UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________
FORM 10-Q
(Mark One)
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þ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended SeptemberJune 30, 20182019
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.INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
500 North Field Drive, Lake Forest, Illinois
(Address of principal executive offices)
76-0515284
(I.R.S. Employer
Identification No.)
60045
(Zip Code)
Registrant’s telephone number, including area code: (847) 482-5000
Securities registered pursuant to Section 12(b) of the Act: |
| | |
DelawareTitle of each class | Trading Symbol | 76-0515284Name of each exchange on which registered |
(State or other jurisdiction of
incorporation or organization) Class A Voting Common Stock, par value $0.01 per share | TEN | (I.R.S. Employer
Identification No.)
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500 North Field Drive, Lake Forest, Illinois | | 60045 |
(Address of principal executive offices) | | (Zip Code)New York Stock Exchange |
Registrant’s telephone number, including area code: (847) 482-5000
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 every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ☑ No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | ☑ | | Accelerated filer¨ | ☐ |
Non-accelerated filer¨ | ☐ | | 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☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
The number of shares of Class A Voting Common Stock, par value $0.01 per share: 57,086,96557,126,858 shares outstanding as of November 5, 2018.August 2, 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 November 5, 2018.August 2, 2019.
TABLE OF CONTENTS
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Part I — Financial Information | |
Item 1. | | |
| Tenneco Inc. and Consolidated Subsidiaries — | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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Part II — Other Information | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | Defaults Upon Senior Securities | * |
Item 4. | Mine Safety Disclosures | * |
Item 5. | Other Information | * |
Item 6. | | |
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* | No response to this item is included herein for the reason that it is inapplicable or the answer to such item is negative. |
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This Quarterly Reportreport 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 Part I Item 2 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 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 have our products included on top selling vehicles, including any shifts in consumer preferences away from light trucks or diesel engines, which tend to behistorically higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements;arrangements, and the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector;
changes in consumer demand for our automotive, commercialoriginal equipment products 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 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 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 automobileautomotive 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 loss of anyamount of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portiondebt, our ability to access capital markets at favorable rates, and the credit ratings of our revenues), ordebt;
our ability to comply with the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs or any changecovenants contained in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;our debt instruments;
our 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 and 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 effect 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 or components,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;adapt to 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 impacteffect 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;
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, or indefinite-lived intangible assets or our inability to realize our deferred tax assets;
the negative effect 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 effect 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 impacteffect 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 or increased costs or loss of revenues relating to products subject to changing regulation;
the potential impairment in the carrying value of our long-lived assets and goodwill or our deferred tax assets;
potential volatility in our effective tax rate;
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, in demand by our 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 impacteffect 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 transaction withacquisition 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 all 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; and
the risk that the companyCompany 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 suchthe separation);
the risk the combined company and each separate company following the separation will underperform relative to our expectations;
the ongoing transaction costs and risk we may incur greater costs following separation of the business;
the risk the spin-off is determined to be a separation).taxable transaction;
the risk 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 the acquisition of Federal-Mogul may not advance our business strategy;
the risk we may experience difficulty integrating or separating employees or operations; and
the risk the transaction may have an adverse effect 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 risks included here are not exhaustive. Refer to “Part II, Item 1A — Risk Factors” herein and “Part I, Item 1A — Risk Factors” inof our annual reportAnnual Report on Form 10-K for the year ended December 31, 2017 and "Part II, Item 1A — Risk Factors” of this Form 10-Q2018 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 impacteffect 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, we dothe Company does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements.
PART I.I
FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS (UNAUDITED)
Report of Independent Registered Public Accounting FirmITEM 1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
To the Board of Directors and Shareholders of Tenneco Inc.
Results of Review of Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Tenneco Inc. and its subsidiaries as of September 30, 2018, and the related condensed consolidated statements of income, comprehensive income and cash flows for the three-month and nine-month periods ended September 30, 2018 and 2017 and the condensed consolidated statements of changes in shareholders' equity for the nine-month periods ended September 30, 2018 and 2017, including the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and of cash flows for the year then ended (not presented herein), and in our report dated February 28, 2018, except for the change in composition of reportable segments discussed in Note 11 to the consolidated financial statements and the changes in the manner in which the Company accounts for certain components of net periodic pension and postretirement benefit costs, cash received to settle the deferred purchase price of factored receivables and restricted cash discussed in Note 1 to the consolidated financial statements, as to which the date is September 28, 2018, which included a paragraph describing a change in the manner of accounting 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, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2017, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
These interim financial statements are the responsibility of the Company’s management. 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 review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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/s/ PricewaterhouseCoopers LLP |
Milwaukee, Wisconsin |
November 7, 2018 |
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(LOSS) (Unaudited)
(in millions, except share and per share amounts)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Millions Except Share and Per Share Amounts) |
Revenues | | | | | | | |
Net sales and operating revenues | $ | 2,372 |
| | $ | 2,274 |
| | $ | 7,483 |
| | $ | 6,883 |
|
| | | | | | | |
Costs and expenses | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | 2,014 |
| | 1,911 |
| | 6,371 |
| | 5,789 |
|
Engineering, research, and development | 39 |
| | 40 |
| | 122 |
| | 115 |
|
Selling, general, and administrative | 141 |
| | 127 |
| | 450 |
| | 520 |
|
Depreciation and amortization of other intangibles | 65 |
| | 58 |
| | 183 |
| | 165 |
|
| 2,259 |
| | 2,136 |
| | 7,126 |
| | 6,589 |
|
Other expense | | | | | | | |
Loss on sale of receivables | 3 |
| | 2 |
| | 8 |
| | 4 |
|
Other expense, net | 6 |
| | 2 |
| | 15 |
| | 8 |
|
| 9 |
| | 4 |
| | 23 |
| | 12 |
|
Earnings before interest expense, income taxes, and noncontrolling interests | 104 |
| | 134 |
| | 334 |
| | 282 |
|
Interest expense | 21 |
| | 19 |
| | 61 |
| | 54 |
|
Earnings before income taxes and noncontrolling interests | 83 |
| | 115 |
| | 273 |
| | 228 |
|
Income tax expense | 20 |
| | 16 |
| | 72 |
| | 41 |
|
Net income | 63 |
| | 99 |
| | 201 |
| | 187 |
|
Less: Net income attributable to noncontrolling interests | 9 |
| | 16 |
| | 39 |
| | 48 |
|
Net income attributable to Tenneco Inc. | $ | 54 |
| | $ | 83 |
| | $ | 162 |
| | $ | 139 |
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Earnings per share | | | | | | | |
Weighted average shares of common stock outstanding — | | | | | | | |
Basic | 51,272,618 |
| | 52,508,078 |
| | 51,247,664 |
| | 53,265,149 |
|
Diluted | 51,401,829 |
| | 52,687,656 |
| | 51,395,927 |
| | 53,501,864 |
|
Basic earnings per share of common stock | $ | 1.05 |
| | $ | 1.57 |
| | $ | 3.17 |
| | $ | 2.61 |
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Diluted earnings per share of common stock | $ | 1.05 |
| | $ | 1.57 |
| | $ | 3.16 |
| | $ | 2.60 |
|
Cash dividends declared per share | $ | 0.25 |
| | $ | 0.25 |
| | $ | 0.75 |
| | $ | 0.75 |
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | | | | | | | |
Net sales and operating revenues | $ | 4,504 |
| | $ | 2,533 |
| | $ | 8,988 |
| | $ | 5,114 |
|
| | | | | | | |
Costs and expenses | | | | | | | |
Cost of sales | 3,793 |
| | 2,134 |
| | 7,657 |
| | 4,327 |
|
Selling, general, and administrative | 288 |
| | 154 |
| | 604 |
| | 305 |
|
Depreciation and amortization | 169 |
| | 60 |
| | 338 |
| | 120 |
|
Engineering, research, and development | 78 |
| | 39 |
| | 170 |
| | 79 |
|
Restructuring charges and asset impairments | 61 |
| | 29 |
| | 85 |
| | 41 |
|
Goodwill impairment charge | — |
| | — |
| | 60 |
| | — |
|
| 4,389 |
| | 2,416 |
| | 8,914 |
| | 4,872 |
|
Other expense (income) | | | | | | | |
Non-service pension and other postretirement benefit costs (credits) | 4 |
| | 3 |
| | 6 |
| | 6 |
|
Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (17 | ) | | — |
| | (33 | ) | | — |
|
Other expense (income), net | (13 | ) | | 3 |
| | (16 | ) | | 3 |
|
| (26 | ) | | 6 |
| | (43 | ) | | 9 |
|
Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 141 |
| | 111 |
| | 117 |
| | 233 |
|
Interest expense | 82 |
| | 22 |
| | 163 |
| | 45 |
|
Earnings (loss) before income taxes and noncontrolling interests | 59 |
| | 89 |
| | (46 | ) | | 188 |
|
Income tax expense (benefit) | 14 |
| | 26 |
| | 14 |
| | 51 |
|
Net income (loss) | 45 |
| | 63 |
| | (60 | ) | | 137 |
|
Less: Net income (loss) attributable to noncontrolling interests | 19 |
| | 16 |
| | 31 |
| | 30 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 26 |
| | $ | 47 |
| | $ | (91 | ) | | $ | 107 |
|
Earnings (loss) per share | | | | | | | |
Basic earnings (loss) per share: | | | | | | | |
Earnings (loss) per share | $ | 0.32 |
| | $ | 0.92 |
| | $ | (1.13 | ) | | $ | 2.08 |
|
Weighted average shares outstanding | 80,920,825 |
| | 51,258,668 |
| | 80,897,731 |
| | 51,232,639 |
|
Diluted earnings (loss) per share: | | | | | | | |
Earnings (loss) per share | $ | 0.32 |
| | $ | 0.92 |
| | $ | (1.13 | ) | | $ | 2.07 |
|
Weighted average shares outstanding | 80,920,825 |
| | 51,607,224 |
| | 80,897,731 |
| | 51,546,015 |
|
TheSee accompanying notes to the condensed consolidated financial statements are an integralstatements.
part of these condensed consolidated statements of income.
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Unaudited)(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| 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 | | | $ | 54 |
| | | | $ | 9 |
| | | | $ | 63 |
|
Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
Cumulative Translation Adjustment | | | | | | | | | | | |
Balance July 1 | $ | (315 | ) | | | | $ | (2 | ) | | | | $ | (317 | ) | | |
Translation of foreign currency statements | (28 | ) | | (28 | ) | | (3 | ) | | (3 | ) | | (31 | ) | | (31 | ) |
Balance September 30 | (343 | ) | | | | (5 | ) | | | | (348 | ) | | |
Additional Liability for Pension and Postretirement Benefits | | | | | | | | | | | |
Balance July 1 | (293 | ) | | | | — |
| | | | (293 | ) | | |
Additional liability for pension and postretirement benefits, net of tax | 4 |
| | 4 |
| | — |
| | — |
| | 4 |
| | 4 |
|
Balance September 30 | (289 | ) | | | | — |
| | | | (289 | ) | | |
Balance September 30 | $ | (632 | ) | | | | $ | (5 | ) | | | | $ | (637 | ) | | |
Other Comprehensive Loss | | | (24 | ) | | | | (3 | ) | | | | (27 | ) |
Comprehensive Income | | | $ | 30 |
| | | | $ | 6 |
| | | | $ | 36 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income (loss) | $ | 45 |
| | $ | 63 |
| | $ | (60 | ) | | $ | 137 |
|
Other comprehensive income (loss) — net of tax | | | | | | | |
Foreign currency translation adjustment | (18 | ) | | (99 | ) | | 17 |
| | (72 | ) |
Cash flow hedges | (3 | ) | | — |
| | 1 |
| | — |
|
Defined benefit plans | (2 | ) | | 4 |
| | (1 | ) | | 7 |
|
| (23 | ) | | (95 | ) | | 17 |
| | (65 | ) |
Comprehensive income (loss) | 22 |
| | (32 | ) | | (43 | ) | | 72 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | 18 |
| | 9 |
| | 36 |
| | 31 |
|
Comprehensive income (loss) attributable to common shareholders | $ | 4 |
| | $ | (41 | ) | | $ | (79 | ) | | $ | 41 |
|
TheSee accompanying notes to the condensed consolidated financial statements are an integralstatements.
part of these condensed consolidated statements of comprehensive income.
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
BALANCE SHEETS (Unaudited)
(in millions, except shares)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Tenneco Inc. | | Noncontrolling Interests | | Total |
| Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income |
| (Millions) |
Net Income | | | $ | 83 |
| | | | $ | 16 |
| | | | $ | 99 |
|
Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
Cumulative Translation Adjustment | | | | | | | | | | | |
Balance July 1 | $ | (285 | ) | | | | $ | (2 | ) | | | | $ | (287 | ) | | |
Translation of foreign currency statements | 28 |
| | 28 |
| | 1 |
| | 1 |
| | 29 |
| | 29 |
|
Balance September 30 | (257 | ) | | | | (1 | ) | | | | (258 | ) | | |
Additional Liability for Pension and Postretirement Benefits | | | | | | | | | | | |
Balance July 1 | (316 | ) | | | | — |
| | | | (316 | ) | | |
Additional liability for pension and postretirement benefits, net of tax | 3 |
| | 3 |
| | — |
| | — |
| | 3 |
| | 3 |
|
Balance September 30 | (313 | ) | | | | — |
| | | | (313 | ) | | |
Balance September 30 | $ | (570 | ) | | | | $ | (1 | ) | | | | $ | (571 | ) | | |
Other Comprehensive Income | | | 31 |
| | | | 1 |
| | | | 32 |
|
Comprehensive Income | | | $ | 114 |
| | | | $ | 17 |
| | | | $ | 131 |
|
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 384 |
| | $ | 697 |
|
Restricted cash | 6 |
| | 5 |
|
Receivables: | | | |
Customer notes and accounts, net | 2,754 |
| | 2,487 |
|
Other | 93 |
| | 85 |
|
Inventories | 2,207 |
| | 2,245 |
|
Prepayments and other current assets | 550 |
| | 590 |
|
Total current assets | 5,994 |
| | 6,109 |
|
Property, plant and equipment, net | 3,569 |
| | 3,501 |
|
Long-term receivables, net | 10 |
| | 10 |
|
Goodwill | 799 |
| | 869 |
|
Intangibles, net | 1,649 |
| | 1,519 |
|
Investments in nonconsolidated affiliates | 531 |
| | 544 |
|
Deferred income taxes | 480 |
| | 467 |
|
Other assets | 560 |
| | 213 |
|
Total assets | $ | 13,592 |
| | $ | 13,232 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities: | | | |
Short-term debt, including current maturities of long-term debt | $ | 170 |
| | $ | 153 |
|
Accounts payable | 2,725 |
| | 2,759 |
|
Accrued compensation and employee benefits | 391 |
| | 343 |
|
Accrued income taxes | — |
| | 64 |
|
Accrued expenses and other current liabilities | 1,024 |
| | 1,001 |
|
Total current liabilities | 4,310 |
| | 4,320 |
|
Long-term debt | 5,508 |
| | 5,340 |
|
Deferred income taxes | 110 |
| | 88 |
|
Pension and postretirement benefits | 1,129 |
| | 1,167 |
|
Deferred credits and other liabilities | 546 |
| | 263 |
|
Commitments and contingencies (Note 13) |
|
| |
|
|
Total liabilities | 11,603 |
| | 11,178 |
|
Redeemable noncontrolling interests | 145 |
| | 138 |
|
Tenneco Inc. shareholders’ equity: | | | |
Preferred stock — $0.01 par value; none issued | — |
| | — |
|
Class A voting stock — $0.01 par value; shares issued: June 30, 2019 — 71,746,952 and December 31, 2018 — 71,675,379 | 1 |
| | 1 |
|
Class B non-voting convertible stock — $0.01 par value; shares issued: June 30, 2019 — 23,793,669 and December 31, 2018 — 23,793,669 | — |
| | — |
|
Additional paid-in capital | 4,371 |
| | 4,360 |
|
Accumulated other comprehensive loss | (680 | ) | | (692 | ) |
Accumulated deficit | (1,124 | ) | | (1,013 | ) |
| 2,568 |
| | 2,656 |
|
Shares held as treasury stock — at cost: June 30, 2019 and December 31, 2018 — 14,592,888 shares | (930 | ) | | (930 | ) |
Total Tenneco Inc. shareholders’ equity | 1,638 |
| | 1,726 |
|
Noncontrolling interests | 206 |
| | 190 |
|
Total equity | 1,844 |
| | 1,916 |
|
Total liabilities, redeemable noncontrolling interests and equity | $ | 13,592 |
| | $ | 13,232 |
|
TheSee accompanying notes to the condensed consolidated financial statements are an integralstatements.
part of these condensed consolidated statements of comprehensive income.
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| 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 | | | $ | 162 |
| | | | $ | 39 |
| | | | $ | 201 |
|
Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
Cumulative Translation Adjustment | | | | | | | | | | | |
Balance January 1 | $ | (241 | ) | | | | $ | (3 | ) | | | | $ | (244 | ) | | |
Translation of foreign currency statements | (102 | ) | | (102 | ) | | (2 | ) | | (2 | ) | | (104 | ) | | (104 | ) |
Balance September 30 | (343 | ) | | | | (5 | ) | | | | (348 | ) | | |
Additional Liability for Pension and Postretirement Benefits | | | | | | | | | z |
| | |
Balance January 1 | (300 | ) | | | | — |
| | | | (300 | ) | | |
Additional liability for pension and postretirement benefits, net of tax | 11 |
| | 11 |
| | — |
| | — |
| | 11 |
| | 11 |
|
Balance September 30 | (289 | ) | | | | — |
| | | | (289 | ) | | |
Balance September 30 | $ | (632 | ) | | | | $ | (5 | ) | | | | $ | (637 | ) | | |
Other Comprehensive Loss | | | (91 | ) | | | | (2 | ) | | | | (93 | ) |
Comprehensive Income | | | $ | 71 |
| | | | $ | 37 |
| | | | $ | 108 |
|
The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income.
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Tenneco Inc. | | Noncontrolling Interests | | Total |
| Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income | | Accumulated Other Comprehensive Income (Loss) | | Comprehensive Income |
| (Millions) |
Net Income | | | $ | 139 |
| | | | $ | 48 |
| | | | $ | 187 |
|
Accumulated Other Comprehensive Income (Loss) | | | | | | | | | | | |
Cumulative Translation Adjustment | | | | | | | | | | | |
Balance January 1 | $ | (338 | ) | | | | $ | (5 | ) | | | | $ | (343 | ) | | |
Translation of foreign currency statements | 81 |
| | 81 |
| | 4 |
| | 4 |
| | 85 |
| | 85 |
|
Balance September 30 | (257 | ) | | | | (1 | ) | | | | (258 | ) | | |
Additional Liability for Pension and Postretirement Benefits | | | | | | | | | | | |
Balance January 1 | (327 | ) | | | | — |
| | | | (327 | ) | | |
Additional liability for pension and postretirement benefits, net of tax | 14 |
| | 14 |
| | — |
| | — |
| | 14 |
| | 14 |
|
Balance September 30 | (313 | ) | | | | — |
| | | | (313 | ) | | |
Balance September 30 | $ | (570 | ) | | | | $ | (1 | ) | | | | $ | (571 | ) | | |
Other Comprehensive Income | | | 95 |
| | | | 4 |
| | | | 99 |
|
Comprehensive Income | | | $ | 234 |
| | | | $ | 52 |
| | | | $ | 286 |
|
The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated statements of comprehensive income.
TENNECO INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| (Millions) |
ASSETS |
Current assets: | | | |
Cash and cash equivalents | $ | 202 |
| | $ | 315 |
|
Restricted cash | 1 |
| | 3 |
|
Receivables — | | | |
Customer notes and accounts, net | 1,389 |
| | 1,294 |
|
Other | 19 |
| | 27 |
|
Inventories — | | | |
Finished goods | 372 |
| | 349 |
|
Work in process | 307 |
| | 268 |
|
Raw materials | 197 |
| | 178 |
|
Materials and supplies | 80 |
| | 74 |
|
Prepayments and other | 369 |
| | 291 |
|
Total current assets | 2,936 |
| | 2,799 |
|
Other assets: | | | |
Long-term receivables, net | 12 |
| | 9 |
|
Goodwill | 47 |
| | 49 |
|
Intangibles, net | 20 |
| | 22 |
|
Deferred income taxes | 227 |
| | 204 |
|
Other | 154 |
| | 144 |
|
| 460 |
| | 428 |
|
Plant, property, and equipment, at cost | 4,068 |
| | 4,008 |
|
Less — Accumulated depreciation and amortization | (2,436 | ) | | (2,393 | ) |
| 1,632 |
| | 1,615 |
|
Total assets | $ | 5,028 |
| | $ | 4,842 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities: | | | |
Short-term debt (including current maturities of long-term debt) | $ | 240 |
| | $ | 83 |
|
Accounts payable | 1,769 |
| | 1,705 |
|
Accrued taxes | 38 |
| | 45 |
|
Accrued interest | 10 |
| | 14 |
|
Accrued liabilities | 299 |
| | 287 |
|
Other | 136 |
| | 132 |
|
Total current liabilities | 2,492 |
| | 2,266 |
|
Long-term debt | 1,304 |
| | 1,358 |
|
Deferred income taxes | 11 |
| | 11 |
|
Pension and postretirement benefits | 258 |
| | 268 |
|
Deferred credits and other liabilities | 160 |
| | 155 |
|
Commitments and contingencies (Note 8) | — |
| | — |
|
Total liabilities | 4,225 |
| | 4,058 |
|
Redeemable noncontrolling interests | 28 |
| | 42 |
|
Tenneco Inc. shareholders’ equity: | | | |
Common stock | 1 |
| | 1 |
|
Premium on common stock and other capital surplus | 3,121 |
| | 3,112 |
|
Accumulated other comprehensive loss | (632 | ) | | (541 | ) |
Accumulated deficit | (823 | ) | | (946 | ) |
| 1,667 |
| | 1,626 |
|
Less — Shares held as treasury stock, at cost | 930 |
| | 930 |
|
Total Tenneco Inc. shareholders’ equity | 737 |
| | 696 |
|
Noncontrolling interests | 38 |
| | 46 |
|
Total equity | 775 |
| | 742 |
|
Total liabilities, redeemable noncontrolling interests and equity | $ | 5,028 |
| | $ | 4,842 |
|
The accompanying notes to the condensed consolidated financial statements are an integral
part of these condensed consolidated balance sheets.
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Unaudited)(in millions)
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Millions) |
| | | | | | | |
Operating Activities | | | | | | | |
Net income | $ | 63 |
| | $ | 99 |
| | $ | 201 |
| | $ | 187 |
|
Adjustments to reconcile net income to cash (used) provided by operating activities — | | | | | | | |
Depreciation and amortization of other intangibles | 65 |
| | 58 |
| | 183 |
| | 165 |
|
Deferred income taxes | (13 | ) | | (1 | ) | | (22 | ) | | (1 | ) |
Stock-based compensation | 5 |
| | 1 |
| | 12 |
| | 12 |
|
Loss on sale of assets | 3 |
| | 1 |
| | 8 |
| | 2 |
|
Changes in components of working capital — | | | | | | | |
(Increase) decrease in receivables | (29 | ) | | 13 |
| | (268 | ) | | (212 | ) |
Increase in inventories | (65 | ) | | (56 | ) | | (118 | ) | | (116 | ) |
Increase in prepayments and other current assets | (21 | ) | | (8 | ) | | (91 | ) | | (76 | ) |
(Decrease) increase in accounts payable | (26 | ) | | (29 | ) | | 141 |
| | 57 |
|
(Decrease) increase in accrued taxes | (3 | ) | | 16 |
| | (6 | ) | | (22 | ) |
Decrease in accrued interest | (3 | ) | | (3 | ) | | (3 | ) | | (5 | ) |
(Decrease) increase in other current liabilities | (19 | ) | | (51 | ) | | 11 |
| | 101 |
|
Changes in long-term assets | (4 | ) | | (10 | ) | | (18 | ) | | (10 | ) |
Changes in long-term liabilities | 1 |
| | (6 | ) | | 2 |
| | 1 |
|
Other | 5 |
| | 1 |
| | 5 |
| | 3 |
|
Net cash (used) provided by operating activities | (41 | ) | | 25 |
| | 37 |
| | 86 |
|
Investing Activities | | | | | | | |
Proceeds from sale of assets | 1 |
| | — |
| | 6 |
| | 6 |
|
Proceeds from sale of equity interest | — |
| | — |
| | — |
| | 9 |
|
Cash payments for plant, property, and equipment | (78 | ) | | (90 | ) | | (242 | ) | | (283 | ) |
Cash payments for software related intangible assets | (3 | ) | | (5 | ) | | (13 | ) | | (17 | ) |
Proceeds from deferred purchase price of factored receivables | 36 |
| | 28 |
| | 102 |
| | 77 |
|
Other | (4 | ) | | (1 | ) | | (2 | ) | | (5 | ) |
Net cash used by investing activities | (48 | ) | | (68 | ) | | (149 | ) | | (213 | ) |
Financing Activities | | | | | | | |
(Repurchase) issuance of common shares | (1 | ) | | 1 |
| | (2 | ) | | (2 | ) |
Cash dividends | (14 | ) | | (14 | ) | | (39 | ) | | (40 | ) |
Payments of long-term debt | (5 | ) | | (1 | ) | | (17 | ) | | (9 | ) |
Issuance of long-term debt | — |
| | — |
| | — |
| | 136 |
|
Debt issuance cost of long-term debt | — |
| | — |
| | (2 | ) | | (8 | ) |
Purchase of common stock under the share repurchase program | — |
| | (71 | ) | | — |
| | (131 | ) |
Net increase (decrease) in bank overdrafts | 2 |
| | (3 | ) | | (5 | ) | | (12 | ) |
Net (decrease) increase in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | (77 | ) | | 84 |
| | (29 | ) | | 144 |
|
Net increase in short-term borrowings secured by accounts receivable | 170 |
| | — |
| | 150 |
| | 20 |
|
Distributions to noncontrolling interest partners | (16 | ) | | (12 | ) | | (44 | ) | | (45 | ) |
Net cash provided (used) by financing activities | 59 |
| | (16 | ) | | 12 |
| | 53 |
|
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (4 | ) | | 3 |
| | (15 | ) | | 4 |
|
Decrease in cash, cash equivalents and restricted cash | (34 | ) | | (56 | ) | | (115 | ) | | (70 | ) |
Cash, cash equivalents and restricted cash, beginning of period | 237 |
| | 335 |
| | 318 |
| | 349 |
|
Cash, cash equivalents and restricted cash, end of period (Note) | $ | 203 |
| | $ | 279 |
| | $ | 203 |
| | $ | 279 |
|
Supplemental Cash Flow Information | | | | | | | |
Cash paid during the period for interest (net of interest capitalized) | $ | 25 |
| | $ | 23 |
| | $ | 65 |
| | $ | 61 |
|
Cash paid during the period for income taxes (net of refunds) | 23 |
| | 31 |
| | 79 |
| | 74 |
|
Non-cash Investing and Financing Activities | | | | | | | |
Period end balance of accounts payable for plant, property, and equipment | $ | 52 |
| | $ | 53 |
| | $ | 52 |
| | $ | 53 |
|
Deferred purchase price of receivables factored in the period | 34 |
| | 27 |
| | 105 |
| | 80 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Operating Activities | | | |
Net income (loss) | $ | (60 | ) | | $ | 137 |
|
Adjustments to reconcile net income (loss) to cash provided (used) by operating activities: | | | |
Goodwill impairment charge | 60 |
| | — |
|
Depreciation and amortization | 338 |
| | 120 |
|
Deferred income taxes | (14 | ) | | (9 | ) |
Stock-based compensation | 13 |
| | 7 |
|
Restructuring charges and asset impairments, net of cash paid | 14 |
| | 10 |
|
Change in pension and other postretirement benefit plans | (32 | ) | | 2 |
|
Equity in earnings of nonconsolidated affiliates | (33 | ) | | — |
|
Cash dividends received from nonconsolidated affiliates | 27 |
| | — |
|
Loss (gain) on sale of assets | (1 | ) | | — |
|
Changes in operating assets and liabilities: | | | |
Receivables | (401 | ) | | (233 | ) |
Inventories | 101 |
| | (51 | ) |
Payables and accrued expenses | 48 |
| | 206 |
|
Accrued interest and accrued income taxes | (66 | ) | | (2 | ) |
Other assets and liabilities | (94 | ) | | (109 | ) |
Net cash provided (used) by operating activities | (100 | ) | | 78 |
|
Investing Activities | | | |
Proceeds from sale of assets | 5 |
| | 5 |
|
Net proceeds from sale of business | 22 |
| | — |
|
Cash payments for property, plant, and equipment | (379 | ) | | (174 | ) |
Acquisition of business, net of cash acquired | (158 | ) | | — |
|
Proceeds from deferred purchase price of factored receivables | 147 |
| | 66 |
|
Other | (1 | ) | | 2 |
|
Net cash used by investing activities | (364 | ) | | (101 | ) |
Financing Activities | | | |
Proceeds from term loans and notes | 111 |
| | 9 |
|
Repayments of term loans and notes | (190 | ) | | (28 | ) |
Borrowings on revolving lines of credit | 4,525 |
| | 2,669 |
|
Payments on revolving lines of credit | (4,254 | ) | | (2,614 | ) |
Issuance (repurchase) of common shares | (2 | ) | | (1 | ) |
Cash dividends | (20 | ) | | (25 | ) |
Net increase (decrease) in bank overdrafts | (8 | ) | | (7 | ) |
Other | (1 | ) | | (22 | ) |
Distributions to noncontrolling interest partners | (20 | ) | | (28 | ) |
Net cash provided (used) by financing activities | 141 |
| | (47 | ) |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | 11 |
| | (11 | ) |
Decrease in cash, cash equivalents and restricted cash | (312 | ) | | (81 | ) |
Cash, cash equivalents and restricted cash, beginning of period | 702 |
| | 318 |
|
Cash, cash equivalents and restricted cash, end of period | $ | 390 |
| | $ | 237 |
|
Supplemental Cash Flow Information | | | |
Cash paid during the period for interest | $ | 145 |
| | $ | 40 |
|
Cash paid during the period for income taxes, net of refunds | $ | 100 |
| | $ | 56 |
|
Non-cash Investing Activities | | | |
Period end balance of accounts payable for property, plant, and equipment | $ | 116 |
| | $ | 54 |
|
Deferred purchase price of receivables factored in the period | $ | 52 |
| | $ | 71 |
|
Note: Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase.
TheSee accompanying notes to the condensed consolidated financial statements are an integralstatements.
part of these condensed consolidated statements of cash flows.
TENNECO INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(in millions)
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| Shares | | Amount | | Shares | | Amount |
| (Millions Except Share Amounts) |
Tenneco Inc. Shareholders: | | | | | | | |
Common Stock | | | | | | | |
Balance January 1 | 66,033,509 |
| | $ | 1 |
| | 65,891,930 |
| | $ | 1 |
|
(Repurchased) issued pursuant to benefit plans | (18,553 | ) | | — |
| | 35,843 |
| | — |
|
Restricted shares forfeited | (8,062 | ) | | — |
| | (126,682 | ) | | — |
|
Stock options exercised | 16,199 |
| | — |
| | 208,818 |
| | — |
|
Balance September 30 | 66,023,093 |
| | 1 |
| | 66,009,909 |
| | 1 |
|
Premium on Common Stock and Other Capital Surplus | | | | | | | |
Balance January 1 | | | 3,112 |
| | | | 3,098 |
|
Premium on common stock issued pursuant to benefit plans | | | 9 |
| | | | 11 |
|
Balance September 30 | | | 3,121 |
| | | | 3,109 |
|
Accumulated Other Comprehensive Loss | | | | | | | |
Balance January 1 | | | (541 | ) | | | | (665 | ) |
Other comprehensive (loss) income | | | (91 | ) | | | | 95 |
|
Balance September 30 | | | (632 | ) | | | | (570 | ) |
Accumulated Deficit | | | | | | | |
Balance January 1 | | | (946 | ) | | | | (1,100 | ) |
Net income attributable to Tenneco Inc. | | | 162 |
| | | | 139 |
|
Cash dividends declared | | | (39 | ) | | | | (40 | ) |
Adjustments to adopt new accounting standards | | | | | | | |
Revenue recognition (notes 11 and 14) | | | 1 |
| | | | — |
|
Tax accounting for intra-entity asset transfers (note 11) | | | (2 | ) | | | | — |
|
Balance September 30 | | | (823 | ) | | | | (1,001 | ) |
Less — Common Stock Held as Treasury Stock at Cost | | | | | | | |
Balance January 1 | 14,592,888 |
| | 930 |
| | 11,655,938 |
| | 761 |
|
Purchase of common stock through stock repurchase program | — |
| | — |
| | 2,310,443 |
| | 131 |
|
Balance September 30 | 14,592,888 |
| | 930 |
| | 13,966,381 |
| | 892 |
|
Total Tenneco Inc. shareholders’ equity | | | $ | 737 |
| | | | $ | 647 |
|
Noncontrolling Interests: | | | | | | | |
Balance January 1 | | | $ | 46 |
| | | | $ | 47 |
|
Net income | | | 17 |
| | | | 21 |
|
Other comprehensive income | | | 1 |
| | | | 2 |
|
Dividends declared | | | (26 | ) | | | | (31 | ) |
Balance September 30 | | | $ | 38 |
| | | | $ | 39 |
|
Total Equity | | | $ | 775 |
| | | | $ | 686 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tenneco Inc. Shareholders' equity | | |
| $0.01 Par Value Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
Balance as of December 31, 2018 | $ | 1 |
| | $ | (930 | ) | | $ | 4,360 |
| | $ | (1,013 | ) | | $ | (692 | ) | | $ | 1,726 |
| | $ | 190 |
| | $ | 1,916 |
|
Net income (loss) | — |
| | — |
| | — |
| | (117 | ) | | — |
| | (117 | ) | | 7 |
| | (110 | ) |
Other comprehensive income (loss)—net of tax: | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | 29 |
| | 29 |
| | 4 |
| | 33 |
|
Derivatives | | | | | | | | | 4 |
| | 4 |
| | — |
| | 4 |
|
Defined benefit plans | | | | | | | | | 1 |
| | 1 |
| | — |
| | 1 |
|
Comprehensive income (loss) | | | | | | | | | | | (83 | ) | | 11 |
| | (72 | ) |
Stock-based compensation, net | — |
| | — |
| | 5 |
| | — |
| — |
| — |
| | 5 |
| | — |
| | 5 |
|
Cash dividends ($0.25 per share) | — |
| | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) | | — |
| | (20 | ) |
Purchase accounting measurement period adjustment | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Balance as of March 31, 2019 | 1 |
| | (930 | ) | | 4,365 |
| | (1,150 | ) | | (658 | ) | | 1,628 |
| | 199 |
| | 1,827 |
|
Net income (loss) | — |
| | — |
| | — |
| | 26 |
| | — |
| | 26 |
| | 9 |
| | 35 |
|
Other comprehensive income (loss)—net of tax: | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | (17 | ) | | (17 | ) | | — |
| | (17 | ) |
Derivatives | | | | | | | | | (3 | ) | | (3 | ) | | — |
| | (3 | ) |
Defined benefit plans | | | | | | | | | (2 | ) | | (2 | ) | | — |
| | (2 | ) |
Comprehensive income (loss) | | | | | | | | | | | 4 |
| | 9 |
| | 13 |
|
Stock-based compensation, net | — |
| | — |
| | 6 |
| | — |
| | — |
| | 6 |
| | — |
| | 6 |
|
Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) |
Balance as of June 30, 2019 | $ | 1 |
| | $ | (930 | ) | | $ | 4,371 |
| | $ | (1,124 | ) | | $ | (680 | ) | | $ | 1,638 |
| | $ | 206 |
| | $ | 1,844 |
|
The
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tenneco Inc. Shareholders' equity | | |
| $0.01 Par Value Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income (Loss) | | Total Tenneco Inc. Shareholders' Equity | | Noncontrolling Interests | | Total Equity |
Balance as of December 31, 2017 | $ | 1 |
| | $ | (930 | ) | | $ | 3,112 |
| | $ | (1,009 | ) | | $ | (538 | ) | | $ | 636 |
| | $ | 46 |
| | $ | 682 |
|
Net Income (loss) | — |
| | — |
| | — |
| | 60 |
| | — |
| | 60 |
| | 7 |
| | 67 |
|
Other comprehensive income (loss)—net of tax: | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | | | | | | | 19 |
| | 19 |
| | 7 |
| | 26 |
|
Defined benefit plans | | | | | | | | | 3 |
| | 3 |
| | — |
| | 3 |
|
Comprehensive income (loss) | | | | | | | | | | | 82 |
| | 14 |
| | 96 |
|
Adjustments to adopt new accounting standards | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Stock-based compensation, net | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Cash dividends ($0.25 per share) | — |
| | — |
| | — |
| | (13 | ) | | — |
| | (13 | ) | | — |
| | (13 | ) |
Balance as of March 31, 2018 | 1 |
| | (930 | ) | | 3,115 |
| | (963 | ) | | (516 | ) | | 707 |
| | 60 |
| | 767 |
|
Net Income (loss) | — |
| | — |
| | — |
| | 47 |
| | — |
| | 47 |
| | 7 |
| | 54 |
|
Other comprehensive income (loss)—net of tax: | | | | | | | | | | |
| | | | |
Foreign currency translation adjustments | | | | | | | | | (92 | ) | | (92 | ) | | (5 | ) | | (97 | ) |
Derivatives | | | | | | | | | — |
| | — |
| | — |
| | — |
|
Defined benefit plans | | | | | | | | | 4 |
| | 4 |
| | — |
| | 4 |
|
Comprehensive income (loss) | | | | | | | | | | | (41 | ) | | 2 |
| | (39 | ) |
Stock-based compensation, net | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
Cash dividends ($0.25 per share) | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) | |
| | (12 | ) |
Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) | | (18 | ) |
Balance as of June 30, 2018 | $ | 1 |
| | $ | (930 | ) | | $ | 3,118 |
| | $ | (928 | ) | | $ | (604 | ) | | $ | 657 |
| | $ | 44 |
| | $ | 701 |
|
See accompanying notes to the condensed consolidated financial statements are an integralstatements.
part of these condensed consolidated statements of changes in shareholders’ equity.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Unaudited)(in millions, except share and per share amounts, or as otherwise noted)
| |
(1) | Consolidation and Presentation |
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’sworld's leading manufacturers of clean air, powertrain, and ride performance products and systems, for light vehicle, commercial truck and off-highway applications. We also engineer, manufacture, marketserves both original equipment manufacturers ("OEM") and distribute leading brand name products to a diversified and global aftermarket customer base. Unless the context indicates otherwise, references herein to and words such as "we," "us," or "our" includereplacement markets worldwide.
On January 10, 2019, the Company completed the acquisition of a 90.5% ownership interest in Öhlins Intressenter AB (“Öhlins”, the "Öhlins Acquisition"), a Swedish technology company that develops premium suspension systems and its consolidated subsidiaries.components for the automotive and motorsport industries. On October 1, 2018, the Company completed the acquisition of a 100% ownership interest in Federal-Mogul LLC ("Federal-Mogul Acquisition," and together with the Öhlins Acquisition, the "Acquisitions"), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems.
As you read the accompanying
2. Summary of Significant Accounting Policies
Basis of Presentation — Interim Financial Statements
Certain information and footnote disclosures normally included in financial statements you should alsoprepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments (consisting of normal recurring adjustments) management believes are necessary to fairly state the results of operations, comprehensive income, financial position, changes in shareholders' equity, and cash flows. The Company's management believes the disclosures are adequate to make the information presented not misleading when read ourin conjunction with the audited consolidated financial statements and the notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2017,2018, which was filed with the Securities and Exchange Commission (SEC) on February 28, 2018 (the "2017 Form 10-K"). A Form 8-K was also filed withMarch 18, 2019. Operating results for the SEC on September 28, 2018 to recast certain portionsthree and six months ended June 30, 2019 are not necessarily indicative of the 2017 Form 10-Kresults that may be expected for the year ending December 31, 2019.
The Company expects to retrospectively reflectseparate its businesses to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company ("DRiV") and a new Powertrain Technology company ("New Tenneco"). The Company currently expects the effectseparation of the Company's changebusinesses to occur through a spinoff transaction of DRiV in reportingmid-2020. In preparation for the spinoff, the Company began to manage and report its DRiV businesses through two new operating segments, that took effect in the first quarter of 2018,2019, as compared to the three operating segments it had previously reported. The DRiV operating segments consist of Motorparts and to recast certain financial informationRide Performance. The new Motorparts operating segment consists of the previously reported Aftermarket operating segment as well as the aftermarket portion of the previously reported Motorparts operating segment. The Ride Performance operating segment consists of the previously reported Ride Performance operating segment as well as the OE Braking business that was included in the previously reported Motorparts operating segment. As such, prior period operating segment results and related disclosures for accounting standards adoptedhave been conformed to reflect the Company's current operating segments. The future New Tenneco consists of two existing operating segments, Powertrain and Clean Air. See Note 17, Segment Information.
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 2018, for which retrospective application was required.
In our opinion, the accompanying unauditedevent of a change in control of Tenneco Inc. or certain of its subsidiaries. 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 condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary forbalance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered, as a fair statement of the Company’s results of operations, comprehensive income, financial position, cash flows,change in control event is generally not probable until it occurs, except as discussed in Note 3, Acquisitions and changes in shareholders’ equityDivestitures, for the periods indicated. We have preparedredeemable noncontrolling interests from the unaudited condensed consolidated financial statements pursuant to the rules and regulations of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for annual financial statements.Acquisitions.
Our unaudited condensed consolidated financial statements include all majority-owned subsidiaries. We have eliminated all intercompany transactions.
Segment Information
In the first quarter of 2018, the Company’s reportable segments were revised, and now consist of the following three segments: Clean Air, Ride Performance and Aftermarket. See Note 13, Segment Information for further information.
Prepayments and Other
Prepayments and other included $156 million and $117 million at September 30, 2018 and December 31, 2017, respectively, for in-process tools and dies that we are building for our original equipment customers.
Accounts Payable
Accounts payable included $110 million and $77 million at September 30, 2018 and December 31, 2017, respectively, for accrued compensation and $15 million and $20 million at September 30, 2018 and December 31, 2017, respectively, for bank overdrafts at our European subsidiaries.
Redeemable Noncontrolling Interests
The following is a rollforward of activities in ourthe Company's redeemable noncontrolling interests:
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Balance at beginning of period | $ | 138 |
| | $ | 42 |
|
Net income (loss) attributable to redeemable noncontrolling interests | 15 |
| | 16 |
|
Other comprehensive income (loss) | 1 |
| | (1 | ) |
Acquisition and other | 16 |
| | — |
|
Purchase accounting measurement period adjustment | (8 | ) | | — |
|
Dividends declared | (17 | ) | | (19 | ) |
Balance at end of period | $ | 145 |
| | $ | 38 |
|
The Company recorded a decrease to the redeemable noncontrolling interests of $8 million from the Federal-Mogul Acquisition, as a result of adjustments made in the measurement period to the preliminary purchase price allocation. The purchase price allocations for the nineAcquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
Earnings (loss) per share — Basic earnings (loss) per share is calculated by dividing net earnings (loss) by the weighted average shares outstanding during the period. Diluted earnings (loss) per share reflects the weighted average effect of all potentially dilutive securities from the date of issuance. Actual weighted average shares outstanding used in calculating earnings (loss) per share were:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six months ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Weighted average shares of common stock outstanding | 80,920,825 |
| | 51,258,668 |
| | 80,897,731 |
| | 51,232,639 |
|
Effect of dilutive securities: | | | | | | | |
Restricted stock, PSUs and RSUs | — |
| | 298,826 |
| | — |
| | 251,971 |
|
Stock options | — |
| | 49,730 |
| | — |
| | 61,405 |
|
Dilutive shares outstanding | 80,920,825 |
| | 51,607,224 |
| | 80,897,731 |
| | 51,546,015 |
|
For the three and six months ended SeptemberJune 30, 2019, the calculation of diluted earnings (loss) per share excluded 1,990,099 and 1,850,850 of share-based awards, as the effect on the calculation would have been anti-dilutive. For the three and six months ended June 30, 2018, the calculation of diluted earnings (loss) per share excluded 123,773 and 2017:123,947 of share-based awards, as the effect on the calculation would have been anti-dilutive.
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. The Company also revised for other immaterial errors related to various line items. As a result, certain amounts in the condensed consolidated financial statements have been revised for the three and six month periods ended June 30, 2018. These revisions were not material to the previously issued financial statements and are presented in the tables below.
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 condensed consolidated financial statements.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following tables present the effects of these reclassifications and revisions for the condensed consolidated financial statement line items adjusted in the affected periods included within this quarterly report:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (Millions) |
Balance January 1 | $ | 42 |
| | $ | 40 |
|
Net income attributable to redeemable noncontrolling interests | 22 |
| | 27 |
|
Other comprehensive (loss) income | (3 | ) | | 2 |
|
Dividends declared | (33 | ) | | (37 | ) |
Balance September 30 | $ | 28 |
| | $ | 32 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
Condensed consolidated statement of income (loss) | | | | | | | | | |
Revenues | | | | | | | | | |
Net sales and operating revenues | $ | 2,537 |
| | $ | — |
| | $ | 2,537 |
| | $ | (4 | ) | | $ | 2,533 |
|
Costs and expenses | | | | | | | | | |
Cost of sales | 2,159 |
| | (23 | ) | | 2,136 |
| | (2 | ) | | 2,134 |
|
Selling, general, and administrative | 156 |
| | (2 | ) | | 154 |
| | — |
| | 154 |
|
Depreciation and amortization | 59 |
| | — |
| | 59 |
| | 1 |
| | 60 |
|
Engineering, research, and development | 42 |
| | (4 | ) | | 38 |
| | 1 |
| | 39 |
|
Restructuring charges and asset impairments | — |
| | 29 |
| | 29 |
| | — |
| | 29 |
|
| 2,416 |
| | — |
| | 2,416 |
| | — |
| | 2,416 |
|
Other expense (income) | | | | | | | | | |
Loss on sale of receivables | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
Non-service pension and other postretirement benefit costs (credits) | — |
| | 3 |
| | 3 |
| | — |
| | 3 |
|
Other expense (income), net | 6 |
| | (3 | ) | | 3 |
| | — |
| | 3 |
|
| 8 |
| | (2 | ) | | 6 |
| | — |
| | 6 |
|
Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 113 |
| | 2 |
| | 115 |
| | (4 | ) | | 111 |
|
Interest expense | 20 |
| | 2 |
| | 22 |
| | — |
| | 22 |
|
Earnings (loss) before income taxes and noncontrolling interests | 93 |
| | — |
| | 93 |
| | (4 | ) | | 89 |
|
Income tax expense (benefit) | 27 |
| | — |
| | 27 |
| | (1 | ) | | 26 |
|
Net income (loss) | 66 |
| | — |
| | 66 |
| | (3 | ) | | 63 |
|
Less: Net income (loss) attributable to noncontrolling interests | 16 |
| | — |
| | 16 |
| | — |
| | 16 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 50 |
| | $ | — |
| | $ | 50 |
| | $ | (3 | ) | | $ | 47 |
|
Earnings (loss) per share | | | | | | | | | |
Basic earnings (loss) per share of common stock | $ | 0.98 |
| | $ | — |
| | $ | 0.98 |
| | $ | (0.06 | ) | | $ | 0.92 |
|
Diluted earnings (loss) per share of common stock | $ | 0.98 |
| | $ | — |
| | $ | 0.98 |
| | $ | (0.06 | ) | | $ | 0.92 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
Condensed consolidated statement of comprehensive income (loss) | | | | | | | | | |
Net income (loss) | $ | 66 |
| | $ | — |
| | $ | 66 |
| | $ | (3 | ) | | $ | 63 |
|
Other comprehensive income (loss)—net of tax |
| |
| |
| |
| |
|
Foreign currency translation adjustment | (100 | ) | | — |
| | (100 | ) | | 1 |
| | (99 | ) |
Defined benefit plans | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
|
| (96 | ) | | — |
| | (96 | ) | | 1 |
| | (95 | ) |
Comprehensive income (loss) | (30 | ) | | — |
| | (30 | ) | | (2 | ) | | (32 | ) |
Less: Comprehensive income (loss) attributable to noncontrolling interests | 9 |
| | — |
| | 9 |
| | — |
| | 9 |
|
Comprehensive income (loss) attributable to common shareholders | $ | (39 | ) | | $ | — |
| | $ | (39 | ) | | $ | (2 | ) | | $ | (41 | ) |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2018 |
| As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
Condensed consolidated statement of income (loss) | | | | | | | | | |
Revenues | | | | | | | | | |
Net sales and operating revenues | $ | 5,111 |
| | $ | — |
| | $ | 5,111 |
| | $ | 3 |
| | $ | 5,114 |
|
Costs and expenses | | | | | | | | | |
Cost of sales | 4,357 |
| | (32 | ) | | 4,325 |
| | 2 |
| | 4,327 |
|
Selling, general, and administrative | 309 |
| | (4 | ) | | 305 |
| | — |
| | 305 |
|
Depreciation and amortization | 118 |
| | — |
| | 118 |
| | 2 |
| | 120 |
|
Engineering, research, and development | 83 |
| | (5 | ) | | 78 |
| | 1 |
| | 79 |
|
Restructuring charges and asset impairments | — |
| | 41 |
| | 41 |
| | — |
| | 41 |
|
| 4,867 |
| | — |
| | 4,867 |
| | 5 |
| | 4,872 |
|
Other expense (income) | | | | | | | | | |
Loss on sale of receivables | 5 |
| | (5 | ) | | — |
| | — |
| | — |
|
Non-service pension and other postretirement benefit costs (credits) | — |
| | 6 |
| | 6 |
| | — |
| | 6 |
|
Other expense (income), net | 9 |
| | (6 | ) | | 3 |
| | — |
| | 3 |
|
| 14 |
| | (5 | ) | | 9 |
| | — |
| | 9 |
|
Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 230 |
| | 5 |
| | 235 |
| | (2 | ) | | 233 |
|
Interest expense | 40 |
| | 5 |
| | 45 |
| | — |
| | 45 |
|
Earnings (loss) before income taxes and noncontrolling interests | 190 |
| | — |
| | 190 |
| | (2 | ) | | 188 |
|
Income tax expense (benefit) | 52 |
| | — |
| | 52 |
| | (1 | ) | | 51 |
|
Net income (loss) | 138 |
| | — |
| | 138 |
| | (1 | ) | | 137 |
|
Less: Net income (loss) attributable to noncontrolling interests | 30 |
| | — |
| | 30 |
| | — |
| | 30 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 108 |
| | $ | — |
| | $ | 108 |
| | $ | (1 | ) | | $ | 107 |
|
Earnings (loss) per share | | | | | | | | | |
Basic earnings (loss) per share of common stock | $ | 2.12 |
| | $ | — |
| | $ | 2.12 |
| | $ | (0.04 | ) | | $ | 2.08 |
|
Diluted earnings (loss) per share of common stock | $ | 2.10 |
| | $ | — |
| | $ | 2.10 |
| | $ | (0.03 | ) | | $ | 2.07 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2018 |
| As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
Condensed consolidated statement of comprehensive income (loss) |
|
Net income (loss) | $ | 138 |
| | $ | — |
| | $ | 138 |
| | $ | (1 | ) | | $ | 137 |
|
Other comprehensive income (loss)—net of tax | | | | | | | | | |
Foreign currency translation adjustment | (73 | ) | | — |
| | (73 | ) | | 1 |
| | (72 | ) |
Defined benefit plans | 7 |
| | — |
| | 7 |
| | — |
| | 7 |
|
| (66 | ) | | — |
| | (66 | ) | | 1 |
| | (65 | ) |
Comprehensive income (loss) | 72 |
| | — |
| | 72 |
| | — |
| | 72 |
|
Less: Comprehensive income (loss) attributable to noncontrolling interests | 31 |
| | — |
| | 31 |
| | — |
| | 31 |
|
Comprehensive income (loss) attributable to common shareholders | $ | 41 |
| | $ | — |
| | $ | 41 |
| | $ | — |
| | $ | 41 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
| | Six months ended June 30, 2018 |
| | As Reported | | Reclasses | | As Reclassified | | Revisions | | As Revised |
Condensed consolidated statements of cash flow | |
|
Operating Activities | | | | | | | | | | |
Net income (loss) | | $ | 138 |
| | $ | — |
| | $ | 138 |
| | $ | (1 | ) | | $ | 137 |
|
Net cash provided by (used by) operating activities | | 78 |
| | — |
| | 78 |
| | — |
| | 78 |
|
| | | | | | | | | | |
Investing Activities | | | | | | | | | | |
Net cash used by investing activities | | (101 | ) | | — |
| | (101 | ) | | — |
| | (101 | ) |
| | | | | | | | | | |
Financing Activities | | | | | | | | | | |
Proceeds from term loans and notes | | — |
| | — |
| | — |
| | 9 |
| | 9 |
|
Repayments of term loans and notes | | — |
| | (12 | ) | | (12 | ) | | (16 | ) | | (28 | ) |
Retirement of long-term debt | | (12 | ) | | 12 |
| | — |
| | — |
| | — |
|
Borrowings on revolving lines of credit | | — |
| | — |
| | — |
| | 2,669 |
| | 2,669 |
|
Payments on revolving lines of credit | | — |
| | — |
| | — |
| | (2,614 | ) | | (2,614 | ) |
Net increase (decrease) in revolver borrowings | | 48 |
| | — |
| | 48 |
| | (48 | ) | | — |
|
Issuance (repurchase) of common shares | | (1 | ) | | — |
| | (1 | ) | | — |
| | (1 | ) |
Cash dividends | | (25 | ) | | — |
| | (25 | ) | | — |
| | (25 | ) |
Debt issuance cost of long-term debt | | (2 | ) | | 2 |
| | — |
| | — |
| | — |
|
Purchase of common stock under the share repurchase program | | — |
| | — |
| | — |
| | — |
| | — |
|
Net increase (decrease) in bank overdrafts | | (7 | ) | | — |
| | (7 | ) | | — |
| | (7 | ) |
Net increase (decrease) in short-term borrowings secured by accounts receivable | | (20 | ) | | 20 |
| | — |
| | — |
| | — |
|
Other | | — |
| | (22 | ) | | (22 | ) | | — |
| | (22 | ) |
Distributions to noncontrolling interest partners | | (28 | ) | | — |
| | (28 | ) | | — |
| | (28 | ) |
Net cash provided by (used by) financing activities | | (47 | ) | | — |
| | (47 | ) | | — |
| | (47 | ) |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | | (11 | ) | | — |
| | (11 | ) | | — |
| | (11 | ) |
Increase (decrease) in cash, cash equivalents and restricted cash | | (81 | ) | | — |
| | (81 | ) | | — |
| | (81 | ) |
Cash, cash equivalents and restricted cash, beginning of period | | 318 |
| | — |
| | 318 |
| | — |
| | 318 |
|
Cash, cash equivalents and restricted cash, end of period | | $ | 237 |
| | $ | — |
| | $ | 237 |
| | $ | — |
| | $ | 237 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | As Reported | | Revisions | | As Revised |
Condensed consolidated statements of changes in shareholders' equity | | |
Accumulated Deficit | | | | | | |
Balance March 31 | | $ | (902 | ) | | $ | (61 | ) | | $ | (963 | ) |
Net income (loss) attributable to Tenneco Inc. | | 50 |
| | (3 | ) | | 47 |
|
Cash dividends declared | | (12 | ) | | — |
| | (12 | ) |
Balance June 30 | | $ | (864 | ) | | $ | (64 | ) | | $ | (928 | ) |
Accumulated Other Comprehensive Income (loss) | | | | | | |
Balance March 31 | | $ | (519 | ) | | $ | 3 |
| | $ | (516 | ) |
Other comprehensive income (loss)—net of tax: | | | | | | |
Foreign currency translation adjustment | | (93 | ) | | 1 |
| | (92 | ) |
Defined benefit plans | | 4 |
| | — |
| | 4 |
|
Balance June 30 | | $ | (608 | ) | | $ | 4 |
| | $ | (604 | ) |
Total Tenneco Inc. Shareholders' Equity | | | | | | |
Balance March 31 | | $ | 765 |
| | $ | (58 | ) | | $ | 707 |
|
Net income (loss) attributable to Tenneco Inc. | | 50 |
| | (3 | ) | | 47 |
|
Other comprehensive income (loss)—net of tax: | | | | | | |
Foreign currency translation adjustment | | (93 | ) | | 1 |
| | (92 | ) |
Defined benefit plans | | 4 |
| | — |
| | 4 |
|
Comprehensive income (loss) | | (39 | ) | | (2 | ) | | (41 | ) |
Cash dividends | | (12 | ) | | — |
| | (12 | ) |
Common Stock Issued | | 3 |
| | — |
| | 3 |
|
Balance June 30 | | $ | 717 |
| | $ | (60 | ) | | $ | 657 |
|
Total Equity | | | | | | |
Balance March 31 | | $ | 825 |
| | $ | (58 | ) | | $ | 767 |
|
Net income (loss) | | 57 |
| | (3 | ) | | 54 |
|
Other comprehensive income (loss)—net of tax: | | | | | | |
Foreign currency translation adjustment | | (98 | ) | | 1 |
| | (97 | ) |
Defined benefit plans | | 4 |
| | — |
| | 4 |
|
Comprehensive income (loss) | | (37 | ) | | (2 | ) | | (39 | ) |
Common Stock Issued | | 3 |
| | — |
| | 3 |
|
Cash dividends | | (30 | ) | | — |
| | (30 | ) |
Balance June 30 | | $ | 761 |
| | $ | (60 | ) | | $ | 701 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | |
| | Six months ended June 30, 2018 |
| | As Reported | | Revisions | | As Revised |
Condensed consolidated statements of changes in shareholders' equity | |
|
Accumulated Deficit | | | | | | |
Balance January 1 | | $ | (946 | ) | | $ | (63 | ) | | $ | (1,009 | ) |
Net income (loss) attributable to Tenneco Inc. | | 108 |
| | (1 | ) | | 107 |
|
Cash dividends declared | | (25 | ) | | — |
| | (25 | ) |
Adjustments to adopt new accounting standards | | (1 | ) | | — |
| | (1 | ) |
Balance June 30 | | $ | (864 | ) | | $ | (64 | ) | | $ | (928 | ) |
Accumulated Other Comprehensive Income (loss) | | | | | | |
Balance January 1 | | $ | (541 | ) | | $ | 3 |
| | $ | (538 | ) |
Other comprehensive income (loss)—net of tax: | | | | | | |
Foreign currency translation adjustment | | (74 | ) | | 1 |
| | (73 | ) |
Defined benefit plans | | 7 |
| | — |
| | 7 |
|
Balance June 30 | | $ | (608 | ) | | $ | 4 |
| | $ | (604 | ) |
Total Tenneco Inc. Shareholders' Equity | | | | | | |
Balance January 1 | | $ | 696 |
| | $ | (60 | ) | | $ | 636 |
|
Net income (loss) attributable to Tenneco Inc. | | 108 |
| | (1 | ) | | 107 |
|
Other comprehensive income (loss)—net of tax: | | | | | | |
Foreign currency translation adjustment | | (74 | ) | | 1 |
| | (73 | ) |
Defined benefit plans | | 7 |
| | — |
| | 7 |
|
Comprehensive income (loss) | | 41 |
| | — |
| | 41 |
|
Adjustments to adopt new accounting standards | | (1 | ) | | — |
| | (1 | ) |
Cash dividends | | (25 | ) | | — |
| | (25 | ) |
Common Stock Issued | | 6 |
| | — |
| | 6 |
|
Balance June 30 | | $ | 717 |
| | $ | (60 | ) | | $ | 657 |
|
Total Equity | | | | | | |
Balance January 1 | | $ | 742 |
| | $ | (60 | ) | | $ | 682 |
|
Net income (loss) | | 122 |
| | (1 | ) | | 121 |
|
Other comprehensive income (loss)—net of tax: | | | | | | |
Foreign currency translation adjustment | | (72 | ) | | 1 |
| | (71 | ) |
Defined benefit plans | | 7 |
| | — |
| | 7 |
|
Comprehensive income (loss) | | 57 |
| | — |
| | 57 |
|
Common Stock Issued | | 6 |
| | — |
| | 6 |
|
Cash dividends | | (43 | ) | | — |
| | (43 | ) |
Adjustments to adopt new accounting standards | | (1 | ) | | — |
| | (1 | ) |
Balance June 30 | | $ | 761 |
| | $ | (60 | ) | | $ | 701 |
|
New Accounting Pronouncements
Adoption of ContentsNew Accounting Standards
Comprehensive income— In February 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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"). The Company has elected not to adopt the optional reclassification.
