NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in millions, except share and per share amounts, or as otherwise noted)
1. Description of Business
Tenneco Inc. ("Tenneco" or "the Company") was formed under the laws of Delaware in 1996. Tenneco designs, manufactures, and sells products and services for light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. The Company is one of the world's leading manufacturers of clean air, powertrain, and ride performance products and systems, and serves both original equipment manufacturers ("OEM") and replacement markets worldwide.
On October 1, 2018, the Company completed the acquisition of Federal-Mogul LLC (“Federal-Mogul”) (the “Federal-Mogul Acquisition”), a global supplier of technology and innovation in vehicle and industrial products for fuel economy, emissions reductions, and safety systems. Federal-Mogul serves the world’s foremost OEM and servicers (“OES”, and together with OEM, “OE”) of automotive, light, medium and heavy-duty commercial vehicles, off road, agricultural, marine, rail, aerospace, and power generation and industrial equipment, as well as the worldwide aftermarket.
The Company has previously announced its intentions, and has agreed to use its reasonable best efforts, to separate the combined company to form two new, independent publicly traded companies, an Aftermarket and Ride Performance company ("DRiV") and a new Powertrain Technology company ("New Tenneco"). Current end-market conditions are affecting the Company's ability to complete a separation within its previously announced timeline and the Company expects these trends will continue throughout this year. The Company is ready to separate the businesses as soon as favorable conditions are present. In order to facilitate the separation, the Company continues to evaluate multiple strategic alternatives, as well as options to deleverage and mitigate the ongoing effect of challenging market conditions and better position it to facilitate a separation transaction.
2. Summary of Significant Accounting Policies
Basis of Presentation — Interim Financial Statements
Certain information and footnote disclosures normally included in financial statements prepared 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 in 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, 2019, which was filed with the Securities and Exchange Commission on March 2, 2020. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. There are many uncertainties related to the COVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows.
At March 31, 2020, the Company was in compliance with all financial covenants under its credit agreement. After considering the effect of COVID-19 on its 2020 forecast, the Company determined it was likely it would not be able to maintain compliance with its financial covenants, as required by its credit agreement. As a result, on May 5, 2020, the Company entered into a third amendment to its credit agreement to increase the maximum leverage ratio and decrease the minimum interest coverage ratio. The amendment is discussed in more detail in Note 10, Debt and Other Financing Arrangements. In response to the expected economic effects of COVID-19, the Company plans to implement various cost reductions initiatives, including, but not limited to reductions to salaried costs and unpaid furloughs; the restructuring action discussed in Note 4, Restructuring Charges, Net and Asset Impairments; and the deferral of the Company’s portion of its 2020 employer paid payroll taxes and its U.S. qualified pension plan contributions under the Coronavirus Aid, Relief, and Economic Security Act.
Reclassifications: Certain amounts in the prior period have been aggregated or disaggregated to conform to current year presentation. These reclassifications included reclassifying amounts from restructuring charges, net and asset impairments to cost of sales (exclusive of depreciation and amortization) and selling, general, and administrative expenses. These reclassifications affected the three months ended March 31, 2019 and have no effect on previously reported net income, other comprehensive income (loss), and the cash provided (used) by operating, investing or financing activities within the condensed consolidated statements of cash flows.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 in the event of a change in control of Tenneco Inc. or certain of its subsidiaries or the passage of time.
At March 31, 2020 and December 31, 2019, the Company held redeemable noncontrolling interests of $41 million and $44 million which were not currently redeemable or probable of becoming redeemable. The redemption of these redeemable noncontrolling interests is not solely within the Company's control, therefore, they are presented in the temporary equity section of the Company's condensed consolidated balance sheets. The Company does not believe it is probable the redemption features related to these noncontrolling interest securities will be triggered, as a change in control event is generally not probable until it occurs. As such, these noncontrolling interests have not been remeasured to redemption value.
