners | (51 | ) | | (64 | ) | | (55 | ) |
| Net cash provided (used) by financing activities | 2,476 |
| | (251 | ) | | (86 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (17 | ) | | 3 |
| | 2 |
|
| Increase (decrease) in cash, cash equivalents and restricted cash | 384 |
| | (31 | ) | | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 318 |
| | 349 |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 702 |
| | $ | 318 |
| | $ | 349 |
|
| | | | | | |
| Supplemental Cash Flow Information | | | | | |
| Cash paid during the year for interest | $ | 143 |
| | $ | 78 |
| | $ | 76 |
|
| Cash paid during the year for income taxes, net of refunds | $ | 113 |
| | $ | 95 |
| | $ | 113 |
|
| Non-cash Investing and Financing Activities | | | | | |
| Period end balance of trade payables for plant, property, and equipment | $ | 135 |
| | $ | 59 |
| | $ | 68 |
|
| Deferred purchase price of receivables factored in period | $ | 154 |
| | $ | 114 |
| | $ | 109 |
|
| Stock issued for acquisition of Federal-Mogul | $ | (1,236 | ) | | $ | — |
| | $ | — |
|
| Stock transferred for acquisition of Federal-Mogul | $ | 1,236 |
| | $ | — |
| | $ | — |
|
The accompanying notes to the consolidated financial statements are an integral
part of these consolidated statements of cash flows.
TENNECO INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Tenneco Inc. Shareholders' equity | | |
| | $0.01 Par Value Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Treasury Stock | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
| | (Millions) |
| Balance as of December 31, 2015 | $ | 1 |
| | $ | 3,081 |
| | $ | (658 | ) | | $ | (1,501 | ) | | $ | (536 | ) | | $ | 387 |
| | $ | 39 |
| | $ | 426 |
|
| Net income | — |
| | — |
| | — |
| | 347 |
| | — |
| | 347 |
| | 32 |
| | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment | — |
| | — |
| | (52 | ) | | — |
| | — |
| | (52 | ) | | (2 | ) | | (54 | ) |
| Defined benefit plans | — |
| | — |
| | 51 |
| | — |
| | — |
| | 51 |
| | — |
| | 51 |
|
| Comprehensive income |
| | | | | | | |
| | 346 |
| | 30 |
| | 376 |
|
| Stock-based compensation expense | — |
| | 17 |
| | — |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (225 | ) | | (225 | ) | | — |
| | (225 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (22 | ) | | (22 | ) |
| Balance as of December 31, 2016 | 1 |
| | 3,098 |
| | (659 | ) | | (1,154 | ) | | (761 | ) | | 525 |
| | 47 |
| | 572 |
|
| Net income | — |
| | — |
| | — |
| | 198 |
| | — |
| | 198 |
| | 31 |
| | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | 104 |
| | — |
| | — |
| | 104 |
| | (1 | ) | | 103 |
|
| Defined benefit plans | — |
| | — |
| | 17 |
| | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
| Comprehensive income |
| | | | | | | |
| | 319 |
| | 30 |
| | 349 |
|
Stock-based compensation expense
| — |
| | 14 |
| | — |
| | — |
| | — |
| | 14 |
| | — |
| | 14 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) | | — |
| | (53 | ) |
| Purchases of treasury stock | — |
| | — |
| | — |
| | — |
| | (169 | ) | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (31 | ) | | (31 | ) |
| Balance as of December 31, 2017 | 1 |
| | 3,112 |
| | (538 | ) | | (1,009 | ) | | (930 | ) | | 636 |
| | 46 |
| | 682 |
|
| Net income | — |
| | — |
| | — |
| | 55 |
| | — |
| | 55 |
| | 27 |
| | 82 |
|
| Other comprehensive loss—net of tax: | | | | | | | | | | | | | | | |
| Foreign currency translation adjustments | — |
| | — |
| | (132 | ) | | — |
| | — |
| | (132 | ) | | — |
| | (132 | ) |
| Defined benefit plans | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Comprehensive income |
| | | | | | | |
| | (99 | ) | | 27 |
| | (72 | ) |
Adjustments to adopt new accounting standards (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Common stock issued | — |
| | 1,236 |
| | — |
| | — |
| | — |
| | 1,236 |
| | — |
| | 1,236 |
|
| Federal-Mogul Acquisition | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 143 |
| | 143 |
|
| Stock-based compensation expense | — |
| | 12 |
| | — |
| | — |
| | — |
| | 12 |
| | — |
| | 12 |
|
| Cash dividends ($1.00 per share) | — |
| | — |
| | — |
| | (59 | ) | | — |
| | (59 | ) | | — |
| | (59 | ) |
| Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| |
| | — |
| | — |
| | (26 | ) | | (26 | ) |
| Balance as of December 31, 2018 | $ | 1 |
| | $ | 4,360 |
| | $ | (692 | ) | | $ | (1,013 | ) | | $ | (930 | ) | | $ | 1,726 |
| | $ | 190 |
| | $ | 1,916 |
|
(1) The cumulative effect of the adoption of ASU 2016-16 was an increase to accumulated deficit of $1 million, and the cumulative effect of the adoption of ASC 606 was a decrease to accumulated deficit of $1 million.
The accompanying notes to the consolidated financial statements are an integral
part of these statements of changes in shareholders’ equity.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
Tenneco Inc. ("Tenneco" or "the Company") was formed under the laws of Delaware in 1996. Tenneco designs, manufactures, and sells products and services for light vehicle, commercial truck, off-highway, industrial and aftermarket customers. The Company is one of the world’s leading manufacturers of clean air, powertrain, and ride performance products and systems, and serves both original equipment manufacturers (“OEM”) and replacement markets worldwide.
Effective October 1, 2018, the Company completed the acquisition (the "Acquisition") of Federal-Mogul LLC ("Federal-Mogul"), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems. Federal-Mogul serves the world’s foremost OEM and servicers (“OES”, and together with OEM, “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off road, agricultural, marine, rail, aerospace, power generation, and industrial equipment, as well as the worldwide aftermarket. The Company expects to separate its businesses to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company and a new Powertrain Technology company, in the second half of 2019.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP").
Revision of Previously Issued Financial Statements
The Company identified an error in the accounting for certain costs capitalized into inventory that did not constitute inventoriable costs in its historical financial statements. Costs incorrectly capitalized in ending inventory were $49 million and $42 million as of December 31, 2017 and 2016.
The Company evaluated the effect of this item as well as the items discussed below on prior periods under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality” and determined the amounts were not material, individually or in the aggregate, to previously issued financial statements. The Company also evaluated the effect of correcting these items through a cumulative adjustment to our financial statements and concluded, based on the guidance within SEC SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”, it was appropriate to revise our previously issued financial statements to correct these errors. The Company also revised for other immaterial errors including (i) capitalization errors related to construction-in-process; (ii) errors related to the estimation of warranty and rebate liabilities; (iii) errors related to the cash flow presentation for borrowings and repayments on revolving lines of credit (net versus gross); (iv) errors related to currency on certain non-income tax transactions; and (v) errors surrounding the misclassification of translation adjustments within accumulated other comprehensive income. These adjustments related to various line items as shown in the tables below. As a result, certain amounts in the consolidated financial statements have been revised, and will be revised for interim periods in future filings, in order to correct for these errors. These revisions have also been reflected in Note 22, Quarterly Financial Data (Unaudited) to show the effects in the unaudited quarterly financial statements.
Reclassifications: Certain amounts in the prior years have been aggregated or disaggregated to conform to current year presentation. These reclassifications have no effect on previously reported earnings before income taxes and noncontrolling interests or net income, other comprehensive income (loss), current or total assets, current or total liabilities, and the cash provided (used) by operating, investing or financing activities within the consolidated statements of cash flows.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables present the effect of these reclassifications and revisions for the financial statement line items adjusted in the affected periods included within this annual financial report:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| | | (Millions, except per share amounts) |
| Consolidated statement of income | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 7,809 |
| | — |
| | 7,809 |
| | 3 |
| | 7,812 |
|
| Selling, general, and administrative | | 636 |
| | — |
| | 636 |
| | 2 |
| | 638 |
|
| Depreciation and amortization | | 224 |
| | — |
| | 224 |
| | 2 |
| | 226 |
|
| Engineering, research, and development | | 158 |
| | — |
| | 158 |
| | — |
| | 158 |
|
| Goodwill impairment charge | | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
| | | 8,838 |
| | — |
| | 8,838 |
| | 7 |
| | 8,845 |
|
| Other expense (income) | | | | | | | | | | |
| Loss on sale of receivables | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Non-service pension and postretirement benefit costs | | — |
| | 16 |
| | 16 |
| | — |
| | 16 |
|
| Loss on extinguishment of debt | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | | — |
| | 1 |
| | 1 |
| | — |
| | 1 |
|
| Other expense (income), net | | 14 |
| | (17 | ) | | (3 | ) | | 1 |
| | (2 | ) |
| | | 19 |
| | 1 |
| | 20 |
| | 1 |
| | 21 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 417 |
| | (1 | ) | | 416 |
| | (8 | ) | | 408 |
|
| Interest expense | | 73 |
| | (1 | ) | | 72 |
| | — |
| | 72 |
|
| Earnings before income taxes and noncontrolling interests | | 344 |
| | — |
| | 344 |
| | (8 | ) | | 336 |
|
| Income tax expense (benefit) | | 70 |
| | — |
| | 70 |
| | 1 |
| | 71 |
|
| Net income | | 274 |
| | — |
| | 274 |
| | (9 | ) | | 265 |
|
| Less: Net income attributable to noncontrolling interests | | 67 |
| | | | 67 |
| | — |
| | 67 |
|
| Net income attributable to Tenneco Inc. | | $ | 207 |
| | $ | — |
| | $ | 207 |
| | $ | (9 | ) | | $ | 198 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic earnings per share of common stock | | $ | 3.93 |
| | $ | — |
| | $ | 3.93 |
| | $ | (0.18 | ) | | $ | 3.75 |
|
| Diluted earnings per share of common stock | | $ | 3.91 |
| | $ | — |
| | $ | 3.91 |
| | $ | (0.18 | ) | | $ | 3.73 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statement of comprehensive income | | (Millions) |
| Net income | | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | (9 | ) | | $ | 265 |
|
| Other comprehensive income (loss)—net of tax | | | | | | | | | | |
| Foreign currency translation adjustment | | 99 |
| | — |
| | 99 |
| | 7 |
| | 106 |
|
| Defined benefit plans | | 27 |
| | — |
| | 27 |
| | (10 | ) | | 17 |
|
| | | 126 |
| | — |
| | 126 |
| | (3 | ) | | 123 |
|
| Comprehensive income (loss) | | 400 |
| | — |
| | 400 |
| | (12 | ) | | 388 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 69 |
| | — |
| | 69 |
| | — |
| | 69 |
|
| Comprehensive income (loss) attributable to common shareholders | | $ | 331 |
| | $ | — |
| | $ | 331 |
| | $ | (12 | ) | | $ | 319 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| | | (Millions, except per share amounts) |
| Consolidated statement of income | | | | | | | | | | |
| Revenues | | | | | | | | | | |
| Net sales and operating revenues | | $ | 8,599 |
| | $ | — |
| | $ | 8,599 |
| | $ | (2 | ) | | $ | 8,597 |
|
| Costs and expenses | | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | 7,116 |
| | — |
| | 7,116 |
| | 10 |
| | 7,126 |
|
| Selling, general, and administrative | | 513 |
| | — |
| | 513 |
| | 1 |
| | 514 |
|
| Depreciation and amortization | | 212 |
| | — |
| | 212 |
| | 1 |
| | 213 |
|
| Engineering, research, and development | | 154 |
| | — |
| | 154 |
| | (1 | ) | | 153 |
|
| | | 7,995 |
| | — |
| | 7,995 |
| | 11 |
| | 8,006 |
|
| Other expense (income) | | | | | | | | | | |
| Loss on sale of receivables | | 5 |
| | — |
| | 5 |
| | — |
| | 5 |
|
| Non-service pension and postretirement benefit costs | | — |
| | 84 |
| | 84 |
| | — |
| | 84 |
|
| Loss on extinguishment of debt | | — |
| | 24 |
| | 24 |
| | — |
| | 24 |
|
| Other expense (income), net | | 83 |
| | (84 | ) | | (1 | ) | | — |
| | (1 | ) |
| | | 88 |
| | 24 |
| | 112 |
| | — |
| | 112 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 516 |
| | (24 | ) | | 492 |
| | (13 | ) | | 479 |
|
| Interest expense | | 92 |
| | (24 | ) | | 68 |
| | — |
| | 68 |
|
| Earnings before income taxes and noncontrolling interests | | 424 |
| | — |
| | 424 |
| | (13 | ) | | 411 |
|
| Income tax expense (benefit) | | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
| Net income | | 424 |
| | — |
| | 424 |
| | (9 | ) | | 415 |
|
| Less: Net income attributable to noncontrolling interests | | 68 |
| | — |
| | 68 |
| | — |
| | 68 |
|
| Net income attributable to Tenneco Inc. | | $ | 356 |
| | $ | — |
| | $ | 356 |
| | $ | (9 | ) | | $ | 347 |
|
| Earnings per share | | | | | | | | | | |
| Weighted average shares of common stock outstanding — | | | | | | | | | | |
| Basic earnings per share of common stock | | $ | 6.36 |
| | $ | — |
| | $ | 6.36 |
| | $ | (0.16 | ) | | $ | 6.20 |
|
| Diluted earnings per share of common stock | | $ | 6.31 |
| | $ | — |
| | $ | 6.31 |
| | $ | (0.16 | ) | | $ | 6.15 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statement of comprehensive income | | (Millions) |
| Net income | | $ | 424 |
| | $ | — |
| | $ | 424 |
| | $ | (9 | ) | | $ | 415 |
|
| Other comprehensive income (loss)—net of tax | | | | | | | | | | |
| Foreign currency translation adjustment | | (45 | ) | | — |
| | (45 | ) | | (11 | ) | | (56 | ) |
| Defined benefit plans | | 41 |
| | — |
| | 41 |
| | 10 |
| | 51 |
|
| | | (4 | ) | | — |
| | (4 | ) | | (1 | ) | | (5 | ) |
| Comprehensive income (loss) | | 420 |
| | — |
| | 420 |
| | (10 | ) | | 410 |
|
| Less: Comprehensive income (loss) attributable to noncontrolling interests | | 64 |
| | — |
| | 64 |
| | — |
| | 64 |
|
| Comprehensive income (loss) attributable to common shareholders | | $ | 356 |
| | $ | — |
| | $ | 356 |
| | $ | (10 | ) | | $ | 346 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated balance sheet | | (Millions) |
| Current assets: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 315 |
| | $ | — |
| | $ | 315 |
| | $ | — |
| | $ | 315 |
|
| Restricted cash | | 3 |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Receivables: | | | | | |
| |
| | |
| Customer notes and accounts, net | | 1,294 |
| | — |
| | 1,294 |
| | — |
| | 1,294 |
|
| Other | | 27 |
| | — |
| | 27 |
| | — |
| | 27 |
|
| Inventories | | 869 |
| | — |
| | 869 |
| | (49 | ) | | 820 |
|
| Prepayments and other current assets | | 291 |
| | — |
| | 291 |
| | (3 | ) | | 288 |
|
| Total current assets | | 2,799 |
| | — |
| | 2,799 |
| | (52 | ) | | 2,747 |
|
| Property, plant and equipment, net | | 1,615 |
| | 79 |
| | 1,694 |
| | (3 | ) | | 1,691 |
|
| Long-term receivables, net | | 9 |
| | — |
| | 9 |
| | — |
| | 9 |
|
| Goodwill | | 49 |
| | — |
| | 49 |
| | — |
| | 49 |
|
| Intangibles, net | | 22 |
| | — |
| | 22 |
| | — |
| | 22 |
|
| Investments in nonconsolidated affiliates | | — |
| | 2 |
| | 2 |
| | — |
| | 2 |
|
| Deferred income taxes | | 204 |
| | — |
| | 204 |
| | 9 |
| | 213 |
|
| Other assets | | 144 |
| | (81 | ) | | 63 |
| | — |
| | 63 |
|
| Total assets | | $ | 4,842 |
| | $ | — |
| | $ | 4,842 |
| | $ | (46 | ) | | $ | 4,796 |
|
| | | | | | | | | | | |
| Short-term debt, including current maturities of long-term debt | | $ | 83 |
| | $ | 20 |
| | $ | 103 |
| | $ | — |
| | $ | 103 |
|
| Accounts payable | | 1,705 |
| | (123 | ) | | 1,582 |
| | — |
| | 1,582 |
|
| Accrued compensation and employee benefits | | | | 141 |
| | 141 |
| | — |
| | 141 |
|
| Accrued income taxes | | 45 |
| | (20 | ) | | 25 |
| | 2 |
| | 27 |
|
| Accrued interest | | 14 |
| | (14 | ) | | — |
| | — |
| | — |
|
| Accrued liabilities | | 287 |
| | (287 | ) | | — |
| | — |
| | — |
|
| Other | | 132 |
| | (132 | ) | | — |
| | — |
| | |
| Accrued expenses and other current liabilities | | | | 415 |
| | 415 |
| | 9 |
| | 424 |
|
| Total current liabilities | | 2,266 |
| | — |
| | 2,266 |
| | 11 |
| | 2,277 |
|
| Long-term debt | | 1,358 |
| | — |
| | 1,358 |
| | — |
| | 1,358 |
|
| Deferred income taxes | | 11 |
| | — |
| | 11 |
| | — |
| | 11 |
|
| Pension and postretirement benefits | | 268 |
| | — |
| | 268 |
| | — |
| | 268 |
|
| Deferred credits and other liabilities | | 155 |
| | — |
| | 155 |
| | 3 |
| | 158 |
|
| Commitments and contingencies | | | | | |
| |
| | |
| Total liabilities | | 4,058 |
| | — |
| | 4,058 |
| | 14 |
| | 4,072 |
|
| Redeemable noncontrolling interests | | 42 |
| | | | 42 |
| | — |
| | 42 |
|
| Tenneco Inc. shareholders’ equity: | | | | | | | | | | |
| Preferred stock—$0.01 par value; none issued | | — |
| | — |
| | — |
| | — |
| | — |
|
| Class A voting common stock—$0.01 par value; shares issued: (2018—71,675,379; 2017—66,033,509) | | 1 |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Additional paid-in capital | | 3,112 |
| | — |
| | 3,112 |
| | — |
| | 3,112 |
|
| Accumulated other comprehensive loss | | (541 | ) | | — |
| | (541 | ) | | 3 |
| | (538 | ) |
| Accumulated deficit | | (946 | ) | | — |
| | (946 | ) | | (63 | ) | | (1,009 | ) |
| | | 1,626 |
| | — |
| | 1,626 |
| | (60 | ) | | 1,566 |
|
| Shares held as treasury stock—at cost: 2018 and 2017—14,592,888 shares | | (930 | ) | | — |
| | (930 | ) | | — |
| | (930 | ) |
| Total Tenneco Inc. shareholders’ equity | | 696 |
| | — |
| | 696 |
| | (60 | ) | | 636 |
|
| Noncontrolling interests | | 46 |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Total equity | | 742 |
| | — |
| | 742 |
| | (60 | ) | | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | $ | 4,842 |
| | $ | — |
| | $ | 4,842 |
| | $ | (46 | ) | | $ | 4,796 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statements of cash flow | | (Millions) |
| Operating Activities | | | | | | | | | | |
| Net income | | $ | 274 |
| | $ | — |
| | $ | 274 |
| | $ | (9 | ) | | $ | 265 |
|
| Net cash provided by operating activities | | 517 |
| | — |
| | 517 |
| | — |
| | 517 |
|
| | | | | | | | | | | |
| Investing Activities | | | | | | | | | | |
| Net cash used by investing activities | | (300 | ) | | — |
| | (300 | ) | | — |
| | (300 | ) |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | |
| Proceeds from term loans and notes | | — |
| | 137 |
| | 137 |
| | 23 |
| | 160 |
|
| Repayments of term loans and notes | | — |
| | (19 | ) | | (19 | ) | | (17 | ) | | (36 | ) |
| Retirement of long-term debt | | (19 | ) | | 19 |
| | — |
| | — |
| | — |
|
| Issuance of long-term debt | | 137 |
| | (137 | ) | | — |
| | — |
| | — |
|
| Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 6,664 |
| | 6,664 |
|
| Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (6,737 | ) | | (6,737 | ) |
| Net increase (decrease) in revolver borrowings | | (67 | ) | | — |
| | (67 | ) | | 67 |
| | — |
|
| Net cash provided (used) by financing activities | | $ | (251 | ) | | $ | — |
| | $ | (251 | ) | | $ | — |
| | $ | (251 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
| Consolidated statements of cash flow | | (Millions) |
| Operating Activities | | | | | | | | | | |
| Net income | | $ | 424 |
| | $ | — |
| | $ | 424 |
| | $ | (9 | ) | | $ | 415 |
|
| Net cash provided by operating activities | | 374 |
| | — |
| | 374 |
| | — |
| | 374 |
|
| | | | | | | | | | | |
| Investing Activities | | | | | | | | | | |
| Net cash used by investing activities | | (229 | ) | | — |
| | (229 | ) | | — |
| | (229 | ) |
| | | | | | | | | | | |
| Financing Activities | | | | | | | | | | |
| Proceeds from term loans and notes | | — |
| | 509 |
| | 509 |
| | 20 |
| | 529 |
|
| Repayments of term loans and notes | | — |
| | (531 | ) | | (531 | ) | | (14 | ) | | (545 | ) |
| Retirement of long-term debt | | (531 | ) | | 531 |
| | — |
| | — |
| | — |
|
| Issuance of long-term debt | | 509 |
| | (509 | ) | | — |
| | — |
| | — |
|
| Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 5,417 |
| | 5,417 |
|
| Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (5,221 | ) | | (5,221 | ) |
| Net increase (decrease) in revolver borrowings | | 202 |
| | — |
| | 202 |
| | (202 | ) | | — |
|
| Net cash provided (used) by financing activities | | $ | (86 | ) | | $ | — |
| | $ | (86 | ) | | $ | — |
| | $ | (86 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | As Reported | | Revisions | | As Revised |
| Consolidated statements of shareholders' equity | | (Millions) |
| Accumulated Deficit | | | | | | |
| Balance January 1 | | $ | (1,100 | ) | | $ | (54 | ) | | $ | (1,154 | ) |
| Net income attributable to Tenneco Inc. | | 207 |
| | (9 | ) | | 198 |
|
| Cash dividends declared | | (53 | ) | | — |
| | (53 | ) |
| Balance December 31 | | $ | (946 | ) | | $ | (63 | ) | | $ | (1,009 | ) |
| Accumulated Other Comprehensive Loss | | | | | | |
| Balance January 1 | | $ | (665 | ) | | $ | 6 |
| | $ | (659 | ) |
| Other comprehensive loss—net of tax: | |
|
| |
|
| |
|
|
| Foreign currency translation adjustment | | 97 |
| | 7 |
| | 104 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Balance December 31 | | $ | (541 | ) | | $ | 3 |
| | $ | (538 | ) |
| Total Tenneco Inc. Shareholders' Equity | | | | | | |
| Balance January 1 | | $ | 573 |
| | $ | (48 | ) | | $ | 525 |
|
| Net income attributable to Tenneco Inc. | | 207 |
| | (9 | ) | | 198 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | 97 |
| | 7 |
| | 104 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Comprehensive income | | 331 |
| | (12 | ) | | 319 |
|
| Stock-based compensation expense | | 14 |
| | — |
| | 14 |
|
| Cash dividends | | (53 | ) | | — |
| | (53 | ) |
| Treasury stock | | (169 | ) | | — |
| | (169 | ) |
| Balance December 31 | | $ | 696 |
| | $ | (60 | ) | | $ | 636 |
|
| Total Equity | | | | | | |
| Balance January 1 | | $ | 620 |
| | $ | (48 | ) | | $ | 572 |
|
| Net income | | 238 |
| | (9 | ) | | 229 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | 96 |
| | 7 |
| | 103 |
|
| Defined benefit plans | | 27 |
| | (10 | ) | | 17 |
|
| Comprehensive income | | 361 |
| | (12 | ) | | 349 |
|
| Stock-based compensation expense | | 14 |
| | — |
| | 14 |
|
| Cash dividends | | (53 | ) | | — |
| | (53 | ) |
| Treasury stock | | (169 | ) | | — |
| | (169 | ) |
| Distributions declared to noncontrolling interests | | (31 | ) | | — |
| | (31 | ) |
| Balance December 31 | | $ | 742 |
| | $ | (60 | ) | | $ | 682 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Reported | | Revisions | | As Revised |
| Consolidated statements of shareholders' equity | | (Millions) |
| Accumulated Deficit | | | | | | |
| Balance January 1 | | $ | (1,456 | ) | | $ | (45 | ) | | $ | (1,501 | ) |
| Net income attributable to Tenneco Inc. | | 356 |
| | (9 | ) | | 347 |
|
| Balance December 31 | | $ | (1,100 | ) | | $ | (54 | ) | | $ | (1,154 | ) |
| Accumulated Other Comprehensive Loss | | | | | | |
| Balance January 1 | | $ | (665 | ) | | $ | 7 |
| | $ | (658 | ) |
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (41 | ) | | (11 | ) | | (52 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Balance December 31 | | $ | (665 | ) | | $ | 6 |
| | $ | (659 | ) |
| Total Tenneco Inc. shareholders' equity | | | | | | |
| Balance January 1 | | $ | 425 |
| | $ | (38 | ) | | $ | 387 |
|
| Net income attributable to Tenneco Inc. | | 356 |
| | (9 | ) | | 347 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (41 | ) | | (11 | ) | | (52 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Comprehensive income | | 356 |
| | (10 | ) | | 346 |
|
| Stock-based compensation expense | | 17 |
| | — |
| | 17 |
|
| Treasury stock | | (225 | ) | | — |
| | (225 | ) |
| Balance December 31 | | $ | 573 |
| | $ | (48 | ) | | $ | 525 |
|
| Total Equity | | | | | | |
| Balance January 1 | | $ | 464 |
| | $ | (38 | ) | | $ | 426 |
|
| Net income | | 388 |
| | (9 | ) | | 379 |
|
| Other comprehensive loss—net of tax: | | | | | | |
| Foreign currency translation adjustment | | (43 | ) | | (11 | ) | | (54 | ) |
| Defined benefit plans | | 41 |
| | 10 |
| | 51 |
|
| Comprehensive income | | 386 |
| | (10 | ) | | 376 |
|
| Stock-based compensation expense | | 17 |
| | — |
| | 17 |
|
| Treasury stock | | (225 | ) | | — |
| | (225 | ) |
| Distribution declared to noncontrolling interests | | (22 | ) | | — |
| | (22 | ) |
| Balance December 31 | | $ | 620 |
| | $ | (48 | ) | | $ | 572 |
|
Summary of Significant Accounting Policies
Principles of Consolidation: The Company consolidates into its financial statements the accounts of the Company, all wholly owned subsidiaries, and any partially owned subsidiary it has the ability to control. Control generally equates to ownership percentage, whereby investments more that 50% owned are consolidated, investments in affiliates of 50% or less but greater than 20% are accounted for using the equity method, and investments in affiliates of 20% or less are accounted for using the cost method. See Note 8, Investment in Nonconsolidated Affiliates.
The Company does not consolidate any entity for which it has a variable interest based solely on the power to direct the activities and significant participation in the entity's expected results that would not otherwise be consolidated based on control through voting interests. Further, its affiliates are businesses established and maintained in connection with its operating strategy and are not special purpose entities. All intercompany transactions and balances have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.
Cash and Cash Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. The carrying value of cash and cash equivalents approximate fair value.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Cash: The Company is required to provide cash collateral in connection with certain contractual arrangements and statutory requirements. The Company has $5 million and $3 million of restricted cash at December 31, 2018 and 2017 in support of these arrangements and requirements.
Notes and Accounts Receivable: Notes and accounts receivable are stated at net realizable value, which approximates fair value. Receivables are reduced by an allowance for amounts that may become uncollectible in the future. The allowance is an estimate based on historical collection experience, current economic and market conditions, and a review of the current status of each customer's trade accounts or notes receivable. A receivable is past due if payments have not been received within the agreed-upon invoice terms. Account balances are charged-off against the allowance when management determines the receivable will not be recovered.
The allowance for doubtful accounts on short-term and long-term accounts receivable was $17 million and $16 million at December 31, 2018 and 2017. The allowance for doubtful accounts on short-term and long-term notes receivable was zero at both December 31, 2018 and 2017.
Inventories: Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) or average cost methods. Work in process includes purchased parts such as substrates coated with precious metals. Cost of inventory includes direct materials, labor, and applicable manufacturing overhead costs. The value of inventories are reduced for excess and obsolescence based on management's review of on-hand inventories compared to historical and estimated future sales and usage. Inventory held at consignment locations is included in finished goods inventory as the Company retains full title and rights to the products.
Redeemable Noncontrolling Interests: The Company has noncontrolling interests with redemption features. These redemption features could require the Company to make an offer to purchase the noncontrolling interests at fair value in the event of a change in control of Tenneco Inc. or certain of its subsidiaries. As a result of the Acquisition, the Company acquired $10 million in redeemable noncontrolling interests (exclusive of interests related to a subsidiary in India) and triggered the related redemption features which provide the holders the option to require the Company to redeem the noncontrolling interests. The noncontrolling interest partners have elected not to require the Company to redeem their shares. The redemption of these redeemable noncontrolling interests is not solely within the Company's control. Accordingly, these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As a result the noncontrolling interests have not been remeasured to redemption value.
In addition, the Company acquired $86 million in redeemable noncontrolling interests related to a subsidiary in India. The Company initiated the process to make a tender offer of the shares it does not own due to the change in control in accordance with local regulations triggered by the Acquisition. It is probable these shares will become redeemable during 2019 under the tender offer at a price that is representative of fair value and as a result the noncontrolling interest is presented in the temporary equity section of the Company’s consolidated balance sheets. At the Acquisition date, this redeemable noncontrolling interest was recorded at its estimated fair value based on the preliminary purchase price allocation. The carrying amount for this redeemable noncontrolling interest at December 31, 2018 is currently greater than the redemption value as evidenced by the tender offer price resulting in no adjustment to reflect the noncontrolling interest at redemption value.
At December 31, 2018, the Company had previously held redeemable noncontrolling interests of $35 million, for which the redemption is not solely within the Company's control and these noncontrolling interests are presented in the temporary equity section of the Company's consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered as a change in control event is generally not probable until it occurs. As such, the noncontrolling interests have not been remeasured to redemption value.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following is a rollforward of the activity in the redeemable noncontrolling interests for the years ended December 31, 2018, 2017 and 2016:
|
| | | | | | | | | | | |
| | December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Balance January 1 | $ | 42 |
| | $ | 40 |
| | $ | 41 |
|
| Federal-Mogul acquisition | 96 |
| | — |
| | — |
|
| Net income attributable to redeemable noncontrolling interests | 29 |
| | 36 |
| | 36 |
|
| Other comprehensive (loss) income | (2 | ) | | 3 |
| | (2 | ) |
| Contributions received | 6 |
| | — |
| | — |
|
| Dividends declared | (33 | ) | | (37 | ) | | (35 | ) |
| Balance December 31 | $ | 138 |
| | $ | 42 |
| | $ | 40 |
|
Long-Lived Assets: Long-lived assets, such as property, plant and equipment and definite-lived intangible assets are recorded at cost or fair value established at acquisition. Definite-lived intangible assets include customer relationships and platforms, patented and unpatented technology, and licensing agreements. Long-lived asset groups are evaluated for impairment when impairment indicators exist. If the carrying value of a long-lived asset group is impaired, an impairment charge is recorded for the amount by which the carrying value of the long-lived asset group exceeds its fair value. Depreciation and amortization are computed principally on a straight-line basis over the estimated useful lives of the assets for financial reporting purposes. Expenditures for maintenance and repairs are expensed as incurred.
Goodwill, net: Goodwill is determined as the excess of fair value over amounts attributable to specific tangible and intangible assets. Goodwill is evaluated for impairment annually, during the fourth quarter, or more frequently, if impairment indicators exist. An impairment indicator exists when a reporting unit's carrying value exceeds its fair value. When performing the goodwill impairment testing, a reporting units' fair value is based on valuation techniques using the best available information. The assessment of fair value utilizes a combination of the income approach and market approach. The impairment charge is the excess of the goodwill carrying value over the implied fair value of goodwill using a one-step quantitative approach.
Trade names and trademarks: Trade names and trademarks are stated at fair value established at acquisition or cost. These indefinite-lived intangible assets will be evaluated for impairment annually during the fourth quarter, or more frequently, if impairment indicators exist. An impairment exists when a trade name and trademarks' carrying value exceeds its fair value. The fair values of these assets are based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The impairment charge is the excess of the assets carrying value over its fair value.
Pre-production Design and Development and Tooling Assets: The Company expenses pre-production design and development costs as incurred unless there is a contractual guarantee for reimbursement from the original equipment customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has title to the assets are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee for reimbursement or has the non-cancelable right to use the assets during the term of the supply arrangement from the customer are capitalized in prepayments and other current assets orassets.
Prepayments and other current assets included $193 million and $142 million at December 31, 2018 and 2017, respectively, for in-process tools and dies being built for OE customers and unbilled pre-production design and development costs.
Internal Use Software Assets: Certain costs related to the purchase and development of software used in the business operations are capitalized. Costs attributable to these software systems are amortized over their estimated useful lives based on various factors such as the effects of obsolescence, technology, and other economic factors. Additions to capitalized software development costs, including payroll and payroll-related costs for those employees directly associated with developing and obtaining the internal use software, are classified as investing activities in the consolidated statements of cash flows.
Income Taxes: Deferred tax assets and liabilities are recognized on the basis of the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and the respective tax values, and net operating losses ("NOL") and tax credit carryforwards on a taxing jurisdiction basis. Deferred tax assets and
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
liabilities are measured using enacted tax rates that will apply in the years in which the temporary differences are expected to be recovered or paid. The effect on deferred tax assets and liabilities of a change in tax rates is recorded in the results of operations in the period that includes the enactment date under the law.
Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. Valuation allowances are established in certain jurisdictions based on a more likely than not standard. The ability to realize deferred tax assets depends on the Company's ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each tax jurisdiction. The Company considers the various possible sources of taxable income when assessing the realization of its deferred tax assets. The valuation allowances recorded against deferred tax assets generated by taxable losses in certain jurisdictions will effect the provision for income taxes until the valuation allowances are released. The Company's provision for income taxes will include no tax benefit for losses incurred and no tax expense with respect to income generated in these jurisdictions until the respective valuation allowance is eliminated.
The Company records uncertain tax positions on the basis of a two-step process whereby it is determined whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position, and for those tax positions that meet the more likely than not criteria, the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority is recognized.
The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in the future periods.
Pension and other postretirement benefit plan obligations: Pensions and other postretirement employee benefit costs and related liabilities and assets are dependent upon assumptions used in calculating such amounts. These assumptions include discount rates, long term rate of return on plan assets, health care cost trends, compensation, and other factors. Actual results that differ from the assumptions used are accumulated and amortized over future periods, and accordingly, generally affect recognized expense in future periods. The cost of benefits provided by defined benefit pension and other postretirement plans is recorded in the period employees provide service. Future pension expense for certain significant funded benefit plans is calculated using an expected return on plan asset methodology.
Investments with registered investment companies, common and preferred stocks, and certain government debt securities are valued at the closing price reported on the active market on which the securities are traded. Corporate debt securities are valued by third-party pricing sources using the multi-dimensional relational model using instruments with similar characteristics. Hedge funds and the collective trusts are valued at net asset value (NAV) per share which are provided by the respective investment sponsors or investment advisers.
Revenue Recognition: The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") 2014-09 on January 1, 2018, which required it to recognize revenue when a customer obtains control rather than when substantially all risks and rewards of a good or service have been transferred. ASU 2014-09 was adopted by applying the modified retrospective method; see the Recently Adopted Accounting Standards section for additional information pertaining to the adoption of ASU 2014-09. The comparative information has not been adjusted and continues to be reported under the accounting standards in effect for those periods. The following accounting policies became effective upon the adoption of ASU 2014-09:
The Company accounts for a contract with a customer when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable.
Revenue is recognized for sales to OE and aftermarket customers when transfer of control of the related good or service has occurred. Revenue from most OE and aftermarket goods and services is transferred to customers at a point in time. Contract terms with certain OE customers results in products and services being transferred over time due to the customized nature of some of the Company's products together with contractual provisions in certain customer contracts that provide the Company with an enforceable right to payment for performance completed to date. The Company considers an input measure (e.g., costs incurred to date relative to total estimated costs at completion) as a fair measure of progress for the recognition of over time revenue associated with these customized parts. A cost measure best depicts the means of transfer of goods to the customer, which occurs as the Company incurs costs to fulfill contracts.
The customer is invoiced once transfer of control has occurred and the Company has a right to payment. Typical payment
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
terms vary based on the customer and the type of goods and services in the contract. The period of time between invoicing and when payment is due is not significant. Amounts billed and due from customers are classified as receivables on the consolidated balance sheets. Standard payment terms are less than one year and the Company has elected the practical expedient to not assess whether a contract has a significant financing component if the payment terms are less than one year.
Performance Obligations: The majority of the Company's customer contracts with OE and aftermarket customers are long-term supply arrangements. The performance obligations are established by the enforceable contract, which is generally considered to be the purchase order but in some cases could be the delivery release schedule. The purchase order, or related delivery release schedule, is of a duration of less than one year. As such, the Company applies the practical expedient and does not disclose information about remaining performance obligations that have original expected durations of one year or less, for which work has not yet been performed.
Rebates: The Company accrues for rebates pursuant to specific arrangements with certain customers, primarily in the aftermarket. Rebates generally provide for payments to customers based upon the achievement of specified purchase volumes and are recorded as a reduction of sales as earned by such customers.
Product returns: Certain aftermarket contracts with customers include terms and conditions that result in a customer right of return that is accounted for on a gross basis. For these contracts the Company has recorded a refund liability and return asset within "Prepayments and other current assets."
Shipping and handling costs: Shipping and handling costs associated with outbound freight after control of a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of sales in the consolidated statements of income.
Sales and sales related taxes: The Company collects and remits taxes assessed by various governmental authorities that are both imposed on and concurrent with revenue-producing transactions with its customers. These taxes may include, but are not limited to, sales, use, value-added, and some excise taxes. The collection and remittance of these taxes is reported on a net basis.
Contract Balances: Contract assets primarily relate to the Company’s rights to consideration for work completed but not billed at the reporting date on contracts with customers. The contract assets are transferred to receivables when the rights become unconditional. Contract liabilities primarily relate to contracts where advance payments or deposits have been received, but performance obligations have not yet been met, and therefore, revenue has not been recognized. There have been no impairment losses recognized related to any receivables or contract assets arising from the Company’s contracts with customers.
Engineering, Research, and Development: The Company records engineering, research, and development costs ("R&D") net of customer reimbursements as they are considered a recovery of cost.
Advertising and Promotion Expenses: The Company expenses advertising and promotional expenses as incurred and these expenses were $36 million, $40 million, and $40 million for the years ended December 31, 2018, 2017, and 2016.
Foreign currency translation: Exchange adjustments related to foreign currency transactions and translation adjustment for foreign subsidiaries whose functional currency is the U.S. dollar are reflected in the consolidated statements of income. Translation adjustments of foreign subsidiaries for which local currency is functional currency are reflected in the consolidated balance sheet.sheets as a component of accumulated other comprehensive income (loss). Transaction gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred, except for those intercompany balances which are designated as long-term investments. The amounts recorded in cost of sales in the consolidated statements of income for foreign currency transactions included $15 million of gains for the year ended December 31, 2018, $4 million of losses for the year ended December 31, 2017 and $1 million of gains for the year ended December 31, 2016.
Asset Retirement Obligations: The Company records asset retirement obligations (ARO) when liabilities are probable and amounts can be reasonably estimated. The Company's primary ARO activities relate to the removal of hazardous building materials at its facilities.
Derivative Financial Instruments: For derivative instruments to qualify as hedging instruments, they must be designated as a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. Gains and losses related to a hedge are
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
either recognized in income immediately to offset the gain or loss on the hedged item or are deferred and reported as a component of accumulated other comprehensive income (loss) and subsequently recognized in earnings when the hedged item affects earnings. The change in fair value of the ineffective portion of a derivative financial instrument, determined using the hypothetical derivative method, is recognized in earnings immediately. The gain or loss related to derivative financial instruments not designated as hedges are recognized immediately in earnings. Cash flows related to hedging activities are included in the operating section of the consolidated statements of cash flows.
New Accounting Pronouncements
In November 2016, the FinancialAdoption of New Accounting Standards
Revenue recognition: The Company adopted ASU No. 2014-09, as incorporated into Accounting Standards Board (“FASB”Codification (ASC) Topic 606, Revenue from Contracts with Customers ("ASC 606") issued Accounting Standard Update 2016-18, Statement, on January 1, 2018, using the modified retrospective application method under which the cumulative effect is recognized in equity at the date of Cash Flows - Restricted Cash (Topic 230)initial application. Therefore, the comparative information has not been adjusted and continues to eliminate diversitybe reported under previous guidance. ASC 606 has been applied to all contracts at the date of initial application. The details of significant changes and quantitative effect of the changes are disclosed below.
Product returns: The Company previously recognized product returns as a reduction in practicerevenue based on the estimated product return rate. Under ASC 606, the Company continues to recognize this liability but also recognizes the value of the inventory to be returned.
Timing of revenue recognition: The Company previously recognized revenue when title and risk of loss passed to the customer. Upon the adoption of ASC 606, there was a change in the presentationpattern of restricted cashrevenue recognition for certain customized parts where the Company has a right to payment. As a result of the adoption, the revenue from these contracts is now being recognized over-time because the customized parts are considered to be assets with limited alternative use and restricted cash equivalents in the statementCompany has an enforceable right to payment for work completed to date. The Company considers the costs incurred (input method) as a fair measure of cash flows. For public business entities,progress for the standard is effectiveover-time recognition of revenue associated with these customized parts.
The cumulative effect of the adoption was recognized as a decrease to accumulated deficit of $1 million and the changes made to the consolidated January 1, 2018 opening consolidated balance sheets for the adoption of ASC Topic 606 were as follows:
|
| | | | | | | | | | | |
| | Balance at December 31, 2017 | | Over-time recognition | | Balance at January 1, 2018 |
| Consolidated Balance Sheets | (Millions) |
| Assets | | | | | |
| Inventory | $ | 820 |
| | $ | (5 | ) | | $ | 815 |
|
| Prepayments and other current assets | $ | 288 |
| | $ | 6 |
| | $ | 294 |
|
| Equity | | | | | |
| Accumulated deficit | $ | (1,009 | ) | | $ | 1 |
| | $ | (1,008 | ) |
The following tables summarize the effects of adopting ASC Topic 606 on the Company’s consolidated financial statements issuedas of and for annual periods beginning afterthe year ended December 15, 2017, and interim periods within those annual periods. The adoption of this guidance is not expected31, 2018:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | As Reported | | Product returns | | Over-time recognition | | Balances Without Adoption of ASC Topic 606 |
| | (Millions) |
| Consolidated Balance Sheets | | | | | | | |
| Assets | | | | | | | |
| Inventory | $ | 2,245 |
| | $ | — |
| | $ | 8 |
| | $ | 2,253 |
|
| Prepayments and other current assets | $ | 590 |
| | $ | (44 | ) | | $ | (9 | ) | | $ | 537 |
|
| Liabilities | | | | | | | |
| Accrued expenses and other current liabilities | $ | 1,001 |
| | $ | (44 | ) | | $ | — |
| | $ | 957 |
|
| Equity | | | | | | | |
| Accumulated deficit | $ | (1,013 | ) | | $ | — |
| | $ | (1 | ) | | $ | (1,014 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | As Reported | | Product returns | | Over-time recognition | | Balances Without Adoption of ASC Topic 606 |
| | (Millions) |
| Consolidated Statements of Income | | | | | | | |
| Revenues | | | | | | | |
| Net sales and operating revenues | $ | 11,763 |
| | $ | 2 |
| | $ | 3 |
| | $ | 11,768 |
|
| Cost and expenses | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | $ | 10,071 |
| | $ | (2 | ) | | $ | (3 | ) | | $ | 10,066 |
|
For the year ended December 31, 2018, there would have been no change to have a material impact on the Company's consolidated financial statements."Net cash provided from (used by) operating activities'' under prior accounting principles.
Income taxes:In October 2016, the FASB issued Accounting Standard UpdateASU 2016-16, Income Taxes - Taxes—Intra Entity Transfers of Assets Other Than Inventory (Topic 740). The new standard changes the accounting for income taxes when a company transfers certain tangible and intangible assets, such as equipment or intellectual property, between entities in different tax jurisdictions. The new standard does not change the current accounting for the income taxes related to transfers of inventory. For public business entities, theThis standard is effective for the Company for its financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company adopted this ASU on January 1, 2018 using the modified retrospective method. The cumulative effect of the adoption was recognized as an increase to accumulated deficit of $1 million.
Retirement Benefits: Effective January 1, 2018, the Company adopted FASB ASU 2017-07, Retirement Benefits. As a result of adoption, the non-service cost components of net periodic pension and postretirement benefit cost previously presented in cost of sales and selling, general, and administrative expense have been reclassified to non-service pension and postretirement benefit cost. These financial statements have been retrospectively adjusted to reflect this change in accounting principle for the years ended December 31, 2017 and 2016.
The following tables summarize the effects of adopting the new standard on our consolidated financial statements:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Prior to Change in Accounting Principle | | Effective of Accounting Change | | After Change in Accounting Principle |
| | (Millions) |
| Consolidated Statements of Income | | | | | |
| Cost of Sales | $ | 7,815 |
| | $ | (3 | ) | | $ | 7,812 |
|
| Selling, general, and administrative | $ | 650 |
| | $ | (12 | ) | | $ | 638 |
|
| Non-service pension and postretirement benefit costs | $ | — |
| | $ | 16 |
| | $ | 16 |
|
| Other (income) expense | $ | (1 | ) | | $ | (1 | ) | | $ | (2 | ) |
|
| | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Prior to Change in Accounting Principle | | Effective of Accounting Change | | After Change in Accounting Principle |
| | (Millions) |
| Consolidated Statements of Income | | | | | |
| Cost of Sales | $ | 7,133 |
| | $ | (7 | ) | | $ | 7,126 |
|
| Selling, general, and administrative | $ | 590 |
| | $ | (76 | ) | | $ | 514 |
|
| Non-service cost pension and other postretirement benefits | $ | — |
| | $ | 84 |
| | $ | 84 |
|
| Other expense | $ | — |
| | $ | (1 | ) | | $ | (1 | ) |
Deferred Purchase Price: Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flow—Classification of certain cash receipts and cash payments (Topic 230). This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The retrospective adoption of this guidance is not expectedASU resulted in the reclassification of cash received to settle the deferred purchase price of factored receivables to an investing activity in the
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
consolidated statement of cash flows. Prior to adoption this amount would have been recorded as an operating activity in the consolidated statement of cash flows. The Company also now presents the transfer of trade receivables in exchange for a material impact onbeneficial interest in the Company's consolidated financial statements.factored receivables as a non-cash investing activity.
In March 2016,
Restricted Cash: Effective January 1, 2018, the FASB issued Accounting Standard Update 2016-09, Compensation - Stock CompensationCompany adopted ASU 2016-18, Statement of Cash Flows—Restricted Cash (Topic 718): Improvements230) to Employee Share-Based Payment Accounting, as parteliminate diversity in practice in the presentation of its initiative to reduce complexityrestricted cash and restricted cash equivalents in accounting standards. The areas for simplification in this update involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities,Under this standard, the standardchange in restricted cash is no longer presented as an investing activity in the consolidated statement of cash flows.
The following tables summarize the effects of adopting ASU 2016-18 and ASU 2016-15 on our consolidated statements of cash flows for the years ended December 31, 2017 and 2016:.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Prior to Change in Accounting Principle | | Effect of ASU 2016-18 | | Effect of ASU 2016-15 | | After Change in Accounting Principle |
| | (Millions) |
| Consolidated Statements of Cash Flows | | | | | | | |
| Decrease (increase) in receivables | $ | 31 |
| | $ | — |
| | $ | (112 | ) | | $ | (81 | ) |
| Net cash provided by operating activities | 629 |
| | — |
| | (112 | ) | | 517 |
|
| Change in restricted cash | (1 | ) | | 1 |
| | — |
| | — |
|
| Proceeds from deferred purchase price of factored receivables | — |
| | — |
| | 112 |
| | 112 |
|
| Net cash used by investing activities | (413 | ) | | 1 |
| | 112 |
| | (300 | ) |
| Decrease in cash, cash equivalents and restricted cash | (32 | ) | | 1 |
| | — |
| | (31 | ) |
| Cash, cash equivalents and restricted cash, January 1 | 347 |
| | 2 |
| | — |
| | 349 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 315 |
| | $ | 3 |
| | $ | — |
| | $ | 318 |
|
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Prior to Change in Accounting Principle | | Effect of ASU 2016-18 | | Effect of ASU 2016-15 | | After Change in Accounting Principle |
| | (Millions) |
| Consolidated Statements of Cash Flows | | | | | | | |
| Increase in receivables | $ | (215 | ) | | $ | — |
| | $ | (110 | ) | | $ | (325 | ) |
| Net cash provided by operating activities | 484 |
| | — |
| | (110 | ) | | 374 |
|
| Change in restricted cash | (1 | ) | | 1 |
| | — |
| | — |
|
| Proceeds from deferred purchase price of factored receivables | — |
| | — |
| | 110 |
| | 110 |
|
| Net cash used by investing activities | (340 | ) | | 1 |
| | 110 |
| | (229 | ) |
| Increase in cash, cash equivalents and restricted cash | 60 |
| | 1 |
| | — |
| | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 287 |
| | 1 |
| | — |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 347 |
| | $ | 2 |
| | $ | — |
| | $ | 349 |
|
Accounting Standards Issued But Not Yet Adopted
Intangibles: In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendments in this update are effective for financial statements issued forinterim and annual periods for the Company beginning on January 1, 2020, with early adoption permitted. The amendments in this update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements.