Leases — In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update supersedes the lease requirements in Topic 840, 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 flows 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. The Company adopted this update on January 1, 2019 using the modified retrospective method without the recasting of comparative periods’ financial information, as permitted by the transition guidance.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The Company adopted the package of practical expedients that allows companies to not reassess its previous conclusions related to contracts that contain leases, existing lease classification, and initial direct costs, and to carry forward its historical conclusions. It elected the land easements practical expedient allowing the Company not to reassess whether existing or expired land easements not accounted for as leases under previous guidance are or contain leases under the new guidance. It also did not 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 sheet recognition. Instead, short-term leases will be expensed over the lease term. As a part of the implementation effort, the Company reviewed its internal control structure and modified and augmented existing controls, as necessary.
The adoption of the new standard resulted in the recording of additional lease assets and lease liabilities of $387 million and $383 million, and a reduction of favorable lease intangibles of $4 million as of January 1, 2019. The standard did not materially affect the Company's condensed consolidated financial position or results of operations and had no effect on cash flows. See Note 14, Leases.
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 interim 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 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 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, 2020 with early adoption permitted. The Company is currently evaluating the potential effect of this new guidance on its 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 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 financial statements.
3. Acquisitions and Divestitures
The preliminary allocation of the purchase price of 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 existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. Any adjustments to amounts recorded in purchase accounting that do not qualify as measurement period adjustments are included in earnings in the period identified.
The fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the Company believes these preliminary estimates provide a reasonable basis for estimating the fair value of the assets acquired and liabilities assumed, it will continue to evaluate available information prior to finalization of the amounts.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
ReclassificationsÖhlins Intressenter AB Acquisition
ReclassificationsThe purchase price for the 90.5% ownership interest in Öhlins was $162 million. The remaining 9.5% ownership interest in Öhlins (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”). Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins Acquisition to certain prior year amounts have beensell the KÖ Interest to the Company. As the redemption of this redeemable noncontrolling interest is not solely within the Company's control, the noncontrolling interest is presented in the temporary equity section of the Company's condensed consolidated balance sheets. The fair value of the KÖ Interest was $17 million and represents its current redemption value at June 30, 2019.
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 2019:
|
| | | | | | | | | | | |
| Initial Allocation | | Adjustments | | Revised Allocation |
Cash, cash equivalents and restricted cash | $ | 4 |
| | $ | — |
| | $ | 4 |
|
Customer notes and accounts receivable | 19 |
| | — |
| | 19 |
|
Inventories | 31 |
| | — |
| | 31 |
|
Prepayments and other current assets | 2 |
| | — |
| | 2 |
|
Property, plant, and equipment | 8 |
| | — |
| | 8 |
|
Goodwill | 28 |
| | 2 |
| | 30 |
|
Intangibles | 135 |
| | (2 | ) | | 133 |
|
Other assets | 9 |
| | — |
| | 9 |
|
Total assets acquired | $ | 236 |
| | $ | — |
| | $ | 236 |
|
| | | | |
|
Short-term debt, including current maturities of long-term debt | $ | 10 |
| | $ | — |
| | $ | 10 |
|
Accounts payable | 11 |
| | — |
| | 11 |
|
Accrued compensation and employee benefits | 12 |
| | — |
| | 12 |
|
Deferred income taxes | 18 |
| | — |
| | 18 |
|
Deferred credits and other liabilities | 6 |
| | — |
| | 6 |
|
Total liabilities assumed | 57 |
| | — |
| | 57 |
|
Redeemable noncontrolling interest | 17 |
| | — |
| | 17 |
|
Net assets acquired | $ | 162 |
| | $ | — |
| | $ | 162 |
|
The primary areas of the preliminary purchase price allocation that are not yet finalized relate to conformthe inventory, intangible assets, right of use assets, and deferred income tax assets and liabilities.
Goodwill of $30 million was recognized as part of the acquisition and is reflected in the Ride Performance segment. During the three months ended June 30, 2019, the Company adjusted the initial allocation of the total purchase consideration, which resulted in a $2 million increase to current year presentation. See Note 12, New Accounting Pronouncements for additional information.
| |
(2) | Acquisition of Federal-Mogul |
On October 1, 2018, we closed ongoodwill. The goodwill consists of the Company’s expected future economic benefits that will result from the acquisition of allÖhlins’ technology, which will allow the Company to more rapidly grow its product offerings for current and future customers, as well as assist the Company in obtaining a larger share of business in developing mobility markets. None of the interests in Federal-Mogul LLC ("Federal-Mogul"), (the "Acquisition") pursuant to the Membership Interest Purchase Agreement, dated as of April 10, 2018 (the “Purchase Agreement”), by and among the Company, Federal-Mogul, American Entertainment Properties Corp. (“AEP” and, together with certain affiliated entities, the “Sellers”) and Icahn Enterprises L.P. (“IEP”). Total consideration was approximately $5.2 billion. Following the completion of the Acquisition, Federal-Mogul was merged with and into the Company, with the Company continuing as the surviving company.
At the effective time 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 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”).
Under the Amended and Restated Certificate of Incorporation, the authorized number of shares was increased from 185,000,000 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 250,000,000 shares, divided into 175,000,000 shares of 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 Company (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 $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 aggregate number of shares of Class A Common Stock issued and outstanding immediately following the closing of the Acquisition, and (b) 23,793,669 shares of newly created Class B Common Stock, par value $0.01. The remaining of approximately $3.2 billion of consideration was comprised of the assumption of Federal-Mogul debt obligations.
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 separate, publicly traded companies in a spin-off transaction thatgoodwill is expected to be treated as a tax-free reorganizationdeductible for U.S. federal income tax purposes.
Advisory costs associated with the Acquisition were $12 million and $43 million for the three and nine months ended September 30, 2018, respectively, and have been recognized as a component of selling, general, and administrative expenses in the condensed consolidated statements of income.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Other intangible assets acquired include the following:
|
| | | | | |
| Estimated Fair Value | | Weighted-Average Useful Lives |
Definite-lived intangible assets: | | | |
Customer platforms and relationships | $ | 37 |
| | 10 years |
Technology rights | 41 |
| | 10 years |
Total definite-lived intangible assets | 78 |
| | |
| | | |
Indefinite-lived intangible assets: | | | |
Trade names and trademarks | 55 |
| | |
Total | $ | 133 |
| | |
The net carryingCompany recorded a $5 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation and estimatedrecognized $3 million and $5 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold.
Pro Forma Results
Pro forma results of operations have not been presented because the effects of the Öhlins Acquisition were not material to the Company’s condensed consolidated results of operations.
Acquisition of Federal-Mogul
During the six months ended June 30, 2019, the Company made measurement period adjustments based on further evaluation of available information to facts and circumstances that existed as of the acquisition date.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following table summarizes the preliminary fair values of our financial instruments by class at Septemberassets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 20182019:
|
| | | | | | | | | | | |
| Initial Allocation | | Adjustments | | Revised Allocation |
Cash, cash equivalents and restricted cash | $ | 277 |
| | $ | — |
| | $ | 277 |
|
Customer notes and accounts receivable | 1,258 |
| | — |
| | 1,258 |
|
Other receivables | 62 |
| | — |
| | 62 |
|
Inventories | 1,551 |
| | (5 | ) | | 1,546 |
|
Prepayments and other current assets | 198 |
| | 1 |
| | 199 |
|
Property, plant and equipment | 1,711 |
| | (28 | ) | | 1,683 |
|
Long-term receivables | 48 |
| | — |
| | 48 |
|
Goodwill | 825 |
| | (40 | ) | | 785 |
|
Intangibles | 1,530 |
| | 71 |
| | 1,601 |
|
Investments in nonconsolidated affiliates | 528 |
| | (15 | ) | | 513 |
|
Deferred income taxes | 166 |
| | — |
| | 166 |
|
Other assets | 55 |
| | (6 | ) | | 49 |
|
Total assets acquired | $ | 8,209 |
| | $ | (22 | ) | | $ | 8,187 |
|
| | | | | |
Short-term debt, including current maturities of long-term debt | $ | 130 |
| | $ | — |
| | $ | 130 |
|
Accounts payable | 957 |
| | — |
| | 957 |
|
Accrued compensation and employee benefits | 231 |
| | — |
| | 231 |
|
Accrued income taxes | 49 |
| | — |
| | 49 |
|
Accrued expenses and other current liabilities | 522 |
| | (8 | ) | | 514 |
|
Long-term debt | 1,315 |
| | — |
| | 1,315 |
|
Deferred income taxes | 56 |
| | — |
| | 56 |
|
Pension and postretirement benefits | 879 |
| | — |
| | 879 |
|
Deferred credits and other liabilities | 124 |
| | (5 | ) | | 119 |
|
Total liabilities assumed | 4,263 |
| | (13 | ) | | 4,250 |
|
Redeemable noncontrolling interests | 96 |
| | (8 | ) | | 88 |
|
Noncontrolling interests | 143 |
| | (1 | ) | | 142 |
|
Net assets and noncontrolling interests acquired | $ | 3,707 |
| | $ | — |
| | $ | 3,707 |
|
The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of property, plant and equipment; intangible assets; unconsolidated affiliates; deferred income tax assets and liabilities; redeemable noncontrolling interests; and noncontrolling interests.
Goodwill of $412 million was allocated to the Powertrain segment, $318 million was allocated to the Motorparts segment, and $55 million was allocated to the Ride Performance segment. The goodwill consists of the Company's expected future economic benefits that will arise from expected future product sales and synergies from combining Federal-Mogul with its existing portfolio of products. None of the goodwill is deductible for tax purposes.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Other intangible assets acquired include the following:
|
| | | | | |
| Estimated Fair Value | | Weighted-Average Useful Lives |
Definite-lived intangible assets: | | | |
Customer platforms and relationships | $ | 978 |
| | 10 years |
Technology rights | 68 |
| | 10 years |
Packaged kits know-how | 54 |
| | 10 years |
Catalogs | 40 |
| | 10 years |
Licensing agreements | 64 |
| | 4.5 years |
Land use rights | 30 |
| | 42.8 years |
Total definite-lived intangible assets | 1,234 |
| | 10.5 years |
| | | |
Indefinite-lived intangible assets: | | | |
Trade names and trademarks | 367 |
| | |
Total | $ | 1,601 |
| | |
The Company recorded a $152 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The Company recognized $3 million and $44 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold. The Company recognized $105 million as a non-cash charge to cost of goods sold during the year ended December 31, 2018 and expects to recognize the remaining amortization of the inventory step-up during 2019.
In addition, the Company acquired $83 million in redeemable noncontrolling interests related to a subsidiary from the Federal-Mogul Acquisition. The Company initiated the process to make a tender offer for 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 condensed consolidated balance sheets. The carrying amount for this redeemable noncontrolling interest represents its current redemption value at June 30, 2019.
The Company's condensed consolidated statements of income (loss) for the six months ended June 30, 2019 included net sales and operating revenues of $3,762 million and net income of $17 million associated with the operating results of Federal-Mogul.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the Federal-Mogul Acquisition, and the related financing, if the transaction had occurred as of January 1, 2017. The pro forma results are not necessarily indicative of either the actual consolidated results had the Federal-Mogul Acquisition occurred on January 1, 2017 or of future consolidated operating results.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales and operating revenues | $ | 4,504 |
| | $ | 4,618 |
| | $ | 8,988 |
| | $ | 9,298 |
|
Earnings (loss) before income taxes and noncontrolling interests | $ | 171 |
| | $ | 232 |
| | $ | 201 |
| | $ | 458 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 43 |
| | $ | 78 |
| | $ | (27 | ) | | $ | 171 |
|
Basic earnings (loss) per share of common stock | $ | 0.54 |
| | $ | 0.97 |
| | $ | (0.33 | ) | | $ | 2.13 |
|
Diluted earnings (loss) per share of common stock | $ | 0.54 |
| | $ | 0.96 |
| | $ | (0.33 | ) | | $ | 2.12 |
|
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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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.
Assets Held for Sale
On March 1, 2019, the Company sold its wipers business in the Motorparts segment for a sale price of $29 million, subject to adjustment based on terms of the sale agreement. Proceeds from the sale were $22 million, subject to customary working capital adjustments. Certain assets and liabilities of the business are still classified as held for sale within the condensed consolidated balance sheet as of June 30, 2019 and are expected to transfer in the second half of 2019.
The related assets and liabilities were classified as held for sale as of June 30, 2019 and December 31, 2018:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets | | | |
Inventories | $ | 3 |
| | $ | 33 |
|
Other current assets | — |
| | 5 |
|
Long-lived assets | 1 |
| | 23 |
|
Total assets held for sale | $ | 4 |
| | $ | 61 |
|
Liabilities | | | |
Accounts payable | $ | 2 |
| | $ | 21 |
|
Accrued liabilities | — |
| | 7 |
|
Other liabilities | 1 |
| | 11 |
|
Total liabilities held for sale | $ | 3 |
| | $ | 39 |
|
4. Restructuring Charges and Asset Impairments, Net
Restructuring and Other Charges
The Company's restructuring activities are undertaken as necessary to execute management's strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company's businesses and to relocate operations to best cost locations.
The Company's restructuring charges consist primarily of employee costs (principally severance and/or termination benefits), and facility closure and other costs.
For the three and six months ended June 30, 2019 and 2018, restructuring charges, net and asset impairments by segment are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Clean Air | $ | 15 |
| | $ | 17 |
| | $ | 20 |
| | $ | 18 |
|
Powertrain | 17 |
| | — |
| | 18 |
| | — |
|
Ride Performance | 22 |
| | 9 |
| | 35 |
| | 17 |
|
Motorparts | 7 |
| | 1 |
| | 11 |
| | 4 |
|
Corporate | — |
| | 2 |
| | 1 |
| | 2 |
|
| $ | 61 |
| | $ | 29 |
| | $ | 85 |
| | $ | 41 |
|
Presented within the table above are asset impairments of $1 million in the Clean Air segment and $1 million in the Motorparts segment incurred during the three and six months ended June 30, 2019.
During the three and six months ended June 30, 2019, the Company incurred $3 million and $9 million in restructuring and related costs and reduced previously recorded estimates by $2 million related to a restructuring plan designed to achieve a portion of the synergies the Company anticipates achieving in connection with the Federal-Mogul Acquisition. Pursuant to the plan, the Company will reduce its headcount globally across all segments. The Company began implementing headcount reductions in January 2019 and these actions will continue throughout 2019. The Federal-Mogul Acquisition is discussed further in Note 3, Acquisitions and Divestitures. During the three and six months ended June 30, 2019, the Company also incurred $17 million and $28 million in restructuring and related costs related to plant relocation and closures within its Ride Performance segment. The Company expects the actions to be completed by the second quarter of 2020.
During the three and six months ended June 30, 2018, the Company incurred $7 million and $14 million in restructuring and related costs related to the accelerated move of the Beijing Ride Performance plant.
Restructuring Reserve Rollforward
Amounts related to activities that were charges to restructuring reserves, including costs incurred to support future structural cost reductions, by reportable segments are as follows:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Net Carrying Amount | | Fair Value | | Net Carrying Amount | | Fair Value |
| (Millions) |
Long-term debt (including current maturities) | $ | 1,308 |
| | $ | 1,252 |
| | $ | 1,361 |
| | $ | 1,398 |
|
Equity swap agreement and foreign currency forward contracts: | | | | | | | |
Asset derivative contracts (a) | 5 |
| | 5 |
| | 4 |
| | 4 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Reportable Segments | | Corporate | | Total |
Balance as of December 31, 2018 | $ | 17 |
| | $ | 15 |
| | $ | 25 |
| | $ | 43 |
| | $ | 100 |
| | $ | 3 |
| | $ | 103 |
|
Provisions | 5 |
| | 1 |
| | 13 |
| | 4 |
| | 23 |
| | 1 |
| | 24 |
|
Payments | (6 | ) | | (3 | ) | | (13 | ) | | (14 | ) | | (36 | ) | | (2 | ) | | (38 | ) |
Balance as of March 31, 2019 | 16 |
| | 13 |
| | 25 |
| | 33 |
| | 87 |
| | 2 |
| | 89 |
|
Provisions | 14 |
| | 17 |
| | 22 |
| | 8 |
| | 61 |
| | — |
| | 61 |
|
Revisions to estimates | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | (2 | ) |
Payments | (2 | ) | | (4 | ) | | (19 | ) | | (7 | ) | | (32 | ) | | (1 | ) | | (33 | ) |
Balance as of June 30, 2019 | $ | 28 |
| | $ | 26 |
| | $ | 28 |
| | $ | 32 |
| | $ | 114 |
| | $ | 1 |
| | $ | 115 |
|
(a) All derivatives |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Reportable Segments | | Corporate | | Total |
Balance as of December 31, 2017 | $ | 14 |
| | $ | — |
| | $ | 7 |
| | $ | 4 |
| | $ | 25 |
| | $ | — |
| | $ | 25 |
|
Provisions | 1 |
| | — |
| | 8 |
| | 3 |
| | 12 |
| | — |
| | 12 |
|
Payments | (5 | ) | | — |
| | (9 | ) | | (2 | ) | | (16 | ) | | — |
| | (16 | ) |
Balance as of March 31, 2018 | 10 |
| | — |
| | 6 |
| | 5 |
| | 21 |
| | — |
| | 21 |
|
Provisions | 17 |
| | — |
| | 9 |
| | 1 |
| | 27 |
| | 2 |
| | 29 |
|
Payments | (3 | ) | | — |
| | (10 | ) | | (2 | ) | | (15 | ) | | — |
| | (15 | ) |
Balance as of June 30, 2018 | $ | 24 |
| | $ | — |
| | $ | 5 |
| | $ | 4 |
| | $ | 33 |
| | $ | 2 |
| | $ | 35 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following table provides a summary of the Company's restructuring liabilities and related activity for each type of exit costs:
|
| | | | | | | | | | | |
| Employee Costs | | Facility Closure and Other Costs | | Total |
Balance as of December 31, 2018 | $ | 98 |
| | $ | 5 |
| | $ | 103 |
|
Provisions | 11 |
| | 13 |
| | 24 |
|
Payments | (25 | ) | | (13 | ) | | (38 | ) |
Balance as of March 31, 2019 | 84 |
| | 5 |
| | 89 |
|
Provisions | 44 |
| | 17 |
| | 61 |
|
Revisions to estimates | (2 | ) | | — |
| | (2 | ) |
Payments | (16 | ) | | (17 | ) | | (33 | ) |
Balance as of June 30, 2019 | $ | 110 |
| | $ | 5 |
| | $ | 115 |
|
|
| | | | | | | | | | | |
| Employee Costs | | Facility Closure and Other Costs | | Total |
Balance as of December 31, 2017 | $ | 19 |
| | $ | 6 |
| | $ | 25 |
|
Provisions | 10 |
| | 2 |
| | 12 |
|
Payments | (13 | ) | | (3 | ) | | (16 | ) |
Balance as of March 31, 2018 | 16 |
| | 5 |
| | 21 |
|
Provisions | 26 |
| | 3 |
| | 29 |
|
Payments | (12 | ) | | (3 | ) | | (15 | ) |
Balance as of June 30, 2018 | $ | 30 |
| | $ | 5 |
| | $ | 35 |
|
5. Inventories
At June 30, 2019 and December 31, 2018, inventory consists of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Finished goods | $ | 1,110 |
| | $ | 1,116 |
|
Work in process | 497 |
| | 562 |
|
Raw materials | 489 |
| | 457 |
|
Materials and supplies | 111 |
| | 110 |
|
| $ | 2,207 |
| | $ | 2,245 |
|
6. Goodwill and Other Intangible Assets
At June 30, 2019 and December 31, 2018, goodwill consists of the following:
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Gross carrying amount at December 31, 2018 | $ | 22 |
| | $ | 388 |
| | $ | 210 |
| | $ | 611 |
| | $ | 1,231 |
|
Measurement period adjustments | — |
| | 21 |
| | — |
| | (67 | ) | | (46 | ) |
Acquisitions | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
Gross carrying amount at March 31, 2019 | 22 |
| | 409 |
| | 238 |
| | 544 |
| | 1,213 |
|
Measurement period adjustments | — |
| | 3 |
| | 2 |
| | 3 |
| | 8 |
|
Foreign exchange | — |
| | — |
| | — |
| | — |
| | — |
|
Gross carrying amount at June 30, 2019 | 22 |
| | 412 |
| | 240 |
| | 547 |
| | 1,221 |
|
| | | | | | | | | |
Accumulated impairment loss at December 31, 2018 | — |
| | — |
| | (143 | ) | | (219 | ) | | (362 | ) |
Impairment | — |
| | — |
| | (60 | ) | | — |
| | (60 | ) |
Accumulated impairment loss at March 31, 2019 | — |
| | — |
| | (203 | ) | | (219 | ) | | (422 | ) |
Foreign exchange | — |
| | — |
| | — |
| | — |
| | — |
|
Accumulated impairment loss at June 30, 2019 | — |
| | — |
| | (203 | ) | | (219 | ) | | (422 | ) |
| | | | | | | | | |
Net carrying value at end of period | $ | 22 |
| | $ | 412 |
| | $ | 37 |
| | $ | 328 |
| | $ | 799 |
|
The Öhlins Acquisition resulted in $30 million of goodwill which was included in the Ride Performance segment. During the six months ended June 30, 2019, the Company made the following adjustments to goodwill in the measurement period to the preliminary purchase price allocation for the Acquisitions:
an increase of $2 million for the Öhlins Acquisition; and
a net decrease of $40 million for the Federal-Mogul Acquisition.
The purchase price allocations for the Acquisitions are categorizedpreliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
During the first quarter of 2019, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within Level 2 ofthose segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value hierarchy.
Assetof the elements transferred and Liability Instruments — Thethe fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time.
During the three months ended June 30, 2019, the Company performed a review of potential triggering events, and concluded no events indicated it was more likely than not that the fair values of its reporting units had declined to below their carrying values at June 30, 2019. The Company considered the results of the post-reorganized reporting unit changes that occurred in the first quarter of 2019, which indicated nine reporting units with goodwill. Three of these nine reporting units have fair values that are within 15% of their carrying values and are reporting units that were acquired as part of the Acquisitions within the last year. The goodwill balance as of June 30, 2019 attributable to these three reporting units was $442 million. Management compared its future projected cash flows for these three reporting units as of June 30, 2019 compared to the future projected cash flows utilized in the valuation performed during the first quarter of 2019 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 fromconcluded there is no indication the carrying amount.value of its reporting units would be less than their fair values.
Long-term Debt — The
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
If the Company’s market capitalization remains at current levels for a sustained period of time or declines further, and if such a decline becomes indicative the fair value of our public fixed rate senior notesits reporting units have declined to below their carrying values, the Company will need to determine the fair value of its reporting units which may result in a material non-cash goodwill impairment charge in a future period.
At June 30, 2019 and December 31, 2018, the Company's intangible assets consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Definite-lived intangible assets: | | | | | | | | | | | | | |
Customer relationships and platforms | 10 years | | $ | 1,014 |
| | $ | (75 | ) | | $ | 939 |
| | $ | 964 |
| | $ | (24 | ) | | $ | 940 |
|
Customer contract | 10 years | | 8 |
| | (6 | ) | | 2 |
| | 8 |
| | (5 | ) | | 3 |
|
Patents | 10 to 17 years | | 1 |
| | (1 | ) | | — |
| | 1 |
| | (1 | ) | | — |
|
Technology rights | 10 to 30 years | | 136 |
| | (31 | ) | | 105 |
| | 98 |
| | (27 | ) | | 71 |
|
Packaged kits know-how | 10 years | | 54 |
| | (4 | ) | | 50 |
| | 36 |
| | (1 | ) | | 35 |
|
Catalogs | 10 years | | 40 |
| | (3 | ) | | 37 |
| | — |
| | — |
| | — |
|
Licensing agreements | 3 to 5 years | | 63 |
| | (11 | ) | | 52 |
| | 66 |
| | (3 | ) | | 63 |
|
Land use rights | 28 to 46 years | | 46 |
| | (2 | ) | | 44 |
| | 44 |
| | (2 | ) | | 42 |
|
| | | 1,362 |
| | (133 | ) | | 1,229 |
| | 1,217 |
| | (63 | ) | | 1,154 |
|
Indefinite-lived intangible assets: | | | | | | | | | | | | | |
Trade names and trademarks | | | 420 |
| | — |
| | 420 |
| | 365 |
| | — |
| | 365 |
|
Total | | | $ | 1,782 |
| | $ | (133 | ) | | $ | 1,649 |
| | $ | 1,582 |
| | $ | (63 | ) | | $ | 1,519 |
|
The Company recorded definite-lived and indefinite-lived intangible assets of $133 million as a result of the Öhlins Acquisition. During the six months ended June 30, 2019, the Company made the following adjustments to definite-lived and indefinite-lived intangible assets in the measurement period to the preliminary purchase price allocation for the Acquisitions:
a decrease of $2 million was recognized for the Öhlins Acquisition; and
a net increase of $71 million was recognized for the Federal-Mogul Acquisition.
The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
The amortization expense associated with definite-lived intangible assets was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Amortization expense | | $ | 33 |
| | $ | — |
| | $ | 68 |
| | $ | 1 |
|
The expected future amortization expense for the Company's definite-lived intangible assets is basedas follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter | | Total |
Expected amortization expense | | $ | 70 |
| | $ | 139 |
| | $ | 138 |
| | $ | 134 |
| | $ | 130 |
| | $ | 618 |
| | $ | 1,229 |
|
7. Investment in Nonconsolidated Affiliates
The Company has 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The Company's ownership interest in affiliates accounted for under the equity method is as follows:
|
| | | | | |
| June 30, 2019 | | December 31, 2018 |
Anqing TP Goetze Piston Ring Company Limited (China) | 35.7 | % | | 35.7 | % |
Anqing TP Powder Metallurgy Co., Ltd (China) | 20.0 | % | | 20.0 | % |
Dongsuh Federal-Mogul Industrial Co. Ltd. (Korea) | 50.0 | % | | 50.0 | % |
Farloc Argentina SAIC Y F (Argentina) | 23.9 | % | | 23.9 | % |
Federal-Mogul Powertrain Otomotiv A.S. (Turkey) | 50.0 | % | | 50.0 | % |
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. (Turkey) | 25.0 | % | | 25.0 | % |
Federal-Mogul TP Liners, Inc. (USA) | 46.0 | % | | 46.0 | % |
Frenos Hidraulicos Automotrices, S.A. de C.V. (Mexico) | 49.0 | % | | 49.0 | % |
JURID do Brasil Sistemas Automotivos Ltda. (Brazil) | 19.9 | % | | 19.9 | % |
KB Autosys Co., Ltd. (Korea) | 33.6 | % | | 33.6 | % |
Montagewerk Abgastechnik Emden GmbH (Germany) | 50.0 | % | | 50.0 | % |
The Company's investments in its nonconsolidated affiliates at June 30, 2019 and December 31, 2018 are:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Investments in nonconsolidated affiliates | $ | 531 |
| | $ | 544 |
|
The following table represents the activity from the Company's investments in its nonconsolidated affiliates for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Equity earnings (losses) of nonconsolidated affiliates, net of tax | $ | 17 |
| | $ | — |
| | $ | 33 |
| | $ | — |
|
Cash dividends received from nonconsolidated affiliates | $ | 12 |
| | $ | — |
| | $ | 27 |
| | $ | — |
|
During the six months ended June 30, 2019, the Company made adjustments in the measurement period to the preliminary purchase price allocation for the Federal-Mogul Acquisition which resulted in a reduction to the fair value of its investments in nonconsolidated affiliates of $15 million. The purchase price allocation is preliminary and subject to the finalization. The Company's current estimates and assumptions may change as more information becomes available. See Note 3, Acquisitions and Divestitures, for additional information.
The following tables present summarized aggregated financial information of the Company's nonconsolidated affiliates for the three and six months ended June 30, 2019. The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
Sales | $ | 85 |
| | $ | 39 |
| | $ | 120 |
| | $ | 244 |
|
Gross profit | $ | 22 |
| | $ | 10 |
| | $ | 23 |
| | $ | 55 |
|
Income from continuing operations | $ | 17 |
| | $ | 9 |
| | $ | 11 |
| | $ | 37 |
|
Net income | $ | 21 |
| | $ | 9 |
| | $ | 11 |
| | $ | 41 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
Sales | $ | 176 |
| | $ | 78 |
| | $ | 245 |
| | $ | 499 |
|
Gross profit | $ | 43 |
| | $ | 26 |
| | $ | 46 |
| | $ | 115 |
|
Income from continuing operations | $ | 36 |
| | $ | 20 |
| | $ | 24 |
| | $ | 80 |
|
Net income | $ | 39 |
| | $ | 18 |
| | $ | 22 |
| | $ | 79 |
|
See Note 18, Related Party Transactions, for additional information on quotedbalances and transactions with equity method investments.
8. Derivatives and Hedging Activities
The Company is exposed to market risk, such as fluctuations in foreign currency exchange rates, commodity prices, (level 1)equity compensation liabilities, and changes in interest rates, which may result in cash flow risks. For exposures not offset within its operations, the Company may enter 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.
Market Risks
Foreign Currency Risk— The Company manufactures and sells its products in North America, South America, Asia, Europe, Australia 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, Mexican peso, and Canadian dollar.
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 June 30, 2019 and 2018 is not material.
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 "Cost of sales" in the condensed consolidated statements of income (loss). Derivative gains and losses included in accumulated other comprehensive income (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 "Cost of sales" in the condensed consolidated statements of income (loss).
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 gains or losses on these contracts is recognized in "Cost of sales" in the condensed consolidated statements of income (loss). The fair value of our private borrowings under our senior credit facilityforeign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the condensed 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 June 30, 2019 and December 31, 2018.
The following table summarizes by position the notional amounts for foreign currency forward contracts as of SeptemberJune 30, 20182019 (all of which mature in 2019):
|
| | | |
| Notional Amount |
Long positions | $ | (26 | ) |
Short positions | $ | 26 |
|
Cash-Settled Share Swap Transactions— In May 2019, the Company entered into an amended and restated 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 June 30, 2019, 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 long-termcurrent assets" in the condensed consolidated balance sheets. The fair value of the Company's equity swap agreement was a net asset position of $3 million at June 30, 2019 and $4 million at December 31, 2018.
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 and tin. 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 condensed consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $25 million as of June 30, 2019 and $27 million as of December 31, 2018. Substantially all of the commodity price hedge contracts mature within one year.
Net Investment Hedge — Foreign Currency Borrowings — The Company has foreign currency denominated debt, €774 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 10, 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 June 30, 2019:
|
| | | | | | | | | |
| | | Carrying Value |
| Balance sheet classification | | June 30, 2019 | | December 31, 2018 |
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 | | $ | 880 |
| | $ | 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 income (loss) three and six month periods ended June 30, 2019 and 2018:
|
| | | | | | | | |
| | Amount of gain (loss) recognized in accumulated OCI or OCL (effective portion): |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2019 |
Commodity price hedge contracts designated as cash flow hedges | | $ | (3 | ) | | $ | 1 |
|
Foreign currency borrowings designated as net investment hedges | | $ | (12 | ) | | $ | 7 |
|
The Company estimates $1 million included in accumulated OCI or OCL as of June 30, 2019 will be reclassified into earnings within the following 12 months.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
9. 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 market valuelowest level of debt with similar maturities, interest rates and risk characteristics (level 2). The fair value of our level 1 debt, as classified ininput that is significant to the fair value hierarchy, was $657 million and $749 million at September 30, 2018 and December 31, 2017, respectively. We have classified $582 million and $634 million as level 2 in the fair value hierarchy at September 30, 2018 and December 31, 2017, respectively, since we utilize valuation inputs that are observable either directly or indirectly. We classified the remaining $13 million and $15 million, consisting of foreign subsidiary debt, as level 3 in the fair value hierarchy at September 30, 2018 and December 31, 2017, respectively.
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 our own assumptions. |
Foreign Currency Forward Contracts — We use derivative financial instruments, principally foreign currency forward purchase
Assets and sales 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 ratesLiabilities Measured at Fair Value 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 currency forward contracts as part of 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 other current liabilities in the consolidated balance sheets. The fair value of our foreign currency forward contracts was a net liability position of less than $1 million at both September 30, 2018 and December 31, 2017.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Recurring Basis
The following table summarizes by major currencypresents assets and liabilities included in the notional amounts for foreign currency forward purchase and sale contractsCompany's condensed consolidated balance sheets as of SeptemberJune 30, 2019 and December 31, 2018 (all of which mature in 2018):that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Fair value hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Derivative instruments: | | | | | | | | | |
Equity swap agreement | Level 2 | | $ | 3 |
| | $ | 3 |
| | $ | 4 |
| | $ | 4 |
|
Commodity contracts | Level 2 | | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (2 | ) |
|
| | | |
| | Notional Amount
in Foreign Currency
|
| | (Millions) |
Canadian dollars | —Sell | (2 | ) |
Chinese yuan | —Purchase | 4 |
|
U.S. dollars | —Purchase | 1 |
|
Cash-settledCash-Settled Share Swap Transactions — We selectively use cash-settled share swaps to reduce market risk associated with our deferred 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 stated amount. As of September 30, 2018, we had hedged our deferred liability related to approximately 250,000 common share equivalents. The fair value of the equity swap agreement is recorded in "Prepayments and other current assetsassets" in the condensed consolidated balance sheets.
Commodity and Foreign Currency 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. The fair value of our equity swap agreementthe Company's foreign currency forward contracts was a net asset position of $5 million and $4less than $1 million at SeptemberJune 30, 20182019 and December 31, 2017, respectively.2018.
Guarantees —We have from time
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
In addition to time issued guaranteesitems 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 first quarter, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the performance of obligations of some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. At September 30, 2018, all of our existing and future material domestic subsidiaries fully and unconditionally guaranteed our senior credit facility and our senior notesaffected reporting units. The Company also performed an impairment analysis on a joint and several basis. The arrangement for the senior credit facility was also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. At September 30, 2018, no assets or capital stock secured our senior notes. For additional information, refer to Note 14, Supplemental Guarantor Condensed 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 the 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 Futaba (U.K.) Limited, formerly our Futaba-Tenneco (U.K.) joint venture. Employer contributions are funded by Tenneco Walker (U.K.) Limited, as the sponsoring employer, and were also funded by Futaba (U.K.) Limited prior to its ceasing, on April 28, 2017, to be an entity in which the Company has an equity interest. 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. 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% of the pension obligation calculated based on U.S. GAAP, for all of the Walker Plans’ participating employers on its balance sheet. As of September 30, 2018 and December 31, 2017, these plans were in an overfunded position and shown under other assets, other on our condensed consolidated balance sheets. At September 30, 2018, all pension contributions under the Walker Plans were current for all of the Walker Plans’ sponsoring and participating employers.
We have issued guarantees through letters of credit in connection with some obligations of our affiliates. As of September 30, 2018, we have guaranteed $27 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.
Financial Instruments — 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 $11 million at September 30, 2018 and December 31, 2017, respectively, and were classified as notes payable recorded in short-term debt in our condensed consolidated balance sheets. Financial instruments received from original equipment (OE) customers and not redeemed totaled $27 million and $10 million at September 30, 2018 and December 31, 2017, respectively, and were classified as other current assets in our condensed consolidated balance sheets. We classify financial instruments received from our customers as other current assets, recorded in prepayments and other, if issued by a financial institution of our customers or as customer notes and accounts, net if issued by our customer.
post-reorganization basis
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time. See Note 6, Goodwill and Other Intangible Assets.
Financial Instruments Not Carried at Fair Value
Estimated fair values of the Company's outstanding debt were:
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Fair value hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt (including current maturities): | | | | | | | | | |
Term loans and senior notes | Level 2 | | $ | 5,247 |
| | $ | 5,035 |
| | $ | 5,307 |
| | $ | 5,218 |
|
The financial instruments received by 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 banksfair value 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 in the U.S. participate in supply chain financing programs under which they securitize their accounts receivables from the Company. Financial institutions participate in the supply chain financing program on an uncommitted basisCompany's public senior notes and can cease purchasing receivables or drafts from the Company's suppliers at any time. If the financial institutions do not continue to purchase receivables or drafts from the Company's suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with the Company which in turn would cause ourprivate borrowings under ourits senior credit facility is based on observable inputs, and its borrowings on the 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. There was no restricted cash balance required at those Chinese subsidiaries at September 30, 2018approximate fair value. The Company also had $91 million and $2$106 million at December 31, 2017.
One of our subsidiaries in Spain is required by law to maintain a cash deposit with a financial institution to guarantee the maximum estimated loss related to a tax audit until a settlement is reached. The cash deposit required was less than $1 million which has been classified as restricted cash on the Company's condensed consolidated balance sheets at both SeptemberJune 30, 20182019 and December 31, 2017. As2018 in other debt whose carrying value approximates fair value, which consists primarily of December 31, 2017, there was a similarforeign debt with maturities of one year or less.
Assets and Liabilities Not Carried at Fair Value
The carrying value of cash deposit required for one of our subsidiaries in Brazil for approximately $1 million. The audit was closed in 2018 and the Brazil subsidiary has nocash equivalents, restricted cash, balance as of September 30, 2018.short and long-term receivables, accounts payable, and short-term debt approximates fair value.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
| |
(4) | Debt and Other Financing Arrangements |
Long-Term Debt
A summary of our long-term debt obligations at SeptemberJune 30, 20182019 and December 31, 20172018 is set forth in the following table:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Principal | | Carrying Amount (1) | | Principal | | Carrying Amount (1) |
Credit Facilities | | | | | | | |
Revolver Borrowings | | | | | | | |
Due 2023 | $ | 250 |
| | $ | 250 |
| | $ | — |
| | $ | — |
|
Term Loans | | | | | | | |
LIBOR plus 1.75% Term Loan A due 2019 through 2023 | 1,658 |
| | 1,649 |
| | 1,700 |
| | 1,691 |
|
LIBOR plus 3.00% Term Loan B due 2019 through 2025(2) | 1,692 |
| | 1,626 |
| | 1,700 |
| | 1,629 |
|
Senior Unsecured Notes | | | | | | | |
$225 million of 5.375% Senior Notes due 2024 | 225 |
| | 222 |
| | 225 |
| | 222 |
|
$500 million of 5.000% Senior Notes due 2026 | 500 |
| | 494 |
| | 500 |
| | 493 |
|
Senior Secured Notes | | | | | | | |
€415 million 4.875% Euro Fixed Rate Notes due 2022 | 472 |
| | 489 |
| | 476 |
| | 496 |
|
€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024 | 341 |
| | 345 |
| | 344 |
| | 349 |
|
€350 million of 5.000% Euro Fixed Rate Notes due 2024 | 398 |
| | 422 |
| | 401 |
| | 427 |
|
Other debt, primarily foreign instruments | 93 |
| | 91 |
| | 108 |
| | 106 |
|
| | | 5,588 |
| | | | 5,413 |
|
Less - maturities classified as current | | | 80 |
| | | | 73 |
|
Total long-term debt | | | $ | 5,508 |
| | | | $ | 5,340 |
|
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Principal | | Carrying Amount (1) | | Principal | | Carrying Amount (1) |
| (Millions) |
Tenneco Inc. — | | | | | | | |
Revolver borrowings due 2022 | $ | 207 |
| | $ | 207 |
| | $ | 244 |
| | $ | 244 |
|
Senior Tranche A Term Loan due 2022 | 375 |
| | 373 |
| | 390 |
| | 388 |
|
5 3/8% Senior Notes due 2024 | 225 |
| | 222 |
| | 225 |
| | 222 |
|
5% Senior Notes due 2026 | 500 |
| | 493 |
| | 500 |
| | 492 |
|
Other subsidiaries — | | | | | | | |
Other long-term debt due in 2020 | 6 |
| | 6 |
| | 5 |
| | 5 |
|
Notes due 2018 through 2028 | 8 |
| | 7 |
| | 12 |
| | 10 |
|
| 1,321 |
| | 1,308 |
| | 1,376 |
| | 1,361 |
|
Less — maturities classified as current | 4 |
| | 4 |
| | 3 |
| | 3 |
|
Total long-term debt | $ | 1,317 |
| | $ | 1,304 |
| | $ | 1,373 |
| | $ | 1,358 |
|
(1) Carrying amount is net of unamortized debt issuance costs and debt discounts.discounts or premiums. Total unamortized debt issuance costs were $11$83 million and $13$90 millionas of SeptemberJune 30, 20182019 and December 31, 2017, respectively, and the total2018. Total unamortized debt (premium) discount, net was $2$(43) million and $(49) million as of both SeptemberJune 30, 20182019 and December 31, 2017.
Short-Term Debt
Our short-term debt includes the current portion of long-term debt, borrowings by the parent company and foreign subsidiaries, which includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements, and borrowings under the U.S. accounts receivable securitization program as discussed in Note 6, Accounts Receivable Securitization and Factoring Programs. Information regarding our short-term debt as of September 30, 2018 and December 31, 2017 is as follows:2018.
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| (Millions) |
Maturities classified as current | $ | 4 |
| | $ | 3 |
|
Short-term borrowings | 236 |
| | 80 |
|
Total short-term debt | $ | 240 |
| | $ | 83 |
|
Financing Arrangements
As of September 30, 2018, our financing arrangements were primarily provided by a committed senior secured credit facility with a syndicate of banks and other financial institutions. The arrangement was 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.
We were required to make quarterly principal payments under the term loan A facility of $5 million through June 30, 2019, $7.5 million beginning September 30, 2019 through June 30, 2020, $10 million beginning September 30, 2020 through March 31, 2022 and a final payment of $260 million is due on May 12, 2022. We excluded the required payments, within the twelve months after September 30, 2018, under the term loan A facility totaling $22.5 million from current liabilities as of September 30, 2018, because we had the intent and the ability to refinance the obligations on a long-term basis by using our revolving credit facility.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
New Credit Facility(2) As of December 31, 2018, the rate on Term Loan B was LIBOR plus 2.75%.
Term Loans
On October 1, 2018, the Company entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the “New"New Credit Facility”Facility") in connection with the acquisition of Federal-Mogul.Federal-Mogul Acquisition. The New Credit Facility consists ofprovides $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. Proceeds fromfacility ("Term Loan B").
Senior Notes
The Company has outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). The Company has outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").
Credit Facilities
The Company had availability on its credit facilities as of June 30, 2019 as follows:
|
| | | | | |
| Credit Facilities as of June 30, 2019 |
| Term | | Available(b) |
| | | (in billions) |
Tenneco Inc. revolving credit facility (a) | 2023 | | $ | 1.2 |
|
Tenneco Inc. Term Loan A | 2023 | | — |
|
Tenneco Inc. Term Loan B | 2025 | | — |
|
Subsidiaries’ credit agreements | 2020 | | 0.2 |
|
| | | $ | 1.4 |
|
| |
(a) | The Company is required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment. |
| |
(b) | Letters of credit reduce the available borrowings under the revolving credit facility, as of June 30, 2019 the revolving credit facility had $20 million in letters of credit outstanding. |
Interest expense associated with the amortization of the debt issuance costs and original issue discounts recognized in the Company's condensed consolidated statements of income (loss) consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Amortization of debt issuance fees | $ | 4 |
| | $ | 1 |
| | $ | 9 |
| | $ | 2 |
|
Included in the table above, is the amortization of debt issuance costs on the revolver, which are $20 million at June 30, 2019 and are recorded in "Other assets" in the condensed consolidated balance sheets. In addition, there was a $3 million and $6 million reduction to interest expense during the three and six months ended June 30, 2019 related to the accretion of the debt premium on the Senior Secured Notes.
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— Other Terms and the term loan A then outstanding, and certain senior credit facilities of Federal-Mogul, and to pay fees and expenses relating to the Acquisition and the financing thereof, and the remainder, including future borrowings under the revolving credit facility, will be used for general corporate purposes.
Each of the Company and Tenneco Automotive Operating Company Inc. 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, Pounds Sterling or Euros.
The New Credit Facility is secured by substantially all domestic assets of the Company and the subsidiary guarantors and by pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. The security for the New Credit Facility will be pari passu with the security for 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 certain foreign subsidiaries of the Company in the chain of ownership of such foreign borrower.
The term loan A and revolving credit facilities will mature on the fifth anniversary of closing, and the term loan B facility will mature on the seventh anniversary of closing. The term loan A facility is payable in 19 consecutive quarterly installments, commencing March 31, 2019, with 5% being paid annually in each of the first two years, 7.5% in the third year, 10% annually in each of the fourth and fifth years and the remainder on the maturity date. The term loan B facility is payable in 27 consecutive quarterly installments, commencing March 31, 2019, with 0.25% being paid in 27 quarterly installments and the remainder on the maturity date.
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.
The New Credit Facility contains representations and warranties and affirmative and negative covenants which are customary for debt facilities of this type. The negative covenants limit the ability of the Company and its restricted subsidiaries to, among other things, (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.Conditions— The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the term loanTerm 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 a 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.
Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions—The New Credit Facility includes customary events of defaultSenior Unsecured Notes and Senior Secured Notes contain covenants that will, among other provisionsthings, limit the Company's ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require 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 does not contain any terms that could accelerate the payment of it as a resultcondition precedent to incurring certain types of a credit rating change.
indebtedness not otherwise permitted, the Company's consolidated fixed
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
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 the Company's existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its 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 the Company's Senior Notes to make distributions to the Company.
As of June 30, 2019, the Company was in compliance with all of its financial covenants.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — The Company has securitization programs for some of its accounts receivables, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at June 30, 2019 and December 31, 2018 are as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Borrowings on securitization programs | $ | 4 |
| | $ | 6 |
|
Off-Balance Sheet Arrangements— In the Company's European and U.S. accounts receivable factoring programs, accounts receivables are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair 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 financial ratios requiredCompany is the servicer of the receivables under some of these arrangements and is responsible for performing all accounts receivable administration functions. Where the senior credit facilityCompany receives a fee to service and monitor these transferred accounts 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 Company's aftermarket customers through a drafting program.
The amounts outstanding for these factoring and drafting arrangements as of SeptemberJune 30, 2018,2019 and the actual ratios we achieved for the first three quarters ofDecember 31, 2018 are as follows: |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (in billions) |
Accounts receivable outstanding and derecognized | $ | 1.1 |
| | $ | 1.0 |
|
The deferred purchase price receivable as of June 30, 2019 and December 31, 2018 is as follows:
|
| | | | | | | | | | | | | | | | | |
| Quarter Ended |
| September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
| Required | | Actual | | Required | | Actual | | Required | | Actual |
Leverage Ratio (maximum) | 3.50 |
| | 2.05 |
| | 3.50 |
| | 1.79 |
| | 3.50 |
| | 2.09 |
|
Interest Coverage Ratio (minimum) | 2.75 |
| | 10.05 |
| | 2.75 |
| | 10.84 |
| | 2.75 |
| | 9.87 |
|
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Deferred purchase price receivable | $ | 52 |
| | $ | 154 |
|
At September 30, 2018,
Proceeds from the senior credit facility included a maximum leverage ratio covenantfactoring of 3.50 and a minimum interest coverage ratio of 2.75, in each case through May 12, 2022. The senior credit facility provided usaccounts receivable qualifying as sales are as follows: |
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in billions) |
Proceeds from factoring qualifying as sales | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.5 |
| | $ | 1.5 |
|
Financing charges associated with the flexibility not to exclude certain otherwise excludable charges incurred in any relevant period from the calculationfactoring of the leverage and interest coverage ratios for such period.
At September 30, 2018, of the $1.6 billion available under the revolving credit facility, we had unused borrowing capacity of $1,393 million with $207 million in outstanding borrowings and no outstanding letters of credit.
receivables are as follows:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Financing charges on sale of receivables(a) | $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 5 |
|
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss). | | | | |
If the Company were not able to factor receivables or sell drafts under either of these programs, its borrowings under its revolving credit agreement might increase. These programs provide the Company with access to cash at costs that are generally favorable to alternative sources of financing and allow the Company to reduce borrowings under its revolving credit agreement.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
11. Pension Plans, Postretirement and Other Employee Benefits
The Company sponsors several defined benefit pension plans ("Pension Benefits") and health care and life insurance benefits ("Other Postretirement Benefits", or "OPEB") for certain employees and retirees around the world.
Components of net periodic benefit cost (credit) for the three months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 |
| Pension | | Other Postretirement Benefits |
| 2019 | | 2018 | |
| US | | Non-U.S. | | US | | Non-U.S. | | 2019 | | 2018 |
Service cost | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Interest cost | 14 |
| | 5 |
| | 2 |
| | 3 |
| | 4 |
| | 1 |
|
Expected return on plan assets | (17 | ) | | (4 | ) | | (3 | ) | | (5 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss | 1 |
| | 2 |
| | 1 |
| | 2 |
| | 1 |
| | 3 |
|
Prior service cost (credit) | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (1 | ) |
Net pension and postretirement costs (credits) | $ | (2 | ) | | $ | 9 |
| | $ | — |
| | $ | 2 |
| | $ | 3 |
| | $ | 3 |
|
| | | | | | | | | | | |
Components of net periodic benefit cost (credit) for the six months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30 |
| Pension | | Other Postretirement Benefits |
| 2019 | | 2018 | |
| US | | Non-U.S. | | US | | Non-U.S. | | 2019 | | 2018 |
Service cost | $ | 1 |
| | $ | 12 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
Interest cost | 27 |
| | 12 |
| | 5 |
| | 6 |
| | 7 |
| | 3 |
|
Expected return on plan assets | (34 | ) | | (9 | ) | | (7 | ) | | (10 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss | 2 |
| | 3 |
| | 2 |
| | 4 |
| | 2 |
| | 4 |
|
Prior service cost (credit) | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (1 | ) |
Net pension and postretirement costs (credits) | $ | (4 | ) | | $ | 18 |
| | $ | — |
| | $ | 5 |
| | $ | 5 |
| | $ | 6 |
|
| | | | | | | | | | | |
12. Income Taxes
For interim tax reporting, we estimate ourthe Company estimates its annual effective tax rate and applyapplies it to our year to dateyear-to-date ordinary income. Jurisdictions where no tax benefit can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The impacteffect of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a particular quarter due to the mix and timing of actual earnings versus annual projections. The tax effects of certain items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
We reported
For the three months ended June 30, 2019, the Company recorded income tax expense of $20$14 million and $16on income from continuing operations before income taxes of $59 million. This compares to income tax expense of $26 million on income from continuing operations before income taxes of $89 million in the same period of 2018.
For the six months ended June 30, 2019, the Company recorded income tax expense of $14 million on loss from continuing operations before income taxes of $46 million. This compares to income tax expense of $51 million on income from continuing operations before income taxes of $188 million in the same period of 2018.
Income tax expense for the three month periodsand six months ended SeptemberJune 30, 2019 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates higher than the U.S. statutory rate and pre-tax losses with no tax benefit.
Income tax expense for the three and six months ended June 30, 2018 and 2017, respectively. The tax expense recorded indiffers from the third quarter of 2018 included a tax benefit of $5 million relatingU.S. statutory rate due primarily to acquisition and restructuring charges, a tax benefit of $10 million relating to a valuation allowance release at our Australian entities and $9$2 million of tax expense for changes in the toll tax, as discussed below. Thepre-tax income taxed at rates lower than the U.S. statutory rate, and pre-tax losses with no tax benefit recorded inbenefit. In addition, during the third quarter of 2017 includedthree and six months ended June 30, 2018, a tax benefit of $12 million primarily relating to valuation allowance releases.
We reported income tax expense of $72$5 million and $41 million in the nine month periods ended September 30, 2018 and 2017, respectively. The tax expense recorded in the first nine months of 2018 included tax benefits of $12 million relating to acquisition and restructuring charges, a tax benefit 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 the first nine months of 2017 included a tax benefit of $12 million primarily relating to valuation allowance releases. In addition, the 2017 tax expense included a $50$7 million tax benefit was recognized related to an antitrust settlement accrual.acquisition charges.
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 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 2018-26final regulations, effective on April 2, 2018,February 5, 2019, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the new guidance,final regulations a $2 million discrete chargebenefit was recorded in income tax expense forduring the second quarter of 2018. On August 1 2018, the IRS issued proposed regulations under section 965, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the new guidance, an additional $9 million discrete charge was recorded in income tax expense for the third quarter of 2018. Material U.S. state income tax conformity to current federal tax code is still pending as of Septembersix months ended June 30, 2018. We will continue to refine our estimates throughout the measurement period provided for in SEC Staff Accounting Bulletin 118, or until our accounting is complete, whichever comes first.2019.
Our losses in various foreign taxing jurisdictions represented sufficient negative evidence to require us to maintain a full valuation allowance against certain of our net deferred tax assets. We evaluate our
The Company evaluates its deferred tax assets quarterly to determine 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 plannedanticipated spin-off of DRiV, the ride performance and aftermarket company, we believeCompany believes it is reasonably possible that sufficient positive evidence may be available to release all, or a portion, of theits valuation allowance in the next twelve months.months in certain jurisdictions. This may result in a one-time tax benefit of up to $53$45 million, primarily related to ChinaSpain and Spain.the Czech Republic.
We believe
The Company believes it is reasonably possible that up to $6$11 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
| |
(6) | Accounts Receivable Securitization and Factoring Programs |
We securitize or factor some of our accounts receivable on a limited recourse basis in the U.S. and Europe. As a servicer under these accounts receivable securitization and factoring programs, we are responsible for performing all accounts receivable administration functions for these securitized and factored 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 April 2017, the U.S. program was amended and extended to April 30, 2019. The first priority facility provides financing of up to $155 million and the second priority facility, which is subordinated to the first priority facility, provides up to an additional $25 million of financing. Both facilities monetize accounts receivable generated in the U.S. that meet certain eligibility requirements and 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 $180 million and $30 million, recorded in short-term debt, at September 30, 2018 and December 31, 2017, respectively.