In addition, at March 31, 2020 and December 31, 2019, the Company held redeemable noncontrolling interests of $31 million and $152 million which were currently redeemable or probable of becoming redeemable. These noncontrolling interests are also presented in the temporary equity section of the Company's condensed consolidated balance sheets and have been remeasured to redemption value. The Company immediately recognizes changes to redemption value as a component of noncontrolling interest income (loss) in the condensed consolidated statements of income (loss). These redeemable noncontrolling interests include the following:
|
|
•
|
During the three months ended March 31, 2020, the Company completed the process to make a tender offer of the shares it did not own for a subsidiary in India acquired by the Company as part of the Federal-Mogul Acquisition on October 1, 2018, in accordance with local regulations. As a result of completing the tender offer, the redeemable noncontrolling interest was no longer redeemable or probable of becoming redeemable and the amount of $82 million was reclassified to permanent equity during the three months ended March 31, 2020. See Note 17, Related Party Transactions, for additional information related to the tender offer of this redeemable noncontrolling interest; and
|
|
|
•
|
A 9.5% ownership interest in Öhlins Intressenter AB (the “KÖ Interest”) was retained by K Öhlin Holding AB (“Köhlin”), as a result of the Öhlins acquisition on January 10, 2019. Köhlin has an irrevocable right at any time after the third anniversary of the Öhlins acquisition to sell the KÖ Interest to the Company. Since it is probable the KÖ Interest will become redeemable, the Company recognized the change in carrying value and recorded an adjustment of $15 million during the three months ended March 31, 2020 to reflect its redemption value of $31 million at March 31, 2020.
|
For the three months ended March 31, 2019, the Company recorded a decrease to the redeemable noncontrolling interests of $8 million, as a result of adjustments made in the measurement period to the preliminary purchase price allocation from the Federal-Mogul Acquisition. The purchase price allocations for the Federal-Mogul acquisition have been finalized.
The following is a rollforward of activities in the Company's redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Balance at beginning of period
|
$
|
196
|
|
|
$
|
138
|
|
Net income (loss) attributable to redeemable noncontrolling interests
|
(4
|
)
|
|
5
|
|
Other comprehensive income (loss)
|
(7
|
)
|
|
2
|
|
Acquisition and other
|
—
|
|
|
16
|
|
Noncontrolling interest tender offer redemption
|
(46
|
)
|
|
—
|
|
Redemption value measurement adjustment
|
15
|
|
|
—
|
|
Purchase accounting measurement period adjustment
|
—
|
|
|
(8
|
)
|
Reclassification of noncontrolling interest to permanent equity
|
(82
|
)
|
|
—
|
|
Dividends declared
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
72
|
|
|
$
|
153
|
|
Income taxes: On December 22, 2017, the Tax Cuts and Jobs Act ("TCJA") was enacted into U.S. law, which, among other provisions, included an anti-deferral provision (the Global Intangible Low-Taxed Income tax) effective from 2018 wherein taxes on foreign income are imposed in excess of a deemed return on tangible assets of non-U.S. corporations. The Company has elected the “tax law ordering approach” in that the Company will look to tax law ordering to determine whether its NOL
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
carryforward deferred tax asset is expected to be realized. Based on the tax law ordering approach, NOL carryforwards are realizable if they will reduce the expected tax liability when utilized, regardless if the 50% GILTI deduction or related FTCs may have been available.
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:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Weighted average shares of common stock outstanding
|
81,168,562
|
|
|
80,874,637
|
|
Effect of dilutive securities:
|
|
|
|
Restricted stock, PSUs, and RSUs
|
—
|
|
|
—
|
|
Stock options
|
—
|
|
|
—
|
|
Dilutive shares outstanding
|
81,168,562
|
|
|
80,874,637
|
|
For the three months ended March 31, 2020 and 2019, the calculation of diluted earnings (loss) per share excluded 1,610,556 and 1,714,950 of share-based awards, as the effect on the calculation would have been anti-dilutive.
New Accounting Pronouncements
Adoption of New Accounting Standards
Income Taxes — In December 2019, the FASB issued ASU 2019-12: Simplifying the Accounting for Income Taxes (Topic 740), which removes certain exceptions to the general principles in Topic 740 and improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The ASU allows certain simplifications in the annual effective tax rate computations, which did not have a material effect on the financial statements. The Company has early adopted this ASU on a prospective basis beginning January 1, 2020.