Retirement benefits: In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The amendments in this update remove disclosures that no longer are considered cost
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this update are effective for fiscal years ending after December 15, 2016,2020 with early adoption permitted. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements.
Fair value measurements: In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. The amendments in this ASU are effective for fiscal years, and interim periods within those annual periods.fiscal years, beginning after December 15, 2019. Implementation on a prospective or retrospective basis varies by specific disclosure requirement. Early adoption is permitted. The standard also allows for early adoption of any removed or modified disclosures upon issuance of this ASU while delaying adoption of the additional disclosures until their effective date. The Company is currently evaluating the potential effect of this new guidance on its consolidated financial statements.
Comprehensive income: In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The amendments in this update allow a reclassification from accumulated other comprehensive income (loss) to accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). Consequently, the amendments allow for an election to eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operations is not expectedaffected. The amendments in this update also require certain disclosures about stranded tax effects. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company has elected not to have a material impact onadopt the Company's consolidated financial statements.optional reclassification.
Leases:In February 2016, the FASB issued Accounting Standard UpdateASU 2016-02, Leases (Topic 842). The amendments in thisThis update create Topic 842, Leases, and supersedesupersedes the leaseslease requirements in Topic 840, Leases. Topic 842 specifies the accounting for leases. The objective of Topic 842 is to establish the principles that lessees and lessors shall apply to report useful information to users of financial statements about the amount, timing, and uncertainty of cash flow arising from a lease. For public business entities, the standard is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. WeThe Company will adopt this amendmentupdate on January 1, 2019. We are currently evaluating2019 using the potential impactmodified retrospective method without the recasting of this new guidancecomparative periods’ financial information, as permitted by the transition guidance.
The Company is finalizing its implementation efforts including final review of lease arrangements and completion of its system implementations. The Company is still quantifying the effect of adoption but does not anticipate a material effect to the consolidated statements of income; however, it does expect a material effect on the Company's consolidated financial statements.balance sheets as it recognizes the right-of-use assets and liabilities for operating leases.
In May 2015,
The Company intends to adopt the FASB issued Accounting Standard Update (ASU) No. 2015-07, Disclosures for Investmentspackage of practical expedients that allow companies to not reassess and will carry forward historical conclusions related to contracts that contain leases, existing lease classification, and initial direct costs. It does not intend to adopt the hindsight practical expedient and has also made an accounting policy election to exempt leases with an initial term of twelve months or less from balance sheets recognition. Instead, short-term leases will be expensed over the lease term. As a part of the implementation efforts, the Company has reviewed its internal control structure and does not anticipate its internal control framework will materially change, but rather existing internal controls will be modified and augmented, as necessary.
3. Acquisitions and Divestitures
Acquisition of Federal-Mogul
On October 1, 2018, the Company closed on the acquisition of all of the interests in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). ASU No. 2015-07 removesFederal-Mogul (the "Acquisition") pursuant to the requirement to categorize withinMembership Interest Purchase Agreement, dated as of April 10, 2018 (the "Purchase Agreement"), by and among the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. Such investments should be disclosed separate from the fair value hierarchy. For public businessCompany, Federal-Mogul, American Entertainment Properties Corp. ("AEP" and, together with certain affiliated entities, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2015,"Sellers") and interim periods within those fiscal years. The adoption of this guidance does not have an impact onIcahn Enterprises L.P. ("IEP"). Total consideration was approximately $3.7 billion. Following the Company's consolidated financial statements but will impact pension asset disclosure.
In May 2014, the FASB issued an amendment on revenue recognition. The amendment in this update creates Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topicscompletion of the Codification. In addition,Acquisition, Federal-Mogul was merged with and into the amendment supersedesCompany, with the cost guidanceCompany continuing as the surviving company.
Following the closing of the Acquisition, the Company has agreed to use its reasonable best efforts to pursue the separation of the combined company's powertrain technology business and its aftermarket and ride performance business into two new independent, publicly traded companies in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and creates new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The core principle of Topic 606a spin-off transaction that is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expectsexpected to be entitled in exchangetreated as a tax-free reorganization for those goods or services. The FASB approved a one-year deferral ofU.S. federal income tax purposes.
At the effective date of the Acquisition, the Company's certificate of incorporation was amended and restated (the "Amended and Restated Certificate of Incorporation") in order to create a new class of non-voting convertible common stock of the Company called "Class B Non-Voting Common Stock" ("Class B Common Stock") with 25,000,000 shares authorized, and to reclassify the Company's existing common stock as "Class A Voting Common Stock" ("Class A Common Stock" and, together with the Class B Common Stock, the “common stock”). See Note 17, Shareholders' Equity for additional information on the conversion features of the Class B Common Stock. On the same date, the Company also entered into a new credit facility in connection with the Acquisition. The new credit facility includes $4.9 billion of total debt financing, consisting of a five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility and a seven-year $1.7 billion term loan B facility. See Note 11, Debt and Other Financing Arrangements, for additional information.
Under the Amended and Restated Certificate of Incorporation, the authorized number of shares was increased from January 1, 2017185,000,000 shares, divided into 135,000,000 shares of common stock, par value $0.01, and 50,000,000 shares of preferred stock, par value $0.01, to January 1, 2018, while allowing for early adoption as250,000,000 shares, divided into 175,000,000 shares of January 1, 2017 for public entities. We will adopt this amendment on January1, 2018.Class A Common Stock, 25,000,000 shares of Class B Common Stock and 50,000,000 shares of preferred stock, par value $0.01.
The guidance permitsCompany (i) paid to AEP an aggregate amount in cash equal to $800 million (the “Cash Consideration”) and (ii) issued and delivered to AEP an aggregate of 29,444,846 shares of common stock at $41.99 per share (the “Stock Consideration”). The $1.2 billion of common stock was comprised of: (a) 5,651,177 shares of Class A Common Stock, par value $0.01 equal to 9.9 percent of the useaggregate number of eithershares of Class A Common Stock issued and outstanding immediately following the retrospective or modified retrospective (cumulative effect) transition methodclosing of the Acquisition, and we have not yet selected which transition method we will apply.(b) 23,793,669 shares of newly created Class B Common Stock, par value $0.01. The remaining consideration of approximately $1.7 billion was comprised primarily of the repayments of certain Federal-Mogul debt obligations.
We have established
Advisory costs associated with the Acquisition were $68 million for the year ended December 31, 2018 and were recognized as a cross-functional coordinated team to implement the guidance related to the recognitioncomponent of revenue from contracts with customers. We areselling, general, and administrative expenses in the processconsolidated statements of assessing our customer contracts, identifying contractual provisionsincome.
The following table summarizes the purchase price (in millions, except for share data):
|
| | | |
| Tenneco shares issued for purchase of Federal-Mogul | 29,444,846 |
|
| Tenneco share price at October 1, 2018 | $ | 41.99 |
|
| Fair value of the Stock Consideration | 1,236 |
|
| | |
Cash Consideration(1) | 811 |
|
Repayment of Federal-Mogul debt and accrued interest (2) | 1,660 |
|
| Total consideration | $ | 3,707 |
|
(1) Cash consideration also included $11 million in advisory fees paid to a third-party.
(2) Portion of the proceeds from the issuance of the $4.9 billion new credit facility that was used to repay Federal-Mogul’s term loan and revolver loan of $1,455 million and $200 million, respectively, and the related accrued interest of $5 million.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date:
|
| | | |
| | (Millions) |
| Cash, cash equivalents and restricted cash | $ | 277 |
|
| Customer notes and accounts receivable | 1,258 |
|
| Other receivables | 62 |
|
| Inventories | 1,551 |
|
| Prepayments and other current assets | 198 |
|
| Property, plant and equipment | 1,711 |
|
| Long-term receivables | 48 |
|
| Goodwill | 825 |
|
| Intangibles | 1,530 |
|
| Investments in nonconsolidated affiliates | 528 |
|
| Deferred income taxes | 166 |
|
| Other assets | 55 |
|
| Total assets acquired | 8,209 |
|
| | |
| Short-term debt, including current maturities of long-term debt | 130 |
|
| Accounts payable | 957 |
|
| Accrued compensation and employee benefits | 231 |
|
| Accrued income taxes | 49 |
|
| Accrued expenses and other current liabilities | 522 |
|
| Long-term debt | 1,315 |
|
| Deferred income taxes | 56 |
|
| Pension and postretirement benefits | 879 |
|
| Deferred credits and other liabilities | 124 |
|
| Total liabilities assumed | 4,263 |
|
| | |
| Redeemable noncontrolling interests | 96 |
|
| Noncontrolling interests | 143 |
|
| Net assets and noncontrolling interests acquired | $ | 3,707 |
|
The preliminary allocation of the purchase price to the assets acquired and liabilities assumed, including the residual amount recognized as goodwill, is based upon estimated information and is subject to change within the measurement period. The measurement period is a period not to exceed one year from the acquisition date during which the Company may adjust estimated or provisional amounts recorded during purchase accounting if new information is obtained about facts and circumstances that may resultexisted as of the acquisition date that, if known, would have resulted in a changerevised estimated values of those assets or liabilities as of that date. Measurement period adjustments are recorded in the timing orperiod identified. Any adjustments to amounts recorded in purchase accounting that do not qualify as measurement period adjustments are included in earnings in the amountperiod identified.
The fair values of revenue recognized in comparison with current guidance,the assets acquired and liabilities assumed are based on preliminary estimates and assumptions, as well as assessingother information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the enhanced disclosure requirementsCompany believes these preliminary estimates provide a reasonable basis for estimating the fair value of the new guidance. Under current guidance we generally recognize revenue when products are shippedassets acquired and risk of loss has transferred to the customer. Under the proposed requirements, the customized nature of some of our products combined with contractual provisions that provide us with an enforceable right to payment, may require us to recognize revenue prior to the product being shipped to the customer. We are also assessing pricing provisions contained in certain of our customer contracts. Pricing provisions contained in some of our customer contracts represent variable consideration or may provide the customer with a material right, potentially resulting in a different allocation of the transaction price than under current guidance. In addition, we are evaluating how the new guidance may impact our accounting for contractually guaranteed reimbursements related to customer tooling, engineering services and pre-production costs. Under the current applicable guidance, these customer reimbursements are recorded as cost recovery offsets; whereas under the new standard these guaranteed recoveries may represent consideration from contracts with customers and be recorded as revenues. Weliabilities assumed, it will continue to evaluate the impact this guidance will have on our financial statements.
Restricted Net Assets
In certain countries where we operate, transfers of funds out of such countries by way of dividends, loans or advances are subject to certain central bank restrictions which require approval from the central bank authoritiesavailable information prior to transferring funds out of these countries. The countries in which we operate that have such restrictions include China, South Africa, and Thailand. The net asset balance of our subsidiaries in the countries in which we operate that have such restrictions was $323 million and $248 million as of December 31, 2016 and 2015, respectively. These central banking restrictions do not have a significant effect on our ability to manage liquidity on a global basis.
2.Earnings Per Share
Earnings per share of common stock outstanding were computed as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (Millions Except Share and Per Share Amounts) |
| Basic earnings per share — | | | | | |
| Net income attributable to Tenneco Inc. | $ | 356 |
| | $ | 241 |
| | $ | 225 |
|
| Average shares of common stock outstanding | 55,939,135 |
| | 59,678,309 |
| | 60,734,022 |
|
| Earnings per average share of common stock | $ | 6.36 |
| | $ | 4.05 |
| | $ | 3.70 |
|
| Diluted earnings per share — |
| |
| |
|
| Net income attributable to Tenneco Inc. | $ | 356 |
| | $ | 241 |
| | $ | 225 |
|
| Average shares of common stock outstanding | 55,939,135 |
| | 59,678,309 |
| | 60,734,022 |
|
| Effect of dilutive securities: |
| |
| |
|
| Restricted stock | 175,513 |
| | 96,168 |
| | 130,732 |
|
| Stock options | 292,788 |
| | 418,673 |
| | 917,754 |
|
| Average shares of common stock outstanding including dilutive securities | 56,407,436 |
| | 60,193,150 |
| | 61,782,508 |
|
| Earnings per average share of common stock | $ | 6.31 |
| | $ | 4.01 |
| | $ | 3.64 |
|
Options to purchase 134,361, 175,216, and 1,357 shares of common stock were outstanding as of December 31, 2016, 2015 and 2014, respectively, but not included in the computation of diluted earnings per share, because the options were anti-dilutive.
3.Acquisitions and divestitures
In May 2014, we sold a 45 percent equity interest in Tenneco Fusheng (Chengdu) Automobile Parts Co., Ltd., to a third party for $4 million. As a resultfinalization of the sale, our equity ownership of Tenneco Fusheng (Chengdu) Automobile Parts Co., Ltd. changed to 55 percent from 100 percent.amounts. The net impact to equity from the sale was less than $1 million.
In November 2015, we closed on the sale of certain assets related to our Marzocchi mountain bike suspension product line to affiliates of Fox Factory Holding Corp.; and in December 2015, we closed on the saleprimary areas of the Marzocchi motorcycle fork product line to an Italian company, VRM S.p.A. We recorded charges of $29 million in 2015 related to severance and other employee related costs, asset write-downs and other expenses relatedpreliminary purchase price allocation that are not yet finalized relate to the closure.
In March 2016, we completed the dispositionfair value of the Gijon, Spainproperty, plant and signed an agreement to transfer ownership of the manufacturing facility in Gijon to German private equity fund Quantum Capital Partners A.G. (QCP). The transfer to QCPequipment; intangible assets; unconsolidated affiliates; deferred income tax assets and liabilities; redeemable noncontrolling interests; and noncontrolling interests.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Goodwill and other assets and liabilities are reflected in the Powertrain and Motorparts segments and are located in all geographic areas. The goodwill resulting from this Acquisition consists largely of the Company's expected future economic benefits to arise from expected future product sales and synergies from combining Federal-Mogul with the Company's existing portfolio of products. Goodwill of $388 million was effective Marchallocated to the Powertrain segment and $437 million was allocated to the Motorparts segment. None of the goodwill is deductible for tax purposes. Other intangible assets acquired include the following:
|
| | | | | |
| | Estimated Fair Value | | Weighted-Average Useful Lives |
| | (Millions) | | |
| Definite-lived intangible assets: | | | |
| Customer platforms and relationships | $ | 964 |
| | 10 years |
| Technology rights | 69 |
| | 10 years |
| Packaged kits know-how | 36 |
| | 10 years |
| Licensing agreements | 66 |
| | 4.5 years |
| Land use rights | 30 |
| | 42.8 years |
| Total definite-lived intangible assets | 1,165 |
| | 10.5 years |
| | | | |
| Indefinite-lived intangible assets: | | | |
| Trade names and trademarks | 365 |
| | |
| Total | $ | 1,530 |
| | |
The Company also recorded a $152 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation and recognized $105 million as a non-cash charge to cost of goods sold during the fourth quarter of 2018 related to the amortization of this step-up, as the acquired inventory was sold. The Company expects to recognize the remaining amortization of the inventory step-up during 2019.
The Company's consolidated statements of income for the year ended December 31, 2018 included net sales and operating revenues of $1,886 million and net loss of $69 million associated with the operating results of Federal-Mogul from October 1, 2018 to December 31, 2018.
Pro Forma Results (Unaudited)
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and Federal-Mogul business as though the Acquisition and the related financing had occurred as of January 1, 2017. The pro forma results are not necessarily indicative of either the actual consolidated results had the acquisition of Federal-Mogul occurred on December 31, 2016 and under a three year manufacturing agreement, QCP will also continue as a supplier to Tenneco.or of future consolidated operating results.
|
| | | | | | | |
| | For the Year Ended December 31 |
| | 2018 | | 2017 |
| | (In millions, except per share amounts) |
| Net sales and operating revenues | $ | 17,860 |
| | $ | 17,153 |
|
| Earnings before income taxes and noncontrolling interests | $ | 488 |
| | $ | 235 |
|
| Net income attributable to Tenneco Inc. | $ | 275 |
| | $ | 372 |
|
| Basic earnings per share of common stock | $ | 3.41 |
| | $ | 4.52 |
|
| Diluted earnings per share of common stock | $ | 3.40 |
| | $ | 4.51 |
|
These pro forma amounts have been calculated after applying the Company's accounting policies and the results presented above primarily reflect: (i) depreciation adjustments relating to fair value adjustments to property, plant, and equipment; (ii) amortization adjustments relating to fair value estimates of intangible assets; (iii) incremental interest expense, net on assumed indebtedness, the new credit facility, debt issuance costs, and fair value adjustments to debt; and (iv) cost of goods sold adjustments relating to fair value adjustments to inventory. Pro forma adjustments described above have been tax affected using the Company's effective rate during the respective periods.
In 2018, the Company incurred $96 million of acquisition related costs. These expenses are included in Selling, general, and administrative on the Company's consolidated statements of income for the year ended December 31, 2018. These expenses, as
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
well as $4 million of expenses incurred by Federal-Mogul in 2018 prior to the acquisition, are reflected in the pro forma earnings for the year ended December 31, 2017, in the table above.
Other Matters Related to the Acquisition
On March 3, 2017, and May 1, 2017, certain purported former stockholders of Federal-Mogul Holdings Corporation (“FMHC”) filed a petition in the Delaware Court of Chancery seeking an appraisal of the value of common stock they claim to have held at the time of the January 23, 2017 merger of IEH FM Holdings, LLC into FMHC. IEH FM Holdings, LLC was a wholly owned subsidiary of American Entertainment Properties Corp. and a subsidiary of Icahn Enterprises L.P. The two cases were consolidated on May 10, 2017 into: “In re Appraisal of Federal-Mogul Holdings LLC, C.A. No. 2017-0158-AGB.”
Federal-Mogul received a capital contribution of $56 million on June 29, 2018 from its then-parent, IEP, in connection with this matter. At October 1, 2018, Federal-Mogul’s litigation reserve was $55 million, along with accrued interest of $6 million, which was assumed as part of the Acquisition. On October 19, 2018, the Company reached an agreement with the plaintiffs to settle their claims for $12.01 per share, inclusive of interest payable, or an aggregate of approximately $61 million. The Company paid this settlement in the fourth quarter of 2018.
Assets Held for Sale
The Company classifies assets and liabilities as held for sale (“disposal group”) when management, having the authority to approve the action, commits to a plan to sell the disposal group, the sale is probable within one year, and the disposal group is available for immediate sale in its present condition. The Company also considers whether an active program to locate a buyer has been initiated, whether the disposal group is marketed actively for sale at a price that is reasonable in relation to its current fair value, and whether actions required to complete the plan indicate it is unlikely significant changes to the plan will be made or the plan will be withdrawn.
In December 2018, the Company entered into a stock and asset purchase agreement to sell certain assets and liabilities related to its wipers business in the Motorparts segment for a sale price of $29 million, subject to adjustment based on terms of the sale agreement. As of December 31, 2018, proceeds from the sale would have been $22 million. The related assets and liabilities were classified as held for sale as of December 31, 2018. The transaction closed on March 1, 2019.
There were no disposal groups classified as held for sale as of December 31, 2017. The assets and liabilities classified as held for sale as of December 31, 2018 were as follows:
|
| | | |
| | December 31 |
| | 2018 |
| | (Millions) |
| Assets | |
| Inventories | $ | 33 |
|
| Other current assets | 5 |
|
| Long-lived assets | 23 |
|
| Total assets held for sale | $ | 61 |
|
| Liabilities | |
| Accounts payable | $ | 21 |
|
| Accrued liabilities | 7 |
|
| Other liabilities | 11 |
|
| Total liabilities held for sale | $ | 39 |
|
The assets and liabilities held for sale are recorded in “Prepayments and other current assets” and “Accrued expenses and other current liabilities” in the consolidated balance sheets as of December 31, 2018.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4.Restructuring Charges and Other ChargesAsset Impairments, Net
Over
For the past several years we have adopted plans to restructure portions of our operations. These plans were approvedended December 31, 2018, 2017, and 2016, restructuring charges, net, by our Board of Directorssegment, is as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Clean Air | $ | 14 |
| | $ | 23 |
| | $ | 6 |
|
| Ride Performance | 48 |
| | 16 |
| | 13 |
|
| Aftermarket | 16 |
| | 7 |
| | 9 |
|
| Powertrain | (2 | ) | | — |
| | — |
|
| Motorparts | 31 |
| | — |
| | — |
|
| Other | 5 |
| | 1 |
| | 2 |
|
| | $ | 112 |
| | $ | 47 |
| | $ | 30 |
|
| These amounts are classified in the consolidated statements of income as follows: | | |
| Cost of sales | $ | 66 |
| | $ | 41 |
| | $ | 17 |
|
| Engineering, research, and development | 4 |
| | — |
| | 1 |
|
| Selling, general, and administrative | 40 |
| | 6 |
| | 12 |
|
| Other expense | 2 |
| | — |
| | — |
|
| | $ | 112 |
| | $ | 47 |
| | $ | 30 |
|
For the years ended December 31, 2018, 2017, and were designed to reduce operational and administrative overhead costs throughout2016, asset impairments, by segment, is as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Clean Air | $ | — |
| | $ | 2 |
| | $ | 1 |
|
| Ride Performance | 6 |
| | 1 |
| | 2 |
|
| Aftermarket | — |
| | — |
| | 3 |
|
| Other | 2 |
| | — |
| | — |
|
| | $ | 8 |
| | $ | 3 |
| | $ | 6 |
|
| These amounts are classified in the consolidated statements of income as follows: | | |
| Cost of sales | $ | 3 |
| | $ | — |
| | $ | — |
|
| Selling, general, and administrative | 2 |
| | — |
| | — |
|
| Depreciation and amortization | 3 |
| | 3 |
| | 4 |
|
| Other expense | — |
| | — |
| | 2 |
|
| | $ | 8 |
| | $ | 3 |
| | $ | 6 |
|
In 2018, the business. In 2014, weCompany incurred $49charges for the following items:
The Company incurred $25 million in restructuring and related costs, including non-cashrelated to the accelerated move of the Beijing Ride Performance plant. The Company anticipates the move out of its Beijing plant will be completed by the first quarter of 2019.
The Company incurred $10 million in restructuring charges related to headcount reductions at a Clean Air manufacturing plant in Germany.
In October, 2018, the Company announced a plan to close its ride performance plants in Owen Sound, Ontario and Hartwell, Georgia as part of an initiative to realign its manufacturing footprint to enhance operational efficiency and respond to changing market conditions and capacity requirements. The Company expects to complete the closure of the two facilities near the end of the second quarter of 2020. The Company recorded charges of $5$24 million primarilyin 2018, including asset write-downs of $6 million. The charges included severance payments to employees, the cost of decommissioning equipment, and other costs associated with this action.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company incurred a $45 million charge related to European cost reduction efforts,a restructuring plan designed to achieve a portion of the synergies the Company anticipates achieving in connection with the acquisition of Federal-Mogul. Pursuant to the plan, the Company will reduce its headcount globally across all segments. The Company began implementing headcount reductions in AustraliaJanuary 2019 and South America, the salethese actions will continue through 2019. The Company's acquisition of a closed facilityFederal-Mogul is discussed further in Cozad, NebraskaNote 3, Acquisitions and costs related to organizational change, of which $28 million was recorded in cost of sales, $9 million in SG&A, $7 million in engineering expense, $4 million in other expense and $1 million in depreciation and amortization. In 2015, weDivestitures.
The Company incurred $63an additional $16 million in restructuring and related costs, including asset write-downs of $2 million, for cost improvement initiatives at various other operations around the world.
In 2017, the Company incurred charges for the following items:
On June 29, 2017, the Company announced a restructuring initiative to close its Clean Air manufacturing plant in O'Sullivan Beach, Australia and downsize its Ride Performance plant in Clovelly Park, Australia when General Motors and Toyota ended vehicle production in the country in October 2017. All such restructuring activities related to this initiative were completed in 2018. The Company recorded total charges related to this initiative of $21 million in 2017 including asset write-downs of $2 million. The charges included severance payments to employees, the cost of decommissioning equipment, a lease termination payment and other costs associated with this action.
In the fourth quarter of 2017, the Company began to accelerate a required move of its Beijing Ride Performance plant outside of Beijing area. The Company incurred $6 million of restructuring and related costs due to this relocation.
The Company recognized a $10 million primarilycharge, including asset write-downs of $1 million, related to European cost reduction efforts, exiting the Marzocchi suspension business, headcount reductions in Australia and South America, and the closureplanned closing of a JITits Clean Air plant in Australia,Ghent, Belgium due to the scheduled end of which $46 million was recordedproduction on a customer platform in cost of sales, $112020.
The Company incurred an additional $13 million in SG&A, $1 million in engineering expense, $4 million in depreciationrestructuring and amortization expense and $1 million inrelated costs for cost improvement initiatives at various other expense. operations around the world.
In 2016, wethe Company incurred $36 million in restructuring and related costs including asset write-downs of $6 million, primarily related to manufacturing footprint improvements in North America, Ride Performance, headcount reduction and cost improvement initiatives in Europe, and China, Clean Air, South America and Australia, of which $17 million was recorded in cost of sales, $12 million in SG&A, $1 million in engineering, $2 million in other expense and $4 million in depreciation and amortization expense.Australia.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restructuring Reserve Rollforward
Amounts related to activities that are part of ourwere charged to restructuring plansreserves, including costs incurred to support future structural cost reductions, by reportable segments are as follows:
|
| | | | | | | | | | | | | | | | |
| | December 31,
2015
Restructuring
Reserve | | 2016
Expenses | | 2016
Cash
Payments | | Impact of Exchange Rates | | December 31,
2016
Restructuring
Reserve |
| | (Millions) |
| Employee Severance, Termination Benefits and Other Related Costs | $ | 30 |
|
| 30 |
|
| (45 | ) |
| — |
| | $ | 15 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | | | |
| | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Total Reportable Segments | | Other | | Total |
| | (Millions) |
| Balance at December 31, 2015 | $ | 2 |
| | $ | 24 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 30 |
|
| Provisions | 6 |
| | 13 |
| | 9 |
| | — |
| | — |
| | 28 |
| | 2 |
| | 30 |
|
| Payments | (6 | ) | | (31 | ) | | (7 | ) | | — |
| | — |
| | (44 | ) | | (1 | ) | | (45 | ) |
| Balance at December 31, 2016 | 2 |
| | 6 |
| | 6 |
| | — |
| | — |
| | 14 |
| | 1 |
| | 15 |
|
| Provisions | 23 |
| | 16 |
| | 7 |
| | — |
| | — |
| | 46 |
| | 1 |
| | 47 |
|
| Payments | (12 | ) | | (16 | ) | | (9 | ) | | — |
| | — |
| | (37 | ) | | (2 | ) | | (39 | ) |
| Foreign currency | 1 |
| | 1 |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
| Balance at December 31, 2017 | 14 |
| | 7 |
| | 4 |
| | — |
| | — |
| | 25 |
| | — |
| | 25 |
|
| Federal-Mogul Acquisition | — |
| | — |
| | — |
| | 22 |
| | 15 |
| | 37 |
| | — |
| | 37 |
|
| Provisions | 14 |
| | 48 |
| | 16 |
| | 1 |
| | 31 |
| | 110 |
| | 5 |
| | 115 |
|
| Held for sale | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | (2 | ) |
| Revisions to estimates | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) | | — |
| | (3 | ) |
| Payments | (10 | ) | | (35 | ) | | (12 | ) | | (5 | ) | | (4 | ) | | (66 | ) | | (2 | ) | | (68 | ) |
| Foreign currency | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Balance at December 31, 2018 | $ | 17 |
| | $ | 20 |
| | $ | 8 |
| | $ | 15 |
| | $ | 40 |
| | $ | 100 |
| | $ | 3 |
| | $ | 103 |
|
On January 31, 2013, we announced our intent to reduce structural costs in Europe by approximately $60 million annually. During the first quarter of 2016, we reached an annualized run rate on this cost reduction initiative of $49 million. With the disposition
The following table provides a summary of the Gijon plant, which was completed at the end of the first quarter of 2016, the annualized rate essentially reached our target of $55 million, at the current exchange rates at that time. In 2014, we incurred $49 million inCompany's consolidated restructuring liabilities and related costs,activity for each type of which $31 million was related to this initiative including $3 million for non-cash asset write downs. In 2015, we incurred $63 million in restructuring and related costs, of which $22 million was related to this initiative. In 2016, we incurred $36 million in restructuring and related costs, of which $20 million was related to this initiative and certain ongoing matters. For example, we closed a plant in Gijon Spain in 2013, but subsequently re-opened it in July 2014 with about half of its prior workforce after the employees' works council successfully filed suit challenging the closure decision. Pursuant to an agreement we entered into with employee representatives, we engaged in a sales process for the facility. In March of 2016, we signed an agreement to transfer ownership of the aftermarket shock absorber manufacturing facility in Gijon, Spain to German private equity fund Quantum Capital Partners A.G. (QCP). The transfer to QCP was effective March 31, 2016 and under a three year manufacturing agreement, QCP will also continue as a supplier to Tenneco.exit costs:
On July 22, 2015, we announced our intention to discontinue our Marzocchi motorcycle fork suspension product line and our mountain bike suspension product line, and liquidate our Marzocchi operations. These actions were subject to a consultation process with the employee representatives and in total eliminated approximately 138 jobs. We employed 127 people at the Marzocchi plant in Bologna, Italy and an additional 11 people in our operations in North America and Taiwan. In November 2015, we closed on the sale of certain assets related to our Marzocchi mountain bike suspension product line to the affiliates of Fox Factory Holding Corp.; and in December 2015, we closed on the sale of the Marzocchi motorcycle fork product line to an Italian company, VRM S.p.A. These actions were a part of our ongoing efforts to optimize our Ride Performance product line globally while continuously improving our operations and increasing profitability. We recorded charges of $29 million in 2015 related to severance and other employee related costs, asset write-downs and other expenses related to the closure.Under the terms of our amended and restated senior credit agreement that took effect on December 8, 2014, we are allowed to exclude up to $150 million in the aggregate of all costs, expenses, fees, fines, penalties, judgments, legal settlements and other amounts associated with any restructuring, litigation, claim, proceeding or investigation related to or undertaken by us or any of our subsidiaries, together with any related provision for taxes, incurred after December 8, 2014 in the calculation of the financial covenant ratios required under our senior credit facility. As of December 31, 2016, we had excluded $83 million of allowable charges relating to restructuring initiatives against the $150 million available under the terms of the senior credit facility. |
| | | | | | | | | | | |
| | Employee Costs | | Facility Closure and Other Costs | | Total |
| | (Millions) |
| Balance at December 31, 2015 | $ | 20 |
| | $ | 10 |
| | $ | 30 |
|
| Provisions | 19 |
| | 11 |
| | 30 |
|
| Revisions to estimates | (15 | ) | | 15 |
| | — |
|
| Payments | (16 | ) | | (29 | ) | | (45 | ) |
| Balance at December 31, 2016 | 8 |
| | 7 |
| | 15 |
|
| Provisions | 31 |
| | 16 |
| | 47 |
|
| Payments | (22 | ) | | (17 | ) | | (39 | ) |
| Foreign currency | 2 |
| | — |
| | 2 |
|
| Balance at December 31, 2017 | 19 |
| | 6 |
| | 25 |
|
| Federal-Mogul Acquisition | 37 |
| | — |
| | 37 |
|
| Provisions | 90 |
| | 25 |
| | 115 |
|
| Held for sale | (2 | ) | | — |
| | (2 | ) |
| Revisions to estimates | (4 | ) | | 1 |
| | (3 | ) |
| Payments | (41 | ) | | (27 | ) | | (68 | ) |
| Foreign currency | (1 | ) | | — |
| | (1 | ) |
| Balance at December 31, 2018 | $ | 98 |
| | $ | 5 |
| | $ | 103 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5.5Long-Term Debt, Short-Term . Inventories
At December 31, 2018 and 2017, inventory by major classification was as follows:
|
| | | | | | | |
| | December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| Finished goods | $ | 1,116 |
| | $ | 300 |
|
| Work in process | 562 |
| | 268 |
|
| Raw materials | 457 |
| | 178 |
|
| Materials and supplies | 110 |
| | 74 |
|
| Total inventories | $ | 2,245 |
| | $ | 820 |
|
6. Property, Plant and Equipment, Net
The components of property, plant and equipment—net were as follows:
|
| | | | | | | | | |
| | December 31 | | Useful Life |
| | 2018 | | 2017 | |
| | (Millions) | | |
| Land | $ | 293 |
| | $ | 20 |
| | — |
| Buildings and improvements | 1,023 |
| | 615 |
| | 10 to 50 years |
| Machinery, equipment and tooling | 4,041 |
| | 2,992 |
| | 3 to 25 years |
| Capitalized software | 378 |
| | 346 |
| | 3 to 12 years |
| Other, including construction in progress | 568 |
| | 396 |
| | — |
Property, plant and equipment, cost | 6,303 |
| | 4,369 |
| | |
| Less: Accumulated depreciation and amortization | (2,802 | ) | | (2,678 | ) | | |
Property, plant and equipment, net | $ | 3,501 |
| | $ | 1,691 |
| | |
Depreciation and amortization related to property, plant and equipment was $313 million, $223 million and $210 million for the years ended December 31, 2018, 2017 and 2016, respectively.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Goodwill and Other Intangible Assets
At December 31, 2018 and 2017, goodwill consists of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Clean Air Segment | | Ride Performance Segment | | Aftermarket Segment | | Powertrain | | Motorparts | | Total |
| | (Millions) |
| Gross carrying amount, January 1 | $ | 23 |
| | $ | 156 |
| | $ | 229 |
| | $ | — |
| | $ | — |
| | $ | 408 |
|
Acquisition of Federal-Mogul (1) | — |
| | — |
| | — |
| | 388 |
| | 437 |
| | 825 |
|
| Currency translation | (1 | ) | | (1 | ) | | — |
| | — |
| | — |
| | (2 | ) |
| Gross carrying amount, December 31 | 22 |
| | 155 |
| | 229 |
| | 388 |
| | 437 |
| | 1,231 |
|
| | | | | | | | | | | | |
| Accumulated impairment loss, January 1 | $ | — |
| | $ | (140 | ) | | $ | (219 | ) | | $ | — |
| | $ | — |
| | $ | (359 | ) |
| Impairment | — |
| | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Accumulated impairment loss, December 31 | — |
| | (143 | ) | | (219 | ) | | — |
| | — |
| | (362 | ) |
| | | | | | | | | | | | |
| Net carrying value, December 31 | $ | 22 |
| | $ | 12 |
| | $ | 10 |
| | $ | 388 |
| | $ | 437 |
| | $ | 869 |
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| | Clean Air Segment | | Ride Performance Segment | | Aftermarket Segment | | Powertrain | | Motorparts | | Total |
| | (Millions) |
| Gross carrying amount, January 1 | $ | 21 |
| | $ | 155 |
| | $ | 229 |
| | $ | — |
| | $ | — |
| | $ | 405 |
|
| Currency translation | 2 |
| | 1 |
| | — |
| | — |
| | — |
| | 3 |
|
| Gross carrying amount, December 31 | 23 |
| | 156 |
| | 229 |
| | — |
| | — |
| | 408 |
|
| | | | | | | | | | | | |
| Accumulated impairment loss, January 1 | $ | — |
| | $ | (133 | ) | | $ | (215 | ) | | $ | — |
| | $ | — |
| | $ | (348 | ) |
| Impairment | — |
| | (7 | ) | | (4 | ) | | — |
| | — |
| | (11 | ) |
| Currency translation | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Accumulated impairment loss, December 31 | — |
| | (140 | ) | | (219 | ) | | — |
| | — |
| | (359 | ) |
| | | | | | | | | | | | |
| Net carrying value, December 31 | $ | 23 |
| | $ | 16 |
| | $ | 10 |
| | $ | — |
| | $ | — |
| | $ | 49 |
|
(1) The acquisition on October 1, 2018 of Federal-Mogul resulted in goodwill of $825 million. See Note 3, Acquisitions and Divestitures for additional information.
As a result of the goodwill impairment evaluation in the fourth quarter of 2018, the estimated fair value of the Ride Performance North America reporting unit was lower than its carrying value. Accordingly, a full goodwill impairment charge of $3 million for Ride Performance was recorded for the year ended December 31, 2018.
As a result of the goodwill impairment evaluation in the fourth quarter of 2017, the estimated fair value of the Europe and South America Ride Performance and Aftermarket reporting units were lower than their carrying value. Accordingly, a full goodwill impairment charge of $7 million for Ride Performance and $4 million for Aftermarket was recorded for the year ended December 31, 2017.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2018 and 2017, the Company's intangible assets consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2018 | | December 31, 2017 |
| | Useful Lives | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Value | | Gross Carrying
Value | | Accumulated
Amortization | | Net Carrying
Value |
| | | (Millions) |
| Definite-lived intangible assets: | | | | | | | | | | | | |
| Customer relationships and platforms | 10 years | $ | 964 |
| | $ | (24 | ) | | $ | 940 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Customer contract | 10 years | 8 |
| | (5 | ) | | 3 |
| | 8 |
| | (5 | ) | | 3 |
|
| Patents | 10 to 17 years | 1 |
| | (1 | ) | | — |
| | 1 |
| | (1 | ) | | — |
|
| Technology rights | 10 to 30 years | 98 |
| | (27 | ) | | 71 |
| | 29 |
| | (23 | ) | | 6 |
|
| Packaged kits know-how | 10 years | 36 |
| | (1 | ) | | 35 |
| | — |
| | — |
| | — |
|
| Licensing agreements | 3 to 5 years | 66 |
| | (3 | ) | | 63 |
| | — |
| | — |
| | — |
|
| Land use rights | 28 to 46 years | 44 |
| | (2 | ) | | 42 |
| | 15 |
| | (2 | ) | | 13 |
|
| | | 1,217 |
| | (63 | ) | | 1,154 |
| | 53 |
| | (31 | ) | | 22 |
|
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Trade names and trademarks | | 365 |
| | — |
| | 365 |
| | — |
| | — |
| | — |
|
| Total | | $ | 1,582 |
| | $ | (63 | ) | | $ | 1,519 |
| | $ | 53 |
| | $ | (31 | ) | | $ | 22 |
|
Included in the table above are definite-lived and indefinite-lived intangible assets of $1,165 million and $365 million, respectively, identified in connection with the October 1, 2018 acquisition of Federal-Mogul. See Note 3, Acquisitions and Divestitures for additional information.
Amortization of intangibles amounted to $32 million in 2018 and $3 million in both 2017 and 2016, and are included in the consolidated statements of income caption “Depreciation and amortization.”
The expected future amortization expense for the Company's definite-lived intangible assets is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter | | Total |
| | | (Millions) | | |
| Expected Amortization Expense | | $ | 124 |
| | $ | 125 |
| | $ | 124 |
| | $ | 119 |
| | $ | 116 |
| | $ | 546 |
| | $ | 1,154 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Investment in Nonconsolidated Affiliates
The Company maintains investments in several nonconsolidated affiliates, which are primarily located in China, Korea, Turkey, and the U.S. The Company generally equates control to ownership percentage whereby investments more than 50% owned are consolidated.
As of December 31, 2018 and 2017, the Company’s investment in affiliates was $544 million and $2 million, respectively.
The Company’s ownership interests in affiliates, not including the acquisition of Federal-Mogul, accounted for under the equity method is as follows:
|
| | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| Futaba Tenneco U.K. Ltd. (UK) | — | % | | — | % | | 49.0 | % |
| Montagewerk Abgastechnik Emden GmbH (Germany) | 50.0 | % | | 50.0 | % | | 50.0 | % |
The Company sold its share of Futaba Tenneco U.K. Limited on April 28, 2017. Additionally, the Company acquired the following ownership interests accounted for under the equity method as a result of the acquisition of Federal-Mogul:
|
| | |
| Year Ended December 31 |
| 2018 |
| Anqing TP Goetze Piston Ring Company Limited (China) | 35.7 | % |
| Anqing TP Powder Metallurgy Co., Ltd (China) | 20.0 | % |
| Dongsuh Federal-Mogul Industrial Co. Ltd. (Korea) | 50.0 | % |
| Farloc Argentina SAIC Y F (Argentina) | 23.9 | % |
| Federal-Mogul Powertrain Otomotiv A.S. (Turkey) | 50.0 | % |
| Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. (Turkey) | 25.0 | % |
| Federal-Mogul TP Liners, Inc. (USA) | 46.0 | % |
| Frenos Hidraulicos Automotrices, S.A. de C.V. (Mexico) | 49.0 | % |
| JURID do Brasil Sistemas Automotivos Ltda. (Brazil) | 19.9 | % |
| KB Autosys Co., Ltd. (Korea) | 33.6 | % |
The following table represents amounts reflected in the Company’s consolidated financial statements related to nonconsolidated affiliates:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Equity earnings (losses) of nonconsolidated affiliates, net of tax | $ | 18 |
| | $ | (1 | ) | | $ | — |
|
| Cash dividends received from nonconsolidated affiliates | $ | 2 |
| | $ | — |
| | $ | — |
|
At December 31, 2018, the carrying amount of the Company's investments in nonconsolidated affiliates accounted for under the equity method exceeded its share of the underlying net assets by $207 million. This is based on the preliminary estimate of the fair value performed as part of the Acquisition and is subject to allocation between identifiable tangible, intangible assets, and goodwill. This amount is subject to change as part of finalizing purchase accounting related to the Acquisition.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following tables present summarized aggregated financial information of the Company’s nonconsolidated affiliates as of and for the period ended December 31, 2018:
|
| | | | | | | | | | | | | | | |
| Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
| | (Millions) |
| Sales | $ | 92 |
| | $ | 41 |
| | $ | 137 |
| | $ | 270 |
|
| Gross profit | $ | 23 |
| | $ | 13 |
| | $ | 33 |
| | $ | 69 |
|
| Income from continuing operations | $ | 26 |
| | $ | 13 |
| | $ | 10 |
| | $ | 49 |
|
| Net income | $ | 22 |
| | $ | 12 |
| | $ | 8 |
| | $ | 42 |
|
|
| | | | | | | | | | | | | | | |
| Balance Sheets | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
| | (Millions) |
| Current assets | $ | 129 |
| | $ | 164 |
| | $ | 249 |
| | $ | 542 |
|
| Noncurrent assets | $ | 300 |
| | $ | 132 |
| | $ | 200 |
| | $ | 632 |
|
| Current liabilities | $ | 70 |
| | $ | 40 |
| | $ | 131 |
| | $ | 241 |
|
| Noncurrent liabilities | $ | 82 |
| | $ | — |
| | $ | 11 |
| | $ | 93 |
|
See Note 21, Related Party Transactions for additional information on balances and transactions with equity method investments.
9. Derivatives and Hedging Activities
The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, equity compensation liabilities, and changes in interest rates, which may result in cash flow risks. For exposures not offset within its operations, the Company enters into various derivative transactions pursuant to its risk management policies, which prohibit holding or issuing derivative financial instruments for speculative purposes. Designation of derivative instruments is performed on a transaction basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company assesses the initial and ongoing effectiveness of its hedging relationships in accordance with its documented policy.
Foreign Currency Risk
The Company manufactures and sells its products in North America, South America, Asia, Europe, and Africa. As a result, the Company’s financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which the Company manufactures and sells its products. The Company generally tries to use natural hedges within its foreign currency activities, including the matching of revenues and costs, to minimize foreign currency risk. Where natural hedges are not in place, the Company considers managing certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. Principal currencies hedged have historically included the U.S. dollar, euro, British pound, Polish zloty, and Mexican peso.
Concentrations of Credit Risk
Financial instruments including cash equivalents and derivative contracts expose the Company to counterparty credit risk for non-performance. The Company’s counterparties for cash equivalents and derivative contracts are banks and financial institutions that meet the Company’s requirement of high credit standing. The Company’s counterparties for derivative contracts are substantial investment and commercial banks with significant experience using such derivatives. The Company manages its credit risk through policies requiring minimum credit standing and limiting credit exposure to any one counterparty and through monitoring counterparty credit risks. The Company’s concentration of credit risk related to derivative contracts at December 31, 2018 and 2017 is not material.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Other
The Company presents its derivative positions and any related material collateral under master netting agreements on a net basis. For derivatives designated as cash flow hedges, changes in the time value are excluded from the assessment of hedge effectiveness. Unrealized gains and losses associated with ineffective hedges, determined using the hypothetical derivative method, are recognized in “Other (income) expense, net.” Derivative gains and losses included in accumulated other comprehensive loss for effective hedges are reclassified into operations upon recognition of the hedged transaction. Derivative gains and losses associated with undesignated hedges are recognized in “Other (income) expense, net” for outstanding hedges and “Cost of sales” or “Other (income) expense, net” upon hedge maturity.
Derivative Instruments
Foreign currency forward contracts — The Company enters into foreign currency forward purchase and sale contracts to mitigate its exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. In managing its foreign currency exposures, the Company identifies and aggregates existing offsetting positions and then hedges residual exposures through third-party derivative contracts. The gain or loss on these contracts is recorded as foreign currency gains (losses) within cost of sales in the consolidated statements of income. The fair value of foreign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at December 31, 2018 and a net liability position of less than $1 million at December 31, 2017.
The following table summarizes by major currency the notional amounts for foreign currency forward purchase and sale contracts as of December 31, 2018 (all of which mature in 2019):
|
| | | |
| | Notional Amount
in Foreign Currency |
| | (Millions) |
| Canadian dollars | —Sell | (2 | ) |
| European euro | —Purchase | 1 |
|
| —Sell | (8 | ) |
| Polish zloty | —Purchase | 35 |
|
| Mexican pesos | —Purchase | 211 |
|
| U.S. dollars | —Purchase | 2 |
|
| —Sell | (11 | ) |
Cash-settled Share Swap Transactions — In the second quarter of 2017, the Company entered into an equity swap agreement. The Company selectively uses cash-settled share swaps to reduce market risk associated with its deferred compensation liabilities. These equity deferred compensation liabilities increase as the Company's stock price increases and decrease as the Company's stock price decreases. In contrast, the value of the swap agreement moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. As of December 31, 2018, the Company had hedged its deferred compensation liability related to approximately 250,000 common share equivalents. The fair value of the equity swap agreement is recorded in "Prepayments and other current assets" in the consolidated balance sheets. The fair value of the Company's equity swap agreement was a net asset position of $4 million at December 31, 2018 and $4 million at December 31, 2017.
Hedging Instruments
Cash Flow Hedges—Commodity Price Risk — The Company’s production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. The primary purpose of the Company’s commodity price forward contract activity is to manage the volatility associated with forecasted purchases for up to eighteen months in the future. The Company monitors its commodity price risk exposures regularly to maximize the overall effectiveness of its commodity forward contracts. Principal raw materials hedged include copper, nickel, tin, zinc, and aluminum. In certain instances within this program, foreign currency forwards may be used in order to match critical terms for commodity exposure.
The Company has designated these contracts as cash flow hedging instruments. The Company records unrecognized gains and losses in other comprehensive income (loss) (“OCI or OCL”) and makes regular reclassifying adjustments into “Cost of sales” within the consolidated statements of income when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $27 million as of December 31, 2018 and none as of December 31, 2017. Substantially all of the commodity price hedge contracts mature within one year.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net Investment Hedge – Foreign Currency Borrowings — The Company has foreign currency denominated debt, €752 million of which was designated as a net investment hedge in certain foreign subsidiaries and affiliates of the Company. Changes to its carrying value are included in shareholders' equity in the foreign currency translation component of OCL and offset against the translation adjustment on the underlying net assets of those foreign subsidiaries and affiliates, which are also recorded in OCL. The Company’s debt instruments are discussed further in Note 11—Debt and Other Financing Arrangements.
The following table is a summary of the carrying value of derivative and non-derivative instruments designated as hedges as of December 31, 2018:
|
| | | | |
| | | | Carrying Value |
| | | | December 31 |
| | Balance sheets classification | | 2018 |
| | | | (Millions) |
| Commodity price hedge contracts designated as cash flow hedges | | Accrued expenses and other current liabilities | | $(2) |
| Foreign currency borrowings designated as net investment hedges | | Long-term debt | | $863 |
The following table represents the effects before reclassification into net income of derivative and non-derivative instruments designated as hedges in accumulated other comprehensive loss as of December 31, 2018:
|
| |
| Amount of gain (loss) recognized in accumulated OCI or OCL (effective portion) |
| December 31 |
| 2018 |
| (Millions) |
| Foreign currency borrowings designated as net investment hedges | $(3) |
The Company estimates less than $1 million of net derivative losses included in AOCI as of December 31, 2018 will be reclassified into earnings within the following 12 months. See Note 18—Changes in Accumulated Other Comprehensive Income (Loss) by Component for amounts recognized in OCL and amounts reclassified out of OCL for the year ended December 31, 2018 for these hedging instruments.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
10. Fair Value of Financial Instruments
A three-level valuation hierarchy, based upon observable and unobservable inputs, is used for fair value measurements. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions based on the best evidence available. A financial instrument’s categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy definition prioritizes the inputs used in measuring fair value into the following levels:
|
| | |
| Level 1 | — | Quoted prices in active markets for identical assets or liabilities. |
| | |
| Level 2 | — | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. |
| | |
| Level 3 | — | Unobservable inputs based on the Company's own assumptions. |
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents assets and liabilities included in the Company's consolidated balance sheets as of December 31, 2018 and 2017 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, 2018 | | December 31, 2017 |
| | Fair value
hierarchy | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Derivative instruments: | | | (Millions) |
| Equity swap agreement | Level 2 | | $ | 4 |
| | $ | 4 |
| | $ | 4 |
| | $ | 4 |
|
| Commodity contracts | Level 2 | | $ | (2 | ) | | $ | (2 | ) | | $ | — |
| | $ | — |
|
Asset and Liability Instruments — The carrying value of cash and cash equivalents, restricted cash, short and long-term receivables, accounts payable, and short-term debt approximates fair value.