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.
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 one 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 $152 million and $107 million at September 30, 2018 and December 31, 2017, respectively.
We also factor 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 accounts receivable sold under programs in Europe was $189 million and $218 million at September 30, 2018 and December 31, 2017, respectively. Certain programs in Europe have deferred purchase price arrangements with the banks. We received cash to settle the deferred purchase price of factored receivables for $36 million and $28 million in the three month periods ended September 30, 2018 and 2017, respectively, and $102 million and $77 million in the nine month periods ended September 30, 2018 and 2017, respectively. The cash received to settle the deferred purchase price of factored receivables is included as part of our investing activities in the condensed consolidated statements of cash flows.
If we were not able to securitize or factor our accounts receivable under either the U.S. or European programs, our borrowings under our revolving credit agreement might increase. These accounts receivable securitization and 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
In one of 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. accounts receivable securitization program as a secured borrowing. In one U.S. program and our European accounts receivable factoring programs, we transfer accounts receivable to the acquiring entities and satisfy all of the conditions established under Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, to report the transfer of financial assets as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under the U.S. and European factoring programs approximates the fair value of such receivables. We recognized $1 million interest expense in each of the three month periods ended September 30, 2018 and 2017, and $4 million and $3 million in the nine month periods ended September 30, 2018 and 2017, respectively, relating to our U.S. accounts receivable securitization program. In addition, we recognized a loss of $2 million in each of the three month periods ended September 30, 2018 and 2017, and $5 million and $4 million in the nine month periods ended September 30, 2018 and 2017, respectively, on the sale of accounts receivable in our U.S. and European accounts receivable factoring programs, representing the discount from book values at which these receivables were sold to our banks. The remaining loss on receivables recognized in our condensed consolidated statements of income is unrelated to the aforementioned factoring programs. The discount rate varies based on funding costs incurred by our banks, which averaged approximately 2% during both the first nine months of 2018 and 2017 for the European programs and 3% during both the first nine months of 2018 and 2017 for the U.S. program.
| |
(7) | Restructuring and Other Charges |
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.
In the third quarter of 2018, we incurred $12 million in restructuring and related costs, primarily related to the accelerated move of our Beijing Ride Performance plant, and other cost improvement initiatives. In the first nine months of 2018, we incurred $55 million in restructuring and related costs, primarily related to the accelerated move of our Beijing Ride Performance plant, headcount reduction at a Clean Air manufacturing plant in Germany and other cost improvement initiatives. We expect all assembly to be relocated to the new China facility by the end of the year and the component manufacturing relocation to be complete during the first quarter of 2019.
In the third quarter of 2017, we incurred $20 million in restructuring and related costs, including asset write-downs of $1 million, primarily related to closing a Clean Air manufacturing plant and downsizing Ride Performance operations in Australia and other cost improvement initiatives. In the first nine months of 2017, we incurred $52 million in restructuring and related costs, including asset write-downs of $3 million, primarily related to closing a Clean Air Belgian JIT plant in response to the end of production on a customer platform, closing a Clean Air manufacturing plant and downsizing Ride Performance operations in Australia and other cost improvement initiatives.
The Company's restructuring and other charges are classified in the condensed consolidated statements of income as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Millions) |
Cost of sales | $ | 12 |
| | $ | 8 |
| | $ | 44 |
| | $ | 31 |
|
Engineering, research, and development | — |
| | — |
| | 1 |
| | — |
|
Selling, general, and administrative | — |
| | 11 |
| | 10 |
| | 18 |
|
Depreciation and amortization of other intangibles | — |
| | 1 |
| | — |
| | 3 |
|
| $ | 12 |
| | $ | 20 |
| | $ | 55 |
| | $ | 52 |
|
Other Structural Cost Reductions
The Company has also been tracking other costs, unrelated to manufacturing operations, which are intended to support the achievement of Acquisition synergies. In the third quarter of 2018, these other costs were $4 million, of which $3 million was recorded in selling, general, and administrative and $1 million in other expense, net. In the first nine months of 2018, these other costs were $13 million, of which $8 million was recorded in selling, general, and administrative expenses, $4 million was recorded in engineering, research, and development and $1 million was recorded in other expense, net.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Amounts related to activities that were charged to our restructuring reserves, including costs incurred to support future structural cost reductions, are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 Restructuring Reserve | | 2018 Expenses | | 2018 Cash Payments | | Impact of Exchange Rates | | September 30, 2018 Restructuring Reserve |
| (Millions) |
Employee severance, termination benefits and other related costs | $ | 25 |
| | $ | 55 |
| | $ | (47 | ) | | $ | (1 | ) | | $ | 32 |
|
Under the terms of our amended and restated senior credit agreement that took effect on May 12, 2017, we were allowed to exclude, at our discretion, (i) up to $35 million in 2017 and $25 million each year thereafter of cash restructuring charges and related expenses, with the ability to carry forward any amount not used in one year to the following year, and (ii) 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 for any quarterly period ending after May 12, 2017 in the calculation of the financial covenant ratios required under our senior credit facility. As of September 30, 2018, we elected not to exclude any of the $106 million of allowable cash charges and related expenses recognized in the fourth quarter of 2017 and in the first nine months of 2018 for restructuring related costs and antitrust settlements against the $35 million annual limit for 2017, the $25 million limit for 2018 and the $150 million aggregate limit that was available under the terms of the senior credit facility.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
| |
(8) | Environmental Matters, Legal Proceedings and Product Warranties
|
We are involved in environmental remediation matters, legal proceedings, claims (including warranty claims) and investigations. These matters are typically incidental to the conduct of our business and create the potential for contingent losses. We accrue for 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 U.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 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 not material.
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 seeking to resolve its responsibilities for those sites for which a claim has been received.
The Company expenses or capitalizes, as appropriate, expenditures for ongoing compliance with environmental regulations. As of SeptemberJune 30, 2018, we have2019, the Company has an obligation to remediate or contribute towards the remediation of certain sites, including one Federal Superfund site. Ourthe sites discussed above at which it may be a PRP.
The Company maintains the aggregated estimated share of environmental remediation costs for all these sites on a discounted basis was approximately $17 million at September 30, 2018, of which $3 million is recorded in other current liabilities and $14 million is recorded in deferred credits and other liabilities in ourthe condensed consolidated balance sheet. sheets as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accrued expenses and other current liabilities | $ | 8 |
| | $ | 12 |
|
Deferred credits and other liabilities | 30 |
| | 28 |
|
| $ | 38 |
| | $ | 40 |
|
For those locations where the liability was discounted, the weighted-averageweighted average discount rate used was 2.6 percent. 1.4% and 2.9% at June 30, 2019 and December 31, 2018.
The undiscounted value of the estimated remediation costs was $21 million. OurCompany's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately $2 million in 2018, $3 million in 2019, $1 million each year beginning 2020 through 2022 and $13 million in aggregate thereafter.approximately:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter |
Expected payments | $ | 7 |
| | $ | 5 |
| | $ | 3 |
| | $ | 3 |
| | $ | 2 |
| | $ | 16 |
|
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.
Asset Retirement Obligations
The Company’s primary asset retirement obligations ("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 third party would charge to perform the remediation activities, generally using a present value technique.
The Company maintains ARO liabilities in the condensed consolidated balance sheets as follows: |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accrued expenses and other current liabilities | $ | 3 |
| | $ | 3 |
|
Deferred credits and other liabilities | 12 |
| | 12 |
|
| $ | 15 |
| | $ | 15 |
|
Antitrust Investigations and Litigation
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 the Company, 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's Corporate Leniency Policy. This agreement provides us with important benefits to the 2014 Tenneco Entities in exchange for ourthe Company's self-reporting of matters to the DOJ and ourits continuing full cooperation with the DOJ'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-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-on civil litigation.
On April 27, 2017, the Company received notification from the European Commission (EC)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 the Company. We haveCompany 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
The 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 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 entities 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.
Following the EC’sEC's decision to administratively close its antitrust inquiry into exhaust systems in 2017, receipt by the Company’s receipt2014 Tenneco Entities of conditional leniency from the DOJ in 2014 and discussions during the third quarter of 2017 following the appointment of a special settlement master in the civil putative class action cases pending against the Company and/or certain of its competitors in the U.S.,United States, the Company continues to vigorously defend itself and/or take actions to minimize its potential exposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the Company and its 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 the Company’sits antitrust matters globally, which primarily involves the resolution of civil suits and related claims. Of the $132 million reserve that was established, $64$79 million has beenwas paid through SeptemberJune 30, 20182019 resulting in a remaining reserve of $68$53 million as of SeptemberJune 30, 2018,2019, which is recorded in accrued expenses and other current liabilities.liabilities in the Company's condensed 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.
Our
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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’sCompany'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 the control of the Company.its control. As a result, the Company’sCompany's reserve may change from time to time, and actual costs may vary. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, we dothe Company does not expect that any such change in the reserve will have a material adverse impacteffect on ourthe Company's annual consolidated financial position, results of operations or liquidity.
Other Legal Proceedings, Claims and Investigations
For many years we havethe Company has been and continuecontinues to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. OurThe Company's current docket of active and inactive cases is less than 500 cases nationwide. A small number ofin the United States and less than 50 in Europe.
With respect to the claims have been asserted against one of our subsidiaries by railroad workers alleging exposure to asbestos productsfiled in railroad cars. Thethe United States, the substantial majority of the remaining claims are related to alleged exposure to asbestos in ourthe 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. We believe,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 ourthe 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, wethe Company may experience an increased number of these claims. WeThe Company vigorously defend ourselvesdefends itself against these claims as part of ourits ordinary course of business. In future periods, wethe Company could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us.the Company. To date, with respect to claims that have proceeded sufficiently through the judicial process, we havethe Company has regularly achieved favorable resolutions. Accordingly, wethe Company presently believebelieves that these asbestos-related claims will not have a material adverse impacteffect on our futurethe Company's annual consolidated financial position, results of operations or liquidity.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
We areThe 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 notthe Company does expect the legal proceedings, claims or investigations currently pending against usit will have any material adverse impacteffect on ourits annual consolidated financial position, results of operations or liquidity.
Warranty MattersAccounting Standards Issued But Not Yet Adopted
We provide warrantiesIntangibles— 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 interim and annual periods for the Company beginning on someJanuary 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 our products.adoption. The warranty terms vary but range fromCompany is currently evaluating the potential effect of this new guidance on its 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 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, 2020 with early adoption permitted. The Company is currently evaluating the potential effect of this new guidance on its 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 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 financial statements.
3. Acquisitions and Divestitures
The preliminary allocation of the purchase price of 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 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, requiringacquisition 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 existed as of the acquisition date that, if known, would have resulted in revised estimated values of those assets or liabilities as of that date. Any adjustments to the reserve. The reserve isamounts recorded in purchase accounting that do not qualify as measurement period adjustments are included in both current and long-term liabilities on the condensed consolidated balance sheets.
Below is a table that shows the activityearnings in the warranty accrual accounts:period identified.
The fair values of the assets acquired and liabilities assumed are based on preliminary estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the Company believes these preliminary estimates provide a reasonable basis for estimating the fair value of the assets acquired and liabilities assumed, it will continue to evaluate available information prior to finalization of the amounts.
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (Millions) |
Beginning Balance January 1, | $ | 26 |
| | $ | 20 |
|
Accruals related to product warranties | 13 |
| | 13 |
|
Reductions for payments made | (11 | ) | | (8 | ) |
Ending Balance September 30, | $ | 28 |
| | $ | 25 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Earnings per share of common stock outstanding were computed as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Millions Except Share and Per Share Amounts) |
Basic earnings per share — | | | | | | | |
Net income attributable to Tenneco Inc. | $ | 54 |
| | $ | 83 |
| | $ | 162 |
| | $ | 139 |
|
Weighted average shares of common stock outstanding | 51,272,618 |
| | 52,508,078 |
| | 51,247,664 |
| | 53,265,149 |
|
Earnings per share of common stock | $ | 1.05 |
| | $ | 1.57 |
| | $ | 3.17 |
| | $ | 2.61 |
|
Diluted earnings per share — | | | | | | | |
Net income attributable to Tenneco Inc. | $ | 54 |
| | $ | 83 |
| | $ | 162 |
| | $ | 139 |
|
Weighted average shares of common stock outstanding | 51,272,618 |
| | 52,508,078 |
| | 51,247,664 |
| | 53,265,149 |
|
Effect of dilutive securities: | | | | | | | |
Restricted stock, PSUs and RSUs
| 93,956 |
| | 89,666 |
| | 95,022 |
| | 106,320 |
|
Stock options | 35,255 |
| | 89,912 |
| | 53,241 |
| | 130,395 |
|
Weighted average shares of common stock outstanding including dilutive securities | 51,401,829 |
| | 52,687,656 |
| | 51,395,927 |
| | 53,501,864 |
|
Earnings per share of common stock | $ | 1.05 |
| | $ | 1.57 |
| | $ | 3.16 |
| | $ | 2.60 |
|
Öhlins Intressenter AB Acquisition
The purchase price for the 90.5% ownership interest in Öhlins was $162 million. The remaining 9.5% ownership interest in Öhlins (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”). Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins Acquisition to sell the KÖ Interest to the Company. As the redemption of September 30, 2018 and 2017,this redeemable noncontrolling interest is not solely within the outstanding options to purchase shares of common stock that were not includedCompany's control, the noncontrolling interest is presented in the computationtemporary equity section of diluted earnings per share because they were anti-dilutive were 124,865the Company's condensed consolidated balance sheets. The fair value of the KÖ Interest was $17 million and 127,359 shares forrepresents its current redemption value at June 30, 2019.
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 2019:
|
| | | | | | | | | | | |
| Initial Allocation | | Adjustments | | Revised Allocation |
Cash, cash equivalents and restricted cash | $ | 4 |
| | $ | — |
| | $ | 4 |
|
Customer notes and accounts receivable | 19 |
| | — |
| | 19 |
|
Inventories | 31 |
| | — |
| | 31 |
|
Prepayments and other current assets | 2 |
| | — |
| | 2 |
|
Property, plant, and equipment | 8 |
| | — |
| | 8 |
|
Goodwill | 28 |
| | 2 |
| | 30 |
|
Intangibles | 135 |
| | (2 | ) | | 133 |
|
Other assets | 9 |
| | — |
| | 9 |
|
Total assets acquired | $ | 236 |
| | $ | — |
| | $ | 236 |
|
| | | | |
|
Short-term debt, including current maturities of long-term debt | $ | 10 |
| | $ | — |
| | $ | 10 |
|
Accounts payable | 11 |
| | — |
| | 11 |
|
Accrued compensation and employee benefits | 12 |
| | — |
| | 12 |
|
Deferred income taxes | 18 |
| | — |
| | 18 |
|
Deferred credits and other liabilities | 6 |
| | — |
| | 6 |
|
Total liabilities assumed | 57 |
| | — |
| | 57 |
|
Redeemable noncontrolling interest | 17 |
| | — |
| | 17 |
|
Net assets acquired | $ | 162 |
| | $ | — |
| | $ | 162 |
|
The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the inventory, intangible assets, right of use assets, and deferred income tax assets and liabilities.
Goodwill of $30 million was recognized as part of the acquisition and is reflected in the Ride Performance segment. During the three months ended SeptemberJune 30, 20182019, the Company adjusted the initial allocation of the total purchase consideration, which resulted in a $2 million increase to goodwill. The goodwill consists of the Company’s expected future economic benefits that will result from the acquisition of Öhlins’ technology, which will allow the Company to more rapidly grow its product offerings for current and 2017, respectively, and 124,606 and 834 sharesfuture customers, as well as assist the Company in obtaining a larger share of business in developing mobility markets. None of the goodwill is deductible for the nine months ended September 30, 2018 and 2017, respectively.
tax purposes.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Common Stock — As discussed in Note 2,
Other intangible assets acquired include the following:
|
| | | | | |
| Estimated Fair Value | | Weighted-Average Useful Lives |
Definite-lived intangible assets: | | | |
Customer platforms and relationships | $ | 37 |
| | 10 years |
Technology rights | 41 |
| | 10 years |
Total definite-lived intangible assets | 78 |
| | |
| | | |
Indefinite-lived intangible assets: | | | |
Trade names and trademarks | 55 |
| | |
Total | $ | 133 |
| | |
The Company recorded a $5 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation and recognized $3 million and $5 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold.
Pro Forma Results
Pro forma results of operations have not been presented because the effects of the Öhlins Acquisition were not material to the Company’s condensed consolidated results of operations.
Acquisition of Federal-Mogul pursuant
During the six months ended June 30, 2019, the Company made measurement period adjustments based on further evaluation of available information to the Amendedfacts and Restated Certificate of Incorporation, a new class of Class B Common Stock was created and the Company’s existing common stock was reclassifiedcircumstances that existed as Class A Common Stock. See Note 2, Acquisition of Federal-Mogul for additional information.
Equity Plans — We have granted a variety of awards, including common stock, restricted stock, restricted stock units (RSUs), performance share units (PSUs), stock appreciation rights (SARs), and stock options to our directors, officers, and employees.
Accounting Methods — Prior to 2018, for employees eligible to retire at grant date, we immediately expensed stock options and restricted stock. In 2018, we prospectively changed our 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, we amortize the expense for the share-based awards over a period starting at the grant date to the date an employee becomes retirement eligible.acquisition date.
Stock Options — There have been no stock options granted since 2014. There is no compensation expense in each of the three month periods ended September 30, 2018 and 2017, and the nine month periods ended September 30, 2018. There is less than $1 million of compensation expense (net of tax) for the nine month period ended September 30, 2017 related to nonqualified stock options, which was recorded in selling, general, and administrative expense. This had no impact on basic or diluted earnings per share for the three month periods ended September 30, 2018 and 2017 and nine month period ended September 30, 2018 and a decrease of less than $0.01 in both basic and diluted earnings per share for the nine month period ended September 30, 2017.
As of September 30, 2018, there was no unrecognized compensation cost related to our stock option awards.
Cash received from stock option exercises for the nine month periods ended September 30, 2018 and 2017 was less than $1 million and $7 million, respectively.
Stock options exercised in the first nine months of 2018 and 2017 generated a tax benefit of less than $1 million and $2 million, respectively.
The following table reflects the status and activity for all options to purchase common stock for the period indicated:
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Shares Under Option | | Weighted Avg. Exercise Prices | | Weighted Avg. Remaining Life in Years | | Aggregate Intrinsic Value |
| | | | | | | (Millions) |
Outstanding Stock Options | | | | | | | |
Outstanding, January 1, 2018 | 318,016 |
| | $ | 43.60 |
| | 2.6 | | $ | 5 |
|
Exercised | (4,607 | ) | | 26.78 |
| | | | — |
|
Outstanding, March 31, 2018 | 313,409 |
| | 43.84 |
| | 2.1 | | 4 |
|
Forfeited | (2,368 | ) | | 54.34 |
| | | | — |
|
Outstanding, June 30, 2018 | 311,041 |
| | 43.76 |
| | 1.8 | | 2 |
|
Exercised | (11,420 | ) | | 29.93 |
| | | | — |
|
Outstanding, September 30, 2018 | 299,621 |
| | $ | 44.29 |
| | 2.4 | | $ | 1 |
|
As mentioned above, there have been no stock options granted since 2014. Accordingly, no options vested during the nine month period ended September 30, 2018. The total fair value of shares vested from options that were granted prior to 2015 for the nine month period ended September 30, 2017 was $2 million.
Long-Term Performance Units, PSUs, RSUs and SARs — Long-term performance units, RSUs granted prior to 2018 and SARs are paid in cash (cash-settled awards) and recognized as a liability based upon their fair value. PSUs and RSUs granted in 2018 onward (share-settled RSUs) are settled in shares upon vesting and recognized in equity based on their fair value. As of September 30, 2018, $3 million of total unrecognized compensation costs is expected to be recognized on the cash-settled awards over a weighted-average period of approximately 1.2 years.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Compensation expense for restricted stock, RSUs, long-term performance units, PSUs and SARs (net of tax) was $3 million and $2 million for the three month periods ended September 30, 2018 and 2017, respectively, and $7 million and $10 million for the nine month periods ended September 30, 2018 and 2017, respectively, and was recorded in selling, general, and administrative expense.
The following table reflectssummarizes the status for all nonvested restricted shares, share-settled RSUspreliminary fair values of assets acquired and PSUs for the period indicated:
|
| | | | | | | | | | | | | | | | | | | | |
| Restricted Shares | | Share-Settled RSUs | | PSUs |
| Shares | | Weighted Avg. Grant Date Fair Value | | Shares | | Weighted Avg. Grant Date Fair Value | | Shares | | Weighted Avg. Grant Date Fair Value |
Nonvested balance at January 1, 2018 | 410,251 |
| | $ | 49.95 |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
Granted | 17,440 |
| | 55.05 |
| | 253,257 |
| | 55.02 |
| | 214,348 |
| | 50.75 |
|
Vested | (168,409 | ) | | 47.08 |
| | — |
| | — |
| | — |
| | — |
|
Forfeited | (5,108 | ) | | 48.68 |
| | (1,362 | ) | | 55.04 |
| | — |
| | — |
|
Nonvested balance at March 31, 2018 | 254,174 |
| | 52.23 |
| | 251,895 |
| | 55.02 |
| | 214,348 |
| | 50.75 |
|
Granted | 1,573 |
| | 47.97 |
| | 16,995 |
| | 47.17 |
| | 25,957 |
| | 35.64 |
|
Vested | (60,434 | ) | | 49.89 |
| | (192 | ) | | 55.04 |
| | — |
| | — |
|
Forfeited | (2,482 | ) | | 57.15 |
| | (8,001 | ) | | 55.04 |
| | (4,051 | ) | | 50.75 |
|
Nonvested balance at June 30, 2018 | 192,831 |
| | 53.14 |
| | 260,697 |
| | 54.51 |
| | 236,254 |
| | 49.28 |
|
Granted | — |
| | — |
| | 14,903 |
| | 42.22 |
| | 8,623 |
| | 32.24 |
|
Vested | (6,443 | ) | | 53.31 |
| | — |
| | — |
| | — |
| | — |
|
Forfeited | (1,210 | ) | | 62.79 |
| | (6,408 | ) | | 55.04 |
| | (5,882 | ) | | 50.75 |
|
Nonvested balance at September 30, 2018 | 185,178 |
| | $ | 53.07 |
| | 269,192 |
| | $ | 57.51 |
| | 238,995 |
| | $ | 48.68 |
|
The fair value of restricted stock grants is equal to the averageliabilities assumed as of the highacquisition date and low trading price of our common stock on the date of grant. As of Septembermeasurement period adjustments made during the six months ended June 30, 2018, approximately $4 million of total unrecognized compensation costs related to restricted stock awards is expected to be recognized over a weighted-average period of approximately 1.2 years. The total fair value of restricted shares vested was $11 million and $14 million at September 30, 2018 and 2017, respectively.2019:
|
| | | | | | | | | | | |
| Initial Allocation | | Adjustments | | Revised Allocation |
Cash, cash equivalents and restricted cash | $ | 277 |
| | $ | — |
| | $ | 277 |
|
Customer notes and accounts receivable | 1,258 |
| | — |
| | 1,258 |
|
Other receivables | 62 |
| | — |
| | 62 |
|
Inventories | 1,551 |
| | (5 | ) | | 1,546 |
|
Prepayments and other current assets | 198 |
| | 1 |
| | 199 |
|
Property, plant and equipment | 1,711 |
| | (28 | ) | | 1,683 |
|
Long-term receivables | 48 |
| | — |
| | 48 |
|
Goodwill | 825 |
| | (40 | ) | | 785 |
|
Intangibles | 1,530 |
| | 71 |
| | 1,601 |
|
Investments in nonconsolidated affiliates | 528 |
| | (15 | ) | | 513 |
|
Deferred income taxes | 166 |
| | — |
| | 166 |
|
Other assets | 55 |
| | (6 | ) | | 49 |
|
Total assets acquired | $ | 8,209 |
| | $ | (22 | ) | | $ | 8,187 |
|
| | | | | |
Short-term debt, including current maturities of long-term debt | $ | 130 |
| | $ | — |
| | $ | 130 |
|
Accounts payable | 957 |
| | — |
| | 957 |
|
Accrued compensation and employee benefits | 231 |
| | — |
| | 231 |
|
Accrued income taxes | 49 |
| | — |
| | 49 |
|
Accrued expenses and other current liabilities | 522 |
| | (8 | ) | | 514 |
|
Long-term debt | 1,315 |
| | — |
| | 1,315 |
|
Deferred income taxes | 56 |
| | — |
| | 56 |
|
Pension and postretirement benefits | 879 |
| | — |
| | 879 |
|
Deferred credits and other liabilities | 124 |
| | (5 | ) | | 119 |
|
Total liabilities assumed | 4,263 |
| | (13 | ) | | 4,250 |
|
Redeemable noncontrolling interests | 96 |
| | (8 | ) | | 88 |
|
Noncontrolling interests | 143 |
| | (1 | ) | | 142 |
|
Net assets and noncontrolling interests acquired | $ | 3,707 |
| | $ | — |
| | $ | 3,707 |
|
The fair value of share-settled RSU grants is equal to the averageprimary areas of the high and low tradingpreliminary purchase price of our common stock on the date of the grant and vest ratably over a three-year period. As of September 30, 2018, approximately $10 million of total unrecognized compensation costs relatedallocation that are not yet finalized relate to share-settled RSUs is expected to be recognized over a weighted-average period of approximately 2.4 years.
PSU grants are subject to service, market and performance conditions. PSU grants are valued based on the fair value of property, plant and equipment; intangible assets; unconsolidated affiliates; deferred income tax assets and liabilities; redeemable noncontrolling interests; and noncontrolling interests.
Goodwill of $412 million was allocated to the highPowertrain segment, $318 million was allocated to the Motorparts segment, and low trading price of our common stock at grant date and at$55 million was allocated to the end of a three-year period, if performance measures are met. As of September 30, 2018, approximately $8 million of total unrecognized compensation costs related to PSUs is expected to be recognized over a weighted-average period of approximately 2.4 years.
Share Repurchase Program — 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 millionRide Performance segment. The goodwill consists of the Company's outstanding common stock.
In February 2017, our Boardexpected future economic benefits that will arise from expected future product sales and synergies from combining Federal-Mogul with its existing portfolio of Directors authorized the repurchase of up to $400 millionproducts. None of the Company's outstanding common stock over the next three years, inclusive of $112 million that remained authorized under earlier repurchase programs. The Company anticipates acquiring the shares through open market or privately negotiated transactions, which will be funded from cash flow 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. We did not repurchase any shares through this program in the nine months ended September 30, 2018. Since we announced the share repurchase program in January 2015, we have repurchased 11.3 million sharesgoodwill is deductible for $607 million through September 30, 2018.tax purposes.
Treasury shares were 14,592,888 shares at September 30, 2018 and December 31, 2017, respectively.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Dividends — On FebruaryOther intangible assets acquired include the following:
|
| | | | | |
| Estimated Fair Value | | Weighted-Average Useful Lives |
Definite-lived intangible assets: | | | |
Customer platforms and relationships | $ | 978 |
| | 10 years |
Technology rights | 68 |
| | 10 years |
Packaged kits know-how | 54 |
| | 10 years |
Catalogs | 40 |
| | 10 years |
Licensing agreements | 64 |
| | 4.5 years |
Land use rights | 30 |
| | 42.8 years |
Total definite-lived intangible assets | 1,234 |
| | 10.5 years |
| | | |
Indefinite-lived intangible assets: | | | |
Trade names and trademarks | 367 |
| | |
Total | $ | 1,601 |
| | |
The Company recorded a $152 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The Company recognized $3 million and $44 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold. The Company recognized $105 million as a non-cash charge to cost of goods sold during the year ended December 31, 2018 and expects to recognize the remaining amortization of the inventory step-up during 2019.
In addition, the Company acquired $83 million in redeemable noncontrolling interests related to a subsidiary from the Federal-Mogul Acquisition. The Company initiated the process to make a tender offer for 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 condensed consolidated balance sheets. The carrying amount for this redeemable noncontrolling interest represents its current redemption value at June 30, 2019.
The Company's condensed consolidated statements of income (loss) for the six months ended June 30, 2019 included net sales and operating revenues of $3,762 million and net income of $17 million associated with the operating results of Federal-Mogul.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the Federal-Mogul Acquisition, and the related financing, if the transaction had occurred as of January 1, 2017. The pro forma results are not necessarily indicative of either the actual consolidated results had the Federal-Mogul Acquisition occurred on January 1, 2017 or of future consolidated operating results.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales and operating revenues | $ | 4,504 |
| | $ | 4,618 |
| | $ | 8,988 |
| | $ | 9,298 |
|
Earnings (loss) before income taxes and noncontrolling interests | $ | 171 |
| | $ | 232 |
| | $ | 201 |
| | $ | 458 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 43 |
| | $ | 78 |
| | $ | (27 | ) | | $ | 171 |
|
Basic earnings (loss) per share of common stock | $ | 0.54 |
| | $ | 0.97 |
| | $ | (0.33 | ) | | $ | 2.13 |
|
Diluted earnings (loss) per share of common stock | $ | 0.54 |
| | $ | 0.96 |
| | $ | (0.33 | ) | | $ | 2.12 |
|
These pro forma amounts have been calculated after applying the Company announced the reinstatement of a quarterly dividend program under which we expect to pay quarterly dividends of $0.25 per share on our common stock, representing planned annual dividends of $1.00 per share. We paid a quarterly dividend of $0.25 per share in each of the first three quarters of 2017 and 2018. Dividends declared and paid were $39 million and $40 million in the nine month periods ended September 30, 2018 and 2017, respectively. As a result of the Federal-Mogul transaction,Company's accounting policies and the resulting higher share count,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 quarterly dividend payment will increasenew credit facility, debt issuance costs, and fair value adjustments to $20 million beginning in the fourth quarter. In viewdebt; and (iv) cost of our current stock price and overall sector valuations, we will evaluate the best methodology to return this value to our shareholders. This may result in a change in the dividend and returning that capital via share buybacks in a comparable amount.
| |
(11) | Pension Plans, Postretirement and Other Employee Benefits |
Net periodic pension and other postretirement benefit costs consist of the following components:goods sold
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| Pension | | Postretirement |
| 2018 | | 2017 | | 2018 | | 2017 |
| U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | U.S. |
| (Millions) |
Service cost — benefits earned during the period | $ | 1 |
| | $ | 3 |
| | $ | 1 |
| | $ | 3 |
| | $ | — |
| | $ | — |
|
Interest cost (a) | 3 |
| | 3 |
| | 2 |
| | 4 |
| | 2 |
| | 1 |
|
Expected return on plan assets (a) | (4 | ) | | (5 | ) | | (4 | ) | | (4 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss (a) | 1 |
| | 2 |
| | 1 |
| | 1 |
| | 2 |
| | 2 |
|
Prior service cost (a) | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
|
Net pension and postretirement costs | $ | 1 |
| | $ | 3 |
| | $ | — |
| | $ | 5 |
| | $ | 4 |
| | $ | 3 |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| Pension | | Postretirement |
| 2018 | | 2017 | | 2018 | | 2017 |
| U.S. | | Foreign | | U.S. | | Foreign | | U.S. | | US |
| (Millions) |
Service cost — benefits earned during the period | $ | 1 |
| | $ | 8 |
| | $ | 1 |
| | $ | 7 |
| | $ | — |
| | $ | — |
|
Interest cost (a) | 8 |
| | 9 |
| | 7 |
| | 10 |
| | 5 |
| | 4 |
|
Expected return on plan assets (a) | (11 | ) | | (15 | ) | | (11 | ) | | (19 | ) | | — |
| | — |
|
Settlement loss (a) | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss (a) | 3 |
| | 6 |
| | 4 |
| | 6 |
| | 6 |
| | 5 |
|
Prior service cost (credit) (a) | — |
| | — |
| | — |
| | 1 |
| | (1 | ) | | (1 | ) |
Net pension and postretirement costs | $ | 1 |
| | $ | 8 |
| | $ | 7 |
| | $ | 5 |
| | $ | 10 |
| | $ | 8 |
|
(a) Recorded in other expense, net.
For the nine months ended September 30, 2018, we made pension contributions of $1 million and $9 million for our domestic and foreign pension plans, respectively. Based on current actuarial estimates, we believe we will be required to contribute approximately $5 million for the remainder of 2018 for domestic and foreign plans. Pension contributions beyond 2018 will be required, but those amounts will vary based upon many factors including, for example, the performance of our pension fund investments during 2018.
We made postretirement contributions of approximately $6 million during the first nine months of 2018. Based on current actuarial estimates, we believe we will be required to contribute approximately $3 million for the remainder of 2018.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
In February 2016,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.
Assets Held for Sale
On March 1, 2019, the Company launched a voluntary program to buy out active employees and retirees who had earned benefitssold its wipers business in the U.S. pension plans. This program was completedMotorparts segment for a sale price of $29 million, subject to adjustment based on terms of the sale agreement. Proceeds from the sale were $22 million, subject to customary working capital adjustments. Certain assets and all cash payments were made from pension plan assets to those who elected to takeliabilities of the buyoutbusiness are still classified as held for sale within the condensed consolidated balance sheet as of June 30, 2017. In connection with this program,2019 and are expected to transfer in the Company contributed $10 million intosecond half of 2019.
The related assets and liabilities were classified as held for sale as of June 30, 2019 and December 31, 2018:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets | | | |
Inventories | $ | 3 |
| | $ | 33 |
|
Other current assets | — |
| | 5 |
|
Long-lived assets | 1 |
| | 23 |
|
Total assets held for sale | $ | 4 |
| | $ | 61 |
|
Liabilities | | | |
Accounts payable | $ | 2 |
| | $ | 21 |
|
Accrued liabilities | — |
| | 7 |
|
Other liabilities | 1 |
| | 11 |
|
Total liabilities held for sale | $ | 3 |
| | $ | 39 |
|
4. Restructuring Charges and Asset Impairments, Net
Restructuring and Other Charges
The Company's restructuring activities are undertaken as necessary to execute management's strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the pension trustCompany's businesses and recognized a non-cash settlement lossto relocate operations to best cost locations.
The Company's restructuring charges consist primarily of $6employee costs (principally severance and/or termination benefits), and facility closure and other costs.
For the three and six months ended June 30, 2019 and 2018, restructuring charges, net and asset impairments by segment are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Clean Air | $ | 15 |
| | $ | 17 |
| | $ | 20 |
| | $ | 18 |
|
Powertrain | 17 |
| | — |
| | 18 |
| | — |
|
Ride Performance | 22 |
| | 9 |
| | 35 |
| | 17 |
|
Motorparts | 7 |
| | 1 |
| | 11 |
| | 4 |
|
Corporate | — |
| | 2 |
| | 1 |
| | 2 |
|
| $ | 61 |
| | $ | 29 |
| | $ | 85 |
| | $ | 41 |
|
Presented within the table above are asset impairments of $1 million in the first quarter of 2017.
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 investmentClean Air segment and administrative purposes. Each of the plans participating$1 million 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.
Amounts recognized for pension and postretirement benefits in other comprehensive income forMotorparts segment incurred during the three and ninesix months ended SeptemberJune 30, 20182019.
During the three and 2017 includesix months ended June 30, 2019, the following components:Company incurred $3 million and $9 million in restructuring and related costs and reduced previously recorded estimates by $2 million related to a restructuring plan designed to achieve a portion of the synergies the Company anticipates achieving in connection with the Federal-Mogul Acquisition. Pursuant to the plan, the Company will reduce its headcount globally across all segments. The Company began implementing headcount reductions in January 2019 and these actions will continue throughout 2019. The Federal-Mogul Acquisition is discussed further in Note 3, Acquisitions and Divestitures. During the three and six months ended June 30, 2019, the Company also incurred $17 million and $28 million in restructuring and related costs related to plant relocation and closures within its Ride Performance segment. The Company expects the actions to be completed by the second quarter of 2020.
During the three and six months ended June 30, 2018, the Company incurred $7 million and $14 million in restructuring and related costs related to the accelerated move of the Beijing Ride Performance plant.
Restructuring Reserve Rollforward
Amounts related to activities that were charges to restructuring reserves, including costs incurred to support future structural cost reductions, by reportable segments are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| 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: | | | | | | | | | | | |
Amortization of prior service cost included in net periodic pension and postretirement costs | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Amortization of actuarial loss included in net periodic pension and postretirement costs | 5 |
| | (1 | ) | | 4 |
| | 4 |
| | (2 | ) | | 2 |
|
Other comprehensive income – pension benefits | $ | 5 |
| | $ | (1 | ) | | $ | 4 |
| | $ | 5 |
| | $ | (2 | ) | | $ | 3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| 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: | | | | | | | | | | | |
Amortization of prior service credit included in net periodic pension and postretirement costs | $ | (1 | ) | | $ | — |
| | $ | (1 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
Amortization of actuarial loss included in net periodic pension and postretirement costs | 15 |
| | (3 | ) | | 12 |
| | 15 |
| | (5 | ) | | 10 |
|
Settlement charge | — |
| | — |
| | — |
| | 6 |
| | (2 | ) | | 4 |
|
Other comprehensive income – pension benefits | $ | 14 |
| | $ | (3 | ) | | $ | 11 |
| | $ | 21 |
| | $ | (7 | ) | | $ | 14 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
| |
(12) | New Accounting Pronouncements |
Adoption of New Accounting Standards
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new guidance improved the presentation of net periodic pension and postretirement benefit costs. We retrospectively adopted this standard in the first quarter of 2018. We recorded other pension and postretirement costs of $4 million and $10 million in other expense, net for the three and nine month periods ended September 30, 2018, respectively. Prior to adoption, this amount would have been recorded in selling, general, and administrative expenses and cost of sales in the condensed consolidated statements of income. Prior year net pension and postretirement costs of $3 million and $10 million for the three and nine month periods ended September 30, 2017, respectively, have been reclassified from selling, general, and administrative expenses and cost of sales to other expense, net to conform to the current year presentation. Of the $10 million adjustment for the nine month period ended September 30, 2017, $6 million was a non-cash charge related to a voluntary program to buy out active employees and retirees who had earned benefits in the U.S. pension plans.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows - Restricted Cash (Topic 230) to eliminate diversity in practice in the presentation of restricted cash and restricted cash equivalents in the statement of cash flows. We retrospectively adopted this standard in the first quarter of 2018 with no material impact. Prior year amounts have been reclassified to conform to current year presentation.
In October 2016, the FASB issued ASU 2016-16, Income Taxes - Intra Entity Transfers of Assets Other Than Inventory (Topic 740). The standard changed 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 standard did not change the current accounting for the income taxes related to transfers of inventory. We adopted this standard on January 1, 2018 using the modified retrospective method. The cumulative effect of the adoption was recognized as an increase to accumulated deficit of $2 million.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of certain cash receipts and cash payments (Topic 230). This update addressed eight specific cash flow issues with the objective of reducing the diversity in practice. We retrospectively adopted this standard in the first quarter of 2018. We recorded $36 million and $102 million as an investing activity in the condensed consolidated statements of cash flows for the cash we received to settle the deferred purchase price of factored receivables for the three and nine month periods ended September 30, 2018, respectively. Prior to adoption, this amount would have been recorded as an operating activity. Prior period amounts of $28 million and $77 million for the three and nine month periods ended September 30, 2017, respectively, have been reclassified from operating to investing activities to conform to the current year presentation.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), an amendment on revenue recognition. The amendment in this update created Topic 606, Revenue from Contracts with Customers, and superseded the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the industry topics of the codification. In addition, the amendment superseded the cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and created a new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The core principle of Topic 606 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 expects to be entitled in exchange for those goods or services. We adopted Topic 606 on January 1, 2018, using the modified retrospective method. The cumulative effect of the adoption was recognized as a decrease to accumulated deficit of $1 million on January 1, 2018. Please refer to Note 15, Revenue for further discussion of the adoption of this standard.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Reportable Segments | | Corporate | | Total |
Balance as of December 31, 2018 | $ | 17 |
| | $ | 15 |
| | $ | 25 |
| | $ | 43 |
| | $ | 100 |
| | $ | 3 |
| | $ | 103 |
|
Provisions | 5 |
| | 1 |
| | 13 |
| | 4 |
| | 23 |
| | 1 |
| | 24 |
|
Payments | (6 | ) | | (3 | ) | | (13 | ) | | (14 | ) | | (36 | ) | | (2 | ) | | (38 | ) |
Balance as of March 31, 2019 | 16 |
| | 13 |
| | 25 |
| | 33 |
| | 87 |
| | 2 |
| | 89 |
|
Provisions | 14 |
| | 17 |
| | 22 |
| | 8 |
| | 61 |
| | — |
| | 61 |
|
Revisions to estimates | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | (2 | ) |
Payments | (2 | ) | | (4 | ) | | (19 | ) | | (7 | ) | | (32 | ) | | (1 | ) | | (33 | ) |
Balance as of June 30, 2019 | $ | 28 |
| | $ | 26 |
| | $ | 28 |
| | $ | 32 |
| | $ | 114 |
| | $ | 1 |
| | $ | 115 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Reportable Segments | | Corporate | | Total |
Balance as of December 31, 2017 | $ | 14 |
| | $ | — |
| | $ | 7 |
| | $ | 4 |
| | $ | 25 |
| | $ | — |
| | $ | 25 |
|
Provisions | 1 |
| | — |
| | 8 |
| | 3 |
| | 12 |
| | — |
| | 12 |
|
Payments | (5 | ) | | — |
| | (9 | ) | | (2 | ) | | (16 | ) | | — |
| | (16 | ) |
Balance as of March 31, 2018 | 10 |
| | — |
| | 6 |
| | 5 |
| | 21 |
| | — |
| | 21 |
|
Provisions | 17 |
| | — |
| | 9 |
| | 1 |
| | 27 |
| | 2 |
| | 29 |
|
Payments | (3 | ) | | — |
| | (10 | ) | | (2 | ) | | (15 | ) | | — |
| | (15 | ) |
Balance as of June 30, 2018 | $ | 24 |
| | $ | — |
| | $ | 5 |
| | $ | 4 |
| | $ | 33 |
| | $ | 2 |
| | $ | 35 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
The following table provides a summary of the Company's restructuring liabilities and related activity for each type of exit costs:
|
| | | | | | | | | | | |
| Employee Costs | | Facility Closure and Other Costs | | Total |
Balance as of December 31, 2018 | $ | 98 |
| | $ | 5 |
| | $ | 103 |
|
Provisions | 11 |
| | 13 |
| | 24 |
|
Payments | (25 | ) | | (13 | ) | | (38 | ) |
Balance as of March 31, 2019 | 84 |
| | 5 |
| | 89 |
|
Provisions | 44 |
| | 17 |
| | 61 |
|
Revisions to estimates | (2 | ) | | — |
| | (2 | ) |
Payments | (16 | ) | | (17 | ) | | (33 | ) |
Balance as of June 30, 2019 | $ | 110 |
| | $ | 5 |
| | $ | 115 |
|
|
| | | | | | | | | | | |
| Employee Costs | | Facility Closure and Other Costs | | Total |
Balance as of December 31, 2017 | $ | 19 |
| | $ | 6 |
| | $ | 25 |
|
Provisions | 10 |
| | 2 |
| | 12 |
|
Payments | (13 | ) | | (3 | ) | | (16 | ) |
Balance as of March 31, 2018 | 16 |
| | 5 |
| | 21 |
|
Provisions | 26 |
| | 3 |
| | 29 |
|
Payments | (12 | ) | | (3 | ) | | (15 | ) |
Balance as of June 30, 2018 | $ | 30 |
| | $ | 5 |
| | $ | 35 |
|
5. Inventories
At June 30, 2019 and December 31, 2018, inventory consists of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Finished goods | $ | 1,110 |
| | $ | 1,116 |
|
Work in process | 497 |
| | 562 |
|
Raw materials | 489 |
| | 457 |
|
Materials and supplies | 111 |
| | 110 |
|
| $ | 2,207 |
| | $ | 2,245 |
|
6. Goodwill and Other Intangible Assets
At June 30, 2019 and December 31, 2018, goodwill consists of the following:
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Gross carrying amount at December 31, 2018 | $ | 22 |
| | $ | 388 |
| | $ | 210 |
| | $ | 611 |
| | $ | 1,231 |
|
Measurement period adjustments | — |
| | 21 |
| | — |
| | (67 | ) | | (46 | ) |
Acquisitions | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
Gross carrying amount at March 31, 2019 | 22 |
| | 409 |
| | 238 |
| | 544 |
| | 1,213 |
|
Measurement period adjustments | — |
| | 3 |
| | 2 |
| | 3 |
| | 8 |
|
Foreign exchange | — |
| | — |
| | — |
| | — |
| | — |
|
Gross carrying amount at June 30, 2019 | 22 |
| | 412 |
| | 240 |
| | 547 |
| | 1,221 |
|
| | | | | | | | | |
Accumulated impairment loss at December 31, 2018 | — |
| | — |
| | (143 | ) | | (219 | ) | | (362 | ) |
Impairment | — |
| | — |
| | (60 | ) | | — |
| | (60 | ) |
Accumulated impairment loss at March 31, 2019 | — |
| | — |
| | (203 | ) | | (219 | ) | | (422 | ) |
Foreign exchange | — |
| | — |
| | — |
| | — |
| | — |
|
Accumulated impairment loss at June 30, 2019 | — |
| | — |
| | (203 | ) | | (219 | ) | | (422 | ) |
| | | | | | | | | |
Net carrying value at end of period | $ | 22 |
| | $ | 412 |
| | $ | 37 |
| | $ | 328 |
| | $ | 799 |
|
The Öhlins Acquisition resulted in $30 million of goodwill which was included in the Ride Performance segment. During the six months ended June 30, 2019, the Company made the following adjustments to goodwill in the measurement period to the preliminary purchase price allocation for the Acquisitions:
an increase of $2 million for the Öhlins Acquisition; and
a net decrease of $40 million for the Federal-Mogul Acquisition.
The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
During the first quarter of 2019, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time.
During the three months ended June 30, 2019, the Company performed a review of potential triggering events, and concluded no events indicated it was more likely than not that the fair values of its reporting units had declined to below their carrying values at June 30, 2019. The Company considered the results of the post-reorganized reporting unit changes that occurred in the first quarter of 2019, which indicated nine reporting units with goodwill. Three of these nine reporting units have fair values that are within 15% of their carrying values and are reporting units that were acquired as part of the Acquisitions within the last year. The goodwill balance as of June 30, 2019 attributable to these three reporting units was $442 million. Management compared its future projected cash flows for these three reporting units as of June 30, 2019 compared to the future projected cash flows utilized in the valuation performed during the first quarter of 2019 and concluded there is no indication the carrying value of its reporting units would be less than their fair values.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
If the Company’s market capitalization remains at current levels for a sustained period of time or declines further, and if such a decline becomes indicative the fair value of its reporting units have declined to below their carrying values, the Company will need to determine the fair value of its reporting units which may result in a material non-cash goodwill impairment charge in a future period.
At June 30, 2019 and December 31, 2018, the Company's intangible assets consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Definite-lived intangible assets: | | | | | | | | | | | | | |
Customer relationships and platforms | 10 years | | $ | 1,014 |
| | $ | (75 | ) | | $ | 939 |
| | $ | 964 |
| | $ | (24 | ) | | $ | 940 |
|
Customer contract | 10 years | | 8 |
| | (6 | ) | | 2 |
| | 8 |
| | (5 | ) | | 3 |
|
Patents | 10 to 17 years | | 1 |
| | (1 | ) | | — |
| | 1 |
| | (1 | ) | | — |
|
Technology rights | 10 to 30 years | | 136 |
| | (31 | ) | | 105 |
| | 98 |
| | (27 | ) | | 71 |
|
Packaged kits know-how | 10 years | | 54 |
| | (4 | ) | | 50 |
| | 36 |
| | (1 | ) | | 35 |
|
Catalogs | 10 years | | 40 |
| | (3 | ) | | 37 |
| | — |
| | — |
| | — |
|
Licensing agreements | 3 to 5 years | | 63 |
| | (11 | ) | | 52 |
| | 66 |
| | (3 | ) | | 63 |
|
Land use rights | 28 to 46 years | | 46 |
| | (2 | ) | | 44 |
| | 44 |
| | (2 | ) | | 42 |
|
| | | 1,362 |
| | (133 | ) | | 1,229 |
| | 1,217 |
| | (63 | ) | | 1,154 |
|
Indefinite-lived intangible assets: | | | | | | | | | | | | | |
Trade names and trademarks | | | 420 |
| | — |
| | 420 |
| | 365 |
| | — |
| | 365 |
|
Total | | | $ | 1,782 |
| | $ | (133 | ) | | $ | 1,649 |
| | $ | 1,582 |
| | $ | (63 | ) | | $ | 1,519 |
|
The Company recorded definite-lived and indefinite-lived intangible assets of $133 million as a result of the Öhlins Acquisition. During the six months ended June 30, 2019, the Company made the following adjustments to definite-lived and indefinite-lived intangible assets in the measurement period to the preliminary purchase price allocation for the Acquisitions:
a decrease of $2 million was recognized for the Öhlins Acquisition; and
a net increase of $71 million was recognized for the Federal-Mogul Acquisition.
The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
The amortization expense associated with definite-lived intangible assets was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Amortization expense | | $ | 33 |
| | $ | — |
| | $ | 68 |
| | $ | 1 |
|
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 |
Expected amortization expense | | $ | 70 |
| | $ | 139 |
| | $ | 138 |
| | $ | 134 |
| | $ | 130 |
| | $ | 618 |
| | $ | 1,229 |
|
7. Investment in Nonconsolidated Affiliates
The Company has 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The Company's ownership interest in affiliates accounted for under the equity method is as follows:
|
| | | | | |
| June 30, 2019 | | December 31, 2018 |
Anqing TP Goetze Piston Ring Company Limited (China) | 35.7 | % | | 35.7 | % |
Anqing TP Powder Metallurgy Co., Ltd (China) | 20.0 | % | | 20.0 | % |
Dongsuh Federal-Mogul Industrial Co. Ltd. (Korea) | 50.0 | % | | 50.0 | % |
Farloc Argentina SAIC Y F (Argentina) | 23.9 | % | | 23.9 | % |
Federal-Mogul Powertrain Otomotiv A.S. (Turkey) | 50.0 | % | | 50.0 | % |
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. (Turkey) | 25.0 | % | | 25.0 | % |
Federal-Mogul TP Liners, Inc. (USA) | 46.0 | % | | 46.0 | % |
Frenos Hidraulicos Automotrices, S.A. de C.V. (Mexico) | 49.0 | % | | 49.0 | % |
JURID do Brasil Sistemas Automotivos Ltda. (Brazil) | 19.9 | % | | 19.9 | % |
KB Autosys Co., Ltd. (Korea) | 33.6 | % | | 33.6 | % |
Montagewerk Abgastechnik Emden GmbH (Germany) | 50.0 | % | | 50.0 | % |
The Company's investments in its nonconsolidated affiliates at June 30, 2019 and December 31, 2018 are:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Investments in nonconsolidated affiliates | $ | 531 |
| | $ | 544 |
|
The following table represents the activity from the Company's investments in its nonconsolidated affiliates for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Equity earnings (losses) of nonconsolidated affiliates, net of tax | $ | 17 |
| | $ | — |
| | $ | 33 |
| | $ | — |
|
Cash dividends received from nonconsolidated affiliates | $ | 12 |
| | $ | — |
| | $ | 27 |
| | $ | — |
|
During the six months ended June 30, 2019, the Company made adjustments in the measurement period to the preliminary purchase price allocation for the Federal-Mogul Acquisition which resulted in a reduction to the fair value of its investments in nonconsolidated affiliates of $15 million. The purchase price allocation is preliminary and subject to the finalization. The Company's current estimates and assumptions may change as more information becomes available. See Note 3, Acquisitions and Divestitures, for additional information.
The following tables present summarized aggregated financial information of the Company's nonconsolidated affiliates for the three and six months ended June 30, 2019. The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
Sales | $ | 85 |
| | $ | 39 |
| | $ | 120 |
| | $ | 244 |
|
Gross profit | $ | 22 |
| | $ | 10 |
| | $ | 23 |
| | $ | 55 |
|
Income from continuing operations | $ | 17 |
| | $ | 9 |
| | $ | 11 |
| | $ | 37 |
|
Net income | $ | 21 |
| | $ | 9 |
| | $ | 11 |
| | $ | 41 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
Sales | $ | 176 |
| | $ | 78 |
| | $ | 245 |
| | $ | 499 |
|
Gross profit | $ | 43 |
| | $ | 26 |
| | $ | 46 |
| | $ | 115 |
|
Income from continuing operations | $ | 36 |
| | $ | 20 |
| | $ | 24 |
| | $ | 80 |
|
Net income | $ | 39 |
| | $ | 18 |
| | $ | 22 |
| | $ | 79 |
|
See Note 18, Related Party Transactions, for additional information on balances and transactions with equity method investments.
8. 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 may enter 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.
Market Risks
Foreign Currency Risk— The Company manufactures and sells its products in North America, South America, Asia, Europe, Australia 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, Mexican peso, and Canadian dollar.
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 June 30, 2019 and 2018 is not material.
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 "Cost of sales" in the condensed consolidated statements of income (loss). Derivative gains and losses included in accumulated other comprehensive income (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 "Cost of sales" in the condensed consolidated statements of income (loss).
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 gains or losses on these contracts is recognized in "Cost of sales" in the condensed consolidated statements of income (loss). 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 condensed 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 June 30, 2019 and December 31, 2018.
The following table summarizes by position the notional amounts for foreign currency forward contracts as of June 30, 2019 (all of which mature in 2019):
|
| | | |
| Notional Amount |
Long positions | $ | (26 | ) |
Short positions | $ | 26 |
|
Cash-Settled Share Swap Transactions— In May 2019, the Company entered into an amended and restated 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 June 30, 2019, 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 condensed consolidated balance sheets. The fair value of the Company's equity swap agreement was a net asset position of $3 million at June 30, 2019 and $4 million at December 31, 2018.
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 and tin. 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 condensed consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $25 million as of June 30, 2019 and $27 million as of December 31, 2018. Substantially all of the commodity price hedge contracts mature within one year.
Net Investment Hedge — Foreign Currency Borrowings — The Company has foreign currency denominated debt, €774 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 10, 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 June 30, 2019:
|
| | | | | | | | | |
| | | Carrying Value |
| Balance sheet classification | | June 30, 2019 | | December 31, 2018 |
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 | | $ | 880 |
| | $ | 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 income (loss) three and six month periods ended June 30, 2019 and 2018:
|
| | | | | | | | |
| | Amount of gain (loss) recognized in accumulated OCI or OCL (effective portion): |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2019 |
Commodity price hedge contracts designated as cash flow hedges | | $ | (3 | ) | | $ | 1 |
|
Foreign currency borrowings designated as net investment hedges | | $ | (12 | ) | | $ | 7 |
|
The Company estimates $1 million included in accumulated OCI or OCL as of June 30, 2019 will be reclassified into earnings within the following 12 months.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
9. 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 our 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 condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Fair value hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Derivative instruments: | | | | | | | | | |
Equity swap agreement | Level 2 | | $ | 3 |
| | $ | 3 |
| | $ | 4 |
| | $ | 4 |
|
Commodity contracts | Level 2 | | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (2 | ) |
Cash-Settled Share Swap Transactions — The fair value of the equity swap agreement is recorded in "Prepayments and other current assets" in the condensed consolidated balance sheets.
Commodity and Foreign Currency 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. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at June 30, 2019 and December 31, 2018.
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 first quarter, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time. See Note 6, Goodwill and Other Intangible Assets.
Financial Instruments Not Carried at Fair Value
Estimated fair values of the Company's outstanding debt were:
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Fair value hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt (including current maturities): | | | | | | | | | |
Term loans and senior notes | Level 2 | | $ | 5,247 |
| | $ | 5,035 |
| | $ | 5,307 |
| | $ | 5,218 |
|
The fair value of the Company's public senior notes and private borrowings under its senior credit facility is based on observable inputs, and its borrowings on the revolving credit facility approximate fair value. The Company also had $91 million and $106 million at June 30, 2019 and December 31, 2018 in other debt whose carrying value approximates fair value, which consists primarily of foreign debt with maturities of one year or less.
Assets and Liabilities Not Carried at Fair Value
The carrying value of cash and cash equivalents, restricted cash, short and long-term receivables, accounts payable, and short-term debt approximates fair value.