Intangibles — On January 1, 2020, the Company adopted 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, which includes amendments to align the accounting for costs incurred to implement a cloud computing arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. The Company adopted this guidance on a prospective basis beginning January 1, 2020 and the effects of the adoption were not material on the consolidated financial statements.
Retirement benefits — In August 2018, the FASB issued ASU 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20). The new standard (i) requires the removal of disclosures that are no longer considered cost beneficial; (ii) clarifies specific requirements of certain disclosures; and (iii) adds new disclosure requirements, including reasons for significant gains and losses related to changes in the benefit obligation. The amendments in this update are effective for fiscal years ending after December 15, 2020. The Company will adopt the enhanced disclosures in the consolidated financial statements for the year ended December 31, 2020.
3. Acquisitions and Divestitures
Öhlins Intressenter AB Acquisition
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 components for the automotive and motorsport industries for a purchase price of $162 million (including $4 million of cash acquired). 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. Refer to Note 2, Summary of Significant Accounting Policies, for further information on the KÖ Interest.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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.
Assets Held for Sale
As the Company continues to rationalize its product portfolio and focus on core production lines, the Company has classified a non-core business in the Motorparts segment as held for sale. At March 31, 2020, expected proceeds from a sale would be approximately $16 million, which is representative of its fair value. The related assets and liabilities were classified as held for sale at March 31, 2020. A sale is expected to occur within the next twelve months.
The related assets and liabilities are classified as held for sale at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Assets
|
|
|
|
Receivables
|
$
|
4
|
|
|
$
|
5
|
|
Inventories
|
6
|
|
|
8
|
|
Other current assets
|
2
|
|
|
1
|
|
Long-lived assets
|
16
|
|
|
18
|
|
Goodwill
|
3
|
|
|
4
|
|
Impairment on carrying value
|
(8
|
)
|
|
(8
|
)
|
Total assets held for sale
|
$
|
23
|
|
|
$
|
28
|
|
Liabilities
|
|
|
|
Accounts payable
|
$
|
3
|
|
|
$
|
4
|
|
Accrued liabilities
|
2
|
|
|
2
|
|
Total liabilities held for sale
|
$
|
5
|
|
|
$
|
6
|
|
The assets and liabilities held for sale are recorded in prepayments and other current assets and accrued expenses and other current liabilities in the condensed consolidated balance sheets at March 31, 2020 and December 31, 2019.
On March 1, 2019, in accordance with a stock and asset purchase agreement, the Company sold certain assets and liabilities related to a non-core business, and received sale proceeds of $22 million, subject to customary working capital adjustments, in the three months ended March 31, 2019.
4. Restructuring Charges, Net and Asset Impairments
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 exit costs. The 2019 amounts below reflect the reclassifications to the prior period as discussed in Note 2, Summary of Significant Accounting Policies.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
For the three months ended March 31, 2020 and 2019, restructuring charges, net and asset impairments by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Corporate
|
|
Total
|
Severance and other charges, net
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
13
|
|
Other non-restructuring asset impairments
|
—
|
|
|
—
|
|
|
455
|
|
|
—
|
|
|
16
|
|
|
471
|
|
Total restructuring charges, net and asset impairments
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
461
|
|
|
$
|
2
|
|
|
$
|
20
|
|
|
$
|
484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Corporate
|
|
Total
|
Severance and other charges, net
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
16
|
|
Other non-restructuring asset impairments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total restructuring charges, net and asset impairments
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
16
|
|
Severance and other charges, net
During the three months ended March 31, 2020, the Company incurred $6 million in restructuring and other costs related to plant relocation and closures within its Ride Performance segment. The Company also incurred $4 million in restructuring for the elimination of certain redundant positions within its corporate component.
In response to the COVID-19 global pandemic, and in conjunction with the Company's previously announced Project Accelerate, the Company expects to reduce its headcount globally, subject to negotiation with works councils in certain jurisdictions. The Company will begin implementing headcount reductions during the second quarter of 2020 and expects these actions to be completed during 2020. The Company expects to record a charge in the range of $25 million to $30 million for the second quarter of 2020 in connection with the cash severance costs expected to be paid.