Cash-settled Share Swap Transactions — The fair value of the equity swap agreement is recorded in "Prepayments and other current assets" in the consolidated balance sheets. The fair value of the Company's equity swap agreement was a net asset position of $4 million at December 31, 2018 and 2017.
Commodity contracts — The Company calculates the fair value of its commodity contracts and foreign currency contracts using quoted commodity forward rates and quoted currency forward rates, to calculate forward values, and then discounts the forward values. The discount rates for all derivative contracts are based on quoted bank deposit rates.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to items measured at fair value on a recurring basis, assets may be measured at fair value on a nonrecurring basis. These assets include long-lived assets and intangible assets which may be written down to fair value as a result of impairment.
The Company has determined the fair value measurements related to each of these rely primarily on Company-specific inputs and the Company's assumptions about the use of the assets, as observable inputs are not available (level 3). To determine the fair value of long-lived asset groups, the Company utilizes discounted cash flows expected to be generated by the long-lived asset group.
The Company evaluates the carrying value of its goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each year. These fair value measurements require the Company to make significant assumptions and estimates about the extent and timing of future cash flows, discount rates, and growth rates, which are subject to a high degree of uncertainty. The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable, but different assumptions could materially affect the estimated fair value.
During the year ended December 31, 2018, the Company recorded a $3 million impairment charge for one of its reporting units. See Note 7, Goodwill and Other Intangible Assets.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Financial Instruments Not Carried at Fair Value
Estimated fair values of the Company's outstanding debt were:
|
| | | | | | | | | | | | | | | | | |
| | | | December 31, 2018 | | December 31, 2017 |
| | Fair value
hierarchy | | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| Long-term debt (including current maturities): | | | (Millions) |
| Term loans and senior notes | Level 2 | | $ | 5,307 |
| | $ | 5,218 |
| | $ | 1,346 |
| | $ | 1,383 |
|
The fair value of the Company's public senior notes and private borrowings under its senior credit facility is based on observable inputs. The Company also had $106 million and $15 million in other debt whose carrying value approximates fair value, which consists primarily of foreign debt with maturities of one year or less.
11. Debt and Other Financing Arrangements
Long-Term Debt
A summary of ourthe Company's long-term debt obligations at December 31, 20162018 and 2015,2017, is set forth in the following table:
|
| | | | | | | |
| | 2016 | | 2015 |
| | (Millions) |
| Tenneco Inc. — | | | |
| Revolver borrowings due 2019, average effective interest rate 2.3% in 2016 and 2.0% in 2015 | $ | 300 |
| | $ | 105 |
|
| Senior Tranche A Term Loan due 2017 through 2020, average effective interest rate 2.2% in 2016 and 1.9% in 2015 | 270 |
| | 285 |
|
| 5 3/8% Senior Notes due 2024 | 225 |
| | 225 |
|
| 5% Senior Notes due 2026 | 500 |
| | — |
|
| 6 7/8% Senior Notes due 2020 | — |
| | 500 |
|
| Other subsidiaries — |
| |
|
| Other Long Term Debt due in 2019, average interest rate 1.7% in 2016 and 6.55% in 2016 | 7 |
| | 15 |
|
| Notes due 2017 through 2027, average effective interest rate 0.2% in 2016 and 0.1% in 2015 | 8 |
| | 7 |
|
| 1,310 |
| | 1,137 |
|
| Less — maturities classified as current | 3 |
| | 1 |
|
| Total long-term debt | $ | 1,307 |
| | $ | 1,136 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 |
| | Principal | | Carrying Amount(1) | | Effective Interest Rate | | Principal | | Carrying Amount(1) | | Effective Interest Rate |
| | (Millions) | | |
| Credit Facilities | | | | | | | | | | | |
| Revolver Borrowings | | | | | | | | | | | |
| Due 2023 | $ | — |
| | $ | — |
| | — |
| | $ | 244 |
| | $ | 244 |
| |
|
|
| Term Loans | | | | | | | | | | | |
LIBOR plus 1.75% Term Loan A due 2019 through 2023(2) | 1,700 |
| | 1,691 |
| | 6.160 | % | | — |
| | — |
| | — |
|
LIBOR plus 2.75% Term Loan B due 2019 through 2025(3) | 1,700 |
| | 1,629 |
| | 8.880 | % | | — |
| | — |
| | — |
|
| Senior Tranche A Term Loan | — |
| | — |
| | — |
| | 390 |
| | 388 |
| | 2.900 | % |
| Senior Unsecured Notes | | | | | | | | | | | |
$225 million of 5.375% Senior Notes due 2024(4) | 225 |
| | 222 |
| | 5.609 | % | | 225 |
| | 222 |
| | 5.609 | % |
$500 million of 5.000% Senior Notes due 2026(5) | 500 |
| | 493 |
| | 5.219 | % | | 500 |
| | 492 |
| | 5.219 | % |
Senior Secured Notes (9) | | | | | | | | | | | |
€415 million 4.875% Euro Fixed Rate Notes due 2022(6) | 476 |
| | 496 |
| | 3.599 | % | | — |
| | — |
| | — |
|
€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024(7) | 344 |
| | 349 |
| | 4.620 | % | | — |
| | — |
| | — |
|
€350 million of 5.000% Euro Fixed Rate Notes due 2024(8) | 401 |
| | 427 |
| | 3.823 | % | | — |
| | — |
| | — |
|
| Other Debt, primarily foreign instruments | 108 |
| | 106 |
| | | | 17 |
| | 15 |
| | |
| | | 5,413 |
| | | | | | 1,361 |
| | |
| Less — maturities classified as current | | | 73 |
| | | | | | 3 |
| | |
| Total long-term debt | | | $ | 5,340 |
| | | | | | $ | 1,358 |
| | |
(1)Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $90 million and $13 million as of December 31, 2018 and 2017. Total unamortized debt (premium) discount, net was $(49) million and $2 million as of December 31, 2018 and 2017.
(2) Principal and interest payable in 19 consecutive quarterly installments beginning March 31, 2019, with $21 million being paid quarterly in the seven quarters, followed by $32 million paid in the subsequent four quarters followed by $43 million in the subsequent eight quarters and the remainder at maturity.
(3) Principal and interest payable in 27 consecutive quarterly installments beginning March 31, 2019 with $4 million paid quarterly and the remainder at maturity.
(4) Interest payable semiannually beginning on June 30, 2015 with principal due at maturity.
(5) Interest payable semiannually beginning on January 31, 2017 with principal due at maturity.
(6) Interest is payable quarterly on April 15 and October 15 of each year with principal due at maturity.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) Interest accrues at the three-month EURIBOR rate (with 0% floor) plus 4.875% per annum and payable quarterly on January 15, April 15, July 15 and October 15.
(8) Interest payable semiannually on January 15 and July 15 of each year beginning on July 17, 2017 with principal due at maturity.
(9) Rank equally in right of payment to all indebtedness under the New Credit Facility (as subsequently defined).
The aggregate maturities applicable to the long-term debt outstanding at December 31, 2016, are $25 million, $34 million, $522 million, $1 million and $1 million for 2017, 2018, 2019, 2020 and 2021, respectively.
We haveCompany has excluded the required payments, within the next twelve months, under the TrancheTerm Loan A and Term FacilityLoan B facilities totaling $23$85 million and $17 million, respectively, from current liabilities as of December 31, 2016,2018, because we havethe Company has the intent and ability to refinance the obligations on a long-term basis by using ourits revolving credit facility.
The aggregate maturities applicable to the long-term debt outstanding at December 31, 2018:
|
| | | |
| | Aggregate Maturities |
| | (Millions) |
| 2019 | $ | 175 |
|
| 2020 | $ | 114 |
|
| 2021 | $ | 154 |
|
| 2022 | $ | 692 |
|
| 2023 | $ | 1,249 |
|
Interest expense associated with the amortization of the debt issuance costs and original issue discounts recognized in the Company's consolidated statements of income consists of the following:
|
| | | | | | | | | | | | |
| | | 2018 | | 2017 | | 2016 |
| | | (Millions) |
| Amortization of debt issuance fees | | $ | 8 |
| | $ | 4 |
| | $ | 4 |
|
Included in the table above, is the amortization of debt issuance costs on the revolver. These are $9 million at December 31, 2018 and are recorded in "Prepayments and other current assets." As a result of the Acquisition, the Senior Secured Notes listed in the table were acquired at fair value, which resulted in recognizing a debt premium of $54 million on these notes, of which $3 million was recognized as interest income during the year ended December 31, 2018.
Short-Term Debt
Our short-term debt includes the current portion of long-term obligations and borrowings by parent company and foreign subsidiaries. Information regarding ourThe Company's short-term debt as of and for the years ended December 31, 20162018 and 20152017 is as follows:
|
| | | | | | | |
| | At December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| Maturities classified as current | $ | 73 |
| | $ | 3 |
|
Short-term borrowings(a) | 66 |
| | 80 |
|
| Bank overdrafts | 14 |
| | 20 |
|
| Total short-term debt | $ | 153 |
| | $ | 103 |
|
|
| | | | | | | |
| | 2016 | | 2015 |
| | (Millions) |
| Maturities classified as current | $ | 3 |
| | $ | 1 |
|
| Short-term borrowings | 87 |
| | 85 |
|
| Total short-term debt | $ | 90 |
| | $ | 86 |
|
|
| | | | | |
| Weighted average interest rate on outstanding short-term borrowings at end of year | 4.4 | % | | 2.9 | % |
|
| | | | | | | |
| | Notes Payable(a) |
| | 2016 | | 2015 |
| | (Dollars in Millions) |
| Outstanding borrowings at end of year | $ | 87 |
| | $ | 85 |
|
| Weighted average interest rate on outstanding borrowings at end of year(b) | 2.8 | % | | 3.2 | % |
| Maximum month-end outstanding borrowings during year | $ | 193 |
| | $ | 178 |
|
| Average month-end outstanding borrowings during year | $ | 177 |
| | $ | 118 |
|
| Weighted average interest rate on average month-end outstanding borrowings during year(b) | 2.4 | % | | 3.0 | % |
| |
| (a) | Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. |
| |
(b) | This calculation does not include the commitment fees to be paid on the unused revolving credit facility balances which are recorded as interest expense for accounting purposes. |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Credit Facilities
Financing Arrangements
| | | | Committed Credit Facilities(a) as of December 31, 2016 | Committed Credit Facilities(a) as of December 31, 2018 |
| | Term | | Commitments | | Borrowings | | Letters of Credit(b) | | Available | Term | | Commitments | | Borrowings | | Letters of
Credit(b) | | Available |
| | (Millions) | (Millions) |
| Tenneco Inc. revolving credit agreement | 2019 | | $ | 1,200 |
| | $ | 300 |
| | $ | — |
| | $ | 900 |
| 2023 | | $ | 1,500 |
| | $ | — |
| | $ | 24 |
| | $ | 1,476 |
|
| Tenneco Inc. tranche A term facility | 2019 | | 270 |
| | 270 |
| | — |
| | — |
| |
| Tenneco Inc. Term Loan A | | 2023 | | 1,700 |
| | 1,700 |
| | — |
| | — |
|
| Tenneco Inc. Term Loan B | | 2025 | | 1,700 |
| | 1,700 |
| | — |
| | — |
|
| Subsidiaries’ credit agreements | 2017-2027 | | 128 |
| | 89 |
| | — |
| | 39 |
| 2018-2028 | | 154 |
| | 51 |
| | 3 |
| | 100 |
|
| | | $ | 1,598 |
| | $ | 659 |
| | $ | — |
| | $ | 939 |
| | $ | 5,054 |
| | $ | 3,451 |
| | $ | 27 |
| | $ | 1,576 |
|
| |
| (a) | WeThe Company generally areis required to pay commitment fees on the unused portion of the total commitment. |
| |
| (b) | Letters of credit reduce the available borrowings under the revolving credit agreement. |
Overview. Our financing arrangements are primarily provided by
On October 1, 2018, the Company entered into a committed senior secured financing arrangementnew credit agreement with a syndicate of banksJPMorgan Chase Bank, N.A., as administrative agent and other financial institutions.lenders (the “ New Credit Facility”) in connection with the acquisition of Federal-Mogul. The arrangementNew Credit Facility consists of $4.9 billion of total debt financing, consisting of a five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility ("Term Loan A") and a seven-year $1.7 billion term loan B facility ("Term Loan B"). Proceeds from the New Credit Facility were used to finance the cash consideration portion of the Acquisition purchase price, to refinance the Company’s then existing senior credit facilities inclusive of the revolver and the tranche A term loan then outstanding (the "Old Credit Facility"), certain senior credit facilities of Federal-Mogul, and to pay fees and expenses relating to the Acquisition and the financing thereof. The remainder, including future borrowings under the revolving credit facility, will be used for general corporate purposes.
The Company and Tenneco Automotive Operating Company Inc., a wholly-owned subsidiary, are borrowers under the New Credit Facility, and the Company is the sole borrower under the Term Loan A and Term Loan B facilities. The New Credit Facility is guaranteed on a senior basis by certain material domestic subsidiaries of the Company. Drawings under the revolving credit facility may be in U.S. dollars, British pounds or euros.
The New Credit Facility is secured by substantially all our domestic assets of the Company, the subsidiary guarantors, and by pledges of up to 66 percent66% of the stock of certain first-tier foreign subsidiaries,subsidiaries. The security for the New Credit Facility is pari passu with the security for the outstanding senior secured notes of Federal-Mogul that were assumed by the Company in connection with the Acquisition. If any foreign subsidiary of the Company is added to the revolving credit facility as a borrower, the obligations of such foreign borrower will be secured by the assets of such foreign borrower, and also will be secured by the assets of, and guaranteed by, the domestic borrowers and domestic guarantors as well as guarantees by our material domestic subsidiaries.certain foreign subsidiaries of the Company in the chain of ownership of such foreign borrower.
On
As a result of the refinancing of the revolving credit agreement and tranche A term loan under the Old Credit Facility, the Company recorded a loss on extinguishment of debt of $10 million for the year-ended December 8, 2014, we completed an31, 2018, primarily consisting of debt issuance costs incurred at the transaction date and write-off of deferred debt issuance costs related to the refinanced revolving credit loan and tranche A term loan. The Company also recorded $1 million of loss on extinguishment of debt for the year ended December 31, 2017 related to amendment and restatement of our senior credit facility by increasing the amounts and extending the maturity dates of our revolving credit facility and our Tranche A Term Facility. The amended and restated facility replaces our former $850 million revolving credit facility and $213 million Tranche A Term Facility. The proceeds from this refinancing transaction were used to repay the $213 million Tranche A TermOld Credit Facility to fund the fees and expenses associated with the purchase and redemption of our $225 million 7 3/4 percent senior notes due in 2018 and for general corporate purposes. As of December 31, 2016, the senior credit facility provides us with a total revolving credit facility size of $1,200 million and a $270 million Tranche A Term Facility, both of which will mature on December 8, 2019. Funds may be borrowed, repaid and re-borrowed under the revolving credit facility without premium or penalty (subject to any customary LIBOR breakage fees). The revolving credit facility is reflected as debt on our balance sheet only if we borrow money under this facility or if we use the facility to make payments for letters of credit. Outstanding letters of credit reduce our availability to borrow revolving loans under the facility. We are required to make quarterly principal payments under the Tranche A Term Facility of $5.625 million beginning March 31, 2017 through December 31, 2017, $7.5 million beginning March 31, 2018 through September 30, 2019 and a final payment of $195 million is due on December 8, 2019. We have excluded the required payments, within the next twelve months, under the Tranche A Term Facility totaling $23 million from current liabilities as of December 31, 2016, because we have the intent and ability to refinance the obligations on a long-term basis by using our revolving credit facility.
On November 20, 2014, we announced a cash tender offer to purchase our outstanding $225 million 7 3/4 percent senior notes due in 2018 and a solicitation of consents to certain proposed amendments to the indenture governing these notes. We received tenders and consents representing $181 million aggregate principal amount of the notes and, on December 5, 2014, we purchased the tendered notes at a price of 104.35 percent of the principal amount (which includes a consent payment of three percent of the principal amount), plus accrued and unpaid interest, and amended the related indenture. On December 22, 2014, we redeemed the remaining outstanding $44 million aggregate principal amount of senior notes that were not purchased pursuant to the tender offer at a price of 103.88 percent of the principal amount, plus accrued and unpaid interest. The additional liquidity provided by the new $1,200 million revolving credit facility and the new $300 million Tranche A Term Facility was used in part to fund the fees and expenses of the tender offer and redemption.
We recorded $13 million of pre-tax interest charges in December 2014 related to the refinancing of our senior credit facility, the repurchase and redemption of our 7 3/4 percent senior notes due in 2018 and the write-off of deferred debt issuance costs relating to those notes.
On June 6, 2016, we announced a cash tender offer to purchase our outstanding $500 million 67/8 percent senior notes due in 2020. We received tenders representing $325 million aggregate principal amount of the notes and, on June 13, 2016, we purchased the tendered notes at a price of 103.81 percent of the principal amount, plus accrued and unpaid interest. On July 13, 2016, we redeemed the remaining outstanding $175 million aggregate principal amount of the notes that were not purchased pursuantrelated to the tender offer atOld Credit Facility. The Company recorded a price$24 million loss on extinguishment of 103.438 percent ofdebt for the principal amount, plus accrued and unpaid interest. We used the proceeds of the issuance of our 5 percent senior notes due 2026 to fund the purchase and redemption. The senior credit facility was used to fund the fees and expenses of the tender offer and redemption.
We recorded $16 million and $8 million of pre-tax interest charges in June and July ofyear ended December 31, 2016 respectively, related tofor the repurchase and redemption of our 67/8 percent senior notes due in 2020 and the write-off of deferred debt issuance costs relating to those notes.
New Credit Facility — Interest Rates and Fees
The interest rate on borrowings under the revolving credit facility and the Term Loan A facility will initially be LIBOR plus 1.75%, which interest rate will be subject to change if the Company’s consolidated net leverage ratio changes. Initially, and so long as the Company’s corporate family rating is Ba3 (with a stable outlook) or higher from Moody’s Investors Service, Inc. (“Moody’s”) and BB- (with a stable outlook) or higher from Standard & Poor’s Financial Services LLC (“S&P”), the interest rate on borrowings under the Term Loan B facility will be LIBOR plus 2.75%; at any time the foregoing conditions are not satisfied, the interest rate on the Term Loan B facility will be LIBOR plus 3.00%. When the Term Loan B facility is no longer outstanding and the Company and its subsidiaries have no other secured indebtedness (with certain exceptions set forth in the New Credit Facility), and upon the Company achieving and maintaining two or more corporate credit and/or corporate family ratings higher than or equal to BBB- from S&P, BBB- from Fitch Ratings Inc. (“Fitch”) and/or Baa3 from Moody’s (in each case, with a stable or positive outlook), the collateral under the New Credit Facility may be released.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
At December 31, 2016, of the $1,200 million available under the revolving credit facility, we had unused borrowing capacity of $900 million with $300 million in outstanding borrowings and zero in outstanding letters of credit. As of December 31, 2016, our outstanding debt also included (i) $270 million of a term loan which consisted of a $269 million net carrying amount including a $1 million debt issuance cost related to our Tranche A Term Facility which is subject to quarterly principal payments as described above through December 8, 2019, (ii) $225 million of notes which consisted of a $221 million net carrying amount including a $4 million debt issuance cost of 53/8 percent senior notes due December 15, 2024, (iii) $500 million of notes which consisted of a $492 million net carrying amount including a $8 million debt issuance cost of 5 percent senior notes due July 15, 2026, and (iv) $102 million of other debt.
Senior Credit Facility — Interest Rates and Fees. Beginning December 8, 2014, our Tranche A Term Facility and revolving credit facility bear interest at an annual rate equal to, at our option, either (i) London Interbank Offered Rate (“LIBOR”) plus a margin of 175 basis points, or (ii) a rate consisting of the greater of (a) the JPMorgan Chase prime rate plus a margin of 75 basis points, (b) the Federal Funds rate plus 50 basis points plus a margin of 75 basis points, and (c) one month LIBOR plus 100 basis points plus a margin of 75 basis points. The margin we pay on these borrowings will be increased by a total of 25 basis points above the original margin following each fiscal quarter for which our consolidated net leverage ratio is equal to or greater than 2.25 and less than 3.25, and will be increased by a total of 50 basis points above the original margin following each fiscal quarter for which our consolidated net leverage ratio is equal to or greater than 3.25. In addition, the margin we pay on these borrowings will be reduced by a total of 25 basis points below the original margin if our consolidated net leverage ratio is less than 1.25. We also pay a commitment fee equal to 30 basis points that will be reduced to 25 basis points or increased to up to 40 basis points depending on consolidated net leverage ratio changes as set forth in the senior credit facility.
SeniorNew Credit Facility — Other Terms and Conditions. Our seniorConditions
The New Credit Facility contains representations and warranties, and covenants which are customary for debt facilities of this type. The covenants limit the ability of the Company and its restricted subsidiaries to, among other things, to (i) incur additional indebtedness or issue preferred stock, (ii) pay dividends or make distributions to the Company’s stockholders, (iii) purchase or redeem the Company’s equity interests, (iv) make investments, (v) create liens on their assets, (vi) enter into transactions with the Company’s affiliates, (vii) sell assets and (viii) merge or consolidate with, or dispose of substantially all of the Company’s assets to, other companies.
The New Credit Facility includes customary events of default and other provisions that could require all amounts due thereunder to become immediately due and payable, either automatically or at the option of the lenders, if the Company fails to comply with the terms of the New Credit Facility or if other customary events occur.
The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility requires that we maintain financial ratios equaland the Term Loan A facility including a requirement to or better than the followinghave a consolidated net leverage ratio (consolidated indebtedness net of cash divided by consolidated EBITDA, as(as defined in the senior credit facility agreement),New Credit Facility) as of the end of each fiscal quarter of not greater than 4.0 to 1 through September 30, 2019, 3.75 to 1 through September 30, 2020 and 3.5 to 1 thereafter; and a requirement to maintain a consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense, as(as defined in the senior credit facility agreement) at the endNew Credit Facility) for any period of each period indicated. Failure to maintain these ratios will result in a default under our senior credit facility. The financial ratios required under the amended and restated senior credit facility and the actual ratios we calculated for the four consecutive fiscal quarters of 2016, are as follows (the ratios in the table reflect the revisions made to the financial statements in this Form 10-K/A; these revisions would result in immaterial changes to the actual ratios reported to our lenders in prior periods, with such changes beingnot less than .03 and .232.75 to each leverage ratio and interest coverage ratio, respectively):1.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended |
| | December 31,
2016 |
| September 30,
2016 |
| June 30,
2016 |
| March 31,
2016 |
| | Req. | | Act. | | Req. | | Act. | | Req. | | Act. | | Req. | | Act. |
| Leverage Ratio (maximum) | 3.50 |
|
| 1.47 |
|
| 3.50 |
|
| 1.53 |
|
| 3.50 |
|
| 1.47 |
|
| 3.50 |
|
| 1.55 |
|
| Interest Coverage Ratio (minimum) | 2.75 |
|
| 14.70 |
|
| 2.75 |
|
| 14.14 |
|
| 2.75 |
|
| 13.74 |
|
| 2.75 |
|
| 13.75 |
|
The senior credit facility includes a maximum leverage ratio covenant of 3.50 and a minimum interest coverage ratio of 2.75 through December 8, 2019.
The covenants in our senior credit facility agreementthe New Credit Facility generally prohibit usthe Company from repaying or refinancing ourits senior unsecured notes. So long as no default existed, weexists, the Company would, however, under our senior credit facility agreement,its New Credit Facility, be permitted to repay or refinance our senior unsecured notes (i) with the net cash proceeds of permitted refinancing indebtedness (as defined in the senior credit facility agreement) or with the net cash proceeds of our common stock in each case issued within 180 days prior to such repayment;New Credit Facility); (ii) with the net cash proceeds of the incremental facilities (as defined in the senior credit facility agreement) and certain indebtedness incurred by our foreign subsidiaries; (iii) with the proceeds of the revolving loans (as defined in the senior credit facility agreement); (iv) with the cash generated by our operations; (v) in an amount equal to the net cash proceeds of qualified capital stock (as defined in the senior credit facility agreement)New Credit Facility) issued by us after December 8, 2014;October 1, 2018 and (vi)(iii) in exchange for permitted refinancing indebtedness or in exchange for shares of our common stock;qualified capital stock issued after October 1, 2018; and (iv) with additional payments provided that such purchasesadditional payments are capped as follows (with respect to clauses (iii), (iv) and (v) based on a pro forma consolidated leverage ratio after giving effect to such purchase, cancellation or redemption):additional payments.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | |
Pro forma Consolidated
Leverage Ratio | Aggregate Senior
Note Maximum Amount |
| | (Millions) |
| Greater than or equal to 3.0x | $ | 20 |
|
| Greater than or equal to 2.5x | $ | 100 |
|
| Greater than or equal to 2.0x | $ | 200 |
|
| Less than 2.0x | no limit |
|
Although the senior credit facility agreement would permit us to repay or refinance our senior notes under the conditions described above, any repayment or refinancing of our outstanding notes would be subject to market conditions and either the voluntary participation of note holders or our ability to redeem the notes under the terms of the applicable note indenture. For example, while the senior credit facility agreement would allow us to repay our outstanding notes via a direct exchange of the notes for either permitted refinancing indebtedness or for shares of our common stock, we do not, under the terms of the agreements governing our outstanding notes, have the right to refinance the notes via any type of direct exchange.
The senior credit facility agreement also contains other restrictions on our operations that are customary for similar facilities, including limitations on: (i) incurring additional liens; (ii) sale and leaseback transactions (except for the permitted transactions as described in the senior credit facility agreement); (iii) liquidations and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; and (viii) refinancing of the senior notes. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require repayment of any outstanding loans.
As of December 31, 2016, we were2018, the Company was in compliance with all the financial covenants and operational restrictions of the senior credit facility. Our senior credit facility does not contain any terms that could accelerate payment of the facility or affect pricing under the facility as a result of a credit rating agency downgrade.New Credit Facility.
Senior Notes.Notes As of December 31, 2016, our
Senior Unsecured Notes
The Company has outstanding 5.375% senior notes included $225 million of 5 3/8 percent seniorunsecured notes due December 15, 2024 which consisted of $221 million net carrying amount including a $4 million debt issuance cost("2024 Senior Notes") and $500 million of 5 percent5.000% senior unsecured notes due July 15, 2026 which consisted of $492 million net carrying amount including a $8 million debt issuance cost. Under("2026 Senior Notes" and together with the indentures governing2024 Senior Notes, the notes, we are“Senior Unsecured Notes”) at December 31, 2018. The Company is permitted to redeem some or all of the remaining senior notesoutstanding Senior Unsecured Notes, at specified redemption prices that decline to par over a specified period, at any time (a) on or after December 15, 2019, in the case of the 2024 Senior Notes and (b) on or after July 15, 2021, in the case of the senior notes due 2026 and (b) on or after December 15, 2019, in the case of the senior notes due 2024.Senior Notes. In addition, the notesSenior Unsecured Notes may also be redeemed at a price generally equal to 100 percent100% of the principal amount thereof plus a premium based on the present values of the remaining payments due to the note holders. Further, the indentures governing the notes also permit us toCompany may redeem up to 35 percent35% of each Senior Unsecured Notes with the proceeds of certain equity offerings (a) on or before July 15, 2019 at a redemption price equal to 105 percent,105%, in the case of the senior notes due 2026 and (b) on or before December 15, 2017 at a redemption price equal to 105.375 percent inSenior Notes.
If the case of the senior notes due 2024. If we sell certain of our assets or experienceCompany experiences specified kinds of changes in control, wethe Company must offer to repurchase the notes due 2024 and 2026Senior Unsecured Notes at 101 percent101% of the principal amount thereof plus accrued and unpaid interest. In addition, if the Company sells certain of its assets and does not apply the proceeds from the sale in a certain manner within 365 days of the sale, the Company must offer to repurchase the 2024 Senior Notes at 100% of the principal amount thereof plus accrued and unpaid interest.
Our senior
Senior Secured Notes
In connection with the Acquisition of Federal-Mogul on October 1, 2018, the Company assumed an aggregate principal amount of €350 million ($401 million) 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), €415 million ($476 million) 4.875% euro denominated fixed rate notes due DecemberApril 15, 2022 ("4.875% Euro Fixed Rate Notes"), and an aggregate principal amount of €300 million ($344 million) floating rate notes due April 15, 2024 ("Euro Floating Rate Notes" and together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Rate Notes, the “Senior Secured Notes”).
The Company is permitted to redeem some or all of the outstanding Senior Secured Notes at specified redemption prices that decline to par over a specified period, at any time (a) on or after July 15, 2026, respectively,2020, in the case of the 5.000% Euro Fixed Rate Notes, (b) on or after April 15, 2019, in the case of the 4.875% Euro Fixed Rate Notes and (c) on or after April 15, 2018, in the case of the Euro Floating Rate Notes. In addition, the Senior Secured Notes may also be redeemed at a price generally equal to 100% of the principal amount thereof plus a premium based on the present values of the remaining payments due to the note
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
holders. Further, the Company may also redeem up to 40% of the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Rate Notes with the proceeds of certain equity offerings at any time prior to (a) July 15, 2020 at a redemption price of 105.0% in the case of the 5.000% Euro Fixed Rate Notes, and (b) April 15, 2019 at a redemption price of 104.875% in the case of the 4.875% Euro Fixed Rate Notes.
If the Company experiences specified kinds of changes in control, the Company must offer to repurchase the Senior Secured Notes at 101% of the principal amount thereof plus accrued and unpaid interest. In addition, if the Company sells certain of its assets and does not apply the proceeds from the sale in a certain manner within 365 days of the sale, the Company must offer to repurchase the Senior Secured Notes at 100% of the principal amount thereof plus accrued and unpaid interest.
The Company has designated a portion of the Senior Secured Notes as a net investment hedge of its European operations. As such, the fluctuations in foreign currency exchange rates on the value of the Senior Secured Notes is recorded to cumulative translation adjustment. See Note 9, Derivatives and Hedging Activitiesfor further details.
Senior Unsecured Notes and Senior Secured Notes - Other Terms and Conditions
The Senior Unsecured Notes and Senior Secured Notes contain covenants that will, among other things, limit ourthe Company's ability to create liens and enter into sale and leaseback transactions. Our senior notes dueIn addition, the Senior Secured Notes and 2024 Unsecured Senior Notes also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on a pro forma basis, be greater than 2.00, as well as containing restrictions on ourits operations, including limitations on: (i) incurring additional indebtedness; (ii) paying dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations.
Subject to limited exceptions, all of ourthe Company's existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee our senior notesits Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed these notesthe Company's Senior Notes to make distributions to us. Asthe Company.
Other Debt
Other debt consists primarily of foreign debt with maturities of one year or less.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements
The Company has securitization programs for some of its accounts receivable, with limited recourse provisions. Borrowings on these securitization programs are recorded in short-term debt.
Borrowings on these securitization programs at December 31, 2016, we were in compliance with the covenants2018 and restrictions of these indentures.2017 are as follows:
Accounts Receivable Securitization. We securitize some of our accounts receivable on a limited recourse basis in the U.S. and Europe. As servicer under these |
| | | | | | | | |
| | | As of December 31 |
| | | 2018 | | 2017 |
| | | (Millions) |
| Borrowings on securitization programs | | $ | 6 |
| | $ | 30 |
|
The Company had an accounts receivable securitization programs, we areprogram in which original equipment and aftermarket receivables were securitized on a daily basis. The Company was responsible for performing all accounts receivable administration functions for these securitized financial assets including collections and processing of customer invoice adjustments. In October 2018, this program was terminated. As of December 31, 2017, the carrying amount of assets pledged as collateral for this securitization program was $343 million.
Off-Balance Sheet Arrangements
In the Company's European and U.S., we have an accounts receivable securitization program with three commercial banks comprised of a first priority facility and a second priority facility. We securitize original equipment and aftermarketfactoring programs, accounts receivables on a daily basis under the bank program. In March 2015, the U.S. program was amended and extended to April 30, 2017. The first priority facility provides financing of up to $130 million and the second priority facility, which is subordinatedare transferred in their entirety to the first priority facility, provides upacquiring entities and are accounted for as a sale. Due to anthe Acquisition, additional $50 million of financing. Both facilities monetize accounts receivable generatedfactoring arrangements in the U.S. that meet certain eligibility requirements.and Europe were acquired which are also accounted for as a sale and have been included in the tables below. The second priority facility also monetizes certainfair value of assets received as proceeds in exchange for the transfer of accounts receivable under these factoring programs approximates the fair value of such receivables. Certain programs in Europe have deferred purchase price arrangements with the banks.
The Company is the servicer of the receivables under some of these arrangements and is responsible for performing all accounts receivable administration functions. Where the Company receives a fee to service and monitor these transferred
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
generatedaccounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.
In the U.S and Canada, the Company participates in supply chain financing programs with certain of the U.S. that would otherwise be ineligible underCompany's aftermarket customers through a drafting program.
The amounts outstanding for these factoring and drafting arrangements as of December 31, 2018 and 2017 are as follows:
|
| | | | | | | |
| | As of December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| Accounts receivable outstanding and derecognized | $ | 1,011 |
| | $ | 406 |
|
| Deferred purchase price receivable | $ | 154 |
| | $ | 114 |
|
Proceeds from the first priority securitization facility. The amountfactoring of outstanding third-party investments in our securitized accounts receivable underqualifying as sales and drafting programs, and expenses associated with these arrangements for the U.S. program was $30 million atyears ended December 31, 2018, 2017, and 2016 and zero at December 31, 2015.are as follows:
Each facility contains customary covenants for financings of this type, including restrictions related to liens, payments, mergers or consolidations and amendments to the agreements underlying the receivables pool. Further, each facility may be terminated upon the occurrence of customary events (with customary grace periods, if applicable), including breaches of covenants, failure to maintain certain financial ratios, inaccuracies of representations and warranties, bankruptcy and insolvency events, certain changes in the rate of default or delinquency of the receivables, a change of control and the entry or other enforcement of material judgments. In addition, each facility contains cross-default provisions, where the facility could be terminated in the event of non-payment of other material indebtedness when due and any other event which permits the acceleration of the maturity of material indebtedness.We also securitize receivables in our European operations with regional banks in Europe. The arrangements to securitize receivables in Europe are provided under six separate facilities provided by various financial institutions in each of the foreign jurisdictions. The commitments for these arrangements are generally for one year, but some may be cancelled with notice 90 days prior to renewal. In some instances, the arrangement provides for cancellation by the applicable financial institution at any time upon notification. The amount of outstanding third-party investments in our securitized accounts receivable in Europe was $160 million and $174 million at December 31, 2016 and December 31, 2015, respectively. |
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Proceeds from factoring qualifying as sales | $ | 3,390 |
| | $ | 1,984 |
| | $ | 1,770 |
|
| Loss on sale of receivables | $ | 16 |
| | $ | 5 |
| | $ | 5 |
|
If wethe Company were not able to securitizefactor receivables or sell drafts under either the U.S or European securitizationof these programs, ourits borrowings under ourits revolving credit agreement might increase. These accounts receivable securitization programs provide usthe Company with access to cash at costs that are generally favorable to alternative sources of financing and allow usthe Company to reduce borrowings under ourits revolving credit agreement.
In our U.S. accounts receivable securitization programs, we transfer a partial interest in a pool of receivables and the interest that we retain is subordinate to the transferred interest. Accordingly, we account for our U.S. securitization program as a secured borrowing. In our European programs, we transfer accounts receivables in their entirety to the acquiring entities and satisfy all of the conditions established under ASC Topic 860, “Transfers and Servicing,” to report the transfer of financial assets in their entirety as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under our European securitization programs approximates the fair value of such receivables. We recognized $3 million in interest expense for the year ended 2016 and $2 million in interest expense for each of the years ended 2015 and 2014 relating to our U.S. securitization program. In addition, we recognized a loss of $3 million for each of the years ended 2016 and 2015 and a $4 million loss for 2014, on the sale of trade accounts receivable in our European accounts receivable securitization programs, representing the discount from book values at which these receivables were sold to our banks. The discount rate varies based on funding costs incurred by our banks, which averaged approximately two percent for all years ended 2016, 2015 and 2014.
6.Financial Instruments
The carrying and estimated fair values of our financial instruments by class at December 31, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| | (Millions) |
| Long-term debt (including current maturities) | $ | 1,297 |
| | $ | 1,311 |
| | $ | 1,125 |
| | $ | 1,160 |
|
| Instruments with off-balance sheet risk: |
| |
| |
| |
|
| Foreign exchange forward contracts: |
| |
| |
| |
|
| Asset derivative contracts | — |
| | — |
| | 1 |
| | 1 |
|
Asset and Liability Instruments — The fair value of cash and cash equivalents, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount.
Long-term Debt — The fair value of our public fixed rate senior notes is based on quoted market prices. The fair value of our private borrowings under our senior credit facility and other long-term debt instruments is based on the market value of debt with similar maturities, interest rates and risk characteristics. The fair value of our level 1 debt, as classified in the fair value hierarchy, was $725 million and $748 million at December 31, 2016 and December 31, 2015, respectively. We have classified the $571 million and $390 million as level 2 in the fair value hierarchy at December 31, 2016 and December 31,
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2015, respectively, since we utilize valuation inputs that are observable both directly12. Accrued Expenses and indirectly. We classified the remaining $15 millionOther Current Liabilities
Accrued expenses and $22 million, consisting of foreign subsidiary debt, as level 3 in the fair value hierarchyother current liabilities at December 31, 2016,2018 and December 31, 2015, respectively.
The fair value hierarchy definition prioritizes2017 included the inputs used in measuring fair value into the following levels:following:
|
| | |
Level 1 | — | Quoted prices in active markets for identical assets or liabilities. |
| | |
Level 2 | — | Inputs, other than quoted prices in active markets, that are observable either directly or indirectly. |
| | |
Level 3 | — | Unobservable inputs based on our own assumptions. |
|
| | | | | | | |
| | December 31 |
| | 2018 | | 2017 |
| | (Millions) |
| Accrued rebates | $ | 189 |
| | $ | 68 |
|
| Product return reserves | 95 |
| | 16 |
|
| Restructuring liabilities | 91 |
| | 16 |
|
| Legal reserves | 71 |
| | 88 |
|
| Non-income tax payable | 67 |
| | 52 |
|
| Pension and postretirement benefits liability | 50 |
| | 14 |
|
| Accrued freight | 48 |
| | 26 |
|
| Liabilities held for sale | 39 |
| | — |
|
| Accrued warranty | 39 |
| | 23 |
|
| Accrued interest | 33 |
| | 14 |
|
| Accrued professional services | 31 |
| | 8 |
|
| Environmental reserve | 12 |
| | 2 |
|
| Other | 236 |
| | 97 |
|
| | $ | 1,001 |
| | $ | 424 |
|
Foreign exchange forward contracts — We use derivative financial instruments, principally foreign currency forward purchase13. Pension Plans, Postretirement and sales contracts with termsOther Employee Benefits
Defined Contribution Plans
Effective January 1, 2012, the Tenneco Employee Stock Ownership Plan for Hourly Employees and the Tenneco Employee Stock Ownership Plan for Salaried Employees were merged into one plan called the Tenneco 401(k) Retirement Savings Plan (the “Retirement Savings Plan”). The Retirement Savings Plan allows for an enhanced company match and contributions for all eligible salaried and hourly employees. As a result of less than one year,the Acquisition, the Company acquired Federal-Mogul's 401(k) Retirement Savings Plan. The Company recorded expense for contributions to hedge our exposureits plans of approximately $43 million, $29 million and $28 million in 2018, 2017 and 2016, respectively.
Defined Benefit Plans
The Company sponsors defined benefit pension plans, and health care and life insurance benefits for certain employees and retirees around the world. There is also an unfunded nonqualified pension plan primarily covering U.S. executives.
The funding policy for defined benefit pension plans is to changes in foreign currency exchange rates. Our primary exposurecontribute the minimum required by applicable laws and regulations or to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We manage counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. We do not enter into derivative financial instruments for speculative purposes. The fair value of our foreign currency forward contracts is based on an internally developed model which incorporates observable inputs including quoted spot rates, forward exchange rates and discounted future expected cash flows utilizing market interest rates with similar quality and maturity characteristics. We record the change in fair value of these foreign exchange forward contracts as part of currency gains (losses) within cost of sales in the consolidated statements of income. The fair value of foreign exchange forward contracts are recorded in prepayments and other current assets or other current liabilities in the consolidated balance sheet. The fair value of our foreign currency forward contracts was a net liability position of less than $1 million atdirectly pay benefit payments where appropriate. At December 31, 20162018, all legal funding requirements had been met. The Company expects to contribute $26 million to its U.S. pension plans, $42 million to its non-U.S. pension plans, and a net asset position of $1$28 million at December 31, 2015.to its other postretirement plans in 2019.
Other Benefits
The following table summarizes by major currency the notional amountsCompany also provides benefits to former or inactive employees paid after employment but before retirement. The liabilities for foreign currency forward purchasesuch U.S. and sale contractsEuropean postemployment benefits were $75 million and $9 million as of December 31, 2016 (all of which mature in 2017):
|
| | | |
| | Notional Amount
in Foreign Currency |
| | (Millions) |
British pounds | —Purchase | 9 |
|
Canadian dollars | —Sell | (2 | ) |
European euro | —Purchase | 21 |
|
| —Sell | (3 | ) |
Japanese yen | —Purchase | 388 |
|
| —Sell | (60 | ) |
South African rand | —Purchase | 131 |
|
| —Sell | (17 | ) |
U.S. dollars | —Purchase | 5 |
|
| —Sell | (45 | ) |
2018 and 2017.
Guarantees — We have from timeSignificant Events
As a result of the Acquisition, the Company assumed $848 million in underfunded defined benefit pension and other postretirement benefit obligations.
In December 2018, the Company approved an amendment for one of its U.S. postretirement medical benefit plans. Beginning June 1, 2019, eligible retirees that opt to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. All of our existing and future material domestic subsidiaries fully and unconditionally guarantee our senior credit facility and our senior notesreceive benefits will receive a fixed subsidiary payment to purchase health care benefits on a joint and several basis. The arrangement for the senior credit facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percentmarketplace exchange in lieu of the stock of certain first-tier foreign subsidiaries. No assets or capital stock secure our senior notes. For additional information, referoriginal plan’s medical benefits. The amendments to Note 13 of the consolidated financial statements of Tenneco Inc., where we present the Supplemental Guarantor Condensed Consolidating Financial Statements.
We have two performance guarantee agreementsplan resulted in the U.K. between Tenneco Management (Europe) Limited (“TMEL”)a plan remeasurement and the two Walker Group Retirement Plans, the Walker Group Employee Benefit Plan and the Walker Group Executive Retirement Benefit Plan (the “Walker Plans”), whereby TMEL will guarantee the payment of all current and future pension contributions in eventrecognition of a payment defaultnegative plan amendment, which reduced the Company's obligation by the sponsoring or participating employers$66 million with a corresponding increase of the Walker Plans.$51 million in AOCI (net of taxes of $16 million) as of December 31, 2018. The Walker Plans are comprised of employees from Tenneco Walker (U.K.) Limited and our Futaba-Tenneco U.K. joint venture. Employer contributions are funded by both Tenneco Walker (U.K.) Limited, as the sponsoring employer and Futaba-Tenneco U.K.,$66 million is being amortized on a straight-line basis as a participating employer. The performance guarantee agreements are expectedreduction to remain in effect until all pension obligations fornet periodic postretirement benefit cost over participants' average remaining service periods.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the Walker Plans’ sponsoring and participating employers have been satisfied. The maximum amount payable for these pension performance guarantees that is not attributable to Tenneco is approximately $7 million as of December 31, 2016 which is determined by taking 105 percent of the liability of the Walker Plans calculated under section 179 of the U.K. Pension Act of 2004 offset by plan assets multiplied by the ownership percentage in Futaba-Tenneco U.K. that is attributable to Futaba Industrial Co. Ltd. We did not record an additional liability for this performance guarantee since Tenneco Walker (U.K.) Limited, as the sponsoring employer of the Walker Plans, already recognizes 100 percent of the pension obligation calculated based on U.S. GAAP, for all of the Walker Plans’ participating employers on its balance sheet, which was $19 million and $11 million at December 31, 2016 and December 31, 2015, respectively. At December 31, 2016, all pension contributions were current for all of the Walker Plans’ sponsoring and participating employers.
In June 2011, we entered into an indemnity agreement between TMEL and Futaba Industrial Co. Ltd. which requires Futaba to indemnify TMEL for any cost, loss or liability which TMEL may incur under the performance guarantee agreements relating to the Futaba-Tenneco U.K. joint venture. The maximum amount reimbursable by Futaba to TMEL under this indemnity agreement is equal to the amount incurred by TMEL under the performance guarantee agreements multiplied by Futaba’s shareholder ownership percentage of the Futaba-Tenneco U.K. joint venture. At December 31,February 2016, the maximum amount reimbursable by FutabaCompany launched a voluntary program to TMEL is approximately $7 million.
We have issued guarantees through letters of creditbuy out active employees and retirees who had earned benefits in connection with some obligations of our affiliates.the U.S. pension plans. As of December 31, 2016, this program had been substantially completed with cash payments to those who elected to take the buyout made from pension plan assets in the fourth quarter of 2016. In connection with this program the Company contributed $18 million into the pension trust and recognized a non-cash charge of $72 million. The program was completed in the first quarter of 2017, at which time we have guaranteed $31contributed another $10 million in lettersand recognize a non-cash charge of credit to support some of our subsidiaries’ insurance arrangements, foreign employee benefit programs, environmental remediation activities and cash management and capital requirements.
Financial Instruments — One of our European subsidiaries receives payment from one of its customers whereby$6 million during the accounts receivable are satisfied through the delivery of negotiable financial instruments. We may collect these financial instruments before their maturity date by either selling them at a discount or using them to satisfy accounts receivable that have previously been sold to a European bank. Any of these financial instruments which are not sold are classified as other current assets. Such financial instruments held by our European subsidiary totaled less than $1 million at bothyear ended December 31, 20162017.
The measurement date for all defined benefit plans is December 31. The following provides a reconciliation of the plans’ benefit obligations, plan assets, and funded status as of December 31, 2015.2018 and 2017:
In certain instances, several of our Chinese subsidiaries receive payment from customers through the receipt of financial instruments on the date the customer payments are due. Several of our Chinese subsidiaries also satisfy vendor payments through the delivery of financial instruments on the date the payments are due. Financial instruments issued to satisfy vendor payables and not redeemed totaled $12 million and $15 million at December 31, 2016 and December 31, 2015, respectively, and were classified as notes payable. Financial instruments received from OE customers and not redeemed totaled $5 million and $8 million at December 31, 2016 and December 31, 2015, respectively. We classify financial instruments received from our customers as other current assets if issued by a financial institution of our customers or as customer notes and accounts, net if issued by our customer. We classified $5 million and $8 million in other current assets at December 31, 2016 and December 31, 2015, respectively.The financial instruments received by one of our European subsidiaries and some of our Chinese subsidiaries are drafts drawn that are payable at a future date and, in some cases, are negotiable and/or are guaranteed by the banks of the customers. The use of these instruments for payment follows local commercial practice. Because certain of such financial instruments are guaranteed by our customers’ banks, we believe they represent a lower financial risk than the outstanding accounts receivable that they satisfy which are not guaranteed by a bank.
Supply Chain Financing. Certain of our suppliers participate in supply chain financing programs under which they securitize their accounts receivables from Tenneco. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from Tenneco's suppliers at any time. If the financial institutions did not continue to purchase receivables or drafts from Tenneco's suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with Tenneco which in turn would cause our borrowings under our revolving credit facility to increase.