10. Debt and Other Financing Arrangements
Long-Term Debt
A summary of our long-term debt obligations at June 30, 2019 and December 31, 2018 is set forth in the following table:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Principal | | Carrying Amount (1) | | Principal | | Carrying Amount (1) |
Credit Facilities | | | | | | | |
Revolver Borrowings | | | | | | | |
Due 2023 | $ | 250 |
| | $ | 250 |
| | $ | — |
| | $ | — |
|
Term Loans | | | | | | | |
LIBOR plus 1.75% Term Loan A due 2019 through 2023 | 1,658 |
| | 1,649 |
| | 1,700 |
| | 1,691 |
|
LIBOR plus 3.00% Term Loan B due 2019 through 2025(2) | 1,692 |
| | 1,626 |
| | 1,700 |
| | 1,629 |
|
Senior Unsecured Notes | | | | | | | |
$225 million of 5.375% Senior Notes due 2024 | 225 |
| | 222 |
| | 225 |
| | 222 |
|
$500 million of 5.000% Senior Notes due 2026 | 500 |
| | 494 |
| | 500 |
| | 493 |
|
Senior Secured Notes | | | | | | | |
€415 million 4.875% Euro Fixed Rate Notes due 2022 | 472 |
| | 489 |
| | 476 |
| | 496 |
|
€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024 | 341 |
| | 345 |
| | 344 |
| | 349 |
|
€350 million of 5.000% Euro Fixed Rate Notes due 2024 | 398 |
| | 422 |
| | 401 |
| | 427 |
|
Other debt, primarily foreign instruments | 93 |
| | 91 |
| | 108 |
| | 106 |
|
| | | 5,588 |
| | | | 5,413 |
|
Less - maturities classified as current | | | 80 |
| | | | 73 |
|
Total long-term debt | | | $ | 5,508 |
| | | | $ | 5,340 |
|
(1) Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $83 million and $90 million as of June 30, 2019 and December 31, 2018. Total unamortized debt (premium) discount, net was $(43) million and $(49) million as of June 30, 2019 and December 31, 2018.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
(2) As of December 31, 2018, the rate on Term Loan B was LIBOR plus 2.75%.
Term Loans
On October 1, 2018, the Company 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 Federal-Mogul Acquisition. The New Credit Facility provides $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").
Senior Notes
The Company has outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). The Company has outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").
Credit Facilities
The Company had availability on its credit facilities as of June 30, 2019 as follows:
|
| | | | | |
| Credit Facilities as of June 30, 2019 |
| Term | | Available(b) |
| | | (in billions) |
Tenneco Inc. revolving credit facility (a) | 2023 | | $ | 1.2 |
|
Tenneco Inc. Term Loan A | 2023 | | — |
|
Tenneco Inc. Term Loan B | 2025 | | — |
|
Subsidiaries’ credit agreements | 2020 | | 0.2 |
|
| | | $ | 1.4 |
|
| |
(a) | The Company is required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment. |
| |
(b) | Letters of credit reduce the available borrowings under the revolving credit facility, as of June 30, 2019 the revolving credit facility had $20 million in letters of credit outstanding. |
Interest expense associated with the amortization of the debt issuance costs and original issue discounts recognized in the Company's condensed consolidated statements of income (loss) consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Amortization of debt issuance fees | $ | 4 |
| | $ | 1 |
| | $ | 9 |
| | $ | 2 |
|
Included in the table above, is the amortization of debt issuance costs on the revolver, which are $20 million at June 30, 2019 and are recorded in "Other assets" in the condensed consolidated balance sheets. In addition, there was a $3 million and $6 million reduction to interest expense during the three and six months ended June 30, 2019 related to the accretion of the debt premium on the Senior Secured Notes.
New Credit Facility — Other Terms and Conditions— The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including 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 a requirement to maintain a 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.
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 the Company's ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, the Company's consolidated fixed
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 the Company's existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its 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 the Company's Senior Notes to make distributions to the Company.
As of June 30, 2019, the Company was in compliance with all of its financial covenants.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — The Company has securitization programs for some of its accounts receivables, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at June 30, 2019 and December 31, 2018 are as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Borrowings on securitization programs | $ | 4 |
| | $ | 6 |
|
Off-Balance Sheet Arrangements— In the Company's European and U.S. accounts receivable factoring programs, accounts receivables are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair 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 accounts 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 Company's aftermarket customers through a drafting program.
The amounts outstanding for these factoring and drafting arrangements as of June 30, 2019 and December 31, 2018 are as follows: |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (in billions) |
Accounts receivable outstanding and derecognized | $ | 1.1 |
| | $ | 1.0 |
|
The deferred purchase price receivable as of June 30, 2019 and December 31, 2018 is as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Deferred purchase price receivable | $ | 52 |
| | $ | 154 |
|
Proceeds from the factoring of accounts receivable qualifying as sales are as follows: |
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in billions) |
Proceeds from factoring qualifying as sales | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.5 |
| | $ | 1.5 |
|
Financing charges associated with the factoring of receivables are as follows:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Financing charges on sale of receivables(a) | $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 5 |
|
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss). | | | | |
If the Company were not able to factor receivables or sell drafts under either of these programs, its borrowings under its revolving credit agreement might increase. These programs provide the Company with access to cash at costs that are generally favorable to alternative sources of financing and allow the Company to reduce borrowings under its revolving credit agreement.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
11. Pension Plans, Postretirement and Other Employee Benefits
The Company sponsors several defined benefit pension plans ("Pension Benefits") and health care and life insurance benefits ("Other Postretirement Benefits", or "OPEB") for certain employees and retirees around the world.
Components of net periodic benefit cost (credit) for the three months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 |
| Pension | | Other Postretirement Benefits |
| 2019 | | 2018 | |
| US | | Non-U.S. | | US | | Non-U.S. | | 2019 | | 2018 |
Service cost | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Interest cost | 14 |
| | 5 |
| | 2 |
| | 3 |
| | 4 |
| | 1 |
|
Expected return on plan assets | (17 | ) | | (4 | ) | | (3 | ) | | (5 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss | 1 |
| | 2 |
| | 1 |
| | 2 |
| | 1 |
| | 3 |
|
Prior service cost (credit) | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (1 | ) |
Net pension and postretirement costs (credits) | $ | (2 | ) | | $ | 9 |
| | $ | — |
| | $ | 2 |
| | $ | 3 |
| | $ | 3 |
|
| | | | | | | | | | | |
Components of net periodic benefit cost (credit) for the six months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30 |
| Pension | | Other Postretirement Benefits |
| 2019 | | 2018 | |
| US | | Non-U.S. | | US | | Non-U.S. | | 2019 | | 2018 |
Service cost | $ | 1 |
| | $ | 12 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
Interest cost | 27 |
| | 12 |
| | 5 |
| | 6 |
| | 7 |
| | 3 |
|
Expected return on plan assets | (34 | ) | | (9 | ) | | (7 | ) | | (10 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss | 2 |
| | 3 |
| | 2 |
| | 4 |
| | 2 |
| | 4 |
|
Prior service cost (credit) | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (1 | ) |
Net pension and postretirement costs (credits) | $ | (4 | ) | | $ | 18 |
| | $ | — |
| | $ | 5 |
| | $ | 5 |
| | $ | 6 |
|
| | | | | | | | | | | |
12. Income Taxes
For interim tax reporting, the Company estimates its annual effective tax rate and applies it to year-to-date ordinary income. Jurisdictions where no tax benefit can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The effect of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a quarter due to the mix and timing of actual earnings versus annual projections. The tax effects of certain items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
For the three months ended June 30, 2019, the Company recorded income tax expense of $14 million on income from continuing operations before income taxes of $59 million. This compares to income tax expense of $26 million on income from continuing operations before income taxes of $89 million in the same period of 2018.
For the six months ended June 30, 2019, the Company recorded income tax expense of $14 million on loss from continuing operations before income taxes of $46 million. This compares to income tax expense of $51 million on income from continuing operations before income taxes of $188 million in the same period of 2018.
Income tax expense for the three and six months ended June 30, 2019 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates higher than the U.S. statutory rate and pre-tax losses with no tax benefit.
Income tax expense for the three and six months ended June 30, 2018 differs from the U.S. statutory rate due primarily to $2 million of tax expense for changes in the toll tax, pre-tax income taxed at rates lower than the U.S. statutory rate, and pre-tax losses with no tax benefit. In addition, during the three and six months ended June 30, 2018, a $5 million and $7 million tax benefit was recognized related to acquisition charges.
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 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 final regulations, effective on February 5, 2019, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the final regulations a $2 million discrete benefit was recorded in income tax expense during the six months ended June 30, 2019.
The Company evaluates its deferred tax assets quarterly to determine 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 anticipated spin-off of DRiV, the Company believes it is reasonably possible sufficient positive evidence may be available to release all, or a portion, of its valuation allowance in the next twelve months in certain jurisdictions. This may result in a one-time tax benefit of up to $45 million, primarily related to Spain and the Czech Republic.
The Company believes it is reasonably possible up to $11 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months.
13. Commitments and Contingencies
Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it 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 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 not material.
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 seeking to resolve its responsibilities for those sites for which a claim has been received.
The Company expenses or capitalizes, as appropriate, expenditures for ongoing compliance with environmental regulations. As of June 30, 2019, the Company has an obligation to remediate or contribute towards the remediation of certain sites, including the sites discussed above at which it may be a PRP.
The Company maintains the aggregated estimated share of environmental remediation costs for all these sites on a discounted basis in the condensed consolidated balance sheets as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accrued expenses and other current liabilities | $ | 8 |
| | $ | 12 |
|
Deferred credits and other liabilities | 30 |
| | 28 |
|
| $ | 38 |
| | $ | 40 |
|
For those locations where the liability was discounted, the weighted average discount rate used was 1.4% and 2.9% at June 30, 2019 and December 31, 2018.
The Company's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter |
Expected payments | $ | 7 |
| | $ | 5 |
| | $ | 3 |
| | $ | 3 |
| | $ | 2 |
| | $ | 16 |
|
Based on information known to the Company from site investigations and the professional judgment of consultants, the Company has established reserves it believes are adequate for these costs. Although the 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, the Company expects other parties will contribute to the remediation costs. In addition, certain environmental statutes provide the Company's liability could be joint and several, meaning the Company could be required to pay amounts in excess of its share of remediation costs. The financial strength of the other PRPs at these sites has been considered, where appropriate, in the determination of the estimated liability. The Company does not believe any potential costs associated with its current status as a PRP, or as a liable party at the other locations referenced herein, will be material to its annual consolidated financial position, results of operations, or liquidity.
Asset Retirement Obligations
The Company’s primary asset retirement obligations ("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 third party would charge to perform the remediation activities, generally using a present value technique.
The Company maintains ARO liabilities in the condensed consolidated balance sheets as follows: |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accrued expenses and other current liabilities | $ | 3 |
| | $ | 3 |
|
Deferred credits and other liabilities | 12 |
| | 12 |
|
| $ | 15 |
| | $ | 15 |
|
Antitrust Investigations and Litigation
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 the same date, the Company also received a related subpoena from the U.S. Department of Justice (“DOJ”).
On November 5, 2014, the DOJ granted conditional leniency to the Company, its subsidiaries, and its 50% affiliates as of such date ("2014 Tenneco Entities") pursuant to an agreement the Company entered into under the Antitrust Division's Corporate Leniency Policy. This agreement provides important benefits to the 2014 Tenneco Entities in exchange for the Company's self-reporting of matters to the DOJ and its continuing full cooperation with the DOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against the 2014 Tenneco Entities, nor seek any criminal fines or penalties, in connection with the matters the Company reported to the DOJ. Additionally, there are limits on the liability of the 2014 Tenneco Entities related to any follow-on civil antitrust litigation in the 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 the Company satisfying the DOJ and any court presiding over such follow-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 the Company and its subsidiaries, including Federal-Mogul. The Company has cooperated and continues to cooperate fully with all of these antitrust investigations and take other actions to minimize its potential exposure.
The 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 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 the DOJ granted conditional leniency to the 2014 Tenneco Entities, the Company's civil liability in U.S. follow-on actions with respect to these entities is limited to single damages and the Company will not be jointly and severally liable with the other defendants, provided that the Company has satisfied its 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.
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 putative class action cases pending against the Company and/or certain of its competitors in the United States, the Company continues to vigorously defend itself and/or take actions to minimize its potential exposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the Company and its 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 related claims. Of the $132 million reserve that was established, $79 million was paid through June 30, 2019 resulting in a remaining reserve of $53 million as of June 30, 2019, which is recorded in accrued expenses and other current liabilities in the Company's condensed 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 outcome of any legal matter cannot be predicted with certainty, based on current information, the Company does not expect any such change in the reserve will have a material adverse effect on the Company's annual consolidated financial position, results of operations or liquidity.
Other Legal Proceedings, Claims and Investigations
For 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 effect on the Company's annual consolidated financial position, results of operations or liquidity.
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 the 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 the Company vigorously defends itself against all of these legal proceedings, claims and investigations and take other actions to minimize its potential exposure, in future periods, the 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 the Company's assessment of the merits of the particular claim, except as described above under "Antitrust Investigations", the Company does expect the legal proceedings, claims or investigations currently pending against it will have any material adverse effect on its annual consolidated financial position, results of operations or liquidity.
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 interim 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. We areThe Company is currently evaluating the potential impacteffect of this new guidance on the Company's consolidatedits 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 beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. Although narrow in scope, the amendments are considered an important part of the Board's efforts to improve the effectiveness of disclosures in the notes to financial statements by applying concepts in the concepts statement. The amendments in this update are effective for fiscal years ending after December 15, 2020 with early adoption permitted. We areThe Company is currently evaluating the potential impacteffect of this new guidance on the Company's consolidatedits 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 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.
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 to accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments allow for an election to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act 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 Tax Cuts and Jobs Act, the underlying guidance that requires the effect of a change in tax laws or rates be included in income from continuing operationsCompany is not affected. 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. We are currently evaluating the potential impacteffect of this new guidance on the Company's consolidatedits financial statements.
In February 2016,
3. Acquisitions and Divestitures
The preliminary allocation of the FASB issued ASU 2016-02, Leases (Topic 842). This update supersedespurchase price of the lease requirementsassets 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 existed as of the acquisition date that, if known, would have resulted in Topic 840, Leases. revised estimated values of those assets or liabilities as of that date. Any adjustments to amounts recorded in purchase accounting that do not qualify as measurement period adjustments are included in earnings in the period identified.
The objectivefair values of Topic 842 is to establish the principles that lesseesassets acquired and lessors shall apply to report useful information to users of financial statements about the amount, timing,liabilities assumed are based on preliminary estimates 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. We will adopt this amendment on January 1, 2019. We are currently undertaking a process to quantify the impact that this standard will have on our condensed consolidated financial statements, including reviewing our lease arrangements,assumptions, as well as working through system implementation stepsother information compiled by management, including valuations that utilize customary valuation procedures and assessing our procedural and policy requirements. Attechniques. While the Company believes these preliminary estimates provide a minimum, inreasonable basis for estimating the periodfair value of the ASU is adopted, total assets and total liabilities will increase in the condensed consolidated balance sheet as a result of recognizing right-of-use assetsacquired and liabilities for our operating lease obligations.assumed, it will continue to evaluate available information prior to finalization of the amounts.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Öhlins Intressenter AB Acquisition
The purchase price for the 90.5% ownership interest in Öhlins was $162 million. The remaining 9.5% ownership interest in Öhlins (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”). Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins Acquisition to sell the KÖ Interest to the Company. As the redemption of this redeemable noncontrolling interest is not solely within the Company's control, the noncontrolling interest is presented in the temporary equity section of the Company's condensed consolidated balance sheets. The fair value of the KÖ Interest was $17 million and represents its current redemption value at June 30, 2019.
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 2019:
|
| | | | | | | | | | | |
| Initial Allocation | | Adjustments | | Revised Allocation |
Cash, cash equivalents and restricted cash | $ | 4 |
| | $ | — |
| | $ | 4 |
|
Customer notes and accounts receivable | 19 |
| | — |
| | 19 |
|
Inventories | 31 |
| | — |
| | 31 |
|
Prepayments and other current assets | 2 |
| | — |
| | 2 |
|
Property, plant, and equipment | 8 |
| | — |
| | 8 |
|
Goodwill | 28 |
| | 2 |
| | 30 |
|
Intangibles | 135 |
| | (2 | ) | | 133 |
|
Other assets | 9 |
| | — |
| | 9 |
|
Total assets acquired | $ | 236 |
| | $ | — |
| | $ | 236 |
|
| | | | |
|
Short-term debt, including current maturities of long-term debt | $ | 10 |
| | $ | — |
| | $ | 10 |
|
Accounts payable | 11 |
| | — |
| | 11 |
|
Accrued compensation and employee benefits | 12 |
| | — |
| | 12 |
|
Deferred income taxes | 18 |
| | — |
| | 18 |
|
Deferred credits and other liabilities | 6 |
| | — |
| | 6 |
|
Total liabilities assumed | 57 |
| | — |
| | 57 |
|
Redeemable noncontrolling interest | 17 |
| | — |
| | 17 |
|
Net assets acquired | $ | 162 |
| | $ | — |
| | $ | 162 |
|
The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the inventory, intangible assets, right of use assets, and deferred income tax assets and liabilities.
Goodwill of $30 million was recognized as part of the acquisition and is reflected in the Ride Performance segment. During the three months ended June 30, 2019, the Company adjusted the initial allocation of the total purchase consideration, which resulted in a $2 million increase to goodwill. The goodwill consists of the Company’s expected future economic benefits that will result from the acquisition of Öhlins’ technology, which will allow the Company to more rapidly grow its product offerings for current and future customers, as well as assist the Company in obtaining a larger share of business in developing mobility markets. None of the goodwill is deductible for tax purposes.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Other intangible assets acquired include the following:
|
| | | | | |
| Estimated Fair Value | | Weighted-Average Useful Lives |
Definite-lived intangible assets: | | | |
Customer platforms and relationships | $ | 37 |
| | 10 years |
Technology rights | 41 |
| | 10 years |
Total definite-lived intangible assets | 78 |
| | |
| | | |
Indefinite-lived intangible assets: | | | |
Trade names and trademarks | 55 |
| | |
Total | $ | 133 |
| | |
The Company recorded a $5 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation and recognized $3 million and $5 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold.
Pro Forma Results
Pro forma results of operations have not been presented because the effects of the Öhlins Acquisition were not material to the Company’s condensed consolidated results of operations.
Acquisition of Federal-Mogul
During the six months ended June 30, 2019, the Company made measurement period adjustments based on further evaluation of available information to facts and circumstances that existed as of the acquisition date.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following table summarizes the preliminary fair values of assets acquired and liabilities assumed as of the acquisition date and the measurement period adjustments made during the six months ended June 30, 2019:
|
| | | | | | | | | | | |
| Initial Allocation | | Adjustments | | Revised Allocation |
Cash, cash equivalents and restricted cash | $ | 277 |
| | $ | — |
| | $ | 277 |
|
Customer notes and accounts receivable | 1,258 |
| | — |
| | 1,258 |
|
Other receivables | 62 |
| | — |
| | 62 |
|
Inventories | 1,551 |
| | (5 | ) | | 1,546 |
|
Prepayments and other current assets | 198 |
| | 1 |
| | 199 |
|
Property, plant and equipment | 1,711 |
| | (28 | ) | | 1,683 |
|
Long-term receivables | 48 |
| | — |
| | 48 |
|
Goodwill | 825 |
| | (40 | ) | | 785 |
|
Intangibles | 1,530 |
| | 71 |
| | 1,601 |
|
Investments in nonconsolidated affiliates | 528 |
| | (15 | ) | | 513 |
|
Deferred income taxes | 166 |
| | — |
| | 166 |
|
Other assets | 55 |
| | (6 | ) | | 49 |
|
Total assets acquired | $ | 8,209 |
| | $ | (22 | ) | | $ | 8,187 |
|
| | | | | |
Short-term debt, including current maturities of long-term debt | $ | 130 |
| | $ | — |
| | $ | 130 |
|
Accounts payable | 957 |
| | — |
| | 957 |
|
Accrued compensation and employee benefits | 231 |
| | — |
| | 231 |
|
Accrued income taxes | 49 |
| | — |
| | 49 |
|
Accrued expenses and other current liabilities | 522 |
| | (8 | ) | | 514 |
|
Long-term debt | 1,315 |
| | — |
| | 1,315 |
|
Deferred income taxes | 56 |
| | — |
| | 56 |
|
Pension and postretirement benefits | 879 |
| | — |
| | 879 |
|
Deferred credits and other liabilities | 124 |
| | (5 | ) | | 119 |
|
Total liabilities assumed | 4,263 |
| | (13 | ) | | 4,250 |
|
Redeemable noncontrolling interests | 96 |
| | (8 | ) | | 88 |
|
Noncontrolling interests | 143 |
| | (1 | ) | | 142 |
|
Net assets and noncontrolling interests acquired | $ | 3,707 |
| | $ | — |
| | $ | 3,707 |
|
The primary areas of the preliminary purchase price allocation that are not yet finalized relate to the fair value of property, plant and equipment; intangible assets; unconsolidated affiliates; deferred income tax assets and liabilities; redeemable noncontrolling interests; and noncontrolling interests.
Goodwill of $412 million was allocated to the Powertrain segment, $318 million was allocated to the Motorparts segment, and $55 million was allocated to the Ride Performance segment. The goodwill consists of the Company's expected future economic benefits that will arise from expected future product sales and synergies from combining Federal-Mogul with its existing portfolio of products. None of the goodwill is deductible for tax purposes.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Other intangible assets acquired include the following:
|
| | | | | |
| Estimated Fair Value | | Weighted-Average Useful Lives |
Definite-lived intangible assets: | | | |
Customer platforms and relationships | $ | 978 |
| | 10 years |
Technology rights | 68 |
| | 10 years |
Packaged kits know-how | 54 |
| | 10 years |
Catalogs | 40 |
| | 10 years |
Licensing agreements | 64 |
| | 4.5 years |
Land use rights | 30 |
| | 42.8 years |
Total definite-lived intangible assets | 1,234 |
| | 10.5 years |
| | | |
Indefinite-lived intangible assets: | | | |
Trade names and trademarks | 367 |
| | |
Total | $ | 1,601 |
| | |
The Company recorded a $152 million step-up of inventory to its fair value as of the acquisition date based on the preliminary valuation. The Company recognized $3 million and $44 million as a non-cash charge to cost of goods sold during the three and six months ended June 30, 2019 related to the amortization of this step-up, as the acquired inventory was sold. The Company recognized $105 million as a non-cash charge to cost of goods sold during the year ended December 31, 2018 and expects to recognize the remaining amortization of the inventory step-up during 2019.
In addition, the Company acquired $83 million in redeemable noncontrolling interests related to a subsidiary from the Federal-Mogul Acquisition. The Company initiated the process to make a tender offer for 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 condensed consolidated balance sheets. The carrying amount for this redeemable noncontrolling interest represents its current redemption value at June 30, 2019.
The Company's condensed consolidated statements of income (loss) for the six months ended June 30, 2019 included net sales and operating revenues of $3,762 million and net income of $17 million associated with the operating results of Federal-Mogul.
Pro Forma Results
The following table summarizes, on a pro forma basis, the combined results of operations of the Company and the Federal-Mogul Acquisition, and the related financing, if the transaction had occurred as of January 1, 2017. The pro forma results are not necessarily indicative of either the actual consolidated results had the Federal-Mogul Acquisition occurred on January 1, 2017 or of future consolidated operating results.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales and operating revenues | $ | 4,504 |
| | $ | 4,618 |
| | $ | 8,988 |
| | $ | 9,298 |
|
Earnings (loss) before income taxes and noncontrolling interests | $ | 171 |
| | $ | 232 |
| | $ | 201 |
| | $ | 458 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 43 |
| | $ | 78 |
| | $ | (27 | ) | | $ | 171 |
|
Basic earnings (loss) per share of common stock | $ | 0.54 |
| | $ | 0.97 |
| | $ | (0.33 | ) | | $ | 2.13 |
|
Diluted earnings (loss) per share of common stock | $ | 0.54 |
| | $ | 0.96 |
| | $ | (0.33 | ) | | $ | 2.12 |
|
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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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.
Assets Held for Sale
On March 1, 2019, the Company sold its wipers business in the Motorparts segment for a sale price of $29 million, subject to adjustment based on terms of the sale agreement. Proceeds from the sale were $22 million, subject to customary working capital adjustments. Certain assets and liabilities of the business are still classified as held for sale within the condensed consolidated balance sheet as of June 30, 2019 and are expected to transfer in the second half of 2019.
The related assets and liabilities were classified as held for sale as of June 30, 2019 and December 31, 2018:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets | | | |
Inventories | $ | 3 |
| | $ | 33 |
|
Other current assets | — |
| | 5 |
|
Long-lived assets | 1 |
| | 23 |
|
Total assets held for sale | $ | 4 |
| | $ | 61 |
|
Liabilities | | | |
Accounts payable | $ | 2 |
| | $ | 21 |
|
Accrued liabilities | — |
| | 7 |
|
Other liabilities | 1 |
| | 11 |
|
Total liabilities held for sale | $ | 3 |
| | $ | 39 |
|
4. Restructuring Charges and Asset Impairments, Net
Restructuring and Other Charges
The Company's restructuring activities are undertaken as necessary to execute management's strategy and streamline operations, consolidate and take advantage of available capacity and resources, and ultimately achieve net cost reductions. Restructuring activities include efforts to integrate and rationalize the Company's businesses and to relocate operations to best cost locations.
The Company's restructuring charges consist primarily of employee costs (principally severance and/or termination benefits), and facility closure and other costs.
For the three and six months ended June 30, 2019 and 2018, restructuring charges, net and asset impairments by segment are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Clean Air | $ | 15 |
| | $ | 17 |
| | $ | 20 |
| | $ | 18 |
|
Powertrain | 17 |
| | — |
| | 18 |
| | — |
|
Ride Performance | 22 |
| | 9 |
| | 35 |
| | 17 |
|
Motorparts | 7 |
| | 1 |
| | 11 |
| | 4 |
|
Corporate | — |
| | 2 |
| | 1 |
| | 2 |
|
| $ | 61 |
| | $ | 29 |
| | $ | 85 |
| | $ | 41 |
|
Presented within the table above are asset impairments of $1 million in the Clean Air segment and $1 million in the Motorparts segment incurred during the three and six months ended June 30, 2019.
During the three and six months ended June 30, 2019, the Company incurred $3 million and $9 million in restructuring and related costs and reduced previously recorded estimates by $2 million related to a restructuring plan designed to achieve a portion of the synergies the Company anticipates achieving in connection with the Federal-Mogul Acquisition. Pursuant to the plan, the Company will reduce its headcount globally across all segments. The Company began implementing headcount reductions in January 2019 and these actions will continue throughout 2019. The Federal-Mogul Acquisition is discussed further in Note 3, Acquisitions and Divestitures. During the three and six months ended June 30, 2019, the Company also incurred $17 million and $28 million in restructuring and related costs related to plant relocation and closures within its Ride Performance segment. The Company expects the actions to be completed by the second quarter of 2020.
During the three and six months ended June 30, 2018, the Company incurred $7 million and $14 million in restructuring and related costs related to the accelerated move of the Beijing Ride Performance plant.
Restructuring Reserve Rollforward
Amounts related to activities that were charges to restructuring reserves, including costs incurred to support future structural cost reductions, by reportable segments are as follows:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Reportable Segments | | Corporate | | Total |
Balance as of December 31, 2018 | $ | 17 |
| | $ | 15 |
| | $ | 25 |
| | $ | 43 |
| | $ | 100 |
| | $ | 3 |
| | $ | 103 |
|
Provisions | 5 |
| | 1 |
| | 13 |
| | 4 |
| | 23 |
| | 1 |
| | 24 |
|
Payments | (6 | ) | | (3 | ) | | (13 | ) | | (14 | ) | | (36 | ) | | (2 | ) | | (38 | ) |
Balance as of March 31, 2019 | 16 |
| | 13 |
| | 25 |
| | 33 |
| | 87 |
| | 2 |
| | 89 |
|
Provisions | 14 |
| | 17 |
| | 22 |
| | 8 |
| | 61 |
| | — |
| | 61 |
|
Revisions to estimates | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | — |
| | (2 | ) |
Payments | (2 | ) | | (4 | ) | | (19 | ) | | (7 | ) | | (32 | ) | | (1 | ) | | (33 | ) |
Balance as of June 30, 2019 | $ | 28 |
| | $ | 26 |
| | $ | 28 |
| | $ | 32 |
| | $ | 114 |
| | $ | 1 |
| | $ | 115 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Reportable Segments | | Corporate | | Total |
Balance as of December 31, 2017 | $ | 14 |
| | $ | — |
| | $ | 7 |
| | $ | 4 |
| | $ | 25 |
| | $ | — |
| | $ | 25 |
|
Provisions | 1 |
| | — |
| | 8 |
| | 3 |
| | 12 |
| | — |
| | 12 |
|
Payments | (5 | ) | | — |
| | (9 | ) | | (2 | ) | | (16 | ) | | — |
| | (16 | ) |
Balance as of March 31, 2018 | 10 |
| | — |
| | 6 |
| | 5 |
| | 21 |
| | — |
| | 21 |
|
Provisions | 17 |
| | — |
| | 9 |
| | 1 |
| | 27 |
| | 2 |
| | 29 |
|
Payments | (3 | ) | | — |
| | (10 | ) | | (2 | ) | | (15 | ) | | — |
| | (15 | ) |
Balance as of June 30, 2018 | $ | 24 |
| | $ | — |
| | $ | 5 |
| | $ | 4 |
| | $ | 33 |
| | $ | 2 |
| | $ | 35 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following table provides a summary of the Company's restructuring liabilities and related activity for each type of exit costs:
|
| | | | | | | | | | | |
| Employee Costs | | Facility Closure and Other Costs | | Total |
Balance as of December 31, 2018 | $ | 98 |
| | $ | 5 |
| | $ | 103 |
|
Provisions | 11 |
| | 13 |
| | 24 |
|
Payments | (25 | ) | | (13 | ) | | (38 | ) |
Balance as of March 31, 2019 | 84 |
| | 5 |
| | 89 |
|
Provisions | 44 |
| | 17 |
| | 61 |
|
Revisions to estimates | (2 | ) | | — |
| | (2 | ) |
Payments | (16 | ) | | (17 | ) | | (33 | ) |
Balance as of June 30, 2019 | $ | 110 |
| | $ | 5 |
| | $ | 115 |
|
|
| | | | | | | | | | | |
| Employee Costs | | Facility Closure and Other Costs | | Total |
Balance as of December 31, 2017 | $ | 19 |
| | $ | 6 |
| | $ | 25 |
|
Provisions | 10 |
| | 2 |
| | 12 |
|
Payments | (13 | ) | | (3 | ) | | (16 | ) |
Balance as of March 31, 2018 | 16 |
| | 5 |
| | 21 |
|
Provisions | 26 |
| | 3 |
| | 29 |
|
Payments | (12 | ) | | (3 | ) | | (15 | ) |
Balance as of June 30, 2018 | $ | 30 |
| | $ | 5 |
| | $ | 35 |
|
5. Inventories
At June 30, 2019 and December 31, 2018, inventory consists of the following:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Finished goods | $ | 1,110 |
| | $ | 1,116 |
|
Work in process | 497 |
| | 562 |
|
Raw materials | 489 |
| | 457 |
|
Materials and supplies | 111 |
| | 110 |
|
| $ | 2,207 |
| | $ | 2,245 |
|
6. Goodwill and Other Intangible Assets
At June 30, 2019 and December 31, 2018, goodwill consists of the following:
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Gross carrying amount at December 31, 2018 | $ | 22 |
| | $ | 388 |
| | $ | 210 |
| | $ | 611 |
| | $ | 1,231 |
|
Measurement period adjustments | — |
| | 21 |
| | — |
| | (67 | ) | | (46 | ) |
Acquisitions | — |
| | — |
| | 28 |
| | — |
| | 28 |
|
Gross carrying amount at March 31, 2019 | 22 |
| | 409 |
| | 238 |
| | 544 |
| | 1,213 |
|
Measurement period adjustments | — |
| | 3 |
| | 2 |
| | 3 |
| | 8 |
|
Foreign exchange | — |
| | — |
| | — |
| | — |
| | — |
|
Gross carrying amount at June 30, 2019 | 22 |
| | 412 |
| | 240 |
| | 547 |
| | 1,221 |
|
| | | | | | | | | |
Accumulated impairment loss at December 31, 2018 | — |
| | — |
| | (143 | ) | | (219 | ) | | (362 | ) |
Impairment | — |
| | — |
| | (60 | ) | | — |
| | (60 | ) |
Accumulated impairment loss at March 31, 2019 | — |
| | — |
| | (203 | ) | | (219 | ) | | (422 | ) |
Foreign exchange | — |
| | — |
| | — |
| | — |
| | — |
|
Accumulated impairment loss at June 30, 2019 | — |
| | — |
| | (203 | ) | | (219 | ) | | (422 | ) |
| | | | | | | | | |
Net carrying value at end of period | $ | 22 |
| | $ | 412 |
| | $ | 37 |
| | $ | 328 |
| | $ | 799 |
|
The Öhlins Acquisition resulted in $30 million of goodwill which was included in the Ride Performance segment. During the six months ended June 30, 2019, the Company made the following adjustments to goodwill in the measurement period to the preliminary purchase price allocation for the Acquisitions:
an increase of $2 million for the Öhlins Acquisition; and
a net decrease of $40 million for the Federal-Mogul Acquisition.
The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
During the first quarter of 2019, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time.
During the three months ended June 30, 2019, the Company performed a review of potential triggering events, and concluded no events indicated it was more likely than not that the fair values of its reporting units had declined to below their carrying values at June 30, 2019. The Company considered the results of the post-reorganized reporting unit changes that occurred in the first quarter of 2019, which indicated nine reporting units with goodwill. Three of these nine reporting units have fair values that are within 15% of their carrying values and are reporting units that were acquired as part of the Acquisitions within the last year. The goodwill balance as of June 30, 2019 attributable to these three reporting units was $442 million. Management compared its future projected cash flows for these three reporting units as of June 30, 2019 compared to the future projected cash flows utilized in the valuation performed during the first quarter of 2019 and concluded there is no indication the carrying value of its reporting units would be less than their fair values.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
If the Company’s market capitalization remains at current levels for a sustained period of time or declines further, and if such a decline becomes indicative the fair value of its reporting units have declined to below their carrying values, the Company will need to determine the fair value of its reporting units which may result in a material non-cash goodwill impairment charge in a future period.
At June 30, 2019 and December 31, 2018, the Company's intangible assets consist of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Useful Lives | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value |
Definite-lived intangible assets: | | | | | | | | | | | | | |
Customer relationships and platforms | 10 years | | $ | 1,014 |
| | $ | (75 | ) | | $ | 939 |
| | $ | 964 |
| | $ | (24 | ) | | $ | 940 |
|
Customer contract | 10 years | | 8 |
| | (6 | ) | | 2 |
| | 8 |
| | (5 | ) | | 3 |
|
Patents | 10 to 17 years | | 1 |
| | (1 | ) | | — |
| | 1 |
| | (1 | ) | | — |
|
Technology rights | 10 to 30 years | | 136 |
| | (31 | ) | | 105 |
| | 98 |
| | (27 | ) | | 71 |
|
Packaged kits know-how | 10 years | | 54 |
| | (4 | ) | | 50 |
| | 36 |
| | (1 | ) | | 35 |
|
Catalogs | 10 years | | 40 |
| | (3 | ) | | 37 |
| | — |
| | — |
| | — |
|
Licensing agreements | 3 to 5 years | | 63 |
| | (11 | ) | | 52 |
| | 66 |
| | (3 | ) | | 63 |
|
Land use rights | 28 to 46 years | | 46 |
| | (2 | ) | | 44 |
| | 44 |
| | (2 | ) | | 42 |
|
| | | 1,362 |
| | (133 | ) | | 1,229 |
| | 1,217 |
| | (63 | ) | | 1,154 |
|
Indefinite-lived intangible assets: | | | | | | | | | | | | | |
Trade names and trademarks | | | 420 |
| | — |
| | 420 |
| | 365 |
| | — |
| | 365 |
|
Total | | | $ | 1,782 |
| | $ | (133 | ) | | $ | 1,649 |
| | $ | 1,582 |
| | $ | (63 | ) | | $ | 1,519 |
|
The Company recorded definite-lived and indefinite-lived intangible assets of $133 million as a result of the Öhlins Acquisition. During the six months ended June 30, 2019, the Company made the following adjustments to definite-lived and indefinite-lived intangible assets in the measurement period to the preliminary purchase price allocation for the Acquisitions:
a decrease of $2 million was recognized for the Öhlins Acquisition; and
a net increase of $71 million was recognized for the Federal-Mogul Acquisition.
The purchase price allocations for the Acquisitions are preliminary and subject to finalization. The Company's current estimates and assumptions may change as a result. See Note 3, Acquisitions and Divestitures for additional information.
The amortization expense associated with definite-lived intangible assets was as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Amortization expense | | $ | 33 |
| | $ | — |
| | $ | 68 |
| | $ | 1 |
|
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 |
Expected amortization expense | | $ | 70 |
| | $ | 139 |
| | $ | 138 |
| | $ | 134 |
| | $ | 130 |
| | $ | 618 |
| | $ | 1,229 |
|
7. Investment in Nonconsolidated Affiliates
The Company has 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The Company's ownership interest in affiliates accounted for under the equity method is as follows:
|
| | | | | |
| June 30, 2019 | | December 31, 2018 |
Anqing TP Goetze Piston Ring Company Limited (China) | 35.7 | % | | 35.7 | % |
Anqing TP Powder Metallurgy Co., Ltd (China) | 20.0 | % | | 20.0 | % |
Dongsuh Federal-Mogul Industrial Co. Ltd. (Korea) | 50.0 | % | | 50.0 | % |
Farloc Argentina SAIC Y F (Argentina) | 23.9 | % | | 23.9 | % |
Federal-Mogul Powertrain Otomotiv A.S. (Turkey) | 50.0 | % | | 50.0 | % |
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. (Turkey) | 25.0 | % | | 25.0 | % |
Federal-Mogul TP Liners, Inc. (USA) | 46.0 | % | | 46.0 | % |
Frenos Hidraulicos Automotrices, S.A. de C.V. (Mexico) | 49.0 | % | | 49.0 | % |
JURID do Brasil Sistemas Automotivos Ltda. (Brazil) | 19.9 | % | | 19.9 | % |
KB Autosys Co., Ltd. (Korea) | 33.6 | % | | 33.6 | % |
Montagewerk Abgastechnik Emden GmbH (Germany) | 50.0 | % | | 50.0 | % |
The Company's investments in its nonconsolidated affiliates at June 30, 2019 and December 31, 2018 are:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Investments in nonconsolidated affiliates | $ | 531 |
| | $ | 544 |
|
The following table represents the activity from the Company's investments in its nonconsolidated affiliates for the three and six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Equity earnings (losses) of nonconsolidated affiliates, net of tax | $ | 17 |
| | $ | — |
| | $ | 33 |
| | $ | — |
|
Cash dividends received from nonconsolidated affiliates | $ | 12 |
| | $ | — |
| | $ | 27 |
| | $ | — |
|
During the six months ended June 30, 2019, the Company made adjustments in the measurement period to the preliminary purchase price allocation for the Federal-Mogul Acquisition which resulted in a reduction to the fair value of its investments in nonconsolidated affiliates of $15 million. The purchase price allocation is preliminary and subject to the finalization. The Company's current estimates and assumptions may change as more information becomes available. See Note 3, Acquisitions and Divestitures, for additional information.
The following tables present summarized aggregated financial information of the Company's nonconsolidated affiliates for the three and six months ended June 30, 2019. The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
Sales | $ | 85 |
| | $ | 39 |
| | $ | 120 |
| | $ | 244 |
|
Gross profit | $ | 22 |
| | $ | 10 |
| | $ | 23 |
| | $ | 55 |
|
Income from continuing operations | $ | 17 |
| | $ | 9 |
| | $ | 11 |
| | $ | 37 |
|
Net income | $ | 21 |
| | $ | 9 |
| | $ | 11 |
| | $ | 41 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
Statements of Income | Otomotiv A.S. | | Anqing TP Goetze | | Other | | Total |
Sales | $ | 176 |
| | $ | 78 |
| | $ | 245 |
| | $ | 499 |
|
Gross profit | $ | 43 |
| | $ | 26 |
| | $ | 46 |
| | $ | 115 |
|
Income from continuing operations | $ | 36 |
| | $ | 20 |
| | $ | 24 |
| | $ | 80 |
|
Net income | $ | 39 |
| | $ | 18 |
| | $ | 22 |
| | $ | 79 |
|
See Note 18, Related Party Transactions, for additional information on balances and transactions with equity method investments.
8. 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 may enter 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.
Market Risks
Foreign Currency Risk— The Company manufactures and sells its products in North America, South America, Asia, Europe, Australia 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, Mexican peso, and Canadian dollar.
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 June 30, 2019 and 2018 is not material.
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 "Cost of sales" in the condensed consolidated statements of income (loss). Derivative gains and losses included in accumulated other comprehensive income (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 "Cost of sales" in the condensed consolidated statements of income (loss).
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 gains or losses on these contracts is recognized in "Cost of sales" in the condensed consolidated statements of income (loss). 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 condensed 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 June 30, 2019 and December 31, 2018.
The following table summarizes by position the notional amounts for foreign currency forward contracts as of June 30, 2019 (all of which mature in 2019):
|
| | | |
| Notional Amount |
Long positions | $ | (26 | ) |
Short positions | $ | 26 |
|
Cash-Settled Share Swap Transactions— In May 2019, the Company entered into an amended and restated 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 June 30, 2019, 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 condensed consolidated balance sheets. The fair value of the Company's equity swap agreement was a net asset position of $3 million at June 30, 2019 and $4 million at December 31, 2018.
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 and tin. 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 condensed consolidated statements of income (loss) when the underlying hedged transaction is recognized in earnings. The Company had commodity derivatives outstanding with an equivalent notional amount of $25 million as of June 30, 2019 and $27 million as of December 31, 2018. Substantially all of the commodity price hedge contracts mature within one year.
Net Investment Hedge — Foreign Currency Borrowings — The Company has foreign currency denominated debt, €774 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 10, 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 June 30, 2019:
|
| | | | | | | | | |
| | | Carrying Value |
| Balance sheet classification | | June 30, 2019 | | December 31, 2018 |
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 | | $ | 880 |
| | $ | 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 income (loss) three and six month periods ended June 30, 2019 and 2018:
|
| | | | | | | | |
| | Amount of gain (loss) recognized in accumulated OCI or OCL (effective portion): |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2019 |
Commodity price hedge contracts designated as cash flow hedges | | $ | (3 | ) | | $ | 1 |
|
Foreign currency borrowings designated as net investment hedges | | $ | (12 | ) | | $ | 7 |
|
The Company estimates $1 million included in accumulated OCI or OCL as of June 30, 2019 will be reclassified into earnings within the following 12 months.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
9. 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 our 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 condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018 that are recognized at fair value on a recurring basis, and indicate the fair value hierarchy utilized to determine such fair value:
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Fair value hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Derivative instruments: | | | | | | | | | |
Equity swap agreement | Level 2 | | $ | 3 |
| | $ | 3 |
| | $ | 4 |
| | $ | 4 |
|
Commodity contracts | Level 2 | | $ | — |
| | $ | — |
| | $ | (2 | ) | | $ | (2 | ) |
Cash-Settled Share Swap Transactions — The fair value of the equity swap agreement is recorded in "Prepayments and other current assets" in the condensed consolidated balance sheets.
Commodity and Foreign Currency 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. The fair value of the Company's foreign currency forward contracts was a net asset position of less than $1 million at June 30, 2019 and December 31, 2018.
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 first quarter, the Company reorganized the reporting structure of its Aftermarket, Ride Performance, and Motorparts segments and the underlying reporting units within those segments. The Company reassigned assets and liabilities (excluding goodwill) to the reporting units affected. Goodwill was then reassigned to the reporting units using a relative fair value approach based on the fair value of the elements transferred and the fair value of the elements remaining within the original reporting units. The Company tested goodwill for impairment on a pre-reorganization basis and determined there was no impairment for the affected reporting units. The Company also performed an impairment analysis on a post-reorganization basis
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
and determined $60 million of goodwill was impaired for two reporting units within its Ride Performance segment, one of which was a full impairment of the goodwill. As a result, this non-cash charge was recorded in the six months ended June 30, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time. See Note 6, Goodwill and Other Intangible Assets.
Financial Instruments Not Carried at Fair Value
Estimated fair values of the Company's outstanding debt were:
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2019 | | December 31, 2018 |
| Fair value hierarchy | | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
Long-term debt (including current maturities): | | | | | | | | | |
Term loans and senior notes | Level 2 | | $ | 5,247 |
| | $ | 5,035 |
| | $ | 5,307 |
| | $ | 5,218 |
|
The fair value of the Company's public senior notes and private borrowings under its senior credit facility is based on observable inputs, and its borrowings on the revolving credit facility approximate fair value. The Company also had $91 million and $106 million at June 30, 2019 and December 31, 2018 in other debt whose carrying value approximates fair value, which consists primarily of foreign debt with maturities of one year or less.
Assets and Liabilities Not Carried at Fair Value
The carrying value of cash and cash equivalents, restricted cash, short and long-term receivables, accounts payable, and short-term debt approximates fair value.
10. Debt and Other Financing Arrangements
Long-Term Debt
A summary of our long-term debt obligations at June 30, 2019 and December 31, 2018 is set forth in the following table:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Principal | | Carrying Amount (1) | | Principal | | Carrying Amount (1) |
Credit Facilities | | | | | | | |
Revolver Borrowings | | | | | | | |
Due 2023 | $ | 250 |
| | $ | 250 |
| | $ | — |
| | $ | — |
|
Term Loans | | | | | | | |
LIBOR plus 1.75% Term Loan A due 2019 through 2023 | 1,658 |
| | 1,649 |
| | 1,700 |
| | 1,691 |
|
LIBOR plus 3.00% Term Loan B due 2019 through 2025(2) | 1,692 |
| | 1,626 |
| | 1,700 |
| | 1,629 |
|
Senior Unsecured Notes | | | | | | | |
$225 million of 5.375% Senior Notes due 2024 | 225 |
| | 222 |
| | 225 |
| | 222 |
|
$500 million of 5.000% Senior Notes due 2026 | 500 |
| | 494 |
| | 500 |
| | 493 |
|
Senior Secured Notes | | | | | | | |
€415 million 4.875% Euro Fixed Rate Notes due 2022 | 472 |
| | 489 |
| | 476 |
| | 496 |
|
€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024 | 341 |
| | 345 |
| | 344 |
| | 349 |
|
€350 million of 5.000% Euro Fixed Rate Notes due 2024 | 398 |
| | 422 |
| | 401 |
| | 427 |
|
Other debt, primarily foreign instruments | 93 |
| | 91 |
| | 108 |
| | 106 |
|
| | | 5,588 |
| | | | 5,413 |
|
Less - maturities classified as current | | | 80 |
| | | | 73 |
|
Total long-term debt | | | $ | 5,508 |
| | | | $ | 5,340 |
|
(1) Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $83 million and $90 million as of June 30, 2019 and December 31, 2018. Total unamortized debt (premium) discount, net was $(43) million and $(49) million as of June 30, 2019 and December 31, 2018.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
(2) As of December 31, 2018, the rate on Term Loan B was LIBOR plus 2.75%.
Term Loans
On October 1, 2018, the Company 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 Federal-Mogul Acquisition. The New Credit Facility provides $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").
Senior Notes
The Company has outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). The Company has outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").
Credit Facilities
The Company had availability on its credit facilities as of June 30, 2019 as follows:
|
| | | | | |
| Credit Facilities as of June 30, 2019 |
| Term | | Available(b) |
| | | (in billions) |
Tenneco Inc. revolving credit facility (a) | 2023 | | $ | 1.2 |
|
Tenneco Inc. Term Loan A | 2023 | | — |
|
Tenneco Inc. Term Loan B | 2025 | | — |
|
Subsidiaries’ credit agreements | 2020 | | 0.2 |
|
| | | $ | 1.4 |
|
| |
(13)(a) | Segment InformationThe Company is required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment. |
| |
(b) | Letters of credit reduce the available borrowings under the revolving credit facility, as of June 30, 2019 the revolving credit facility had $20 million in letters of credit outstanding. |
Interest expense associated with the amortization of the debt issuance costs and original issue discounts recognized in the Company's condensed consolidated statements of income (loss) consist of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Amortization of debt issuance fees | $ | 4 |
| | $ | 1 |
| | $ | 9 |
| | $ | 2 |
|
Included in the table above, is the amortization of debt issuance costs on the revolver, which are $20 million at June 30, 2019 and are recorded in "Other assets" in the condensed consolidated balance sheets. In addition, there was a $3 million and $6 million reduction to interest expense during the three and six months ended June 30, 2019 related to the accretion of the debt premium on the Senior Secured Notes.
New Credit Facility — Other Terms and Conditions— The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including 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 a requirement to maintain a 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.
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 the Company's ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require that, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, the Company's consolidated fixed
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 the Company's existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its 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 the Company's Senior Notes to make distributions to the Company.
As of June 30, 2019, the Company was in compliance with all of its financial covenants.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — The Company has securitization programs for some of its accounts receivables, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at June 30, 2019 and December 31, 2018 are as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Borrowings on securitization programs | $ | 4 |
| | $ | 6 |
|
Off-Balance Sheet Arrangements— In the Company's European and U.S. accounts receivable factoring programs, accounts receivables are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair 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 accounts 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 Company's aftermarket customers through a drafting program.
The amounts outstanding for these factoring and drafting arrangements as of June 30, 2019 and December 31, 2018 are as follows: |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| (in billions) |
Accounts receivable outstanding and derecognized | $ | 1.1 |
| | $ | 1.0 |
|
The deferred purchase price receivable as of June 30, 2019 and December 31, 2018 is as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Deferred purchase price receivable | $ | 52 |
| | $ | 154 |
|
Proceeds from the factoring of accounts receivable qualifying as sales are as follows: |
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| (in billions) |
Proceeds from factoring qualifying as sales | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.5 |
| | $ | 1.5 |
|
Financing charges associated with the factoring of receivables are as follows:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Financing charges on sale of receivables(a) | $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 5 |
|
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss). | | | | |
If the Company were not able to factor receivables or sell drafts under either of these programs, its borrowings under its revolving credit agreement might increase. These programs provide the Company with access to cash at costs that are generally favorable to alternative sources of financing and allow the Company to reduce borrowings under its revolving credit agreement.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
11. Pension Plans, Postretirement and Other Employee Benefits
The Company sponsors several defined benefit pension plans ("Pension Benefits") and health care and life insurance benefits ("Other Postretirement Benefits", or "OPEB") for certain employees and retirees around the world.
Components of net periodic benefit cost (credit) for the three months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30 |
| Pension | | Other Postretirement Benefits |
| 2019 | | 2018 | |
| US | | Non-U.S. | | US | | Non-U.S. | | 2019 | | 2018 |
Service cost | $ | — |
| | $ | 6 |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | — |
|
Interest cost | 14 |
| | 5 |
| | 2 |
| | 3 |
| | 4 |
| | 1 |
|
Expected return on plan assets | (17 | ) | | (4 | ) | | (3 | ) | | (5 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss | 1 |
| | 2 |
| | 1 |
| | 2 |
| | 1 |
| | 3 |
|
Prior service cost (credit) | — |
| | — |
| | — |
| | — |
| | (2 | ) | | (1 | ) |
Net pension and postretirement costs (credits) | $ | (2 | ) | | $ | 9 |
| | $ | — |
| | $ | 2 |
| | $ | 3 |
| | $ | 3 |
|
| | | | | | | | | | | |
Components of net periodic benefit cost (credit) for the six months ended June 30, 2019 and 2018 are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30 |
| Pension | | Other Postretirement Benefits |
| 2019 | | 2018 | |
| US | | Non-U.S. | | US | | Non-U.S. | | 2019 | | 2018 |
Service cost | $ | 1 |
| | $ | 12 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | — |
|
Interest cost | 27 |
| | 12 |
| | 5 |
| | 6 |
| | 7 |
| | 3 |
|
Expected return on plan assets | (34 | ) | | (9 | ) | | (7 | ) | | (10 | ) | | — |
| | — |
|
Net amortization: | | | | | | | | | | | |
Actuarial loss | 2 |
| | 3 |
| | 2 |
| | 4 |
| | 2 |
| | 4 |
|
Prior service cost (credit) | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (1 | ) |
Net pension and postretirement costs (credits) | $ | (4 | ) | | $ | 18 |
| | $ | — |
| | $ | 5 |
| | $ | 5 |
| | $ | 6 |
|
| | | | | | | | | | | |
12. Income Taxes
For interim tax reporting, the Company estimates its annual effective tax rate and applies it to year-to-date ordinary income. Jurisdictions where no tax benefit can be recognized due to a valuation allowance are excluded from the estimated annual effective tax rate. The effect of including these jurisdictions on the quarterly effective rate calculation could result in a higher or lower effective tax rate during a quarter due to the mix and timing of actual earnings versus annual projections. The tax effects of certain items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are excluded from the estimated annual effective tax rate calculation and recognized in the interim period in which they occur.
For the three months ended June 30, 2019, the Company recorded income tax expense of $14 million on income from continuing operations before income taxes of $59 million. This compares to income tax expense of $26 million on income from continuing operations before income taxes of $89 million in the same period of 2018.
For the six months ended June 30, 2019, the Company recorded income tax expense of $14 million on loss from continuing operations before income taxes of $46 million. This compares to income tax expense of $51 million on income from continuing operations before income taxes of $188 million in the same period of 2018.
Income tax expense for the three and six months ended June 30, 2019 differs from the U.S. statutory rate due primarily to pre-tax income taxed at rates higher than the U.S. statutory rate and pre-tax losses with no tax benefit.
Income tax expense for the three and six months ended June 30, 2018 differs from the U.S. statutory rate due primarily to $2 million of tax expense for changes in the toll tax, pre-tax income taxed at rates lower than the U.S. statutory rate, and pre-tax losses with no tax benefit. In addition, during the three and six months ended June 30, 2018, a $5 million and $7 million tax benefit was recognized related to acquisition charges.
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 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 final regulations, effective on February 5, 2019, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the final regulations a $2 million discrete benefit was recorded in income tax expense during the six months ended June 30, 2019.
The Company evaluates its deferred tax assets quarterly to determine 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 anticipated spin-off of DRiV, the Company believes it is reasonably possible sufficient positive evidence may be available to release all, or a portion, of its valuation allowance in the next twelve months in certain jurisdictions. This may result in a one-time tax benefit of up to $45 million, primarily related to Spain and the Czech Republic.
The Company believes it is reasonably possible up to $11 million in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months.
13. Commitments and Contingencies
Environmental Matters
The Company is subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which it 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 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 not material.
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 seeking to resolve its responsibilities for those sites for which a claim has been received.
The Company expenses or capitalizes, as appropriate, expenditures for ongoing compliance with environmental regulations. As of June 30, 2019, the Company has an obligation to remediate or contribute towards the remediation of certain sites, including the sites discussed above at which it may be a PRP.
The Company maintains the aggregated estimated share of environmental remediation costs for all these sites on a discounted basis in the condensed consolidated balance sheets as follows:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accrued expenses and other current liabilities | $ | 8 |
| | $ | 12 |
|
Deferred credits and other liabilities | 30 |
| | 28 |
|
| $ | 38 |
| | $ | 40 |
|
For those locations where the liability was discounted, the weighted average discount rate used was 1.4% and 2.9% at June 30, 2019 and December 31, 2018.
The Company's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and thereafter |
Expected payments | $ | 7 |
| | $ | 5 |
| | $ | 3 |
| | $ | 3 |
| | $ | 2 |
| | $ | 16 |
|
Based on information known to the Company from site investigations and the professional judgment of consultants, the Company has established reserves it believes are adequate for these costs. Although the 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, the Company expects other parties will contribute to the remediation costs. In addition, certain environmental statutes provide the Company's liability could be joint and several, meaning the Company could be required to pay amounts in excess of its share of remediation costs. The financial strength of the other PRPs at these sites has been considered, where appropriate, in the determination of the estimated liability. The Company does not believe any potential costs associated with its current status as a PRP, or as a liable party at the other locations referenced herein, will be material to its annual consolidated financial position, results of operations, or liquidity.
Asset Retirement Obligations
The Company’s primary asset retirement obligations ("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 third party would charge to perform the remediation activities, generally using a present value technique.
The Company maintains ARO liabilities in the condensed consolidated balance sheets as follows: |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accrued expenses and other current liabilities | $ | 3 |
| | $ | 3 |
|
Deferred credits and other liabilities | 12 |
| | 12 |
|
| $ | 15 |
| | $ | 15 |
|
Antitrust Investigations and Litigation
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 the same date, the Company also received a related subpoena from the U.S. Department of Justice (“DOJ”).
On November 5, 2014, the DOJ granted conditional leniency to the Company, its subsidiaries, and its 50% affiliates as of such date ("2014 Tenneco Entities") pursuant to an agreement the Company entered into under the Antitrust Division's Corporate Leniency Policy. This agreement provides important benefits to the 2014 Tenneco Entities in exchange for the Company's self-reporting of matters to the DOJ and its continuing full cooperation with the DOJ's resulting investigation. For example, the DOJ will not bring any criminal antitrust prosecution against the 2014 Tenneco Entities, nor seek any criminal fines or penalties, in connection with the matters the Company reported to the DOJ. Additionally, there are limits on the liability of the 2014 Tenneco Entities related to any follow-on civil antitrust litigation in the 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 the Company satisfying the DOJ and any court presiding over such follow-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 the Company and its subsidiaries, including Federal-Mogul. The Company has cooperated and continues to cooperate fully with all of these antitrust investigations and take other actions to minimize its potential exposure.