During the three months March 31, 2019, charges included the following items:
|
|
•
|
The Company incurred $6 million in restructuring and related costs related to a restructuring plan designed to achieve a portion of the synergies the Company anticipated achieving in connection with the Federal-Mogul Acquisition. Pursuant to the plan, the Company reduced its headcount globally across all segments. The Company began implementing headcount reductions in January 2019 and these actions continued through the end of 2019.
|
|
|
•
|
The Ride Performance segment incurred $3 million in restructuring and other costs related to a previously announced plant relocation in Beijing, China and the Hartwell and Owen Sound plant closures.
|
|
|
•
|
The Clean Air segment incurred $3 million restructuring and other costs related to the closing of a plant in Rennes, France.
|
Restructuring Reserve Rollforward
Amounts related to activities that were charges to restructuring reserves by reportable segments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Total Reportable Segments
|
|
Corporate
|
|
Total
|
Balance at December 31, 2019
|
$
|
23
|
|
|
$
|
30
|
|
|
$
|
23
|
|
|
$
|
16
|
|
|
$
|
92
|
|
|
$
|
9
|
|
|
$
|
101
|
|
Provisions
|
—
|
|
|
2
|
|
|
7
|
|
|
2
|
|
|
11
|
|
|
4
|
|
|
15
|
|
Revisions to estimates
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Payments
|
(4
|
)
|
|
(4
|
)
|
|
(9
|
)
|
|
(4
|
)
|
|
(21
|
)
|
|
(9
|
)
|
|
(30
|
)
|
Foreign currency
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
Balance at March 31, 2020
|
$
|
19
|
|
|
$
|
27
|
|
|
$
|
19
|
|
|
$
|
14
|
|
|
$
|
79
|
|
|
$
|
4
|
|
|
$
|
83
|
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Total Reportable Segments
|
|
Corporate
|
|
Total
|
Balance at December 31, 2018
|
$
|
17
|
|
|
$
|
15
|
|
|
$
|
25
|
|
|
$
|
43
|
|
|
$
|
100
|
|
|
$
|
3
|
|
|
$
|
103
|
|
Provisions
|
5
|
|
|
1
|
|
|
5
|
|
|
4
|
|
|
15
|
|
|
1
|
|
|
16
|
|
Payments
|
(6
|
)
|
|
(3
|
)
|
|
(5
|
)
|
|
(14
|
)
|
|
(28
|
)
|
|
(2
|
)
|
|
(30
|
)
|
Balance at March 31, 2019
|
$
|
16
|
|
|
$
|
13
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
87
|
|
|
$
|
2
|
|
|
$
|
89
|
|
The following table provides a summary of the Company's restructuring liabilities and related activity for each type of exit costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
Three months ended March 31, 2019
|
|
Employee Costs
|
|
Facility Closure and Other Costs
|
|
Total
|
|
Employee Costs
|
|
Facility Closure and Other Costs
|
|
Total
|
Balance at beginning of period
|
$
|
97
|
|
|
$
|
4
|
|
|
$
|
101
|
|
|
$
|
98
|
|
|
$
|
5
|
|
|
$
|
103
|
|
Provisions
|
10
|
|
|
5
|
|
|
15
|
|
|
11
|
|
|
5
|
|
|
16
|
|
Revisions to estimates
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments
|
(23
|
)
|
|
(7
|
)
|
|
(30
|
)
|
|
(25
|
)
|
|
(5
|
)
|
|
(30
|
)
|
Foreign currency
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
81
|
|
|
$
|
2
|
|
|
$
|
83
|
|
|
$
|
84
|
|
|
$
|
5
|
|
|
$
|
89
|
|
Asset impairments
The Company evaluates its long-lived assets for impairment whenever events or circumstances indicate the value of these long-lived asset groups are not recoverable.
As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded impairment triggers had occurred for certain long-lived asset groups in the Ride Performance segment. Accordingly, the Company tested these long-lived asset groups for recoverability by performing undiscounted cash flow analyses. Based on these analyses, the net carrying values of these asset groups exceeded their undiscounted future cash flows. As such, the Company estimated the fair values of these asset groups at March 31, 2020 and compared them to their carrying values. As the fair values of these long-lived asset groups exceeded their carrying values, the Company recorded long-lived asset impairment charges for property, plant, and equipment of $455 million during the three months ended March 31, 2020. See Note 9, Fair Value for additional information on the fair value estimates used in these analyses.