Restricted Cash - Some of our Chinese subsidiaries that issue their own financial instruments to pay vendors are required to maintain a cash balance if they exceed credit limits with the financial institution that guarantees the financial instruments. A restricted cash balance was required at those Chinese subsidiaries for $2 million and $1 million at December 31, 2016 and December 31, 2015, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | U.S. | | Non-U.S. | |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| | (Millions) |
| Change in benefit obligation: | | | | | | | | | | | |
| Benefit obligation, beginning of year | $ | 263 |
| | $ | 272 |
| | $ | 471 |
| | $ | 438 |
| | $ | 151 |
| | $ | 143 |
|
| Federal-Mogul acquisition | 1,064 |
| | — |
| | 545 |
| | — |
| | 263 |
| | — |
|
| Service cost | 1 |
| | 1 |
| | 13 |
| | 9 |
| | — |
| | — |
|
| Interest cost | 21 |
| | 10 |
| | 15 |
| | 13 |
| | 8 |
| | 5 |
|
| Settlement | (1 | ) | | (7 | ) | | (13 | ) | | (3 | ) | | — |
| | — |
|
| Curtailment | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
|
| Administrative expenses/taxes paid | — |
| | — |
| | (3 | ) | | (2 | ) | | — |
| | — |
|
| Plan amendments | — |
| | — |
| | 2 |
| | — |
| | (66 | ) | | — |
|
| Actuarial (gain)/loss | (12 | ) | | 10 |
| | (16 | ) | | (9 | ) | | (24 | ) | | 12 |
|
| Benefits paid | (34 | ) | | (23 | ) | | (22 | ) | | (18 | ) | | (15 | ) | | (10 | ) |
| Medicare subsidies received | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
| Participants’ contributions | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | — |
|
| Held for sale | — |
| | — |
| | (16 | ) | | — |
| | — |
| | — |
|
| Currency rate conversion and other | — |
| | — |
| | (31 | ) | | 42 |
| | 4 |
| | 1 |
|
| Benefit obligation, end of year | 1,302 |
| | 263 |
| | 946 |
| | 471 |
| | 322 |
| | 151 |
|
| Change in plan assets: | | | | | | | | | | | |
| Fair value of plan assets, beginning of year | 202 |
| | 192 |
| | 438 |
| | 369 |
| | — |
| | — |
|
| Federal-Mogul acquisition | 943 |
| | — |
| | 81 |
| | — |
| | — |
| | — |
|
| Settlement | (1 | ) | | (7 | ) | | (14 | ) | | (3 | ) | | — |
| | — |
|
| Actual return on plan assets | (122 | ) | | 22 |
| | (1 | ) | | 42 |
| | — |
| | — |
|
| Administrative expenses/taxes paid | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
|
| Employer contributions | 6 |
| | 18 |
| | 21 |
| | 14 |
| | 13 |
| | 10 |
|
| Medicare subsidies received | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
| Participants’ contributions | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | — |
|
| Benefits paid | (33 | ) | | (23 | ) | | (25 | ) | | (18 | ) | | (15 | ) | | (10 | ) |
| Held for sale | — |
| | — |
| | (10 | ) | | — |
| | — |
| | — |
|
| Currency rate conversion and other | — |
| | — |
| | (25 | ) | | 35 |
| | — |
| | — |
|
| Fair value of plan assets, end of year | 995 |
| | 202 |
| | 466 |
| | 438 |
| | — |
| | — |
|
| Funded status of the plans | $ | (307 | ) | | $ | (61 | ) | | $ | (480 | ) | | $ | (33 | ) | | $ | (322 | ) | | $ | (151 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Amounts recognized on the consolidated balance sheets consist of the following as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | U.S. | | Non-U.S. | |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| | (Millions) |
| Noncurrent assets | $ | — |
| | $ | — |
| | $ | 33 |
| | $ | 28 |
| | $ | — |
| | $ | — |
|
| Current liabilities | (5 | ) | | (2 | ) | | (17 | ) | | (3 | ) | | (28 | ) | | (9 | ) |
Noncurrent liabilities (a) | (302 | ) | | (59 | ) | | (496 | ) | | (58 | ) | | (294 | ) | | (142 | ) |
| $ | (307 | ) | | $ | (61 | ) | | $ | (480 | ) | | $ | (33 | ) | | $ | (322 | ) | | $ | (151 | ) |
(a)The "pension and postretirement benefits" line in the consolidated balance sheets includes $75 million and $9 million as of December 31, 2018 and 2017 of postemployment benefits which are not included in the table above.
Amounts recognized in accumulated other comprehensive loss for pension and postretirement benefits, inclusive of tax effects, consist of the following components as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | U.S. | | Non-U.S. | |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| | (Millions) |
| Actuarial loss | $ | 255 |
| | $ | 130 |
| | $ | 80 |
| | $ | 91 |
| | $ | 31 |
| | $ | 51 |
|
| Prior service cost/(credit) | — |
| | — |
| | 4 |
| | 3 |
| | (73 | ) | | — |
|
| Total | $ | 255 |
| | $ | 130 |
| | $ | 84 |
| | $ | 94 |
| | $ | (42 | ) | | $ | 51 |
|
Information for defined benefit plans with projected benefit obligations in excess of plan assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | 2018 | | 2017 | |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. | | 2018 | | 2017 |
| | (Millions) |
| Projected benefit obligation | $ | 1,302 |
| | $ | 652 |
| | $ | 263 |
| | $ | 130 |
| | $ | 322 |
| | $ | 151 |
|
| Fair value of plan assets | $ | 995 |
| | $ | 138 |
| | $ | 202 |
| | $ | 69 |
| | $ | — |
| | $ | — |
|
Information for pension plans with accumulated benefit obligations in excess of plan assets:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| | (Millions) |
| Projected benefit obligation | $ | 1,302 |
| | $ | 620 |
| | $ | 263 |
| | $ | 117 |
|
| Accumulated benefit obligation | $ | 1,302 |
| | $ | 606 |
| | $ | 263 |
| | $ | 112 |
|
| Fair value of plan assets | $ | 995 |
| | $ | 111 |
| | $ | 202 |
| | $ | 56 |
|
The accumulated benefit obligation for all pension plans is $2,225 million and $728 million as of December 31, 2018 and 2017.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net periodic pension and postretirement benefits costs for the years 2018, 2017 and 2016, consist of the following components:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | U.S. | | Non-U.S. | |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| | (Millions) |
| Service cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 14 |
| | $ | 9 |
| | $ | 8 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Interest cost | 21 |
| | 10 |
| | 15 |
| | 15 |
| | 13 |
| | 14 |
| | 8 |
| | 5 |
| | 6 |
|
| Expected return on plan assets | (28 | ) | | (14 | ) | | (23 | ) | | (18 | ) | | (25 | ) | | (20 | ) | | — |
| | — |
| | — |
|
| Curtailment loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
| Settlement loss | 1 |
| | 8 |
| | 72 |
| | 3 |
| | 1 |
| | — |
| | — |
| | — |
| | — |
|
| Net amortization: |
| |
| |
| |
| |
| |
| | | | | | |
| Actuarial loss | 5 |
| | 5 |
| | 8 |
| | 6 |
| | 9 |
| | 7 |
| | 5 |
| | 4 |
| | 5 |
|
| Prior service cost (credit) | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | (1 | ) | | (1 | ) |
| Net periodic costs | $ | — |
| | $ | 10 |
| | $ | 73 |
| | $ | 21 |
| | $ | 8 |
| | $ | 10 |
| | $ | 14 |
| | $ | 8 |
| | $ | 10 |
|
The following assumptions were used in the accounting for the pension and other postretirement benefits plans for the years of 2018, 2017, and 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | U.S. | | Non-U.S. | |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Weighted-average assumptions used to determine benefit obligations: | |
| Discount rate | 4.2 | % | | 3.8 | % | | 4.2 | % | | 2.6 | % | | 2.6 | % | | 2.8 | % | | 4.3 | % | | 3.8 | % | | 4.2 | % |
| Rate of compensation increase | n/a |
| | n/a |
| | n/a |
| | — | % | | 2.5 | % | | 2.5 | % | | n/a |
| | n/a |
| | n/a |
|
| | | | | | | | | | | | | | | | | | |
| Weighted-average assumptions used to determine net periodic benefit cost: | |
| Discount rate | 4.1 | % | | 4.2 | % | | 4.3 | % | | 2.4 | % | | 2.8 | % | | 3.5 | % | | 4.2 | % | | 4.2 | % | | 4.3 | % |
| Expected long-term return on plan assets | 6.0 | % | | 7.8 | % | | 7.6 | % | | 4.2 | % | | 5.2 | % | | 5.7 | % | | n/a |
| | n/a |
| | n/a |
|
| Rate of compensation increase | n/a |
| | n/a |
| | n/a |
| | 2.9 | % | | 2.5 | % | | 2.7 | % | | n/a |
| | n/a |
| | n/a |
|
Estimated amounts to be amortized from accumulated other comprehensive loss into net periodic benefit cost in the year ending December 31, 2019 based on December 31, 2018 plan measurements:
|
| | | | | | | | | | | |
| | 2019 |
| | Pension Plans | | Other Postretirement Benefits Plans |
| | U.S. | | Non-U.S | |
| | (Millions) |
| Net actuarial loss | $ | 5 |
| | $ | 5 |
| | $ | 4 |
|
| Prior service cost | — |
| | 1 |
| | (8 | ) |
| | $ | 5 |
| | $ | 6 |
| | $ | (4 | ) |
Estimated future benefit payments are as follows:
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | Pension Plans | | Other Postretirement Benefits Plans |
| Year | U.S. | | Non-U.S. | |
| | (Millions) |
| 2019 | $ | 100 |
| | $ | 43 |
| | $ | 28 |
|
| 2020 | $ | 99 |
| | $ | 44 |
| | $ | 28 |
|
| 2021 | $ | 99 |
| | $ | 43 |
| | $ | 27 |
|
| 2022 | $ | 101 |
| | $ | 45 |
| | $ | 26 |
|
| 2023 | $ | 100 |
| | $ | 49 |
| | $ | 26 |
|
| 2024-2028 | $ | 442 |
| | $ | 243 |
| | $ | 113 |
|
Health Care Trend
The weighted-average assumed health care cost trend rate used in determining next year's postretirement health care benefits are as follows:
|
| | | | | | | | |
| | Other Postretirement Benefits Plans |
| | 2018 | | 2017 | | 2016 |
| Initial health care cost trend rate | 6.9 | % | | 6.8 | % | | 7.0 | % |
| Ultimate health care cost trend rate | 4.9 | % | | 4.5 | % | | 4.5 | % |
| Year ultimate health care cost trend rate reached | 2027 |
| | 2027 |
| | 2026 |
|
The assumed health care cost trend rate has a significant effect on the amounts reported for other postretirement benefits plans. The following table illustrates the sensitivity to a change in the assumed health care cost trend rate:
|
| | | | | | | |
| | Total Service and Interest Cost | | Postretirement Benefits Obligation |
| | (Millions) |
| 100 basis point ("bp") increase in health care cost trend rate | $ | 1 |
| | $ | 23 |
|
| 100 bp decrease in health care cost trend rate | $ | (1 | ) | | $ | (20 | ) |
Long-term Rate of Return
The Company's expected return on assets is established annually through analysis of anticipated future long-term investment performance for the plan based upon the asset allocation strategy and is primarily a long-term prospective rate.
An analysis was performed in December 2018 resulting in changes to the expected long-term rate of return on assets. The weighted-average long-term rate of return on assets for the U.S. pension plans decreased from 7.75% at December 31, 2017 to 6.00% at December 31, 2018. The expected long-term rate of return on plan assets used in determining pension expense for non-U.S. plans is determined in a similar manner to the U.S. plans and decreased from 5.25% at December 31, 2017 to 4.2% at December 31, 2018.
Plan Assets
Certain pension plans sponsored by the Company invest in a diversified portfolio consisting of an array of asset classes that attempts to maximize returns while minimizing volatility. These asset classes include developed market equities, emerging market equities, private equity, global high quality and high yield fixed income, real estate, and absolute return strategies.
U.S. Plan
The U.S. investment strategy mitigates risk by incorporating diversification across appropriate asset classes to meet the plan’s objectives. It is intended to reduce risk, provide long-term financial stability for the plan, and maintain funded levels that meet long-term plan obligations while preserving sufficient liquidity for near-term benefit payments. Risk assumed is considered appropriate for the return anticipated and consistent with the diversification of plan assets. Approximately 49% of the U.S. plan assets were invested in actively managed investment funds. The Company’s investment strategy includes a target asset allocation of 60% equity investments, 15% fixed income investments, 15% debt securities, and 10% in other investment types including hedge funds.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Non-U.S. Plans
The Company's non-U.S. plans are individually managed to different target levels depending on the investing environment in each country and the funded status of each plan, with an increased allocation of assets to equity and fixed income securities at higher funded ratios. The insurance contracts guarantee a minimum rate of return. The Company has no input into the investment strategy of the assets underlying the contracts, but they are typically heavily invested in active bond markets and are highly regulated by local law.
Pension plan assets were invested in the following classes of securities:
|
| | | | | |
| | Percentage of Fair Market Value |
| | December 31, 2018 |
| | U.S. | | Non-U.S. |
| Equity securities | 62 | % | | 32 | % |
| Fixed income securities | 17 | % | | 5 | % |
| Debt securities | 11 | % | | 43 | % |
| Insurance contracts | — | % | | 15 | % |
| Other | 10 | % | | 5 | % |
The assets of some of the Company's pension plans are invested in trusts that permit commingling of the assets of more than one employee benefit plan for investment and administrative purposes. Each of the plans participating in the trust has interests in the net assets of the underlying investment pools.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7.The following table presents the Company’s defined benefit plan assets measured at fair value by asset class:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Level as of December 31, 2018 |
| | U.S. | | Non-U.S. |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (Millions) |
| Investments with registered investment companies: | | | | | | | | | | | | | | | |
| Equity securities | $ | 323 |
| | $ | — |
| | $ | — |
| | $ | 323 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 1 |
|
| Fixed income securities | 167 |
| | — |
| | — |
| | 167 |
| | 21 |
| | — |
| | — |
| | 21 |
|
| Real estate and other | 41 |
| | — |
| | — |
| | 41 |
| | — |
| | — |
| | — |
| | — |
|
| Equity securities | 194 |
| | — |
| | — |
| | 194 |
| | 14 |
| | 55 |
| | — |
| | 69 |
|
| Debt securities: | | | | | | | | | | | | | | | |
| Corporate and other | — |
| | 18 |
| | — |
| | 18 |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Government | 12 |
| | 21 |
| | — |
| | 33 |
| | 2 |
| | 147 |
| | — |
| | 149 |
|
| Real Estate and other | — |
| | — |
| | — |
| | — |
| | 1 |
| | 4 |
| | — |
| | 5 |
|
| Insurance contracts | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 71 |
| | 71 |
|
| Hedge funds | — |
| | — |
| | 28 |
| | 28 |
| | — |
| | — |
| | — |
| | — |
|
| Cash and equivalents | 33 |
| | — |
| | — |
| | 33 |
| | 17 |
| | — |
| | — |
| | 17 |
|
| Total | $ | 770 |
| | $ | 39 |
| | $ | 28 |
| | $ | 837 |
| | $ | 64 |
| | $ | 206 |
| | $ | 71 |
| | $ | 341 |
|
| Plan assets measured at net asset value | | | | | | | | | | | | | | | |
| Equity securities | | | | | | | $ | 104 |
| | | | | | | | $ | 81 |
|
| Government debt securities | | | | | | | — |
| | | | | | | | 30 |
|
| Corporate and other debt securities | | | | | | | 54 |
| | | | | | | | 14 |
|
| Total plan assets measured at net asset value | | | | | | | 158 |
| | | | | | | | 125 |
|
| Net plan assets | | | | | | | $ | 995 |
| | | | | | | | $ | 466 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Level as of December 31, 2017 |
| | U.S. | | Non-U.S. |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| | (Millions) |
| Equity securities | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | 21 |
| | $ | 16 |
| | $ | 101 |
| | $ | — |
| | $ | 117 |
|
| Debt securities: | | | | | | | | | | | | | | | |
| Corporate and other | — |
| | — |
| | — |
| | — |
| | 6 |
| | 16 |
| | — |
| | 22 |
|
| Government | — |
| | — |
| | — |
| | — |
| | 2 |
| | 112 |
| | — |
| | 114 |
|
| Real Estate and other | — |
| | — |
| | — |
| | — |
| | 1 |
| | 6 |
| | — |
| | 7 |
|
| Insurance contracts | — |
| | — |
| | — |
| | — |
| | — |
| | 16 |
| | 9 |
| | 25 |
|
| Cash and equivalents | 2 |
| | — |
| | — |
| | 2 |
| | 9 |
| | 1 |
| | — |
| | 10 |
|
| Total | $ | 23 |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | 34 |
| | $ | 252 |
| | $ | 9 |
| | $ | 295 |
|
| Plan assets measured at net asset value | | | | | | | | | | | | | | | |
| Equity securities | | | | | | | $ | 120 |
| | | | | | | | $ | 97 |
|
| Government debt securities | | | | | | | — |
| | | | | | | | 32 |
|
| Corporate and other debt securities | | | | | | | 59 |
| | | | | | | | 14 |
|
| Total plan assets measured at net asset value | | | | | | | 179 |
| | | | | | | | 143 |
|
| Net plan assets | | | | | | | $ | 202 |
| | | | | | | | $ | 438 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's level 1 assets were valued using market prices based on daily net asset value ("NAV") or prices available daily through a public stock exchange. Its level 2 assets were valued primarily using market prices, sometimes net of estimated realization expenses, and based on broker/dealer markets or in commingled funds where NAV is not available daily or publicly. For insurance contracts, the estimated surrender value of the policy was used to estimate fair market value.
The table below summarizes the changes in the fair value of the Level 3 assets:
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Level 3 Assets | | Level 3 Assets |
| | U.S. | | Non-U.S. | | U.S. | | Non-U.S. |
| | (Millions) | | (Millions) |
| Balance at December 31 of the previous year | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 9 |
|
| Federal-Mogul acquisition | 30 |
| | 56 |
| | — |
| | — |
|
| Net realized/unrealized gains (loss) | (2 | ) | | 1 |
| | — |
| | — |
|
| Purchases and settlements, net | — |
| | — |
| | — |
| | — |
|
| Sales, net | — |
| | — |
| | — |
| | — |
|
| Transfers into (out) of Level 3 | — |
| | 15 |
| | — |
| | — |
|
| Held for sale | — |
| | (10 | ) | | | | |
| Foreign currency exchange rate movements | — |
| | — |
| | — |
| | — |
|
| Ending Balance at December 31 | $ | 28 |
| | $ | 71 |
| | $ | — |
| | $ | 9 |
|
The following table contains information about significant concentrations of risk, including all individual assets that make up more than 5% of the total assets and any direct investments in Tenneco stock:
|
| | | | | | | | | |
| Asset Category | Fair Value Level | | Value | | Percentage of
Total Assets |
| | (Millions) |
| 2018: |
| |
| |
|
| Tenneco stock | 1 |
| | $ | 10 |
| | 0.7 | % |
| 2017: |
| |
| |
|
| Tenneco stock | 1 |
| | $ | 21 |
| | 3.3 | % |
The Company's approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and adjusts for any expected changes in the long-term outlook for the equity and fixed income markets for both its U.S. and Non-U.S. plans.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14. Income Taxes
The domestic and foreign components of our incomethe Company's earnings before income taxes and noncontrolling interests are as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (Millions) |
| U.S. income before income taxes | $ | 63 |
| | $ | 198 |
| | $ | 130 |
|
| Foreign income before income taxes | 361 |
| | 243 |
| | 268 |
|
| Income before income taxes and noncontrolling interests | $ | 424 |
| | $ | 441 |
| | $ | 398 |
|
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| U.S. income earnings (loss) before income taxes | $ | (138 | ) | | $ | (28 | ) | | $ | 52 |
|
| Foreign earnings (loss) before income taxes | 312 |
| | 364 |
| | 359 |
|
| Earnings (loss) before income taxes and noncontrolling interests | $ | 174 |
| | $ | 336 |
| | $ | 411 |
|
Following is a comparative analysis of the components of income tax expense:expense (benefit):
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (Millions) | (Millions) |
| Current — | | | | | | | | | | |
| U.S. federal | $ | (9 | ) | | $ | 64 |
| | $ | 38 |
| $ | 8 |
| | $ | (23 | ) | | $ | (9 | ) |
| State and local | 4 |
| | 5 |
| | 3 |
| 1 |
| | 1 |
| | 4 |
|
| Foreign | 85 |
| | 83 |
| | 92 |
| 119 |
| | 101 |
| | 85 |
|
| 80 |
| | 152 |
| | 133 |
| 128 |
| | 79 |
| | 80 |
|
| Deferred — |
| |
| |
| | | | | |
| U.S. federal | (91 | ) | | (1 | ) | | 2 |
| (35 | ) | | 16 |
| | (95 | ) |
| State and local | (1 | ) | | 1 |
| | 7 |
| (5 | ) | | (3 | ) | | (1 | ) |
| Foreign | 12 |
| | (6 | ) | | (11 | ) | (25 | ) | | (21 | ) | | 12 |
|
| (80 | ) | | (6 | ) | | (2 | ) | (65 | ) | | (8 | ) | | (84 | ) |
| Income tax expense | $ | — |
| | $ | 146 |
| | $ | 131 |
| |
| Income tax expense (benefit) | | $ | 63 |
| | $ | 71 |
| | $ | (4 | ) |
Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35 percent(21% for all years presented)2018 and 35% for 2017 and 2016) to the income tax expense (benefit) reflected in the consolidated statements of income:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (Millions) | (Millions) |
| Income tax expense computed at the statutory U.S. federal income tax rate | $ | 148 |
| | $ | 154 |
| | $ | 139 |
| $ | 37 |
| | $ | 117 |
| | $ | 144 |
|
| Increases (reductions) in income tax expense resulting from: |
| |
| |
| | | | | |
| Foreign income taxed at different rates | (42 | ) | | (14 | ) | | (20 | ) | 19 |
| | (48 | ) | | (42 | ) |
| Taxes on repatriation of dividends | (105 | ) | | 9 |
| | 4 |
| |
| Remeasurement of estimated tax on unremitted earnings | — |
| | (4 | ) | | — |
| |
| Transition Tax under Tax Cuts and Jobs Act ("TCJA") | | 11 |
| | 43 |
| | — |
|
| Re-measurement of Worldwide Deferred Taxes | | — |
| | 53 |
| | — |
|
| State and local taxes on income, net of U.S. federal income tax benefit | 3 |
| | 11 |
| | 8 |
| (6 | ) | | (2 | ) | | 3 |
|
| Changes in valuation allowance for tax loss carryforwards and credits | 18 |
| | 13 |
| | 12 |
| — |
| | (1 | ) | | 18 |
|
| Foreign tax holidays | — |
| | (7 | ) | | (6 | ) | |
| Investment and R&D tax credits | (6 | ) | | (26 | ) | | (10 | ) | (12 | ) | | (6 | ) | | (6 | ) |
| Foreign earnings subject to U.S. federal income tax | 4 |
| | 3 |
| | 7 |
| 9 |
| | (74 | ) | | (101 | ) |
| Adjustment of prior years taxes | — |
| | 2 |
| | (2 | ) | |
| Tax contingencies | (7 | ) | | 4 |
| | — |
| 1 |
| | (1 | ) | | (7 | ) |
| Other | (13 | ) | | 1 |
| | (1 | ) | 4 |
| | (10 | ) | | (13 | ) |
| Income tax expense | $ | — |
| | $ | 146 |
| | $ | 131 |
| |
| Income tax expense (benefit) | | $ | 63 |
| | $ | 71 |
| | $ | (4 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of our net deferred tax assets were as follows:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (Millions) |
| Deferred tax assets — |
| |
|
| Tax loss carryforwards: |
| |
|
| State | $ | 13 |
| | $ | 14 |
|
| Foreign | 92 |
| | 72 |
|
| Tax credits | 83 |
| | 89 |
|
| Postretirement benefits other than pensions | 55 |
| | 54 |
|
| Pensions | 48 |
| | 50 |
|
| Bad debts | 3 |
| | 2 |
|
| Sales allowances | 7 |
| | 8 |
|
| Payroll accruals | 39 |
| | 34 |
|
| Other accruals | 50 |
| | 58 |
|
| Valuation allowance | (145 | ) | | (127 | ) |
| Total deferred tax assets | 245 |
| | 254 |
|
| Deferred tax liabilities — |
| |
|
| Tax over book depreciation | 53 |
| | 40 |
|
| Total deferred tax liabilities | 53 |
| | 40 |
|
| Net deferred tax assets | $ | 192 |
| | $ | 214 |
|
State tax loss carryforwards have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in both 2016 and 2015 by $3 million. Additionally, foreign tax loss carryforwards, have been presented net of uncertain tax positions that if realized, would reduce tax loss carryforwards in 2016 and 2015 by $7 million and $13 million, respectively.
Following is a reconciliation of deferred taxes to the deferred taxes shown in the balance sheet:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | (Millions) |
| Balance Sheet: | | | |
| Non-current portion — deferred tax asset | $ | 199 |
| | $ | 221 |
|
| Non-current portion — deferred tax liability | (7 | ) | | (7 | ) |
| Net deferred tax assets | $ | 192 |
| | $ | 214 |
|
As a result of the valuation allowances recorded for $145 million and $127 million at December 31, 2016 and 2015, respectively, we have potential tax assets that were not recognized on our balance sheet. These unrecognized tax assets resulted primarily from foreign tax loss carryforwards, foreign investment tax credits, foreign research and development credits and U.S. state net operating losses that are available to reduce future tax liabilities.
WeCompany reported income tax expense of less than $1 million, $146 million and $131$63 million in 2018, $71 million in 2017 and a tax benefit of $4 million in 2016. The tax expense recorded in 2018 included tax benefits of $10 million relating to a valuation allowance release at its Australian entities and $11 million of tax expense for changes in the years ended 2016, 2015toll tax as discussed below. The tax expense recorded in 2017 includes a net provisional tax expense of $43 million for one-time transition tax on deemed repatriation of previously deferred foreign earnings under the Tax Cuts and 2014, respectively. Jobs Act ("TCJA") as discussed below. The Company remeasured U.S. deferred taxes from an applicable federal rate of 35% to the new statutory rate of 21% at which they are expected to be utilized, recording a $51 million provisional expense. The tax expense recorded in 2017 included a net tax benefit of $74 million relating to recognizing a U.S. tax benefit for foreign taxes.The tax expense recorded in 2016 includesincluded a net tax benefit of $110 million primarily relating to the recognition of a U.S. tax benefit for foreign taxes. In 2016, wethe Company completed ourits detailed analysis of ourits ability to recognize and utilize foreign tax credits within the carryforward period. As a result, wethe Company amended ourits U.S. federal tax returns for the years 2006 to 2012 to claim foreign tax credits in lieu of deducting foreign taxes paid. The U.S. foreign tax credit law provides for a credit against U.S. taxes otherwise payable for foreign taxes paid with regard to dividends, interest and royalties paid to usthe Company in the U.S. Income tax expense also decreased in 2016 as a result of the mix of earnings in ourthe Company's various tax jurisdictions.
On December 22, 2017, the TCJA was enacted into U.S. law, which, among other provisions, lowered the corporate income tax rate effective January 1, 2018 from 35% to 21%, and implemented significant changes with respect to U.S. tax treatment of earnings originating from outside the U.S. Many of the provisions of TCJA are subject to regulatory interpretation and U.S. state conforming enactments. The Internal Revenue Service (IRS) issued Notice 2018-26 on April 2, 2018 and issued proposed regulations under Section 965 on August 1, 2018, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the new guidance, an $11 million discrete charge was recorded in income tax expense in 2018. The Company has completed our accounting for the tax effects of the enactment as of December 31, 2018.
The Company elected to account for Global Intangible Low-Taxed Income (“GILTI”) as a current-period expense when incurred. Therefore, the Company has not recorded deferred taxes for basis differences expected to reverse in 2015 includes athe future periods.
The components of the Company's net deferred tax benefitassets were as follows:
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (Millions) |
| Deferred tax assets — | | | |
| Tax loss carryforwards: | | | |
| State | $ | 18 |
| | $ | 19 |
|
| Foreign | 364 |
| | 114 |
|
| Tax credits | 159 |
| | 118 |
|
| Postretirement benefits other than pensions | 21 |
| | 37 |
|
| Pensions | 158 |
| | 24 |
|
| Payroll accruals | 24 |
| | 18 |
|
| Book over tax depreciation | 68 |
| | (45 | ) |
| Other accruals | 163 |
| | 80 |
|
| Valuation allowance | (514 | ) | | (163 | ) |
| Total deferred tax assets | 461 |
| | 202 |
|
| Deferred tax liabilities — |
| |
|
| Amortization of intangibles | 82 |
| | — |
|
| Total deferred tax liabilities | 82 |
| | — |
|
| Net deferred tax assets | $ | 379 |
| | $ | 202 |
|
State tax loss carryforwards have been presented net of $15 million primarily relating to prior year U.S. research and development tax credits, changes to uncertain tax positions that, if realized, would reduce tax loss carryforwards in both 2018 and prior year income2017 by $2 million. Additionally, foreign tax adjustments. The tax expense recorded in 2014 includes aloss carryforwards, have been presented net tax benefit of $11 million for prior year tax adjustments primarily relating to changes to uncertain tax positions that, if realized, would reduce tax loss carryforwards in 2018 and prior year income tax estimates.2017 by $68 million and $7 million, respectively.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (Millions) |
| Consolidated Balance Sheets: | | | |
| Non-current portion — deferred tax asset | $ | 467 |
| | $ | 213 |
|
| Non-current portion — deferred tax liability | (88 | ) | | (11 | ) |
| Net deferred tax assets | $ | 379 |
| | $ | 202 |
|
We fully utilizedevaluate our federal net operating loss ("NOL") priordeferred income taxes quarterly to 2014determine if valuation allowances are required or should be adjusted. This assessment considers, among other matters, the nature, frequency and amount of recent losses, the duration of statutory carryforward periods, and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified. If recent operational improvements continue in our foreign subsidiaries or if certain restructuring steps are completed as part of the Federal-Mogul acquisition and future spin of the Ride Performance / Aftermarket company, we believe it is reasonably possible that sufficient positive evidence may be available to release all, or a portion, of its valuation allowance in the next twelve months. This may result in a one-time tax benefit of up to $51 million, primarily related to Spain, China, and Czech Republic.
As a result of amending our U.S. federalthe valuation allowances recorded of $514 million and $163 million at December 31, 2018 and 2017, respectively, the Company has potential tax returns for years 2006 to 2012 to claimassets that were not recognized on its consolidated balance sheets. These unrecognized tax assets resulted primarily from foreign tax loss carryforwards, foreign investment tax credits, in lieu of deducting foreign taxes paid. research and development credits and U.S. state net operating losses ("NOLs") that are available to reduce future tax liabilities.
The Company's state NOLs expire in various tax years through 2031.2039. The Company's non-U.S. NOLs expire in various tax years through 2038, or have unlimited carryforward potential.
We do
The Company does not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries, except for the earnings of certain of ourits China operations and in certain of its joint ventures in Spain, South Korea, and India, as ourits present intention is to reinvest the unremitted earnings in ourits foreign operations. Unremitted earnings of foreign subsidiaries were approximately $795 million$2.6 billion at December 31, 2016. We2018. The Company estimated that the amount of U.S. and foreign income taxes that would be accrued or paid upon remittance of the assets that represent those unremitted earnings was $159$117 million. The estimated U.S. and foreign income taxes on unremitted earnings may be impacted in the future if we are unable to claim a U.S. foreign tax credit.
U.S. GAAP provides that a
A tax benefit from an uncertain tax position may be recognized when it is “more likely than not” that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits.
A reconciliation of ourthe Company's uncertain tax positions is as follows:
| | | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (Millions) | (Millions) |
| Uncertain tax positions — | | | | | | | | | | |
| Balance January 1 | $ | 123 |
| | $ | 114 |
| | $ | 115 |
| $ | 112 |
| | $ | 111 |
| | $ | 123 |
|
| Gross increases in tax positions due to acquisition | | 110 |
| | — |
| | — |
|
| Gross increases in tax positions in current period | 6 |
| | 7 |
| | 8 |
| 8 |
| | 6 |
| | 6 |
|
| Gross increases in tax positions in prior period | 2 |
| | 14 |
| | 5 |
| 7 |
| | 2 |
| | 2 |
|
| Gross decreases in tax positions in prior period | (5 | ) | | (4 | ) | | (5 | ) | (1 | ) | | (2 | ) | | (5 | ) |
| Gross decreases — settlements | — |
| | (1 | ) | | (2 | ) | (2 | ) | | — |
| | — |
|
| Gross decreases — statute of limitations expired | (15 | ) | | (7 | ) | | (7 | ) | (10 | ) | | (5 | ) | | (15 | ) |
| Balance December 31 | $ | 111 |
| | $ | 123 |
| | $ | 114 |
| $ | 224 |
| | $ | 112 |
| | $ | 111 |
|
Included in the balance of uncertain tax positions were $134 million in 2018, $108 million in 2017, $108 million in 2016, $110 million in 2015, $101 million in 2014, of tax benefits, that if recognized, would affect the effective tax rate. We recognizeThe Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense. Penalties of less than $1 million were accrued in 2016, 20152018, 2017 and 2014.2016. Additionally, wethe Company accrued interest expense related to uncertain tax positions of less than$1$2 million in 2016,2018, and interest incomeexpense of less than $1 million in 2015,both 2017 and interest expense of $1 million in 2014. Our2016. The Company's liability for penalties was $1$12 million at December 31, 2018, and $1 million at both December 31, 2017 and December 31, 2016, $2and its liability for interest was $11 million at December 31, 20152018 and $3$4 million at both December 31, 2014, respectively,2017 and our liability for interest was $6 million at December 31, 2016, 2015 and 2014.2016.
Our
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company's uncertain tax position at December 31, 20162018 and 20152017 included exposures relating to the disallowance of deductions, global transfer pricing and various other issues. We believeThe Company believes it is reasonably possible that a decrease of up to $17$14 million in unrecognized tax benefits related to the expiration of U.S. and foreign statute of limitations and the conclusion of income tax examinations may occur within the next twelve months.
We are
The Company is subject to taxation in the U.S. and various state and foreign jurisdictions. As of December 31, 2016, our2018, the Company's tax years open to examination in primary jurisdictions are as follows:
|
| |
| | Open To Tax
Year |
| United States | 20062003 |
| Belgium | 2016 |
| Brazil | 2014 |
| China | 20062009 |
| Germany | 2009 |
| Mexico | 2013 |
| Poland | 2013 |
| Spain | 2004 |
Canada | 2013 |
Brazil | 2011 |
Mexico | 2011 |
Belgium | 2014 |
Germany | 20142000 |
| United Kingdom | 20142015 |
| Italy | 2013 |
| France | 2009 |
| India | 1995 |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8.Common Stock
We have authorized 135 million shares ($0.01 par value) of common stock, of which 65,891,930 shares and 65,067,132 shares were issued at December 31, 2016 and 2015, respectively. We held 11,655,938 and 7,473,325 shares of treasury stock at December 31, 2016 and 2015, respectively.
Equity Plans — In December 1996, we adopted the 1996 Stock Ownership Plan, which permitted the granting of a variety of awards, including common stock, restricted stock, performance units, stock equivalent units, stock appreciation rights (“SARs”) and stock options to our directors, officers, employees and consultants. The 1996 plan, which terminated as to new awards on December 31, 2001, was renamed the “Stock Ownership Plan.” In December 1999, we adopted the Supplemental Stock Ownership Plan, which permitted the granting of a variety of similar awards to our directors, officers, employees and consultants. We were authorized to deliver up to about 1.1 million treasury shares of common stock under the Supplemental Stock Ownership Plan, which also terminated as to new awards on December 31, 2001. In March 2002, we adopted the 2002 Long-Term Incentive Plan which permitted the granting of a variety of similar awards to our officers, directors, employees and consultants. Up to 4 million shares of our common stock were authorized for delivery under the 2002 Long-Term Incentive Plan. In March 2006, we adopted the 2006 Long-Term Incentive Plan which replaced the 2002 Long-Term Incentive Plan and permits the granting of a variety of similar awards to directors, officers, employees and consultants. On May 13, 2009, our stockholders approved an amendment to the Tenneco Inc. 2006 Long-Term Incentive Plan to increase the shares of common stock available thereunder by 2.3 million. Each share underlying an award generally counts as one share against the total plan availability under the 2009 amendment, each share underlying a full value award (e.g. restricted stock), however, counts as 1.25 shares against the total plan availability. On May 15, 2013 our stockholders approved another amendment to the Tenneco Inc. 2006 Long-Term Incentive Plan to increase the shares of common stock available thereunder by 3.5 million. As part of this amendment, each share underlying a full value award subsequently issued counts as 1.49 shares against total plan availability. As of December 31, 2016, up to 2,541,470 shares of our common stock remain authorized for delivery under the 2006 Long-Term Incentive Plan. Our nonqualified stock options have seven to 20 year terms and vest equally over a three-year service period from the date of the grant.
We have granted restricted common stock and stock options to our directors and certain key employees and restricted stock units, payable in cash, to certain key employees. These awards generally require, among other things, that the award holder remain in service to our company during the restriction period, which is currently three years, with a portion of the award vesting equally each year. We have also granted stock equivalent units and long-term performance units to certain key employees that are payable in cash. At December 31, 2016, the long-term performance units outstanding included a three-year grant for 2014-2016 payable in the first quarter of 2017, a three-year grant for 2015-2017 payable in the first quarter of 2018 and a three-year grant for 2016-2018 payable in the first quarter of 2019. Payment is based on the attainment of specified performance goals. Grant value is based on stock price, cumulative EBITDA and free cash flow metrics. In addition, we have granted SARs to certain key employees in our Asian and Indian operations that are payable in cash after a three-year service period. The grant value is indexed to the stock price.
Accounting Methods — We have recorded compensation expense (net of taxes) of $1 million, $2 million, and $3 million in the years ended December 31, 2016, 2015 and 2014, respectively, related to nonqualified stock options as part of our selling, general and administrative expense. This resulted in a $0.01 decrease in basic and diluted earnings per share in 2016, a $0.03 decrease in basic and diluted earnings per share in 2015, and a $0.06 decrease in basic and diluted earnings per share in 2014.
For employees eligible to retire at the grant date, we immediately expense stock options and restricted stock. If employees become eligible to retire during the vesting period, we immediately recognize any remaining expense associated with their stock options and restricted stock.
As of December 31, 2016, there was less than $1 million of unrecognized compensation costs related to our stock options awards that we expect to recognize over a weighted average period of 0.1 years.
Compensation expense for restricted stock, restricted stock units, long-term performance units and SARs (net of taxes) was $18 million, $12 million, and $13 million for each of the years ended 2016, 2015 and 2014, respectively, and was recorded in selling, general, and administrative expense on the consolidated statements of income.
Cash received from stock option exercises was $16 million in 2016, $4 million in 2015, and $10 million in 2014. Stock option exercises generated an excess tax benefit of $1 million in 2016, $6 million in 2015 and $12 million in 2014.
Assumptions — We calculated the fair values of stock option awards using the Black-Scholes option pricing model with the weighted average assumptions listed below. The fair value of share-based awards is determined at the time the awards are granted which is generally in January of each year, and requires judgment in estimating employee and market behavior. There were no stock options granted in 2016 or 2015.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | |
| | |
| | 2016 | | 2015 | | 2014 |
| Stock Options Granted: |
| |
| |
|
| Weighted average grant date fair value, per share | $ | — |
| | $ | — |
| | $ | 26.46 |
|
| Weighted average assumptions used: |
| |
| |
|
| Expected volatility | — | % | | — | % | | 52.8 | % |
| Expected lives | 0.0 |
| | 0.0 |
| | 5.0 |
|
| Risk-free interest rates | — | % | | — | % | | 1.7 | % |
| Dividends yields | — | % | | — | % | | — | % |
Expected volatility is calculated based on current implied volatility and historical realized volatility for the Company.
Expected lives of options are based upon the historical and expected time to post-vesting forfeiture and exercise. We believe this method is the best estimate of the future exercise patterns currently available.
The risk-free interest rates are based upon the Constant Maturity Rates provided by the U.S. Treasury. For our valuations, we used the continuous rate with a term equal to the expected life of the options.
Stock Options — The following table reflects the status and activity for all options to purchase common stock for the period indicated:
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Shares
Under
Option | | Weighted Avg.
Exercise
Prices | | Weighted Avg.
Remaining
Life in Years | | Aggregate
Intrinsic
Value |
| | | | | | | | (Millions) |
| Outstanding Stock Options: |
| |
| |
| |
|
| Outstanding, January 1, 2016 | 1,144,719 |
| | $ | 34.69 |
| | 3.6 | | $ | 19 |
|
| Exercised | (19,192 | ) | | 9.31 |
| |
| | 1 |
|
| Outstanding, March 31, 2016 | 1,125,527 |
| | $ | 35.12 |
| | 3.5 | | $ | 12 |
|
| Forfeited | (788 | ) | | 51.88 |
| |
| |
|
| Exercised | (183,774 | ) | | 23.07 |
| |
| | 5 |
|
| Outstanding, June 30, 2016 | 940,965 |
| | $ | 37.46 |
| | 3.1 | | $ | 14 |
|
| Forfeited | (3,183 | ) | | 56.23 |
| |
| |
|
| Exercised | (178,455 | ) | | 30.17 |
| |
| | 4 |
|
| Outstanding, September 30, 2016 | 759,327 |
| | $ | 39.13 |
| | 2.8 | | $ | 12 |
|
| Canceled | (4,499 | ) | | 24.07 |
| |
| |
|
| Exercised | (148,303 | ) | | 42.01 |
| |
| |
|
|
| Outstanding, December 31, 2016 | 606,525 |
|
| $ | 38.54 |
| | 2.6 | | $ | 12 |
|
Of the outstanding 606,525 options, 560,238 are currently exercisable and have an intrinsic value of $12 million, a weighted average exercise price of $37.01 and a weighted average remaining life of 2.6 years.
The weighted average grant-date fair value of options granted during the year 2014 was $26.48. There were no stock options granted in 2016 or 2015. The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $11 million, $10 million and $30 million, respectively. The total fair value of shares vested was $4 million in 2016 and $6 million in both 2015 and 2014, respectively.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Stock — The following table reflects the status for all nonvested restricted shares for the period indicated:
|
| | | | | | |
| | Year Ended December 31, 2016 |
| | Shares | | Weighted Avg.
Grant Date
Fair Value |
| Nonvested Restricted Shares |
| |
|
| Nonvested balance at January 1, 2016 | 496,842 |
| | $ | 51.65 |
|
| Granted | 347,398 |
| | 35.98 |
|
| Vested | (156,109 | ) | | 46.50 |
|
| Nonvested balance at March 31, 2016 | 688,131 |
| | $ | 44.90 |
|
| Vested | (20,221 | ) | | 42.32 |
|
| Forfeited | (32,192 | ) | | 53.91 |
|
| Nonvested balance at June 30, 2016 | 635,718 |
| | $ | 44.42 |
|
| Granted | 3,368 |
| | 55.02 |
|
| Vested | (23,705 | ) | | 37.37 |
|
| Forfeited | (3,485 | ) | | 53.34 |
|
| Nonvested balance at September 30, 2016 | 611,896 |
| | $ | 44.70 |
|
| Granted | 3,038 |
| | 55.45 |
|
| Vested | (1,999 | ) | | 52.75 |
|
| Forfeited | (21,519 | ) | | 47.46 |
|
| Nonvested balance at December 31, 2016 | 591,416 |
| | $ | 44.63 |
|
The fair value of restricted stock grants is equal to the average market price of our stock at the date of grant. As of December 31, 2016, approximately $13 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.9 years.
The weighted average grant-date fair value of restricted stock granted during the years 2016, 2015 and 2014 was $36.36, $52.85, and $55.26, respectively. The total fair value of restricted shares vested was $9 million in 2016, $7 million in 2015 and $8 million in 2014.
Share Repurchase Program — In January 2014, our Board of Directors approved a share repurchase program, authorizing our company to repurchase up to 400,000 shares of our outstanding common stock over a 12 month period. This share repurchase program was intended to offset dilution from shares of restricted stock and stock options issued in 2014 to employees. We purchased 400,000 shares through open market purchases, which were funded through cash from operations, at a total cost of $22 million, at an average price of $56.06 per share. These repurchased shares are held as part of our treasury stock which increased to 3,244,692 shares at December 31, 2014 from 2,844,692 shares at December 31, 2013.
In January 2015, our Board of Directors approved a share repurchase program, authorizing our company to repurchase up to $350 million of our outstanding common stock over a three-year period. In October 2015, our Board of Directors expanded this share repurchase program, authorizing the repurchase of an additional $200 million of the Company’s outstanding common stock. We purchased 4,228,633 shares in 2015 through open market purchases, which were funded through cash from operations, at a total cost of $213 million, at an average price of $50.32 per share. These repurchased shares are held as part of our treasury stock which increased to 7,473,325 at December 31, 2015 from 3,244,692 at December 31, 2014. We purchased 4,182,613 shares in 2016 through open market purchases, which were funded through cash from operations, at a total cost of $225 million, at an average price of $53.89 per share. These repurchased shares are held as part of our treasury stock which increased to 11,655,938 at December 31, 2016 from 7,473,325 at December 31, 2015.
In February 2017, our Board of Directors authorized the repurchase of up to $400 million of the Company's outstanding common stock over the next three years. This includes $112 million remaining amount authorized under earlier repurchase programs. The company anticipates acquiring the shares through open market or privately negotiated transactions, which will be funded through cash from operations. The repurchase program does not obligate the Company to repurchase shares within any specific time or situations, and opportunities in higher priority areas could affect the cadence of this program.
Dividends —On February 1, 2017, our Board of Directors declared a quarterly cash dividend of $0.25, payable on March 23, 2017 to shareholders of record as of March 7, 2017.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Long-Term Performance Units, Restricted Stock Units and SARs — Long-term performance units, restricted stock units, and SARs are paid in cash and recognized as a liability based upon their fair value. As of December 31, 2016, $22 million of total unrecognized compensation costs is expected to be recognized over a weighted-average period of approximately 1.8 years.
9.Preferred Stock
We had 50 million shares of preferred stock ($0.01 par value) authorized at December 31, 2016 and 2015, respectively. No shares of preferred stock were outstanding at those dates.
10.Pension Plans, Postretirement and Other Employee Benefits
Pension benefits are based on years of service and, for most salaried employees, on average compensation. Our funding policy is to contribute to the plans amounts necessary to satisfy the funding requirement of applicable federal or foreign laws and regulations. Of our $710 million benefit obligation at December 31, 2016, approximately $641 million required funding under applicable federal and foreign laws. The balance of our benefit obligation, $69 million, did not require funding under applicable federal or foreign laws and regulations. At December 31, 2016, we had approximately $561 million in assets to fund that obligation. Pension plan assets were invested in the following classes of securities:
|
| | | | | | | | | | | |
| | Percentage of Fair Market Value |
| | December 31, 2016 | | December 31, 2015 |
| | US | | Foreign | | US | | Foreign |
| Equity Securities | 70 | % | | 61 | % | | 51 | % | | 61 | % |
| Debt Securities | 30 | % | | 34 | % | | 49 | % | | 30 | % |
| Real Estate | — |
| | 2 | % | | — |
| | 2 | % |
| Other | — |
| | 3 | % | | — | % | | 7 | % |
The assets of some of our pension plans are invested in trusts that permit commingling of the assets of more than one employee benefit plan for investment and administrative purposes. Each of the plans participating in the trust has interests in the net assets of the underlying investment pools of the trusts. The investments for all our pension plans are recorded at estimated fair value, in compliance with the accounting guidance on fair value measurement.