The 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 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 the DOJ granted conditional leniency to the 2014 Tenneco Entities, the Company's civil liability in U.S. follow-on actions with respect to these entities is limited to single damages and the Company will not be jointly and severally liable with the other defendants, provided that the Company has satisfied its 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.
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 putative class action cases pending against the Company and/or certain of its competitors in the United States, the Company continues to vigorously defend itself and/or take actions to minimize its potential exposure to matters pertaining to the global antitrust investigation, including engaging in settlement discussions when it is in the best interests of the Company and its 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 related claims. Of the $132 million reserve that was established, $79 million was paid through June 30, 2019 resulting in a remaining reserve of $53 million as of June 30, 2019, which is recorded in accrued expenses and other current liabilities in the Company's condensed 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 outcome of any legal matter cannot be predicted with certainty, based on current information, the Company does not expect any such change in the reserve will have a material adverse effect on the Company's annual consolidated financial position, results of operations or liquidity.
Other Legal Proceedings, Claims and Investigations
For 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 effect on the Company's annual consolidated financial position, results of operations or liquidity.
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 the 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 the Company vigorously defends itself against all of these legal proceedings, claims and investigations and take other actions to minimize its potential exposure, in future periods, the 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 the Company's assessment of the merits of the particular claim, except as described above under "Antitrust Investigations", the Company does expect the legal proceedings, claims or investigations currently pending against it will have any material adverse effect on its annual consolidated financial position, results of operations or liquidity.
Warranty Matters
The Company provides warranties on some of its products. The warranty terms vary but range from one year up to limited lifetime warranties on some of its 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 the Company's products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. The
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 condensed consolidated balance sheets.
Below is a table that shows the activity in the warranty accrual accounts:
|
| | | | | | | |
| 2019 | | 2018 |
Balance as of December 31 of the prior year | $ | 45 |
| | $ | 26 |
|
Accruals related to product warranties | 5 |
| | 6 |
|
Reductions for payments made | (2 | ) | | (3 | ) |
Foreign currency | — |
| | — |
|
Balance as of March 31 | $ | 48 |
| | $ | 29 |
|
Accruals related to product warranties | 16 |
| | 2 |
|
Reductions for payments made | (11 | ) | | (2 | ) |
Foreign currency | — |
| | — |
|
Balance as of June 30 | $ | 53 |
| | $ | 29 |
|
14. Leases
The Company has operating and finance leases for real estate and equipment. Generally, the leases have remaining terms ofone month to ten years. Leases with an initial term of 12 months or less which do not include an option to purchase the underlying asset that the Company is reasonably certain to exercise are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis over the lease term.
In addition, some leases include options to terminate the lease. The Company generally negotiates these termination clauses in anticipation of any changes in market conditions; however, because a termination option requires approval from management, the Company assumes the majority of its termination options will not be exercised when determining the lease term.
The Company has elected the practical expedient to not separate non-lease components from the lease components to which they relate, and instead account for each separate lease and non-lease component associated with that lease component as a single lease component for all underlying asset classes. Accordingly, all costs associated with a lease contract are accounted for as lease cost. Lease expense is recorded in operating expenses in the results of operations.
Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance and tax payments. The variable portion of lease payments is not included in the computation of the right of use assets or lease liabilities. Rather, variable payments, other than those dependent upon a market index or rate, are expensed when the obligation for those payments is incurred and are included in "Cost of sales" and "Selling, general, and administrative" within the condensed consolidated statements of income (loss).
The Company does not include significant restrictions or covenants in its lease agreements, and residual value guarantees are generally not included within its operating leases.
The components of lease expense were as follows:
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease expense | $ | 30 |
| | $ | 64 |
|
Short-term lease expense | 2 |
| | 4 |
|
Variable lease expense | 12 |
| | 20 |
|
Total lease expense | $ | 44 |
| | $ | 88 |
|
Other information related to leases was as follows:
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities | | | |
Operating cash flows from operating leases | $ | 41 |
| | $ | 82 |
|
Supplemental balance sheet information related to leases was as follows:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | |
| June 30, 2019 |
Operating leases | |
Operating lease right-of-use assets (a) | $ | 344 |
|
| |
Other current liabilities (b) | $ | 99 |
|
Other long-term liabilities (c) | 239 |
|
Total operating lease liabilities | $ | 338 |
|
| |
Finance leases | |
Property, plant and equipment, gross | $ | 2 |
|
Accumulated depreciation | — |
|
Total finance lease right-of-use assets | $ | 2 |
|
| |
Other current liabilities (b) | $ | 1 |
|
Other long-term liabilities (c) | 1 |
|
Total finance lease liabilities | $ | 2 |
|
| |
(a) Included in "Other assets" in the condensed consolidated balance sheets. | |
(b) Included in "Accrued expenses and other current liabilities" in the condensed consolidated balance sheets. | |
(c) Included in "Deferred credits and other liabilities" in the condensed consolidated balance sheets. | |
|
| | | | |
| June 30, 2019 |
| Weighted average remaining lease term | | Weighted average discount rate |
Operating leases | 4.96 years | | 4.26 | % |
Finance leases | 3.05 years | | 5.08 | % |
Maturities of lease liabilities under non-cancellable leases as of June 30, 2019 were as follows:
|
| | | | | | | |
Year ending December 31 | Operating leases | | Finance leases |
2019 (excluding the six months ended June 30, 2019) | $ | 56 |
| | $ | 1 |
|
2020 | 97 |
| | 1 |
|
2021 | 75 |
| | — |
|
2022 | 53 |
| | — |
|
2023 | 37 |
| | — |
|
Thereafter | 57 |
| | — |
|
Total future undiscounted lease payments | 375 |
| | 2 |
|
Less imputed interest | (37 | ) | | — |
|
Total reported lease liability | $ | 338 |
| | $ | 2 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Future minimum operating lease payments at December 31, 2018 are as follows:
|
| | | |
2019 | $ | 120 |
|
2020 | 100 |
|
2021 | 86 |
|
2022 | 68 |
|
2023 | 56 |
|
Beyond 2023 | 53 |
|
| $ | 483 |
|
15. Share-Based Compensation
Share-Based Compensation Expense
The total share-based compensation expense was as follows:
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Cash-settled share-based compensation expense (benefit) | $ | 1 |
| | $ | (2 | ) | | — |
| | (3 | ) |
Share-settled share-based compensation expense (benefit) | 6 |
| | 2 |
| | 13 |
| | 7 |
|
| $ | 7 |
| | $ | — |
| | 13 |
| | 4 |
|
Cash-Settled Awards
Prior to 2018, the Company has granted restricted stock units ("RSUs") and long-term performance units ("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 June 30, 2019, the LTPUs outstanding included a three-year grant for 2017-2019 payable in the first quarter of 2018,2020.
As of June 30, 2019, $1 million of total unrecognized compensation costs is expected to be recognized on the cash-settled awards over a weighted-average period of less than 1 year.
Share-Settled Awards
The Company has granted restricted stock to its directors and certain key employees as well as RSUs and performance share units ("PSUs") that are payable in common stock to certain key employees. These awards are settled in shares upon vesting and recognized in equity based on their fair value.
The following table reflects the status for all nonvested restricted shares, share-settled RSUs, and PSUs as of June 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | |
| 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 beginning of period | 178,550 |
| | $ | 55.46 |
| | 440,403 |
| | $ | 47.99 |
| | 227,049 |
| | $ | 49.18 |
|
Granted | 34,009 |
| | 34.66 |
| | 867,137 |
| | 34.21 |
| | 634,511 |
| | 24.77 |
|
Vested | (172,050 | ) | | 50.12 |
| | (88,590 | ) | | 54.60 |
| | — |
| | — |
|
Forfeited | (3,329 | ) | | 62.12 |
| | (50,113 | ) | | 41.26 |
| | (43,527 | ) | | 43.61 |
|
Nonvested balance at end of period | 37,180 |
| | $ | 63.30 |
| | 1,168,837 |
| | $ | 38.04 |
| | 818,033 |
| | $ | 34.25 |
|
As of June 30, 2019, approximately $54 million of total unrecognized compensation costs is expected to be recognized on the share-settled awards over a weighted-average period of approximately 2 years.
16. Shareholders' Equity
Common Stock Outstanding
The Company has authorized 175,000,000 shares and 135,000,000 shares ($0.01 par value) of Class A Common Stock at June 30, 2019 and 2018. The Company has authorized 25,000,000 shares ($0.01 par value) of Class B Common Stock at June 30, 2019.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Total common stock outstanding and changes in common stock issued are as follows:
|
| | | | | | | | |
| Class A Common Stock | | Class B Common Stock |
| Six Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 |
Shares issued at beginning of period | 71,675,379 |
| | 66,033,509 |
| | 23,793,669 |
|
Issuance (repurchased) pursuant to benefit plans | 123,216 |
| | (15,906 | ) | | — |
|
Restricted stock forfeited and withheld for taxes | (60,081 | ) | | (7,590 | ) | | — |
|
Stock options exercised | 8,438 |
| | (6,975 | ) | | — |
|
Shares issued at end of period | 71,746,952 |
| | 66,003,038 |
| | 23,793,669 |
|
| | | | | |
Treasury stock | 14,592,888 |
| | 14,592,888 |
| | — |
|
Total shares outstanding | 57,154,064 |
| | 51,410,150 |
| | 23,793,669 |
|
Preferred Stock
The Company had 50,000,000 shares of preferred stock ($0.01 par value) authorized at both June 30, 2019 and 2018. No shares of preferred stock were issued or outstanding at those dates.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Accumulated Other Comprehensive Income (Loss)
The following represents the Company's changes in accumulated other comprehensive income (loss) by component, net of tax for the three and six months ended June 30, 2019 and 2018: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Foreign currency translation adjustments and other | | | | | | | |
Balance at beginning of period | $ | (366 | ) | | $ | (244 | ) | | $ | (395 | ) | | $ | (263 | ) |
Other comprehensive income (loss) before reclassifications adjustments | (16 | ) | | (94 | ) | | 11 |
| | (75 | ) |
Reclassification from other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | (16 | ) | | (94 | ) | | 11 |
| | (75 | ) |
Income tax provision (benefit) | (1 | ) | | 2 |
| | 1 |
| | 2 |
|
Balance at end of period | $ | (383 | ) | | $ | (336 | ) | | $ | (383 | ) | | $ | (336 | ) |
| | | | | | | |
Pensions and other postretirement benefits | | | | | | | |
Balance at beginning of period | $ | (296 | ) | | $ | (272 | ) | | $ | (297 | ) | | $ | (275 | ) |
Other comprehensive income (loss) before reclassifications | — |
| | — |
| | — |
| | — |
|
Reclassification from other comprehensive income (loss) | 2 |
| | 5 |
| | 3 |
| | 9 |
|
Other comprehensive income (loss) | 2 |
| | 5 |
| | 3 |
| | 9 |
|
Income tax provision (benefit) | (4 | ) | | (1 | ) | | (4 | ) | | (2 | ) |
Balance at end of period | $ | (298 | ) | | $ | (268 | ) | | $ | (298 | ) | | $ | (268 | ) |
| | | | | | | |
Cash flow hedge instruments | | | | | | | |
Balance at beginning of period | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Other comprehensive income (loss) before reclassifications | (3 | ) | | — |
| | 1 |
| | — |
|
Reclassification from other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
|
Other comprehensive income (loss) | (3 | ) | | — |
| | 1 |
| | — |
|
Income tax provision (benefit) | — |
| | — |
| | — |
| | — |
|
Balance at end of period | $ | 1 |
| | $ | — |
| | $ | 1 |
| | $ | — |
|
| | | | | | | |
Other comprehensive income (loss) attributable to noncontrolling interests | $ | (1 | ) | | $ | (7 | ) | | $ | 5 |
| | $ | 1 |
|
17. Segment Information
The Company expects to separate its businesses to form two new, independent publicly traded companies and currently expects the DRiV spin-off to occur in mid-2020. As such, the Company revisedbegan to manage and report its reportableDRiV businesses through two new operating segments, in the first quarter of 2019, as compared to the three operating segments it had previously reported. The DRiV operating segments consist of Motorparts and Ride Performance. The new Motorparts operating segment consists of the following three segments: Clean Air,previously reported Aftermarket operating segment as well as the aftermarket portion of the previously reported Motorparts operating segment. The Ride Performance and Aftermarket. The new reportable segments, which are alsooperating segment consists of the previously reported Ride Performance operating segment as well as the OE Braking business that was included in the previously reported Motorparts operating segment. As such, prior period operating segment results have been conformed to reflect the Company's current operating segments. The future New Tenneco consists of two existing operating segments, align with how the Chief Operating Decision Maker allocates resourcesPowertrain and assesses performance against the Company’s key growth strategies.Clean Air. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the threefour operating segments as "Other."Corporate." We evaluate
Management uses EBITDA including noncontrolling interests as the key performance measure of segment performance based primarily onprofitability 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. Segment assets are not presented as it is not a measure reviewed by the Chief Operating Decision Maker in allocating resources and assessing performance.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
EBITDA including noncontrolling interests. Products are transferred between segmentsinterests should not be considered a substitute for results prepared in accordance with US GAAP and geographic areas on a basis intendedshould not be considered an alternative to reflectnet 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 nearly as possibledetermined and measured by the “market value” of the products. Prior period segment information has been retrospectively revisedCompany, should not be compared to reflect our current segmentation. These changes also resulted in changes to the Company's reporting units. The Company allocated goodwill to its new reporting units in the first quarter of 2018, using a relative fair value approach, assessed potential goodwill impairment for all reporting units immediately before and immediately after the reallocation, and determined that no impairment existed.similarly titled measures reported by other companies.
The following table summarizes certain of the Company's segment information:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segments | | | | | | |
| Clean Air | | Ride Performance | | Aftermarket | | Total | | Other | | Reclass & Elims | | Total |
| (Millions) |
At September 30, 2018 and for the Three Months Ended September 30, 2018 | | | | | | | | | | | | | |
Revenues from external customers | $ | 1,602 |
| | $ | 461 |
| | $ | 309 |
| | $ | 2,372 |
| | $ | — |
| | $ | — |
| | $ | 2,372 |
|
Intersegment revenues | 14 |
| | 16 |
| | 12 |
| | 42 |
| | — |
| | (42 | ) | | — |
|
EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 104 |
| | (5 | ) | | 45 |
| | 144 |
| | (40 | ) | | — |
| | 104 |
|
Total assets | 3,008 |
| | 1,079 |
| | 885 |
| | 4,972 |
| | — |
| | 56 |
| | 5,028 |
|
At September 30, 2017 and for the Three Months Ended September 30, 2017 | | | | | | | | | | | | | |
Revenues from external customers | $ | 1,495 |
| | $ | 457 |
| | $ | 322 |
| | $ | 2,274 |
| | $ | — |
| | $ | — |
| | $ | 2,274 |
|
Intersegment revenues | 11 |
| | 18 |
| | 8 |
| | 37 |
| | — |
| | (37 | ) | | — |
|
EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 100 |
| | 7 |
| | 50 |
| | 157 |
| | (23 | ) | | — |
| | 134 |
|
Total assets | 2,912 |
| | 1,100 |
| | 864 |
| | 4,876 |
| | — |
| | 59 |
| | 4,935 |
|
At September 30, 2018 and for the Nine Months Ended September 30, 2018 | | | | | | | | | | | | | |
Revenues from external customers | $ | 5,052 |
| | $ | 1,480 |
| | $ | 951 |
| | $ | 7,483 |
| | $ | — |
| | $ | — |
| | $ | 7,483 |
|
Intersegment revenues | 42 |
| | 45 |
| | 35 |
| | 122 |
| | — |
| | (122 | ) | | — |
|
EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 328 |
| | 8 |
| | 130 |
| | 466 |
| | (132 | ) | | — |
| | 334 |
|
Total assets | 3,008 |
| | 1,079 |
| | 885 |
| | 4,972 |
| | — |
| | 56 |
| | 5,028 |
|
At September 30, 2017 and for the Nine Months Ended September 30, 2017 | | | | | | | | | | | | | |
Revenues from external customers | $ | 4,589 |
| | $ | 1,327 |
| | $ | 967 |
| | $ | 6,883 |
| | $ | — |
| | $ | — |
| | $ | 6,883 |
|
Intersegment revenues | 53 |
| | 46 |
| | 29 |
| | 128 |
| | — |
| | (128 | ) | | — |
|
EBIT, Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 300 |
| | 52 |
| | 146 |
| | 498 |
| | (216 | ) | | — |
| | 282 |
|
Total assets | 2,912 |
| | 1,100 |
| | 864 |
| | 4,876 |
| | — |
| | 59 |
| | 4,935 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total | | Corporate | | Reclass & Elims | | Total |
For the Three Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 1,827 |
| | $ | 1,133 |
| | $ | 709 |
| | $ | 835 |
| | $ | 4,504 |
| | $ | — |
| | $ | — |
| | $ | 4,504 |
|
Intersegment revenues | $ | — |
| | $ | 40 |
| | $ | 38 |
| | $ | 11 |
| | $ | 89 |
| | $ | — |
| | $ | (89 | ) | | $ | — |
|
EBITDA, including noncontrolling interests | $ | 152 |
| | $ | 100 |
| | $ | 26 |
| | $ | 110 |
| | $ | 388 |
| | $ | (78 | ) | | $ | — |
| | $ | 310 |
|
For the Three Months Ended June 30, 2018 | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 1,694 |
| | $ | — |
| | $ | 506 |
| | $ | 333 |
| | $ | 2,533 |
| | $ | — |
| | $ | — |
| | $ | 2,533 |
|
Intersegment revenues | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | (5 | ) | | $ | — |
|
EBITDA, including noncontrolling interests | $ | 142 |
| | $ | — |
| | $ | 20 |
| | $ | 55 |
| | $ | 217 |
| | $ | (46 | ) | | $ | — |
| | $ | 171 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total | | Corporate | | Reclass & Elims | | Total |
For the Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 3,606 |
| | $ | 2,308 |
| | $ | 1,442 |
| | $ | 1,632 |
| | $ | 8,988 |
| | $ | — |
| | $ | — |
| | $ | 8,988 |
|
Intersegment revenues | $ | — |
| | $ | 86 |
| | $ | 84 |
| | $ | 22 |
| | $ | 192 |
| | $ | — |
| | $ | (192 | ) | | $ | — |
|
EBITDA, including noncontrolling interests | $ | 283 |
| | $ | 213 |
| | $ | (19 | ) | | $ | 155 |
| | $ | 632 |
| | $ | (177 | ) | | $ | — |
| | $ | 455 |
|
For the Six Months Ended June 30, 2018 | | | | | | | | | | | | | | | |
Revenues from external customers | $ | 3,450 |
| | $ | — |
| | $ | 1,019 |
| | $ | 645 |
| | $ | 5,114 |
| | $ | — |
| | $ | — |
| | $ | 5,114 |
|
Intersegment revenues | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | 11 |
| | $ | — |
| | $ | (11 | ) | | $ | — |
|
EBITDA, including noncontrolling interests | $ | 299 |
| | $ | — |
| | $ | 44 |
| | $ | 100 |
| | $ | 443 |
| | $ | (90 | ) | | $ | — |
| | $ | 353 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
(14)Segment EBITDA including noncontrolling interests and the reconciliation to earnings before interest expense, income taxes, and noncontrolling interests are as follow: |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30 | | Six Months Ended June 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
EBITDA including noncontrolling interests by Segments: | | | | | | | |
Clean Air | $ | 152 |
| | 142 |
| | $ | 283 |
| | $ | 299 |
|
Powertrain | 100 |
| | — |
| | 213 |
| | — |
|
Ride Performance | 26 |
| | 20 |
| | (19 | ) | | 44 |
|
Motorparts | 110 |
| | 55 |
| | 155 |
| | 100 |
|
Corporate | (78 | ) | | (46 | ) | | (177 | ) | | (90 | ) |
Total EBITDA including noncontrolling interests | 310 |
| | 171 |
| | 455 |
| | 353 |
|
Depreciation and amortization | (169 | ) | | (60 | ) | | (338 | ) | | (120 | ) |
Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 141 |
| | 111 |
| | 117 |
| | 233 |
|
Interest expense | (82 | ) | | (22 | ) | | (163 | ) | | (45 | ) |
Income tax (expense) benefit | (14 | ) | | (26 | ) | | (14 | ) | | (51 | ) |
Net income (loss) | $ | 45 |
| | $ | 63 |
| | $ | (60 | ) | | $ | 137 |
|
Revenue from contracts with customers is disaggregated by customer type and geography, 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 tables, revenue is disaggregated accordingly:
|
| | | | | | | | | | | | | | | | | | | |
| Reportable Segments |
By Customer Type | Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Three Months Ended June 30, 2019 | | | | | | | | | |
OE - Substrate | $ | 777 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 777 |
|
OE - Value add | 1,050 |
| | 1,133 |
| | 709 |
| | — |
| | 2,892 |
|
Aftermarket | — |
| | — |
| | — |
| | 835 |
| | 835 |
|
Total | $ | 1,827 |
| | $ | 1,133 |
| | $ | 709 |
| | $ | 835 |
| | $ | 4,504 |
|
Three Months Ended June 30, 2018 | | | | | | | | | |
OE - Substrate | $ | 621 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 621 |
|
OE - Value add | 1,073 |
| | — |
| | 506 |
| | — |
| | 1,579 |
|
Aftermarket | — |
| | — |
| | — |
| | 333 |
| | 333 |
|
Total | $ | 1,694 |
| | $ | — |
| | $ | 506 |
| | $ | 333 |
| | $ | 2,533 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Reportable Segments |
By Customer Type | Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Six Months Ended June 30, 2019 | | | | | | | | | |
OE - Substrate | $ | 1,483 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,483 |
|
OE - Value add | 2,123 |
| | 2,308 |
| | 1,442 |
| | — |
| | 5,873 |
|
Aftermarket | — |
| | — |
| | — |
| | 1,632 |
| | 1,632 |
|
Total | $ | 3,606 |
| | $ | 2,308 |
| | $ | 1,442 |
| | $ | 1,632 |
| | $ | 8,988 |
|
Six Months Ended June 30, 2018 | | | | | | | | | |
OE - Substrate | $ | 1,273 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,273 |
|
OE - Value add | 2,177 |
| | — |
| | 1,019 |
| | — |
| | 3,196 |
|
Aftermarket | — |
| | — |
| | — |
| | 645 |
| | 645 |
|
Total | $ | 3,450 |
| | $ | — |
| | $ | 1,019 |
| | $ | 645 |
| | $ | 5,114 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Reportable Segments |
By Geography | Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Three Months Ended June 30, 2019 | | | | | | | | | |
North America | $ | 800 |
| | $ | 398 |
| | $ | 228 |
| | $ | 536 |
| | $ | 1,962 |
|
Europe, Middle East and Africa | 609 |
| | 540 |
| | 349 |
| | 241 |
| | 1,739 |
|
Rest of world | 418 |
| | 195 |
| | 132 |
| | 58 |
| | 803 |
|
Total | $ | 1,827 |
| | $ | 1,133 |
| | $ | 709 |
| | $ | 835 |
| | $ | 4,504 |
|
Three Months Ended June 30, 2018 | | | | | | | | | |
North America | $ | 745 |
| | $ | — |
| | $ | 185 |
| | $ | 210 |
| | $ | 1,140 |
|
Europe, Middle East and Africa | 623 |
| | — |
| | 212 |
| | 105 |
| | 940 |
|
Rest of world | 326 |
| | — |
| | 109 |
| | 18 |
| | 453 |
|
Total | $ | 1,694 |
| | $ | — |
| | $ | 506 |
| | $ | 333 |
| | $ | 2,533 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Reportable Segments |
By Geography | Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total |
Six Months Ended June 30, 2019 | | | | | | | | | |
North America | $ | 1,593 |
| | $ | 803 |
| | $ | 460 |
| | $ | 1,043 |
| | $ | 3,899 |
|
Europe, Middle East and Africa | 1,250 |
| | 1,115 |
| | 727 |
| | 478 |
| | 3,570 |
|
Rest of world | 763 |
| | 390 |
| | 255 |
| | 111 |
| | 1,519 |
|
Total | $ | 3,606 |
| | $ | 2,308 |
| | $ | 1,442 |
| | $ | 1,632 |
| | $ | 8,988 |
|
Six Months Ended June 30, 2018 | | | | | | | | | |
North America | $ | 1,513 |
| | $ | — |
| | $ | 365 |
| | $ | 398 |
| | $ | 2,276 |
|
Europe, Middle East and Africa | 1,280 |
| | — |
| | 437 |
| | 213 |
| | 1,930 |
|
Rest of world | 657 |
| | — |
| | 217 |
| | 34 |
| | 908 |
|
Total | $ | 3,450 |
| | $ | — |
| | $ | 1,019 |
| | $ | 645 |
| | $ | 5,114 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
18. Related Party Transactions
Amounts presented as Icahn Automotive Group LLC represent the Company's activity with Auto Plus and Pep Boys. See Note 7, Investment in Nonconsolidated Affiliates, for further information for companies within the tables below that represent equity method investments.
The following tables are summaries of the net sales, purchases, and royalty and other income from related parties for the three and six months ended June 30, 2019:
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Net Sales | | Purchases | | Royalty and Other Income |
Icahn Automotive Group LLC | $ | 47 |
| | $ | — |
| | $ | 1 |
|
PSC Metals, Inc. | $ | — |
| | $ | — |
| | $ | — |
|
Anqing TP Goetze Piston Ring Company Limited | $ | — |
| | $ | 15 |
| | $ | 1 |
|
Anqing TP Powder Metallurgy Company Limited | $ | 1 |
| | $ | 2 |
| | $ | — |
|
Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | 2 |
| | $ | 5 |
| | $ | — |
|
Federal-Mogul Powertrain Otomotiv A.S. | $ | 15 |
| | $ | 49 |
| | $ | 1 |
|
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. | $ | — |
| | $ | 2 |
| | $ | — |
|
Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S. | $ | 1 |
| | $ | 4 |
| | $ | — |
|
Federal-Mogul TP Liners, Inc. | $ | 4 |
| | $ | — |
| | $ | 1 |
|
Frenos Hidraulicos Auto | $ | 1 |
| | $ | — |
| | $ | — |
|
Montagewerk Abgastechnik Emden GmbH | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Net Sales | | Purchases | | Royalty and Other Income |
Icahn Automotive Group LLC | $ | 90 |
| | $ | — |
| | $ | 2 |
|
PSC Metals, Inc. | $ | 1 |
| | $ | — |
| | $ | — |
|
Anqing TP Goetze Piston Ring Company Limited | $ | — |
| | $ | 29 |
| | $ | — |
|
Anqing TP Powder Metallurgy Company Limited | $ | 1 |
| | $ | 3 |
| | $ | — |
|
Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | 3 |
| | $ | 7 |
| | $ | — |
|
Federal-Mogul Powertrain Otomotiv A.S. | $ | 42 |
| | $ | 104 |
| | $ | 2 |
|
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. | $ | — |
| | $ | 5 |
| | $ | — |
|
Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S. | $ | 2 |
| | $ | 8 |
| | $ | — |
|
Federal-Mogul TP Liners, Inc. | $ | 8 |
| | $ | — |
| | $ | 1 |
|
Frenos Hidraulicos Auto | $ | 1 |
| | $ | — |
| | $ | — |
|
Montagewerk Abgastechnik Emden GmbH | $ | 2 |
| | $ | — |
| | $ | — |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following table is a summary of amounts due to and from the Company's related parties as of June 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Receivables | | Payables and accruals | | Receivables | | Payables and accruals |
Icahn Automotive Group LLC | $ | 54 |
| | $ | 2 |
| | $ | 60 |
| | $ | 12 |
|
Anqing TP Goetze Piston Ring Company Limited | $ | 2 |
| | $ | 22 |
| | $ | 1 |
| | $ | 22 |
|
Anqing TP Powder Metallurgy Company Limited | $ | — |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
Dongsuh Federal-Mogul Industrial Co., Ltd. | $ | — |
| | $ | 2 |
| | $ | 1 |
| | $ | 2 |
|
Federal-Mogul Powertrain Otomotiv A.S. | $ | 12 |
| | $ | 27 |
| | $ | 9 |
| | $ | 16 |
|
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti. | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Federal-Mogul Izmit Piston ve Pim Uretim Tesisleri A.S.
| $ | — |
| | $ | 3 |
| | $ | — |
| | $ | — |
|
Federal-Mogul TP Liners, Inc. | $ | 2 |
| | $ | 7 |
| | $ | 2 |
| | $ | 7 |
|
Farloc Argentina SAIC | $ | 1 |
| | $ | 1 |
| | $ | — |
| | $ | — |
|
Montagewerk Abgastechnik Emden GmbH
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
19. Supplemental Guarantor Condensed Consolidating Financial Statements
Basis of Presentation
As of September 30, 2018, substantiallySubstantially 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.
The accompanying supplemental guarantor consolidating financial statements have been updated to reflect the revision as described in Note 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.
distributions.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Revenues | | | | | | | | | |
Net sales and operating revenues — | | | | | | | | | |
External | $ | 990 |
| | $ | 1,382 |
| | $ | — |
| | $ | — |
| | $ | 2,372 |
|
Affiliated companies | 145 |
| | 152 |
| | — |
| | (297 | ) | | — |
|
| 1,135 |
| | 1,534 |
| | — |
| | (297 | ) | | 2,372 |
|
Costs and expenses | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | 962 |
| | 1,349 |
| | — |
| | (297 | ) | | 2,014 |
|
Engineering, research, and development | 20 |
| | 19 |
| | — |
| | — |
| | 39 |
|
Selling, general, and administrative | 67 |
| | 74 |
| | — |
| | — |
| | 141 |
|
Depreciation and amortization of other intangibles | 30 |
| | 35 |
| | — |
| | — |
| | 65 |
|
| 1,079 |
| | 1,477 |
| | — |
| | (297 | ) | | 2,259 |
|
Other expense (income) | | | | | | | | | |
Loss on sale of receivables | 1 |
| | 2 |
| | — |
| | — |
| | 3 |
|
Other expense (income) | 10 |
| | (10 | ) | | — |
| | 6 |
| | 6 |
|
| 11 |
| | (8 | ) | | — |
| | 6 |
| | 9 |
|
Earnings before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies | 45 |
| | 65 |
| | — |
| | (6 | ) | | 104 |
|
Interest expense — | | | | | | | | | |
External (net of interest capitalized) | 9 |
| | 2 |
| | 10 |
| | — |
| | 21 |
|
Affiliated companies (net of interest income) | (4 | ) | | — |
| | 4 |
| | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests, and equity in net income from affiliated companies | 40 |
| | 63 |
| | (14 | ) | | (6 | ) | | 83 |
|
Income tax expense | 10 |
| | 10 |
| | — |
| | — |
| | 20 |
|
Equity in net income from affiliated companies | 38 |
| | — |
| | 68 |
| | (106 | ) | | — |
|
Net income | 68 |
| | 53 |
| | 54 |
| | (112 | ) | | 63 |
|
Less: Net income attributable to noncontrolling interests | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
Net income attributable to Tenneco Inc. | $ | 68 |
| | $ | 44 |
| | $ | 54 |
| | $ | (112 | ) | | $ | 54 |
|
Comprehensive income attributable to Tenneco Inc. | $ | 68 |
| | $ | 44 |
| | $ | 30 |
| | $ | (112 | ) | | $ | 30 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
Revenues | | | | | | | | | |
Net sales and operating revenues: | | | | | | | | | |
External | $ | 1,690 |
| | $ | 2,814 |
| | $ | — |
| | $ | — |
| | $ | 4,504 |
|
Affiliated companies | 235 |
| | 283 |
| | — |
| | (518 | ) | | — |
|
| 1,925 |
| | 3,097 |
| | — |
| | (518 | ) | | 4,504 |
|
Costs and expenses | | | | | | | | | |
Cost of sales | 1,618 |
| | 2,692 |
| | 1 |
| | (518 | ) | | 3,793 |
|
Restructuring charges and asset impairments | 43 |
| | 18 |
| | — |
| | — |
| | 61 |
|
Engineering, research, and development | 30 |
| | 48 |
| | — |
| | — |
| | 78 |
|
Selling, general, and administrative | 148 |
| | 143 |
| | (3 | ) | | — |
| | 288 |
|
Depreciation and amortization | 81 |
| | 88 |
| | — |
| | — |
| | 169 |
|
| 1,920 |
| | 2,989 |
| | (2 | ) | | (518 | ) | | 4,389 |
|
Other expense (income) | | | | | | | | | |
Non-service postretirement benefit costs | (1 | ) | | 5 |
| | — |
| | — |
| | 4 |
|
Equity in (income) losses of nonconsolidated affiliates, net of tax | (1 | ) | | (16 | ) | | — |
| | — |
| | (17 | ) |
Other (income) expense, net | 30 |
| | (43 | ) | | — |
| | — |
| | (13 | ) |
| 28 |
| | (54 | ) | | — |
| | — |
| | (26 | ) |
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | (23 | ) | | 162 |
| | 2 |
| | — |
| | 141 |
|
Interest expense: | | | | | | | | | |
External, net of interest capitalized | (6 | ) | | 12 |
| | 76 |
| | — |
| | 82 |
|
Affiliated companies, net of interest income | (6 | ) | | 11 |
| | (5 | ) | | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | (11 | ) | | 139 |
| | (69 | ) | | — |
| | 59 |
|
Income tax expense (benefit) | — |
| | 27 |
| | (13 | ) | | — |
| | 14 |
|
Equity in net income (loss) from affiliated companies | 93 |
| | — |
| | 82 |
| | (175 | ) | | — |
|
Net income (loss) | 82 |
| | 112 |
| | 26 |
| | (175 | ) | | 45 |
|
Less: Net income (loss) attributable to noncontrolling interests | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 82 |
| | $ | 93 |
| | $ | 26 |
| | $ | (175 | ) | | $ | 26 |
|
Comprehensive income (loss) attributable to Tenneco Inc. | $ | 51 |
| | $ | 67 |
| | $ | (86 | ) | | $ | (28 | ) | | $ | 4 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF COMPREHENSIVE INCOME |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Revenues | | | | | | | | | |
Net sales and operating revenues — | | | | | | | | | |
External | $ | 917 |
| | $ | 1,357 |
| | $ | — |
| | $ | — |
| | $ | 2,274 |
|
Affiliated companies | 128 |
| | 143 |
| | — |
| | (271 | ) | | — |
|
| 1,045 |
| | 1,500 |
| | — |
| | (271 | ) | | 2,274 |
|
Costs and expenses | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | 887 |
| | 1,295 |
| | — |
| | (271 | ) | | 1,911 |
|
Engineering, research, and development | 17 |
| | 23 |
| | — |
| | — |
| | 40 |
|
Selling, general, and administrative | 50 |
| | 77 |
| | — |
| | — |
| | 127 |
|
Depreciation and amortization of other intangibles | 23 |
| | 35 |
| | — |
| | — |
| | 58 |
|
| 977 |
| | 1,430 |
| | — |
| | (271 | ) | | 2,136 |
|
Other expense (income) | | | | | | | | | |
Loss on sale of receivables | 1 |
| | 1 |
| | — |
| | — |
| | 2 |
|
Other expense (income) | 12 |
| | (10 | ) | | — |
| | — |
| | 2 |
|
| 13 |
| | (9 | ) | | — |
| | — |
| | 4 |
|
Earnings before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies | 55 |
| | 79 |
| | — |
| | — |
| | 134 |
|
Interest expense — | | | | | | | | | |
External (net of interest capitalized) | 7 |
| | 2 |
| | 10 |
| | — |
| | 19 |
|
Affiliated companies (net of interest income) | (5 | ) | | 3 |
| | 2 |
| | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests, and equity in net income from affiliated companies | 53 |
| | 74 |
| | (12 | ) | | — |
| | 115 |
|
Income tax (benefit) expense
| (5 | ) | | 21 |
| | — |
| | — |
| | 16 |
|
Equity in net income from affiliated companies | 31 |
| | — |
| | 95 |
| | (126 | ) | | — |
|
Net income | 89 |
| | 53 |
| | 83 |
| | (126 | ) | | 99 |
|
Less: Net income attributable to noncontrolling interests | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
Net income attributable to Tenneco Inc. | $ | 89 |
| | $ | 37 |
| | $ | 83 |
| | $ | (126 | ) | | $ | 83 |
|
Comprehensive income attributable to Tenneco Inc. | $ | 89 |
| | $ | 31 |
| | $ | 114 |
| | $ | (120 | ) | | $ | 114 |
|
(LOSS)
39 |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
Revenues | | | | | | | | | |
Net sales and operating revenues: | | | | | | | | | |
External | $ | 1,028 |
| | $ | 1,505 |
| | $ | — |
| | $ | — |
| | $ | 2,533 |
|
Affiliated companies | 134 |
| | 156 |
| | — |
| | (290 | ) | | — |
|
| 1,162 |
| | 1,661 |
| | — |
| | (290 | ) | | 2,533 |
|
Costs and expenses | | | | | | | | | |
Cost of sales | 984 |
| | 1,440 |
| | — |
| | (290 | ) | | 2,134 |
|
Restructuring charges and asset impairments
| 2 |
| | 27 |
| | — |
| | — |
| | 29 |
|
Engineering, research, and development | 19 |
| | 20 |
| | — |
| | — |
| | 39 |
|
Selling, general, and administrative | 82 |
| | 72 |
| | — |
| | — |
| | 154 |
|
Depreciation and amortization | 24 |
| | 36 |
| | — |
| | — |
| | 60 |
|
| 1,111 |
| | 1,595 |
| | — |
| | (290 | ) | | 2,416 |
|
Other expense (income) | | | | | | | | | |
Non-service postretirement benefit costs | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Other (income) expense, net | 15 |
| | (22 | ) | | — |
| | 10 |
| | 3 |
|
| 18 |
| | (22 | ) | | — |
| | 10 |
| | 6 |
|
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | 33 |
| | 88 |
| | — |
| | (10 | ) | | 111 |
|
Interest expense: | | | | | | | | | |
External, net of interest capitalized | 10 |
| | 3 |
| | 9 |
| | — |
| | 22 |
|
Affiliated companies, net of interest income | (4 | ) | | — |
| | 4 |
| | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | 27 |
| | 85 |
| | (13 | ) | | (10 | ) | | 89 |
|
Income tax (benefit) expense | (2 | ) | | 28 |
| | — |
| | — |
| | 26 |
|
Equity in net income (loss) from affiliated companies | 37 |
| | — |
| | 60 |
| | (97 | ) | | — |
|
Net income (loss) | 66 |
| | 57 |
| | 47 |
| | (107 | ) | | 63 |
|
Less: Net income (loss) attributable to noncontrolling interests | — |
| | 16 |
| | — |
| | — |
| | 16 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 66 |
| | $ | 41 |
| | $ | 47 |
| | $ | (107 | ) | | $ | 47 |
|
Comprehensive income (loss) attributable to Tenneco Inc. | $ | 66 |
| | $ | 41 |
| | $ | (41 | ) | | $ | (107 | ) | | $ | (41 | ) |
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Revenues | | | | | | | | | |
Net sales and operating revenues — | | | | | | | | | |
External | $ | 3,050 |
| | $ | 4,433 |
| | $ | — |
| | $ | — |
| | $ | 7,483 |
|
Affiliated companies | 402 |
| | 464 |
| | — |
| | (866 | ) | | — |
|
| 3,452 |
| | 4,897 |
| | — |
| | (866 | ) | | 7,483 |
|
Costs and expenses | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | 2,956 |
| | 4,281 |
| | — |
| | (866 | ) | | 6,371 |
|
Engineering, research, and development | 57 |
| | 65 |
| | — |
| | — |
| | 122 |
|
Selling, general, and administrative | 222 |
| | 228 |
| | — |
| | — |
| | 450 |
|
Depreciation and amortization of other intangibles | 74 |
| | 109 |
| | — |
| | — |
| | 183 |
|
| 3,309 |
| | 4,683 |
| | — |
| | (866 | ) | | 7,126 |
|
Other expense (income) | | | | | | | | | |
Loss on sale of receivables | 5 |
| | 3 |
| | — |
| | — |
| | 8 |
|
Other expense (income) | 40 |
| | (41 | ) | | — |
| | 16 |
| | 15 |
|
| 45 |
| | (38 | ) | | — |
| | 16 |
| | 23 |
|
Earnings before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies | 98 |
| | 252 |
| | — |
| | (16 | ) | | 334 |
|
Interest expense — | | | | | | | | | |
External (net of interest capitalized) | 25 |
| | 7 |
| | 29 |
| | — |
| | 61 |
|
Affiliated companies (net of interest income) | (11 | ) | | — |
| | 11 |
| | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests, and equity in net income from affiliated companies | 84 |
| | 245 |
| | (40 | ) | | (16 | ) | | 273 |
|
Income tax expense | 9 |
| | 63 |
| | — |
| | — |
| | 72 |
|
Equity in net income from affiliated companies | 122 |
| | — |
| | 202 |
| | (324 | ) | | — |
|
Net income | 197 |
| | 182 |
| | 162 |
| | (340 | ) | | 201 |
|
Less: Net income attributable to noncontrolling interests | — |
| | 39 |
| | — |
| | — |
| | 39 |
|
Net income attributable to Tenneco Inc. | $ | 197 |
| | $ | 143 |
| | $ | 162 |
| | $ | (340 | ) | | $ | 162 |
|
Comprehensive income attributable to Tenneco Inc. | $ | 197 |
| | $ | 143 |
| | $ | 71 |
| | $ | (340 | ) | | $ | 71 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
Revenues | | | | | | | | | |
Net sales and operating revenues: | | | | | | | | | |
External | $ | 3,381 |
| | $ | 5,607 |
| | $ | — |
| | $ | — |
| | $ | 8,988 |
|
Affiliated companies | 453 |
| | 564 |
| | — |
| | (1,017 | ) | | — |
|
| 3,834 |
| | 6,171 |
| | — |
| | (1,017 | ) | | 8,988 |
|
Costs and expenses | | | | | | | | | |
Cost of sales | 3,294 |
| | 5,380 |
| | — |
| | (1,017 | ) | | 7,657 |
|
Restructuring charges and asset impairments | 51 |
| | 34 |
| | — |
| | — |
| | 85 |
|
Goodwill impairment charge | 33 |
| | 27 |
| | — |
| | — |
| | 60 |
|
Engineering, research, and development | 69 |
| | 101 |
| | — |
| | — |
| | 170 |
|
Selling, general, and administrative | 326 |
| | 278 |
| | — |
| | — |
| | 604 |
|
Depreciation and amortization | 164 |
| | 174 |
| | — |
| | — |
| | 338 |
|
| 3,937 |
| | 5,994 |
| | — |
| | (1,017 | ) | | 8,914 |
|
Other expense (income) | | | | | | | | | |
Non-service postretirement benefit costs | (1 | ) | | 7 |
| | — |
| | — |
| | 6 |
|
Equity in losses of nonconsolidated affiliates, net of tax | (2 | ) | | (31 | ) | | — |
| | — |
| | (33 | ) |
Other (income) expense, net | 23 |
| | (39 | ) | | — |
| | — |
| | (16 | ) |
| 20 |
| | (63 | ) | | — |
| | — |
| | (43 | ) |
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | (123 | ) | | 240 |
| | — |
| | — |
| | 117 |
|
Interest expense: | | | | | | | | | |
External, net of interest capitalized | 5 |
| | 17 |
| | 141 |
| | — |
| | 163 |
|
Affiliated companies, net of interest income | (14 | ) | | 19 |
| | (5 | ) | | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | (114 | ) | | 204 |
| | (136 | ) | | — |
| | (46 | ) |
Income tax expense (benefit) | (18 | ) | | 57 |
| | (25 | ) | | — |
| | 14 |
|
Equity in net income (loss) from affiliated companies | 72 |
| | — |
| | 20 |
| | (92 | ) | | — |
|
Net income (loss) | (24 | ) | | 147 |
| | (91 | ) | | (92 | ) | | (60 | ) |
Less: Net income (loss) attributable to noncontrolling interests | — |
| | 31 |
| | — |
| | — |
| | 31 |
|
Net income (loss) attributable to Tenneco Inc. | $ | (24 | ) | | $ | 116 |
| | $ | (91 | ) | | $ | (92 | ) | | $ | (91 | ) |
Comprehensive income (loss) attributable to Tenneco Inc. | $ | (17 | ) | | $ | 128 |
| | $ | (79 | ) | | $ | (111 | ) | | $ | (79 | ) |
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF COMPREHENSIVE INCOME
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
Revenues | | | | | | | | | |
Net sales and operating revenues: | | | | | | | | | |
External | $ | 2,060 |
| | $ | 3,054 |
| | $ | — |
| | $ | — |
| | $ | 5,114 |
|
Affiliated companies | 257 |
| | 312 |
| | — |
| | (569 | ) | | — |
|
| 2,317 |
| | 3,366 |
| | — |
| | (569 | ) | | 5,114 |
|
Costs and expenses | | | | | | | | | |
Cost of sales | 1,991 |
| | 2,905 |
| | — |
| | (569 | ) | | 4,327 |
|
Restructuring charges and asset impairments
| 3 |
| | 38 |
| | — |
| | — |
| | 41 |
|
Engineering, research, and development | 37 |
| | 42 |
| | — |
| | — |
| | 79 |
|
Selling, general, and administrative | 155 |
| | 150 |
| | — |
| | — |
| | 305 |
|
Depreciation and amortization | 47 |
| | 73 |
| | — |
| | — |
| | 120 |
|
| 2,233 |
| | 3,208 |
| | — |
| | (569 | ) | | 4,872 |
|
Other expense (income) | | | | | | | | | |
Non-service postretirement benefit costs | 6 |
| | — |
| | — |
| | — |
| | 6 |
|
Other (income) expense, net | 24 |
| | (31 | ) | | — |
| | 10 |
| | 3 |
|
| 30 |
| | (31 | ) | | — |
| | 10 |
| | 9 |
|
Earnings (loss) before interest expense, income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | 54 |
| | 189 |
| | — |
| | (10 | ) | | 233 |
|
Interest expense: |
| |
| |
| |
| |
|
External, net of interest capitalized | 20 |
| | 6 |
| | 19 |
| | — |
| | 45 |
|
Affiliated companies, net of interest income | (7 | ) | | — |
| | 7 |
| | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests and equity in net income (loss) from affiliated companies | 41 |
| | 183 |
| | (26 | ) | | (10 | ) | | 188 |
|
Income tax (benefit) expense | (1 | ) | | 52 |
| | — |
| | — |
| | 51 |
|
Equity in net income (loss) from affiliated companies | 85 |
| | — |
| | 133 |
| | (218 | ) | | — |
|
Net income (loss) | 127 |
| | 131 |
| | 107 |
| | (228 | ) | | 137 |
|
Less: Net income (loss) attributable to noncontrolling interests | — |
| | 30 |
| | — |
| | — |
| | 30 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 127 |
| | $ | 101 |
| | $ | 107 |
| | $ | (228 | ) | | $ | 107 |
|
Comprehensive income (loss) attributable to Tenneco Inc. | $ | 127 |
| | $ | 101 |
| | $ | 41 |
| | $ | (228 | ) |
| $ | 41 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Revenues | | | | | | | | | |
Net sales and operating revenues — | | | | | | | | | |
External | $ | 2,958 |
| | $ | 3,925 |
| | $ | — |
| | $ | — |
| | $ | 6,883 |
|
Affiliated companies | 413 |
| | 497 |
| | — |
| | (910 | ) | | — |
|
| 3,371 |
| | 4,422 |
| | — |
| | (910 | ) | | 6,883 |
|
Costs and expenses | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization shown below) | 2,865 |
| | 3,834 |
| | — |
| | (910 | ) | | 5,789 |
|
Engineering, research, and development | 56 |
| | 59 |
| | — |
| | — |
| | 115 |
|
Selling, general, and administrative | 301 |
| | 219 |
| | — |
| | — |
| | 520 |
|
Depreciation and amortization of other intangibles | 65 |
| | 100 |
| | — |
| | — |
| | 165 |
|
| 3,287 |
| | 4,212 |
| | — |
| | (910 | ) | | 6,589 |
|
Other expense (income) | | | | | | | | | |
Loss on sale of receivables | 2 |
| | 2 |
| | — |
| | — |
| | 4 |
|
Other expense (income) | 24 |
| | (31 | ) | | — |
| | 15 |
| | 8 |
|
| 26 |
| | (29 | ) | | — |
| | 15 |
| | 12 |
|
Earnings before interest expense, income taxes, noncontrolling interests, and equity in net income from affiliated companies | 58 |
| | 239 |
| | — |
| | (15 | ) | | 282 |
|
Interest expense — | | | | | | | | | |
External (net of interest capitalized) | 10 |
| | 4 |
| | 40 |
| | — |
| | 54 |
|
Affiliated companies (net of interest income) | (12 | ) | | 6 |
| | 6 |
| | — |
| | — |
|
Earnings (loss) before income taxes, noncontrolling interests, and equity in net income from affiliated companies | 60 |
| | 229 |
| | (46 | ) | | (15 | ) | | 228 |
|
Income tax expense | 6 |
| | 35 |
| | — |
| | — |
| | 41 |
|
Equity in net income from affiliated companies | 119 |
| | — |
| | 185 |
| | (304 | ) | | — |
|
Net income | 173 |
| | 194 |
| | 139 |
| | (319 | ) | | 187 |
|
Less: Net income attributable to noncontrolling interests | — |
| | 48 |
| | — |
| | — |
| | 48 |
|
Net income attributable to Tenneco Inc. | $ | 173 |
| | $ | 146 |
| | $ | 139 |
| | $ | (319 | ) | | $ | 139 |
|
Comprehensive income attributable to Tenneco Inc. | $ | 173 |
| | $ | 140 |
| | $ | 234 |
| | $ | (313 | ) | | $ | 234 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
BALANCE SHEETSHEETS
| | | September 30, 2018 | | | | | | | | | | | |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated | June 30, 2019 |
| (Millions) | Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
ASSETS | ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
| |
| |
| |
| |
|
|
Cash and cash equivalents | $ | 5 |
| | $ | 197 |
| | $ | — |
| | $ | — |
| | $ | 202 |
| $ | 216 |
| | $ | 165 |
| | $ | 3 |
| | $ | — |
| | $ | 384 |
|
Restricted cash | — |
| | 1 |
| | — |
| | — |
| | 1 |
| — |
| | 6 |
| | — |
| | — |
| | 6 |
|
Receivables, net | 434 |
| | 1,707 |
| | — |
| | (733 | ) | | 1,408 |
| 965 |
| | 1,882 |
| | — |
| | — |
| | 2,847 |
|
Inventories | 414 |
| | 542 |
| | — |
| | — |
| | 956 |
| |
Prepayments and other | 139 |
| | 230 |
| | — |
| | — |
| | 369 |
| |
Inventories, net | | 927 |
| | 1,280 |
| | — |
| | — |
| | 2,207 |
|
Prepayments and other current assets | | 193 |
| | 329 |
| | 28 |
| | — |
| | 550 |
|
Total current assets | 992 |
| | 2,677 |
| | — |
| | (733 | ) | | 2,936 |
| 2,301 |
| | 3,662 |
| | 31 |
| | — |
| | 5,994 |
|
Other assets: | | | | | | | | | | |
Property, plant and equipment, net | | 1,142 |
| | 2,418 |
| | 9 |
| | — |
| | 3,569 |
|
Investment in affiliated companies | 1,385 |
| | — |
| | 1,357 |
| | (2,742 | ) | | — |
| 1,637 |
| | — |
| | 5,204 |
| | (6,841 | ) | | — |
|
Notes and advances receivable from affiliates | 801 |
| | 20,907 |
| | 4,180 |
| | (25,888 | ) | | — |
| |
Long-term receivables, net | 12 |
| | — |
| | — |
| | — |
| | 12 |
| 9 |
| | 1 |
| | — |
| | — |
| | 10 |
|
Goodwill | 22 |
| | 25 |
| | — |
| | — |
| | 47 |
| 470 |
| | 329 |
| | — |
| | — |
| | 799 |
|
Intangibles, net | 5 |
| | 15 |
| | — |
| | — |
| | 20 |
| 971 |
| | 678 |
| | — |
| | — |
| | 1,649 |
|
Investments in nonconsolidated affiliates | | 42 |
| | 489 |
| | — |
| | — |
| | 531 |
|
Deferred income taxes | 171 |
| | 56 |
| | — |
| | — |
| | 227 |
| 256 |
| | 212 |
| | 12 |
| | — |
| | 480 |
|
Other | 63 |
| | 91 |
| | — |
| | — |
| | 154 |
| |
| 2,459 |
| | 21,094 |
| | 5,537 |
| | (28,630 | ) | | 460 |
| |
Plant, property, and equipment, at cost | 1,564 |
| | 2,504 |
| | — |
| | — |
| | 4,068 |
| |
Less — Accumulated depreciation and amortization | (978 | ) | | (1,458 | ) | | — |
| | — |
| | (2,436 | ) | |
| 586 |
| | 1,046 |
| | — |
| | — |
| | 1,632 |
| |
Other assets | | 150 |
| | 396 |
| | 14 |
| | — |
| | 560 |
|
Total assets | $ | 4,037 |
| | $ | 24,817 |
| | $ | 5,537 |
| | $ | (29,363 | ) | | $ | 5,028 |
| $ | 6,978 |
| | $ | 8,185 |
| | $ | 5,270 |
| | $ | (6,841 | ) | | $ | 13,592 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | |
Short-term debt (including current maturities of long-term debt): | | | | | | | | | | |
Short-term debt — non-affiliated | $ | — |
| | $ | 225 |
| | $ | 15 |
| | $ | — |
| | $ | 240 |
| |
Short-term debt — affiliated | 458 |
| | 157 |
| | — |
| | (615 | ) | | — |
| |
Short-term debt, including current maturities of long-term debt
| | $ | 1 |
| | $ | 154 |
| | $ | 15 |
| | $ | — |
| | $ | 170 |
|
Accounts payable | 724 |
| | 1,157 |
| | — |
| | (112 | ) | | 1,769 |
| 904 |
| | 1,821 |
| | — |
| | — |
| | 2,725 |
|
Accrued taxes | 4 |
| | 34 |
| | — |
| | — |
| | 38 |
| |
Other | 210 |
| | 232 |
| | 9 |
| | (6 | ) | | 445 |
| |
Accrued compensation and employee benefits | | 87 |
| | 304 |
| | — |
| | — |
| | 391 |
|
Accrued income taxes | | — |
| | — |
| | — |
| | — |
| | — |
|
Accrued expenses and other current liabilities | | 426 |
| | 542 |
| | 56 |
| | — |
| | 1,024 |
|
Total current liabilities | 1,396 |
| | 1,805 |
| | 24 |
| | (733 | ) | | 2,492 |
| 1,418 |
| | 2,821 |
| | 71 |
| | — |
| | 4,310 |
|
Long-term debt: | | | | | | | | | | |
Long-term debt — non-affiliated | 580 |
| | 9 |
| | 715 |
| | — |
| | 1,304 |
| |
Long-term debt — affiliated | 1,061 |
| | 20,766 |
| | 4,061 |
| | (25,888 | ) | | — |
| |
Long-term debt | | 250 |
| | 11 |
| | 5,247 |
| | — |
| | 5,508 |
|
Intercompany due to (due from) | | 1,905 |
| | (196 | ) | | (1,709 | ) | | — |
| | — |
|
Deferred income taxes | — |
| | 11 |
| | — |
| | — |
| | 11 |
| — |
| | 110 |
| | — |
| | — |
| | 110 |
|
Pension, postretirement benefits and other liabilities | 298 |
| | 120 |
| | — |
| | — |
| | 418 |
| 817 |
| | 835 |
| | 23 |
| | — |
| | 1,675 |
|
Commitments and contingencies | |
| |
| |
| |
| |
|
Total liabilities | 3,335 |
| | 22,711 |
| | 4,800 |
| | (26,621 | ) | | 4,225 |
| 4,390 |
| | 3,581 |
| | 3,632 |
| | — |
| | 11,603 |
|
Redeemable noncontrolling interests | — |
| | 28 |
| | — |
| | — |
| | 28 |
| — |
| | 145 |
| | — |
| | — |
| | 145 |
|
Tenneco Inc. shareholders’ equity | 702 |
| | 2,040 |
| | 737 |
| | (2,742 | ) | | 737 |
| 2,588 |
| | 4,253 |
| | 1,638 |
| | (6,841 | ) | | 1,638 |
|
Noncontrolling interests | — |
| | 38 |
| | — |
| | — |
| | 38 |
| — |
| | 206 |
| | — |
| | — |
| | 206 |
|
Total equity | 702 |
| | 2,078 |
| | 737 |
| | (2,742 | ) | | 775 |
| 2,588 |
| | 4,459 |
| | 1,638 |
| | (6,841 | ) | | 1,844 |
|
Total liabilities, redeemable noncontrolling interests and equity | $ | 4,037 |
| | $ | 24,817 |
| | $ | 5,537 |
| | $ | (29,363 | ) | | $ | 5,028 |
| $ | 6,978 |
| | $ | 8,185 |
| | $ | 5,270 |
| | $ | (6,841 | ) | | $ | 13,592 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
BALANCE SHEETSHEETS |
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
ASSETS | | | | | | | | | |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 329 |
| | $ | 364 |
| | $ | 4 |
| | $ | — |
| | $ | 697 |
|
Restricted cash | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
Receivables, net | 943 |
| | 1,629 |
| | — |
| | — |
| | 2,572 |
|
Inventories, net | 958 |
| | 1,287 |
| | — |
| | — |
| | 2,245 |
|
Prepayments and other current assets | 254 |
| | 311 |
| | 25 |
| | — |
| | 590 |
|
Total current assets | 2,484 |
| | 3,596 |
| | 29 |
| | — |
| | 6,109 |
|
Property, plant and equipment, net | 1,131 |
| | 2,361 |
| | 9 |
| | — |
| | 3,501 |
|
Investment in affiliated companies | 1,421 |
| | — |
| | 4,856 |
| | (6,277 | ) | | — |
|
Long-term receivables, net | 9 |
| | 1 |
| | — |
| | — |
| | 10 |
|
Goodwill | 263 |
| | 383 |
| | 223 |
| | — |
| | 869 |
|
Intangibles, net | 1,007 |
| | 510 |
| | 2 |
| | — |
| | 1,519 |
|
Investments in nonconsolidated affiliates
| 43 |
| | 501 |
| | — |
| | — |
| | 544 |
|
Deferred income taxes | 255 |
| | 200 |
| | 12 |
| | — |
| | 467 |
|
Other assets | 48 |
| | 180 |
| | — |
| | (15 | ) | | 213 |
|
Total assets | $ | 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 | $ | 1 |
| | $ | 152 |
| | $ | — |
| | $ | — |
| | $ | 153 |
|
Accounts payable | 858 |
| | 1,894 |
| | 7 |
| | — |
| | 2,759 |
|
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 | 1,383 |
| | 2,841 |
| — |
| 111 |
| | (15 | ) | | 4,320 |
|
Long-term debt | 3 |
| | 32 |
| | 5,305 |
| | — |
| | 5,340 |
|
Intercompany due to (due from) | 2,726 |
| | (215 | ) | | (2,511 | ) | | — |
| | — |
|
Deferred income taxes | — |
| | 88 |
| | — |
| | — |
| | 88 |
|
Postretirement benefits and other liabilities | 225 |
| | 705 |
| | 500 |
| | — |
| | 1,430 |
|
Commitments and contingencies |
|
| |
|
| |
|
| |
|
| |
|
|
Total liabilities | 4,337 |
| | 3,451 |
| | 3,405 |
| | (15 | ) | | 11,178 |
|
Redeemable noncontrolling interests | — |
| | 138 |
| | — |
| | — |
| | 138 |
|
Tenneco Inc. shareholders’ equity | 2,324 |
| | 3,953 |
| | 1,726 |
| | (6,277 | ) | | 1,726 |
|
Noncontrolling interests | — |
| | 190 |
| | — |
| | — |
| | 190 |
|
Total equity | 2,324 |
| | 4,143 |
| | 1,726 |
| | (6,277 | ) | | 1,916 |
|
Total liabilities, redeemable noncontrolling interests and equity | $ | 6,661 |
| | $ | 7,732 |
| | $ | 5,131 |
| | $ | (6,292 | ) | | $ | 13,232 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
ASSETS |
Current assets: | | | | | | | | | |
Cash and cash equivalents | $ | 7 |
| | $ | 308 |
| | $ | — |
| | $ | — |
| | $ | 315 |
|
Restricted cash | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Receivables, net | 402 |
| | 1,567 |
| | — |
| | (648 | ) | | 1,321 |
|
Inventories | 383 |
| | 486 |
| | — |
| | — |
| | 869 |
|
Prepayments and other | 99 |
| | 192 |
| | — |
| | — |
| | 291 |
|
Total current assets | 891 |
| | 2,556 |
| | — |
| | (648 | ) | | 2,799 |
|
Other assets: | | | | | | | | | |
Investment in affiliated companies | 1,389 |
| | — |
| | 1,258 |
| | (2,647 | ) | | — |
|
Notes and advances receivable from affiliates | 791 |
| | 19,119 |
| | 3,967 |
| | (23,877 | ) | | — |
|
Long-term receivables, net | 8 |
| | 1 |
| | — |
| | — |
| | 9 |
|
Goodwill | 22 |
| | 27 |
| | — |
| | — |
| | 49 |
|
Intangibles, net | 5 |
| | 17 |
| | — |
| | — |
| | 22 |
|
Deferred income taxes | 161 |
| | 43 |
| | — |
| | — |
| | 204 |
|
Other | 66 |
| | 78 |
| | — |
| | — |
| | 144 |
|
| 2,442 |
| | 19,285 |
| | 5,225 |
| | (26,524 | ) | | 428 |
|
Plant, property, and equipment, at cost | 1,478 |
| | 2,530 |
| | — |
| | — |
| | 4,008 |
|
Less — Accumulated depreciation and amortization | (934 | ) | | (1,459 | ) | | — |
| | — |
| | (2,393 | ) |
| 544 |
| | 1,071 |
| | — |
| | — |
| | 1,615 |
|
Total assets | $ | 3,877 |
| | $ | 22,912 |
| | $ | 5,225 |
| | $ | (27,172 | ) | | $ | 4,842 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
Current liabilities: | | | | | | | | | |
Short-term debt (including current maturities of long-term debt): | | | | | | | | | |
Short-term debt — non-affiliated | $ | — |
| | $ | 83 |
| | $ | — |
| | $ | — |
| | $ | 83 |
|
Short-term debt — affiliated | 408 |
| | 148 |
| | — |
| | (556 | ) | | — |
|
Accounts payable | 562 |
| | 1,232 |
| | — |
| | (89 | ) | | 1,705 |
|
Accrued taxes | 8 |
| | 37 |
| | — |
| | — |
| | 45 |
|
Other | 203 |
| | 221 |
| | 12 |
| | (3 | ) | | 433 |
|
Total current liabilities | 1,181 |
| | 1,721 |
| | 12 |
| | (648 | ) | | 2,266 |
|
Long-term debt: | | | | | | | | | |
Long-term debt — non-affiliated | 632 |
| | 12 |
| | 714 |
| | — |
| | 1,358 |
|
Long-term debt — affiliated | 1,093 |
| | 18,981 |
| | 3,803 |
| | (23,877 | ) | | — |
|
Deferred income taxes | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
Pension, postretirement benefits and other liabilities | 296 |
| | 127 |
| | — |
| | — |
| | 423 |
|
Total liabilities | 3,202 |
| | 20,852 |
| | 4,529 |
| | (24,525 | ) | | 4,058 |
|
Redeemable noncontrolling interests | — |
| | 42 |
| | — |
| | — |
| | 42 |
|
Tenneco Inc. shareholders’ equity | 675 |
| | 1,972 |
| | 696 |
| | (2,647 | ) | | 696 |
|
Noncontrolling interests | — |
| | 46 |
| | — |
| | — |
| | 46 |
|
Total equity | 675 |
| | 2,018 |
| | 696 |
| | (2,647 | ) | | 742 |
|
Total liabilities, redeemable noncontrolling interests and equity | $ | 3,877 |