As a result of changes in the business, the Company assessed and concluded an impairment trigger had occurred for a long-lived asset group in its corporate component. Accordingly, the Company tested this long-lived asset group for recoverability. The Company estimated the fair value of this asset group at March 31, 2020 and compared it to the carrying value. As the fair value of this long-lived asset group exceeded the carrying value, the Company recorded long-lived asset impairment charges of $16 million during the three months ended March 31, 2020, consisting of $11 million of property, plant, and equipment and $5 million of operating lease right-of-use assets, included in other assets within the condensed consolidated balance sheets.
There are many uncertainties regarding the COVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows. As a result, if there is an adverse change to the Company’s projected financial information, due to business performance or market conditions, this may be indicative the value of its long-lived assets are not recoverable, which may result in additional non-cash long-lived asset impairment charges in a future period.
5. Inventories
At March 31, 2020 and December 31, 2019, inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Finished goods
|
$
|
981
|
|
|
$
|
1,027
|
|
Work in process
|
483
|
|
|
460
|
|
Raw materials
|
435
|
|
|
408
|
|
Materials and supplies
|
102
|
|
|
104
|
|
|
$
|
2,001
|
|
|
$
|
1,999
|
|
6. Goodwill and Other Intangible Assets
As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded it was more likely than not the fair values value of certain reporting units and its indefinite-lived intangible assets had declined to below their carrying values during the three months ended March 31, 2020.
The Company completed a goodwill impairment analysis for four reporting units with goodwill in the Powertrain, Motorparts, and Ride Performance segments. The difference between the reporting units' carrying values and fair values were recognized as impairment charges. The Company recognized $267 million in non-cash impairment charges related to its goodwill during the three months ended March 31, 2020, which represented full impairments of the goodwill in one reporting unit in the Powertrain segment and one reporting unit in the Ride Performance segment, and partial impairments of goodwill in one reporting unit in the Powertrain segment and one reporting unit in the Motorparts segment.
The Company also completed an analysis to determine the fair value of its trade names and trademarks for its reporting units in the Ride Performance and Motorparts segments. It was determined their carrying values exceeded their fair values and the Company recognized $51 million in non-cash impairment charges related these indefinite-lived assets, which represented a full impairment of the trade names and trademarks in one of the reporting units in the Motorparts segment, and a partial impairment of the trade names and trademarks in one of the reporting units in the Ride Performance segment and one of the reporting units in the Motorparts segment. As a result, the remaining carrying value of the Company's trade names and trademarks equals fair value at March 31, 2020.
As discussed in more details in Note 4, Restructuring Charges, Net and Asset Impairments, the Company concluded impairment triggers had occurred for certain long-lived asset groups within the Ride Performance segment. As a result, the Company recorded non-cash impairment charges of $65 million related to its definite-lived intangible assets, which represented full impairments of the definite-lived intangible assets in these two reporting units.
As a result, impairment charges for goodwill and intangible assets recognized by segment during the three months ended March 31, 2020 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2020
|
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Total
|
Goodwill impairment charges
|
|
$
|
160
|
|
|
$
|
37
|
|
|
$
|
70
|
|
|
$
|
267
|
|
Trade names and trademarks intangible asset impairment charges
|
|
—
|
|
|
11
|
|
|
40
|
|
|
51
|
|
Definite-lived intangible assets impairment charges
|
|
—
|
|
|
65
|
|
|
—
|
|
|
65
|
|
|
|
$
|
160
|
|
|
$
|
113
|
|
|
$
|
110
|
|
|
$
|
383
|
|