The following table presents our plan assets using the fair value hierarchy as of December 31, 2016 and 2015, respectively. The fair value hierarchy has three levels based on the methods used to determine the fair value. Level 1 assets refer to those asset values based on quoted market prices in active markets for identical assets at the measurement date. Level 2 assets refer to assets with values determined using significant other observable inputs, and Level 3 assets include values determined with non-observable inputs.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Level as of December 31, 2016 |
| | US | | Foreign |
| Asset Category | Level 1 |
| Level 2 |
| Level 3 |
| Assets
Measurement
at NAV | | Level 1 |
| Level 2 |
| Level 3 | | Assets
Measurement
at NAV |
| | (Millions) |
| Equity securities: |
| |
| |
| | | |
| |
| |
| | |
| U.S. large cap | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | 2 |
| | $ | 30 |
| | $ | — |
| | $ | 26 |
|
| U.S. mid cap | — |
| | — |
| | — |
| | — |
| | 1 |
| | 2 |
| | — |
| | — |
|
| U.S. small cap | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | — |
|
| Non-U.S. large cap | — |
| | — |
| | — |
| | — |
| | 7 |
| | 67 |
| | — |
| | 46 |
|
| Non-U.S. mid cap | — |
| | — |
| | — |
| | 15 |
| | — |
| | 15 |
| | — |
| | 8 |
|
| Non-U.S. small cap | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 1 |
|
| Emerging markets | — |
| | — |
| | — |
| | 5 |
| | 2 |
| | 3 |
| | — |
| | 1 |
|
| Debt securities: |
| |
| |
| | | |
| |
| |
| | |
| U.S. treasuries/government bonds | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
| U.S. corporate bonds | — |
| | — |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | — |
|
| U.S. other fixed income | — |
| | — |
| | — |
| | 54 |
| | — |
| | — |
| | — |
| | — |
|
| Non-U.S. treasuries/government bonds | — |
| | — |
| | — |
| | — |
| | 1 |
| | 38 |
| | — |
| | 29 |
|
| Non-U.S. corporate bonds | — |
| | — |
| | — |
| | — |
| | 4 |
| | 23 |
| | — |
| | 12 |
|
| Non-U.S. municipal obligations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Non-U.S. other fixed income | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
|
| Real Estate: |
| |
| |
| | | |
| |
| |
| | |
| Non-U.S. real estate | — |
| | — |
| | — |
| | — |
| | 1 |
| | 5 |
| | — |
| | — |
|
| Other: |
| |
| |
| | | |
| |
| |
| | |
| Insurance contracts | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | 9 |
| | — |
|
| Cash held in bank accounts | 2 |
| | — |
| | — |
| | — |
| | 7 |
| | 2 |
| | — |
| | — |
|
| Total | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 168 |
| | $ | 27 |
| | $ | 209 |
| | $ | 9 |
| | $ | 124 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Level as of December 31, 2015 |
| | US | | Foreign |
| Asset Category | Level 1 | | Level 2 | | Level 3 | | Asset
Measurement
at NAV | | Level 1 | | Level 2 | | Level 3 | | Asset
Measurement
at NAV |
| | (Millions) |
| Equity securities: |
| |
| |
| | | |
| |
| |
| | |
| U.S. large cap | $ | 33 |
| | $ | — |
| | $ | — |
| | $ | 63 |
| | $ | 5 |
| | $ | 24 |
| | $ | — |
| | $ | 23 |
|
| U.S. mid cap | — |
| | — |
| | — |
| | 8 |
| | 1 |
| | 5 |
| | — |
| | 2 |
|
| U.S. small cap | — |
| | — |
| | — |
| | 15 |
| | — |
| | — |
| | — |
| | — |
|
| Non-U.S. large cap | — |
| | — |
| | — |
| | — |
| | 13 |
| | 65 |
| | — |
| | 34 |
|
| Non-U.S. mid cap | — |
| | — |
| | — |
| | 25 |
| | 1 |
| | 15 |
| | — |
| | 15 |
|
| Non-U.S. small cap | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 1 |
|
| Emerging markets | — |
| | — |
| | — |
| | 8 |
| | 2 |
| | 4 |
| | — |
| | — |
|
| Debt securities: |
| |
| |
| | | |
| |
| |
| | |
| U.S. corporate bonds | — |
| | — |
| | — |
| | 35 |
| | — |
| | 3 |
| | — |
| | — |
|
| U.S. other fixed income | — |
| | — |
| | — |
| | 113 |
| | — |
| | — |
| | — |
| | — |
|
| Non-U.S. treasuries/government bonds | — |
| | — |
| | — |
| | — |
| | 1 |
| | 28 |
| | — |
| | 28 |
|
| Non-U.S. corporate bonds | — |
| | — |
| | — |
| | — |
| | 7 |
| | 20 |
| | — |
| | 12 |
|
| Non-U.S. mortgage backed securities | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
|
| Non-U.S. municipal obligations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Non-U.S. asset backed securities | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
|
| Non-U.S. other fixed income | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | — |
| | — |
|
| Real Estate: |
|
| |
|
| |
|
| | | |
|
| |
|
| |
|
| | |
| Non-U.S. real estate | — |
| | — |
| | — |
| | — |
| | 1 |
| | 5 |
| | — |
| | 1 |
|
| Other: |
|
| |
|
| |
|
| | | |
|
| |
|
| |
|
| | |
| Insurance contracts | — |
| | — |
| | — |
| | — |
| | — |
| | 12 |
| | 8 |
| | — |
|
| Cash held in bank accounts | 2 |
| | — |
| | — |
| | — |
| | 11 |
| | — |
| | — |
| | — |
|
| Total | $ | 35 |
| | $ | — |
| | $ | — |
| | $ | 267 |
| | $ | 44 |
| | $ | 188 |
| | $ | 8 |
| | $ | 117 |
|
Level 1 assets were valued using market prices based on daily net asset value (NAV) or prices available daily through a public stock exchange. Level 2 assets were valued primarily using market prices, sometimes net of estimated realization expenses, and based on broker/dealer markets or in commingled funds where NAV is not available daily or publicly. For insurance contracts, the estimated surrender value of the policy was used to estimate fair market value. Level 3 assets in the Netherlands were valued using an industry standard model based on certain assumptions such as the U-return and estimated technical reserve.
The table below summarizes the changes in the fair value of the Level 3 assets:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | Level 3 Assets | | Level 3 Assets |
| | US | | Foreign | | US | | Foreign |
| | (Millions) | | (Millions) |
| Balance at December 31 of the previous year | $ | — |
| | $ | 8 |
| | $ | — |
| | $ | 9 |
|
| Actual return on plan assets: |
| |
| |
| |
|
| Relating to assets still held at the reporting date | — |
| | 1 |
| | — |
| | (1 | ) |
| Ending Balance at December 31 | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 8 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table contains information about significant concentrations of risk, including all individual assets that make up more than 5 percent of the total assets and any direct investments in Tenneco stock:
|
| | | | | | | | | |
| Asset Category | Fair Value Level | | Value | | Percentage of
Total Assets |
| | (Millions) |
| 2016: |
| |
| |
|
| Tenneco Stock | 1 |
| | $ | 22 |
| | 4.0 | % |
| 2015: |
| |
| |
|
| Tenneco Stock | 1 |
| | $ | 33 |
| | 5.0 | % |
Our investment policy for both our domestic and foreign plans is to invest more heavily in equity securities than debt securities. Targeted pension plan allocations are 70 percent in equity securities and 30 percent in debt securities, with acceptable tolerance levels of plus or minus five percent within each category for our domestic plans. Our foreign plans are individually managed to different target levels depending on the investing environment in each country.
In December 2015, in anticipation of an offer to active employees and retirees in the U.S. to receive their pension benefit as a lump sum payment, we reallocated a portion of the U.S. pension plan asset portfolio to a lower percentage of equity securities and a higher percentage of debt securities, resulting in a change in the average composition of the domestic investment portfolio to 51 percent equity and 49 percent debt securities. At December 31, 2016, we reestablished the domestic pension plan asset portfolio back to the targeted mix of 70 percent equity and 30 percent debt securities.
Our approach to determining expected return on plan asset assumptions evaluates both historical returns as well as estimates of future returns, and adjusts for any expected changes in the long-term outlook for the equity and fixed income markets for both our domestic and foreign plans.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the change in benefit obligation, the change in plan assets, the development of net amount recognized, and the amounts recognized in the balance sheets for the pension plans and postretirement benefit plan follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension | | Postretirement |
| | 2016 | | 2015 | | 2016 | | 2015 |
| | US | | Foreign | | US | | Foreign | | US | | US |
| | (Millions) |
| Change in benefit obligation: |
| |
| |
| |
| |
| |
|
| Benefit obligation at December 31 of the previous year | $ | 416 |
| | $ | 425 |
| | $ | 448 |
| | $ | 483 |
| | $ | 141 |
| | $ | 143 |
|
| Currency rate conversion | — |
| | (38 | ) | | — |
| | (45 | ) | | — |
| | — |
|
| Settlement | (1 | ) | | — |
| | (8 | ) | | (2 | ) | | — |
| | — |
|
| Service cost | 1 |
| | 8 |
| | 1 |
| | 9 |
| | — |
| | — |
|
| Interest cost | 15 |
| | 14 |
| | 17 |
| | 15 |
| | 6 |
| | 6 |
|
| Administrative expenses/taxes paid | — |
| | (1 | ) | | — |
| | (2 | ) | | — |
| | — |
|
| Plan amendments | — |
| | (1 | ) | | — |
| | 2 |
| | — |
| | — |
|
| Actuarial (gain)/loss | (7 | ) | | 50 |
| | (21 | ) | | (17 | ) | | 5 |
| | 1 |
|
| Benefits paid | (152 | ) | | (20 | ) | | (21 | ) | | (19 | ) | | (9 | ) | | (9 | ) |
| Participants’ contributions | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Benefit obligation at December 31 | $ | 272 |
| | $ | 438 |
| | $ | 416 |
| | $ | 425 |
| | $ | 143 |
| | $ | 141 |
|
| Change in plan assets: |
| |
| |
| |
| |
| |
|
| Fair value at December 31 of the previous year | $ | 304 |
| | $ | 355 |
| | $ | 334 |
| | $ | 392 |
| | $ | — |
| | $ | — |
|
| Currency rate conversion | — |
| | (33 | ) | | — |
| | (38 | ) | | — |
| | — |
|
| Settlement | (1 | ) | | — |
| | (8 | ) | | (2 | ) | | — |
| | — |
|
| Actual return on plan assets | 21 |
| | 50 |
| | (11 | ) | | 8 |
| | — |
| | — |
|
| Administrative expenses/taxes paid | — |
| | (1 | ) | | — |
| | (2 | ) | | — |
| | — |
|
| Employer contributions | 20 |
| | 17 |
| | 10 |
| | 15 |
| | 9 |
| | 9 |
|
| Participants’ contributions | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | — |
|
| Benefits paid | (152 | ) | | (20 | ) | | (21 | ) | | (19 | ) | | (9 | ) | | (9 | ) |
| Fair value at December 31 | $ | 192 |
| | $ | 369 |
| | $ | 304 |
| | $ | 355 |
| | $ | — |
| | $ | — |
|
| Development of net amount recognized: |
| |
| |
| |
| |
| |
|
| Unfunded status at December 31 | $ | (80 | ) | | $ | (69 | ) | | $ | (114 | ) | | $ | (68 | ) | | $ | (143 | ) | | $ | (141 | ) |
| Unrecognized cost: |
| |
| |
| |
| |
| |
|
| Actuarial loss | 146 |
| | 145 |
| | 232 |
| | 144 |
| | 48 |
| | 49 |
|
| Prior service cost/(credit) | — |
| | 4 |
| | — |
| | 5 |
| | (4 | ) | | (6 | ) |
| Net amount recognized at December 31 | $ | 66 |
| | $ | 80 |
| | $ | 118 |
| | $ | 81 |
| | $ | (99 | ) | | $ | (98 | ) |
| Amounts recognized in the balance sheets as of December 31 |
| |
| |
| |
| |
| |
|
| Noncurrent assets | $ | — |
| | $ | 9 |
| | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | — |
|
| Current liabilities | (20 | ) | | (2 | ) | | (2 | ) | | (3 | ) | | (10 | ) | | (9 | ) |
| Noncurrent liabilities | (60 | ) | | (76 | ) | | (112 | ) | | (71 | ) | | (133 | ) | | (132 | ) |
| Net amount recognized | $ | (80 | ) | | $ | (69 | ) | | $ | (114 | ) | | $ | (68 | ) | | $ | (143 | ) | | $ | (141 | ) |
Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) pension cost has been recorded based upon certain actuarial estimates as described below. Those estimates are subject to revision in future periods given new facts or circumstances.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Net periodic pension costs for the years 2016, 2015 and 2014, consist of the following components:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | US | | Foreign | | US | | Foreign | | US | | Foreign |
| | (Millions) |
| Service cost — benefits earned during the year | $ | 1 |
| | $ | 8 |
| | $ | 1 |
| | $ | 9 |
| | $ | 1 |
| | $ | 8 |
|
| Interest cost | 15 |
| | 14 |
| | 17 |
| | 15 |
| | 20 |
| | 18 |
|
| Expected return on plan assets | (23 | ) | | (20 | ) | | (23 | ) | | (21 | ) | | (25 | ) | | (23 | ) |
| Settlement loss | 72 |
| | — |
| | 4 |
| | — |
| | 21 |
| | — |
|
| Net amortization: |
| |
| |
| |
| |
| |
|
| Actuarial loss | 8 |
| | 7 |
| | 8 |
| | 8 |
| | 7 |
| | 7 |
|
| Prior service cost | — |
| | 1 |
| | — |
| | 1 |
| | — |
| | 2 |
|
| Net pension costs | $ | 73 |
| | $ | 10 |
| | $ | 7 |
| | $ | 12 |
| | $ | 24 |
| | $ | 12 |
|
Amounts recognized in accumulated other comprehensive loss for pension benefits consist of the following components:
|
| | | | | | | | | | | | | | | |
| | 2016 | | 2015 |
| | US | | Foreign | | US | | Foreign |
| | (Millions) |
| Net actuarial loss | $ | 146 |
| | $ | 145 |
| | $ | 232 |
| | $ | 144 |
|
| Prior service cost | — |
| | 4 |
| | — |
| | 5 |
|
| $ | 146 |
| | $ | 149 |
| | $ | 232 |
| | $ | 149 |
|
Amounts recognized for pension and postretirement benefits in other comprehensive income for the year ended December 31, 2016 and 2015 include the following components:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2016 | | 2015 |
| | Before-Tax
Amount | | Tax
Benefit | | Net-of-Tax
Amount | | Before-Tax
Amount | | Tax
Benefit | | Net-of-Tax
Amount |
| | (Millions) |
| Defined benefit pension and postretirement plans: |
| |
| |
| |
| |
| |
|
| Change in total actuarial gain (loss) | $ | 51 |
| | $ | (21 | ) | | $ | 30 |
| | $ | (7 | ) | | $ | 2 |
| | $ | (5 | ) |
| Amortization of prior service cost included in net periodic pension and postretirement cost | (1 | ) | | — |
| | (1 | ) | | (3 | ) | | — |
| | (3 | ) |
| Amortization of actuarial gain (loss) included in net periodic pension and postretirement cost | 20 |
| | (8 | ) | | 12 |
| | 23 |
| | (4 | ) | | 19 |
|
| Other comprehensive income — pension benefits | $ | 70 |
| | $ | (29 | ) | | $ | 41 |
| | $ | 13 |
| | $ | (2 | ) | | $ | 11 |
|
In 2017, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive loss, as components of net periodic benefit cost:
|
| | | | | | | |
| | 2017 |
| | US | | Foreign |
| | (Millions) |
| Net actuarial loss | $ | 10 |
| | $ | 8 |
|
| Prior service cost | — |
| | 1 |
|
| | $ | 10 |
| | $ | 9 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets at December 31, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | | | | |
| | December 31, 2016 | | December 31, 2015 |
| | US | | Foreign | | US | | Foreign |
| | (Millions) |
| Projected benefit obligation | $ | 272 |
| | $ | 266 |
| | $ | 416 |
| | $ | 337 |
|
| Accumulated benefit obligation | 272 |
| | 261 |
| | 416 |
| | 332 |
|
| Fair value of plan assets | 192 |
| | 188 |
| | 302 |
| | 262 |
|
The following estimated benefit payments are payable from the pension plans to participants:
|
| | | | | | | |
| Year | US | | Foreign |
| | (Millions) |
| 2017 | $ | 33 |
| | $ | 15 |
|
| 2018 | 14 |
| | 15 |
|
| 2019 | 15 |
| | 16 |
|
| 2020 | 16 |
| | 18 |
|
| 2021 | 15 |
| | 17 |
|
| 2022-2026 | 77 |
| | 95 |
|
The following assumptions were used in the accounting for the pension plans for the years of 2016, 2015, and 2014:
|
| | | | | | | | | | | |
| | 2016 |
| 2015 |
| | US | | Foreign | | US | | Foreign |
| Weighted-average assumptions used to determine benefit obligations |
| |
| |
| |
|
| Discount rate | 4.2 | % | | 2.8 | % | | 4.3 | % | | 3.5 | % |
| Rate of compensation increase | N/A |
| | 2.5 | % | | N/A |
| | 2.7 | % |
|
| | | | | | | | | | | | | | | | | |
| | 2016 | | 2015 | | 2014 |
| | US | | Foreign | | US | | Foreign | | US | | Foreign |
| Weighted-average assumptions used to determine net periodic benefit cost |
| |
| |
| |
| |
| |
|
| Discount rate | 4.3 | % | | 3.5 | % | | 4.1 | % | | 3.2 | % | | 4.8 | % | | 4.3 | % |
| Expected long-term return on plan assets | 7.6 | % | | 5.7 | % | | 7.8 | % | | 5.9 | % | | 7.8 | % | | 6.1 | % |
| Rate of compensation increase | N/A |
| | 2.7 | % | | N/A |
| | 3.0 | % | | N/A |
| | 3.3 | % |
We made contributions of $37 million to our pension plans during 2016. Based on current actuarial estimates, we believe we will be required to make contributions of $32 million to those plans during 2017. Pension contributions beyond 2017 will be required, but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2017 and future discount rate changes.
The Company announced and launched a voluntary program offering to buyout former employees vested in the U.S. pension plan during the third quarter of 2014. The process was completed in the fourth quarter of 2014. Based on participant responses, more than 60% of the former employees who were eligible to participate received a buyout. This resulted in a non-cash charge of $21 million. The cash payments to those former employees who elected to take the buyout were made from the pension plan's assets and did not impact the company's cash flow. This program reduced the outstanding U.S. pension liability by approximately $50 million15.
In February 2016, the Company launched a voluntary program to buy out active employees and retirees who have earned benefits in the U.S. pension plans. As of December 31, 2016, this program has been substantially completed with cash payments to those who elected to take the buyout made from pension plan assets in the fourth quarter of 2016. In connection with this program the Company contributed $18 million into the pension trust and recognized a non-cash charge of $72 million. We expect to complete the program in the first quarter of 2017, at which time we will contribute another $9 million and recognize a non-cash charge of approximately $6 million.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
We have life insurance plans which provided benefit to a majority of our U.S. employees. We also have postretirement plans for our U.S. employees hired before January 1, 2001. The plans cover salaried employees retiring on or after attaining age 55 who have at least 10 years of service with us. For hourly employees, the postretirement benefit plans generally cover employees who retire according to one of our hourly employee retirement plans. All of these benefits may be subject to deductibles, co-payment provisions and other limitations, and we have reserved the right to change these benefits. For those employees hired after January 1, 2001, we do not provide any postretirement benefits. Our postretirement healthcare and life insurance plans are not funded. The measurement date used to determine postretirement benefit obligations is December 31.
Net periodic postretirement benefit cost for the years 2016, 2015, and 2014, consists of the following components:
|
| | | | | | | | | | | |
| 2016 | | 2015 | | 2014 |
| | (Millions) |
| Service cost — benefits earned during the year | $ | — |
| | $ | — |
| | $ | — |
|
| Interest on accumulated postretirement benefit obligation | 6 |
| | 6 |
| | 6 |
|
| Net amortization: |
| |
| |
|
| Actuarial loss | 5 |
| | 6 |
| | 4 |
|
| Prior service credit | (1 | ) | | (4 | ) | | (7 | ) |
| Prior period correction | — |
| | — |
| | 9 |
|
| Net periodic postretirement benefit cost | $ | 10 |
| | $ | 8 |
| | $ | 12 |
|
In the fourth quarter of 2014, we recorded an $11 million adjustment to our postretirement medical expense as a result of approximately 170 retirees who were entitled to benefits but had not been included in the prior year calculations of net periodic postretirement benefit cost.
In 2017, we expect to recognize the following amounts, which are currently reflected in accumulated other comprehensive loss, as components of net periodic benefit cost:
|
| | | |
| | 2017 |
| | (Millions) |
| Net actuarial loss | $ | 5 |
|
| Prior service credit | (1 | ) |
| $ | 4 |
|
The following estimated postretirement benefit payments are payable from the plan to participants:
|
| | | |
| Year | Postretirement
Benefits |
| | (Millions) |
| 2017 | $ | 10 |
|
| 2018 | 10 |
|
| 2019 | 10 |
|
| 2020 | 10 |
|
| 2021 | 9 |
|
| 2022-2026 | 45 |
|
We do not expect to receive any future subsidies under the Medicare Prescription Drug, Improvement, and Modernization Act.
The weighted-average assumed health care cost trend rate used in determining the 2016 accumulated postretirement benefit obligation was 7.0 percent, declining to 4.5 percent by 2026. For 2015, the health care cost trend rate was 7.0 percent declining to 4.5 percent by 2026 and for 2014, the health care cost trend rate was 6.5 percent declining to 4.5 percent by 2019.
The following assumptions were used in the accounting for postretirement cost for the years of 2016, 2015 and 2014:
|
| | | | | |
| 2016 | | 2015 |
| Weighted-average assumptions used to determine benefit obligations |
| |
|
| Discount rate | 4.2 | % | | 4.3 | % |
| Rate of compensation increase | N/A |
| | N/A |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | |
| 2016 | | 2015 | | 2014 |
| Weighted-average assumptions used to determine net periodic benefit cost |
| |
| |
|
| Discount rate | 4.3 | % | | 4.1 | % | | 4.8 | % |
| Rate of compensation increase | N/A |
| | N/A |
| | N/A |
|
A one-percentage-point increase in the 2016 assumed health care cost trend rates would increase total service and interest cost by $1 million and would increase the postretirement benefit obligation by $15 million. A one-percentage-point decrease in the 2016 assumed health care cost trend rates would decrease the total service and interest cost by $1 million and decrease the postretirement benefit obligation by $12 million.
Based on current actuarial estimates, we believe we will be required to make postretirement contributions of approximately $10 million during 2017.
Effective January 1, 2012, the Tenneco Employee Stock Ownership Plan for Hourly Employees and the Tenneco Employee Stock Ownership Plan for Salaried Employees were merged into one plan called the Tenneco 401(k) Retirement Savings Plan (the “Retirement Savings Plan”). Under the plan, subject to limitations in the Internal Revenue Code, participants may elect to defer up to 75 percent of their salary through contributions to the plan, which are invested in selected mutual funds or used to buy our common stock. We match 100 percent of an employee's contributions up to three percent of the employee's salary and 50 percent of an employee's contributions that are between three percent and five percent of the employee's salary. In connection with freezing the defined benefit pension plans for nearly all U.S. based salaried and non-union hourly employees effective December 31, 2006, and the related replacement of those defined benefit plans with defined contribution plans, we are making additional contributions to the Employee Stock Ownership Plans. We recorded expense for these contributions of approximately $28 million, $27 million and $25 million in 2016, 2015 and 2014, respectively. Matching contributions vest immediately. Defined benefit replacement contributions fully vest on the employee’s third anniversary of employment.
11.Segment and Geographic Area Information
We are organized and manage our business along our two major product lines (clean air and ride performance) and three geographic areas (North America; Europe, South America and India; and Asia Pacific), resulting in six operating segments (North America Clean Air, North America Ride Performance, Europe, South America and India Clean Air, Europe, South America and India Ride Performance, Asia Pacific Clean Air and Asia Pacific Ride Performance). Within each geographical area, each operating segment manufactures and distributes either clean air or ride performance products primarily for the original equipment and aftermarket industries. Each of the six operating segments constitutes a reportable segment. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the six operating segments as "Other." We evaluate segment performance based primarily on earnings before interest expense, income taxes, and noncontrolling interests. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Segment results for 2016, 2015 and 2014 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Clean Air Division |
| Ride Performance Division | | | | | | |
| | North
America |
| Europe, South America & India |
| Asia
Pacific |
| North
America |
| Europe, South America & India |
| Asia
Pacific |
| Other |
| Reclass & Elims |
| Total |
| | (Millions) |
| At December 31, 2016, and for the Year Ended |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Revenues from external customers | $ | 3,003 |
| | $ | 1,989 |
| | $ | 1,077 |
| | $ | 1,234 |
| | $ | 1,019 |
| | $ | 277 |
| | $ | — |
| | $ | — |
| | $ | 8,599 |
|
| Intersegment revenues | 13 |
| | 92 |
| | 3 |
| | 9 |
| | 26 |
| | 46 |
| | — |
| | (189 | ) | | — |
|
| EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 220 |
| | 103 |
| | 145 |
| | 157 |
| | 25 |
| | 54 |
| | (188 | ) | | — |
| | 516 |
|
| Total assets | 1,356 |
| | 734 |
| | 651 |
| | 723 |
| | 570 |
| | 265 |
| | — |
| | 47 |
| | 4,346 |
|
| At December 31, 2015, and for the Year Ended |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Revenues from external customers | $ | 2,823 |
| | $ | 1,835 |
| | $ | 1,037 |
| | $ | 1,313 |
| | $ | 944 |
| | $ | 229 |
| | $ | — |
| | $ | — |
| | $ | 8,181 |
|
| Intersegment revenues | 16 |
| | 100 |
| | — |
| | 10 |
| | 28 |
| | 46 |
| | — |
| | (200 | ) | | — |
|
| EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 244 |
| | 52 |
| | 111 |
| | 155 |
| | (5 | ) | | 38 |
| | (87 | ) | | — |
| | 508 |
|
| Total assets | 1,208 |
| | 713 |
| | 598 |
| | 694 |
| | 499 |
| | 226 |
| | — |
| | 32 |
| | 3,970 |
|
| At December 31, 2014, and for the Year Ended |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
| Revenues from external customers | $ | 2,776 |
| | $ | 1,974 |
| | $ | 1,022 |
| | $ | 1,351 |
| | $ | 1,032 |
| | $ | 226 |
| | $ | — |
| | $ | — |
| | $ | 8,381 |
|
| Intersegment revenues | 25 |
| | 114 |
| | — |
| | 10 |
| | 38 |
| | 43 |
| | — |
| | (230 | ) | | — |
|
| EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 237 |
| | 59 |
| | 99 |
| | 143 |
| | 40 |
| | 35 |
| | (124 | ) | | — |
| | 489 |
|
| Total assets | 1,156 |
| | 789 |
| | 593 |
| | 659 |
| | 503 |
| | 227 |
| | — |
| | 69 |
| | 3,996 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table shows information relating to our external customer revenues for each product or each group of similar products:
|
| | | | | | | | | | | |
| | Net Sales
Year Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| | (Millions) |
| Clean Air Products & Systems | | | | | |
| Aftermarket | $ | 305 |
| | $ | 318 |
| | $ | 318 |
|
| Original Equipment | | | | | |
| OE Value-add | 3,736 |
| | 3,489 |
| | 3,559 |
|
| OE Substrate | 2,028 |
| | 1,888 |
| | 1,895 |
|
| | 5,764 |
| | 5,377 |
| | 5,454 |
|
| | 6,069 |
| | 5,695 |
| | 5,772 |
|
| Ride Performance Products & Systems | | | | | |
| Aftermarket | 937 |
| | 941 |
| | 976 |
|
| Original Equipment | 1,593 |
| | 1,545 |
| | 1,633 |
|
| | 2,530 |
| | 2,486 |
| | 2,609 |
|
| Total Revenues | $ | 8,599 |
| | $ | 8,181 |
| | $ | 8,381 |
|
| | | | | | |
The following customers accounted for 10 percent or more of our net sales in the last three years. The net sales to both customers were across segments.
|
| | | | | | | | |
| Customer | 2016 | | 2015 | | 2014 |
| General Motors Company | 17 | % | | 15 | % | | 15 | % |
| Ford Motor Company | 13 | % | | 14 | % | | 13 | % |
The following table shows information relating to the geographic regions in which we operate:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Geographic Area |
| | United
States | | China | | Germany | | Canada | | United
Kingdom | | Other
Foreign(a) | | Reclass &
Elims | | Consolidated |
| | (Millions) | | |
| At December 31, 2016, and for the Year Then Ended | | | | | | | | | | | | | | | |
| Revenues from external customers(b) | $ | 3,512 |
| | $ | 1,186 |
| | $ | 764 |
| | $ | 387 |
| | $ | 387 |
| | $ | 2,363 |
| | $ | — |
| | $ | 8,599 |
|
| Long-lived assets(c) | 541 |
| | 217 |
| | 111 |
| | 44 |
| | 38 |
| | 518 |
| | — |
| | $ | 1,469 |
|
| Total assets | 1,897 |
| | 795 |
| | 231 |
| | 166 |
| | 130 |
| | 1,275 |
| | (148 | ) | | $ | 4,346 |
|
| At December 31, 2015, and for the Year Then Ended | | | | | | | | | | | | | | | |
| Revenues from external customers(b) | $ | 3,334 |
| | $ | 1,101 |
| | $ | 807 |
| | $ | 387 |
| | $ | 307 |
| | $ | 2,245 |
| | $ | — |
| | $ | 8,181 |
|
| Long-lived assets(c) | 496 |
| | 203 |
| | 108 |
| | 41 |
| | 32 |
| | 476 |
| | — |
| | $ | 1,356 |
|
| Total assets | 1,726 |
| | 699 |
| | 258 |
| | 146 |
| | 101 |
| | 1,156 |
| | (116 | ) | | $ | 3,970 |
|
| At December 31, 2014, and for the Year Then Ended | | | | | | | | | | | | | | | |
| Revenues from external customers(b) | $ | 3,309 |
| | $ | 1,079 |
| | $ | 955 |
| | $ | 413 |
| | $ | 235 |
| | $ | 2,390 |
| | $ | — |
| | $ | 8,381 |
|
| Long-lived assets(c) | 473 |
| | 192 |
| | 113 |
| | 52 |
| | 27 |
| | 494 |
| | — |
| | 1,351 |
|
| Total assets | 1,696 |
| | 683 |
| | 319 |
| | 164 |
| | 68 |
| | 1,221 |
| | (155 | ) | | 3,996 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
(a) | Revenues from external customers and long-lived assets for individual foreign countries other than China, Germany, Canada, and United Kingdom are not material. |
| |
(b) | Revenues are attributed to countries based on location of the shipper. |
| |
(c) | Long-lived assets include all long-term assets except goodwill, intangibles and deferred tax assets. |
12.Commitments and Contingencies
Capital Commitments
We estimate thatThe Company estimates expenditures aggregating to approximately $112$181 million will be required after December 31, 20162018 to complete facilities and projects authorized at such date, and we haveit has made substantial commitments in connection with these facilities and projects.
Lease Commitments
We have long-term leasesThe Company's facilities and equipment are generally leased under arrangements that are accounted for certain facilities,as operating leases. Total rental expense for the years ended December 31, 2018, 2017 and 2016 was $111 million, $81 million and $74 million, respectively. Future minimum operating lease payments at December 31, 2018 are as follows:
|
| | | |
| | (Millions) |
| 2019 | $ | 120 |
|
| 2020 | 100 |
|
| 2021 | 86 |
|
| 2022 | 68 |
|
| 2023 | 56 |
|
| Beyond 2023 | 53 |
|
| Total minimum lease payments | $ | 483 |
|
Certain equipment is leased under long term agreements. Capital assets for these agreements were $2 million and other assets.$1 million at December 31, 2018 and 2017. The minimum lease payments under our non-cancelable operating leases with lease terms in excess of one year are $39 million in 2017, $25 million in 2018, $18 million in 2019, $15 million in 2020, and $12 million in 2021 and $17 million in subsequent years. The minimum lease payments under our non-cancelablenon-cancellable capital leases with lease terms in excess of one year are less than $1 million in each of the next five years. Total rental expense for the year 2016, 2015 and 2014 was $65 million, $61 million and $64 million, respectively.
Environmental Matters, Legal Proceedings and Product Warranties
We are involved in environmental remediation matters, legal proceedings, claims, investigations and warranty obligations. These matters are typically incidental to the conduct of our business and create the potential for contingent losses. We accrue for potential contingent losses when our review of available facts indicates that it is probable a loss has been incurred and the amount of the loss is reasonably estimable. Each quarter we assess our loss contingencies based upon currently available facts, existing technology, presently enacted laws and regulations and taking into consideration the likely effects of inflation and other societal and economic factors and record adjustments to these reserves as required. As an example, we consider all available evidence including prior experience in remediation of contaminated sites, other companies’ cleanup experiences and data released by the United States Environmental Protection Agency or other organizations when we evaluate our environmental remediation contingencies. All of our loss contingency estimates are subject to revision in future periods based on actual costs or new information. With respect to our environmental liabilities, where future cash flows are fixed or reliably determinable, we have discounted those liabilities. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our consolidated financial statements.
Environmental Matters
We areThe Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We expenseit operates. The Company has been notified by the U.S. Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies it may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") and other national and state or capitalize,provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities. Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, its share of the total waste sent to these sites generally has been small. The Company believes its exposure for liability at these sites is limited.
On a global basis, the Company has also identified certain other present and former properties at which it may be responsible for cleaning up or addressing environmental contamination, in some cases as a result of contractual commitments and/or federal or state environmental laws. The Company is actively seeking to resolve these actual and potential statutory, regulatory, and contractual obligations.
The Company expenses or capitalizes, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense costs related to an existing condition caused by past operations that do not contribute to current or future revenue generation.regulations. As of December 31, 2016, we have2018, the Company has an obligation to remediate or contribute towards the remediation of certain sites, including one Federal Superfund site. At December 31, 2016, ourthe sites discussed above at which it may be a PRP. The Company's aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $15$40 million as of December 31, 2018, of which $2$12 million is recorded in accrued expenses and other current liabilities and $13$28 million is recorded in deferred credits and other liabilities in ourthe consolidated balance sheet.sheets. For those locations where the liability was discounted, the weighted average discount rate used was 2.4 percent.2.9%. The undiscounted value of the estimated remediation costs was $18 million. Our$46 million as of December 31, 2018. The Company's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately $10 million in 2019, $6 million in 2020, $3 million in both 2021 and 2022, $2 million in 2017, $1 million each year beginning 2018 through 20212023 and $12$16 million in the aggregate thereafter.
In addition to amounts described above, the Company estimates it will make expenditures for property, plant and equipment for environmental matters of approximately $14 million in 2019 and $7 million in 2020.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Based on information known to us, we havethe Company from site investigations and the professional judgment of consultants, the Company has established reserves that we believeit believes are adequate for these costs. Although we believethe Company believes these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates, difficult to quantify based on the complexity of the issues, and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect thatthe Company expects other parties will contribute to the remediation costs. In addition, certain environmental statutes provide that ourthe Company's liability could be joint and several, meaning that wethe Company could be required to pay amounts in excess of ourits share of remediation costs. Our understanding of theThe financial strength of the other potentially responsible partiesPRPs at these sites has been considered, where appropriate, in ourthe determination of ourthe estimated liability. We doThe Company does not believe that any potential costs associated with ourits current status as a potentially responsible party in the Federal Superfund site,PRP, or as a liable party at the other locations referenced herein, will be material to ourits annual consolidated financial position, results of operations, or liquidity.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Antitrust Investigations and Litigation
On March 25, 2014, representatives of the European Commission (EC) were at Tenneco GmbH's Edenkoben, Germany administrative facility to gather information in connection with an ongoing global antitrust investigation concerning multiple automotive suppliers. On March 25, 2014, wethe same date, the Company also received a related subpoena from the U.S. Department of Justice (“DOJ”).
On November 5, 2014, the DOJ granted us conditional leniency to Tenneco, its subsidiaries and its 50% affiliates as of such date ("2014 Tenneco Entities") pursuant to an agreement wethe Company entered into under the Antitrust Division’sDivision's Corporate Leniency Policy. This agreement provides us with important benefits to the 2014 Tenneco Entities in exchange for our self reportingthe Company's self-reporting of matters to the DOJ and ourits continuing full cooperation with the DOJ’sDOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against us,the 2014 Tenneco Entities, nor seek any criminal fines or penalties, in connection with the matters wethe Company reported to the DOJ. Additionally, there are limits on ourthe liability of the 2014 Tenneco Entities related to any follow onfollow-on civil antitrust litigation in the U.S.United States. The limits include single rather than treble damages, as well as relief from joint and several antitrust liability with other relevant civil antitrust action defendants. These limits are subject to ourthe Company satisfying the DOJ and any court presiding over such follow onfollow-on civil litigation.
On April 27, 2017, the Company received notification from the EC that it has administratively closed its global antitrust inquiry regarding the production, assembly, and supply of complete exhaust systems. No charges against the Company or any other competitor were initiated at any time and the EC inquiry is now closed.
Certain other competition agencies are also investigating possible violations of antitrust laws relating to products supplied by our company. We havethe Company and its subsidiaries, including Federal-Mogul. The Company has cooperated and continuecontinues to cooperate fully with all of these antitrust investigations, and take other actions to minimize ourits potential exposure.
TennecoThe Company and certain of its competitors are also currently defendants in civil putative class action litigation, and are subject to similar claims filed by other plaintiffs, in the United States.States and Canada. More related lawsuits may be filed, including in other jurisdictions. Plaintiffs in these cases generally allege that defendants have engaged in anticompetitive conduct, in violation of federal and state laws, relating to the sale of automotive exhaust systems or components thereof. Plaintiffs seek to recover, on behalf of themselves and various purported classes of purchasers, injunctive relief, damages and attorneys’ fees. However, as explained above, because we receivedthe DOJ granted conditional leniency fromto the DOJ, our2014 Tenneco Entities, the Company's civil liability in U.S. follow-on actions with respect to these follow on actionsentities is limited to single damages and wethe Company will not be jointly and severally liable with the other defendants, provided that we havethe Company has satisfied ourits obligations under the DOJ leniency agreement and approval is granted by the presiding court. Typically, exposure for follow-on actions in Canada is less than the exposure for U.S. follow-on actions.
Antitrust law investigations,Following the EC’s decision to administratively close its antitrust inquiry into exhaust systems in 2017, receipt by the 2014 Tenneco Entities of conditional leniency from the DOJ and discussions during the third quarter of 2017 following the appointment of a special settlement master in the civil litigation, and related matters often continue for several years and can resultputative class action cases pending against the Company and/or certain of its competitors in significant penalties and liability. We intendthe United States, the Company continues to vigorously defend the companyitself and/or take other actions to minimize ourits potential exposure. In lightexposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the many uncertaintiesCompany and variables involved, we cannotits stockholders. For example, in October 2017, the Company settled an administrative action brought by Brazil's competition authority for an amount that was not material. In December 2018, the Company settled a separate administrative action brought by Brazil’s competition authority against a Federal-Mogul subsidiary, also for an amount that was not material.
Additionally, in February 2018, the Company settled civil putative class action litigation in the United States brought by classes of direct purchasers, end-payors and auto dealers. No other classes of plaintiffs have brought claims against the Company in the United States. Based upon those earlier developments, including settlement discussions, The Company established a reserve of $132 million in its second quarter 2017 financial results for settlement costs that were probable, reasonably estimable, and expected to be necessary to resolve its antitrust matters globally, which primarily involves the resolution of civil suits and
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
related claims. Of the $132 million reserve that was established, $79 million was paid through December 31, 2018 resulting in a remaining reserve of $53 million as of December 31, 2018, which is recorded in accrued expenses and other current liabilities in the Company's consolidated balance sheets. While the Company, including its Federal-Mogul subsidiaries, continues to cooperate with certain competition agencies investigating possible violations of antitrust laws relating to products supplied by the Company, and the Company may be subject to other civil lawsuits and/or related claims, no amount of this reserve is attributable to matters with the DOJ or the EC, and no such amount is expected based on current information.
The Company's reserve for its antitrust matters is based upon all currently available information and an assessment of the probability of events for those matters where the Company can make a reasonable estimate of the costs to resolve such outstanding matters. The Company's estimate involves significant judgment, given the number, variety and potential outcomes of actual and potential claims, the uncertainty of future rulings and approvals by a court or other authority, the behavior or incentives of adverse parties or regulatory authorities, and other factors outside of its control. As a result, the Company's reserve may change from time to time, and actual costs may vary. Although the ultimate impactoutcome of any legal matter cannot be predicted with certainty, based on current information, the Company does not expect that these matters may have on our company. Further, there can be no assurance thatany such change in the ultimate resolution of these mattersreserve will not have a material adverse effectimpact on ourthe Company's annual consolidated financial position, results of operations or liquidity.
Other Legal Proceedings, Claims and Investigations
WeFor many years the Company has been and continues to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. The Company's current docket of active and inactive cases is less than 500 cases in the United States and less than 50 in Europe.
With respect to the claims filed in the United States, the substantial majority of the claims are related to alleged exposure to asbestos in the Company's line of Walker® exhaust automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. A small number of claims have been asserted against one of the Company's subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. The Company believes, based on scientific and other evidence, it is unlikely that U.S. claimants were exposed to asbestos by the Company's former products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number in some cases exceeding 100 defendants from a variety of industries. Additionally, in many cases the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages.
With respect to the claims filed in Europe, the substantial majority relate to occupational exposure claims brought by current and former employees of Federal-Mogul facilities in France and amounts paid out were not material. A small number of occupational exposure claims have also been asserted against Federal-Mogul entities in Italy and Spain.
As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, the Company may experience an increased number of these claims. The Company vigorously defends itself against these claims as part of its ordinary course of business. In future periods, the Company could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to the Company. To date, with respect to claims that have proceeded sufficiently through the judicial process, the Company has regularly achieved favorable resolutions. Accordingly, the Company presently believes that these asbestos-related claims will not have a material adverse impact on the Company's annual consolidated financial position, results of operations or liquidity.
In connection with Federal-Mogul’s emergence from bankruptcy in 2008, trusts were funded and established to assume liability for and resolve Federal-Mogul’s legacy asbestos liabilities in the United States and United Kingdom. Accordingly, those legacy liabilities in the United States and United Kingdom have had no ongoing impact on Federal-Mogul, Tenneco or their operations.
The Company is also from time to time involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of damages against usthe Company relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warning issues, and other product liability related matters), taxes, unclaimed property, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance.
While wethe Company vigorously defend ourselvesdefends itself against all of these legal proceedings, claims and investigations and take other actions to minimize ourits potential exposure, in future periods, wethe Company could be subject to cash costs or charges to earnings if any of these matters are resolved on unfavorable terms. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including ourthe Company's assessment of the merits of the particular claim, except as described above under "Antitrust Investigations," we do notInvestigations", the Company does expect the legal proceedings, claims or investigations currently pending against usit will have any material adverse impact on ourits annual consolidated financial position, results of operations or liquidity.
In addition, for many years we have been and continue to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. Our current docket of active and inactive cases is less than 500 cases nationwide. A small number of claims have been asserted against one of our subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. The substantial majority of the remaining claims are related to alleged exposure to asbestos in our automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. We believe, based on scientific and other evidence, it is unlikely that claimants were exposed to asbestos by our former products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants, with the number in some cases exceeding 100 defendants from a variety of industries. Additionally, in many cases the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages. As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
through
Asset Retirement Obligations
As a result of the judicial process, we have regularly achieved favorable resolutions. Accordingly, we presently believe that these asbestos-related claims willAcquisition, the Company acquired liabilities related to asset retirement obligations (ARO). The Company did not have ARO liabilities as of December 31, 2017. The Company’s primary ARO activities relate to the removal of hazardous building materials at its facilities. The Company records an ARO at fair value upon initial recognition when the amount is probable and can be reasonably estimated. ARO fair values are determined based on the Company’s determination of what a material adverse impact on our futurethird party would charge to perform the remediation activities, generally using a present value technique.
The Company maintains ARO liabilities in the consolidated financial position, resultsbalance sheets as follows:
|
| | | |
| | December 31 |
| | 2018 |
| | (Millions) |
| Accrued expenses and other current liabilities | $ | 3 |
|
| Deferred credits and other liabilities | 12 |
|
| | $ | 15 |
|
The following is a rollforward of operations or liquidity.the Company’s ARO liability for the year ended December 31, 2018 (in millions):
|
| | | |
| | December 31 |
| | 2018 |
| | (Millions) |
| Balance as of December 31, 2017 | $ | — |
|
| Acquisition of Federal-Mogul | 12 |
|
| Liabilities incurred | 3 |
|
| Liabilities settled/adjustments | — |
|
| Balance as of December 31, 2018 | $ | 15 |
|
Warranty Matters
We provideThe Company provides warranties on some of ourits products. The warranty terms vary but range from one year up to limited lifetime warranties on some of ourits premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified with ourthe Company's products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. We actively study trends of our warranty claims and take action to improve product quality and minimize warranty claims. We believe thatThe Company believes the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both current and long-term liabilities on the consolidated balance sheet.sheets.
Below is a table that shows the activity in the warranty accrual accounts:
| | | | Year Ended
December 31, | Year Ended December 31 |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (Millions) | (Millions) |
| Beginning Balance | $ | 23 |
| | $ | 26 |
| | $ | 24 |
| |
| Beginning balance | | $ | 32 |
| | $ | 27 |
| | $ | 23 |
|
| Acquisition of Federal-Mogul | | 17 |
| | — |
| | — |
|
| Accruals related to product warranties | 12 |
| | 15 |
| | 24 |
| 14 |
| | 15 |
| | 19 |
|
| Reductions for payments made | (15 | ) | | (18 | ) | | (22 | ) | (18 | ) | | (10 | ) | | (15 | ) |
| Ending Balance | $ | 20 |
| | $ | 23 |
| | $ | 26 |
| |
| Ending balance | | $ | 45 |
| | $ | 32 |
| | $ | 27 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
16. Share-Based Compensation
The Company's current long-term incentive compensation plan, which was originally adopted in 2006 and amended in 2009, 2013 and 2018, is known as the Tenneco Inc. 2006 Long-Term Incentive Plan (2006 LTIP). The types of awards that may be granted under the 2006 LTIP are stock-options (both incentive and non-qualified stock options), stock appreciation rights (SARs), Full Value Awards (including bonus stock, stock units, restricted stock, restricted stock units (RSUs), deferred stock units, performance stock, and performance stock units (PSUs), and cash incentive awards (including long-term performance units (LTPUs) and cash settled RSUs).
On September 12, 2018, the stockholders of the Company approved an amendment to the 2006 LTIP to increase the shares of common stock available thereunder to 3.0 million. Share-settled awards are settled through the issuance of new shares of Class A Common Stock. As of December 31, 2018, up to 14.8 million shares of the Company's Class A Common Stock are authorized to be issued under its 2006 LTIP, of which approximately 4,034,413 shares remain authorized for granting under the plan.
In 2018, the Company prospectively changed its vesting policy regarding retirement eligibility and now require a retirement eligible employee (or an employee who becomes retirement eligible) to provide at least one year of service from the grant date in order for the award to vest. If an employee becomes retirement eligible after the first year of vesting but before completion of the three-year term, the Company amortizes the expense for the share-based awards over a period starting at the grant date to the date an employee becomes retirement eligible. Prior to 2018, for employees eligible to retire at grant date, the Company immediately expensed the granted awards.
Director restricted stock awards generally vest on the date of grant. Stock options, RSUs (both cash-settled and share-settled) and restricted stock are time-based service awards and generally vest according to a three-year graded vesting schedule. One-third of the award will vest on the first anniversary of the grant date, one-third of the award will vest on the second anniversary and one-third of the award will vest on the third anniversary.
LTPU and PSU awards generally have a three-year performance period and cliff vest at the end of the period based upon achievement of performance and market targets established at the time of grant. Generally 50% of the award is based on performance targets and 50% is based on market targets. The market target for both LTPUs and PSU is Company total shareholder return (TSR) percentile ranking among peer companies with TSR defined as change in stock price plus dividends paid divided by beginning stock price. The LTPUs have two performance targets, Cumulative EBITDA and Cumulative free cash flow, which are defined in the award. The PSUs have one performance target, Cumulative economic value added, which is defined in the award.
Director restricted stock, restricted stock and RSUs (cash-settled and share-settled) will participate in any dividends during the vesting period, which are subject to the same vesting terms of the award. The dividends are generally paid in cash on the settlement date of the award.
The fair value of restricted stock and RSUs (cash-settled and share-settled) are determined using the average of the high and low trading price of our common stock on the date of measurement. The fair value of LTPU’s and PSUs are determined using the probability weighted factors for performance conditions combined with Monte Carlo simulation model for market conditions. The Monte Carlo model utilizes multiple input variables that determine the probability of satisfying the market condition stipulated in the award and calculated the fair value of the award. The starting stock price is based on the trailing 20-day closing stock price as of the beginning of the performance period and the closing stock price on the valuation date, as well as the respective stock prices for component companies. The risk-free rate is based on yields observed on the U.S. Treasury constant maturity notes with a term equal to the remaining term of the award being measured. Expected volatilities utilized in the model are based on historical volatility of the Company and the companies in the S&P 500 index using daily stock price returns prior to the valuation date, commensurate with the remaining performance period at the measurement date. The cross correlation among stock price returns of the Company and each of the component companies in the S&P 500 with the S&P 500 Index are calculated based on daily returns over the trailing period commensurate with the remainder of the performance period at the valuation date.
For our restricted stock, share-settled RSUs and PSUs that have not yet vested, we estimate forfeitures by taking the average of the past actual forfeiture rate for these grants.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Cash-Settled Awards
Prior to 2018, the Company has granted RSUs and LTPUs to certain key employees that are payable in cash. These awards are classified as liabilities and are valued based on the fair value of the award at the grant date and are remeasured at each reporting date until settlement with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. At December 31, 2018, the LTPUs outstanding included a three-year grant for 2016-2018 payable in the first quarter of 2019, and a three-year grant for 2017-2019 payable in the first quarter of 2020.
Total share-based compensation expense (net of taxes) for the cash-settled awards was a benefit of $1 million in 2018, and an expense of $4 million and $10 million in 2017 and 2016, respectively. Share-based compensation expense is included in selling, general and administrative expenses in the consolidated statements of income. As of December 31, 2018, $2 million of total unrecognized compensation costs is expected to be recognized on the cash-settled awards over a weighted-average period of approximately 1 year.
Share-Settled Awards
The Company has granted restricted stock and stock options to its directors and certain key employees. In addition, beginning in 2018, the Company has granted RSUs and PSUs that are payable in common stock to certain key employees. These awards are settled in shares upon vesting with compensation expense being recognized based on the grant date fair value recognized ratably over the requisite service period if it is probable that the performance target related to the PSUs will be achieved and subsequently adjusted if the probability assessment changes.
Total share-based compensation expense (net of taxes) for the share-settled awards for the years ended December 31, 2018, 2017, and 2016 was $11 million, $11 million and $9 million, respectively. Share-based compensation expense is included in selling, general and administrative expenses in the consolidated statements of income.
Stock Options
The Company's nonqualified stock options generally have seven-year terms. There have been no stock options granted since 2014 and all options are currently vested. As such, there was no unrecognized compensation cost related to the Company's stock option awards as of December 31, 2018.
The following table reflects the status and activity for all options to purchase common stock for the period indicated:
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Shares
Under
Option | | Weighted Avg.
Exercise
Prices | | Weighted Avg.
Remaining
Life in Years | | Aggregate
Intrinsic
Value |
| | | | | | | | (Millions) |
| Options outstanding, January 1, 2018 | 318,016 |
| | $ | 46.18 |
| | 2.3 | | $ | 5 |
|
| Granted | — |
| | — |
| | | | |
| Exercised | (21,823 | ) | | 29.79 |
| | | | |
| Forfeited/expired | (2,196 | ) | | 55.50 |
| | | | |
| Options outstanding, December 31, 2018 | 293,997 |
| | 46.89 |
| | 1.4 | | $ | — |
|
Cash received from stock option exercises was $1 million in 2018, $8 million in 2017, and $16 million in 2016. Stock options exercised generated a tax shortfall of less than $1 million in 2018, and an excess tax benefit of $2 million in 2017 and $1 million in 2016.