| | $ | 22,912 |
| | $ | 5,225 |
| | $ | (27,172 | ) | | $ | 4,842 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Operating Activities | | | | | | | | | |
Net cash provided (used) by operating activities | $ | 111 |
| | $ | (145 | ) | | $ | (4 | ) | | $ | (3 | ) | | $ | (41 | ) |
Investing Activities | | | | | | | | | |
Proceeds from sale of assets | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Cash payments for plant, property, and equipment | (29 | ) | | (49 | ) | | — |
| | — |
| | (78 | ) |
Cash payments for software related intangible assets | (1 | ) | | (2 | ) | | — |
| | — |
| | (3 | ) |
Proceeds from deferred purchase price of factored receivables | — |
| | 36 |
| | — |
| | — |
| | 36 |
|
Other | (4 | ) | | — |
| | — |
| | — |
| | (4 | ) |
Net cash used by investing activities | (34 | ) | | (14 | ) | | — |
| | — |
| | (48 | ) |
Financing Activities | | | | | | | | | |
Repurchase of common shares | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Cash dividends | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
Payments of long-term debt | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
Net increase in bank overdrafts | — |
| | 2 |
| | — |
| | — |
| | 2 |
|
Net (decrease) increase in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | (243 | ) | | 164 |
| | 2 |
| | — |
| | (77 | ) |
Net increase in short-term borrowings secured by accounts receivable | 170 |
| | — |
| | — |
| | — |
| | 170 |
|
Intercompany dividend payments and net increase (decrease) in intercompany obligations | 4 |
| | (24 | ) | | 17 |
| | 3 |
| | — |
|
Distributions to noncontrolling interest partners | — |
| | (16 | ) | | — |
| | — |
| | (16 | ) |
Net cash (used) provided by financing activities | (74 | ) | | 126 |
| | 4 |
| | 3 |
| | 59 |
|
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Increase (decrease) in cash, cash equivalents and restricted cash | 3 |
| | (37 | ) | | — |
| | — |
| | (34 | ) |
Cash, cash equivalents and restricted cash, July 1 | 3 |
| | 234 |
| | — |
| | — |
| | 237 |
|
Cash, cash equivalents and restricted cash, September 30 (Note) | $ | 6 |
| | $ | 197 |
| | $ | — |
| | $ | — |
| | $ | 203 |
|
|
| |
Note: | Cash and cash equivalents include highly liquid investments with a maturity of three months or less at the date of purchase. |
|
| | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
Operating Activities | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | (8 | ) | | $ | (2 | ) | | $ | (90 | ) | | $ | — |
| | $ | (100 | ) |
Investing Activities | | | | | | | | | |
Acquisition of business, net of cash acquired | — |
| | (158 | ) | | — |
| | — |
| — |
| (158 | ) |
Proceeds from sale of assets | 1 |
| | 4 |
| | — |
| | — |
| | 5 |
|
Cash payments for property, plant and equipment | (118 | ) | | (261 | ) | | — |
| | — |
| | (379 | ) |
Net proceeds from sale of business | 6 |
| | 16 |
| | — |
| | — |
| | 22 |
|
Other | 1 |
| | (2 | ) | | — |
| | — |
| | (1 | ) |
Proceeds from deferred purchase price of factored receivables | — |
| | 147 |
| | — |
| | — |
| | 147 |
|
Net cash used in investing activities | (110 | ) | | (254 | ) | | — |
| | — |
| | (364 | ) |
Financing Activities | | | | | | | | | |
Cash dividends | — |
| | — |
| | (20 | ) | | — |
| | (20 | ) |
Repayment of term loans and notes | — |
| | (139 | ) | | (51 | ) | | — |
| | (190 | ) |
Proceeds from term loans and notes | — |
| | 111 |
| | — |
| | — |
| | 111 |
|
Issuance (repurchase) of common shares | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Decrease in bank overdrafts | — |
| | (8 | ) | | — |
| | — |
| | (8 | ) |
Borrowings on revolving lines of credit | 4,047 |
| | 117 |
| | 361 |
| | — |
| | 4,525 |
|
Payments on revolving lines of credit | (3,797 | ) | | (111 | ) | | (346 | ) | | — |
| | (4,254 | ) |
Other | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Intercompany dividends and net (decrease) increase in intercompany obligations | (245 | ) | | 98 |
| | 147 |
| | — |
| | — |
|
Distribution to noncontrolling interests partners | — |
| | (20 | ) | | — |
| | — |
| | (20 | ) |
Net cash (used in) provided by financing activities | 5 |
| | 47 |
| | 89 |
| | — |
| | 141 |
|
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 11 |
| | — |
| | — |
| | 11 |
|
Increase (decrease) in cash, cash equivalents and restricted cash | (113 | ) | | (198 | ) | | (1 | ) | | — |
| | (312 | ) |
Cash, cash equivalents and restricted cash, January 1 | 329 |
| | 369 |
| | 4 |
| | — |
| | 702 |
|
Cash, cash equivalents and restricted cash, June 30 | $ | 216 |
| | $ | 171 |
| | $ | 3 |
| | $ | — |
| | $ | 390 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
Operating Activities | | | | | | | | | |
Net cash provided by (used in) operating activities | $ | 79 |
| | $ | 13 |
| | $ | (5 | ) | | $ | (9 | ) | | $ | 78 |
|
Investing Activities | | | | | | | | | |
Proceeds from sale of assets | 1 |
| | 4 |
| | — |
| | — |
| | 5 |
|
Cash payments for property, plant and equipment | (77 | ) | | (97 | ) | | — |
| | — |
| | (174 | ) |
Proceeds from deferred purchase price of factored receivables | — |
| | 66 |
| | — |
| | — |
| | 66 |
|
Other | 2 |
| | — |
| | — |
| | — |
| | 2 |
|
Net cash used in investing activities | (74 | ) | | (27 | ) | | — |
| | — |
| | (101 | ) |
Financing Activities | | | | | | | | | |
Proceeds from term loans and notes | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
Repayments of term loans and notes | (10 | ) | | (18 | ) | | — |
| | — |
| | (28 | ) |
Borrowings on revolving lines of credit | 2,349 |
| | 45 |
| | 275 |
| | — |
| | 2,669 |
|
Payments on revolving lines of credit | (2,315 | ) | | (38 | ) | | (261 | ) | | — |
| | (2,614 | ) |
Issuance (repurchase) of common shares | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Cash dividends | — |
| | — |
| | (25 | ) | | — |
| | (25 | ) |
Net increase (decrease) in bank overdrafts | — |
| | (7 | ) | | — |
| | — |
| | (7 | ) |
Distribution to noncontrolling interests partners | — |
| | (28 | ) | | — |
| | — |
| | (28 | ) |
Other | (2 | ) | | (20 | ) | | — |
| | — |
| | (22 | ) |
Intercompany dividends and net (decrease) increase in intercompany obligations | (32 | ) | | 6 |
| | 17 |
| | 9 |
| | — |
|
Net cash (used in) provided by financing activities | (10 | ) | | (51 | ) | | 5 |
| | 9 |
| | (47 | ) |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) |
Increase (decrease) in cash, cash equivalents and restricted cash | (5 | ) | | (76 | ) | | — |
| | — |
| | (81 | ) |
Cash, cash equivalents and restricted cash, January 1 | 7 |
| | 311 |
| | — |
| | — |
| | 318 |
|
Cash, cash equivalents and restricted cash, June 30 | $ | 2 |
| | $ | 235 |
| | $ | — |
| | $ | — |
| | $ | 237 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Operating Activities | | | | | | | | | |
Net cash provided (used) by operating activities | $ | 39 |
| | $ | (2 | ) | | $ | (8 | ) | | $ | (4 | ) | | $ | 25 |
|
Investing Activities | | | | | | | | | |
Cash payments for plant, property, and equipment | (29 | ) | | (61 | ) | | — |
| | — |
| | (90 | ) |
Cash payments for software related intangible assets | (4 | ) | | (1 | ) | | — |
| | — |
| | (5 | ) |
Proceeds from deferred purchase price of factored receivables | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
Other | (1 | ) | | — |
| | — |
| | — |
| | (1 | ) |
Net cash used by investing activities | (34 | ) | | (34 | ) | | — |
| | — |
| | (68 | ) |
Financing Activities | | | | | | | | | |
Issuance of common shares | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
Cash dividends | — |
| | — |
| | (14 | ) | | — |
| | (14 | ) |
Payments of long-term debt | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
Purchase of common stock under the share repurchase program | — |
| | — |
| | (71 | ) | | — |
| | (71 | ) |
Net decrease in bank overdrafts | — |
| | (3 | ) | | — |
| | — |
| | (3 | ) |
Net increase in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | 82 |
| | 2 |
| | — |
| | — |
| | 84 |
|
Intercompany dividend payments and net (decrease) increase in intercompany obligations | (87 | ) | | (9 | ) | | 92 |
| | 4 |
| | — |
|
Distributions to noncontrolling interest partners | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
Net cash (used) provided by financing activities | (5 | ) | | (23 | ) | | 8 |
| | 4 |
| | (16 | ) |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Decrease in cash, cash equivalents and restricted cash | — |
| | (56 | ) | | — |
| | — |
| | (56 | ) |
Cash, cash equivalents and restricted cash, July 1 | 4 |
| | 331 |
| | — |
| | — |
| | 335 |
|
Cash, cash equivalents and restricted cash, September 30 (Note) | $ | 4 |
| | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | 279 |
|
|
| |
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Operating Activities | | | | | | | | | |
Net cash provided (used) by operating activities | $ | 190 |
| | $ | (132 | ) | | $ | (9 | ) | | $ | (12 | ) | | $ | 37 |
|
Investing Activities | | | | | | | | | |
Proceeds from sale of assets | 1 |
| | 5 |
| | — |
| | — |
| | 6 |
|
Cash payments for plant, property, and equipment | (100 | ) | | (142 | ) | | — |
| | — |
| | (242 | ) |
Cash payments for software related intangible assets | (7 | ) | | (6 | ) | | — |
| | — |
| | (13 | ) |
Proceeds from deferred purchase price of factored receivables | — |
| | 102 |
| | — |
| | — |
| | 102 |
|
Other | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
Net cash used by investing activities | (108 | ) | | (41 | ) | | — |
| | — |
| | (149 | ) |
Financing Activities | | | | | | | | | |
Repurchase of common shares | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Cash dividends | — |
| | — |
| | (39 | ) | | — |
| | (39 | ) |
Payments of long-term debt | (14 | ) | | (3 | ) | | — |
| | — |
| | (17 | ) |
Debt issuance cost for long-term debt | (2 | ) | | — |
| | — |
| | — |
| | (2 | ) |
Net decrease in bank overdrafts | — |
| | (5 | ) | | — |
| | — |
| | (5 | ) |
Net (decrease) increase in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivable | (189 | ) | | 144 |
| | 16 |
| | — |
| | (29 | ) |
Net increase in short-term borrowings secured by accounts receivable | 150 |
| | — |
| | — |
| | — |
| | 150 |
|
Intercompany dividend payments and net (decrease) increase in intercompany obligations | (28 | ) | | (18 | ) | | 34 |
| | 12 |
| | — |
|
Distributions to noncontrolling interest partners | — |
| | (44 | ) | | — |
| | — |
| | (44 | ) |
Net cash (used) provided by financing activities | (83 | ) | | 74 |
| | 9 |
| | 12 |
| | 12 |
|
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (15 | ) | | — |
| | — |
| | (15 | ) |
Decrease in cash, cash equivalents and restricted cash | (1 | ) | | (114 | ) | | — |
| | — |
| | (115 | ) |
Cash, cash equivalents and restricted cash, January 1 | 7 |
| | 311 |
| | — |
| | — |
| | 318 |
|
Cash, cash equivalents and restricted cash, September 30 (Note) | $ | 6 |
| | $ | 197 |
| | $ | — |
| | $ | — |
| | $ | 203 |
|
|
| |
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
STATEMENT OF CASH FLOWS
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Guarantor Subsidiaries | | Nonguarantor Subsidiaries | | Tenneco Inc. (Parent Company) | | Reclass & Elims | | Consolidated |
| (Millions) |
Operating Activities | | | | | | | | | |
Net cash provided (used) by operating activities | $ | 102 |
| | $ | 24 |
| | $ | (29 | ) | | $ | (11 | ) | | $ | 86 |
|
Investing Activities | | | | | | | | | |
Proceeds from sale of assets | 3 |
| | 3 |
| | — |
| | — |
| | 6 |
|
Proceeds from sale of equity interest | — |
| | 9 |
| | — |
| | — |
| | 9 |
|
Cash payments for plant, property, and equipment | (110 | ) | | (173 | ) | | — |
| | — |
| | (283 | ) |
Cash payments for software related intangible assets | (10 | ) | | (7 | ) | | — |
| | — |
| | (17 | ) |
Proceeds from deferred purchase price of factored receivables | — |
| | 77 |
| | — |
| | — |
| | 77 |
|
Other | (5 | ) | | — |
| | — |
| | — |
| | (5 | ) |
Net cash used by investing activities | (122 | ) | | (91 | ) | | — |
| | — |
| | (213 | ) |
Financing Activities | | | | | | | | | |
Repurchase of common shares | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Cash dividends | — |
| | — |
| | (40 | ) | | — |
| | (40 | ) |
Payments of long-term debt | — |
| | (3 | ) | | (6 | ) | | — |
| | (9 | ) |
Issuance of long-term debt | 400 |
| | — |
| | (264 | ) | | — |
| | 136 |
|
Debt issuance cost for long-term debt | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) |
Purchase of common stock under the share repurchase program | — |
| | — |
| | (131 | ) | | — |
| | (131 | ) |
Net decrease in bank overdrafts | — |
| | (12 | ) | | — |
| | — |
| | (12 | ) |
Net increase (decrease) in revolver borrowings and short-term debt excluding current maturities of long-term debt and short-term borrowings secured by accounts receivables | 451 |
| | 16 |
| | (323 | ) | | — |
| | 144 |
|
Net increase in short-term borrowings secured by accounts receivables | — |
| | — |
| | 20 |
| | — |
| | 20 |
|
Intercompany dividend payments and net (decrease) increase in intercompany obligations | (828 | ) | | 42 |
| | 775 |
| | 11 |
| | — |
|
Distributions to noncontrolling interest partners | — |
| | (45 | ) | | — |
| | — |
| | (45 | ) |
Net cash provided (used) by financing activities | 15 |
| | (2 | ) | | 29 |
| | 11 |
| | 53 |
|
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Decrease in cash, cash equivalents and restricted cash | (5 | ) | | (65 | ) | | — |
| | — |
| | (70 | ) |
Cash, cash equivalents and restricted cash, January 1 | 9 |
| | 340 |
| | — |
| | — |
| | 349 |
|
Cash, cash equivalents and restricted cash, September 30 (Note) | $ | 4 |
| | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | 279 |
|
|
| |
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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
In May 2014, the FASB issued ASU 2014-09, an amendment on revenue recognition. The amendment created Topic 606, Revenue from Contracts with Customers, and supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the industry topics of the codification. In addition, the amendment supersedes the cost guidance in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type Contracts, and created new Subtopic 340-40, Other Assets and Deferred Costs-Contracts with Customers. The core principle of ASC Topic 606 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 expects to be entitled in exchange for those goods or services.
We adopted ASC Topic 606, Revenue from Contracts with Customers, and all the related amendments ("new revenue standard") on January 1, 2018, using the modified retrospective method. The cumulative effect of the adoption was recognized as decrease to accumulated deficit of $1 million and the changes made to our consolidated January 1, 2018 opening balance sheet for the adoption of ASC Topic 606 were as follows:
|
| | | | | | | | | | | | | | | |
| Balance at December 31, 2017 | | Adjustments due to ASU 2014-09 | | Adjustments due to ASU 2016-16 (a) | | Balance at January 1, 2018 |
| (Millions) |
Consolidated Balance Sheet | | | | | | | |
Assets | | | | | | | |
Inventory | $ | 869 |
| | $ | (5 | ) | | $ | — |
| | $ | 864 |
|
Prepayments and other (including contract assets) | 291 |
| | 6 |
| | — |
| | 297 |
|
Equity | | | | | | | |
Accumulated deficit | (946 | ) | | 1 |
| | (2 | ) | | (947 | ) |
(a) Cumulative effect of adopting ASU 2016-16, Income Taxes - Intra Entity Transfers of Assets Other Than Inventory (Topic 740). See Note 12, New Accounting Pronouncements for further information.
Revenue from Contracts with Customers
We account for a contract 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. While the majority of the contracts we enter into with original equipment (“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 in ASC paragraph 606-10-50-14 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.
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.
Performance Obligations
The Company generates revenue through the design, manufacture, and sale of clean air and ride performance systems and products for light vehicle, commercial truck, off-highway and other applications. We recognize revenue for sales to our OE and aftermarket customers when transfer of control of the related good or service has occurred. Revenue from most of OE and aftermarket goods and services is transferred to customers occurs at a point in time. Contract terms with certain of our OE customers results in products and services being transferred over time due to the customized nature of some of our products together with contractual provisions in certain of our customer contracts that provide us with an enforceable right to payment for performance completed to date.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
Under typical terms, we do not have the right to consideration until the time of shipment from our plants or distribution center or the time of delivery to our customers. The timing of revenue recognition from products transferred to customers over time may be slightly accelerated compared to our right to consideration at the time of shipment or delivery. We invoice the customer once transfer of control has occurred and we have a right to payment. Our typical payment 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 our customers are classified as receivables on the condensed consolidated balance sheet. As our standard payment terms are less than one year, we have elected the practical expedient under ASC paragraph 606-10-32-18 to not assess whether a contract has a significant financing component.
Original Equipment
In a typical arrangement with an OE customer, purchase orders are issued for pre-production activities, which consist of engineering, design and development, tooling, and prototypes for the manufacture and delivery of component parts. We have concluded that these activities are not in the scope of ASC Topic 606 and for that reason, the Company has not made any changes to how it accounts for reimbursable pre-production costs, currently accounted for as a cost reduction. Generally, in connection with the sale of exhaust systems to certain OE manufacturers, we purchase catalytic converters and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of our customers which are used in the assembled system. These substrates are included in our inventory and are “passed through” to the customer at our cost, plus a small margin. Since we take title to the substrate inventory and have 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 $596 million and $522 million for the three month periods ended September 30, 2018 and 2017, respectively, and $1,869 million and $1,610 million for the nine month periods ended September 30, 2018 and 2017, respectively.
Due to the highly customized nature of certain finished components for our OE customers, revenue is recognized over time, consistent with the transfer of control of an asset with limited alternative use, and the Company having an enforceable right to payment for performance completed to date. We consider 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 we incur costs to fulfill contracts. Total revenue recognized over time for such customized parts totaled less than $1 million and $2 million for the three and nine month periods ended September 30, 2018, respectively.
Prices for our OE customer base are generally fixed on the purchase order and allocation of consideration between goods and services is rare as the highly customized parts are considered sold at their standalone selling price. If an occasion arose whereby a finished component was not deemed sold at its standalone selling price, consideration would be allocated among different performance obligations based on an estimate, most likely cost plus margin, of the standalone selling price of each distinct good or service in the contract.
Aftermarket
Our aftermarket customers take delivery of finished components, which are recognized as revenue at the time the customer takes possession, which is usually at the time of shipment. This determination is based on applicable shipping terms as well as the consideration of other indicators, including timing of when the Company has a present right to payment, when physical possession of products is transferred to customers, when the customer has the significant risks and rewards of ownership of the asset, and any provisions in contracts regarding customer acceptance. While unit prices are generally fixed, for certain of our aftermarket customers, we provide for variable consideration, typically in the form of promotional incentives and returns at the time of sale. Expected values are based upon the contractual terms of the incentives and historical experience with returns. In most cases, we are able to derive the expected value of variable consideration at a level to conclude it is probable that a significant revenue reversal will not occur in future periods. In cases where the high threshold for recognition is not established, such amounts will be constrained and recognized when the uncertainty underlying the constraint is resolved. Certain aftermarket contracts with customers include terms and conditions that provide for inventory adjustments that result in a customer right of return that should be accounted for on a gross basis. For these contracts we have recorded a refund liability and inventory return asset.
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 the 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
The Company applies the practical expedient in ASC paragraph 606-10-50-14 and does not disclose information about the remaining performance obligations that have original expected durations of one year or less.
Disaggregation of revenue
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:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| Total Revenues | | Substrate Sales | | Value-add Revenues | | Total Revenues | | Substrate Sales | | Value-add Revenues |
| (Millions) | | (Millions) |
Clean Air | $ | 1,602 |
| | $ | 596 |
| | $ | 1,006 |
| | $ | 5,052 |
| | $ | 1,869 |
| | $ | 3,183 |
|
Ride Performance | 461 |
| | — |
| | 461 |
| | 1,480 |
| | — |
| | 1,480 |
|
Aftermarket | 309 |
| | — |
| | 309 |
| | 951 |
| | — |
| | 951 |
|
Total Tenneco Inc. | $ | 2,372 |
| | $ | 596 |
| | $ | 1,776 |
| | $ | 7,483 |
| | $ | 1,869 |
| | $ | 5,614 |
|
Changes to policies related to revenue recognition under ASC Topic 606
Upon the adoption of ASC Topic 606, there was a change in the pattern of revenue recognition for certain customized parts. Under ASC Topic 605, revenue was recognized for these customized parts when title and risk of loss passed to the customers under the terms of our arrangements with those customers, which was usually at the time of shipment from our plants or distribution centers. 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 the Company has an enforceable right to payment for work completed to date. The Company considers the costs incurred (input method) as a fair measure of progress for the over time recognition of revenue associated with these customized parts.
The following tables summarize the impacts of adopting ASC Topic 606 on the Company’s consolidated financial statements as of and for the three and nine month periods ended September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| As Reported | | Balances Without Adoption of ASC Topic 606 | | Effect of Change Higher/(Lower) | | As Reported | | Balances Without Adoption of ASC Topic 606 | | Effect of Change Higher/(Lower) |
| (Millions) | | (Millions) |
Consolidated Statements of Income | | | | | | | | | | |
Revenues | | | | | | | | | | | |
Net sales and operating revenues | $ | 2,372 |
| | $ | 2,372 |
| | $ | — |
| | $ | 7,483 |
| | $ | 7,481 |
| | $ | 2 |
|
Cost and expenses | | | | | | | | | | | |
Cost of sales (exclusive of depreciation and amortization) | 2,014 |
| | 2,014 |
| | — |
| | 6,371 |
| | 6,369 |
| | 2 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
|
| | | | | | | | | | | |
| September 30, 2018 |
| As Reported | | Balances Without Adoption of ASC Topic 606 | | Effect of Change Higher/(Lower) |
| | | (Millions) | | |
Consolidated Balance Sheet | | | | | |
Assets | | | | | |
Inventory | $ | 956 |
| | $ | 963 |
| | $ | (7 | ) |
Prepayments and other (including contract assets) | 369 |
| | 349 |
| | 20 |
|
Liabilities | | | | | |
Accrued liabilities | 299 |
| | 287 |
| | 12 |
|
Equity | | | | | |
Accumulated deficit | (823 | ) | | (824 | ) | | 1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 | | Nine Months Ended September 30, 2018 |
| As Reported | | Balances Without Adoption of ASC Topic 606 | | Effect of Change Higher/(Lower) | | As Reported | | Balances Without Adoption of ASC Topic 606 | | Effect of Change Higher/(Lower) |
| | | (Millions) | | | | | | (Millions) | | |
Consolidated Statements of Cash Flows | | | | | | | | | | |
Operating Activities | | | | | | | | | | | |
Increase in inventories | $ | (65 | ) | | $ | (64 | ) | | $ | (1 | ) | | $ | (118 | ) | | $ | (125 | ) | | $ | 7 |
|
Increase in prepayments and other current assets | (21 | ) | | (21 | ) | | — |
| | (91 | ) | | (71 | ) | | (20 | ) |
(Decrease) increase in other current liabilities | (19 | ) | | (20 | ) | | 1 |
| | 11 |
| | (1 | ) | | 12 |
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
(Unaudited)
(16) Subsequent Events
On October 1, 2018, we completed our Acquisition of all of the interests in Federal-Mogul. Total consideration was approximately $5.2 billion. The Company will record the assets acquired and liabilities assumed at their fair values as of the acquisition date. Due to the limited amount of time since the closing of the Acquisition, the initial purchase accounting for the Acquisition has yet to be completed, including determining the fair value, as of the acquisition date, of recognized and previously unrecognized assets and liabilities. Federal-Mogul's annual sales in 2017 were $7.9 billion. We will provide additional disclosures in our Form 10-K once the initial purchase accounting is complete.See Note 2, Acquisition of Federal-Mogul for additional information.
Following the completion of the Acquisition, Federal-Mogul was merged with and into the Company, with the Company continuing as the surviving company. In addition, at the effective time of the Acquisition, the Company’s certificate of incorporation was amended and restated in order to create a new class of non-voting Class B Common Stock and to reclassify the Company’s existing common stock as Class A Voting Common Stock. See Note 2, Acquisition of Federal-Mogul for additional information. 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 4, Debt and Other Financing Arrangements for additional information.
On October 26, 2018, we announced our plan to close our OE ride control plants in Owen Sound, Ontario and Hartwell, Georgia as part of an initiative to realign our manufacturing footprint to enhance operational efficiency and respond to changing market conditions and capacity requirements. We expect to complete the closure of the two facilities near the end of the second quarter of 2020. Restructuring and related charges are expected to be in the range of $70 million to $85 million, with $20 million to $30 million occurring in the fourth quarter of 2018. The charges comprise between $40 million and $50 million of cash expenditures (including severance payments to employees, the cost of decommissioning and starting up equipment, and other costs associated with this action) and between $30 million and $35 million of non-cash asset write-downs and other costs.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As you
References herein to "Tenneco", the "Company", "we", "us", and "our" refer to Tenneco Inc. and its consolidated subsidiaries. Unless otherwise stated, all comparisons of June 30, 2019 financial results are to June 30, 2018 financial results.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the following review of our financial condition and results of operations, you should also read our condensed consolidated financial statements and related notes included in Item I1 of this quarterly report on Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, which was filed with the Securities and Exchange Commission (SEC)("SEC") on February 28, 2018March 18, 2019 (the "2017"2018 Form 10-K"). A Form 8-K was also filed with the SEC on September 28, 2018 to recast certain portions of the 2017 Form 10-K to retrospectively reflect the effect of the Company's change in reporting segments that took effect in the first quarter of 2018, and to recast certain financial information and related disclosures for accounting standards adopted in 2018, for which retrospective application was required.
Executive Summary
EXECUTIVE OVERVIEW
Our Business
We are one of the world's leading manufacturers of clean air, powertrain, and ride performance products and systems for light vehicle, commercial truck, off-highway, industrial, and off-highway applications. We also engineer, manufacture, market and distribute leading, brand-name products to a diversified and global aftermarket customer base.customers. Both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, are served globally through leading brands, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, CleviteThrush® Elastomers, Axios™, KineticNational®, and Fric-Rot™ ride performance products and WalkerSealed 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 six of the top 10 car models produced for sale in Europe and nine of the top 10 light truck models produced for sale in North America for 2017. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. As of December 31, 2017, we operated 92 manufacturing facilities worldwide and employed approximately 32,000 people to service our customers' demands.among others.
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences to other vehicles in response to higher fuel costs and other economic and social factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards, and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the impacteffect of any such cost increases through material substitutions, cost reduction initiatives, and other methods.
In
Öhlins Intressenter AB Acquisition
On January 10, 2019, we completed the third quarteracquisition of a 90.5% ownership interest in Öhlins Intressenter AB (the "Öhlins Acquisition"), a Swedish technology company that develops premium suspension systems and components for the automotive and motorsport industries. The purchase price was $162 million. See Note 3, Acquisitions and Divestitures, of our condensed consolidated financial statements for additional information.
Federal-Mogul Acquisition
On October 1, 2018, light vehicle production was upwe completed the acquisition of a 100% ownership interest in Federal-Mogul LLC (the "Federal-Mogul Acquisition", and together with the Öhlins Acquisition, the "Acquisitions"). See Note 3, Acquisitions and Divestitures, of our condensed consolidated financial statements for additional information.
Spin-Off Transaction and Change in Reportable Segments
Following the closing of the Federal-Mogul Acquisition, we agreed to use our reasonable best efforts to pursue the separation of the combined company. As such, we expect to separate our businesses to form two percent in both North Americanew, independent publicly traded companies, an Aftermarket and South America,Ride Performance company ("DRiV") and up seven percent in India compareda new Powertrain Technology company ("New Tenneco"). We currently expect the separation of the business to the third quarteroccur mid-2020 through a spin-off transaction of 2017. Light vehicle production was down five percent in Europe and down four percent in China when compared to the third quarter of 2017. In the first nine months of 2018, light vehicle production was up seven percent in South America, up 10 percent in India and up one percent in China compared to the first nine months of 2017. Light vehicle production was flat in Europe and down one percent in North America when compared to the first nine months of 2017.
DRiV. In the first quarter of 2018,2019, we changedbegan to manage and report our reportableDRiV businesses through two new operating segments as compared to the three operating segments we had previously reported. The DRiV operating segments consist of Motorparts and Ride Performance. The new Motorparts operating segment consists of the previously reported Aftermarket operating segment as well as the aftermarket portion of the previously reported Motorparts operating segment. The Ride Performance operating segment consists of the previously reported Ride Performance operating segment as well as the OE Braking business that was included in the previously reported Motorparts operating segment. As such, prior period operating segment results and related disclosures have been conformed to reflect our current operating segments. The new reportingfuture New Tenneco consists of two existing operating segments, (Clean Air, Ride PerformancePowertrain and Aftermarket) align with how the Chief Operating Decision Maker allocates resources and assesses performance against the Company’s key growth strategies.Clean Air. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the threefour operating segments as "Other."Corporate." Prior period segmentation has been revised to conform to current year presentation.
On October 1, 2018, we closed on the acquisition of all of the interests in Federal-Mogul LLC ("Federal-Mogul"), (the "Acquisition") pursuant to the Membership Interest Purchase Agreement, dated as of April 10, 2018 (the “Purchase Agreement”), by and among the Company, Federal-Mogul, American Entertainment Properties Corp. (“AEP” and, together with certain affiliated entities, the “Sellers”) and Icahn Enterprises L.P. (“IEP”). Total consideration was approximately $5.2 billion. Following the completion of the Acquisition, Federal-Mogul was merged with and into the Company, with the Company continuing as the surviving company.
See Note 2, Acquisition17, Segment Information, of Federal-Mogul to our condensed consolidated financial statements for additional information.
Subsequent to
Financial Results for the Company's earnings release on October 26, 2018, the Company recorded $7Six Months Ended June 30, 2019
Consolidated revenues were $8,988 million, an increase of additional depreciation and amortization expense related to current and prior periods, which resulted in a decrease in net income attributable to Tenneco Inc. of $6$3,874 million, or $0.10 per diluted share for both the three and nine months periods ended September 30, 2018.
Results of Operations
For the Three Months Ended September 30, 2018 and 2017
Total revenues76%, for the third quarter of 2018 were $2,372 million, up $98six months ended June 30, 2019. The Acquisitions increased revenues by $3,816 million, or four percent,75%. The remaining increase in revenues was primarily driven by the net favorable effects of organic growth from $2,274higher sales volume and mix of $251 million inand the third quarterfavorable effect of 2017 on growth inother of $8 million, partially offset by the Clean Air and Ride Performance segments. Excluding the impactunfavorable effects of foreign currency and substrate sales, revenue was up $80 million, or five percent, from $1,752 million to $1,832 million, driven primarily by stronger light vehicle volumes, higher commercial truck, off-highway and other vehicle revenues and new platforms.exchange of $201 million.
Cost of sales (exclusivewas $7,657 million, an increase of depreciation and amortization): Cost of sales$3,330 million, or 77%, for the third quarter of 2018six months ended June 30, 2019. The Acquisitions increased $103 million to $2,014 million, or 84.9 percent of sales, compared to $1,911 million, or 84.0 percent of sales in the third quarter of 2017. The following table lists the primary drivers behind the change in cost of sales ($ millions)by $3,202 million, or 74%.
|
| | | |
Quarter ended September 30, 2017 | $ | 1,911 |
|
Volume and mix | 149 |
|
Material | (2 | ) |
Currency exchange rates | (58 | ) |
Restructuring and other charges | 4 |
|
Manufacturing and other costs | 10 |
|
Quarter ended September 30, 2018 | $ | 2,014 |
|
The remaining increase in cost of sales was mainlyprimarily driven by incremental costs related to higher sales volume and mix of $256 million, the unfavorable effects of materials sourcing of $9 million, and an increase in other costs of $25 million, which was partially offset by a favorable effect of foreign currency exchange of $162 million.
Net income decreased by $197 million to a net loss of $60 million for the six months ended June 30, 2019 as compared to $137 million of net income for the six months ended June 30, 2018. The decrease was primarily driven by:
an increase in selling, general, and administrative costs primarily due to the year-over-yeareffect of the Acquisitions of $289 million and an increase in volume,acquisition and spin related costs of $33 million;
an increase in depreciation and amortization of $218 million primarily due to the Acquisitions;
| |
• | an increase in engineering, research and development of $91 million primarily due to the Acquisitions; |
an increase in restructuring charges of $44 million related to higher costs for facility closure and other costs;
a goodwill impairment charge of $60 million as a result of our change in operating segments; and
an increase in interest expense and other financing charges of $118 million.
These unfavorable effects were partially offset by:
an increase in equity earnings in nonconsolidated affiliates of $33 million, which was the result of the Federal-Mogul Acquisition; and
a reduction in income tax expense of $37 million.
Recent Trends and Market Conditions
There is inherent uncertainty in the continuation of the trends discussed below. In addition, there may be other factors or trends that can have an effect on our business. Our business and operating results are affected by the relative strength of:
General economic conditions
Our OE business is directly related to automotive vehicle production by our customers. Automotive production levels depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by three primary factors: the number of vehicles in operation; the average age of vehicles; and vehicle usage trends (primarily distance traveled).
Global light vehicle production levels (According to IHS Markit, July, 2019)
Global light vehicle production decreased by 8% for the three months ending June 30, 2019 compared to the same period in the prior year. Production levels were down in the major markets in which we operate. North and South American light vehicle production decreased by 2% in each region. European production decreased by 7%, while China decreased by 16% and India decreased by 12%.
Global light vehicle production decreased by 7% for the first half of 2019 compared to the same period in the prior year. North and South American light vehicle production decreased 3% in each region. European production decreased by 6%, while China decreased by 13% and India decreased by 7%.
Global commercial vehicle production decreased by 4% for the three months ending June 30, 2019 compared to the same period in the prior year. Consistent with the first quarter of 2019, commercial vehicle production increased in North America, Brazil and Europe, while production in China and India declined. Commercial vehicle production in North America was up 6%, production in Brazil rose 4% and European commercial vehicle production increased 1%. China posted a decrease for the second quarter of 2019 of 9% and India experienced a decrease of 12%.
Global commercial vehicle production decreased by 4% for the first half of 2019 compared to the same period in the prior year. Production in North America was up 6%, production in Brazil rose 4% and European commercial vehicle production increased 1%. Commercial vehicle production decreased in China by 9% and in India by 13%.
Part replacement trends
The strength of our aftermarket business is influenced by several key drivers. These include the vehicle population (or "parc"), average vehicle age, fuel prices, and vehicle distance traveled. The vehicle parc is estimated to have expanded in most major markets, including the U.S., China, and Germany. Average vehicle ages also increased, despite growth in new vehicle sales, in most regions. Vehicle distance traveled varies by region and is sensitive to several factors, including fuel prices, and transportation alternatives.
Geopolitical risk
We conduct business globally, which subjects us to numerous risks and uncertainties including, without limitation, “Brexit” implications, joint ventures in unstable regions, and substantial new tariffs. For example, we have operations in the U.K. which may be materially affected by the U.K.'s referendum to leave the European Union, which has created uncertainty in both the U.K. and Europe. We also have an interest in a Turkish joint venture, which may be affected by recent turmoil in that region. In addition, we do business in Mexico and China where there could be potential changes in trade agreements (e.g., the North American Free Trade Agreement) and new or changed tariffs in the U.S. (such as those relating to China).
Foreign currencies
Given the global nature of our operations, we are subject to fluctuations in foreign exchanges rates and there has been significant volatility in foreign currency rates.
Strategy
The key components of our strategy are as follows:
Continue to optimize our operations by aggressively pursuing cost competitiveness in all business segments and continuing to drive productivity in existing operations
We operate within competitive industries and our management teams continuously analyze opportunities to reduce costs and improve productivity. We assess individual opportunities to execute our strategy based upon estimated sales and margin growth, cost reduction potential, internal investment returns, and other criteria, to make investment decisions on a case-by-case basis.
We will continue to focus on operational excellence by optimizing our manufacturing footprint, further developing our engineering capabilities, managing the complexities of our global supply chain to realize purchasing economies of scale while satisfying diverse and global 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.
We seek to continue optimizing our performance through enhanced efficiencies to meet the world-class delivery performance our customers increasingly require. We have made investments in our global distribution network, through our new multi-product distribution centers, the implementation of automated picking technology, and a more efficient replenishment system with the objective of improving inventory visibility and availability, and lowering costs.
Execute a Spin-Off Transaction in mid-2020
We completed the Federal-Mogul Acquisition on October 1, 2018. We will continue to seek synergies to optimize the two independent companies in preparation for the anticipated separation. This optimization should present additional opportunities for cost reduction, increased profitability, and cash flow.
Assess focused acquisition and investment opportunities that provide product line expansion, technological advancements, geographic positioning, penetration of emerging markets and market share growth
We completed the Öhlins Acquisition, a Swedish technology company that develops premium suspension systems and components for the automotive and motorsport industries. We intend to continue to explore 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.
Adapt cost structure to economic realities
We aggressively respond to difficult economic environments, executing comprehensive restructuring and cost-reduction initiatives, and realigning our operations to any resulting reductions in production levels and replacement demand. Suppliers must also continually identify and implement product innovation and cost reduction activities to fund customer annual price concession expectations to retain current business and be competitively positioned for future new business opportunities.
Original Equipment Specific Strategies
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 as follows:
Maintain technological leadership to drive further growth from secular market trends
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 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. In order to maintain our strong market positions, we are focused on meeting these changing requirements and keeping up with new OE trends. In addition, our suite of solutions represents an opportunity to drive greater partnership with OE manufacturers, capturing growth with higher value content per vehicle.
Penetrate adjacent market segments
We seek to penetrate a variety of adjacent sales opportunities and achieve growth in higher-margin businesses by leveraging our technology and engineering leadership in powertrain, clean air, ride performance and aftermarket into adjacent sales opportunities for heavy-duty trucks, buses, agricultural equipment, construction machinery and other costs,vehicles in other regions around the world.
Aftermarket Specific Strategies
We expect the demand for replacement parts to increase steadily as a result of the anticipated significant increase in vehicles in operation (“VIO”) through 2040, the increase in the average age of VIO, and the increase in the average miles driven per year. The characteristics of aftermarket sales and distribution are defined regionally, which require regionally focused strategies to address the key success factors of our customers. The key components of our aftermarket strategy are described below:
Leverage the strength of our global aftermarket leading brands positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities
Our aftermarket business has a portfolio of leading brands with strong product offerings. We will build 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 established markets (North America, Europe, Australia) as well as high-growth regions (China, South America, India, Southeast and Northeast Asia). Important focus areas are enhancing our presence in high-growth markets; leveraging our portfolio and strong presence in suspension to expand our business globally; and diversifying outside of chassis with our sealing, engine, and underhood products, as well as other components.
Continue to strengthen our aftermarket capabilities and product offerings in mature markets, including North America and Europe
The scale of our aftermarket business allows for strong distribution channels that significantly enhance our go-to-market capabilities across mature markets in North America and Europe. 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. This 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, which differ significantly by region.
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.
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, where the aftermarket industry is fragmented with a large number of small distributors and installers. 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.
Critical Accounting Estimates
Refer to our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission on March 18, 2019. Also refer to Note 6, Goodwill and Other Intangible Assets, for additional discussion on our goodwill.
Non-GAAP Measures
As a result of the Federal-Mogul Acquisition, we changed our key performance measure. We now utilize 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 conformed to reflect the change in our key performance measure. 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.
RESULTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2019 compared to the Three and Six Months Ended June 30, 2018
Consolidated Results of Operations
The following table presents our condensed consolidated results of operations and reflects the revisions discussed in Item 1 — Condensed Consolidated Financial Statements (Unaudited).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Increase / (Decrease) | | Six Months Ended June 30, | | Increase / (Decrease) |
| 2019 | | 2018 | | $ Change | | % Change (1) | | 2019 | | 2018 | | $ Change | | % Change (1) |
| (millions, except percent, share, and per share amounts) |
Revenues | | | | | | | | | | | | | | | |
Net sales and operating revenues | $ | 4,504 |
| | $ | 2,533 |
| | $ | 1,971 |
| | 78 | % | | $ | 8,988 |
| | $ | 5,114 |
| | $ | 3,874 |
| | 76 | % |
Costs and expenses | | | | | | | | | | | | | | | |
Cost of sales | 3,793 |
| | 2,134 |
| | 1,659 |
| | 78 | % | | 7,657 |
| | 4,327 |
| | 3,330 |
| | 77 | % |
Selling, general, and administrative | 288 |
| | 154 |
| | 134 |
| | 87 | % | | 604 |
| | 305 |
| | 299 |
| | 98 | % |
Depreciation and amortization | 169 |
| | 60 |
| | 109 |
| | 182 | % | | 338 |
| | 120 |
| | 218 |
| | 182 | % |
Engineering, research, and development | 78 |
| | 39 |
| | 39 |
| | 100 | % | | 170 |
| | 79 |
| | 91 |
| | 115 | % |
Restructuring charges and asset impairments | 61 |
| | 29 |
| | 32 |
| | 110 | % | | 85 |
| | 41 |
| | 44 |
| | 107 | % |
Goodwill impairment charge | — |
| | — |
| | — |
| | n/m |
| | 60 |
| | — |
| | 60 |
| | n/m |
|
| 4,389 |
| | 2,416 |
| | 1,973 |
| | 82 | % | | 8,914 |
| | 4,872 |
| | 4,042 |
| | 83 | % |
Other expense (income) | | | | | | | | | | | | | | | |
Non-service pension and other postretirement benefit costs (credits) | 4 |
| | 3 |
| | 1 |
| | 33 | % | | 6 |
| | 6 |
| | — |
| | — | % |
Equity in (earnings) losses of nonconsolidated affiliates, net of tax | (17 | ) | | — |
| | (17 | ) | | n/m |
| | (33 | ) | | — |
| | (33 | ) | | n/m |
|
Other expense (income), net | (13 | ) | | 3 |
| | (16 | ) | | n/m |
| | (16 | ) | | 3 |
| | (19 | ) | | n/m |
|
| (26 | ) | | 6 |
| | (32 | ) | | n/m |
| | (43 | ) | | 9 |
| | (52 | ) | | n/m |
|
Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 141 |
| | 111 |
| | 30 |
| | 27 | % | | 117 |
| | 233 |
| | (116 | ) | | (50 | )% |
Interest expense | 82 |
| | 22 |
| | 60 |
| | 273 | % | | 163 |
| | 45 |
| | 118 |
| | 262 | % |
Earnings (loss) before income taxes and noncontrolling interests | 59 |
| | 89 |
| | (30 | ) | | (34 | )% | | (46 | ) | | 188 |
| | (234 | ) | | (124 | )% |
Income tax expense (benefit) | 14 |
| | 26 |
| | (12 | ) | | (46 | )% | | 14 |
| | 51 |
| | (37 | ) | | (73 | )% |
Net income (loss) | 45 |
| | 63 |
| | (18 | ) | | (29 | )% | | (60 | ) | | 137 |
| | (197 | ) | | (144 | )% |
Less: Net income (loss) attributable to noncontrolling interests | 19 |
| | 16 |
| | 3 |
| | 19 | % | | 31 |
| | 30 |
| | 1 |
| | 3 | % |
Net income (loss) attributable to Tenneco Inc. | $ | 26 |
| | $ | 47 |
| | $ | (21 | ) | | (45 | )% | | $ | (91 | ) | | $ | 107 |
| | $ | (198 | ) | | (185 | )% |
Earnings (loss) per share | | | | | | | | | | | | | | | |
Basic earnings (loss) per share: | | | | | | | | | | | | | | | |
Earnings (loss) per share | $ | 0.32 |
| | $ | 0.92 |
| | | | | | $ | (1.13 | ) | | $ | 2.08 |
| | | | |
Weighted average shares outstanding | 80,920,825 |
| | 51,258,668 |
| | | | | | 80,897,731 |
| | 51,232,639 |
| | | | |
Diluted earnings (loss) per share: | | | | | | | | | | | | | | | |
Earnings (loss) per share | $ | 0.32 |
| | $ | 0.92 |
| | | | | | $ | (1.13 | ) | | $ | 2.07 |
| | | | |
Weighted average shares outstanding | 80,920,825 |
| | 51,607,224 |
| | | | | | 80,897,731 |
| | 51,546,015 |
| | | | |
(1) Percentages above denoted as "n/m" are not meaningful to present in the table.
Revenues
Three-months ended: Revenues increased by $1,971 million, or 78%, as compared to the three months ended June 30, 2018. The Acquisitions increased revenues by $1,881 million, or 74%. The remaining increase in revenues was primarily driven by the net favorable effects of organic growth from higher sales volume and mix of $162 million and the favorable effect of other of $2 million, partially offset by the favorable impactunfavorable effects of foreign currency exchange rates.of $74 million.
Gross margin: Revenue less
The table below reflects our consolidated revenues for the three months ended June 30, 2019 and 2018 (amounts in millions):
|
| | | |
Three-months ended June 30, 2018 | $ | 2,533 |
|
Acquisitions | 1,881 |
|
Drivers in the change of organic revenues: |
|
|
Volume and mix | 162 |
|
Currency exchange rates | (74 | ) |
Others | 2 |
|
Three-months ended June 30, 2019 | $ | 4,504 |
|
Six-months ended: Revenues increased by $3,874 million, or 76%, as compared to the six months ended June 30, 2018. The Acquisitions increased revenues by $3,816 million, or 75%. The remaining increase in revenues was primarily driven by the net favorable effects of organic growth from higher sales volume and mix of $251 million and the favorable effect of other of $8 million, partially offset by the unfavorable effects of foreign currency exchange of $201 million.
The table below reflects our consolidated revenues for the six months ended June 30, 2019 and 2018 (amounts in millions):
|
| | | |
Six months ended June 30, 2018 | $ | 5,114 |
|
Acquisitions | 3,816 |
|
Drivers in the change of organic revenues: |
|
|
Volume and mix | 251 |
|
Currency exchange rates | (201 | ) |
Others | 8 |
|
Six months ended June 30, 2019 | $ | 8,988 |
|
Cost of Sales
Three-months ended: Cost of sales increased by $1,659 million, or 78%, as compared to the three months ended June 30, 2018. The Acquisitions increased cost of sales by $1,569 million, or 74%. The remaining increase in cost of sales was primarily driven by incremental costs related to higher sales volume and mix of $164 million and the unfavorable effects of materials sourcing of $2 million, partially offset by a favorable effect of foreign currency exchange of $61 million and a decrease in other costs of $15 million.
The table below reflects our consolidated cost of sales for the third quarterthree months ended June 30, 2019 and 2018 (amounts in millions):
|
| | | |
Three months ended June 30, 2018 | $ | 2,134 |
|
Acquisitions | 1,569 |
|
Drivers in the change of organic revenues: |
|
|
Volume and mix | 164 |
|
Material | 2 |
|
Currency exchange rates | (61 | ) |
Others | (15 | ) |
Three months ended June 30, 2019 | $ | 3,793 |
|
Six-months ended: Cost of 2018 was $358sales increased by $3,330 million, or 15.1 percent, versus $36377%, as compared to the six months ended June 30, 2018. The Acquisitions increased cost of sales by $3,202 million, or 16.0 percent, in the third quarter of 2017.74%. The remaining increase in gross margin dollars resulting from year-over-yearcost of sales was primarily driven by incremental costs related to higher sales volume and mix of $256 million, the unfavorable effects of materials sourcing of $9 million, and an increase in volumeother costs of $25 million, which was partially offset by unfavorable mix, higher restructuringa favorable effect of foreign currency exchange of $162 million.
The table below reflects our consolidated cost of sales for the six months ended June 30, 2019 and manufacturing and other costs and unfavorable currency impact.2018 (amounts in millions):
Engineering, research, and development: Engineering, research, and development expense was $39 million and $40 million in the third quarters of 2018 and 2017, respectively. |
| | | |
Six months ended June 30, 2018 | $ | 4,327 |
|
Acquisitions | 3,202 |
|
Drivers in the change of organic revenues: |
|
|
Volume and mix | 256 |
|
Material | 9 |
|
Currency exchange rates | (162 | ) |
Others | 25 |
|
Six months ended June 30, 2019 | $ | 7,657 |
|
Selling, general, and administrative (SG&A):
Three-months ended: SG&A expenseincreased by $134 million as compared to the three months ended June 30, 2018. The increase was up $14primarily due to the effect of the Acquisitions of $141 million and an increase in acquisition and spin related costs of $7 million, partially offset by a decrease of $7 million in the third quarter of 2018, at $141cost reduction initiatives.
Six-months ended: SG&A increased by $299 million as compared to $127the six months ended June 30, 2018. The increase was primarily due to the effect of the Acquisitions of $289 million, an increase in the third quarteracquisition and spin related costs of 2017. Included in the third quarter of 2018 was $12$33 million, of advisory expensesand an increase related to the Acquisitionspending for cost reduction initiatives of Federal-Mogul, $10 million of litigation settlement, and $3 million of costs to support future structural cost reductions, while 2017 included $11 million related to restructuring and related expenses.$1 million.
Depreciation and amortization: amortization
Three-months ended: Depreciation and amortization expenseincreased by $109 million as compared to the three months ended June 30, 2018. The increase was $65due primarily to the effect of the Acquisitions.