There are many uncertainties regarding the COVID-19 global pandemic that could negatively affect the Company's results of operations, financial position, and cash flows. As a result, if there is an adverse change to the Company’s projected financial information, due to business performance or market conditions, this may be indicative the fair value of its reporting units have declined below their carrying values, which may result in additional non-cash goodwill or intangible asset impairment charges in a future period.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The following table shows a summary of the number of reporting units with goodwill in each segment and whether or not the reporting unit's fair value exceeds its carrying value by more or less than 10% at March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segments
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
Number of reporting units with goodwill
|
3
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Number of reporting units where fair value exceeds carrying value:
|
|
|
|
|
|
|
|
Greater than 10%
|
3
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Less than 10%
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Goodwill for reporting units where fair value exceeds carrying value:
|
|
|
|
|
|
|
|
Greater than 10%
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
—
|
|
Less than 10%
|
—
|
|
|
165
|
|
|
—
|
|
|
311
|
|
|
$
|
22
|
|
|
$
|
165
|
|
|
$
|
7
|
|
|
$
|
311
|
|
At March 31, 2020 and December 31, 2019, goodwill consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Total
|
Gross carrying amount at December 31, 2019
|
$
|
22
|
|
|
$
|
343
|
|
|
$
|
259
|
|
|
$
|
620
|
|
|
$
|
1,244
|
|
Foreign exchange
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
Gross carrying amount at March 31, 2020
|
22
|
|
|
343
|
|
|
256
|
|
|
620
|
|
|
1,241
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment loss at December 31, 2019
|
—
|
|
|
(18
|
)
|
|
(212
|
)
|
|
(239
|
)
|
|
(469
|
)
|
Impairment
|
—
|
|
|
(160
|
)
|
|
(37
|
)
|
|
(70
|
)
|
|
(267
|
)
|
Accumulated impairment loss at March 31, 2020
|
—
|
|
|
(178
|
)
|
|
(249
|
)
|
|
(309
|
)
|
|
(736
|
)
|
|
|
|
|
|
|
|
|
|
|
Net carrying value at end of period
|
$
|
22
|
|
|
$
|
165
|
|
|
$
|
7
|
|
|
$
|
311
|
|
|
$
|
505
|
|
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 three months ended March 31, 2019. Goodwill allocated to other reporting units was supported by the valuation performed at that time.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
At March 31, 2020 and December 31, 2019, the Company's intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
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
|
|
$
|
984
|
|
|
$
|
(209
|
)
|
|
$
|
775
|
|
|
$
|
988
|
|
|
$
|
(123
|
)
|
|
$
|
865
|
|
Customer contract
|
10 years
|
|
8
|
|
|
(6
|
)
|
|
2
|
|
|
8
|
|
|
(6
|
)
|
|
2
|
|
Patents
|
10 to 17 years
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
Technology rights
|
10 to 30 years
|
|
131
|
|
|
(41
|
)
|
|
90
|
|
|
133
|
|
|
(37
|
)
|
|
96
|
|
Packaged kits know-how
|
10 years
|
|
54
|
|
|
(8
|
)
|
|
46
|
|
|
54
|
|
|
(7
|
)
|
|
47
|
|
Catalogs
|
10 years
|
|
47
|
|
|
(7
|
)
|
|
40
|
|
|
47
|
|
|
(6
|
)
|
|
41
|
|
Licensing agreements
|
3 to 5 years
|
|
62
|
|
|
(23
|
)
|
|
39
|
|
|
63
|
|
|
(18
|
)
|
|
45
|
|
Land use rights
|
28 to 46 years
|
|
46
|
|
|
(3
|
)
|
|
43
|
|
|
47
|
|
|
(3
|
)
|
|
44
|
|
|
|
|
1,333
|
|
|
(298
|
)
|
|
1,035
|
|
|
1,341
|
|
|
(201
|
)
|
|
1,140
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade names and trademarks
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
282
|
|
Total
|
|
|
|
|
|
|
$
|
1,264
|
|
|
|
|
|
|
$
|
1,422
|
|
The amortization expense associated with definite-lived intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
Amortization expense
|
|
$
|
34
|
|
|
$
|
35
|
|
The expected future amortization expense for the Company's definite-lived intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 and thereafter
|
|
Total
|
Expected amortization expense
|
|
$
|
98
|
|
|
$
|
126
|
|
|
$
|
122
|
|
|
$
|
120
|
|
|
$
|
113
|
|
|
$
|
456
|
|
|
$
|
1,035
|
|
7. Investment in Nonconsolidated Affiliates
The Company's ownership interest in affiliates accounted for under the equity method is as follows:
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
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
|
%
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
The Company's investments in its nonconsolidated affiliates at March 31, 2020 and December 31, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Investments in nonconsolidated affiliates
|
$
|
509
|
|
|
$
|
518
|
|
The carrying amount of the Company's investments in its nonconsolidated affiliates accounted for under the equity method exceeded its share of the underlying net assets by $252 million and $251 million at March 31, 2020 and December 31, 2019.