As of December 31, 2018, all outstanding options are exercisable. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017, and 2016 was less than $1 million, $6 million and $11 million, respectively.
As mentioned above, there have been no stock options granted since 2014. Accordingly, no options vested in 2018. The total fair value of shares vested from options that were granted prior to 2015 was $2 million in 2017 and $4 million in 2016.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Restricted Stock, Share-Settled RSUs and PSUs
The following table reflects the status for all nonvested restricted stock, share-settled RSUs and PSUs for the period indicated: |
| | | | | | | | | | | | | | | | | | | | |
| | Restricted Stock | | Share-Settled RSUs | | PSUs |
| | Shares | | Weighted Avg.
Grant Date
Fair Value | | Units | | Weighted Avg.
Grant Date
Fair Value | | Units | | Weighted Avg.
Grant Date
Fair Value |
| Nonvested balance at January 1, 2018 | 410,251 |
| | $ | 53.36 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Granted | 19,727 |
| | 54.19 |
| | 467,358 |
| | 48.48 |
| | 248,928 |
| | 49.32 |
|
| Vested | (237,342 | ) | | 51.17 |
| | (192 | ) | | 55.04 |
| | — |
| | — |
|
| Forfeited | (14,086 | ) | | 60.87 |
| | (26,763 | ) | | 55.04 |
| | (21,879 | ) | | 50.75 |
|
| Nonvested balance at December 31, 2018 | 178,550 |
| | 55.46 |
| | 440,403 |
| | 47.99 |
| | 227,049 |
| | 49.18 |
|
At December 31, 2018, the PSUs outstanding represent a three-year grant for 2018-2020 payable in the first quarter of 2021.
The total fair value of restricted stock vested was $11 million in 2018, $14 million in 2017, and $9 million in 2016.
As of December 31, 2018, approximately $25 million of total unrecognized compensation costs is expected to be recognized on the share-settled awards over a weighted-average period of approximately two years.
17. Shareholders' Equity
Common Stock
Common Stock Outstanding
As discussed in Note 3, Acquisitions and Divestitures, and pursuant to the Amended and Restated Certificate of Incorporation, Class B Common Stock was created, and the Company’s existing common stock was reclassified as Class A Common Stock.
The Company has authorized 175,000,000 shares and 135,000,000 shares ($0.01 par value) of Class A Common Stock at December 31, 2018 and 2017. The Company has authorized 25,000,000 shares ($0.01 par value) of Class B Common Stock at December 31, 2018.
Total common stock outstanding and changes in common stock issued are as follows:
|
| | | | | | | | | | | |
| | Class A Common Stock | | Class B Common Stock |
| | Year Ended December 31 | | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 | | 2018 |
| Shares issued, beginning balance | 66,033,509 |
| | 65,891,930 |
| | 65,067,132 |
| | — |
|
| Share issuances (1) | 5,651,177 |
| | — |
| | — |
| | 23,793,669 |
|
| Issuance pursuant to benefit plans | 19,919 |
| | 34,760 |
| | 292,514 |
| | — |
|
| Restricted stock forfeited and withheld for taxes | (51,049 | ) | | (126,682 | ) | | — |
| | — |
|
| Stock options exercised | 21,823 |
| | 233,501 |
| | 532,284 |
| | — |
|
| Shares issued, ending balance | 71,675,379 |
| | 66,033,509 |
| | 65,891,930 |
| | 23,793,669 |
|
| | | | | | | | |
| Treasury stock | 14,592,888 |
| | 14,592,888 |
| | 11,655,938 |
| | — |
|
| Total shares outstanding | 57,082,491 |
| | 51,440,621 |
| | 54,235,992 |
| | 23,793,669 |
|
(1) Represents an aggregate of 29,444,846 shares of Common Stock delivered to AEP as the Stock Consideration related to Federal-Mogul Acquisition. See Note 3, Acquisitions and Divestitures for additional information.
The rights of the Class A Common Stock and Class B Common Stock are the same, except with respect to voting and conversion. Holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are not entitled to vote unless a proposed action would diminish their rights, powers or privileges, in which case such action must be unanimously approved by the holders of the Class B Common Stock. Holders of Class A Common Stock have no right to
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
convert their shares into other securities. Each share of Class B Common Stock will automatically convert into a share of Class A Common Stock upon transfer, with limited exceptions. In addition, if the proposed spin-off of the Company’s aftermarket and ride performance business (the “Spin-Off”) does not occur by April 1, 2020, each holder of Class B Common Stock may convert its shares into an equal number of shares of Class A Common Stock, provided that the initial Class B holders would not own, in the aggregate, more than 15 percent of the Class A Common Stock following such conversion.
Shareholder Agreement
In connection with the closing of the Federal-Mogul acquisition, on October 1, 2018, the Company, AEP, IEP, and Icahn Enterprises Holdings L.P. (“IEH”) entered into a Shareholders Agreement (the “Shareholders Agreement”).
Pursuant to the Shareholders Agreement, a designee of IEP will be nominated to the Company’s board of directors (the “Board”) at each annual meeting of stockholders until the earlier of the Spin-Off date and the date IEP and its affiliates own less than 10% of the outstanding Class A Common Stock and Class B Common Stock, measured as a single class (the “Outstanding Shares”).
The Shareholders Agreement prohibits IEP and its affiliates from taking certain actions until the earlier of (i) April 1, 2020, if the Spin-Off has not occurred, and (ii) one year after the date on which IEP and its affiliates cease to own at least 5% of the Outstanding Shares. Prohibited actions include: (i) acquisitions of stock or other securities or any material assets of the Company or any subsidiaries (subject to some exceptions); (ii) participating in a proxy solicitation; (iii) announcing or proposing any extraordinary business combination transaction; and (iv) otherwise seeking to control or influence control of the management, the Board or the policies of the Company.
Until the later of (i) the expiration of the standstill restrictions discussed above and (ii) the time when IEP and its affiliates cease to own at least 10% of the Outstanding Shares, IEP and its affiliates may not transfer any shares (a) to certain specified types of investors and (b) in an amount equal to 5% or more of the Class A Common Stock issued and outstanding (subject to certain carve outs for transfers to certain passive institutional investors).
For so long as IEP and its affiliates own at least 10% of the Outstanding Shares, if the Company proposes to issue any equity securities (other than in an excluded issuance), IEP and its affiliates have certain preemptive rights. The Shareholders Agreement also includes registration rights for IEP.
Share Repurchase Program
During 2015, the Company's Board of Directors approved a share repurchase program, authorizing it to repurchase up to $550 million of its outstanding class A common stock over a three-year period ("2015 Program"). The Company purchased 4,182,613 shares in 2016 through open market purchases, which were funded through cash from operations, at a total cost of $225 million, at an average price of $53.89 per share. These repurchased shares are held as part of the Company's treasury stock.
In February 2017, the Company's Board of Directors authorized the repurchase of up to $400 million of its outstanding common stock over the next three years ("2017 Program"). The 2017 Program included $112 million that remained authorized under the 2015 Program. The Company generally acquires the shares through open market or privately negotiated transactions, and has historically utilized cash from operations. The repurchase program does not obligate the Company to repurchase shares within any specific time or situations.
The Company purchased 2,936,950 shares in 2017 through open market purchases at a total cost of $169 million, at an average price of $57.57 per share. These repurchased shares are held as part of the Company's treasury stock which increased to 14,592,888 at December 31, 2017 from 11,655,938 at December 31, 2016. As of December 31, 2018, approximately $231 million remained authorized for share repurchases under the 2017 Program.
In 2018, no shares were repurchased under the 2017 Program. No new share repurchase programs were authorized by the Board of Directors in 2018.
Preferred Stock
The Company had 50,000,000 shares of preferred stock ($0.01 par value) authorized at both December 31, 2018 and 2017. No shares of preferred stock were issued or outstanding at those dates.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
18. Changes in Accumulated Other Comprehensive Income (Loss) by Component
The following represents the Company’s changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 2018, 2017, and 2016:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Foreign currency translation adjustment: | | | | | |
| Balance at beginning of year | $ | (263 | ) | | $ | (367 | ) | | $ | (315 | ) |
| Other comprehensive income (loss) before reclassifications | (134 | ) | | 104 |
| | (49 | ) |
| Income tax provision (benefit) | 2 |
| | — |
| | (3 | ) |
| Other comprehensive income (loss), net of tax | (132 | ) | | 104 |
| | (52 | ) |
| Balance at end of period | (395 | ) | | (263 | ) | | (367 | ) |
| Pension and postretirement benefits: | | | | | |
| Balance at beginning of year | (275 | ) | | (292 | ) | | (343 | ) |
| Other comprehensive income (loss) before reclassifications | (47 | ) | | 2 |
| | 61 |
|
| Reclassification to earnings | 22 |
| | 26 |
| | 19 |
|
| Other comprehensive income (loss) before tax | (25 | ) | | 28 |
| | 80 |
|
| Income tax provision (benefit) | 3 |
| | (11 | ) | | (29 | ) |
| Other comprehensive income (loss), net of tax | (22 | ) | | 17 |
| | 51 |
|
| Balance at end of period | $ | (297 | ) | | $ | (275 | ) | | $ | (292 | ) |
| | | | | | |
Other comprehensive income (loss) attributable to noncontrolling interests, net of tax
| $ | (2 | ) | | $ | 2 |
| | $ | (4 | ) |
13.19.Earnings per Share
The Company computes basic earnings per share by dividing income available to common shareholders by the weighted average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the Company adjusts the weighted average number of shares outstanding to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, the Company adjusts income available to common shareholders to include any changes in income or loss that would result from the assumed issuance of the dilutive common shares.
Earnings per share of common stock outstanding were computed as follows:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions Except Share and Per Share Amounts) |
| Net income attributable to Tenneco Inc. | $ | 55 |
| | $ | 198 |
| | $ | 347 |
|
| Basic earnings per share — | | | | | |
| Average shares of common stock outstanding | 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Earnings per average share of common stock | $ | 0.93 |
| | $ | 3.75 |
| | $ | 6.20 |
|
| Diluted earnings per share — | | | | | |
| Average shares of common stock outstanding | 58,625,087 |
| | 52,796,184 |
| | 55,939,135 |
|
| Effect of dilutive securities: |
| |
| |
|
| Restricted stock and RSUs | 93,546 |
| | 111,062 |
| | 175,513 |
|
| Stock options | 40,099 |
| | 119,665 |
| | 292,788 |
|
| Average shares of common stock outstanding including dilutive securities | 58,758,732 |
| | 53,026,911 |
| | 56,407,436 |
|
| Earnings per average share of common stock | $ | 0.93 |
| | $ | 3.73 |
| | $ | 6.15 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the years ended December 31, 2018, 2017 and 2016, the weighted average number of anti-dilutive potential common shares excluded from the calculation above totaled 257,567 shares, 834 shares and 134,361 shares, respectively.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
20. Segment and Geographic Area Information
In the first quarter of 2018, the Company's reportable segments were revised to reflect the Clean Air, Ride Performance, and Aftermarket businesses. Until the fourth quarter of 2018, the three reportable segments were also the Company's operating segments, and aligned with how the Chief Operating Decision Maker (“CODM”) allocated resources and assessed performance against key growth strategies.
As discussed in Note 3, Acquisitions and Divestitures, the Company completed the Acquisition of Federal-Mogul on October 1, 2018 and its results are included in the Powertrain and Motorparts segments. As a result, it was determined the Company has five operating segments consisting of Clean Air, Ride Performance, Aftermarket, Powertrain, and Motorparts businesses. This structure is consistent with how the CODM allocates resources and assesses performance.
With respect to the five segments:
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 OEMs.
The Ride Performance segment designs, manufactures and distributes a variety of products and systems designed to reduce and control excessive roll, pitch and bounce of a vehicle through the suspension system for OEM customers.
The Aftermarket segment designs, manufactures and distributes replacement products for the automotive parts industry including ride performance and clean air products.
The Powertrain segment focuses on original equipment powertrain products for automotive, heavy duty, and industrial applications.
The Motorparts segment sells and distributes a broad portfolio of products in the global aftermarket, while also serving OEMs with products including, braking, wipers, and a limited range of chassis components.
As a result of the Acquisition, management changed its key performance measure of segment profitability. Management now uses EBITDA including noncontrolling interests as the key performance measure of segment profitability and uses the measure in its 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. Prior period operating segment results have been retrospectively recast to reflect the Company's current operating segments and change in key performance measure for segment profitability. Segment assets are not presented as it is not a measure reviewed by the CODM in allocating resources and assessing performance.
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, which is the most directly comparable financial measure to EBITDA including noncontrolling interests that is in accordance with US GAAP. EBITDA including noncontrolling interests, as determined and measured by the Company, should not be compared to similarly titled measures reported by other companies.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Segment results for 2018, 2017 and 2016 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | | | | | |
| | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Total | | Other | | Reclass & Elims | | Total |
| | (Millions) |
| At December 31, 2018, and for the Year Ended | | | | | | | | | | | | | | | | | |
| Revenues from external customers | $ | 6,707 |
| | $ | 1,949 |
| | $ | 1,221 |
| | $ | 1,112 |
| | $ | 774 |
| | $ | 11,763 |
| | $ | — |
| | $ | — |
| | $ | 11,763 |
|
| Intersegment revenues | — |
| | 22 |
| | — |
| | 40 |
| | 10 |
| | 72 |
| | — |
| | (72 | ) | | — |
|
| EBITDA including noncontrolling interests | 597 |
| | 66 |
| | 169 |
| | 92 |
| | (39 | ) | | 885 |
| | (234 | ) | | — |
| | 651 |
|
| At December 31, 2017, and for the Year Ended | | | | | | | | | | | | | | | | | |
| Revenues from external customers | $ | 6,216 |
| | $ | 1,807 |
| | $ | 1,251 |
| | $ | — |
| | $ | — |
| | $ | 9,274 |
| | $ | — |
| | $ | — |
| | $ | 9,274 |
|
| Intersegment revenues | — |
| | 22 |
| | — |
| | — |
| | — |
| | 22 |
| | — |
| | (22 | ) | | — |
|
| EBITDA including noncontrolling interests | 562 |
| | 124 |
| | 193 |
| | — |
| | — |
| | 879 |
| | (245 | ) | | — |
| | 634 |
|
| At December 31, 2016, and for the Year Ended | | | | | | | | | | | | | | | | | |
| Revenues from external customers | $ | 5,764 |
| | $ | 1,593 |
| | $ | 1,240 |
| | $ | — |
| | $ | — |
| | $ | 8,597 |
| | $ | — |
| | $ | — |
| | $ | 8,597 |
|
| Intersegment revenues | — |
| | 26 |
| | — |
| | — |
| | — |
| | 26 |
| | — |
| | (26 | ) | | — |
|
| EBITDA including noncontrolling interests | 561 |
| | 153 |
| | 207 |
| | — |
| | — |
| | 921 |
| | (229 | ) | | — |
| | 692 |
|
Segment EBITDA including noncontrolling interests and the reconciliation to earnings before interest expense, income taxes, and noncontrolling interests are as follow:
|
| | | | | | | | | | | |
| | Year Ended December 31 |
| | 2018 | | 2017 | | 2016 |
| | (Millions) |
| EBITDA including noncontrolling interests by Segments: | | | | | |
| Clean Air | $ | 597 |
| | $ | 562 |
| | $ | 561 |
|
| Ride Performance | 66 |
| | 124 |
| | 153 |
|
| Aftermarket | 169 |
| | 193 |
| | 207 |
|
| Powertrain | 92 |
| | — |
| | — |
|
| Motorparts | (39 | ) | | — |
| | — |
|
| Other | (234 | ) | | (245 | ) | | (229 | ) |
| Total EBITDA including noncontrolling interests | 651 |
| | 634 |
| | 692 |
|
| Less: Depreciation and amortization | (345 | ) | | (226 | ) | | (213 | ) |
| Earnings before interest expense, income taxes, and noncontrolling interests | $ | 306 |
| | $ | 408 |
| | $ | 479 |
|
| Less: Interest expense | 132 |
| | 72 |
| | 68 |
|
| Less: Income tax expense (benefit) | 63 |
| | 71 |
| | (4 | ) |
| Net income | $ | 111 |
| | $ | 265 |
| | $ | 415 |
|
The following customers accounted for 10% or more of the Company's net sales in the last three years. The net sales to both customers were across all segments.
|
| | | | | | | | |
| Customer | 2018 | | 2017 | | 2016 |
| General Motors Company | 12 | % | | 14 | % | | 17 | % |
| Ford Motor Company | 12 | % | | 13 | % | | 13 | % |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | Revenues from external customers (b) | | Long-lived assets (c) |
| | Year Ended December 31 | | December 31 |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (Millions) |
| United States | $ | 4,488 |
| | $ | 3,632 |
| | $ | 3,512 |
| | $ | 1,341 |
| | $ | 655 |
|
| China | 1,553 |
| | 1,283 |
| | 1,186 |
| | 687 |
| | 280 |
|
| Germany | 1,212 |
| | 798 |
| | 764 |
| | 543 |
| | 144 |
|
| Poland | 731 |
| | 488 |
| | 385 |
| | 319 |
| | 219 |
|
| United Kingdom | 499 |
| | 482 |
| | 387 |
| | 116 |
| | 48 |
|
| Mexico | 543 |
| | 416 |
| | 352 |
| | 239 |
| | 75 |
|
| India | 316 |
| | 216 |
| | 159 |
| | 167 |
| | 46 |
|
| Turkey | 7 |
| | 9 |
| | 9 |
| | 276 |
| | — |
|
Other Foreign (a) | 2,414 |
| | 1,950 |
| | 1,843 |
| | 687 |
| | 298 |
|
| Reclass & Elims | — |
| | — |
| | — |
| | (107 | ) | | — |
|
| Consolidated | $ | 11,763 |
| | $ | 9,274 |
| | $ | 8,597 |
| | $ | 4,268 |
| | $ | 1,765 |
|
| |
| (a) | Revenues from external customers and long-lived assets for individual foreign countries other than China, Germany, Poland, United Kingdom, Mexico, India, and Turkey are not material. |
| |
| (b) | Revenues are attributed to countries based on location of the shipper. |
| |
| (c) | Long-lived assets include all long-term assets except goodwill, intangibles and deferred tax assets. |
Disaggregation of revenue
Original Equipment
Value added: OE revenue is generated from providing original equipment manufacturers and servicers with products for automotive, heavy duty, and industrial applications. Supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions, and do not require the customer to purchase a minimum quantity.
Substrate/Pass through sales: Generally, in connection with the sale of exhaust systems to certain OE manufacturers, the Company purchases catalytic converters and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of its customers which are used in the assembled system. These substrates are included in inventory and are “passed through” to the customer at cost, plus a small margin. Since the Company takes title to the substrate inventory and has responsibility for both the delivery and quality of the finished product including the substrates, the revenues and related expenses are recorded at gross amounts. Revenues recognized for substrate sales were $2,500 million, $2,187 million, and $2,028 million for the years ended December 31, 2018, 2017 and 2016.
Aftermarket
Aftermarket revenue is generated from providing products for the global vehicle aftermarket to a wide range of warehouse distributors, retail parts stores, and mass merchants that distribute these products to customers ranging from professional service providers to “do-it-yourself” consumers.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Revenue from contracts with customers is disaggregated by product lines, as it depicts the nature and amount of the Company’s revenue that is aligned with the Company's key growth strategies. In the following table, revenue is disaggregated accordingly:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | |
| By Customer Type | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Total |
| | (Millions) |
| Year Ended December 31, 2018 | | | | | | | | | | | |
| OE - Substrate | $ | 2,500 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,500 |
|
| OE - Value add | 4,207 |
| | 1,949 |
| | — |
| | 1,112 |
| | — |
| | 7,268 |
|
| Aftermarket | — |
| | — |
| | 1,221 |
| | — |
| | 774 |
| | 1,995 |
|
| Total | $ | 6,707 |
| | $ | 1,949 |
| | $ | 1,221 |
| | $ | 1,112 |
| | $ | 774 |
| | $ | 11,763 |
|
| Year Ended December 31, 2017 | | | | | | | | | | | |
| OE - Substrate | $ | 2,187 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,187 |
|
| OE - Value add | 4,029 |
| | 1,807 |
| | — |
| | — |
| | — |
| | 5,836 |
|
| Aftermarket | — |
| | — |
| | 1,251 |
| | — |
| | — |
| | 1,251 |
|
| Total | $ | 6,216 |
| | $ | 1,807 |
| | $ | 1,251 |
| | $ | — |
| | $ | — |
| | $ | 9,274 |
|
| Year Ended December 31, 2016 | | | | | | | | | | | |
| OE - Substrate | $ | 2,028 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 2,028 |
|
| OE - Value add | 3,736 |
| | 1,593 |
| | — |
| | — |
| | — |
| | 5,329 |
|
| Aftermarket | — |
| | — |
| | 1,240 |
| | — |
| | — |
| | 1,240 |
|
| Total | $ | 5,764 |
| | $ | 1,593 |
| | $ | 1,240 |
| | $ | — |
| | $ | — |
| | $ | 8,597 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Reportable Segments | | |
| By Geography | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Total |
| | (Millions) |
| Year Ended December 31, 2018 | | | | | | | | | | | |
| North America | $ | 2,981 |
| | $ | 721 |
| | $ | 758 |
| | $ | 386 |
| | $ | 408 |
| | $ | 5,254 |
|
| EMEA | 2,415 |
| | 801 |
| | 399 |
| | 498 |
| | 290 |
| | 4,403 |
|
| ROW | 1,311 |
| | 427 |
| | 64 |
| | 228 |
| | 76 |
| | 2,106 |
|
| Total | $ | 6,707 |
| | $ | 1,949 |
| | $ | 1,221 |
| | $ | 1,112 |
| | $ | 774 |
| | $ | 11,763 |
|
| Year Ended December 31, 2017 | | | | | | | | | | | |
| North America | $ | 2,866 |
| | $ | 674 |
| | $ | 786 |
| | $ | — |
| | $ | — |
| | $ | 4,326 |
|
| EMEA | 2,143 |
| | 736 |
| | 404 |
| | — |
| | — |
| | 3,283 |
|
| ROW | 1,207 |
| | 397 |
| | 61 |
| | — |
| | — |
| | 1,665 |
|
| Total | $ | 6,216 |
| | $ | 1,807 |
| | $ | 1,251 |
| | $ | — |
| | $ | — |
| | $ | 9,274 |
|
| Year Ended December 31, 2016 | | | | | | | | | | | |
| North America | $ | 2,767 |
| | $ | 652 |
| | $ | 818 |
| | $ | — |
| | $ | — |
| | $ | 4,237 |
|
| EMEA | 1,872 |
| | 604 |
| | 370 |
| | — |
| | — |
| | 2,846 |
|
| ROW | 1,125 |
| | 337 |
| | 52 |
| | — |
| | — |
| | 1,514 |
|
| Total | $ | 5,764 |
| | $ | 1,593 |
| | $ | 1,240 |
| | $ | — |
| | $ | — |
| | $ | 8,597 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table shows the asset expenditure information by reportable segments:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2018 |
| | | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Other unallocated assets | | Total |
| | | (Millions) |
| Prior year payable on assets | | $ | 33 |
| | $ | 22 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 59 |
|
| Asset additions | | 202 |
| | 121 |
| | 38 |
| | 81 |
| | 43 |
| | 56 |
| | 541 |
|
| Less: Current year payable on assets | | (38 | ) | | (23 | ) | | (7 | ) | | (23 | ) | | (2 | ) | | — |
| | (93 | ) |
| Cash payments for property, plant, and equipment | | $ | 197 |
| | $ | 120 |
| | $ | 35 |
| | $ | 58 |
| | $ | 41 |
| | $ | 56 |
| | $ | 507 |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2017 |
| | | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Other unallocated assets | | Total |
| | | (Millions) |
| Prior year payable on assets | | $ | 43 |
| | $ | 19 |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | 68 |
|
| Asset additions | | 212 |
| | 145 |
| | 27 |
| | — |
| | — |
| | 26 |
| | 410 |
|
| Less: Current year payable on assets | | (33 | ) | | (22 | ) | | (4 | ) | | — |
| | — |
| | — |
| | (59 | ) |
| Cash payments for property, plant, and equipment | | $ | 222 |
| | $ | 142 |
| | $ | 28 |
| | $ | — |
| | $ | — |
| | $ | 27 |
| | $ | 419 |
|
| | | | | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | Clean Air | | Ride Performance | | Aftermarket | | Powertrain | | Motorparts | | Other unallocated assets | | Total |
| | | (Millions) |
| Prior year payable on assets | | $ | 35 |
| | $ | 11 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 50 |
|
| Asset additions | | 217 |
| | 96 |
| | 26 |
| | — |
| | — |
| | 24 |
| | 363 |
|
| Less: Current year payable on assets | | (43 | ) | | (19 | ) | | (5 | ) | | — |
| | — |
| | (1 | ) | | (68 | ) |
| Cash payments for property, plant, and equipment | | $ | 209 |
| | $ | 88 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 23 |
| | $ | 345 |
|
The Other unallocated assets are comprised of software additions not included in segment information.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
21. Related Party Transactions
The parties presented in the tables below, other than Montagewerk Abgastechnik Emden GmbH, became related parties of the Company as a result of the Acquisition discussed in Note 3, Acquisitions and Divestitures, with net sales and purchases presented being reflective of activity post acquisition date. Amounts presented as Icahn Automotive Group LLC represent the Company's activity with Auto Plus and Pep Boys. See Note 8, Investment in Nonconsolidated Affiliates, for further information for companies within the tables below that represent equity method investments.
The following table is a summary of net sales to the Company's related parties for the year ended December 31, 2018:
|
| | | |
| | Year Ended December 31 |
| | 2018 |
| Net Sales: | (Millions) |
Icahn Automotive Group LLC
| $ | 52 |
|
| Anqing TP Powder Metallurgy Company Limited | $ | 1 |
|
| Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | 1 |
|
| Federal-Mogul Powertrain Otomotiv A.S. | $ | 11 |
|
| Federal-Mogul TP Liners, Inc. | $ | 2 |
|
| Montagewerk Abgastechnik Emden GmbH | $ | 1 |
|
The following table is a summary of purchases made by the Company from its related parties for the year ended December 31, 2018:
|
| | | |
| | Year Ended December 31 |
| | 2018 |
| Purchases: | (Millions) |
| Anqing TP Goetze Piston Ring Company Limited | $ | 16 |
|
| Anqing TP Powder Metallurgy Company Limited | $ | 1 |
|
| Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | 2 |
|
| Federal-Mogul Powertrain Otomotiv A.S. | $ | 53 |
|
| Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. | $ | 13 |
|
| Federal-Mogul TP Liners, Inc. | $ | 14 |
|
The following table is a summary of royalty and other income from the Company's related parties for the year ended December 31, 2018:
|
| | | |
| | Year Ended December 31 |
| | 2018 |
| Royalty and Other Income: | (Millions) |
Icahn Automotive Group LLC
| $ | 1 |
|
| Federal-Mogul Powertrain Otomotiv A.S. | $ | 4 |
|
| Federal-Mogul TP Liners, Inc. | $ | 4 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table is a summary of amounts due to and from the Company's related parties as of December 31, 2018:
|
| | | |
| | December 31 |
| | 2018 |
| Receivables: | (Millions) |
Icahn Automotive Group LLC
| $ | 60 |
|
| Anqing TP Goetze Piston Ring Company Limited | $ | 1 |
|
| Anqing TP Powder Metallurgy Company Limited | $ | 1 |
|
| Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | 1 |
|
| Federal-Mogul Powertrain Otomotiv A.S. | $ | 9 |
|
| Federal-Mogul TP Liners, Inc. | $ | 2 |
|
| | |
| Payables and accruals: | |
Icahn Automotive Group LLC
| $ | 12 |
|
| Anqing TP Goetze Piston Ring Company Limited | $ | 22 |
|
| Anqing TP Powder Metallurgy Company Limited | $ | 1 |
|
| Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | 2 |
|
| Federal-Mogul Powertrain Otomotiv A.S. | $ | 16 |
|
| Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. | $ | 1 |
|
| Federal-Mogul TP Liners, Inc. | $ | 7 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
22. Quarterly Financial Data (Unaudited)
The following tables present the unaudited quarterly results of operations for the eight quarters ended December 31, 2018. This quarterly information has been prepared on the same basis as the consolidated financial statements and, in the opinion of management, reflects all adjustments necessary for the fair statement of the information for the periods presented. This data should be read in conjunction with the consolidated financial statements and related disclosures. Operating results for any quarter apply to that quarter only and are not necessarily indicative of results for any future period. The amounts below reflect the revisions as discussed in Note 2, Summary of Significant Accounting Policies and the 2018 amounts will be revised for interim periods in future filings and were not material to the previously issued financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Net sales and operating revenues | | Cost of sales (exclusive of depreciation and amortization) |
| | As Reported | | Revision | | As Revised | | As Reported | | Revision | | As Revised |
| Quarter | (Millions) | | (Millions) |
| 2018 | | | | | | | | | | | |
| 1st | $ | 2,574 |
| | $ | 7 |
| | $ | 2,581 |
| | $ | 2,198 |
| | $ | 4 |
| | $ | 2,202 |
|
| 2nd | 2,537 |
| | (4 | ) | | 2,533 |
| | 2,159 |
| | (2 | ) | | 2,157 |
|
| 3rd | 2,372 |
| | (1 | ) | | 2,371 |
| | 2,014 |
| | — |
| | 2,014 |
|
| 4th |
|
| |
|
| | 4,278 |
| |
|
| |
|
| | 3,698 |
|
| Full Year |
|
| |
|
| | $ | 11,763 |
| |
|
| |
|
| | $ | 10,071 |
|
| | | | | | | | | | | | |
| 2017 | | | | | | | | | | | |
| 1st | $ | 2,292 |
| | $ | 6 |
| | $ | 2,298 |
| | $ | 1,929 |
| | $ | 3 |
| | $ | 1,932 |
|
| 2nd | 2,317 |
| | (3 | ) | | 2,314 |
| | 1,949 |
| | — |
| | 1,949 |
|
| 3rd | 2,274 |
| | (1 | ) | | 2,273 |
| | 1,911 |
| | 1 |
| | 1,912 |
|
| 4th | 2,391 |
| | (2 | ) | | 2,389 |
| | 2,020 |
| | (1 | ) | | 2,019 |
|
| Full Year | $ | 9,274 |
| | $ | — |
| | $ | 9,274 |
| | $ | 7,809 |
| | $ | 3 |
| | $ | 7,812 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Earnings before interest expense, income taxes, and noncontrolling interests | | Net Income |
| | As Reported | | Reclass | | As Reclassified | | Revision | | As Revised | | As Reported | | Revision | | As Revised |
| Quarter | (Millions) | | (Millions) |
| 2018 | | | | | | | | | | | | | | | |
| 1st | $ | 117 |
| | $ | — |
| | $ | 117 |
| | $ | 2 |
| | $ | 119 |
| | $ | 58 |
| | $ | 2 |
| | $ | 60 |
|
| 2nd | 113 |
| | — |
| | 113 |
| | (4 | ) | | 109 |
| | 50 |
| | (3 | ) | | 47 |
|
| 3rd | 104 |
| | — |
| | 104 |
| | 5 |
| | 109 |
| | 54 |
| | 3 |
| | 57 |
|
| 4th |
|
| | | | | |
|
| | (31 | ) | |
|
| |
|
| | (109 | ) |
| Full Year |
|
| | | | | |
|
| | $ | 306 |
| |
|
| |
|
| | $ | 55 |
|
| | | | | | | | | | | | | | | | |
| 2017 | | | | | | | | | | | | | | | |
| 1st | $ | 121 |
| | — |
| | $ | 121 |
| | $ | 1 |
| | $ | 122 |
| | $ | 59 |
| | $ | 2 |
| | $ | 61 |
|
| 2nd | 27 |
| | (1 | ) | | 26 |
| | (3 | ) | | 23 |
| | (3 | ) | | (2 | ) | | (5 | ) |
| 3rd | 134 |
| | — |
| | 134 |
| | (3 | ) | | 131 |
| | 83 |
| | (3 | ) | | 80 |
|
| 4th | 135 |
| | — |
| | 135 |
| | (3 | ) | | 132 |
| | 68 |
| | (6 | ) | | 62 |
|
| Full Year | $ | 417 |
| | $ | (1 | ) | | $ | 416 |
| | $ | (8 | ) | | $ | 408 |
| | $ | 207 |
| | $ | (9 | ) | | $ | 198 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Basic earnings (loss) per share of common stock(1) | | Diluted earnings (loss) per share of common stock(1) |
| | As Reported | | Revision | | As Revised | | As Reported | | Revision | | As Revised |
| Quarter | (Millions) | | (Millions) |
| 2018 | | | | | | | | | | | |
| 1st | $ | 1.13 |
| | $ | 0.04 |
| | $ | 1.17 |
| | $ | 1.13 |
| | $ | 0.04 |
| | $ | 1.17 |
|
| 2nd | 0.98 |
| | (0.06 | ) | | 0.92 |
| | 0.98 |
| | (0.06 | ) | | 0.92 |
|
| 3rd | 1.05 |
| | 0.06 |
| | 1.11 |
| | 1.05 |
| | 0.06 |
| | 1.11 |
|
| 4th |
|
| |
|
| | (1.35 | ) | |
|
| |
|
| | (1.35 | ) |
| Full Year |
|
| |
|
| | $ | 0.93 |
| |
|
| |
|
| | $ | 0.93 |
|
| | | | | | | | | | | | |
| 2017 | | | | | | | | | | | |
| 1st | $ | 1.10 |
| | $ | 0.03 |
| | $ | 1.13 |
| | $ | 1.09 |
| | $ | 0.03 |
| | $ | 1.12 |
|
| 2nd | (0.05 | ) | | (0.04 | ) | | (0.09 | ) | | (0.05 | ) | | (0.04 | ) | | (0.09 | ) |
| 3rd | 1.57 |
| | (0.04 | ) | | 1.53 |
| | 1.57 |
| | (0.04 | ) | | 1.53 |
|
| 4th | 1.33 |
| | (0.14 | ) | | 1.19 |
| | 1.33 |
| | (0.14 | ) | | 1.19 |
|
| Full Year | $ | 3.93 |
| | $ | (0.18 | ) | | $ | 3.75 |
| | $ | 3.91 |
| | $ | (0.18 | ) | | $ | 3.73 |
|
(1) The sum of the quarters may not equal the total of the respective year’s earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
23. Supplemental Guarantor Condensed Consolidating Financial StatementStatements
Basis of Presentation
Substantially all of ourthe Company's existing and future material domestic 100% owned subsidiaries (which are referred to as the Guarantor Subsidiaries) fully and unconditionally guarantee ourits senior notes due in 2024 and 2026 on a joint and several basis. However, a subsidiary’s guarantee may be released in certain customary circumstances such as a sale of the subsidiary or all or substantially all of its assets in accordance with the indenture applicable to the notes. The Guarantor Subsidiaries are combined in the presentation below.
These consolidating financial statements are presented on the equity method. Under this method, ourthe Company's investments are recorded at cost and adjusted for ourits ownership share of a subsidiary’s cumulative results of operations, capital contributions and distributions, and other equity changes. You should read the condensed consolidating financial information of the Guarantor Subsidiaries in connection with ourthe Company's condensed consolidated financial statements and related notes of which this note is an integral part. These consolidating financial statements have been updated subsequent to the filing of the Form 10-K for the year ended December 31, 2017 to reflect the adoption of certain new accounting standards in the first quarter of 2018.
The accompanying supplemental guarantor consolidating financial statements have been updated to reflect the revision as described in Note 16.2, Summary of Significant Accounting Policies.
As discussed in Note 3, Acquisitions and Divestitures, the allocation of the purchase price to the assets acquired and liabilities assumed, including the entities to which it is allocated, is preliminary and subject to change during the measurement period.