Six-months ended: Depreciation and amortization increased by $218 million as compared to the six months ended June 30, 2018. The increase was due primarily to the effect of the Acquisitions.
Engineering, research, and development
Three-months ended: Engineering, research, and development increased by $39 million as compared to the three months ended June 30, 2018. The increase was due primarily to the effect of the Acquisitions.
Six-months ended: Engineering, research, and development increased by $91 million as compared to the six months ended June 30, 2018. The increase was due primarily to the effect of the Acquisitions.
Restructuring charges and asset impairments
Three-months ended: Restructuring charges increased by $32 million as compared to the three months ended June 30, 2018. The increase is primarily attributable to higher costs related to facility closure and other costs incurred during the three months ended June 30, 2019.
Six-months ended: Restructuring charges increased by $44 million as compared to the six months ended June 30, 2018. The increase is primarily attributable to higher costs related to facility closure and other costs incurred during the six months ended June 30, 2019.
Goodwill impairment charge
Three-months ended: There was no goodwill impairment charge recorded in the third quarter of 2018,three months ended June 30, 2019, and resulted in no change as compared to $58the three months ended June 30, 2018.
Six-months ended: During the six months ended June 30, 2019, there was reorganization of reporting units within the Aftermarket, Ride Performance, and Motorparts segments, which resulted in a goodwill impairment of $60 million, inall of which was within the third quarter of 2017.Ride Performance segment.
Earnings before interest expense, taxes
Non-service pension and noncontrolling interests (“EBIT”) was $104postretirement benefit costs (credits)
Three-months ended: Non-service pension and postretirement benefit costs (credits) increased $1 million for the third quarter of 2018, a decrease of $30 million whenthree months ended June 30, 2019 as compared to $134the three months ended June 30, 2018. The Federal-Mogul Acquisition increased non-service pension and postretirement benefit costs by $3 million, in the third quarter of the prior year. Higher OE light vehicle volumes, increased commercial truck, off-highway and other vehicle revenues, new platforms and lower restructuring and related expenses were more than offset by higher depreciation and amortization, unfavorable mix, advisory expenses related to the Acquisition, a litigation settlement, continued investments in growth for new programs and $9 million of unfavorable currency impact.
For the Nine Months Ended September 30, 2018 and 2017
Total revenues for the first nine months of 2018 were $7,483 million, up $600 million or nine percent, from $6,883 million in the first nine months of 2017 driven by the growth in the Clean Air and Ride Performance segments. Excluding the impact of currency and substrate sales, revenue was up $270 million, or five percent, from $5,273 million to $5,543 million. The increase in revenues was driven primarily by stronger light vehicle volumes, higher commercial truck, off-highway and other vehicle revenues and new platforms.
Cost of sales (exclusive of depreciation and amortization): Cost of sales for the first nine months of 2018 increased $582 million to $6,371 million, or 85.1 percent of sales, compared to $5,789 million, or 84.1 percent of sales in the first nine months of 2017. The following table lists the primary drivers behind the change in cost of sales ($ millions).
|
| | | |
Nine months ended September 30, 2017 | $ | 5,789 |
|
Volume and mix | 470 |
|
Material | (1 | ) |
Currency exchange rates | 89 |
|
Restructuring and other charges | 13 |
|
Manufacturing and other costs | 11 |
|
Nine months ended September 30, 2018 | $ | 6,371 |
|
The increase in cost of sales was mainly due to the year-over-year increase in volume, the impact of currency exchange rates and higher restructuring and manufacturing and other costs.
Gross margin: Revenue less cost of sales for the first nine months of 2018 was $1,112 million, or 14.9 percent, versus $1,094 million, or 15.9 percent, in the first nine months of 2017. The effect on gross margin dollars resulting from year-over-year increase in volume and favorable currency impactwhich was partially offset by price reductions, unfavorable mix and higher restructuring and manufacturing and other costs.
Engineering, research, and development: Engineering, research, and development expense was $122 million and $115the recognition of $2 million in prior service credits during the first ninethree months ended June 30, 2019, as a result of the plan amendment recognized at December 31, 2018 for one of our postretirement medical benefits plan.
Six-months ended: Non-service pension and 2017, respectively. Includedpostretirement benefit costs (credits) remained consistent for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018. The Federal-Mogul Acquisition increased non-service pension and postretirement benefit costs by $5 million, which was partially offset by the recognition of $4 million in prior service credits during the six months ended June 30, 2019, as a result of the plan amendment recognized at December 31, 2018 for one of our postretirement medical benefit plans.
Equity in (earnings) losses of nonconsolidated affiliates, net of tax
Three-months ended: Equity in (earnings) losses of nonconsolidated affiliates, net of tax increased by $17 million as compared to the three months ended June 30, 2018. The increase was due to the Federal-Mogul Acquisition.
Six-months ended: Equity in (earnings) losses of nonconsolidated affiliates, net of tax increased by $33 million as compared to the six months ended June 30, 2018. The increase was due to the Federal-Mogul Acquisition.
Other expense (income), net
Three-months ended: Other income, net increased by $16 million as compared to the three months ended June 30, 2018. The Acquisitions increased other income, net by $7 million. Excluding the Acquisitions, the increase was primarily attributable to income from an Environmental Protection Agency ("EPA") mandate to which we were a party.
Six-months ended: Other income, net increased by $19 million as compared to the six months ended June 30, 2018. The Acquisitions increased other income, net by $12 million. Excluding the Acquisitions, the increase was primarily attributable to income from an EPA mandate to which we were a beneficiary.
Interest expense
Three-months ended: Interest expense increased by $60 million as compared to the three months ended June 30, 2018. The increase was primarily attributable 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 Federal-Mogul Acquisition, and interest expense on the debt assumed in the first nine monthsFederal-Mogul Acquisition.
Interest expense includes financing charges on sales of 2018 wasaccounts receivable, which increased by $4 million of costs incurredas compared to support future structural cost reductions in anticipation ofthe three months ended June 30, 2018. The increase is primarily attributable to the Federal-Mogul acquisition.Acquisition.
SG&A: SG&A
Six-months ended: Interest expense increased by $118 million as compared to the six months ended June 30, 2018. The increase was $450primarily attributable to higher interest expense pertaining to the five-year $1,700 million down $70term loan A facility and the seven-year $1,700 million term loan B facility that were entered into in connection with the Federal-Mogul Acquisition, and interest expense on the debt assumed in the first nine monthsFederal-Mogul Acquisition.
Interest expense includes financing charges on sales of 2018accounts receivable, which increased by $9 million as compared to $520 million in the first ninesix months of 2017. Included in the first nine months of 2018 was $43 million of advisory expenses relatedended June 30, 2018. The increase is primarily attributable to the Acquisition, $10Federal-Mogul Acquisition.
Income tax expense (benefit)
Three-months ended: Income tax expense decreased by $12 million of restructuring and related expenses, $10as compared to the three months ended June 30, 2018. The decrease was primarily attributable to a decrease in pre-tax earnings.
Six-months ended: Income tax expense decreased by $37 million of litigation settlement and $8 million of costsas compared to support future structural cost reductions, while 2017 includedthe six months ended June 30, 2018. The decrease was primarily attributable to a $132 million antitrust settlement accrual anddecrease in pre-tax earnings.
Net income (loss)
Three-months ended: Net income decreased by $18 million of restructuring and related expenses.
Depreciation and amortization: Depreciation and amortization expense was $183 million in the first nine months of 2018, compared to $165 million in the first nine months of 2017.
EBIT was $334$45 million for the first ninethree months of 2018, an increase of $52 million whenended June 30, 2019 as compared to $282$63 million inof net income for the first ninethree months ended June 30, 2018, as result of the prior year. Higher light vehicle volumes, increased commercial truck, off-highway and other vehicle revenues, new platforms and $8aforementioned items.
Six-months ended: Net income decreased by $197 million to a net loss of $60 million for the six months ended June 30, 2019 as compared to $137 million of favorable currency impact were partially offset by highernet income for the six months ended June 30, 2018, as result of the aforementioned items.
Earnings (loss) before interest expense, income taxes, noncontrolling interests, and depreciation and amortization unfavorable mix, price reductions, higher restructuring(“EBITDA including noncontrolling interests”)
The following table presents the reconciliation from net income (loss) attributable to Tenneco Inc. to EBITDA including noncontrolling interests for the three and related expenses, advisory expenses relatedsix months ended June 30, 2019 and 2018 (amounts in millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Total EBITDA including noncontrolling interests | $ | 310 |
| | $ | 171 |
| | $ | 455 |
| | $ | 353 |
|
Depreciation and amortization | (169 | ) | | (60 | ) | | (338 | ) | | (120 | ) |
Earnings (loss) before interest expense, income taxes, and noncontrolling interests | 141 |
| | 111 |
| | 117 |
| | 233 |
|
Interest expense | (82 | ) | | (22 | ) | | (163 | ) | | (45 | ) |
Income tax (expense) benefit | (14 | ) | | (26 | ) | | (14 | ) | | (51 | ) |
Net income (loss) | 45 |
| | 63 |
| | (60 | ) | | 137 |
|
Less: Net income (loss) attributable to noncontrolling interests | 19 |
| | 16 |
| | 31 |
| | 30 |
|
Net income (loss) attributable to Tenneco Inc. | $ | 26 |
| | $ | 47 |
| | $ | (91 | ) | | $ | 107 |
|
Three-months ended: EBITDA including noncontrolling interests increased by $139 million as compared to the Acquisition,three months ended June 30, 2018, as a litigation settlement charge and continued investments in growthresult of the aforementioned items. See "Non-GAAP Measures" for new programs. EBIT infurther discussion on the first nineuse of non-GAAP measures.
Six-months ended: EBITDA including noncontrolling interests increased by $102 million as compared to the six months ended June 30, 2018, as a result of 2017 also included a $132 million antitrust settlement accrual and $11 million charges related to pension derisking and the accelerationaforementioned items. See "Non-GAAP Measures" for further discussion on the use of restricted stock vesting.non-GAAP measures.
Segment Results of Operations
Overview of Net Sales and Operating Revenues
An element of the revenues of ourOur Clean Air segment is derived fromhas substrate sales. Substrates are porous ceramic filters coated with a catalyst - typically, precious metals such as platinum, palladium and rhodium. While we generally have primary design, engineering and manufacturing responsibility for OE emission control systems, weWe do not manufacture substrates, but rather,as 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.
We present these substrate sales separately because we believe investors utilize this information to understand the impact of this portion of our revenues on our overall business and because it removes the impact of potentially volatile precious metals pricing from our revenues. While our original equipment customers generally assume the risk of precious metals pricing volatility, it impacts our reported revenues. Presenting revenues that exclude “substrates” used in catalytic converters and diesel particulate filters removes this impact.
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.
Finally,
We disclose substrate sales amounts because we present these reconciliations of revenues in orderbelieve investors utilize this information to reflect value-add revenues withoutunderstand the effect of changes in foreign currency rates. We have not reflected any currency impact inthis portion of our revenues on our overall business and because it removes the base periodeffect of the comparisons for measuring the effects of currency in the subsequent year. We believe investors find this information useful in understanding period-to-period comparisons inpotentially volatile precious metals pricing from our revenues. While our OE customers generally assume the risk of precious metals pricing volatility, it affects our reported revenues.
The tablestable below reflectreflects our segment revenues for the three months ended June 30, 2019 and nine months periods ended September 30, 2018 and 2017.
Net Sales and Operating Revenues for the Three Months Ended September 30, 2018 and 2017 |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 |
| Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| (Millions) |
| | | | | | | | | |
Clean Air | $ | 1,602 |
| | $ | 596 |
| | $ | 1,006 |
| | $ | (22 | ) | | $ | 1,028 |
|
Ride Performance | 461 |
| | — |
| | 461 |
| | (18 | ) | | 479 |
|
Aftermarket | 309 |
| | — |
| | 309 |
| | (16 | ) | | 325 |
|
Total Tenneco Inc. | $ | 2,372 |
| | $ | 596 |
| | $ | 1,776 |
| | $ | (56 | ) | | $ | 1,832 |
|
(amounts in millions): |
| | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| (Millions) |
| | | | | | | | | |
Clean Air | $ | 1,495 |
| | $ | 522 |
| | $ | 973 |
| | $ | — |
| | $ | 973 |
|
Ride Performance | 457 |
| | — |
| | 457 |
| | — |
| | 457 |
|
Aftermarket | 322 |
| | — |
| | 322 |
| | — |
| | 322 |
|
Total Tenneco Inc. | $ | 2,274 |
| | $ | 522 |
| | $ | 1,752 |
| | $ | — |
| | $ | 1,752 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Revenue |
| New Tenneco | | DRiV | |
| |
|
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Revenues |
Three months ended June 30, | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 1,827 |
| | $ | 1,694 |
| | $ | 1,133 |
| | $ | — |
| | $ | 709 |
| | $ | 506 |
| | $ | 835 |
| | $ | 333 |
| | $ | 4,504 |
| | $ | 2,533 |
|
| — |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|
Value-add revenues | 1,050 |
| | 1,073 |
| | 1,133 |
| | — |
| | 709 |
| | 506 |
| | 835 |
| | 333 |
| | 3,727 |
| | 1,912 |
|
Currency effect on value-add revenue | (31 | ) | | — |
| | — |
| | — |
| | (20 | ) | | — |
| | (8 | ) | | — |
| | (59 | ) | | — |
|
Value-add revenue excluding currency | $ | 1,081 |
| | $ | 1,073 |
| | $ | 1,133 |
| | $ | — |
| | $ | 729 |
| | $ | 506 |
| | $ | 843 |
| | $ | 333 |
| | $ | 3,786 |
| | $ | 1,912 |
|
| | | | | | | | | | | | | | | | | | | |
Substrate sales | $ | 777 |
| | $ | 621 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 777 |
| | $ | 621 |
|
Effect of Acquisitions | $ | — |
| | $ | — |
| | $ | 1,133 |
| | $ | — |
| | $ | 221 |
| | $ | — |
| | $ | 527 |
| | $ | — |
| | $ | 1,881 |
| | $ | — |
|
The table below reflects our segment revenues for the six months ended June 30, 2019 and 2018 (amounts in millions):
|
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2018 Versus Three Months Ended September 30, 2017 Dollar and Percent Increase (Decrease) |
| Revenues | | Percent | | Value-add Revenues excluding Currency | | Percent |
| (Millions Except Percent Amounts) |
| | | | | | | |
Clean Air | $ | 107 |
| | 7 | % | | $ | 55 |
| | 6 | % |
Ride Performance | 4 |
| | 1 | % | | 22 |
| | 5 | % |
Aftermarket | (13 | ) | | (4 | )% | | 3 |
| | 1 | % |
Total Tenneco Inc. | $ | 98 |
| | 4 | % | | $ | 80 |
| | 5 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Segment Revenue |
| New Tenneco | | DRiV | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total Revenues |
Six months ended June 30, | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 3,606 |
| | $ | 3,450 |
| | $ | 2,308 |
| | $ | — |
| | $ | 1,442 |
| | $ | 1,019 |
| | $ | 1,632 |
| | $ | 645 |
| | $ | 8,988 |
| | $ | 5,114 |
|
| | | | | | | | | | | | | | | | | | | |
Value-add revenues | 2,123 |
| | 2,177 |
| | 2,308 |
| | — |
| | 1,442 |
| | 1,019 |
| | 1,632 |
| | 645 |
| | 7,505 |
| | 3,841 |
|
Currency effect on value-add revenue | (82 | ) | | — |
| | — |
| | — |
| | (51 | ) | | — |
| | (26 | ) | | — |
| | (159 | ) | | — |
|
Value-add revenue excluding currency | $ | 2,205 |
| | $ | 2,177 |
| | $ | 2,308 |
| | $ | — |
| | $ | 1,493 |
| | $ | 1,019 |
| | $ | 1,658 |
| | $ | 645 |
| | $ | 7,664 |
| | $ | 3,841 |
|
| | | | | | | | | | | | | | | | | | | |
Substrate sales | $ | 1,483 |
| | $ | 1,273 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,483 |
| | $ | 1,273 |
|
Effect of Acquisitions | $ | — |
| | $ | — |
| | $ | 2,308 |
| | $ | — |
| | $ | 465 |
| | $ | — |
| | $ | 1,043 |
| | $ | — |
| | $ | 3,816 |
| | $ | — |
|
Light Vehicle Industry Production by Region for Three Months Ended September 30, 2018 and 2017 (According to IHS Automotive, October 2018)
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 | | Increase (Decrease) | | % Increase (Decrease) |
| (Number of Vehicles in Thousands) |
North America | 4,048 |
| | 3,970 |
| | 78 |
| | 2 | % |
Europe | 4,674 |
| | 4,923 |
| | (249 | ) | | (5 | )% |
South America | 902 |
| | 883 |
| | 19 |
| | 2 | % |
China | 6,245 |
| | 6,487 |
| | (242 | ) | | (4 | )% |
India | 1,254 |
| | 1,168 |
| | 86 |
| | 7 | % |
Segment Revenue
Clean Air
Three-months ended: Clean Air revenue was $1,602increased $133 million, in the third quarter of 2018or 8%, as compared to $1,495 million in the third quarter of 2017.three months ended June 30, 2018. Higher volumes drove a $142 million increase due to higher light vehicle revenues, highersales and commercial truck off-highway and other vehicle sales, as well as new platforms, which was partially offset byrevenues contributed $183 million to the negative impact of the end of OE customer production in Australia. Currencyincrease, while foreign currency exchange had a $35$46 million unfavorable impacteffect on Clean Air revenues.
Ride Performance
Six-Months ended: Clean Air revenue was $461increased $156 million, in the third quarter of 2018or 5%, as compared to $457 million in the third quarter of 2017. The benefit of a $17 million increase in volume due to increased OEsix months ended June 30, 2018. Higher light vehicle and commercial truck off-highwaysales contributed $287 million to the increase, while foreign currency exchange had a $124 million unfavorable effect on Clean Air revenues.
Powertrain
Three and other vehicle salesSix-months ended: As a result of the Federal-Mogul Acquisition, Powertrain revenue was $1,133 million and new platforms,$2,308 million for the three and six months ended June 30, 2019, respectively.
Ride Performance
Three-months ended: Ride Performance revenue increased $203 million, or 40%, as well as favorable pricing wascompared to the three months ended June 30, 2018. The Acquisitions increased revenue by $221 million. Excluding the Acquisitions, revenue decreased by $18 million due to the unfavorable effects of foreign currency exchange of $20 million and net unfavorable volume and mix of $1 million, partially offset by an $18net favorable other of $3 million.
Six-months ended: Ride Performance revenue increased $423 million, unfavorable currency impact.
Aftermarket revenue was $309 million in the third quarter of 2018or 42%, as compared to $322the six months ended June 30, 2018. The Acquisitions increased revenue by $465 million. Excluding the Acquisitions, revenue decreased by $42 million in the third quarter of 2017. The benefit of higher volumes and favorable pricing was more than offset by unfavorable mix and a $16 million unfavorable currency impact.
Net Sales and Operating Revenues for the Nine Months Ended September 30, 2018 and 2017
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 |
| Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| (Millions) |
| | | | | | | | | |
Clean Air | $ | 5,052 |
| | $ | 1,869 |
| | $ | 3,183 |
| | $ | 65 |
| | $ | 3,118 |
|
Ride Performance | 1,480 |
| | — |
| | 1,480 |
| | 20 |
| | 1,460 |
|
Aftermarket | 951 |
| | — |
| | 951 |
| | (14 | ) | | 965 |
|
Total Tenneco Inc. | $ | 7,483 |
| | $ | 1,869 |
| | $ | 5,614 |
| | $ | 71 |
| | $ | 5,543 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Revenues | | Substrate Sales | | Value-add Revenues | | Currency Impact on Value-add Revenues | | Value-add Revenues excluding Currency |
| (Millions) |
| | | | | | | | | |
Clean Air | $ | 4,589 |
| | $ | 1,610 |
| | $ | 2,979 |
| | $ | — |
| | $ | 2,979 |
|
Ride Performance | 1,327 |
| | — |
| | 1,327 |
| | — |
| | 1,327 |
|
Aftermarket | 967 |
| | — |
| | 967 |
| | — |
| | 967 |
|
Total Tenneco Inc. | $ | 6,883 |
| | $ | 1,610 |
| | $ | 5,273 |
| | $ | — |
| | $ | 5,273 |
|
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, 2018 Versus Nine Months Ended September 30, 2017 Dollar and Percent Increase (Decrease) |
| Revenues | | Percent | | Value-add Revenues excluding Currency | | Percent |
| (Millions Except Percent Amounts) |
| | | | | | | |
Clean Air | $ | 463 |
| | 10 | % | | $ | 139 |
| | 5 | % |
Ride Performance | 153 |
| | 12 | % | | 133 |
| | 10 | % |
Aftermarket | (16 | ) | | (2 | )% | | (2 | ) | | — | % |
Total Tenneco Inc. | $ | 600 |
| | 9 | % | | $ | 270 |
| | 5 | % |
Light Vehicle Industry Production by Region for Nine Months Ended September 30, 2018 and 2017 (According to IHS Automotive, October 2018)
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 | | Increase (Decrease) | | % Increase (Decrease) |
| (Number of Vehicles in Thousands) |
North America | 12,785 |
| | 12,955 |
| | (170 | ) | | (1 | )% |
Europe | 16,557 |
| | 16,524 |
| | 33 |
| | — | % |
South America | 2,599 |
| | 2,421 |
| | 178 |
| | 7 | % |
China | 19,649 |
| | 19,372 |
| | 277 |
| | 1 | % |
India | 3,685 |
| | 3,345 |
| | 340 |
| | 10 | % |
Clean Air revenue was $5,052 million in the first nine months of 2018 compared to $4,589 million in the first nine months of 2017. Higher volumes drove a $389 million increase due to higher light vehicle revenues, higher commercial truck, off-highway and other vehicle sales, as well as new platforms,the unfavorable effects of foreign currency exchange of $51 million, partially offset by price reductionsnet favorable volume and mix of $5 million and $4 million favorable other.
Motorparts
Three-months ended: Motorparts revenue increased $502 million, or 151%, as compared to the three months ended June 30, 2018. The Federal-Mogul Acquisition increased revenue by $527 million. Excluding the Federal-Mogul Acquisition, revenue decreased by $25 million due to the net unfavorable effects of $20 million from lower volume and the negative impactunfavorable effects of the endforeign currency exchange of OE customer production in Australia. Currency had a $101$8 million, favorable impact on Clean Air revenues.
Ride Performance revenue was $1,480 million in the first nine months of 2018 compared to $1,327 million in the first nine months of 2017. Higher volumes drove a $131 million increase due to increased light vehicle and commercial truck, off-highway and other vehicle sales and new platforms. Currency had a $20 million favorable impact on Ride Performance revenues.
Aftermarket revenue was $951 million in the first nine months of 2018 compared to $967 million in the first nine months of 2017 due to lower volumes and unfavorable mix, partially offset by $3 million favorable pricing. Currency had a $14other.
Six-months ended: Motorparts revenue increased $987 million, or 153%, as compared to the six months ended June 30, 2018. The Federal-Mogul Acquisition increased revenue by $1,043 million. Excluding the Federal-Mogul Acquisition, revenue decreased by $56 million which was due to unfavorable impact on Aftermarket revenues.volume and mix of $41 million and the unfavorable effects of foreign currency exchange of $26 million, partially offset by $11 million of other.
Earnings before Interest Expense, Income Taxes, and Noncontrolling Interests and Depreciation and Amortization (“EBIT”EBITDA including noncontrolling interests”)
The following table presents EBITDA including noncontrolling interests by segment for the Three Months Ended Septemberthree and six months ended June 30, 2019 and 2018 and 2017(amounts in millions):
|
| | | | | | | | | | | |
| Three Months Ended September 30, | | Change |
| 2018 | | 2017 | |
| (Millions) |
| | | | | |
Clean Air | $ | 104 |
| | $ | 100 |
| | $ | 4 |
|
Ride Performance | (5 | ) | | 7 |
| | (12 | ) |
Aftermarket | 45 |
| | 50 |
| | (5 | ) |
Other | (40 | ) | | (23 | ) | | (17 | ) |
Total Tenneco Inc. | $ | 104 |
| | $ | 134 |
| | $ | (30 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months | | Six Months |
| 2019 | | 2018 | | 2019 | | 2018 | | 2019 vs 2018 | | 2019 vs 2018 |
| (Millions) |
EBITDA including noncontrolling interests by Segments: | | | | | | | | | | | |
Clean Air | $ | 152 |
| | $ | 142 |
| | $ | 283 |
| | $ | 299 |
| | $ | 10 |
| | $ | (16 | ) |
Powertrain | 100 |
| | — |
| | 213 |
| | — |
| | 100 |
| | 213 |
|
Ride Performance | 26 |
| | 20 |
| | (19 | ) | | 44 |
| | 6 |
| | (63 | ) |
Motorparts | 110 |
| | 55 |
| | 155 |
| | 100 |
| | 55 |
| | 55 |
|
Corporate | (78 | ) | | (46 | ) | | (177 | ) | | (90 | ) | | (32 | ) | | (87 | ) |
Total EBITDA including noncontrolling interests | $ | 310 |
| | $ | 171 |
| | $ | 455 |
| | $ | 353 |
| | $ | 139 |
| | $ | 102 |
|
(1) See "Non-GAAP Measures" for further discussion on the use of non-GAAP measures.
Clean Air
Three-months ended: Clean Air EBITDA including noncontrolling interests increased $10 million as compared to the three months ended June 30, 2018. The increase is primarily attributable to strong light vehicle and commercial truck sales, lower selling, general and administrative costs and improved operating efficiencies, offset by unfavorable foreign exchange.
Six-months ended: Clean Air EBITDA including noncontrolling interests decreased $16 million as compared to the six months ended June 30, 2018. The decrease is primarily attributable to unfavorable operating performance, incremental costs for process harmonization, higher restructuring costs, and unfavorable effects of foreign currency exchange, partially offset by stronger light vehicle and commercial truck sales and lower selling, general and administrative costs.
Powertrain
Three and Six-months ended: As a result of the Federal-Mogul Acquisition, Powertrain EBITDA including noncontrolling interests was $100 million and $213 million for the three and six months ended June 30, 2019, respectively.
Ride Performance
Three-Months ended: Ride Performance EBITDA including noncontrolling interests increased $6 million as compared to the three months ended June 30, 2018. The Acquisitions contributed $9 million of additional EBITDA, thus resulting in a total decrease of $3 million without Acquisitions. The decrease is primarily attributable to incremental restructuring costs and the unfavorable effects of foreign currency, partially offset by net favorable volume and mix and lower one-time selling, general and administrative costs.
Six-Months ended: Ride Performance EBITDA including noncontrolling interests decreased $63 million as compared to the six months ended June 30, 2018. While the Acquisitions contributed $17 million of additional EBITDA, this increase is more than offset by a goodwill impairment charge of $60 million taken in the six months ended June 30, 2019 as a result of an operating segment reorganization. Also contributing to the decrease in EBITDA was unfavorable operating performance, higher selling, general, administrative and engineering costs, and the unfavorable effects of foreign currency, which were partially offset by net favorable volume and mix.
Motorparts
Three-months ended: Motorparts EBITDA including noncontrolling interests increased $55 million compared to the three months ended June 30, 2018. The Federal-Mogul Acquisition contributed $75 million of EBITDA including noncontrolling interests to the second quarter 2019 results. The increase in EBITDA attributable to the acquisition was offset primarily by an unfavorable warranty charge, incremental purchase accounting charges, unfavorable operating performance, net unfavorable volume and mix and incremental restructuring charges.
Six-months ended: Motorparts EBITDA including noncontrolling interests increased $55 million as compared to the six months ended June 30, 2018. The Federal-Mogul Acquisition contributed $142 million of EBITDA including noncontrolling interests to the results for the six months ended June 30, 2019. The increase in EBITDA attributable to the acquisition was offset primarily by purchase accounting charges, unfavorable performance, net unfavorable volume and mix, incremental costs associated with a warranty charge, and costs associated with process harmonization.
Corporate
Three-months ended: Corporate EBITDA including noncontrolling interests decreased $32 million as compared to the three months ended June 30, 2018. The decrease is primarily attributable to higher acquisition and spin costs and higher corporate costs post Federal-Mogul Acquisition, offset by lower selling, general and administrative costs.
Six-months ended: Corporate EBITDA including noncontrolling interests decreased $87 million as compared to the six months ended June 30, 2018. The decrease is primarily attributable to higher acquisition and spin costs and higher corporate costs post Federal-Mogul Acquisition, offset by lower selling, general and administrative costs.
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,” which may have an effect on the comparability of EBITEBITDA including noncontrolling interests results between periods:periods (amounts in millions):
|
| | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| (Millions) |
| | | |
Clean Air: | | | |
Restructuring and related expenses | $ | 1 |
| | $ | 4 |
|
Ride Performance: | | | |
Restructuring and related expenses | 10 |
| | 14 |
|
Pre-closing structural cost reductions (1) | 1 |
| | — |
|
Litigation settlement | 9 |
| | — |
|
Aftermarket: | | | |
Restructuring and related expenses | 1 |
| | 2 |
|
Other: | | | |
Acquisition advisory costs (2) | 12 |
| | — |
|
Pre-closing structural cost reductions (1) | 3 |
| | — |
|
Litigation settlement | 1 |
| | — |
|
Total Tenneco Inc. | $ | 38 |
| | $ | 20 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total | | Corporate | | Reclass & Elims | | Total |
Three Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Costs to achieve synergies (1) | | | | | | | | | | | | | | | |
Restructuring related to synergy initiatives | $ | — |
| | $ | 1 |
| | $ | (1 | ) | | $ | 4 |
| | $ | 4 |
| | $ | — |
| | $ | — |
| | $ | 4 |
|
Other cost to achieve synergies | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | 2 |
| | — |
| | 3 |
|
Total costs to achieve synergies | — |
| | 2 |
| | (1 | ) | | 4 |
| | 5 |
| | 2 |
| | — |
| | 7 |
|
| | | | | | | | | | | | | | | |
Restructuring and related expenses | | | | | | | | |
|
| | | | | |
|
|
Other restructuring charges | 14 |
| | 16 |
| | 23 |
| | 2 |
| | 55 |
| | — |
| | — |
| | 55 |
|
Asset impairments | 1 |
| | — |
| | — |
| | 1 |
| | 2 |
| | — |
| | — |
| | 2 |
|
Total restructuring and related expenses | 15 |
| | 16 |
| | 23 |
| | 3 |
| | 57 |
| | — |
| | — |
| | 57 |
|
| | | | | | | | | | | | | | | |
Cost reduction initiatives (2) | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | — |
| | 2 |
|
Acquisition and expected spin costs (3) | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | 26 |
| | — |
| | 27 |
|
Process harmonization(4) | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Purchase accounting charges (5) | — |
| | — |
| | 2 |
| | 1 |
| | 3 |
| | — |
| | — |
| | 3 |
|
Warranty charge (7) | — |
| | — |
| | — |
| | 7 |
| | 7 |
| | — |
| | — |
| | 7 |
|
Total adjustments | $ | 16 |
| | $ | 18 |
| | $ | 24 |
| | $ | 16 |
| | $ | 74 |
| | $ | 30 |
| | $ | — |
| | $ | 104 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total | | Corporate | | Reclass & Elims | | Total |
Three Months Ended June 30, 2018 | | | | | | | | | | | | | | | |
Costs to achieve synergies (1) | | | | | | | | | | | | | | | |
Restructuring related to synergy initiatives | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | 2 |
| | $ | — |
| | $ | 8 |
|
Other cost to achieve synergies | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
|
Total costs to achieve synergies | 6 |
| | — |
| | — |
| | 1 |
| | 7 |
| | 2 |
| | — |
| | 9 |
|
| | | | | | | | | | | | | | | |
Restructuring and related expenses | | | | | | | | |
|
| | | | | |
|
|
Other restructuring charges | 11 |
| | — |
| | 8 |
| | 2 |
| | 21 |
| | — |
| | — |
| | 21 |
|
Asset impairments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total restructuring and related expenses | 11 |
| | — |
| | 8 |
| | 2 |
| | 21 |
| | — |
| | — |
| | 21 |
|
| | | | | | | | | | | | | | | |
Cost reduction initiatives | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | — |
| | — |
| | 10 |
|
Acquisition and expected spin costs (3) | | | — |
| | — |
| | | | — |
| | 18 |
| | — |
| | 18 |
|
Environmental charge (6) | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Total adjustments | $ | 17 |
| | $ | — |
| | $ | 18 |
| | $ | 3 |
| | $ | 38 |
| | $ | 24 |
| | $ | — |
| | $ | 62 |
|
(1) Structural cost reductionsCost to achieve synergies related to the Acquisition.Acquisitions.
(2) Advisory costsCosts related to cost reduction initiatives.
(3) Costs related to the Acquisition.Acquisitions and expected spin.
(4) Change due to process harmonization.
EBIT(5) This primarily relates to a non-cash charge to cost of goods sold for Clean Air was $104 millionthe amortization of the inventory fair value step-up recorded as part of the Acquisitions.
(6) Not used in the third quarter of 2018 compared to $100 million in the third quarter a year ago driven by higher light vehicle revenues, higher commercial truck, off-highway and other vehicle sales, new platforms, lower restructuring and related expenses and manufacturing efficiencies, which was partially offset by an increase in depreciation and amortization, unfavorable mix and pricing. Currency had a $3 million unfavorable impact on EBIT of Clean Air for the third quarter of 2018 when compared to last year.table above.
EBIT for Ride Performance was $(5) million, a decrease of $12 million in the third quarter of 2018 from $7 million in the third quarter of 2017. Higher light vehicle and commercial truck, off-highway and other vehicle sales and new platforms were more than offset by higher material costs, an increase in depreciation and amortization and a $9 million litigation settlement. Included in EBIT for the third quarter of 2018 was $10 million of restructuring and related expenses, primarily related to the accelerated move of our Beijing Ride Performance plant and other cost improvement initiatives, and included in EBIT for the third quarter of 2017 was $14 million of restructuring and related expenses, primarily related to downsizing of Ride Performance operations in Australia and cost improvement initiatives. Currency had a $1 million unfavorable impact on EBIT of Ride Performance for the third quarter of 2018 when compared to last year.
EBIT for Aftermarket was $45 million in the third quarter of 2018 compared to $50 million in the third quarter of 2017. The benefit of favorable pricing and lower restructuring and related expenses of $1 million was more than offset by unfavorable mix, an increase in depreciation and amortization, and a $5 million unfavorable currency impact on EBIT of Aftermarket for the third quarter of 2018 when compared to last year.
Currency had a $9 million unfavorable impact on overall company EBIT for the third quarter of 2018 as compared to the third quarter of prior year.
EBIT as a Percentage of Revenue for the Three Months Ended September 30, 2018 and 2017
|
| | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| | | |
Clean Air | 6 | % | | 7 | % |
Ride Performance | (1 | )% | | 2 | % |
Aftermarket | 15 | % | | 16 | % |
Total Tenneco Inc. | 4 | % | | 6 | % |
In Clean Air, EBIT as a percentage of revenues for the third quarter of 2018 was down one percentage point compared to last year's third quarter, driven by higher light vehicle revenues, higher commercial truck, off-highway and other vehicle sales, new platforms, lower restructuring and related expenses and manufacturing performance efficiency, which was more than offset by increased depreciation and amortization, unfavorable mix and pricing.
In Ride Performance, EBIT as a percentage of revenues for the third quarter of 2018 was down three percentage points compared to last year's third quarter. Higher light vehicle and commercial truck, off-highway and other vehicle sales, new platforms and lower restructuring and related expenses were more than offset by higher material costs, increased depreciation and amortization and a $9 million litigation settlement expense.
In Aftermarket, EBIT as a percentage of revenues for the third quarter of 2018 was down one percentage point compared to last year's third quarter primarily due to unfavorable mix and increased depreciation and amortization partially offset by favorable pricing and lower restructuring and related expenses.
EBIT for the Nine Months Ended September 30, 2018 and 2017
|
| | | | | | | | | | | |
| Nine Months Ended September 30, | | Change |
| 2018 | | 2017 | |
| (Millions) |
| | | | | |
Clean Air | $ | 328 |
| | $ | 300 |
| | $ | 28 |
|
Ride Performance | 8 |
| | 52 |
| | (44 | ) |
Aftermarket | 130 |
| | 146 |
| | (16 | ) |
Other | (132 | ) | | (216 | ) | | 84 |
|
Total Tenneco Inc. | $ | 334 |
| | $ | 282 |
| | $ | 52 |
|
The EBIT results shown in the preceding table include the following items, certain of which are discussed below under “Restructuring and Other Charges,” which may have an effect on the comparability of EBIT results between periods: |
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (Millions) |
Clean Air: |
|
| |
|
|
Restructuring and related expenses | $ | 13 |
| | $ | 25 |
|
Pre-closing structural cost reductions (1) | 6 |
| | — |
|
Ride Performance: |
|
| |
|
|
Restructuring and related expenses | 37 |
| | 19 |
|
Warranty settlement (2) | — |
| | 7 |
|
Warranty charge (3) | 5 |
| | — |
|
Litigation settlement | 9 |
| | — |
|
Pre-closing structural cost reductions (1) | 1 |
| | — |
|
Aftermarket: |
|
| |
|
|
Restructuring and related expenses | 5 |
| | 5 |
|
Pre-closing structural cost reductions (1) | 1 |
| | — |
|
Other: |
|
| |
|
|
Restructuring and related expenses | — |
| | 3 |
|
Pension charges / Stock vesting (4) | — |
| | 11 |
|
Antitrust settlement accrual (5) | — |
| | 132 |
|
Gain on sale of unconsolidated JV | — |
| | (5 | ) |
Acquisition advisory costs (6) | 43 |
| | — |
|
Pre-closing structural cost reductions (1) | 5 |
| | — |
|
Environmental charge (7) | 4 |
| | — |
|
Litigation settlement | 1 |
| | — |
|
Total Tenneco Inc. | $ | 130 |
| | $ | 197 |
|
(1) Structural cost reductions related to the Acquisition.
(2) Warranty settlement with a customer.
(3)(7) Charge related to warranty. Although the Companywe regularly incursincur warranty costs, this specific charge wasis of an unusual nature in the period incurred.
(4) Charges related to pension derisking and the acceleration of restricted stock vesting in accordance with the long-term incentive plan.
(5) Charges related to establishing a reserve for settlement costs necessary to resolve the company's antitrust matters globally.
(6) Advisory costs related to the Acquisition.
(7)(8) Environmental charge related to an acquired site whereby an indemnification reverted back to the Company resulting from a 2009 bankruptcy filing of Mark IV Industries.
EBIT for Clean Air was $328 million in the first nine months of 2018 compared to $300 million in the first nine months a year ago driven by higher light vehicle revenues, higher commercial truck, off-highway and other vehicle sales, new platforms, lower restructuring and related expenses of $12 million and manufacturing performance efficiencies, which was partially offset by pre-closing costs of $6 million, an increase in depreciation and amortization, unfavorable mix and pricing. Currency had a $13 million favorable impact on EBIT of Clean Air for the first nine months of 2018 when compared to last year.
EBIT for Ride Performance was $8 million in the first nine months of 2018 and $52 million in the first nine months of 2017. Higher light vehicle and commercial truck, off-highway and other vehicle sales and new platforms were more than offset by launch costs related to a major truck platform, carryover of 2017 steel economic impacts, higher restructuring and related expenses, a $9 million litigation settlement and an increase in depreciation and amortization. Restructuring and related expenses of $37 million and $19 million were included in EBIT for the first nine months of 2018 and 2017, respectively. Currency had a $1 million favorable impact on EBIT of Ride Performance for the first nine months of 2018 when compared to last year.
EBIT for Aftermarket decreased $16 million to $130 million in the first nine months of 2018 from $146 million in the first nine months of 2017 primarily due to lower volumes, unfavorable mix, higher manufacturing costs, an increase in depreciation and amortization and pre-closing costs of $1 million, partially offset by favorable pricing. Currency had a $6 million unfavorable impact on EBIT of Aftermarket for the first nine months of 2018 when compared to last year.
Currency had an $8 million favorable impact on overall company EBIT for the first nine months of 2018 as compared to the first nine months of prior year.
EBIT as a Percentage of Revenue for the Nine Months Ended September 30, 2018 and 2017
|
| | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
Clean Air | 6 | % | | 7 | % |
Ride Performance | 1 | % | | 4 | % |
Aftermarket | 14 | % | | 15 | % |
Total Tenneco Inc. | 4 | % | | 4 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total | | Corporate | | Reclass & Elims | | Total |
Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | |
Costs to achieve synergies (1) | | | | | | | | | | | | | | | |
Restructuring related to synergy initiatives | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 7 |
| | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 11 |
|
Other cost to achieve synergies | — |
| | 1 |
| | — |
| | — |
| | 1 |
| | 2 |
| | — |
| | 3 |
|
Total costs to achieve synergies | 1 |
| | 2 |
| | 2 |
| | 7 |
| | 12 |
| | 2 |
| | — |
| | 14 |
|
| | | | | | | | | | | | | | | |
Restructuring and related expenses | | | | | | | | | | | | | | | |
Other restructuring charges | 18 |
| | 17 |
| | 33 |
| | 3 |
| | 71 |
| | 1 |
| | — |
| | 72 |
|
Asset impairments | 1 |
| | — |
| | — |
| | 1 |
| | 2 |
| | — |
| | — |
| | 2 |
|
Total restructuring and related expenses | 19 |
| | 17 |
| | 33 |
| | 4 |
| | 73 |
| | 1 |
| | — |
| | 74 |
|
| | | | | | | | | | | | | | | |
Cost reduction initiatives (2) | — |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
Acquisition and expected spin costs (3) | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | 66 |
| | — |
| | 67 |
|
Process harmonization(4) | 5 |
| | — |
| | — |
| | 5 |
| | 10 |
| | — |
| | — |
| | 10 |
|
Purchase accounting charges (5) | — |
| | 2 |
| | 5 |
| | 37 |
| | 44 |
| | — |
| | — |
| | 44 |
|
Goodwill impairment charge (6) | — |
| | — |
| | 60 |
| | — |
| | 60 |
| | — |
| | — |
| | 60 |
|
Warranty charge (7) | — |
| — |
| — |
| | — |
| | 7 |
| | 7 |
| | — |
| | — |
| | 7 |
|
Total adjustments | $ | 25 |
| | $ | 21 |
| | $ | 100 |
| | $ | 61 |
| | $ | 207 |
| | $ | 79 |
| | $ | — |
| | $ | 286 |
|
In Clean Air, EBIT as
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reportable Segments | | | | |
| Clean Air | | Powertrain | | Ride Performance | | Motorparts | | Total | | Corporate | | Reclass & Elims | | Total |
Six months ended June 30, 2018 | | | | | | | | | | | | | | | |
Costs to achieve synergies (1) | | | | | | | | | | | | | | | |
Restructuring related to synergy initiatives | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | 2 |
| | $ | — |
| | $ | 8 |
|
Other cost to achieve synergies | — |
| | — |
| | — |
| | 1 |
| | 1 |
| | — |
| | — |
| | 1 |
|
Total costs to achieve synergies | 6 |
| | — |
| | — |
| | 1 |
| | 7 |
| | 2 |
| | — |
| | 9 |
|
| | | | | | | | | | | | | | | |
Restructuring and related expenses | | | | | | | | | | | | | | | |
Other restructuring charges | 12 |
| | — |
| | 17 |
| | 4 |
| | 33 |
| | — |
| | — |
| | 33 |
|
Asset impairments | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total restructuring and related expenses | 12 |
| | — |
| | 17 |
| | 4 |
| | 33 |
| | — |
| | — |
| | 33 |
|
| | | | | | | | | | | | | | | |
Cost reduction initiatives (2) | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | | | — |
| | 10 |
|
Warranty charge (3) | — |
| | — |
| | 5 |
| | — |
| | 5 |
| | | | | | 5 |
|
Environmental charge (6) | — |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| | — |
| | 4 |
|
Acquisition and expected spin costs (3) | — |
| | — |
| | — |
| | — |
| | — |
| | 31 |
| | — |
| | 31 |
|
Total adjustments | $ | 18 |
| | $ | — |
| | $ | 32 |
| | $ | 5 |
| | $ | 55 |
| | $ | 37 |
| | $ | — |
| | $ | 92 |
|
(1) Cost to achieve synergies related to the Acquisitions.
(2) Costs related to cost reduction initiatives.
(3) Costs related to the Acquisitions and expected spin.
(4) Change due to process harmonization.
(5) This primarily relates to a percentagenon-cash charge to cost of revenuesgoods sold for the first nine monthsamortization of 2018 was down one percentage point compared to last year's first nine months driven by higher light vehicle revenues, higher commercial truck, off-highway and other vehicle sales, new platforms, lower restructuring and related expenses and manufacturing performance efficiencies, which was more than offset by pre-closing costs, increased depreciation and amortization, unfavorable mix and pricing.the inventory fair value step-up recorded as part of the Acquisitions.
In Ride Performance, EBIT as a percentage(6) Post segment reorganization impairment of revenues for the first nine months of 2018 was down three percentage points compared to last year's first nine months. Higher light vehicle and commercial truck, off-highway and other vehicle sales and new platforms were more than offset by launch costsgoodwill.
(7) Charge related to a major truck platform, carryoverwarranty. Although we regularly incur warranty costs, this specific charge is of 2017 steel economic impacts, higher restructuring and related expenses, a litigation settlement and increased depreciation and amortization.
In Aftermarket, EBIT as a percentage of revenues for the first nine months of 2018 was down one percentage point compared to last year's first nine months primarily due to lower volumes, unfavorable mix, higher manufacturing costs, increased depreciation and amortization and pre-closing costs, partially offset by favorable pricing.
Interest Expense, Net of Interest Capitalized
We reported interest expensean unusual nature in the third quarter of 2018 of $21 million, net of interest capitalized of $1 million, and $19 million, net of interest capitalized of $2 million in the third quarter of 2017.period incurred.
We reported interest expense in the first nine months of 2018 of $61 million, net of interest capitalized of $4 million, and $54 million, net of interest capitalized of $6 million in the first nine months of 2017. The increase was primarily due to higher interest rates on our floating rate debt. Included in the first nine months of 2017 was $1 million of expense(8) Environmental charge related to our refinancing activities.an acquired site whereby an indemnification reverted back to the Company resulting from a 2009 bankruptcy filing of Mark IV Industries.
On September 30, 2018, we had $736 million of principal amounts 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 through 2025. We also had $585 million of principal amounts in long-term debt obligations that were subject to variable interest rates. For more detailed explanations on our debt structure refer to “Liquidity
Liquidity and Capital Resources — Capitalization” later
Liquidity and Financing Arrangements
The table below shows our borrowing capacity on credit facilities as of June 30, 2019 (amounts in this Management’s Discussionbillions):
|
| | | | | |
| Credit Facilities as of June 30, 2019 |
| Term | | Available(b) |
Tenneco Inc. revolving credit facility (a) | 2023 | | $ | 1.2 |
|
Tenneco Inc. Term Loan A | 2023 | | — |
|
Tenneco Inc. Term Loan B | 2025 | | — |
|
Subsidiaries’ credit agreements | 2020 | | 0.2 |
|
| | | $ | 1.4 |
|
| |
(a) | We are required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment. |
| |
(b) | Letters of credit reduce the available borrowings under the revolving credit facility. As of June 30, 2019, the revolving credit facility had $20 million in letters of credit outstanding. |
In addition, we had cash and Analysis.cash equivalents of $384 million and $697 million as of June 30, 2019 and December 31, 2018.
Income TaxesTerm Loans
We reported income tax expenseentered 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 Federal-Mogul Acquisition. The New Credit Facility consists of $20 million$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 $16 milliona seven-year $1.7 billion term loan B facility ("Term Loan B").
Senior Notes
We have outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). We also have outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").
New Credit Facility — Other Terms and Conditions— The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including a requirement to have a consolidated net leverage ratio (as defined in the three month periods endedNew Credit Facility) as of the end of each fiscal quarter of not greater than 4.0 to 1 through September 30, 20182019, 3.75 to 1 through September 30, 2020 and 2017, respectively. The tax expense recorded3.5 to 1 thereafter; and a requirement to maintain a consolidated interest coverage ratio (as defined in the third quarterNew Credit Facility) for any period of 2018 included a tax benefitfour consecutive fiscal quarters of $5 million relatingnot less than 2.75 to acquisition1.
The financial ratios required under the New Credit Facility and restructuring charges, a tax benefitthe actual ratios we calculated as of $10 million relating to a valuation allowance release at our Australian entities and $9 million of tax expense for changes in the toll tax as discussed below. The tax benefit recorded in the third quarter of 2017 included a tax benefit of $12 million primarily relating to valuation allowance releases.
We reported income tax expense of $72 million and $41 million in the nine month periods ended SeptemberJune 30, 2018 and 2017, respectively. The tax expense recorded in the first nine months of 2018 included tax benefits of $12 million relating to acquisition and restructuring charges, a tax benefit of $10 million relating to a valuation allowance release at our Australian entities and $9 million of tax expense for changes in the toll tax as discussed below. The tax expense recorded in the first nine months of 2017 included a tax benefit of $12 million primarily relating to valuation allowance releases. In addition, the 2017 tax expense included a $50 million tax benefit related to an antitrust settlement accrual.
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 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 IRS issued Notice 2018-26 on April 2, 2018, which provided additional guidance to assist taxpayers in computing the toll tax. Based on the new guidance, a $2 million discrete charge was recorded in income tax expense2019 for the second quarter of 2018. On August 1 2018,2019, are as follows: leverage ratio of 3.39 actual versus 4.00 (maximum) required; and interest coverage ratio of 5.77 actual versus 2.75 (minimum) required.
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 our ability to create liens and enter into sale and leaseback transactions. In addition, the IRS issued proposed regulations under section 965Senior Secured Notes and 2024 Senior Unsecured Notes also require, as a condition precedent to incurring certain types of indebtedness not otherwise permitted, our consolidated fixed charge coverage ratio, as calculated on August 1, 2018, which provideda pro forma basis, be greater than 2.00, as well as containing restrictions on its operations, including limitations on: (i) incurring additional guidanceindebtedness; (ii) paying dividends; (iii) distributions and stock repurchases; (iv) investments; (v) asset sales and (vi) mergers and consolidations.
Subject to assist taxpayers in computing the toll tax. Basedlimited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee its Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the new guidance, a $9 million discrete charge wasability of the subsidiaries that have guaranteed our Senior Notes to make distributions to us.
As of June 30, 2019, we were in compliance with all of our financial covenants.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — We have securitization programs for some of our accounts receivable, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in income tax expense forshort-term debt, at June 30, 2019 and December 31, 2018 are as follows (amounts in millions): |
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Borrowings on securitization programs | | $ | 4 |
| | $ | 6 |
|
Off-Balance Sheet Arrangements — We have an accounts receivable factoring program in the third quarter of 2018. Material US state income tax conformity to current federal tax code is still pending as of September 30, 2018. We will continue to refine our estimates throughout the measurement period provided for in SEC Staff Accounting Bulletin 118, or until our accounting is complete, whichever is earlier.
Our losses in various foreign taxing jurisdictions represented sufficient negative evidence to require us to maintainU.S. with a full valuation allowance againstcommercial bank. Under this program we sell receivables from certain of our netU.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. In addition, we have 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.
We also have 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. Certain of these programs in Europe include deferred tax assets.purchase price arrangements.
These 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 these 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 evaluatesell these financial instruments before their maturity date to various financial institutions at a discount.
If these supply chain financing 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 accounts receivables under the programs described above are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair 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. We are the servicer of the receivables under some of these arrangements and are responsible for performing all accounts receivable administration functions. Where we receive a fee to service and monitor these transferred accounts 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.
The amounts outstanding for these factoring and drafting arrangements as of June 30, 2019 and December 31, 2018 are as follows (amounts in billions): |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accounts receivable outstanding and derecognized | $ | 1.1 |
| | $ | 1.0 |
|
The deferred tax assets quarterlypurchase price receivable as of June 30, 2019 and December 31, 2018 is as follows (amounts in millions):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Deferred purchase price receivable | $ | 52 |
| | $ | 154 |
|
Proceeds from the factoring of accounts receivable qualifying as sales are as follows (amounts in billions): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Proceeds from factoring qualifying as sales | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.5 |
| | $ | 1.5 |
|
Financing charges associated with the factoring of receivables are as follows (amounts in millions): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Financing charges on sale of receivables(a) | $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 5 |
|
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss). | | | | |
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 determine if valuation allowances are requiredpurchase receivables or should be adjusted. This assessment considers, among other matters,drafts from our suppliers under these programs, the nature, frequencyparticipating 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 cash flows from operations, combined with our cash on hand (subject to our proportionate share and amountany applicable withholding taxes upon repatriation 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 incash balances from our foreign subsidiaries or if certainoperations) and available borrowing capacity described above (assuming 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 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 we are unable to meet these financial covenants, we would consider several options to meet our cash flow needs. Such actions include additional restructuring steps are completedinitiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, 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
Operating activities for the six months ended June 30, 2019 and 2018 were as partfollows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Operational cash flow before changes in operating assets and liabilities | $ | 312 |
| | $ | 267 |
|
| | | |
Changes in operating assets and liabilities: | | | |
Receivables | (401 | ) | | (233 | ) |
Inventories | 101 |
| | (51 | ) |
Payables and accrued expenses | 48 |
| | 206 |
|
Accrued interest and income taxes | (66 | ) | | (2 | ) |
Other assets and liabilities | (94 | ) | | (109 | ) |
Total change in operating assets and liabilities | (412 | ) | | (189 | ) |
Net cash provided (used) by operating activities | $ | (100 | ) | | $ | 78 |
|
Cash used by operations for the six months ended June 30, 2019 was $100 million, a decrease of $178 million compared to the six months ended June 30, 2018. The net decrease was primarily the result of:
cash flows used by the operations of the Federal-Mogul acquisitionAcquisition, of approximately $75 million; and future spin
a net decrease of $103 million due to unfavorable changes in working capital items and performance (excluding the Federal-Mogul Acquisition).
Investing Activities
Investing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Proceeds from sale of assets | $ | 5 |
| | $ | 5 |
|
Net proceeds from sale of business | 22 |
| | — |
|
Cash payments for property, plant, and equipment | (379 | ) | | (174 | ) |
Acquisition of business, net of cash acquired | (158 | ) | | — |
|
Proceeds from deferred purchase price of factored receivables | 147 |
| | 66 |
|
Other | (1 | ) | | 2 |
|
Net cash used by investing activities | $ | (364 | ) | | $ | (101 | ) |
Cash used by investing activities for the six months ended June 30, 2019 included cash paid for the Ohlins Acquisition of $158 million and proceeds from the sale of the ride performancewipers business of $22 million, included in our Motorparts segment. See Note 3, Acquisitions and aftermarket company, we believe itDivestitures for additional details. In addition, there was an increase in proceeds from deferred purchase price of factored receivables of $81 million, primarily attributable to the Federal-Mogul Acquisition.
Cash payments for property, plant, and equipment were $379 million and $174 million for the six months ended June 30, 2019 and 2018. The increase is reasonably possible that sufficient positive evidence may be availableprimarily attributable to release all, or a portion, of the valuation allowance in the next twelve months. This may result in a one-time tax benefit of up to $53 million,Federal-Mogul Acquisition. These cash payments were primarily related to Chinacapital expenditures to invest in new facilities, upgrade existing products, continue new product launches, and Spain.infrastructure and equipment at our facilities to support our manufacturing, distribution, and cost reduction efforts, as well as software-related expenditures.
We believe it is reasonably possible that up to $6 million
Financing Activities
Financing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in unrecognized tax benefits related to the expiration of foreign statute of limitations and the conclusion of income tax examinations may be recognized within the next twelve months.
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.
In the third quarter of 2018, we incurred $12 million in restructuring and related costs, primarily related the accelerated move of our Beijing Ride Performance plant, and other cost improvement initiatives. In the first nine months of 2018, we incurred $55 million in restructuring and related costs, primarily related to the accelerated move of our Beijing Ride Performance plant, headcount reduction at a Clean Air manufacturing plant in Germany and other cost improvement initiatives. We expect all assembly to be relocated to the new facility by the end of the year and the component manufacturing relocation to be completed during the first quarter of 2019.
In the third quarter of 2017, we incurred $20 million in restructuring and related costs, including asset write-downs of $1 million, primarily related to closing a Clean Air manufacturing plant and downsizing Ride Performance operations in Australia and other cost improvement initiatives. In the first nine months of 2017, we incurred $52 million in restructuring and related costs, including asset write-downs of $3 million, primarily related to closing a Clean Air Belgian JIT plant in response to the end of production on a customer platform, closing a Clean Air manufacturing plant and downsizing Ride Performance operations in Australia and other cost improvement initiatives.