The following table represents the activity from the Company's investments in its nonconsolidated affiliates for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
|
$
|
13
|
|
|
$
|
16
|
|
Cash dividends received from nonconsolidated affiliates
|
$
|
13
|
|
|
$
|
15
|
|
The following tables present summarized aggregated financial information of the Company's nonconsolidated affiliates for the three months ended March 31, 2020 and 2019. The amounts represent 100% of the interest in the nonconsolidated affiliates and not the Company's proportionate share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
Statements of Income
|
Otomotiv A.S.
|
|
Anqing TP Goetze
|
|
Other
|
|
Total
|
Sales
|
$
|
96
|
|
|
$
|
30
|
|
|
$
|
105
|
|
|
$
|
231
|
|
Gross profit
|
$
|
26
|
|
|
$
|
6
|
|
|
$
|
20
|
|
|
$
|
52
|
|
Income from continuing operations
|
$
|
23
|
|
|
$
|
7
|
|
|
$
|
9
|
|
|
$
|
39
|
|
Net income
|
$
|
18
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Statements of Income
|
Otomotiv A.S.
|
|
Anqing TP Goetze
|
|
Other
|
|
Total
|
Sales
|
$
|
91
|
|
|
$
|
39
|
|
|
$
|
125
|
|
|
$
|
255
|
|
Gross profit
|
$
|
21
|
|
|
$
|
16
|
|
|
$
|
23
|
|
|
$
|
60
|
|
Income from continuing operations
|
$
|
19
|
|
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
43
|
|
Net income
|
$
|
18
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
$
|
38
|
|
See Note 17, 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, 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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, Singapore dollar, Thailand bhat, South African rand, 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 March 31, 2020 and December 31, 2019 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 is recorded in prepayments and other current assets or accrued expenses and other current liabilities in the condensed consolidated balance sheets. The fair value of these derivative instruments are not considered material, see Note 9, Fair Value for additional information.
The following table summarizes by position the notional amounts for foreign currency forward contracts at March 31, 2020 (all of which mature in 2021):
|
|
|
|
|
|
Notional Amount
|
Long positions
|
$
|
52
|
|
Short positions
|
$
|
(53
|
)
|
Cash-Settled Share and Index Swap Transactions
The Company selectively uses swaps to reduce market risk associated with its deferred compensation liabilities, which increase as the Company's stock price increases and decrease as the Company's stock price decreases. The Company has entered into a cash-settled share swap agreement that moves in the opposite direction of these liabilities, allowing the Company to fix a portion of the liabilities at a stated amount. At March 31, 2020, the Company hedged its deferred compensation liability related to approximately 1,350,000 common share equivalents, an increase of 750,000 common share equivalents from December 31, 2019. In the first quarter of 2020, the Company entered into an S&P 500 index fund ETF swap agreement to further reduce its market risk. This agreement will act as a natural hedge offsetting an equivalent amount of indexed investments in the Company's deferred compensation plans. The fair value of these swap agreements is recorded in prepayments and other current assets or accrued expenses and other current liabilities in the condensed consolidated balance sheets. The fair value of these derivative instruments are not considered material, see Note 9, Fair Value for additional information.
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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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, tin, and nickel. 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 $21 million and $19 million at March 31, 2020 and December 31, 2019. 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, €784 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 at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
Balance sheet classification
|
|
March 31, 2020
|
|
December 31, 2019
|
Commodity price hedge contracts designated as cash flow hedges
|
Accrued expenses and other current liabilities
|
|
$
|
3
|
|
|
$
|
—
|
|
Foreign currency borrowings designated as net investment hedges
|
Long-term debt
|
|
$
|
865
|
|
|
$
|
850
|
|
The following table represents the amount of gain (loss) recognized in accumulated other comprehensive income (loss) before any reclassifications into net income (loss) for derivative and non-derivative instruments designated as hedges for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
2020
|
|
2019
|
Commodity price hedge contracts designated as cash flow hedges
|
|
$
|
(3
|
)
|
|
$
|
4
|
|
Foreign currency borrowings designated as net investment hedges
|
|
$
|
14
|
|
|
$
|
19
|
|
The Company estimates about $3 million included in accumulated OCI or OCL at March 31, 2020 will be reclassified into earnings within the following twelve months. See Note 15, Shareholders' Equity for further information.