Distributions
There are no significant restrictions on the ability of the Guarantor Subsidiaries to make distributions to us.the Company.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2016 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Revenues | | | | | | | | | |
| Net sales and operating revenues — |
| |
| |
| |
| |
|
| External | $ | 3,865 |
| | $ | 4,734 |
| | $ | — |
| | $ | — |
| | $ | 8,599 |
|
| Affiliated companies | 526 |
| | 747 |
| | — |
| | (1,273 | ) | | — |
|
| | 4,391 |
| | 5,481 |
| | — |
| | (1,273 | ) | | 8,599 |
|
| Costs and expenses | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization shown below) | 3,720 |
| | 4,676 |
| | — |
| | (1,273 | ) | | 7,123 |
|
| Engineering, research, and development | 76 |
| | 78 |
| | — |
| | — |
| | 154 |
|
| Selling, general, and administrative | 311 |
| | 277 |
| | 1 |
| | — |
| | 589 |
|
| Depreciation and amortization of other intangibles | 86 |
| | 126 |
| | — |
| | — |
| | 212 |
|
| 4,193 |
| | 5,157 |
| | 1 |
| | (1,273 | ) | | 8,078 |
|
| Other income (expense) | | | | | | | | | |
| Loss on sale of receivables | (2 | ) | | (3 | ) | | — |
| | — |
| | (5 | ) |
| Other income (expense) | (9 | ) | | 24 |
| | — |
| | (15 | ) | | — |
|
| (11 | ) | | 21 |
| | — |
| | (15 | ) | | (5 | ) |
| Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income from affiliated companies | 187 |
| | 345 |
| | (1 | ) | | (15 | ) | | 516 |
|
| Interest expense — |
| |
| |
| |
| |
|
| External (net of interest capitalized) | (2 | ) | | 4 |
| | 90 |
| | — |
| | 92 |
|
| Affiliated companies (net of interest income) | (12 | ) | | 7 |
| | 5 |
| | — |
| | — |
|
| Earnings (loss) before income taxes, noncontrolling interests and equity in net income from affiliated companies | 201 |
| | 334 |
| | (96 | ) | | (15 | ) | | 424 |
|
| Income tax expense (benefit) | (97 | ) | | 97 |
| |
|
| |
|
| | — |
|
| Equity in net income (loss) from affiliated companies | 166 |
| | — |
| | 452 |
| | (618 | ) | | — |
|
| Net income (loss) | 464 |
| | 237 |
| | 356 |
| | (633 | ) | | 424 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | 68 |
| |
|
| | — |
| | 68 |
|
| Net income (loss) attributable to Tenneco Inc. | $ | 464 |
| | $ | 169 |
| | $ | 356 |
| | $ | (633 | ) | | $ | 356 |
|
| Comprehensive income (loss) attributable to Tenneco Inc. | $ | 464 |
| | $ | 169 |
| | $ | 356 |
| | $ | (633 | ) | | $ | 356 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Revenues | | | | | | | | | |
| Net sales and operating revenues: | | | | | | | | | |
| External | $ | 4,678 |
| | $ | 7,085 |
| | $ | — |
| | $ | — |
| | $ | 11,763 |
|
| Affiliated companies | 606 |
| | 725 |
| | — |
| | (1,331 | ) | | — |
|
| | 5,284 |
| | 7,810 |
| | — |
| | (1,331 | ) | | 11,763 |
|
| Costs and expenses | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 4,570 |
| | 6,845 |
| | (13 | ) | | (1,331 | ) | | 10,071 |
|
| Selling, general, and administrative | 384 |
| | 377 |
| | 33 |
| | — |
| | 794 |
|
| Depreciation and amortization | 153 |
| | 192 |
| | — |
| | — |
| | 345 |
|
| Engineering, research, and development | 95 |
| | 109 |
| | — |
| | — |
| | 204 |
|
| Goodwill impairment charge | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
| | | | | | | | | | |
| 5,205 |
| | 7,523 |
| | 20 |
| | (1,331 | ) | | 11,417 |
|
| Equity earnings of nonconsolidated affiliates | — |
| | — |
| | — |
| | — |
| | — |
|
| Other expense (income) | | | | | | | | | |
| Loss on sale of receivables | 8 |
| | 8 |
| | — |
| | — |
| | 16 |
|
| Non-service postretirement benefit costs | 13 |
| | 9 |
| | (2 | ) | | — |
| | 20 |
|
| Loss on extinguishment of debt | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Equity in (earnings) losses of nonconsolidated affiliates, net of tax | — |
| | (18 | ) | | — |
| | — |
| | (18 | ) |
| Other (income) expense, net | 29 |
| | (36 | ) | | 1 |
| | 18 |
| | 12 |
|
| 50 |
| | (37 | ) | | 9 |
| | 18 |
| | 40 |
|
| Earnings (loss) before interest expense, income taxes and noncontrolling interests | 29 |
| | 324 |
| | (29 | ) | | (18 | ) | | 306 |
|
| Interest expense: | | | | | | | | | |
| External, net of interest capitalized | 26 |
| | 12 |
| | 94 |
| | — |
| | 132 |
|
| Affiliated companies, net of interest income | (14 | ) | | 7 |
| | 7 |
| | — |
| | — |
|
| Earnings (loss) before income taxes and noncontrolling interests | 17 |
| | 305 |
| | (130 | ) | | (18 | ) | | 174 |
|
| Income tax expense (benefit) | (30 | ) | | 93 |
| | — |
| | — |
| | 63 |
|
| Equity in net income from affiliated companies | 135 |
| | — |
| | 184 |
| | (319 | ) | | — |
|
| Net income | 182 |
| | 212 |
| | 54 |
| | (337 | ) | | 111 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | 56 |
| | — |
| | — |
| | 56 |
|
| Net income attributable to Tenneco Inc. | $ | 182 |
| | $ | 156 |
| | $ | 54 |
| | $ | (337 | ) | | $ | 55 |
|
| Comprehensive income (loss) attributable to Tenneco Inc. | $ | 159 |
| | $ | 24 |
| | $ | (31 | ) | | $ | (251 | ) | | $ | (99 | ) |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2015 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Revenues | | | | | | | | | |
| Net sales and operating revenues — | | | | | | | | | |
| External | $ | 3,683 |
| | $ | 4,498 |
| | $ | — |
| | $ | — |
| | $ | 8,181 |
|
| Affiliated companies | 411 |
| | 558 |
| | — |
| | (969 | ) | | — |
|
| 4,094 |
| | 5,056 |
| | — |
| | (969 | ) | | 8,181 |
|
| Costs and expenses | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization shown below) | 3,414 |
| | 4,383 |
| | — |
| | (969 | ) | | 6,828 |
|
| Engineering, research, and development | 70 |
| | 76 |
| | — |
| | — |
| | 146 |
|
| Selling, general, and administrative | 193 |
| | 295 |
| | 3 |
| | — |
| | 491 |
|
| Depreciation and amortization of other intangibles | 87 |
| | 116 |
| | — |
| | — |
| | 203 |
|
| 3,764 |
| | 4,870 |
| | 3 |
| | (969 | ) | | 7,668 |
|
| Other income (expense) | | | | | | | | | |
| Loss on sale of receivables | (1 | ) | | (3 | ) | | — |
| | — |
| | (4 | ) |
| Other income (expense) | 41 |
| | 6 |
| | — |
| | (48 | ) | | (1 | ) |
| 40 |
| | 3 |
| | — |
| | (48 | ) | | (5 | ) |
| Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income from affiliated companies | 370 |
| | 189 |
| | (3 | ) | | (48 | ) | | 508 |
|
| Interest expense — | | | | | | | | | |
| External (net of interest capitalized) | (2 | ) | | 3 |
| �� | 66 |
| | — |
| | 67 |
|
| Affiliated companies (net of interest income) | 54 |
| | (56 | ) | | 2 |
| | — |
| | — |
|
| Earnings (loss) before income taxes, noncontrolling interests and equity in net income from affiliated companies | 318 |
| | 242 |
| | (71 | ) | | (48 | ) | | 441 |
|
| Income tax expense | 43 |
| | 103 |
| | — |
| | — |
| | 146 |
|
| Equity in net income (loss) from affiliated companies | 78 |
| | — |
| | 312 |
| | (390 | ) | | — |
|
| Net income (loss) | 353 |
| | 139 |
| | 241 |
| | (438 | ) | | 295 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | 54 |
| | — |
| | — |
| | 54 |
|
| Net income (loss) attributable to Tenneco Inc. | $ | 353 |
| | $ | 85 |
| | $ | 241 |
| | $ | (438 | ) | | $ | 241 |
|
| Comprehensive income (loss) attributable to Tenneco Inc. | $ | 353 |
| | $ | 85 |
| | $ | 121 |
| | $ | (438 | ) | | $ | 121 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Revenues | | | | | | | | | |
| Net sales and operating revenues: | | | | | | | | | |
| External | $ | 3,889 |
| | $ | 5,385 |
| | $ | — |
| | $ | — |
| | $ | 9,274 |
|
| Affiliated companies | 540 |
| | 640 |
| | — |
| | (1,180 | ) | | — |
|
| 4,429 |
| | 6,025 |
| | — |
| | (1,180 | ) | | 9,274 |
|
| Costs and expenses | | | | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | 3,771 |
| | 5,221 |
| | — |
| | (1,180 | ) | | 7,812 |
|
| Selling, general, and administrative | 352 |
| | 286 |
| | — |
| | — |
| | 638 |
|
| Depreciation and amortization | 90 |
| | 136 |
| | — |
| | — |
| | 226 |
|
| Engineering, research, and development | 77 |
| | 81 |
| | — |
| | — |
| | 158 |
|
| Goodwill impairment charge | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| 4,290 |
| | 5,735 |
| | — |
| | (1,180 | ) | | 8,845 |
|
| Other expense (income) | | | | | | | | | |
| Loss on sale of receivables | 2 |
| | 3 |
| | — |
| | — |
| | 5 |
|
| Non-service postretirement benefit costs | 18 |
| | (2 | ) | | — |
| | — |
| | 16 |
|
| Loss on extinguishment of debt | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Equity in losses of nonconsolidated affiliates, net of tax | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Other (income) expense, net | (2 | ) | | (53 | ) | | — |
| | 53 |
| | (2 | ) |
| 19 |
| | (51 | ) | | — |
| | 53 |
| | 21 |
|
| Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income from affiliated companies | 120 |
| | 341 |
| | — |
| | (53 | ) | | 408 |
|
| Interest expense: | | | | | | | | | |
| External, net of interest capitalized | 18 |
| | 5 |
| | 49 |
| | — |
| | 72 |
|
| Affiliated companies, net of interest income | (15 | ) | | 6 |
| | 9 |
| | — |
| | — |
|
| Earnings (loss) before income taxes, noncontrolling interests and equity in net income from affiliated companies | 117 |
| | 330 |
| | (58 | ) | | (53 | ) | | 336 |
|
| Income tax (benefit) expense | (10 | ) | | 81 |
| | — |
| | — |
| | 71 |
|
| Equity in net income from affiliated companies | 149 |
| | — |
| | 265 |
| | (414 | ) | | — |
|
| Net income | 276 |
| | 249 |
| | 207 |
| | (467 | ) | | 265 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | 67 |
| | — |
| | — |
| | 67 |
|
| Net income attributable to Tenneco Inc. | $ | 276 |
| | $ | 182 |
| | $ | 207 |
| | $ | (467 | ) | | $ | 198 |
|
| Comprehensive income attributable to Tenneco Inc. | $ | 282 |
| | $ | 173 |
| | $ | 331 |
| | $ | (467 | ) | | $ | 319 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | | | | |
| | For the Year Ended December 31, 2014 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Revenues |
| |
| |
| |
| |
|
| Net sales and operating revenues — |
| |
| |
| |
| |
|
| External | $ | 3,688 |
| | $ | 4,693 |
| | $ | — |
| | $ | — |
| | $ | 8,381 |
|
| Affiliated companies | 403 |
| | 602 |
| | — |
| | (1,005 | ) | | — |
|
| 4,091 |
| | 5,295 |
| | — |
| | (1,005 | ) | | 8,381 |
|
| Costs and expenses |
| |
| |
| |
| |
|
| Cost of sales (exclusive of depreciation and amortization shown below) | 3,352 |
| | 4,642 |
| | — |
| | (1,005 | ) | | 6,989 |
|
| Engineering, research, and development | 81 |
| | 88 |
| | — |
| | — |
| | 169 |
|
| Selling, general, and administrative | 211 |
| | 302 |
| | 6 |
| | — |
| | 519 |
|
| Depreciation and amortization of other intangibles | 86 |
| | 122 |
| | — |
| | — |
| | 208 |
|
| 3,730 |
| | 5,154 |
| | 6 |
| | (1,005 | ) | | 7,885 |
|
| Other income (expense) |
| |
| |
| |
| |
|
| Loss on sale of receivables | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
| Other income (expense) | 26 |
| | 9 |
| | — |
| | (38 | ) | | (3 | ) |
| 26 |
| | 5 |
| | — |
| | (38 | ) | | (7 | ) |
| Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income from affiliated companies | 387 |
| | 146 |
| | (6 | ) | | (38 | ) | | 489 |
|
| Interest expense — |
| |
| |
| |
| |
|
| External (net of interest capitalized) | (1 | ) | | 4 |
| | 88 |
| | — |
| | 91 |
|
| Affiliated companies (net of interest income) | 73 |
| | (75 | ) | | 2 |
| | — |
| | — |
|
| Earnings (loss) before income taxes, noncontrolling interests and equity in net income from affiliated companies | 315 |
| | 217 |
| | (96 | ) | | (38 | ) | | 398 |
|
| Income tax expense | 94 |
| | 37 |
| | — |
| | — |
| | 131 |
|
| Equity in net income (loss) from affiliated companies | 128 |
| | — |
| | 321 |
| | (449 | ) | | — |
|
| Net income (loss) | 349 |
| | 180 |
| | 225 |
| | (487 | ) | | 267 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | 42 |
| | — |
| | — |
| | 42 |
|
| Net income (loss) attributable to Tenneco Inc. | $ | 349 |
| | $ | 138 |
| | $ | 225 |
| | $ | (487 | ) | | $ | 225 |
|
| Comprehensive income (loss) attributable to Tenneco Inc. | $ | 349 |
| | $ | 138 |
| | $ | 40 |
| | $ | (487 | ) | | $ | 40 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Revenues | | | | | | | | | |
| Net sales and operating revenues: | | | | | | | | | |
| External | $ | 3,863 |
| | $ | 4,734 |
| | $ | — |
| | $ | — |
| | $ | 8,597 |
|
| Affiliated companies | 526 |
| | 747 |
| | — |
| | (1,273 | ) | | — |
|
| 4,389 |
| | 5,481 |
| | — |
| | (1,273 | ) | | 8,597 |
|
| Costs and expenses |
| |
| |
| |
| |
|
| Cost of sales (exclusive of depreciation and amortization) | 3,724 |
| | 4,675 |
| | — |
| | (1,273 | ) | | 7,126 |
|
| Selling, general, and administrative | 235 |
| | 278 |
| | 1 |
| | — |
| | 514 |
|
| Depreciation and amortization | 87 |
| | 126 |
| | — |
| | — |
| | 213 |
|
| Engineering, research, and development | 76 |
| | 77 |
| | — |
| | — |
| | 153 |
|
| 4,122 |
| | 5,156 |
| | 1 |
| | (1,273 | ) | | 8,006 |
|
| Other expense (income) | | | | | | | | | |
| Loss on sale of receivables | 2 |
| | 3 |
| | — |
| | — |
| | 5 |
|
| Non-service postretirement benefit costs | 83 |
| | 1 |
| | — |
| | — |
| | 84 |
|
| Loss on extinguishment of debt | 24 |
| | — |
| | — |
| | — |
| | 24 |
|
| Other (income) expense, net | 8 |
| | (24 | ) | | — |
| | 15 |
| | (1 | ) |
| 117 |
| | (20 | ) | | — |
| | 15 |
| | 112 |
|
| Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income from affiliated companies | 150 |
| | 345 |
| | (1 | ) | | (15 | ) | | 479 |
|
| Interest expense: | | | | | | | | | |
| External, net of interest capitalized | (26 | ) | | 4 |
| | 90 |
| | — |
| | 68 |
|
| Affiliated companies, net of interest income | (12 | ) | | 7 |
| | 5 |
| | — |
| | — |
|
| Earnings (loss) before income taxes, noncontrolling interests and equity in net income from affiliated companies | 188 |
| | 334 |
| | (96 | ) | | (15 | ) | | 411 |
|
| Income tax (income) expense | (101 | ) | | 97 |
| | — |
| | — |
| | (4 | ) |
| Equity in net income from affiliated companies | 166 |
| | — |
| | 452 |
| | (618 | ) | | — |
|
| Net income | 455 |
| | 237 |
| | 356 |
| | (633 | ) | | 415 |
|
| Less: Net income attributable to noncontrolling interests | — |
| | 68 |
| | — |
| | — |
| | 68 |
|
| Net income attributable to Tenneco Inc. | $ | 455 |
| | $ | 169 |
| | $ | 356 |
| | $ | (633 | ) | | $ | 347 |
|
| Comprehensive income attributable to Tenneco Inc. | $ | 464 |
| | $ | 159 |
| | $ | 356 |
| | $ | (633 | ) | | $ | 346 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
BALANCE SHEETSHEETS
| | | | December 31, 2016 | December 31, 2018 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) | (Millions) |
| ASSETS |
| |
| |
| |
| |
| | | | | | | | | |
| Current assets: |
| |
| |
| |
| |
| | | | | | | | | |
| Cash and cash equivalents | $ | 9 |
| | $ | 338 |
| | $ | — |
| | $ | — |
| | $ | 347 |
| $ | 329 |
| | $ | 364 |
| | $ | 4 |
| | $ | — |
| | $ | 697 |
|
| Restricted cash | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
|
| | 5 |
| | — |
| | — |
| | 5 |
|
| Receivables, net | 386 |
| | 1,412 |
| | — |
| | (504 | ) | | 1,294 |
| 943 |
| | 1,629 |
| | — |
| | — |
| | 2,572 |
|
| Inventories | 361 |
| | 369 |
| | — |
| | — |
| | 730 |
| |
| Prepayments and other | 62 |
| | 167 |
| | — |
| | — |
| | 229 |
| |
| Inventories, net | | 958 |
| | 1,287 |
| | — |
| | — |
| | 2,245 |
|
| Prepayments and other current assets | | 254 |
| | 311 |
| | 25 |
| | — |
| | 590 |
|
| Total current assets | 818 |
| | 2,288 |
| | — |
| | (504 | ) | | 2,602 |
| 2,484 |
| | 3,596 |
| | 29 |
| | — |
| | 6,109 |
|
| Other assets: |
| |
| |
| |
| |
| |
| Property, plant and equipment, net | | 1,131 |
| | 2,361 |
| | 9 |
| | — |
| | 3,501 |
|
| Investment in affiliated companies | 1,211 |
| | — |
| | 1,207 |
| | (2,418 | ) | | — |
| 1,421 |
| | — |
| | 4,856 |
| | (6,277 | ) | | — |
|
| Notes and advances receivable from affiliates | 939 |
| | 16,529 |
| | 4,781 |
| | (22,249 | ) | | — |
| |
| Long-term receivables, net | 9 |
| | — |
| | — |
| | — |
| | 9 |
| 9 |
| | 1 |
| | — |
| | — |
| | 10 |
|
| Goodwill | 22 |
| | 35 |
| | — |
| | — |
| | 57 |
| 263 |
| | 383 |
| | 223 |
| | — |
| | 869 |
|
| Intangibles, net | 7 |
| | 12 |
| | — |
| | — |
| | 19 |
| 1,007 |
| | 510 |
| | 2 |
| | — |
| | 1,519 |
|
| Investments in nonconsolidated affiliates | | 43 |
| | 501 |
| | — |
| | — |
| | 544 |
|
| Deferred income taxes | 47 |
| | 23 |
| | 129 |
| | — |
| | 199 |
| 255 |
| | 200 |
| | 12 |
| | — |
| | 467 |
|
| Other | 46 |
| | 49 |
| | 8 |
| | — |
| | 103 |
| |
| 2,281 |
| | 16,648 |
| | 6,125 |
| | (24,667 | ) | | 387 |
| |
| Plant, property, and equipment, at cost | 1,371 |
| | 2,177 |
| | — |
| | — |
| | 3,548 |
| |
| Less — Accumulated depreciation and amortization | (895 | ) | | (1,296 | ) | | — |
| | — |
| | (2,191 | ) | |
| 476 |
| | 881 |
| | — |
| | — |
| | 1,357 |
| |
| Other assets | | 48 |
| | 180 |
| | — |
| | (15 | ) | | 213 |
|
| Total assets | $ | 3,575 |
| | $ | 19,817 |
| | $ | 6,125 |
| | $ | (25,171 | ) | | $ | 4,346 |
| $ | 6,661 |
| | $ | 7,732 |
| | $ | 5,131 |
| | $ | (6,292 | ) | | $ | 13,232 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
| |
| |
| |
| |
| | | | | | | | | |
| Current liabilities: |
| |
| |
| |
| |
| | | | | | | | | |
| Short-term debt (including current maturities of long-term debt) |
| |
| |
| |
| |
| |
| Short-term debt — non-affiliated | $ | — |
| | $ | 75 |
| | $ | 15 |
| | $ | — |
| | $ | 90 |
| |
| Short-term debt — affiliated | 167 |
| | 187 |
| | — |
| | (354 | ) | | — |
| |
Short-term debt, including current maturities of long-term debt
| | $ | 1 |
| | $ | 152 |
| | $ | — |
| | $ | — |
| | $ | 153 |
|
| Accounts payable | 562 |
| | 1,027 |
| | — |
| | (88 | ) | | 1,501 |
| 858 |
| | 1,894 |
| | 7 |
| | — |
| | 2,759 |
|
| Accrued taxes | 4 |
| | 35 |
| | — |
| | — |
| | 39 |
| |
| Other | 147 |
| | 243 |
| | 15 |
| | (62 | ) | | 343 |
| |
| Accrued compensation and employee benefits | | 88 |
| | 255 |
| | — |
| | — |
| | 343 |
|
| Accrued income taxes | | — |
| | 52 |
| | 27 |
| | (15 | ) | | 64 |
|
| Accrued expenses and other current liabilities | | 436 |
| | 488 |
| | 77 |
| | — |
| | 1,001 |
|
| Total current liabilities | 880 |
| | 1,567 |
| | 30 |
| | (504 | ) | | 1,973 |
| 1,383 |
| | 2,841 |
| | 111 |
| | (15 | ) | | 4,320 |
|
| Long-term debt — non-affiliated | — |
| | 12 |
| | 1,282 |
| | — |
| | 1,294 |
| |
| Long-term debt — affiliated | 1,543 |
| | 16,466 |
| | 4,240 |
| | (22,249 | ) | | — |
| |
| Long-term debt | | 3 |
| | 32 |
| | 5,305 |
| | — |
| | 5,340 |
|
| Intercompany due to (due from) | | 2,726 |
| | (215 | ) | | (2,511 | ) | | — |
| | — |
|
| Deferred income taxes | — |
| | 7 |
| | — |
| | — |
| | 7 |
| — |
| | 88 |
| | — |
| | — |
| | 88 |
|
| Postretirement benefits and other liabilities | 297 |
| | 115 |
| | — |
| | — |
| | 412 |
| |
| Pension, postretirement benefits and other liabilities | | 225 |
| | 705 |
| | 500 |
| | — |
| | 1,430 |
|
| Commitments and contingencies |
| |
| |
| |
| |
|
| |
| |
| |
| |
|
| Total liabilities | 2,720 |
| | 18,167 |
| | 5,552 |
| | (22,753 | ) | | 3,686 |
| 4,337 |
| | 3,451 |
| | 3,405 |
| | (15 | ) | | 11,178 |
|
| Redeemable noncontrolling interests | — |
| | 40 |
| | — |
| | — |
| | 40 |
| — |
| | 138 |
| | — |
| | — |
| | 138 |
|
| Tenneco Inc. Shareholders’ equity | 855 |
| | 1,563 |
| | 573 |
| | (2,418 | ) | | 573 |
| |
| Tenneco Inc. shareholders’ equity | | 2,324 |
| | 3,953 |
| | 1,726 |
| | (6,277 | ) | | 1,726 |
|
| Noncontrolling interests | — |
| | 47 |
| | — |
| | — |
| | 47 |
| — |
| | 190 |
| | — |
| | — |
| | 190 |
|
| Total equity | 855 |
| | 1,610 |
| | 573 |
| | (2,418 | ) | | 620 |
| 2,324 |
| | 4,143 |
| | 1,726 |
| | (6,277 | ) | | 1,916 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 3,575 |
| | $ | 19,817 |
| | $ | 6,125 |
| | $ | (25,171 | ) | | $ | 4,346 |
| $ | 6,661 |
| | $ | 7,732 |
| | $ | 5,131 |
| | $ | (6,292 | ) | | $ | 13,232 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
BALANCE SHEETSHEETS
| | | | December 31, 2015 | December 31, 2017 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) | (Millions) |
| ASSETS |
| |
| |
| |
| |
| | | | | | | | | |
| Current assets: |
| |
| |
| |
| |
| | | | | | | | | |
| Cash and cash equivalents | $ | 2 |
| | $ | 285 |
| | $ | — |
| | $ | — |
| | $ | 287 |
| $ | 7 |
| | $ | 308 |
| | $ | — |
| | $ | — |
| | $ | 315 |
|
| Restricted cash | — |
| | 1 |
| | — |
| | — |
| | 1 |
| — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Receivables, net | 299 |
| | 1,241 |
| | — |
| | (428 | ) | | 1,112 |
| 208 |
| | 1,113 |
| | — |
| | — |
| | 1,321 |
|
| Inventories | 333 |
| | 349 |
| | — |
| | — |
| | 682 |
| |
| Prepayments and other | 67 |
| | 162 |
| | — |
| | — |
| | 229 |
| |
| Inventories, net | | 359 |
| | 461 |
| | — |
| | — |
| | 820 |
|
| Prepayments and other current assets | | 99 |
| | 189 |
| | — |
| | — |
| | 288 |
|
| Total current assets | 701 |
| | 2,038 |
| | — |
| | (428 | ) | | 2,311 |
| 673 |
| | 2,074 |
| | — |
| | — |
| | 2,747 |
|
| Other assets: |
| |
| |
| |
| |
| |
| Property, plant and equipment, net | | 594 |
| | 1,097 |
| | — |
| | — |
| | 1,691 |
|
| Investment in affiliated companies | 1,141 |
| | — |
| | 885 |
| | (2,026 | ) | | — |
| 1,385 |
| | — |
| | 1,198 |
| | (2,583 | ) | | — |
|
| Notes and advances receivable from affiliates | 938 |
| | 13,291 |
| | 4,788 |
| | (19,017 | ) | | — |
| |
| Long-term receivables, net | 11 |
| | 2 |
| | — |
| | — |
| | 13 |
| 8 |
| | 1 |
| | — |
| | — |
| | 9 |
|
| Goodwill | 22 |
| | 38 |
| | — |
| | — |
| | 60 |
| 22 |
| | 27 |
| | — |
| | — |
| | 49 |
|
| Intangibles, net | 9 |
| | 13 |
| | — |
| | — |
| | 22 |
| 5 |
| | 17 |
| | — |
| | — |
| | 22 |
|
Investments in nonconsolidated affiliates
| | 1 |
| | 1 |
| | — |
| | — |
| | 2 |
|
| Deferred income taxes | 122 |
| | 31 |
| | 68 |
| | — |
| | 221 |
| 169 |
| | 44 |
| | — |
| | — |
| | 213 |
|
| Pension Assets | — |
| | — |
| | — |
| | — |
| | — |
| |
| Other | 42 |
| | 47 |
| | 11 |
| | — |
| | 100 |
| |
| 2,285 |
| | 13,422 |
| | 5,752 |
| | (21,043 | ) | | 416 |
| |
| Plant, property, and equipment, at cost | 1,281 |
| | 2,137 |
| | — |
| | — |
| | 3,418 |
| |
| Less — Accumulated depreciation and amortization | (851 | ) | | (1,324 | ) | | — |
| | — |
| | (2,175 | ) | |
| 430 |
| | 813 |
| | — |
| | — |
| | 1,243 |
| |
| Other assets | | 12 |
| | 51 |
| | — |
| | — |
| | 63 |
|
| Total assets | $ | 3,416 |
| | $ | 16,273 |
| | $ | 5,752 |
| | $ | (21,471 | ) | | $ | 3,970 |
| $ | 2,869 |
| | $ | 3,312 |
| | $ | 1,198 |
| | $ | (2,583 | ) | | $ | 4,796 |
|
| LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | | | | | | | | | | | |
| Current liabilities: |
| |
| |
| |
| |
| | | | | | | | | |
| Short-term debt (including current maturities of long-term debt) |
| |
| |
| |
| |
| |
| Short-term debt — non-affiliated | $ | — |
| | $ | 73 |
| | $ | 13 |
| | $ | — |
| | $ | 86 |
| |
| Short-term debt — affiliated | 164 |
| | 147 |
| | — |
| | (311 | ) | | — |
| |
| Short-term debt, including current maturities of long-term debt | | $ | — |
| | $ | 103 |
| | $ | — |
| | $ | — |
| | $ | 103 |
|
| Accounts payable | 484 |
| | 955 |
| | — |
| | (63 | ) | | 1,376 |
| 496 |
| | 1,086 |
| | — |
| | — |
| | 1,582 |
|
| Accrued taxes | 6 |
| | 31 |
| | — |
| | — |
| | 37 |
| |
| Other | 125 |
| | 221 |
| | 3 |
| | (54 | ) | | 295 |
| |
| Accrued compensation and employee benefits | | 24 |
| | 117 |
| | — |
| | — |
| | 141 |
|
| Accrued income taxes | | 2 |
| | 25 |
| | — |
| | — |
| | 27 |
|
| Accrued expenses and other current liabilities | | 208 |
| | 204 |
| | 12 |
| | — |
| | 424 |
|
| Total current liabilities | 779 |
| | 1,427 |
| | 16 |
| | (428 | ) | | 1,794 |
| 730 |
| | 1,535 |
| | 12 |
| | — |
| | 2,277 |
|
| Long-term debt — non-affiliated | — |
| | 21 |
| | 1,103 |
| | — |
| | 1,124 |
| |
| Long-term debt — affiliated | 1,583 |
| | 13,226 |
| | 4,208 |
| | (19,017 | ) | | — |
| |
| Long-term debt | | 632 |
| | 12 |
| | 714 |
| | — |
| | 1,358 |
|
| Intercompany due to (due from) | | 561 |
| | (397 | ) | | (164 | ) | | — |
| | — |
|
| Deferred income taxes | — |
| | 7 |
| | — |
| | — |
| | 7 |
| — |
| | 11 |
| | — |
| | — |
| | 11 |
|
| Postretirement benefits and other liabilities | 424 |
| | 116 |
| | — |
| | — |
| | 540 |
| 299 |
| | 127 |
| | — |
| | — |
| | 426 |
|
| Commitments and contingencies |
| |
| |
| |
| |
|
| |
| |
| |
| |
|
| Total liabilities | 2,786 |
| | 14,797 |
| | 5,327 |
| | (19,445 | ) | | 3,465 |
| 2,222 |
| | 1,288 |
| | 562 |
| | — |
| | 4,072 |
|
| Redeemable noncontrolling interests | — |
| | 41 |
| | — |
| | — |
| | 41 |
| — |
| | 42 |
| | — |
| | — |
| | 42 |
|
| Tenneco Inc. Shareholders’ equity | 630 |
| | 1,396 |
| | 425 |
| | (2,026 | ) | | 425 |
| |
| Tenneco Inc. shareholders’ equity | | 647 |
| | 1,936 |
| | 636 |
| | (2,583 | ) | | 636 |
|
| Noncontrolling interests | — |
| | 39 |
| | — |
| | — |
| | 39 |
| — |
| | 46 |
| | — |
| | — |
| | 46 |
|
| Total equity | 630 |
| | 1,435 |
| | 425 |
| | (2,026 | ) | | 464 |
| 647 |
| | 1,982 |
| | 636 |
| | (2,583 | ) | | 682 |
|
| Total liabilities, redeemable noncontrolling interests and equity | $ | 3,416 |
| | $ | 16,273 |
| | $ | 5,752 |
| | $ | (21,471 | ) | | $ | 3,970 |
| $ | 2,869 |
| | $ | 3,312 |
| | $ | 1,198 |
| | $ | (2,583 | ) | | $ | 4,796 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Operating Activities | | | | | | | | | |
| Net cash provided (used) by operating activities | $ | 176 |
| | $ | 300 |
| | $ | 28 |
| | $ | (15 | ) | | $ | 489 |
|
| Investing Activities |
| |
| |
| |
| |
|
| Proceeds from sale of assets | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Cash payments for plant, property, and equipment | (117 | ) | | (208 | ) | | — |
| | — |
| | (325 | ) |
| Cash payments for software related intangible assets | (13 | ) | | (7 | ) | | — |
| | — |
| | (20 | ) |
| Change in restricted cash | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Net cash used by investing activities | (130 | ) | | (210 | ) | | — |
| | — |
| | (340 | ) |
| Financing Activities |
| |
| |
| |
| |
|
| Retirement of long-term debt | — |
| | (16 | ) | | (515 | ) | | — |
| | (531 | ) |
| Issuance of long-term debt | — |
| | 9 |
| | 500 |
| | — |
| | 509 |
|
| Debt issuance cost on long-term debt | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
| Tax impact from stock-based compensation | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) |
| Purchase of common stock under the share repurchase program | — |
| | — |
| | (225 | ) | | — |
| | (225 | ) |
| Issuance of common shares | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
| Increase in bank overdrafts | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
| Net increase in revolver borrowings and short-term debt excluding current maturities of long-term debt | — |
| | 5 |
| | 197 |
| | — |
| | 202 |
|
| Intercompany dividends and net increase (decrease) in intercompany obligations | (39 | ) | | 8 |
| | 16 |
| | 15 |
| | — |
|
| Distribution to noncontrolling interests partners | — |
| | (55 | ) | | — |
| | — |
| | (55 | ) |
| Net cash provided (used) by financing activities | (39 | ) | | (39 | ) | | (28 | ) | | 15 |
| | (91 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Increase in cash and cash equivalents | 7 |
| | 53 |
| | — |
| | — |
| | 60 |
|
| Cash and cash equivalents, January 1 | 2 |
| | 285 |
| | — |
| | — |
| | 287 |
|
| Cash and cash equivalents, December 31 (Note) | $ | 9 |
| | $ | 338 |
| | $ | — |
| | $ | — |
| | $ | 347 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Operating Activities | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 248 |
| | $ | 246 |
| | $ | (36 | ) | | $ | (19 | ) | | $ | 439 |
|
| Investing Activities | | | | | | | | | |
| Federal-Mogul acquisition | 151 |
| | 124 |
| | (2,469 | ) | | — |
| — |
| (2,194 | ) |
| Proceeds from sale of assets | 2 |
| | 7 |
| | — |
| | — |
| | 9 |
|
| Cash payments for property, plant and equipment | (196 | ) | | (311 | ) | | — |
| | — |
| | (507 | ) |
| Proceeds from deferred purchase price of factored receivables | — |
| | 174 |
| | — |
| | — |
| | 174 |
|
| Other | 1 |
| | 3 |
| | — |
| | — |
| | 4 |
|
| Net cash used in investing activities | (42 | ) | | (3 | ) | | (2,469 | ) | | — |
| | (2,514 | ) |
| Financing Activities | | | | | | | | | |
| Cash dividends | — |
| | — |
| | (59 | ) | | — |
| | (59 | ) |
| Repayment of term loans and notes | (391 | ) | | (62 | ) | | — |
| | — |
| | (453 | ) |
| Proceeds from term loans and notes | — |
| | 26 |
| | 3,400 |
| | — |
| | 3,426 |
|
| Debt issuance cost on long-term debt | (15 | ) | | — |
| | (80 | ) | | — |
| | (95 | ) |
| Tax impact from stock-based compensation | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance (repurchase) of common shares | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Decrease in bank overdrafts | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
| Borrowings on revolving lines of credit | 4,411 |
| | 114 |
| | 624 |
| | — |
| | 5,149 |
|
| Payments on revolving lines of credit | (4,654 | ) | | (127 | ) | | (624 | ) | | — |
| | (5,405 | ) |
| Net increase (decrease) in short-term borrowings secured by accounts receivable | — |
| | (30 | ) | | — |
| | — |
| | (30 | ) |
| Intercompany dividends and net (decrease) increase in intercompany obligations | 765 |
| | (33 | ) | | (751 | ) | | 19 |
| | — |
|
| Distribution to noncontrolling interests partners | — |
| | (51 | ) | | — |
| | — |
| | (51 | ) |
| Net cash (used in) provided by financing activities | 116 |
| | (168 | ) | | 2,509 |
| | 19 |
| | 2,476 |
|
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (17 | ) | | — |
| | — |
| | (17 | ) |
| Increase in cash, cash equivalents and restricted cash | 322 |
| | 58 |
| | 4 |
| | — |
| | 384 |
|
| Cash, cash equivalents and restricted cash, January 1 | 7 |
| | 311 |
| | — |
| | — |
| | 318 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 329 |
| | $ | 369 |
| | $ | 4 |
| | $ | — |
| | $ | 702 |
|
|
| |
Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2015 |
| | Guarantor
Subsidiaries |
| Nonguarantor
Subsidiaries |
| Tenneco Inc.
(Parent
Company) |
| Reclass
& Elims |
| Consolidated |
| | (Millions) |
| Operating Activities |
| |
| |
| |
| |
|
| Net cash provided (used) by operating activities | $ | 204 |
| | $ | 311 |
| | $ | 49 |
| | $ | (47 | ) | | $ | 517 |
|
| Investing Activities |
| |
| |
| |
| |
|
| Proceeds from sale of assets | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
| Cash payments for plant, property, and equipment | (114 | ) | | (172 | ) | | — |
| | — |
| | (286 | ) |
| Cash payments for software related intangible assets | (16 | ) | | (7 | ) | | — |
| | — |
| | (23 | ) |
| Change in restricted cash | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Net cash used by investing activities | (130 | ) | | (173 | ) | | — |
| | — |
| | (303 | ) |
| Financing Activities |
| |
| |
| |
| |
|
| Retirement of long-term debt | — |
| | (22 | ) | | (15 | ) | | — |
| | (37 | ) |
| Issuance of long-term debt | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
| Debt issuance cost on long-term debt | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Tax impact from stock-based compensation | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Purchase of common stock under the share repurchase program | — |
| | — |
| | (213 | ) | | — |
| | (213 | ) |
| Issuance of common shares | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
| Increase in bank overdrafts | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) |
| Net increase in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | — |
| | 20 |
| | 82 |
| | — |
| | 102 |
|
| Net increase (decrease) in short-term borrowings secured by accounts receivable | — |
| | — |
| | 30 |
| | — |
| | 30 |
|
| Intercompany dividends and net increase (decrease) in intercompany obligations | (82 | ) | | (21 | ) | | 56 |
| | 47 |
| | — |
|
| Distribution to noncontrolling interests partners | — |
| | (44 | ) | | — |
| | — |
| | (44 | ) |
| Net cash provided (used) by financing activities | (82 | ) | | (88 | ) | | (49 | ) | | 47 |
| | (172 | ) |
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | (37 | ) | | — |
| | — |
| | (37 | ) |
| Increase (decrease) in cash and cash equivalents | (8 | ) | | 13 |
| | — |
| | — |
| | 5 |
|
| Cash and cash equivalents, January 1 | 10 |
| | 272 |
| | — |
| | — |
| | 282 |
|
| Cash and cash equivalents, December 31 (Note) | $ | 2 |
| | $ | 285 |
| | $ | — |
| | $ | — |
| | $ | 287 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Operating Activities | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 284 |
| | $ | 290 |
| | $ | (4 | ) | | $ | (53 | ) | | $ | 517 |
|
| Investing Activities | | | | | | | | | |
| Proceeds from sale of assets | 3 |
| | 5 |
| | — |
| | — |
| | 8 |
|
| Proceeds from sale of equity interest | — |
| | 9 |
| |
|
| |
|
| | 9 |
|
| Cash payments for property, plant and equipment | (164 | ) | | (255 | ) | | — |
| | — |
| | (419 | ) |
| Proceeds from deferred purchase price of factored receivables | — |
| | 112 |
| | — |
| | — |
| | 112 |
|
| Other | (4 | ) | | (6 | ) | | — |
| | — |
| | (10 | ) |
| Net cash used in investing activities | (165 | ) | | (135 | ) | | — |
| | — |
| | (300 | ) |
| Financing Activities | | | | | | | | | |
| Cash dividends | — |
| | — |
| | (53 | ) | | — |
| | (53 | ) |
| Payments of term loans and notes | (10 | ) | | (20 | ) | | (6 | ) | | — |
| | (36 | ) |
| Proceeds from term loans and notes | 136 |
| | 24 |
| | — |
| | — |
| | 160 |
|
| Debt issuance cost on long-term debt | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) |
| Purchase of common stock under the share repurchase program | — |
| | — |
| | (169 | ) | | — |
| | (169 | ) |
| Issuance of common shares | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
| Decrease in bank overdrafts | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) |
| Borrowings on revolving lines of credits | 3,956 |
| | 48 |
| | 2,660 |
| | — |
| | 6,664 |
|
| Payments on revolving lines of credits | (3,710 | ) | | (49 | ) | | (2,978 | ) | | | | (6,737 | ) |
| Intercompany dividends and net (decrease) increase in intercompany obligations | (485 | ) | | (119 | ) | | 551 |
| | 53 |
| | — |
|
| Distribution to noncontrolling interests partners | — |
| | (64 | ) | | — |
| | — |
| | (64 | ) |
| Net cash (used in) provided by financing activities | (121 | ) | | (187 | ) | | 4 |
| | 53 |
| | (251 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Decrease in cash, cash equivalents and restricted cash | (2 | ) | | (29 | ) | | — |
| | — |
| | (31 | ) |
| Cash, cash equivalents and restricted cash, January 1 | 9 |
| | 340 |
| | — |
| | — |
| | 349 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 7 |
| | $ | 311 |
| | $ | — |
| | $ | — |
| | $ | 318 |
|
|
| |
Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2014 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Operating Activities |
| |
| |
| |
| |
|
| Net cash provided (used) by operating activities | $ | 44 |
| | $ | 314 |
| | $ | 21 |
| | $ | (38 | ) | | $ | 341 |
|
| Investing Activities |
| |
| |
| |
| |
|
| Proceeds from sale of assets | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
| Cash payments for plant, property, and equipment | (106 | ) | | (222 | ) | | — |
| | — |
| | (328 | ) |
| Cash payments for software related intangible assets | (5 | ) | | (8 | ) | | — |
| | — |
| | (13 | ) |
| Cash payments for net assets purchased | (3 | ) | | — |
| | — |
| | — |
| | (3 | ) |
| Change in restricted cash | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Net cash used by investing activities | (114 | ) | | (225 | ) | | — |
| | — |
| | (339 | ) |
| Financing Activities |
| |
| |
| |
| |
|
| Retirement of long-term debt | — |
| | (9 | ) | | (453 | ) | | — |
| | (462 | ) |
| Issuance of long-term debt | — |
| | 45 |
| | 525 |
| | — |
| | 570 |
|
| Debt issuance cost on long-term debt | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
| Tax impact from stock-based compensation | — |
| | — |
| | 26 |
| | — |
| | 26 |
|
| Purchase of common stock under the share repurchase program | — |
| | — |
| | (22 | ) | | — |
| | (22 | ) |
| Issuance of common shares | — |
| | — |
| | 19 |
| | — |
| | 19 |
|
| Increase in bank overdrafts | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Net decrease in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | — |
| | (13 | ) | | (57 | ) | | — |
| | (70 | ) |
| Net decrease in short-term borrowings secured by accounts receivable | — |
| | — |
| | (10 | ) | | — |
| | (10 | ) |
| Intercompany dividends and net increase (decrease) in intercompany obligations | 74 |
| | (75 | ) | | (37 | ) | | 38 |
| | — |
|
| Capital contribution from noncontrolling interest partner | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Distribution to noncontrolling interests partners | — |
| | (30 | ) | | — |
| | — |
| | (30 | ) |
| Net cash provided (used) by financing activities | 74 |
| | (71 | ) | | (21 | ) | | 38 |
| | 20 |
|
| Effect of foreign exchange rate changes on cash and cash equivalents | — |
| | (15 | ) | | — |
| | — |
| | (15 | ) |
| Increase in cash and cash equivalents | 4 |
| | 3 |
| | — |
| | — |
| | 7 |
|
| Cash and cash equivalents, January 1 | 6 |
| | 269 |
| | — |
| | — |
| | 275 |
|
| Cash and cash equivalents, December 31 (Note) | $ | 10 |
| | $ | 272 |
| | $ | — |
| | $ | — |
| | $ | 282 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2016 |
| | Guarantor
Subsidiaries | | Nonguarantor
Subsidiaries | | Tenneco Inc.
(Parent
Company) | | Reclass
& Elims | | Consolidated |
| | (Millions) |
| Operating Activities | | | | | | | | | |
| Net cash provided by (used in) operating activities | $ | 176 |
| | $ | 190 |
| | $ | 23 |
| | $ | (15 | ) | | $ | 374 |
|
| Investing Activities | | | | | | | | | |
| Proceeds from sale of assets | — |
| | 6 |
| | — |
| | — |
| | 6 |
|
| Cash payments for property, plant and equipment | (130 | ) | | (215 | ) | | — |
| | — |
| | (345 | ) |
| Proceeds from deferred purchase price of factored receivables | — |
| | 110 |
| | | | | | 110 |
|
| Net cash used in investing activities | (130 | ) | | (99 | ) | | — |
| | — |
| | (229 | ) |
| Financing Activities | | | | | | | | | |
| Repayments of term loans and notes | — |
| | (29 | ) | | (516 | ) | | — |
| | (545 | ) |
| Proceeds from term loans and notes | — |
| | 29 |
| | 500 |
| | — |
| | 529 |
|
| Debt issuance cost on long-term debt | — |
| | — |
| | (9 | ) | | — |
| | (9 | ) |
| Purchase of common stock under the share repurchase program | — |
| | — |
| | (225 | ) | | — |
| | (225 | ) |
| Issuance of common shares | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
| Increase in bank overdrafts | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
| Borrowings on revolving lines of credit | — |
| | 101 |
| | 5,316 |
| | — |
| | 5,417 |
|
| Payments on revolving lines of credit | — |
| | (103 | ) | | (5,118 | ) | | — |
| | (5,221 | ) |
| Intercompany dividends and net (decrease) increase in intercompany obligations | (39 | ) | | 8 |
| | 16 |
| | 15 |
| | — |
|
| Distribution to noncontrolling interests partners | — |
| | (55 | ) | | — |
| | — |
| | (55 | ) |
| Net cash used in financing activities | (39 | ) | | (39 | ) | | (23 | ) | | 15 |
| | (86 | ) |
| Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
| Increase in cash, cash equivalents and restricted cash | 7 |
| | 54 |
| | — |
| | — |
| | 61 |
|
| Cash, cash equivalents and restricted cash, January 1 | 2 |
| | 286 |
| | — |
| | — |
| | 288 |
|
| Cash, cash equivalents and restricted cash, December 31 | $ | 9 |
| | $ | 340 |
| | $ | — |
| | $ | — |
| | $ | 349 |
|
|
| |
Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
14.24. Subsequent Events
Change in Reportable Segments
On February 7, 2017, the Company announced that we will be making a change in our reportable segments. Our Clean Air and Ride Performance product lines in India, which have been reported as part of the Europe, South America and India segments, will now be reported with their respective product lines in the Asia Pacific segments, effective with the first quarter of 2017. Such changes will bring the high growth markets in both India and China under the Asia Pacific segments. The change in reportable segments comes as a result of the change to the chief operating decision maker, who will assess business performance and allocation of resources through this structure.
Dividend
On February 1, 2017, our6, 2019, the Company's Board of Directors declared a cash dividend of $0.25 per share on its Class A Common Stock and Class B Common Stock, payable on March 23, 201721, 2019 to shareholders of record as of March 7, 2017.5, 2019.
| |
15. | Quarterly Financial Data (Unaudited) |
Öhlins Racing A.B Acquisition |
| | | | | | | | | | | | | | | |
| Quarter | Net Sales
and
Operating
Revenues | | Cost of Sales
(Excluding
Depreciation and
Amortization) | | Earnings Before
Interest Expense,
Income Taxes
and Noncontrolling
Interests | | Net Income
Attributable
to Tenneco
Inc. |
| | (Millions) |
| 2016 |
| |
| |
| |
|
| 1st | $ | 2,136 |
| | $ | 1,770 |
| | $ | 124 |
| | $ | 57 |
|
| 2nd | 2,212 |
| | 1,816 |
| | 171 |
| | 82 |
|
| 3rd | 2,096 |
| | 1,743 |
| | 150 |
| | 179 |
|
| 4th | 2,155 |
| | 1,794 |
| | 71 |
| | 38 |
|
| $ | 8,599 |
| | $ | 7,123 |
| | $ | 516 |
| | $ | 356 |
|
| 2015 |
| |
| |
| |
|
| 1st | $ | 2,012 |
| | $ | 1,677 |
| | $ | 118 |
| | $ | 47 |
|
| 2nd | 2,118 |
| | 1,757 |
| | 150 |
| | 75 |
|
| 3rd | 2,020 |
| | 1,707 |
| | 111 |
| | 49 |
|
| 4th | 2,031 |
| | 1,687 |
| | 129 |
| | 70 |
|
| $ | 8,181 |
| | $ | 6,828 |
| | $ | 508 |
| | $ | 241 |
|
|
| | | | | | | |
| Quarter | Basic
Earnings
per Share of
Common Stock | | Diluted
Earnings
per Share of
Common Stock |
| 2016 | | | |
| 1st | $ | 1.00 |
| | $ | 0.99 |
|
| 2nd | 1.44 |
| | 1.43 |
|
| 3rd | 3.22 |
| | 3.19 |
|
| 4th | 0.70 |
| | 0.69 |
|
| Full Year | 6.36 |
| | 6.31 |
|
| 2015 | | | |
| 1st | $ | 0.79 |
| | $ | 0.78 |
|
| 2nd | 1.24 |
| | 1.23 |
|
| 3rd | 0.84 |
| | 0.83 |
|
| 4th | 1.19 |
| | 1.18 |
|
| Full Year | 4.05 |
| | 4.01 |
|
|
| |
Note: | The sum of the quarters may not equal the total of the respective year’s earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year. |
(The preceding notes are an integral part of the foregoing consolidated financial statements.)
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
| |
16. | Revision of Previously Issued Financial Statements |
For the periods from April 1, 2013 through March 31, 2017, we identified approximately $34 million in lump sum payments from our suppliers that were incorrectly recorded upon receipt as a reduction to cost of sales. Of the lump sum payments that were accounted for incorrectly, $28 million were received from our suppliers prior to December 31, 2016. These payments should have been deferred and amortized over the life of the underlying supplier agreements. The deferred credit balance related to these payments was $23 million and $16 million at December 31, 2016 and 2015, respectively.
In addition, we identified approximately $7 million in cost of sales that should have been accrued in prior periods for substrate liabilities, impacting the periods from January 1, 2016 through March 31, 2017.
With this revision, we are including previously known adjustments impacting revenues and cost of sales for the periods from January 1, 2012 to September 30, 2015, to reflect a correction from gross revenue reporting to net revenue reporting for certain transactions where it was determined that we earned a fee as an agent. These previously known adjustments reduced both revenue and cost of sales by $28 million and $39 million for years ended December 31, 2015 and 2014, respectively.
We evaluated the impact of these items on prior periods under the guidance of SEC Staff Accounting Bulletin (SAB) No. 99, “Materiality” and determined that the amounts were not material to previously issued financial statements.
We also evaluated the impact of correcting these items through a cumulative adjustment to our financial statements and concluded that based on the guidance within SEC SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” it was appropriate to revise our previously issued financial statements to reflect this correction. As a result, we have revised and will revise for annual and interim periods in future filings, for certain amounts in the consolidated financial statements and related notes in order to correct these errors, which are described further below.
The following tables present the effect of these revisions for the financial statement line items impacted in the affected periods included within this annual financial report:
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions Except Per Share Amounts) |
| Consolidated Statement of Income | | | | | | |
| Cost of sales (exclusive of depreciation and amortization) | | $ | 7,111 |
| | $ | 12 |
| | $ | 7,123 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 528 |
| | (12 | ) | | 516 |
|
| Earnings before income taxes and noncontrolling interests | | 436 |
| | (12 | ) | | 424 |
|
| Income tax expense | | 3 |
| | (3 | ) | | — |
|
| Net income | | 433 |
| | (9 | ) | | 424 |
|
| Less: Net income attributable to noncontrolling interests | | 70 |
| | (2 | ) | | 68 |
|
| Net income attributable to Tenneco Inc. | | $ | 363 |
| | $ | (7 | ) | | $ | 356 |
|
| Earnings per share | | | | | | |
| Basic earnings per share of common stock | | $ | 6.49 |
| | $ | (0.13 | ) | | $ | 6.36 |
|
| Diluted earnings per share of common stock | | $ | 6.44 |
| | $ | (0.13 | ) | | $ | 6.31 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions Except Per Share Amounts) |
| Consolidated Statement of Income | | | | | | |
| Net sales and operating revenues | | $ | 8,209 |
| | $ | (28 | ) | | $ | 8,181 |
|
| Cost of sales (exclusive of depreciation and amortization) | | 6,845 |
| | (17 | ) | | 6,828 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 519 |
| | (11 | ) | | 508 |
|
| Earnings before income taxes and noncontrolling interests | | 452 |
| | (11 | ) | | 441 |
|
| Income tax expense | | 149 |
| | (3 | ) | | 146 |
|
| Net income | | 303 |
| | (8 | ) | | 295 |
|
| Less: Net income attributable to noncontrolling interests | | $ | 56 |
| | $ | (2 | ) | | $ | 54 |
|
| Net income attributable to Tenneco Inc. | | $ | 247 |
| | $ | (6 | ) | | $ | 241 |
|
| Earnings per share | | | | | | |
| Basic earnings per share of common stock | | $ | 4.14 |
| | $ | (0.09 | ) | | $ | 4.05 |
|
| Diluted earnings per share of common stock | | $ | 4.11 |
| | $ | (0.10 | ) | | $ | 4.01 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2014 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions Except Per Share Amounts) |
| Consolidated Statement of Income | | | | | | |
| Net sales and operating revenues | | $ | 8,420 |
| | $ | (39 | ) | | $ | 8,381 |
|
| Cost of sales (exclusive of depreciation and amortization) | | 7,025 |
| | (36 | ) | | 6,989 |
|
| Earnings before interest expense, income taxes, and noncontrolling interests | | 492 |
| | (3 | ) | | 489 |
|
| Earnings before income taxes and noncontrolling interests | | 401 |
| | (3 | ) | | 398 |
|
| Net income | | 270 |
| | (3 | ) | | 267 |
|
| Less: Net income attributable to noncontrolling interests | | $ | 44 |
| | $ | (2 | ) | | $ | 42 |
|
| Net income attributable to Tenneco Inc. | | $ | 226 |
| | $ | (1 | ) | | $ | 225 |
|
| Earnings per share | | | | | | |
| Basic earnings per share of common stock | | $ | 3.72 |
| | $ | (0.02 | ) | | $ | 3.70 |
|
| Diluted earnings per share of common stock | | $ | 3.66 |
| | $ | (0.02 | ) | | $ | 3.64 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statement of Comprehensive Income | | | | | | |
| Tenneco Inc. | | | | | | |
| Net Income | | $ | 363 |
| | $ | (7 | ) | | $ | 356 |
|
| Comprehensive Income | | $ | 363 |
| | $ | (7 | ) | | $ | 356 |
|
| | | | | | | |
| Noncontrolling Interests | | | | | | |
| Net Income | | $ | 70 |
| | $ | (2 | ) | | $ | 68 |
|
| Comprehensive Income | | $ | 66 |
| | $ | (2 | ) | | $ | 64 |
|
| | | | | | | |
| Total | | | | | | |
| Net Income | | $ | 433 |
| | $ | (9 | ) | | $ | 424 |
|
| Comprehensive Income | | $ | 429 |
| | $ | (9 | ) | | $ | 420 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statement of Comprehensive Income | | | | | | |
| Tenneco Inc. | | | | | | |
| Net Income | | $ | 247 |
| | $ | (6 | ) | | $ | 241 |
|
| Comprehensive Income | | $ | 127 |
| | $ | (6 | ) | | $ | 121 |
|
| | | | | | | |
| Noncontrolling Interests | | | | | | |
| Net Income | | $ | 56 |
| | $ | (2 | ) | | $ | 54 |
|
| Comprehensive Income | | $ | 52 |
| | $ | (2 | ) | | $ | 50 |
|
| | | | | | | |
| Total | | | | | | |
| Net Income | | $ | 303 |
| | $ | (8 | ) | | $ | 295 |
|
| Comprehensive Income | | $ | 179 |
| | $ | (8 | ) | | $ | 171 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2014 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statement of Comprehensive Income | | | | | | |
| Tenneco Inc. | | | | | | |
| Net Income | | $ | 226 |
| | $ | (1 | ) | | $ | 225 |
|
| Comprehensive Income | | $ | 41 |
| | $ | (1 | ) | | $ | 40 |
|
| | | | | | | |
| Noncontrolling Interests | | | | | | |
| Net Income | | $ | 44 |
| | $ | (2 | ) | | $ | 42 |
|
| Comprehensive Income | | $ | 42 |
| | $ | (2 | ) | | $ | 40 |
|
| | | | | | | |
| Total | | | | | | |
| Net Income | | $ | 270 |
| | $ | (3 | ) | | $ | 267 |
|
| Comprehensive Income | | $ | 83 |
| | $ | (3 | ) | | $ | 80 |
|
|
| | | | | | | | | | | | |
| | | December 31, 2016 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Balance Sheet | | | | | | |
| Deferred income taxes | | $ | 195 |
| | $ | 4 |
| | $ | 199 |
|
| Total assets | | 4,342 |
| | 4 |
| | 4,346 |
|
| Accounts payable | | 1,496 |
| | 5 |
| | 1,501 |
|
| Accrued taxes | | 41 |
| | (2 | ) | | 39 |
|
| Total current liabilities | | 1,970 |
| | 3 |
| | 1,973 |
|
| Deferred credits and other liabilities | | 116 |
| | 23 |
| | 139 |
|
| Total liabilities | | 3,660 |
| | 26 |
| | 3,686 |
|
| Redeemable noncontrolling interests | | 43 |
| | (3 | ) | | 40 |
|
| Retained earnings (accumulated deficit) | | (1,085 | ) | | (15 | ) | | (1,100 | ) |
| Total Tenneco Inc. shareholders’ equity | | 588 |
| | (15 | ) | | 573 |
|
| Noncontrolling interests | | 51 |
| | (4 | ) | | 47 |
|
| Total equity | | 639 |
| | (19 | ) | | 620 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | 4,342 |
| | 4 |
| | 4,346 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | December 31, 2015 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Balance Sheet | | | | | | |
| Deferred income taxes | | $ | 218 |
| | $ | 3 |
| | $ | 221 |
|
| Total assets | | 3,967 |
| | 3 |
| | 3,970 |
|
| Deferred credits and other liabilities | | 206 |
| | 16 |
| | 222 |
|
| Total liabilities | | 3,449 |
| | 16 |
| | 3,465 |
|
| Redeemable noncontrolling interests | | 43 |
| | (2 | ) | | 41 |
|
| Retained earnings (accumulated deficit) | | (1,448 | ) | | (8 | ) | | (1,456 | ) |
| Total Tenneco Inc. shareholders’ equity | | 433 |
| | (8 | ) | | 425 |
|
| Noncontrolling interests | | 42 |
| | (3 | ) | | 39 |
|
| Total equity | | 475 |
| | (11 | ) | | 464 |
|
| Total liabilities, redeemable noncontrolling interests and equity | | 3,967 |
| | 3 |
| | 3,970 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statement of Cash Flow * | | | | | | |
| Net income | | $ | 433 |
| | $ | (9 | ) | | $ | 424 |
|
| Deferred income taxes | | (79 | ) | | (1 | ) | | (80 | ) |
| Increase (decrease) in payables | | 109 |
| | 5 |
| | 114 |
|
| Increase (decrease) in accrued taxes | | 4 |
| | (2 | ) | | 2 |
|
| Changes in long-term liabilities | | 26 |
| | 7 |
| | 33 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statement of Cash Flow * | | | | | | |
| Net income | | $ | 303 |
| | $ | (8 | ) | | $ | 295 |
|
| Deferred income taxes | | — |
| | (2 | ) | | (2 | ) |
| Changes in long-term liabilities | | (2 | ) | | 10 |
| | 8 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2014 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statement of Cash Flow * | | | | | | |
| Net income | | $ | 270 |
| | $ | (3 | ) | | $ | 267 |
|
| Changes in long-term liabilities | | (13 | ) | | 3 |
| | (10 | ) |
* No change to net cash provided by operating activities.