The Company's restructuring and other charges are classified in the condensed consolidated statements of income as follows:millions):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Millions) |
Cost of sales | $ | 12 |
| | $ | 8 |
| | $ | 44 |
| | $ | 31 |
|
Engineering, research, and development | — |
| | — |
| | 1 |
| | — |
|
Selling, general, and administrative | — |
| | 11 |
| | 10 |
| | 18 |
|
Depreciation and amortization of other intangibles | — |
| | 1 |
| | — |
| | 3 |
|
| $ | 12 |
| | $ | 20 |
| | $ | 55 |
| | $ | 52 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Proceeds from term loans and notes | $ | 111 |
| | $ | 9 |
|
Repayments of term loans and notes | (190 | ) | | (28 | ) |
Borrowings on revolving lines of credit | 4,525 |
| | 2,669 |
|
Payments on revolving lines of credit | (4,254 | ) | | (2,614 | ) |
Issuance (repurchase) of common shares | (2 | ) | | (1 | ) |
Cash dividends | (20 | ) | | (25 | ) |
Net increase (decrease) in bank overdrafts | (8 | ) | | (7 | ) |
Other | (1 | ) | | (22 | ) |
Distributions to noncontrolling interest partners | (20 | ) | | (28 | ) |
Net cash provided (used) by financing activities | $ | 141 |
| | $ | (47 | ) |
On October 26, 2018, we announced our plan to close our original equipment (OE) ride control plants in Owen Sound, Ontario and Hartwell, Georgia as part
Cash flow provided by financing activities was $141 million for the six months ended June 30, 2019. This included net repayments on term loans of an initiative to realign our manufacturing footprint to enhance operational efficiency and respond to changing market conditions and capacity requirements. We expect to begin transferring current customer business primarily to our ride control facility in Kettering, Ohio, later this year. We expect to complete the closure$79 million, net borrowings on revolving lines of the two facilities near the endcredit of the second quarter of 2020. We estimate that these restructuring actions will generate between $20$271 million, and $25 million in annualized savings beginning by the end of 2020. Restructuring and related charges are expected to be in the range of $70 million to $85 million, with $20 million to $30 million occurring in the fourth quarter of 2018. The charges comprise between $40 million and $50 million of cash expenditures (including severance payments to employees, the cost of decommissioning and starting up equipment, and other costs associated with this action) and between $30 million and $35 million of non-cash asset write-downs and other costs.
As previously disclosed, we expect to achieve synergies of at least $200 million in connection with the Acquisition. Achievement of these synergies will likely require restructuring actions. Accordingly, we expect that our level of restructuring charges and expense for 2019 will be more than our historical levels of restructuring charges and expenses.
Other Structural Cost Reductions
The Company has also been tracking other costs, unrelated to manufacturing operations, which are intended to support achievement of Acquisition synergies. In the third quarter of 2018, these other costs were $4 million, of which $3 million was recorded in SG&A and $1 million in other incomeborrowings on accounts receivable securitization programs.
Cash flow used by financing activities was $47 million for the six months ended June 30, 2018. This included net repayments on term loans of $19 million, net borrowings on revolving lines of credit of $55 million, and expenses. In the first nine months of 2018, these other costs were $13 million, of which $8 million was recorded in SG&A, $4$22 million in engineering, research, and development and $1 million in other expense, net.borrowings on accounts receivable securitization programs.
Amounts related to activities that were charged to our restructuring reserves, including costs incurred to support future structural cost reductions, are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2017 Restructuring Reserve | | 2018 Expenses | | 2018 Cash Payments | | Impact of Exchange Rates | | September 30, 2018 Restructuring Reserve |
| (Millions) |
Employee severance, termination benefits and other related costs | $ | 25 |
| | $ | 55 |
| | $ | (47 | ) | | $ | (1 | ) | | $ | 32 |
|
Under the terms of our amended and restated senior credit agreement that took effect on May 12, 2017, we are allowed to exclude, at our discretion, (i) up to $35 million in 2017 and $25 million each year thereafter of cash restructuring charges and related expenses, with the ability to carry forward any amount not used in one year to the next following year, and (ii) 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 in any quarterly period ending after May 12, 2017 in the calculation of the financial covenant ratios required under our senior credit facility. As of September 30, 2018, we elected not to exclude any of the $106 million of allowable cash charges and related expenses recognized in the fourth quarter of 2017 and in the first nine months of 2018 for restructuring related costs and antitrust settlements against the $35 million annual limit for 2017, $25 million for 2018 and the $150 million aggregate limit that was available under the terms of the senior credit facility.
Earnings Per Share
We reported net income attributable to Tenneco Inc. of $54 million or $1.05 per diluted common share for the third quarter of 2018. Included in the results for the third quarter of 2018 were costs related to our restructuring activities, acquisition advisory costs, pre-closing structural cost reduction, a litigation settlement and other unfavorable discrete tax items. The total impact of these items decreased earnings per diluted share by $0.54. We reported net income attributable to Tenneco Inc. of $83 million or $1.57 per diluted common share for the third quarter of 2017. Included in the results for the third quarter of 2017 was negative impact related to our restructuring activities, partially offset by positive impact from net tax benefit. The total impact of these items decreased earnings per diluted share by $0.10.
We reported net income attributable to Tenneco Inc. of $162 million or $3.16 per diluted common share for the first nine months of 2018. Included in the results for the first nine months of 2018 were costs related to our restructuring activities, acquisition advisory costs, pre-closing structural cost reduction, a warranty charge, an environmental charge, a litigation settlement, the associated tax impacts on the aforementioned costs and other unfavorable discrete tax items. The total impact of these items decreased earnings per diluted share by $1.94. We reported net income attributable to Tenneco Inc. of $139 million or $2.60 per diluted common share for first nine months of 2017. Included in the results for the first nine months of 2017 were negative impacts from expenses related to our restructuring activities, charges related to pension derisking and the acceleration of restricted stock vesting, cost related to our refinancing activities, a warranty settlement and an antitrust settlement accrual, which was partially offset by positive impact from the gain on sale of an unconsolidated JV and net tax benefits. The total impact of these items decreased earnings per diluted share by $2.41.
DividendsLiquidity and Capital Resources
Liquidity and Financing Arrangements
The table below shows our borrowing capacity on Common Stockcredit facilities as of June 30, 2019 (amounts in billions):
|
| | | | | |
| Credit Facilities as of June 30, 2019 |
| Term | | Available(b) |
Tenneco Inc. revolving credit facility (a) | 2023 | | $ | 1.2 |
|
Tenneco Inc. Term Loan A | 2023 | | — |
|
Tenneco Inc. Term Loan B | 2025 | | — |
|
Subsidiaries’ credit agreements | 2020 | | 0.2 |
|
| | | $ | 1.4 |
|
| |
(a) | We are required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment. |
| |
(b) | Letters of credit reduce the available borrowings under the revolving credit facility. As of June 30, 2019, the revolving credit facility had $20 million in letters of credit outstanding. |
In addition, we had cash and cash equivalents of $384 million and $697 million as of June 30, 2019 and December 31, 2018.
Term Loans
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 Company announced the reinstatementFederal-Mogul Acquisition. The New Credit Facility consists of $4.9 billion of total debt financing, consisting of a quarterly dividendfive-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").
Senior Notes
We have outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). We also have outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").
New Credit Facility — Other Terms and Conditions— The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including 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 a requirement to maintain a 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 June 30, 2019 for the second quarter of 2019, are as follows: leverage ratio of 3.39 actual versus 4.00 (maximum) required; and interest coverage ratio of 5.77 actual versus 2.75 (minimum) required.
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 our ability to create liens and enter into sale and leaseback transactions. In addition, the Senior Secured Notes and 2024 Senior Unsecured Notes also require, 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 its 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 our Senior Notes to make distributions to us.
As of June 30, 2019, we were in compliance with all of our financial covenants.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements — We have securitization programs for some of our accounts receivable, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at June 30, 2019 and December 31, 2018 are as follows (amounts in millions): |
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Borrowings on securitization programs | | $ | 4 |
| | $ | 6 |
|
Off-Balance Sheet Arrangements — We have an 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. In addition, we have 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.
We expectalso have subsidiaries in several countries in Europe that are parties to pay a quarterly dividendaccounts 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. Certain of $0.25 per share onthese programs in Europe include deferred purchase price arrangements.
These 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 common stock, representing a planned annual dividendrevolving credit agreement. If we were not able to factor receivables under these 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 $1.00 per share. the aftermarket customers whose receivables we sell under the U.S. factoring programs in the event that those factoring programs are terminated.
In the third quarterU.S and Canada, we participate in supply chain financing programs with certain of 2018our 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.
If these supply chain financing 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 2017,Canadian programs in the event that those programs are terminated or otherwise reduced.
The accounts receivables under the programs described above are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair 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. We are the servicer of the receivables under some of these arrangements and are responsible for performing all accounts receivable administration functions. Where we paidreceive a quarterly dividend of $0.25 per share,fee to service and monitor these transferred accounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or $14 million in each quarter. In the first nine months of 2018 and 2017, we paid a quarterly dividend of $0.25 per share, or $39 million and $40 million, respectively. Asliability is not recorded as a result of the Federal-Mogul transaction,such activities.
The amounts outstanding for these factoring and the resulting higher share count, the quarterly dividend payment will increase to $20 million beginningdrafting arrangements as of June 30, 2019 and December 31, 2018 are as follows (amounts in the fourth quarter. In viewbillions): |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accounts receivable outstanding and derecognized | $ | 1.1 |
| | $ | 1.0 |
|
The deferred purchase price receivable as of our current stock priceJune 30, 2019 and overall sector valuations, we will evaluate the best methodology to return this value to our shareholders. This may resultDecember 31, 2018 is as follows (amounts in a change in the dividend and returning that capital via share buybacks in a comparable amount.
Cash Flows for the Three Months Ended September 30, 2018 and 2017millions):
|
| | | | | | | |
| Three Months Ended September 30, |
| 2018 | | 2017 |
| (Millions) |
Cash provided (used) by: | | | |
Operating activities | $ | (41 | ) | | $ | 25 |
|
Investing activities | (48 | ) | | (68 | ) |
Financing activities | 59 |
| | (16 | ) |
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Deferred purchase price receivable | $ | 52 |
| | $ | 154 |
|
Proceeds from the factoring of accounts receivable qualifying as sales are as follows (amounts in billions): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Proceeds from factoring qualifying as sales | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.5 |
| | $ | 1.5 |
|
Financing charges associated with the factoring of receivables are as follows (amounts in millions): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Financing charges on sale of receivables(a) | $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 5 |
|
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss). | | | | |
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 cash flows from operations, combined with our cash on hand (subject to our proportionate share and any applicable withholding taxes upon repatriation of cash balances from our foreign operations) and available borrowing capacity described above (assuming 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 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 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, 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
ForOperating activities for the third quartersix months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Operational cash flow before changes in operating assets and liabilities | $ | 312 |
| | $ | 267 |
|
| | | |
Changes in operating assets and liabilities: | | | |
Receivables | (401 | ) | | (233 | ) |
Inventories | 101 |
| | (51 | ) |
Payables and accrued expenses | 48 |
| | 206 |
|
Accrued interest and income taxes | (66 | ) | | (2 | ) |
Other assets and liabilities | (94 | ) | | (109 | ) |
Total change in operating assets and liabilities | (412 | ) | | (189 | ) |
Net cash provided (used) by operating activities | $ | (100 | ) | | $ | 78 |
|
Cash used by operations for the six months ended June 30, 2019 was $100 million, a decrease of 2018, cash from operating activities decreased by $66$178 million compared to last year’s third quarter mainly driventhe six months ended June 30, 2018. The net decrease was primarily the result of:
cash flows used by investmentthe operations of the Federal-Mogul Acquisition, of approximately $75 million; and
a net decrease of $103 million due to unfavorable changes in working capital to support revenue growth as well as cash payments for transaction costs. Foritems and performance (excluding the third quarter of 2018, cash used by working capital was $165 million versus $118 million of cash used for working capital in the third quarter of 2017. Receivables were a use of cash of $29 million in the third quarter of 2018 compared to a source of cash of $13 million in the prior year’s third quarter. Inventory represented a cash outflow of $65 million for the third quarter of 2018 and a cash outflow of $56 million during the third quarter of 2017. Accounts payable used $26 million of cash for the quarter ended September 30, 2018 compared to $29 million of cash used for the quarter ended September 30, 2017. Cash taxes were $23 million in the third quarter of 2018 compared to $31 million in the prior year's third quarter.Federal-Mogul Acquisition).
Investing Activities
Investing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Proceeds from sale of assets | $ | 5 |
| | $ | 5 |
|
Net proceeds from sale of business | 22 |
| | — |
|
Cash payments for property, plant, and equipment | (379 | ) | | (174 | ) |
Acquisition of business, net of cash acquired | (158 | ) | | — |
|
Proceeds from deferred purchase price of factored receivables | 147 |
| | 66 |
|
Other | (1 | ) | | 2 |
|
Net cash used by investing activities | $ | (364 | ) | | $ | (101 | ) |
Cash used forby investing activities was $48 million infor the third quartersix months ended June 30, 2019 included cash paid for the Ohlins Acquisition of 2018 compared to cash used of $68 million in the same period a year ago. Cash payments for plant, property and equipment were $78 million in the third quarter of 2018 versus payments of $90 million in the third quarter of 2017. Cash payments for software-related intangible assets were $3$158 million and $5proceeds from the sale of the wipers business of $22 million, included in the third quarters of 2018our Motorparts segment. See Note 3, Acquisitions and 2017, respectively. ProceedsDivestitures for additional details. In addition, there was an increase in proceeds from the deferred purchase price of factored receivables of $81 million, primarily attributable to the Federal-Mogul Acquisition.
Cash payments for property, plant, and equipment were a source of$379 million and $174 million for the six months ended June 30, 2019 and 2018. The increase is primarily attributable to the Federal-Mogul Acquisition. These cash of $36 millionpayments were primarily related to capital expenditures to invest in the third quarter of 2018 comparednew facilities, upgrade existing products, continue new product launches, and infrastructure and equipment at our facilities to a source of cash of $28 million in the third quarter of 2017.support our manufacturing, distribution, and cost reduction efforts, as well as software-related expenditures.
Financing Activities
Financing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Proceeds from term loans and notes | $ | 111 |
| | $ | 9 |
|
Repayments of term loans and notes | (190 | ) | | (28 | ) |
Borrowings on revolving lines of credit | 4,525 |
| | 2,669 |
|
Payments on revolving lines of credit | (4,254 | ) | | (2,614 | ) |
Issuance (repurchase) of common shares | (2 | ) | | (1 | ) |
Cash dividends | (20 | ) | | (25 | ) |
Net increase (decrease) in bank overdrafts | (8 | ) | | (7 | ) |
Other | (1 | ) | | (22 | ) |
Distributions to noncontrolling interest partners | (20 | ) | | (28 | ) |
Net cash provided (used) by financing activities | $ | 141 |
| | $ | (47 | ) |
Cash flow fromprovided by financing activities was an inflow of $59$141 million for the quartersix months ended SeptemberJune 30, 2018, compared to an outflow2019. This included net repayments on term loans of $16$79 million, net borrowings on revolving lines of credit of $271 million, and $1 million in borrowings on accounts receivable securitization programs.
Cash flow used by financing activities was $47 million for the quartersix months ended SeptemberJune 30, 2017. We repurchased no shares2018. This included net repayments on term loans of our outstanding common stock during the third quarter$19 million, net borrowings on revolving lines of 2018credit of $55 million, and 1,286,643 shares of our outstanding common stock for $71 million at an average price of $54.90 per share during the third quarter of 2017. In each of the third quarter of 2018 and 2017, we paid a quarterly dividend of $0.25 per share, or $14 million.
Cash Flows for the Nine Months Ended September 30, 2018 and 2017
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (Millions) |
Cash provided (used) by: | | | |
Operating activities | $ | 37 |
| | $ | 86 |
|
Investing activities | (149 | ) | | (213 | ) |
Financing activities | 12 |
| | 53 |
|
Operating Activities
For the first nine months of 2018, cash from operating activities decreased by $49 million compared to last year’s first nine months mainly due to an increase in cash used for working capital. For the first nine months of 2018, cash used by working capital was $333 million versus $273 million of cash used for working capital in the first nine months of 2017. Receivables were a use of cash of $268$22 million in the first nine months of 2018 compared to a use of cash of $212 million in the prior year’s first nine months. Inventory represented a cash outflow of $118 million for the first nine months of 2018 and a cash outflow of $116 million during the first nine months of 2017. Accounts payable provided $141 million of cash for the quarter ended September 30, 2018 compared to $57 million of cash provided for the quarter ended September 30, 2017. Cash taxes were $79 million in the first nine months of 2018 compared to $74 million in the prior year's first nine months.
Investing Activities
Cash used for investing activities was $149 million in the first nine months of 2018 compared to cash used of $213 million in the same period a year ago. Cash payments for plant, property and equipment were $242 million in the first nine months of 2018 versus payments of $283 million in the first nine months of 2017. Cash payments for software-related intangible assets were $13 million and $17 million in the first nine months of 2018 and 2017, respectively. Proceeds from the deferred purchase price of factored receivables were a source of cash of $102 million in the first nine months of 2018 compared to a source of cash of $77 million in the first nine months of 2017.
Financing Activities
Cash flow from financing activities was an inflow of $12 million for the nine months ended September 30, 2018, compared to an inflow of $53 million for the nine months ended September 30, 2017. We repurchased no shares of our outstanding common stock during the first nine months of 2018 and 2,310,443 shares of our outstanding common stock for $131 million at an average price of $56.51 per share during the first nine months of 2017. Since announcing our share repurchase program in 2015, we have repurchased a total of approximately 11.3 million shares for $607 million, representing 19 percent 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 authorized under earlier repurchase programs. As of September 30, 2018, we had $231 million remainingborrowings on the share repurchase authorization. In the first nine months of 2018 and 2017, we paid a quarterly dividend of $0.25 per share, or $39 million and $40 million, respectively.
On May 12, 2017, we completed a refinancing of our senior credit facility by entering into an amendment and restatement of that facility. The amended and restated credit agreement enhanced financial flexibility by increasing the size and extending the term of its revolving credit facility and term loan facility, and by adding Tenneco Automotive Operating Company Inc. as a co-borrower under the revolver credit facility. The amended and restated credit agreement also added foreign currency borrowing capability and permitted the joinder of our foreign and domestic subsidiaries as borrowers under the revolving credit facility in the future. If any foreign subsidiary of ours had been added to the revolving credit facility as a borrower, the obligations of such foreign borrower would have been 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 foreign subsidiaries of ours in the chain of ownership of such foreign borrower. The amended and restated credit facility consisted of a $1,600 million revolving credit facility and a $400 million term loan A facility, which replaced our former $1,200 million revolving credit facility and $264 million term loan A facility, respectively. As of September 30, 2018, the senior credit facility provides us with a total revolving credit facility of $1,600 million and had a $375 million balance outstanding under the term loan A facility, both of which will mature on May 12, 2022.
Borrowings under our revolving credit facility were $207 million at September 30, 2018 and $453 million at September 30, 2017. At September 30, 2018, there was $180 million borrowing under the U.S. accounts receivable securitization program, whereas at September 30, 2017, there was $50 million.programs.
Outlook
Fourth Quarter 2018
In the fourth quarter, we expect constant currency organic revenue growth in our legacy business of three percent, outpacing forecasted light vehicle industry production growth of one percent. We anticipate currency will have a negative impact on revenue of three percent, based on exchange rates as of September 30, 2018. With the closing of the Federal-Mogul acquisition, we expect approximately $1.9 billion of additional revenue from Federal-Mogul operations in the fourth quarter.
We expect fourth quarter combined Tenneco and Federal-Mogul value-add adjusted EBITDA margin in the range of 11.0 percent to 11.4 percent.
Full Year 2018
For the full year, we raised our revenue guidance and now expect constant currency organic revenue growth in our legacy business of six percent, outpacing industry production by five percentage points. We expect full year revenue of approximately $11.8 billion, reflecting this strong organic growth as well as Federal-Mogul revenue from the date of acquisition.
For the full year, we expect our value-add adjusted EBITDA margin, including Federal-Mogul from the date of acquisition, in the range of 11.3 percent to 11.5 percent.
Acquisition of Federal-Mogul LLC
During a special meeting of stockholders held September 12, 2018, the Company's stockholders approved all of the proposals related to the acquisition of Federal-Mogul. The acquisition was officially completed on October 1, 2018.
Tenneco's projections are based on the type of information set forth under "Outlook" in Item 7 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" as set forth in Tenneco's Annual Report on Form 10-K for the year ended December 31, 2017. Please see that disclosure for further information. Additionally, assumptions for the fourth quarter and full year 2018 are based on current and projected customer production schedules as well as aggregate industry production, which includes IHS Automotive October 2018 global light vehicle production forecasts, Power Systems Research (PSR) October 2018 forecast for global commercial truck and buses, PSR off-highway engine production in North America and Europe and Tenneco estimates. Unless otherwise indicated, our methodology does not attempt to forecast currency fluctuations, and accordingly, reflects constant currency. Certain elements of the restructuring and related expenses, legal settlements and other unusual charges we incur from time to time cannot be forecasted accurately. In this respect, we are not able to forecast EBIT or EBITDA (and the related margins) on a forward-looking basis without unreasonable efforts on account of these factors and the difficulty in predicting GAAP revenues (for purposes of a margin calculation) due to variability in production rates and volatility of precious metal pricing in the substrates that we pass through to our customers. See “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” and Item 1A, “Risk Factors.”
Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. Preparing our condensed consolidated financial statements in accordance with generally accepted accounting principles 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 condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. There have been no changes to our critical accounting policies since December 31 2017, except for the following:
Revenue Recognition
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which we adopted on January 1, 2018, using the modified retrospective method. The Company recorded a transition adjustment as of January 1, 2018, which increased retained earnings (accumulative deficit) by $1 million related to these arrangements. Please refer to Note 15, Revenue, in our condensed consolidated financial statements for further discussion of the adoption of this standard.
Revenue is recognized for our original equipment and aftermarket customers when performance obligations under the terms of a contract are satisfied, which generally occurs with the transfer of control of our products. For most of our products, transfer of control occurs upon shipment or delivery, however, a limited number of our customer arrangements for our highly customized products with no alternative use provide us with the right to payment during the production process. As a result, for these limited arrangements, under the new revenue standard, revenue is recognized as goods are produced and control transfers to the customer.
Generally, in connection with the sale of exhaust systems to certain original equipment manufacturers, we purchase catalytic converters and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of our customers which are used in the assembled system. These substrates are included in our inventory and “passed through” to the customer at our cost, plus a small margin, since we take title to the inventory and are responsible for both the delivery and quality of the finished product. Revenues recognized for substrate sales were $1,869 million and $1,610 million for the first nine months of 2018 and 2017, 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 condensed consolidated statements of income.
New Accounting Pronouncements
Note 12, New Accounting Pronouncements, to our condensed consolidated financial statements located in Part I Item 1 of this Form 10-Q is incorporated herein for reference.
Liquidity and Capital Resources
Capitalization
Liquidity and Financing Arrangements
The table below shows our borrowing capacity on credit facilities as of June 30, 2019 (amounts in billions):
|
| | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 | | % Change |
| (Millions) | | |
Short-term debt and maturities classified as current | $ | 240 |
| | $ | 83 |
| | 189 | % |
Long-term debt | 1,304 |
| | 1,358 |
| | (4 | ) |
Total debt | 1,544 |
| | 1,441 |
| | 7 |
|
Total redeemable noncontrolling interests | 28 |
| | 42 |
| | (33 | ) |
Total other noncontrolling interests | 38 |
| | 46 |
| | (17 | ) |
Tenneco Inc. shareholders’ equity | 737 |
| | 696 |
| | 6 |
|
Total equity | 775 |
| | 742 |
| | 4 |
|
Total capitalization | $ | 2,347 |
| | $ | 2,225 |
| | 5 | % |
|
| | | | | |
| Credit Facilities as of June 30, 2019 |
| Term | | Available(b) |
Tenneco Inc. revolving credit facility (a) | 2023 | | $ | 1.2 |
|
Tenneco Inc. Term Loan A | 2023 | | — |
|
Tenneco Inc. Term Loan B | 2025 | | — |
|
Subsidiaries’ credit agreements | 2020 | | 0.2 |
|
| | | $ | 1.4 |
|
| |
(a) | We are required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment. |
| |
(b) | Letters of credit reduce the available borrowings under the revolving credit facility. As of June 30, 2019, the revolving credit facility had $20 million in letters of credit outstanding. |
General. Short-term debt, which includes maturities classified as current, borrowings by foreign subsidiaries,In addition, we had cash and borrowings under our U.S. accounts receivable securitization program, were $240cash equivalents of $384 million and $83$697 million as of SeptemberJune 30, 2018 and December 31, 2017, respectively. Borrowings under our revolving credit facilities, which are classified as long-term debt, were $207 million and $244 million at September 30, 2018 and December 31, 2017, respectively.
The 2018 year-to-date increase in the Company's shareholders' equity primarily resulted from net income attributable to Tenneco Inc. of $162 million, a $11 million increase related to pension and postretirement benefits and a $9 million increase in premium on common stock and other capital surplus relating to common stock issued pursuant to benefit plans, partially offset by a $39 million decrease related to cash dividends declared and a $102 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.
Overview. As of September 30, 2018, our financing arrangements were primarily provided by a committed senior secured credit facility with a syndicate of banks and other financial institutions. The arrangement was 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.
A summary of our long-term debt obligations at September 30, 20182019 and December 31, 2017 is set forth in the following table:2018.
|
| | | | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Principal | | Carrying Amount | | Principal | | Carrying Amount |
| (Millions) |
Tenneco Inc. — | | | | | | | |
Revolver borrowings due 2022 | $ | 207 |
| | $ | 207 |
| | $ | 244 |
| | $ | 244 |
|
Senior Tranche A Term Loan due 2022 | 375 |
| | 373 |
| | 390 |
| | 388 |
|
5 3/8% Senior Notes due 2024 | 225 |
| | 222 |
| | 225 |
| | 222 |
|
5% Senior Notes due 2026 | 500 |
| | 493 |
| | 500 |
| | 492 |
|
Other subsidiaries — | | | | | | | |
Other long-term debt due in 2020 | 6 |
| | 6 |
| | 5 |
| | 5 |
|
Notes due 2018 through 2028 | 8 |
| | 7 |
| | 12 |
| | 10 |
|
| 1,321 |
| | 1,308 |
| | 1,376 |
| | 1,361 |
|
Less — maturities classified as current | 4 |
| | 4 |
| | 3 |
| | 3 |
|
Total long-term debt | $ | 1,317 |
| | $ | 1,304 |
| | $ | 1,373 |
| | $ | 1,358 |
|
Term Loans
(1) Carrying amount is net of unamortized debt issuance costs and debt discounts. Total unamortized debt issuance costs were $11 million and $13 million as of September 30, 2018 and December 31, 2017, respectively, and the total unamortized debt discount was $2 million as of both September 30, 2018 and December 31, 2017.
Our short-term debt includes the current portion of long-term debt, borrowings by the parent company and foreign subsidiaries, which includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements, and borrowings under the U.S. accounts receivable securitization program as discussed in Note 6, Accounts Receivable Securitization and Factoring Programs. Information regarding our short-term debt as of September 30, 2018 and December 31, 2017 is as follows:
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| (Millions) |
Maturities classified as current | $ | 4 |
| | $ | 3 |
|
Short-term borrowings | 236 |
| | 80 |
|
Total short-term debt | $ | 240 |
| | $ | 83 |
|
New Credit Facility. On October 1, 2018, the CompanyWe entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the “New"New Credit Facility”Facility") in connection with the acquisition of Federal-Mogul.Federal-Mogul Acquisition. The New 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. Proceeds fromfacility ("Term Loan B").
Senior Notes
We have outstanding 5.375% senior unsecured notes due December 15, 2024 ("2024 Senior Notes") and 5.000% senior unsecured notes due July 15, 2026 ("2026 Senior Notes" and together with the 2024 Senior Notes, the "Senior Unsecured Notes"). We also have outstanding 5.000% euro denominated fixed rate notes which are due July 15, 2024 ("5.000% Euro Fixed Rate Notes"), 4.875% euro denominated fixed rate notes due April 15, 2022 ("4.875% Euro Fixed Rate Notes"), and floating rate notes due April 15, 2024 ("Euro Floating Rate Notes", together with the 5.000% Euro Fixed Rate Notes and the 4.875% Euro Fixed Notes, the "Senior Secured Notes").
New Credit Facility were used to finance the cash consideration portion of the purchase price, to refinance the Company’s then existing senior credit facilities, inclusive of the revolver— Other Terms and the term loan A then outstanding, and certain senior credit facilities of Federal-Mogul, and to pay fees and expenses relating to the Acquisition and the financing thereof, and the remainder, including future borrowings under the revolving credit facility, will be used for general corporate purposes.
Each of the Company and Tenneco Automotive Operating Company Inc. 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, Pounds Sterling or Euros.
The New Credit Facility is secured by substantially all domestic assets of the Company and the subsidiary guarantors and by pledges of up to 66 percent of the stock of certain first-tier foreign subsidiaries. The security for the New Credit Facility will be pari passu with the security for 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 certain foreign subsidiaries of the Company in the chain of ownership of such foreign borrower.
The term loan A and revolving credit facilities will mature on the fifth anniversary of closing, and the term loan B facility will mature on the seventh anniversary of closing. The term loan A facility is payable in 19 consecutive quarterly installments, commencing March 31, 2019, with 5% being paid annually in each of the first two years, 7.5% in the third year, 10% annually in each of the fourth and fifth years and the remainder on the maturity date. The term loan B facility is payable in 27 consecutive quarterly installments, commencing March 31, 2019, with 0.25% being paid in 27 quarterly installments and the remainder on the maturity date.
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.
The New Credit Facility contains representations and warranties and affirmative and negative covenants which are customary for debt facilities of this type. The negative covenants limit the ability of the Company and its restricted subsidiaries to, among other things, (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.Conditions— The New Credit Facility also contains two financial maintenance covenants for the revolving credit facility and the term loanTerm 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 a 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 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 does not contain any terms that could accelerate the payment of it as a result of a credit rating change.
Senior Credit Facility — Other Terms and Conditions. At September 30, 2018, our senior credit facility required that we maintain financial ratios equal to or better than the following consolidated net leverage ratio (consolidated indebtedness plus, without duplication, the domestic receivable program amount, net of unrestricted cash and cash equivalents up to $250 million, divided by consolidated EBITDA, each 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 senior credit facility outstanding as of September 30, 2018New Credit Facility and the actual ratios we achievedcalculated as of June 30, 2019 for the thirdsecond quarter of 2018,2019, are as follows:
|
| | | | | |
| Quarter Ended |
| September 30, 2018 |
| Required | | Actual |
Leverage Ratio (maximum) | 3.50 |
| | 2.05 |
|
Interest Coverage Ratio (minimum) | 2.75 |
| | 10.05 |
|
At September 30, 2018, the senior credit facility included a maximum leverage ratio covenant of 3.503.39 actual versus 4.00 (maximum) required; and a minimum interest coverage ratio of 5.77 actual versus 2.75 in each case through May 12, 2022.(minimum) required.
Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions— The senior credit facility provided us withSenior Unsecured Notes and Senior Secured Notes contain covenants that will, among other things, limit our ability to create liens and enter into sale and leaseback transactions. In addition, the flexibilitySenior Secured Notes and 2024 Senior Unsecured Notes also require, as a condition precedent to incurring certain types of indebtedness not to exclude certain otherwise excludable charges incurred in any relevant period from the calculation of the leverage and interest coverage ratios for such period. As of September 30, 2018, we elected not to exclude a total of $106 million of excludable charges. Had these charges been excluded, the leverage ratio and the interestpermitted, our consolidated fixed charge coverage ratio, would have been 1.68 and 12.31, respectively, as of September 30, 2018.
As of September 30, 2018, 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 May 12, 2017; 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) basedcalculated 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 3.25x | $ | 20 |
|
Greater than or equal to 3.0x | $ | 100 |
|
Greater than or equal to 2.5x | $ | 225 |
|
Less than 2.5x | no limit |
|
Although the senior credit facility agreement permitted us to repay or refinance our senior notes under the conditions described above, any repayment or refinancing of our outstanding notes wouldbasis, 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 allowed 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 contained othergreater than 2.00, as well as containing restrictions on ourits operations, that are customary for similar facilities, including limitations on: (i) incurring additional liens;indebtedness; (ii) salepaying dividends; (iii) distributions and leaseback transactions (except for the permitted transactions as described in the senior credit facility agreement); (iii) liquidationsstock repurchases; (iv) investments; (v) asset sales and dissolutions; (iv) incurring additional indebtedness or guarantees; (v) investments and acquisitions; (vi) dividends and share repurchases; (vii) mergers and consolidations; (viii) dispositionconsolidations.
Subject to limited exceptions, all of assets;our existing and (ix) refinancingfuture material domestic wholly owned subsidiaries fully and unconditionally guarantee its Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the senior notes. Compliance with these requirements and restrictions was a condition for any incremental borrowings under the senior credit facility agreement and failuresubsidiaries that have guaranteed our Senior Notes to meet these requirements enables the lendersmake distributions to require repayment of any outstanding loans.us.
At September 30, 2018, of the $1.6 billion available under the revolving credit facility, we had unused borrowing capacity of $1,393 million with $207 million in outstanding borrowings and no outstanding letters of credit. We monitor market conditions with respect to the potential refinancing of our outstanding debt obligations, including our senior secured credit facility and senior notes. Depending on market and other conditions, we may seek to refinance our debt obligations from time to time. We cannot make any assurance, however, that any refinancing will be completed.
As of SeptemberJune 30, 2018,2019, we were in compliance with all of our financial covenants.
Accounts Receivable Securitization and Factoring Programs.
On-Balance Sheet Arrangements — We securitize or factorhave securitization programs for some of our accounts receivable, on awith limited recourse basis in the U.S. and Europe. As a servicer underprovisions. Borrowings on these accounts receivable securitization and factoring programs, wewhich are responsible for performing all accounts receivable administration functions for these securitized and factored 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 April 2017, the U.S. program was amended and extended to April 30, 2019. The first priority facility provides financing of up to $155 million and the second priority facility, which is subordinated to the first priority facility, provides up to an additional $25 million of financing. Both facilities monetize accounts receivable generated in the U.S. that meet certain eligibility requirements, and 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 $180 million and $30 million, recorded in short-term debt, at SeptemberJune 30, 20182019 and December 31, 2017, respectively.2018 are as follows (amounts in millions): 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. |
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Borrowings on securitization programs | | $ | 4 |
| | $ | 6 |
|
On December 14, 2017, we entered into a new
Off-Balance Sheet Arrangements — We have an accounts receivable factoring program in the U.S. with a commercial bank. Under this program we sell receivables from onecertain 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 amountIn addition, we have two other receivable factoring programs in the U.S. with commercial banks under which we sell receivables from certain of outstanding third-party investments in our accounts receivable sold under thisaftermarket customers to whom we have extended payment terms. Both arrangements are uncommitted and may be terminated with 10 days prior notice for one program was $152 million and $107 million at September 30 2018 and December 31, 2017, respectively.days prior notice for the other program.
We also factor receivableshave subsidiaries in our European operations with regional banksseveral countries in Europe under various separatethat are parties to accounts receivable factoring facilities. The commitments for these arrangements are generally for one year, but some may be cancelledcanceled 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 amountCertain of outstanding third-party investments in our accounts receivable sold underthese programs in Europe was $189 million and $218 million at September 30, 2018 and December 31, 2017, respectively. Certain programs in Europe haveinclude deferred purchase price arrangements with the banks. We received cash to settle the deferred purchase price for $36 million and $28 million in the three month periods ended September 30, 2018 and 2017, respectively, and $102 million and $77 million for the nine month periods ended September 30, 2018 and 2017, respectively. The cash received to settle the deferred purchase price of factored receivables is included as part of our investing activities in the condensed consolidated statements of cash flows.arrangements.
If we were not able to securitize or factor receivables under either the U.S. or European programs, our borrowings under our revolving credit agreement might increase. These accounts receivable securitization and 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 these 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 onethe U.S and Canada, we participate in supply chain financing programs with certain of our U.S.aftermarket customers to whom we have extended payment terms whereby the accounts receivable securitizationare 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.
If these supply chain financing 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 transfer a partial interestsell under the U.S. and Canadian programs in a pool of receivables and the interestevent that we retain is subordinate to the transferred interest. Accordingly, we account for our U.S. securitization program as a secured borrowing. In one U.S. program and our European accounts receivable factoringthose programs we transferare terminated or otherwise reduced.
The accounts receivables under the programs described above are transferred 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 assetsare accounted for as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under the U.S. and Europeanthese factoring programs approximates the fair value of such receivables. We recognized $1 million interest expense in eachare the servicer of the three month periods ended September 30, 2018receivables under some of these arrangements and 2017, and $4 million and $3 million in the nine month periods ended September 30, 2018 and 2017, relating to our U.S. securitization program. In addition, we recognized a loss of $2 million in each of the three month periods ended September 30, 2018 and 2017, respectively, and $5 million and $4 million in the nine month periods ended September 30, 2018 and 2017, respectively, on the sale of tradeare responsible for performing all accounts receivable in our U.S.administration functions. Where we receive a fee to service and Europeanmonitor these transferred accounts receivablereceivables, 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.
The amounts outstanding for these factoring 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 2% during both the first nine monthsand drafting arrangements as of 2018 and 2017, respectively, for the European programs and 3% and during both the first nine months of 2018 and 2017, respectively, for the US program.
Financial Instruments. 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 $11 million at SeptemberJune 30, 20182019 and December 31, 2017, respectively, and were classified2018 are as notes payable recordedfollows (amounts in short-term debt. Financial instruments received from OE customers and not redeemed totaled $27 million and $10 million at Septemberbillions): |
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accounts receivable outstanding and derecognized | $ | 1.1 |
| | $ | 1.0 |
|
The deferred purchase price receivable as of June 30, 20182019 and December 31, 2017, respectively, and were classified2018 is as other current assets. We classify financial instruments receivedfollows (amounts in millions):
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Deferred purchase price receivable | $ | 52 |
| | $ | 154 |
|
Proceeds from our customers as other current assets, recorded in prepayments and other, if issued by a financial institutionthe factoring of our customers or as customer notes and accounts, net if issued by our customer.
The financial instruments received by 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 whichqualifying as sales are
not guaranteed by a bank.as follows (amounts in billions): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Proceeds from factoring qualifying as sales | $ | 1.3 |
| | $ | 0.7 |
| | $ | 2.5 |
| | $ | 1.5 |
|
Financing charges associated with the factoring of receivables are as follows (amounts in millions): |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Financing charges on sale of receivables(a) | $ | 6 |
| | $ | 2 |
| | $ | 14 |
| | $ | 5 |
|
(a) Amount is included in "Interest expense" in the condensed consolidated statements of income (loss). | | | | |
Supply Chain Financing.Financing
Certain of our suppliers in the U.S. participate in a supply chain financing programs under which they securitize their accounts receivables from the Company.us. Financial institutions participate in the supply chain financing program on an uncommitted basis and can cease purchasing receivables or drafts from the Company'sour suppliers at any time. If the financial institutions did not continue to purchase receivables or drafts from the Company'sour suppliers under these programs, the participating vendors may have a need to renegotiate their payment terms with the Companyus which in turn wouldcould cause our borrowings under our revolving credit facility to increase.
Capital Requirements. Requirements
We believe that cash flows from operations, combined with our cash on hand subject(subject to our proportionate share and any applicable withholding taxes upon repatriation of cash balances from our foreign operations where most of our cash balances are located,operations) and available borrowing capacity described above assuming that(assuming we maintain compliance with the financial covenants and other requirements of our senior credit facility agreement,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, 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
Operating activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Operational cash flow before changes in operating assets and liabilities | $ | 312 |
| | $ | 267 |
|
| | | |
Changes in operating assets and liabilities: | | | |
Receivables | (401 | ) | | (233 | ) |
Inventories | 101 |
| | (51 | ) |
Payables and accrued expenses | 48 |
| | 206 |
|
Accrued interest and income taxes | (66 | ) | | (2 | ) |
Other assets and liabilities | (94 | ) | | (109 | ) |
Total change in operating assets and liabilities | (412 | ) | | (189 | ) |
Net cash provided (used) by operating activities | $ | (100 | ) | | $ | 78 |
|
Cash used by operations for the six months ended June 30, 2019 was $100 million, a decrease of $178 million compared to the six months ended June 30, 2018. The net decrease was primarily the result of:
cash flows used by the operations of the Federal-Mogul Acquisition, of approximately $75 million; and
a net decrease of $103 million due to unfavorable changes in working capital items and performance (excluding the Federal-Mogul Acquisition).
Investing Activities
Investing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Proceeds from sale of assets | $ | 5 |
| | $ | 5 |
|
Net proceeds from sale of business | 22 |
| | — |
|
Cash payments for property, plant, and equipment | (379 | ) | | (174 | ) |
Acquisition of business, net of cash acquired | (158 | ) | | — |
|
Proceeds from deferred purchase price of factored receivables | 147 |
| | 66 |
|
Other | (1 | ) | | 2 |
|
Net cash used by investing activities | $ | (364 | ) | | $ | (101 | ) |
Cash used by investing activities for the six months ended June 30, 2019 included cash paid for the Ohlins Acquisition of $158 million and proceeds from the sale of the wipers business of $22 million, included in our Motorparts segment. See Note 3, Acquisitions and Divestitures for additional details. In addition, there was an increase in proceeds from deferred purchase price of factored receivables of $81 million, primarily attributable to the Federal-Mogul Acquisition.
Cash payments for property, plant, and equipment were $379 million and $174 million for the six months ended June 30, 2019 and 2018. The increase is primarily attributable to the Federal-Mogul Acquisition. These cash payments were primarily related to capital expenditures to invest in new facilities, upgrade existing products, continue new product launches, and infrastructure and equipment at our facilities to support our manufacturing, distribution, and cost reduction efforts, as well as software-related expenditures.
Financing Activities
Financing activities for the six months ended June 30, 2019 and 2018 were as follows (amounts in millions):
|
| | | | | | | |
| Six Months Ended June 30, |
| 2019 | | 2018 |
Proceeds from term loans and notes | $ | 111 |
| | $ | 9 |
|
Repayments of term loans and notes | (190 | ) | | (28 | ) |
Borrowings on revolving lines of credit | 4,525 |
| | 2,669 |
|
Payments on revolving lines of credit | (4,254 | ) | | (2,614 | ) |
Issuance (repurchase) of common shares | (2 | ) | | (1 | ) |
Cash dividends | (20 | ) | | (25 | ) |
Net increase (decrease) in bank overdrafts | (8 | ) | | (7 | ) |
Other | (1 | ) | | (22 | ) |
Distributions to noncontrolling interest partners | (20 | ) | | (28 | ) |
Net cash provided (used) by financing activities | $ | 141 |
| | $ | (47 | ) |
Cash flow provided by financing activities was $141 million for the six months ended June 30, 2019. This included net repayments on term loans of $79 million, net borrowings on revolving lines of credit of $271 million, and $1 million in borrowings on accounts receivable securitization programs.
Cash flow used by financing activities was $47 million for the six months ended June 30, 2018. This included net repayments on term loans of $19 million, net borrowings on revolving lines of credit of $55 million, and $22 million in borrowings on accounts receivable securitization programs.
Dividends on Common Stock
We suspended the quarterly dividend in the second quarter of 2019. For the six months ended June 30, 2019, a dividend of $0.25 per share was paid, or $20 million in the aggregate. The first quarter dividend was a decrease of $5 million as compared to the six months ended June 30, 2018, due to the suspension of the dividend program in the second quarter 2019.
Environmental Matters, Legal Proceedings and Product Warranties
Note 13, Commitments and Contingencies in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
Derivative Financial InstrumentsITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Rate Risk
When foreign currency exchange rate risk cannotWe manufacture and sell our products in North America, South America, Asia, Europe, and Africa. As a result, our financial results could be managedsignificantly affected by operational strategies, we use derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge our exposure tofactors 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 loansactivities, including the matching of revenues and accounts receivable and payable in nonfunctional currencies made between affiliatescosts, 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, Mexican peso, and Canadian dollar.
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 aggregates existing offsetting positions and then hedge residual exposures by creating offsetting intercompany exposures or 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 condensed consolidated statements of income (loss). The fair value of ourforeign currency forward contracts are recorded in "Prepayments and other current assets" or "Accrued expenses and other current liabilities" in the condensed consolidated balance sheets. The fair value of the Company's foreign currency forward contracts was a net liabilityasset position of less than $1 million at SeptemberJune 30, 20182019 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. December 31, 2018.
The following table summarizes by major currencyposition the notional amounts for our foreign currency forward purchase and sale contracts as of SeptemberJune 30, 2018. All contracts in the following table2019 (all of which mature in 2018.2019):
|
| | | |
| | September 30, 2018 |
| | Notional Amount
in Foreign Currency |
| | (Millions) |
Canadian dollars | —Sell | (2 | ) |
Chinese yuan | —Purchase | 4 |
|
U.S. dollars | —Purchase | 1 |
|
|
| | | |
| Notional Amount |
Long position | $ | (26 | ) |
Short position | $ | 26 |
|
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 facility 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 five to ten years. On SeptemberJune 30, 2018,2019, we had $736$1.6 billion par value of fixed rate debt and $4.0 billion par value of floating rate debt. Of the fixed rate debt, $472 million of principal amounts in long-term debt obligations that haveis fixed interest rates. Of that amount,through 2022, $623 million is fixed through 2024, and $500 million is fixed through July 2026, $225 million is fixed through December 2024, and the remainder is fixed through 2025.2026. We also had $585 million$4.0 billion of principal amounts 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”Resources” earlier in this Management’s Discussion and Analysis.Analysis and Note 10, Debt and Other Financing Arrangements in our condensed consolidated financial statements located in Part I, Item I of this Form 10-Q.
We estimate that the fair value of our long-term debt at SeptemberJune 30, 20182019 was about 9696% percent of its book value. A one percentage point increase or decrease in interest rates related to our variable interest rate debt would increase or decrease the annual interest expense we recognize in the income statement and the cash we pay for interest expense by about $8$40 million.
Equity Prices
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 fair value of these equity swaps are generally offset by the losses or gains on the related liabilities. In 2017,May 2019, we entered into an amended and restated equity swap agreement with a financial institution. We selectively use cash-settled share swaps to reduce market risk associated with our deferred 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 stated amount. As of SeptemberJune 30, 2018,2019, we had hedged the deferred liability related to approximately 250,000 common share equivalents.
Environmental Matters, Legal Proceedings and Product Warranties
Note 8, Environmental Matters, Legal Proceedings and Product Warranties, in our condensed consolidated financial statements located in Part I Item 1 of this Form 10-Q is incorporated herein by reference.
Tenneco 401(K) Retirement Savings Plan
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 Retirement Savings Plan. We recorded expense for these contributions of approximately $24 million and $22 million for the nine month periods ended September 30, 2018 and 2017, respectively. Matching contributions vest immediately. Defined benefit replacement contributions fully vest on the employee’s third anniversary of employment.
Other Financial Information
The interim financial information included in this Quarterly Report on Form 10-Q for the periods ended
September 30, 2018 and 2017 has not been audited by PricewaterhouseCoopers LLP (“PwC”). In reviewing such information, PwC has applied limited procedures in accordance with professional standards for reviews of interim financial information. Readers should restrict reliance on PwC’s reports on such information accordingly. PwC is not subject to the liability provisions of Section 11 of the Securities Act of 1933 for its reports on interim financial information, because such reports do not constitute “reports” or “parts” of registration statements prepared or certified by PwC within the meaning of Sections 7 and 11 of the Securities Act of 1933.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding our exposure to interest rate risk and foreign currency exchange rate risk, see the caption entitled “Derivative Financial Instruments” in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is incorporated herein by reference.
ITEM 4.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, (asas defined in Rule 13a-15(e) and Rule 15d-15(e) underof the Securities Exchange Act of 1934, as amended (the ("Exchange Act)Act"), as of the end of the quarter covered by this report. Based on thattheir evaluation, our ChiefCo-Chief Executive OfficerOfficers and Chief Financial Officer have concluded that, due to the material weakness in our internal control over financial reporting previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company’s disclosure controls and procedures were not effective as of September 30, 2018 to ensure that information required to be disclosed by our Company in reports that it files or submits under the 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.
Internal Controls Surrounding the Accounting for Supplier Payments
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.
As previously identified and described more fully under Item 9A in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, the Company identified deficiencies that, when aggregated together, resulted in a material weakness in 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 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 continued to exist as of the end of the period covered by this Quarterly Report.
The material weakness resulted in the revision of the consolidated financial statements as of December 31, 2016, 2015 and 2014, each interim and year-to-date period in those respective years, and the first interim period in 2017. Additionally these control deficiencies 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, our management has determined that these control deficiencies constitute a material weakness.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
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 has taken action to dismiss the individuals who engaged in intentional misconduct.
Under the oversight of the Audit Committee and as part of our commitment to strengthening our internal control over financial reporting, we implemented a number of actions during the second half of 2017, including (i) strengthening the China accounting staff with personnel who have significant experience in U.S. and international financial reporting; (ii) providing additional training for China accounting and purchasing personnel; and (iii) augmenting the process with additional oversight from qualified personnel in the U.S. and Europe. Oversight activities have revealed the need for increased frequency in communication and additional transparency in the monitoring mechanisms put in place. Accordingly, we concluded that this material weakness had not yet been remediated as of September 30, 2018.
We will continue to monitor the effectiveness of these and other processes, procedures and controls and make any further changes management determines appropriate.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II
OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS
Note 8, Environmental Matters, Legal Proceedings13, Commitments and Product Warranties,Contingencies, in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q is incorporated herein by reference.
ITEM 1A.RISK FACTORS
We are exposed to certain risks and uncertainties that could have a material adverse impacteffect on our business, financial condition and operating results. On April 10, 2018, we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”), pursuant to which we acquired (the “Acquisition”) Federal-Mogul LLC ("Federal-Mogul") on October 1, 2018.
The risk factors set forth herein relate primarily to the Acquisition, the nature of Federal Mogul's operations and our planned Spin-off (defined below).
Except for the addition of the risk factors below, thereThere have been no other material changes to the Risk Factors described in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018. The risks described herein or in our Annual Report on Form 10-K are not the only risks facing us. 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 impacteffect such risk factors might have on our business, financial condition and operating results, or the extent to which any such risk factor or combination of risk factors may impactaffect our business, financial condition and operating results.
Changes in tax law or trade agreements and new or changed tariffs could have a material adverse effect on the Company.
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 the Company or its customers operate could adversely affect its 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. income tax 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. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and the Company’s financial performance could be adversely affected. In addition, it is uncertain if and to what extent various states will conform to the new law and whether foreign countries will react by adopting tax legislation or take other actions that could adversely affect the Company’s business.
In addition, the United States, Mexico and Canada have renegotiated the North American Free Trade Agreement. 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. The Company’s manufacturing facilities in the U.S. and Mexico are dependent on duty-free trade within the NAFTA region. The Company has significant imports into the U.S., and the imposition of customs duties on these imports could negatively impact its financial performance.
Moreover, in March 2018, the Trump Administration 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 Canada, Mexico and the European Union, which ended on June 1, 2018. As a result of the tariffs, Canada, Mexico and the European Union may take retaliatory actions with respect to U.S. imports in their countries, which could adversely affect the Company’s business, financial condition or results of operations.
In addition, on three separate occasions in 2018, the Trump Administration 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 hit with an additional 25% ad valorem tariff, and finally on October 1, 2018, a third group of Chinese imports were hit with an additional 10% ad valorem tariff (set to increase to 25% on January 1, 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 later in 2018 or in 2019. 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 the Company operates and could result in a decrease in imports and higher prices for those imports which are sold into the U.S. When the Company buys metals internationally, it may be unable to pass through the higher costs to its customers, which could adversely impact its 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 the Company buys, which could limit its ability to meet customer demand or purchase material at competitive prices. This could cause the Company to lose sales, incur additional costs, or suffer harm to its reputation, all of which may adversely affect operating results.
Further, in May 2018, the Trump Administration announced that it is considering potential additional tariffs to be imposed on imported 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, the Company’s 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 rising cost of providing 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 assets in the 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, Federal Mogul 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.
The Company’s hedging activities are not designed to mitigate long-term commodity price fluctuations and, therefore, will not protect from long-term commodity price increases. The Company’s future hedging positions may not correlate to actual raw materials costs, which would cause acceleration in the recognition of unrealized gains and losses on hedging positions in operating results.
The Company’s 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. Upon consummation of the Acquisition, we had approximately $3.4 billion of indebtedness outstanding under our new senior credit facility, $2.0 billion of outstanding notes and approximately $300 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 went from 63 percent to 69 percent.
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 increases 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 our 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;
amend or otherwise alter debt and other material agreements;
engage in mergers, acquisitions or asset sales; and
engage in transactions with affiliates.
Risks Relating to the Transaction
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 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 Spin-off) (defined below) to realize the anticipated benefits of the Acquisition and 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 adverse 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 further dilution and 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 separate, publicly traded companies in a spin-off transaction (the “Spin-Off”). The 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 Spin-Off will be completed at all or that the Spin-Off will be tax-free for U.S. federal income purposes. We expect that the process of completing the proposed 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 Spin-Off is not completed. Planning for the Spin-Off is in its early stages, and we may encounter unforeseen impediments to the completion of the Spin-Off that render the Spin-Off impossible or impracticable.
If the 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 Spin-Off will be completed. If the completion of the 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 pendency of the Spin-Off and impact of the Transaction could adversely affect our business, financial results and operations.
The announcement and pendency of the 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 Spin-Off) business, financial condition and results of operations following the Acquisition or 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 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 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 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 Spin-Off. As 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 Spin-Off not occurred.
The combined company prior to the Spin-Off and, if the Spin-Off is completed, each separate company following the Spin-Off may underperform relative to our expectations.
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 condition and results of operations or, following the 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 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 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 Spin-Off may incur material restructuring charges in connection with integration activities or the 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.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) None.
(b) Not applicable.
(c) Purchase of equity securities by the issuer and affiliated purchasers. The following table provides information relating to our purchase of shares of our common stock in the thirdsecond quarter of 2018.2019. These purchases reflect shares withheld upon vesting of restricted stock for tax withholding obligations. We generally intend to continue to satisfy tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares.
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. 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, including $112 million that remained authorized under earlier repurchase programs. The Company anticipates acquiringWe generally acquire the shares through open market or privately negotiated transactions which will be funded throughand have historically used cash from operations. The repurchase program does not obligate the Companyus to repurchase shares within any specific time or situations, and opportunities in higher priority areas could affect the cadence of this program.time. We did not repurchase any shares through this program in the ninesix months ended SeptemberJune 30, 2018. Since we announced the share repurchase program in January 2015, we have repurchased 11.3 million shares for $607 million through September 30, 2018.2019.
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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) |
July 2018 | 401 |
| | $ | 44.29 |
| | — |
| | $ | 231 |
|
August 2018 | 12 |
| | 42.79 |
| | — |
| | 231 |
|
September 2018 | 155 |
| | 46.42 |
| | — |
| | 231 |
|
Total | 568 |
| | $ | 44.84 |
| | — |
| | $ | 231 |
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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) |
April 2019 | — |
| | $ | — |
| | — |
| | $ | 231 |
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May 2019 | 2,183 |
| | 11.61 |
| | — |
| | 231 |
|
June 2019 | — |
| | — |
| | — |
| | 231 |
|
Total | 2,183 |
| | $ | 11.61 |
| | — |
| | $ | 231 |
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(1) | Shares withheld upon vesting of restricted stock and share settled restricted stock units in the thirdsecond quarter of 2018.2019. |
ITEM 6.EXHIBITS
INDEX TO EXHIBITS
TO
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTER ENDED SEPTEMBERJUNE 30, 20182019
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Exhibit Number | | Description |
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| — | 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).
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| — | Addendum, dated July 20, 2018, to Offer Letter to Brian J. Kesseler dated January 6, 2015.
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| — | Offer Letter to Roger Wood dated July 20, 2018.
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| — | Tenneco Automotive Operating Company Inc. Severance Benefit Plan and Summary Plan Description, effective as of July 20, 2018.
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| — | First Amendment to Tenneco Inc. Excess Benefit Plan, dated October 9, 2018.
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| — | Form of Restricted Stock Unit Agreement under Tenneco Inc. 2006 Long-Term Incentive Plan (Retention Awards). |
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| — | Letter of PricewaterhouseCoopers LLP regarding interim financial information. |
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| — | Certification of Brian J. Kesseler under Section 302 of the Sarbanes-Oxley Act of 2002. |
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| | Certification of Roger J. Wood under Section 302 of the Sarbanes-Oxley Act of 2002.
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| — | Certification of Jason M. Hollar under Section 302 of the Sarbanes-Oxley Act of 2002. |
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| — | Certification of Brian J. Kesseler, Roger J. Wood and Jason M. Hollar under Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, Tenneco Inc. has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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TENNECO INC. |
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By: | | /S/ JASON M. HOLLAR |
| | Jason M. Hollar |
| | Executive Vice President and Chief Financial Officer (on behalf of the Registrant) |
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TENNECO INC. |
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By: | /s/ AUDREY A. SMITH JOHN S. PATOUHAS |
| Audrey A. SmithJohn S. Patouhas |
| Vice President and ControllerChief Accounting Officer (principal accounting officer) |
| (Principal Accounting Officer) |
Dated: November 7, 2018August 6, 2019