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2016 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statements of Changes in Shareholders' Equity | | | | | | |
| | | | | | | |
| Retained earnings (accumulated deficit) | | | | | | |
| Balance January 1 | | $ | (1,448 | ) | | $ | (8 | ) | | $ | (1,456 | ) |
| Net income attributable to Tenneco Inc. | | 363 |
| | (7 | ) | | 356 |
|
| Balance December 31 | | $ | (1,085 | ) | | $ | (15 | ) | | $ | (1,100 | ) |
| | | | | | | |
| Total Tenneco Inc. shareholders' equity | | $ | 588 |
| | $ | (15 | ) | | $ | 573 |
|
| | | | | | | |
| Noncontrolling interests: | | | | | | |
| Balance January 1 | | $ | 42 |
| | $ | (3 | ) | | $ | 39 |
|
| Net income | | 33 |
| | (1 | ) | | 32 |
|
| Other comprehensive loss | | (2 | ) | | — |
| | (2 | ) |
| Dividends declared | | $ | (22 | ) | | $ | — |
| | $ | (22 | ) |
| Balance December 31 | | $ | 51 |
| | $ | (4 | ) | | $ | 47 |
|
| | | | | | | |
| Total Equity | | $ | 639 |
| | $ | (19 | ) | | $ | 620 |
|
TENNECO INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2015 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statements of Changes in Shareholders' Equity Data: | | | | | | |
| | | | | | | |
| Retained earnings (accumulated deficit) | | | | | | |
| Balance January 1 | | $ | (1,695 | ) | | $ | (2 | ) | | $ | (1,697 | ) |
| Net income attributable to Tenneco Inc. | | 247 |
| | (6 | ) | | 241 |
|
| Balance December 31 | | $ | (1,448 | ) | | $ | (8 | ) | | $ | (1,456 | ) |
| | | | | | | |
| Total Tenneco Inc. shareholders' equity | | $ | 433 |
| | $ | (8 | ) | | $ | 425 |
|
| | | | | | | |
| Noncontrolling interests: | | | | | | |
| Balance January 1 | | $ | 41 |
| | $ | (1 | ) | | $ | 40 |
|
| Net income | | 24 |
| | (2 | ) | | 22 |
|
| Other comprehensive loss | | (3 | ) | | — |
| | (3 | ) |
| Dividends declared | | $ | (20 | ) | | $ | — |
| | $ | (20 | ) |
| Balance December 31 | | $ | 42 |
| | $ | (3 | ) | | $ | 39 |
|
| | | | | | | |
| Total Equity | | $ | 475 |
| | $ | (11 | ) | | $ | 464 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, 2014 |
| | | As Previously Reported | | Adjustment | | As Revised |
| | | (Millions) |
| Consolidated Statements of Changes in Shareholders' Equity Data: | | | | | | |
| | | | | | | |
| Retained earnings (accumulated deficit) | | | | | | |
| Balance January 1 | | $ | (1,921 | ) | | $ | (1 | ) | | $ | (1,922 | ) |
| Net income attributable to Tenneco Inc. | | 226 |
| | (1 | ) | | 225 |
|
| Balance December 31 | | $ | (1,695 | ) | | $ | (2 | ) | | $ | (1,697 | ) |
| | | | | | | |
| Total Tenneco Inc. shareholders' equity | | $ | 497 |
| | $ | (2 | ) | | $ | 495 |
|
| | | | | | | |
| Noncontrolling interests: | | | | | | |
| Balance January 1 | | $ | 39 |
| | $ | — |
| | $ | 39 |
|
| Net income | | 21 |
| | (1 | ) | | 20 |
|
| Other comprehensive loss | | (1 | ) | | — |
| | (1 | ) |
| Dividends declared | | $ | (18 | ) | | $ | — |
| | $ | (18 | ) |
| Balance December 31 | | $ | 41 |
| | $ | (1 | ) | | $ | 40 |
|
| | | | | | | |
| Total Equity | | $ | 538 |
| | $ | (3 | ) | | $ | 535 |
|
SCHEDULE II
TENNECO INC. AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
| | | | |
| Additions | | | | | | | Additions | | | | |
| Description | Balance
at
Beginning
of Year | | Charged
to
Costs and
Expenses | | Charged
to
Other
Accounts | | Deductions | | Balance
at End of
Year | Balance
at
Beginning
of Year | | Charged
to
Costs and
Expenses | | Charged
to
Other
Accounts | | Deductions | | Balance
at End of
Year |
| | (Millions) | (Millions) |
| Allowance for Doubtful Accounts and Notes Receivable Deducted from Assets to Which it Applies: |
| |
| |
| |
| |
| | | | | | | | | |
| Year Ended December 31, 2018 | | $ | 16 |
| | 5 |
| | — |
| | 4 |
| | $ | 17 |
|
| Year Ended December 31, 2017 | | $ | 16 |
| | 1 |
| | — |
| | 1 |
| | $ | 16 |
|
| Year Ended December 31, 2016 | $ | 16 |
| | 1 |
| | — |
| | 1 |
| | $ | 16 |
| $ | 16 |
| | 1 |
| | — |
| | 1 |
| | $ | 16 |
|
| Year Ended December 31, 2015 | $ | 16 |
| | 4 |
| | — |
| | 4 |
| | $ | 16 |
| |
| Year Ended December 31, 2014 | $ | 14 |
| | 4 |
| | — |
| | 2 |
| | $ | 16 |
| |
|
| | | | | | | | | | | | | | | | |
| Description | Balance
at
Beginning
of Year | | Provision Charged (Credited) to Expense | | Allowance Changes | | Other Additions (Deductions) | | Balance
at End of
Year |
| | (Millions) |
| Deferred Tax Assets- Valuation Allowance | | | | | | | | | |
| Year Ended December 31, 2016 | $ | 127 |
| | 18 |
| | — |
| | — |
| | $ | 145 |
|
| Year Ended December 31, 2015 | $ | 139 |
| | 15 |
| | (3 | ) | | (24 | ) | | $ | 127 |
|
| Year Ended December 31, 2014 | $ | 135 |
| | 15 |
| | (3 | ) | | (8 | ) | | $ | 139 |
|
|
| | | | | | | | | | | | | | | | |
| Description | Balance
at
Beginning
of Year | | Provision Charged (Credited) to Expense | | Allowance Changes | | Other Additions (Deductions) (a) | | Balance
at End of
Year |
| | (Millions) |
| Deferred Tax Assets- Valuation Allowance: | | | | | | | | | |
| Year Ended December 31, 2018 | $ | 163 |
| | — |
| | — |
| | 351 |
| | $ | 514 |
|
| Year Ended December 31, 2017 | $ | 145 |
| | (1 | ) | | — |
| | 19 |
| | $ | 163 |
|
| Year Ended December 31, 2016 | $ | 127 |
| | 18 |
| | — |
| | — |
| | $ | 145 |
|
(a) This amount primarily relates to the acquisition of Federal-Mogul in 2018 of $368 million, and changes in foreign currency exchange rates, primarily the euro, in 2017 and 2018.
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
ITEM 9A.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of our management, including our Chiefco-Chief Executive OfficerOfficers and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, our Chiefco-Chief Executive OfficerOfficers and Chief Financial Officer concluded that ourthe Company’s disclosure controls and procedures were effective as of December 31, 20162018 to ensure that information required to be disclosed by our Company in our original Annual Report on Form 10-K forreports that it files or submits under the year ended December 31, 2016, filed on February 24, 2017.Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.
Subsequent to this evaluation, our Chief Executive Officer and Chief Financial Officer reevaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of December 31, 2016 because of the identification of a material weakness in our internal control over financial reporting in China as described in Management’sManagement's Report on Internal Control overOver Financial Reporting included under Item 8, “Financial Statements and Supplementary Data”.
See Item 8, “Financial Statements and Supplementary Data” for management’s report on internal control over financial reporting and the report of our independent registered public accounting firm thereon.
Remediation Planof Material Weakness
The Audit Committee engaged an independent legal firm to investigate these transactions and it concluded that such mischaracterizations were intentional. In particular, certain China personnel created accounting documentation for certain supplier transactions that was inconsistent with the substance of the transactions. With respect to these circumstances, the Company is taking action with respect to the individuals who have engagedManagement previously reported a material weakness in intentional misconduct, and will take further actions as appropriate.
As part of our commitment to strengthening our internal controlscontrol over financial reporting in our 2017 Form 10-K, filed on February 28, 2018, related to accounting for supplier payments in China. To address the material weakness in accounting for supplier payments, we are implementing various personnelundertook the following actions in prior 2018 quarters:
| |
| (i) | We strengthened the China accounting staff by adding personnel who have significant experience in U.S. and international financial reporting; |
| |
| (ii) | We conducted training on the proper accounting for supplier payments in addition to providing training on the code of ethical conduct for China accounting and purchasing personnel; |
| |
| (iii) | We augmented oversight of the China accounting and purchasing functions with qualified personnel in the U.S. and Europe. |
During the fourth quarter of 2018, we designed and will initiate other related remedial actions under the oversightimplemented new processes associated with supplier agreements and payments that include development of policies and procedures, enhancements to supporting documentation, and adding additional levels of review and approval of the Audit Committee, including implementing additional training for China accounting and purchasing personnel, augmenting international accounting oversight with qualified personnel in the United States and Europe, and enhancing oversight controls at the Company’s China locations around adherence by Company personnel to policies regarding payments received from suppliers.
We will continue to monitor the effectivenesstransactions recorded. Our testing of these and other processes, procedures andour internal control over financial reporting validated that controls and make any further changes management determines appropriate.procedures over our accounting for supplier payments operated consistently on a monthly basis during the quarter. Therefore, we determined that the previously reported material weakness related to our accounting for supplier payment process has been remediated as of December 31, 2018.
Changes in Internal Control Over Financial Reporting
There were noOn October 1, 2018, Tenneco Inc. completed the acquisition of Federal-Mogul LLC. The acquisition of the Federal-Mogul business and the fourth quarter remediation activities described above are changes in our internal control over financial reporting during the quarter ended December 31, 2016,2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the quarter ended December 31, 2018, there were no other changes in Tenneco’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect Tenneco’s internal control over financial reporting.
ITEM 9B.OTHER INFORMATION.
None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The sections entitled “Election of Directors” and “Corporate Governance” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 17, 201715, 2019 are incorporated herein by reference. In addition, Item 4.1 of this Annual Report on Form 10-K, which appears at the end of Part I, is incorporated herein by reference.
A copy of our Code of Ethical Conduct for Financial Managers, which applies to our Chief Executive Officer, Chief Financial Officer, Controller and other key financial managers, is filed as Exhibit 14 to this Form 10-K. We have posted a copy of the Code of Ethical Conduct for Financial Managers on our Internet website at www.tenneco.com. We will make a copy of this code available to any person, without charge, upon written request to Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to or waivers of our Code of Ethical Conduct by posting this information on our Internet website at www.tenneco.com.
ITEM 11.EXECUTIVE COMPENSATION.
The sections entitled “Executive Compensation” and “Compensation/Nominating/Governance Committee Report on Executive Compensation” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 201715, 2019 are incorporated herein by reference.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The section entitled “Ownership of Common Stock” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 201715, 2019 is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table shows, as of December 31, 2016,2018, information regarding outstanding awards available under our compensation plans (including individual compensation arrangements) under which our equity securities may be delivered:
|
| | | | | | | | | | |
| Plan category | | (a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights(1) | | (b)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights | | (c)
Number of
securities
available for
future
issuance
(excluding
shares in
column (a))(1) |
| Equity compensation plans approved by security holders: | |
| |
| |
|
| Stock Ownership Plan(2) | | 54,279 |
| | $ | 19.51 |
| | — |
|
| 2002 Long-Term Incentive Plan (as amended)(3) | | — |
| | $ | — |
| | — |
|
| 2006 Long-Term Incentive Plan (as amended)(4) | | 552,246 |
| | $ | 44.89 |
| | 2,541,470 |
|
|
| | | | | | | | | | |
| Plan category | | (a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights(1) | | (b)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights | | (c)
Number of
securities
available for
future
issuance
(excluding
shares in
column (a))(1) |
| Equity compensation plans approved by security holders: | | | | | | |
Stock Ownership Plan (2) | | 1,261 |
| | $ | 19.08 |
| | — |
|
2006 Long-Term Incentive Plan (as amended) (3) | | 1,187,537 |
| | $ | 48.62 |
| | 4,034,413 |
|
| |
| (1) | Reflects the number of shares of the Company’s common stock. Does not include 241,980219,868 shares that may be issued in settlement of common stock equivalent units that were (i) credited to outside directors as payment for their retainer and other fees or (ii) credited to any of our executive officers who have elected to defer a portion of their compensation. In general, these units are settled in cash. At the option of the Company, however, the units may be settled in shares of the Company’s common stock. |
| |
| (2) | This plan terminated as to new awards on December 31, 2001 (except awards pursuant to commitments outstanding at that date). |
| |
(3) | This plan terminated as to new awards upon adoption of our 2006 Long-term Incentive Plan (except awards pursuant to commitments outstanding on that date). |
| |
(4)(3) | Does not include 591,416178,550 shares subject to outstanding restricted stock (vest over time) as of December 31, 20162018 that were issued at a weighted average grant date fair value of $44.89.$55.46. Under this plan, as of December 31, 2016,2018, a maximum of 1,705,6852,707,660 shares remained available for delivery under full value awards (i.e., bonus stock, stock equivalent units, performance units, restricted stock and restricted stock units). |
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
The subsections entitled “The Board of Directors and its Committees” and “Transactions with Related Persons” under the section entitled “Corporate Governance” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 201715, 2019 are incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The sections entitled “Ratify Appointment of Independent Public Accountants — Audit, Audit-Related, Tax and All Other Fees” and “Ratify Appointment of Independent Public Accountants — Pre-Approval Policy” in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 17, 201715, 2019 are incorporated herein by reference.
PART IV
ITEM 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN ITEM 8
See “Index to Financial Statements of Tenneco Inc. and Consolidated Subsidiaries” set forth in Item 8, “Financial Statements and Supplementary Data” for a list of financial statements filed as part of this Report.
INDEX TO SCHEDULE INCLUDED IN ITEM 8
SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE
Schedule I — Condensed financial information of registrant
Schedule III — Real estate and accumulated depreciation
Schedule IV — Mortgage loans on real estate
Schedule V — Supplemental information concerning property — casualty insurance operations
EXHIBITS
The following exhibits are filed with this Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, or incorporated herein by reference (exhibits designated by an asterisk are filed with the report; all other exhibits are incorporated by reference):
INDEX TO EXHIBITS
|
| | |
Exhibit Number | | Description |
2 | — | None. |
3.1(a) | — | Restated CertificateMembership Interest Purchase Agreement, dated as of Incorporation ofApril 10, 2018 by and among the registrant dated December 11, 1996Company, Federal-Mogul LLC, American Entertainment Properties Corp. and Icahn Enterprises L.P. (incorporated herein by reference to Exhibit 3.1(a)2.1 of the registrant’s AnnualCurrent Report on Form 10-K for the year ended December 31, 1997,8-K filed April 10, 2018. File No. 1-12387). |
3.1(b) | — | Amended and Restated Certificate of Amendment, dated December 11, 1996Incorporation of Tenneco Inc. (incorporated herein by reference to Exhibit 3.1(c) of the registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). |
3.1(c) | — | Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference to Exhibit 3.1(d) of the registrant’s Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). |
3.1(d) | — | Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference to Exhibit 3.1(d) of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). |
3.1(e) | — | Certificate of Elimination of the Series A Participating Junior Preferred Stock of the registrant dated September 11, 1998 (incorporated herein by reference to Exhibit 3.1(e) of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). |
3.1(f) | — | Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference to Exhibit 3.1(f) of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). |
3.1(g) | — | Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference to Exhibit 3.1(g) of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). |
3.1(h) | — | Certificate of Ownership and Merger merging Tenneco Automotive Merger Sub Inc. with and into the registrant, dated November 5, 1999 (incorporated herein by reference to Exhibit 3.1(h) of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). |
3.1(i) | — | Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated May 9, 2000 (incorporated herein by reference to Exhibit 3.1(i) of the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000, File No. 1-12387). |
| — | Certificate of Ownership and Merger merging Tenneco Inc. with and into the registrant, dated October 27, 2005 (incorporated herein by reference to Exhibit 99.13.1 of the registrant’s Current Report on Form 8-K dated October 28, 2005,1 2018, File No. 1-12387).
|
| — | By-laws of the registrant, as amended and restated effective October 11, 20161, 2018 (incorporated herein by reference to Exhibit 3.2 of the registrant’s Current Report on Form 8-K event dated October 11, 2016,1, 2018, File No. 1-12387).
|
| — | Specimen stock certificate for Tenneco Inc. common stock (incorporated herein by reference to Exhibit 4.3 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). |
| — | Fourth Amended and Restated CreditShareholders Agreement, dated as of December 8, 2014,October 1, 2018 by and among Tenneco Inc.the Company, American Entertainment Properties Corp., JPMorgan Chase Bank, N.A., as administrative agent,Icahn Enterprises Holdings L.P. and the other lenders party theretoIcahn Enterprises L.P. (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K dated December 8, 2014,October 1, 2018, File No. 1-12387).
|
| — | Amended and Restated Guarantee and CollateralCredit Agreement, dated as of December 8, 2014,October 1, 2018, among Tenneco Inc., variousTenneco Automotive Operating Company Inc., JPMorgan Chase Bank, N.A., as Administrative Agent, and the other lenders party thereto (incorporated herein by reference to Exhibit 10.01 of its subsidiariesthe registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Guarantee Agreement, dated as of October 1, 2018, among Tenneco Inc., the Guarantors party thereto and JPMorgan Chase Bank, N.A., as administrative agentAdministrative Agent (incorporated herein by reference to Exhibit 4.210.02 of the registrant'sregistrant’s Current Report on Form 8-K dated December 8, 2014,October 1, 2018, File No. 1-12387).
|
| — | Collateral Agreement, dated as of October 1, 2018, among Tenneco Inc., various subsidiaries to Tenneco, Inc. party thereto and Wilmington Trust, National Association, as Collateral Trustee (incorporated herein by reference to Exhibit 10.03 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Indenture, dated December 5, 2014, among the registrant, various subsidiaries of the registrant and U.S, Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.1 of the registrant’s Current Report on Form 8-K filed December 5, 2014, File No. 1-12387).
|
| — | First Supplemental Indenture, dated December 5, 2014, among the registrant, various subsidiaries of the registrant and U.S. Bank National Association, as trustee (incorporated herein by reference to Exhibit 4.2 of the registrant's Current Report on Form 8-K filed December 5, 2014, File No. 1-12387).
|
| — | Second Supplemental Indenture, dated as of June 13, 2016, among Tenneco Inc., the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the registrant’s Current Report on Form 8-K dated June 13, 2016, File No. 1-12387).
|
| — | Indenture, dated as of March 30, 2017, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, Wilmington Trust, National Association, as Trustee, The Bank of New York Mellon, London Branch, as Paying Agent, and The Bank of New York Mellon SA/NV, Luxembourg Branch (formerly. The Bank of New York Mellon (Luxembourg) S.A.), as Registrar (including the form of 4.875% Senior Secured Notes due 2022 and the form of Floating Rate Senior Secured Notes due 2024) (incorporated herein by reference to Exhibit 4.01 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | First Supplemental Indenture, dated as of April 4, 2018, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, Wilmington Trust, National Association, as Trustee, and Bank of America, N.A. and Citibank, N.A. as Co-Collateral Trustees (incorporated herein by reference to Exhibit 4.02 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
|
| | |
Exhibit Number | | Description |
4.6 | — | Second Supplemental Indenture, dated as of July 30, 2018, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.03 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Third Supplemental Indenture, dated as of September 18, 2018, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.04 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Fourth Supplemental Indenture, dated as of October 1, 2018, among Tenneco Inc. (as successor by merger to Federal-Mogul LLC) and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee (incorporated herein by reference to Exhibit 4.05 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Collateral Agreement, dated as of March 30, 2017, among Federal-Mogul LLC, as Company and Issuer, and certain of its subsidiaries in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.06 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of July 30, 2018, made by Federal-Mogul Products Company LLC and Federal-Mogul Ignition LLC in favor of Bank of America, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.07 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of September 18, 2018, made by Federal-Mogul New Products, Inc. and Federal-Mogul Products US LLC in favor of Bank of America, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.08 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of October 1, 2018, made by Tenneco Inc., Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., TMC Texas Inc., The Pullman Company and Clevite Industries Inc. in favor of Wilmington Trust, National Association, as Collateral Trustee (incorporated herein by reference to Exhibit 4.09 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Amended and Restated Collateral Trust Agreement, dated as of April 15, 2014, among Federal-Mogul Holdings Corporation, certain of its subsidiaries and Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.10 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of July 29, 2014, made by FM Motorparts TSC, Inc. (as predecessor to F-M Motorparts TSC LLC) in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.11 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of July 23, 2015, made by F-M TSC Real Estate Holdings LLC in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.12 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of July 28, 2015, made by Federal-Mogul Valve Train International LLC in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.13 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of August 12, 2015, made by Federal-Mogul Sevierville, Inc. (as predecessor to Federal-Mogul Sevierville, LLC) in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.14 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of July 14, 2016, made by Beck Arnley Holdings LLC and Federal-Mogul Filtration LLC in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.15 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of March 30, 2017, made by Federal-Mogul Financing Corporation in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.16 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Collateral Trust Joinder, dated as of March 30, 2017, by Wilmington Trust, National Associate, as Trustee, and acknowledged by Citibank, N.A, as Collateral Trustee (incorporated herein by reference to Exhibit 4.17 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Collateral Trust Joinder, dated as of June 29, 2017 by The Bank of New York Mellon, London Branch, as Trustee, and acknowledged by Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.18 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
|
| | |
Exhibit Number | | Description |
| — | Assumption Agreement, dated as of July 30, 2018 made by Federal-Mogul Products Company LLC and Federal-Mogul Ignition LLC in favor of Bank of America, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.19 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement, dated as of September 18, 2018 made by Federal-Mogul New Products, Inc. and Federal-Mogul Products US LLC in favor of Bank of America, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.20 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Assumption Agreement to Collateral Trust Agreement, dated as of October 1, 2018, made by Tenneco Inc., Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., TMC Texas Inc., The Pullman Company and Clevite Industries Inc. in favor of Wilmington Trust, National Association, as Collateral Trustee (incorporated herein by reference to Exhibit 4.21 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Pari Passu Intercreditor Agreement, dated as of March 30, 2017, among Credit Suisse AG, Cayman Islands Branch, as Tranche C Term Administrative Agent for the applicable PP&E Credit Agreement Secured Parties, Citibank, N.A., as Collateral Trustee, and Wilmington Trust, National Association, as the Initial Other Authorized Representative (incorporated herein by reference to Exhibit 4.22 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Indenture, dated as of June 29, 2017, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, The Bank of New York Mellon, London Branch, as Trustee and Paying Agent, and The Bank of New York Mellon SA/NV, Luxembourg Branch (formerly, The Bank of New York Mellon (Luxembourg S.A.), as Registrar (incorporated herein by reference to Exhibit 4.23 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | First Supplemental Indenture, dated as of April 4, 2018, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, The Bank of New York Mellon, London Branch, as Trustee, and Bank of America, N.A. and Citibank, N.A., as Co-Collateral Trustees (incorporated herein by reference to Exhibit 4.24 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Second Supplemental Indenture, dated as of July 30, 2018, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto and The Bank of New York Mellon, London Branch, as Trustee (incorporated herein by reference to Exhibit 4.25 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Third Supplemental Indenture, dated as of September 18, 2018, among Federal-Mogul LLC and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto and The Bank of New York Mellon, London Branch, as Trustee (incorporated herein by reference to Exhibit 4.26 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Fourth Supplemental Indenture, dated as of October 1, 2018, among Tenneco Inc. (as successor by merger to Federal-Mogul LLC) and Federal-Mogul Financing Corporation, as Issuers, the Guarantors party thereto, and The Bank of New York Mellon, London Branch, as Trustee (incorporated herein by reference to Exhibit 4.27 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Collateral Agreement, dated as of June 29, 2017, among Federal-Mogul LLC, as Company and Issuer, and certain of its subsidiaries in favor of Citibank, N.A., as Collateral Trustee (incorporated herein by reference to Exhibit 4.28 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
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| — | Assumption Agreement, dated as of July 30, 2018, made by Federal-Mogul Products Company LLC and Federal-Mogul Ignition LLC in favor of Bank of America, N.A. as Collateral Trustee (incorporated herein by reference to Exhibit 4.29 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
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| — | Assumption Agreement, dated as of September 18, 2018, made by Federal-Mogul New Products, Inc. and Federal-Mogul Products US LLC in favor of Bank of America, N.A. as Collateral Trustee (incorporated herein by reference to Exhibit 4.30 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
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| — | Assumption Agreement, dated as of October 1, 2018, made by Tenneco Inc., Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., TMC Texas Inc., The Pullman Company and Clevite Industries Inc. in favor of Wilmington Trust, National Association, as Collateral Trustee (incorporated herein by reference to Exhibit 4.31 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387). |
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| | |
Exhibit Number | | Description |
| — | Joinder No. 1 to Pari Passu Intercreditor Agreement, dated as of June 29, 2017, among The Bank of New York Mellon, London Branch, as Trustee, Citibank, N.A., as Collateral Trustee, Credit Suisse, AG, Cayman Islands Branch, as Tranche C Term Administrative Agent and an Authorized Representative, and Wilmington Trust National Association, as Initial Other Authorized Representative (incorporated herein by reference to Exhibit 4.32 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
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| — | Collateral Trustee Resignation and Appointment Agreement, dated as of February 23, 2018, among Bank of America, N.A., as Co-Collateral Trustee, successor Collateral Trustee and ABL Agent, Citibank. N.A., as Co-Collateral Trustee and resigning Collateral Trustee, Credit Suisse AG, Cayman Islands Branch, as PP&E First Lien Agent, Wilmington Trust, National Association, as PP&E First Lien Agent, The Bank of New Mellon, London Branch, as PP&E First Lien Agent, Federal-Mogul LLC and the other Loan Parties party thereto (incorporated herein by reference to Exhibit 4.33 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387). |
| — | Collateral Trustee Resignation and Appointment, Joinder, Assumption and Designation Agreement, dated as of October 1, 2018, among Wilmington Trust, National Association, as Co-Collateral Trustee, successor Collateral Trustee and PP&E First Lien Agent, Bank of America, N.A., as Co-Collateral Trustee and Retiring Collateral Trustee, the Bank of New York Mellon, London Branch, as PP&E First Lien Agent, JPMorgan Chase Bank, N.A., as Authorized Agent, Tenneco Inc. and the other Loan Parties party thereto (incorporated herein by reference to Exhibit 4.34 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
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| — | Third Supplemental Indenture, dated October 1, 2018, among Tenneco Inc., as issuer, the Guarantors party thereto and U.S. Bank National Association, as trustee (the “Trustee”) (incorporated herein by reference to Exhibit 4.35 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Fourth Supplemental Indenture, dated October 1, 2018, among Tenneco Inc., as issuer, the Guarantors party thereto and the Trustee (incorporated herein by reference to Exhibit 4.36 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387).
|
| — | Joinder No. 2 to Pari Passu Intercreditor Agreement, dated as of October 1, 2018, among JPMorgan Chase Bank, N.A., as Additional Senior Class Debt Representative, Wilmington Trust, National Association, as Collateral Trustee, Wilmington Trust, National Association, as Initial Other Authorized Representative, The Bank of New York Mellon, London Branch, as an Authorized Representative (incorporated herein by reference to Exhibit 4.37 of the registrant’s Current Report on Form 8-K dated October 1, 2018, File No. 1-12387). |
| 4.44 | — | The registrant is a party to other agreements for unregistered long-term debt securities, which do not exceed 10% of the registrant’s total assets. The registrant agrees to furnish a copy of such agreements to the Commission upon request.
|
| 9 | — | NoneNone.
|
| — | Change of Control Severance Benefits Plan for Key Executives (incorporated herein by reference to Exhibit 10.13 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). |
+10.2 | — | Stock Ownership Plan (incorporated herein by reference to Exhibit 10.14 of the registrant’s Registration Statement on Form S-4, Reg. No. 333-93757). |
| — | Key Executive Pension Plan (incorporated herein by reference to Exhibit 10.11 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). |
| — | Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.12 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). |
| — | Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.13 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). |
| — | Amendment No. 1 to Change in Control Severance Benefits Plan for Key Executives (incorporated herein by reference to Exhibit 10.23 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). |
| — | Form of Indemnity Agreement entered into between the registrant and Paul Stecko (incorporated herein by reference to Exhibit 10.29 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2000, File No. 1-12387).
|
| — | 2002 Long-Term Incentive Plan (As Amended and Restated Effective March 11, 2003) (incorporated herein by reference to Exhibit 10.26 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, File No. 1-12387). |
| — | Amendment No. 1 to Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.27 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). |
| — | Form of Stock Option Agreement for employees under the 2002 Long-Term Incentive Plan, as amended (providing for a ten year option term) (incorporated herein by reference to Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated January 13, 2005, File No. 1-12387). |
| — | Amendment No. 1 to the Key Executive Pension Plan (incorporated herein by reference to Exhibit 10.39 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, File No. 1-12387). |
| — | Amendment No. 1 to the Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.40 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). |
| — | Second Amendment to the Key Executive Pension Plan (incorporated herein by reference to Exhibit 10.41 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). |
| — | Amendment No. 2 to the Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.42 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). |
| — | Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.43 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). |
| — | Supplemental Pension Plan for Management (incorporated herein by reference to Exhibit 10.45 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005, File No. 1-12387). |
| — | Amended and Restated Value Added (“TAVA”) Incentive Compensation Plan, effective January 1, 2006 (incorporated herein by reference to Exhibit 10.47 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2005, File No. 1-12387). |
| — | Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K, dated May 9, 2006). |
| — | Form of Stock Option Agreement for employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 99.3 of the registrant’s Current Report on Form 8-K, dated May 9, 2006). |
| — | Form of First Amendment to the Tenneco Inc. Supplemental Pension Plan for Management (incorporated herein by reference to Exhibit 10.56 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). |
| — | Form of First Amendment to the Tenneco Inc. Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.57 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 1-12387). |
|
| | |
Exhibit
Number
| | Description |
| — | Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives, as Amended and Restated effective December 12, 2007 (incorporated herein by reference to Exhibit 10.61 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387).
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|
| | |
Exhibit Number | | Description |
| — | Amendment No. 2 to Change in Control Severance Benefit Plan for Key Executives (incorporated herein by reference to Exhibit 10.66 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
| — | Code Section 409A Amendment to 2002 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.68 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
| — | Code Section 409A Amendment to 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.69 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
| — | Code Section 409A Amendment to Supplemental Retirement Plan (incorporated herein by reference to Exhibit 10.71 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387).
|
| — | Code Section 409A Amendment to Supplemental Pension Plan for Management (incorporated herein by reference to Exhibit 10.72 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
| — | Code Section 409A Amendment to Amended and Restated Value Added (“TAVA”) Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.73 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
| — | Tenneco Inc. 2006 Long-Term Incentive Plan (as amended and restated effective March 11, 2009) (incorporated herein by reference to Appendix A of the registrant’s proxy statement on Schedule 14A, filed with the Securities and Exchange Commission on March 31, 2009, File No. 1-12387).
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| — | Amendment No. 2, effective January 15, 2010, to Amended and Restated Tenneco Value Added Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.70 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2009, File No. 1-12387). |
| — | First Amendment to Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives, as Amended and Restated effective December 12, 2007 (incorporated herein by reference to Exhibit 10.3 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, File No. 1-12387).
|
| — | Form of Non-Qualified Stock Option Agreement for Employees under Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.3 of the registrant’sregistrant's Current Report on Form 8-K dated January 18, 2012,2012. File No. 1-12387). |
| — | Letter Agreement between Tenneco Inc. and Gregg M. Sherrill (incorporated herein by reference to Exhibit 99.2 of the registrant's Current Report on Form 8-K dated as of January 5, 2007. File No. 1-12387). |
| — | Letter Agreement between Tenneco Inc. and Gregg M. Sherrill, dated as of January 15, 2007 (incorporated herein by reference to Exhibit 99.1 of the registrant’s Current Report on Form 8-K dated as of January 15, 2007, File No. 1-12387). |
| — | Code Section 409A Amendment to Letter Agreement between the registrant and Gregg M. Sherrill (incorporated herein by reference to Exhibit 10.74 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
| — | Third Amended and Restated Receivables Purchase Agreement, dated as of March 26, 2010, among Tenneco Automotive RSA Company, as Seller, Tenneco Automotive Operating Company Inc., as Servicer, Falcon Asset Securitization Company LLC and Liberty Street Funding LLC, as Conduits, the Committed Purchasers from time to time party thereto, JPMorgan Chase Bank, N.A., The Bank of Nova Scotia and Wells Fargo Bank, N.A., as Co-Agents and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated herein by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). |
| — | Intercreditor Agreement, dated as of March 26, 2010, among Tenneco Automotive RSA Company, Tenneco Automotive Operating Company Inc., JPMorgan Chase Bank, N.A. and Wells Fargo Bank, N.A. (incorporated herein by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). |
| — | Omnibus Amendment No. 4, dated as of March 26, 2010, to Receivables Sale Agreements, as amended (incorporated herein by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). |
| — | SLOT Receivables Purchase Agreement, dated as of March 26, 2010, among Tenneco Automotive RSA Company, as Seller, Tenneco Automotive Operating Company Inc., as Servicer, and Wells Fargo Bank, N.A., individually and as SLOT Agent (incorporated herein by reference to Exhibit 10.4 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). |
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| | |
Exhibit
Number
| | Description |
| — | Fourth Amended and Restated Performance Undertaking, dated as of March 26, 2010, by the registrant in favor of Tenneco Automotive RSA Company (incorporated herein by reference to Exhibit 10.5 of the registrant’s Current Report on Form 8-K dated as of March 26, 2010, File No. 1-12387). |
| — | Amendment No. 1 to Third Amended and Restated Receivables Purchase Agreement, dated as of March 25, 2011, among Tenneco Automotive RSA Company, as Seller, Tenneco Automotive Operating Company Inc., as Servicer, Falcon Asset Securitization Company LLC and Liberty Street Funding LLC, as Conduits, the Committed Purchasers from time to time party thereto, JPMorgan Chase Bank, N.A., The Bank of Nova Scotia and Wells Fargo Bank, N.A., as Co-Agents and JPMorgan Chase Bank, N.A., as Administrative Agent (incorporated herein by reference from Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated as of March 29, 2011, File No. 1-12387). |
| — | Amendment No. 1 to SLOT Receivables Purchase Agreement, dated as of March 25, 2011, among Tenneco Automotive RSA Company, as Seller, Tenneco Automotive Operating Company Inc. as Servicer, and Wells Fargo Bank, N.A., individually and as SLOT Agent (incorporated herein by reference from Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated as of March 29, 2011, File No. 1-12387). |
| — | Amendment No. 2 to Third Amended and Restated Receivables Purchase Agreement, dated as of March 23, 2012 (incorporated herein by reference from Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated as of March 26, 2012, File No. 1-12387). |
| — | Amendment No. 2 to SLOT Receivables Purchase Agreement, dated as of March 23, 2012 (incorporated herein by reference from Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated as of March 26, 2012, File No. 1-12387). |
| — | Omnibus Amendment No. 5 to Receivables Sale Agreements and Amendment No. 3 to Third Amended and Restated Receivables Purchase Agreement, dated March 22, 2013 (incorporated herein by reference from Exhibit 10.1 of the registrant’s Current Report on Form 8-K dated as of March 22, 2013, File No. 1-12387). |
| — | Amendment No. 3 to SLOT Receivables Purchase Agreement, dated as of March 22, 2013 (incorporated herein by reference from Exhibit 10.2 of the registrant’s Current Report on Form 8-K dated as of March 22, 2013, File No. 1-12387). |
| — | Amendment No. 4 to SLOT Receivables Purchase Agreement, dated May 22, 2013 (incorporated herein by reference from Exhibit 10.1of the registrant’s Current Report on Form 8-K dated as of May 28, 2013, File No. 1-12387). |
| — | Tenneco Inc. Executive Bonus Plan (incorporated herein by reference from Exhibit 99.1 of the registrant’s Current Report on Form 8-K dated as of January 15, 2014, File No. 1-12387). |
| — | Amended and Restated Tenneco Inc. 2006 Long-Term Incentive Plan (effective March 18, 2013) (incorporated by reference to Appendix A of the Company’sCompany's Proxy Statement on Schedule 14A, filed with the Securities and Exchange Commission on April 3, 2013). |
| — | Form of Restricted Stock Unit Award Agreement for Employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (awards after May 21, 2013 and before February 2017) (incorporated herein by reference fromto Exhibit 10.3 of the registrant’s Current Report on Form 8-K dated as offiled May 21, 2013, File No. 1-12387). |
| — | Form of Stock Option Award Agreement for Employees under the Tenneco Inc. 2006 Long-Term Incentive Plan (awards after May 21, 2013)2013 and before February 2017) (incorporated herein by reference fromto Exhibit 10.4 of the registrant’s Current Report on Form 8-K dated as offiled May 21, 2013, File No. 1-12387). |
| — | Form of Long-Term Performance Unit Award Agreement under the Tenneco Inc. 2006 Long-Term Incentive Plan (grants after January 14, 2014 and before February 2017) (incorporated herein by reference fromto Exhibit 99.2 of the registrant’s Current Report on Form 8-K dated as offiled January 15, 2014, File No. 1-12387). |
| — | Amendment No. 4 to Third Amended and Restated Receivables Purchase Agreement, dated as of March 21, 2014 (incorporated herein by reference to Exhibit 10.1 of the registrant's Current Report on Form 8-K dated March 21, 2014, File No. 1-12387). |
| — | Amendment No. 5 to SLOT Receivables Purchase Agreement, dated March 21, 2014 (incorporated herein by reference to Exhibit 10.2 of the registrant's Current Report on Form 8-K dated March 21, 2014, File No. 1-12387). |
| — | Offer Letter to Brian J. Kesseler dated January 6, 2015 (incorporated herein by reference to Exhibit 10.67 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2014, File No. 1-12387). |
| — | Tenneco Inc. Excess Benefit Plan (as amended and restated effective as of January 1, 2013) (incorporated by reference to Exhibit 10.5 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, File No. 1-12387). |
| — | First Amendment to Amended and Restated Tenneco Inc. Excess Benefit Plan (amendment effective as of January 6, 2015) (incorporated by reference to Exhibit 10.5 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, File No. 1-12387). |
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| | |
Exhibit
Number
| | Description |
| — | Second Amendment to Tenneco Inc. Change in Control Severance Benefit Plan for Key Executives (incorporated by reference to Exhibit 10.1 of registrant's Current Report on form 8-K dated April 28, 2015, File No. 1.12387). |
| — | Form of Restricted Stock Award for Brian J. Kesseler (January 2015 replacement grant) under Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated herein by reference to Exhibit 10.71 of the registrant's Annual Report on Form 10-K for the year ended December 31,2014, File No. 1-12387). |
| — | Amendment No. 5 to Third Amended and Restated Receivables Purchase Agreement, dated as of March 20, 2015 (incorporated herein by reference to Exhibit 10.1 of the registrant's Current Report on Form 8-K dated March 20, 2016, File No. 1-12387). |
| — | Amendment No. 6 to SLOT Receivables Purchase Agreement, dated as of March 20, 2015 (incorporated herein by reference to Exhibit 10.2 of the registrant's Current Report on Form 8-K dated March 20, 2015, File No. 1-12387). |
| — | Tenneco Inc. Deferred Compensation Plan (as Amended and Restated Effective as of August 1, 2013) (incorporated by reference to Exhibit 10.6 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, File No. 1-12387). |
| — | Tenneco Inc. Incentive Deferral Plan (as Amended and Restated Effective as of August 1, 2013) (incorporated by reference to Exhibit 10.7 of Tenneco Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, File No. 1-12387). |
| — | Letter Agreement dated February 19, 2015 between the registrant and Enrique Orta. |
| — | Amendment dated July 14, 2015 to Letter Agreement dated February 19, 2015 between the registrant and Enrique Orta. |
| — | Leave and Termination Agreement, dated as of December 15, 2016, between Tenneco Automotive Iberica, S.A. and Josep Fornos (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated December 21, 2016, File No. 1-12387). |
| — | Transaction Regarding the Termination of the Employment Agreement, dated as of December 15, 2016, between Tenneco Automotive Europe BVBA and Josep Fornos (incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K dated December 21, 2016, File No. 1-12387). |
| — | Agreement and General Release, dated as of September 27, 2016, between Tenneco Automotive Operating Company, Inc. and Enrique Orta (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K dated October 3, 2016, File No. 1-12387). |
| — | Amendment No. 1 to Tenneco Inc. 2006 Long-Term Incentive Plan, effective October 10, 2016 (incorporated herein by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, File No. 1-12387). |
| — | Notice to Employees of Agreement Amendments and New Options for Withholding, effective October 10, 2016 (incorporated herein by reference to Exhibit 10.5 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, File No. 1-12387). |
| — | Letter of Understanding, dated October 7, 2015, between Tenneco Inc. and Josep Fornos (incorporated herein by reference to Exhibit 10.6 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, File No. 1-12387). |
| — | Omnibus Amendment No. 6 to Receivables Sale Agreement and Amendment No. 6 to Third Amended and Restated Receivables Purchase Agreement, dated as of March 1, 2016 (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, File No. 1-12387). |
| — | Amendment No. 7 to SLOT Receivables Purchase Agreement, dated as of March 1, 2016 (incorporated by reference to Exhibit 10.2 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, File No. 1-12387). |
| — | Form of Restricted Stock Award Agreement for non-employee directors under the Tenneco Inc. 2006 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.3 to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, File No. 1-12387). |
| — | Letter Agreement dated July 27, 2000 between the registrant and Timothy E. Jackson (incorporated herein by reference to Exhibit 10.27 of the registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000, File No. 1-12387). |
| — | Letter Agreement dated January 5, 2007 between the registrant and Timothy E. Jackson (incorporated herein by reference to Exhibit 10.69 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, File No. 1-12387). |
| — | Code Section 409A Amendment to Letter Agreement between the registrant and Timothy E. Jackson (incorporated herein by reference to Exhibit 10.76 of the registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 1-12387). |
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| | |
Exhibit
Number
| | Description |
| — | Form of Restricted Stock Award Agreement for Employees under Tenneco Inc. 2006 Long-Term Incentive Plan (for awards commencing February 2017) (incorporated herein by reference to Exhibit 10.78 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2016, File No. 1-12387). |
| — | Form of Long-Term Performance Unit Award Agreement for Employees under Tenneco Inc. 2006 Long-Term Incentive Plan (for awards commencing February 2017) (incorporated herein by reference to Exhibit 10.79 to the registrant's Annual Report on Form 10-K for the year ended December 31, 2016, File No. 1-12387). |
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| | |
Exhibit Number | | Description |
| — | Tenneco Inc. Annual Incentive Plan (incorporated herein by reference to Exhibit 10.1 of the registrant’s Current Report on Form 8-K filed February 9, 2018. File No. 1-12387). |
| — | Form of Restricted Stock Unit Award Agreement under the Tenneco Inc. 2006 Long-Term Incentive Plan (grants after 2017) (incorporated herein by reference to Exhibit 10.2 of the registrant’s Current Report on Form 8-K filed February 9, 2018. File No. 1-12387). |
| — | Form of Performance Share Unit Award Agreement under the Tenneco Inc. 2006 Long-Term Incentive Plan (grants after 2017) (incorporated herein by reference to Exhibit 10.3 of the registrant’s Current Report on Form 8-K filed February 9, 2018. File No. 1-12387). |
| — | Offer Letter to Jason M. Hollar dated April 18, 2017 (incorporated herein by reference to Exhibit 10.43 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | Offer Letter to Gregg A. Bolt dated December 6, 2012 (incorporated herein by reference to Exhibit 10.44 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | Amendment dated June 12, 2013 to Offer Letter to Gregg A Bolt (incorporated herein by reference to Exhibit 10.45 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | Offer Letter to Patrick Guo dated March 26, 2007 (incorporated herein by reference to Exhibit 10.46 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | Amendment dated February 29, 2012 to Offer Letter to Patrick Guo (incorporated herein by reference to Exhibit 10.47 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | Tenneco Inc. Incentive Deferral Plan (incorporated herein by reference to Exhibit 10.48 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | Tenneco Inc. Excess Benefit Plan (incorporated herein by reference to Exhibit 10.49 of the registrant's Annual Report on Form 10-K for the year ended December 31, 2017, File No. 1-12387). |
| — | First Amendment to Tenneco Inc. Excess Benefit Plan, dated October 9, 2018 (incorporated herein by reference to Exhibit 10.5 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, File No. 1-12387). |
| — | Amended and Restated Tenneco Inc. 2006 Long-Term Incentive Plan adopted September 12, 2018 (incorporated by reference to Annex D of the registrant’s definitive Proxy Statement dated August 2, 2018, File No. 1-12387). |
| — | Addendum, dated July 20, 2018, to Offer Letter to Brian J. Kesseler dated January 6, 2015 (incorporated herein by reference to Exhibit 10.2 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, File No. 1-12387). |
| — | Offer Letter to Roger Wood dated July 20, 2018 (incorporated herein by reference to Exhibit 10.3 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, File No. 1-12387). |
| — | Tenneco Automotive Operating Company Inc. Severance Benefit Plan and Summary Plan Description, effective as of July 20, 2018 (incorporated herein by reference to Exhibit 10.4 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, File No. 1-12387). |
| — | Form of Restricted Stock Unit Agreement under Tenneco Inc. 2006 Long-Term Incentive Plan (Retention Awards) (incorporated herein by reference to Exhibit 10.6 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, File No. 1-12387). |
| — | Tenneco Inc. 2006 Long-Term Incentive Plan Special Restricted Stock Unit and Cash Incentive Award Agreement for Brandon Smith |
| — | Tenneco Inc. 2006 Long-Term Incentive Plan Special Restricted Stock Unit and Cash Incentive Award Agreement for Jason Hollar |
| — | Federal-Mogul LLC 2017 Long-Term Incentive Plan Motorparts Segment (for the period January 1, 2017 - December 31, 2019) |
| — | Federal-Mogul LLC 2017 Long Term Incentive Plan Powertrain Segment (for the period January 1, 2017 - December 31, 2019). |
| — | Federal-Mogul LLC 2017 Long-Term Incentive Plan Motorparts Segment LTIP Award Agreement (for the period January 1, 2017 - December 31, 2019) effective January 1, 2017 |
| — | Federal-Mogul LLC 2017 Long Term Incentive Plan Powertrain Segment LTIP Award Agreement (for the period January 1, 2017 - December 31, 2019) effective January 1, 2017 |
| — | Federal-Mogul LLC 2018 Long-Term Incentive Plan Motorparts Segment (for the period January 1, 2018 - December 31, 2020) |
|
| | |
| — | Federal-Mogul LLC 2018 Long-Term Incentive Plan Powertrain (for the period January 1, 2018 - December 31, 2020) |
| — | Federal-Mogul LLC 2018 Long Term Incentive Plan Motorparts Segment LTIP Award Agreement (for the period January 1, 2018 - December 31, 2020) effective January 1, 2018 |
| — | Federal-Mogul LLC 2018 Long Term Incentive Plan Powertrain Segment LTIP Award Agreement (for the period January 1, 2018 - December 31, 2020) effective January 1, 2018 |
| — | Form of Performance Share Unit Award Agreement under the Tenneco Inc. 2006 Long-Term Incentive Plan (grants after 2018) |
| 11 | — | None. |
| — | Computation of Ratio of Earnings to Fixed Charges. |
| 13 | — | None. |
| — | Tenneco Inc. Code of Ethical Conduct for Financial Managers (incorporated herein by reference from Exhibit 99.3 to the registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 1-12387). |
| 16 | — | None. |
| 18 | — | None. |
|
| | |
Exhibit Number | | Description |
| — | List of Subsidiaries of Tenneco Inc. |
| 22 | — | None. |
| — | Consent of PricewaterhouseCoopers LLP. |
| — | Powers of Attorney. |
| — | Certification of Brian J. Kesseler under Section 302 of the Sarbanes-Oxley Act of 2002. |
| — | Certification of Kenneth R. TrammellRoger J. Wood under Section 302 of the Sarbanes-Oxley Act of 2002. |
| — | Certification of Jason M. Hollar under Section 302 of the Sarbanes-Oxley Act of 2002. |
| — | Certification of Brian J. Kesseler, Roger J. Wood and Kenneth R. TrammellJason M. Hollar under Section 906 of the Sarbanes-Oxley Act of 2002. |
| 33 | — | None. |
| 34 | — | None. |
| 35 | — | None. |
| 99 | — | None. |
| 100 | — | None. |
| 101 | — | None. |
| *101.INS | — | XBRL Instance Document. |
| *101.SCH | — | XBRL Taxonomy Extension Schema Document. |
| *101.CAL | — | XBRL Taxonomy Extension Calculation Linkbase Document. |
| *101.DEF | — | XBRL Taxonomy Extension Definition Linkbase Document. |
| *101.LAB | — | XBRL Taxonomy Extension Label Linkbase Document. |
| *101.PRE | — | XBRL Taxonomy Extension Presentation Linkbase Document. |
|
| |
| * | Filed herewith. |
** | Previously filed. |
|
| |
| + | Indicates a management contract or compensatory plan or arrangement. |
| |
| ITEM 16. | FORM 10-K SUMMARY. |
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| |
| TENNECO INC. |
| | |
| By | /S/ BRIAN J. KESSELER |
| | Brian J. Kesseler |
| | ChiefCo-Chief Executive Officer |
Date: September 8, 2017
|
| |
| By | /S/ ROGER J. WOOD |
| Roger J. Wood |
| Co-Chief Executive Officer |
Date: March 15, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons in the capacities indicated on September 8, 2017.
|
| | | |
| Signature | | Title |
| | | | |
| * | | Executive Chairman and Director |
| Gregg M. Sherrill | |
| | | | |
/S/ BRIAN J. KESSELER | | ChiefCo-Chief Executive Officer and Director (principal executive officer) |
| Brian J. Kesseler | |
| | | |
/S/ KROGER J. WOOD | | Co-Chief Executive Officer and Director (principal executive officer) |
| Roger J. Wood | |
| | |
/ENNETHS R. T/ JASON M. HOLLARRAMMELL | | Executive Vice President and Chief Financial Officer (principal financial officer) |
Kenneth R. TrammellJason M. Hollar | |
| | | |
| /s/ JOHN S. PATOUHAS | | Vice President and Chief Accounting Officer (principal accounting officer) |
| John S. Patouhas | |
| | | | |
| * | | Vice President and Controller (principal accounting officer)Director |
John E. KunzKeith Cozza | | |
| | | | |
| * | | Director |
| Thomas C. Freyman | | |
| | | | |
| * | | Director |
| Dennis J. Letham | | |
| | | | |
| * | | Director |
| James S. Metcalf | | |
| | | | |
| * | | Director |
| Roger B. Porter | | |
| | | | |
| * | | Director |
| David B. Price, Jr. | | |
| | | | |
| * | | Director |
| Paul T. Stecko | | |
| | | | |
| * | | Director |
| Jane L. Warner | | |
| | | | |
* | | | |
| Denise Gray | | Director |
Roger J. Wood | | |
| | | | |
*BY: | /S/ KENNETH R. TRAMMELLJASON M. HOLLAR | | |
| | Kenneth R. TrammellJason M. Hollar
Attorney in fact | | |