9. Fair Value
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.
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the assets and liabilities included in the Company's condensed consolidated balance sheets at March 31, 2020 and December 31, 2019 that are recognized at fair value on a recurring basis and indicate the fair value hierarchy utilized to determine such fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Fair value
hierarchy
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Derivative asset (liability) instruments:
|
|
|
|
|
|
|
|
|
|
Swap agreements
|
Level 2
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
Commodity contracts
|
Level 2
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Asset and Liability Instruments
The carrying value of cash and cash equivalents, restricted cash, short and long-term receivables, accounts payable, and short-term debt approximates fair value.
Cash-Settled Share and Index Swap Agreements
The Company's stock price is used as an observable input in determining the fair value of the cash-settled share swap agreement. The S&P 500 index ETF price is used as an observable input in determining the fair value of this swap agreement.
Commodity Contracts and Foreign Currency Contracts
The Company calculates the fair value of its commodity contracts and foreign currency contracts using commodity forward rates and currency forward rates, to calculate forward values, and then discounts the forward values. The discount rates for all derivative contracts are based on bank deposit rates. The fair value of the Company's foreign currency forward contracts was a net liability position of $1 million at March 31, 2020 and net asset position of less than $1 million at December 31, 2019.
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.
Long-Lived Assets
The Company evaluates its long-lived assets for impairment whenever events or circumstances indicate the value of these long-lived asset groups are not recoverable. As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded certain impairment triggers had occurred for certain long-lived asset groups. After failing the undiscounted cash flow recoverability test, the Company estimated the fair values of these long-lived asset groups at March 31, 2020 and compared them to their net carrying values. The fair value measurements related to these long-lived asset groups 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 the long-lived asset groups, the Company utilized an asset-based approach. The Company believes the assumptions and estimates used to determine the estimated fair values of the long-lived asset groups are reasonable; however, these estimates and assumptions are subject to a high degree of uncertainty. Due to the many variables inherent in estimating fair value differences in assumptions could have a material effect on the results of the analyses.
As the fair values of the long-lived asset groups exceeded their net carrying values, the Company recorded long-lived asset impairment charges consisting of $65 million of definite-lived intangible assets and $455 million of property, plant, and equipment, during the three months ended March 31, 2020. See Note 4, Restructuring Charges, Net and Asset Impairments for additional information on asset impairments and see Note 6, Goodwill and Other Intangible Assets, for additional information on the definite-lived intangible asset impairments.
Goodwill and Indefinite-Lived Intangible Assets
The Company evaluates the carrying value of its goodwill and indefinite-lived intangible assets for impairment annually in the fourth quarter of each year, or more frequently if events or circumstances indicate these assets might be impaired. As a result of the effects of the COVID-19 global pandemic on the Company's projected financial information, the Company concluded it was more likely than not the fair values of certain reporting units and its indefinite-lived intangible assets had declined to below their carrying values. The Company completed analyses to estimate the fair values of these reporting units and its trade names
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
and trademarks. These fair value measurements require the Company to make significant assumptions and estimates about the (i) projected operating margins, (ii) revenue growth rate, and (iii) discount rate, which is risk-adjusted based on the aforementioned items, as observable inputs are not available (level 3). The Company believes the assumptions and estimates used to determine the estimated fair value are reasonable; however, these estimates and assumptions are subject to a high degree of uncertainty. Due to the many variables inherent in estimating fair value, differences in assumptions could have a material effect on the results of the analyses.
It was determined the carrying values of the reporting units, and trade names and trademarks exceeded their fair values. As result, the Company recognized $267 million in non-cash impairment charges related to its goodwill and $51 million in non-cash impairment charges related to its indefinite-lived assets during the three months ended March 31, 2020. As a result, the remaining carrying value of the Company's trade names and trademarks equals fair value at March 31, 2020. See Note 6, Goodwill and Other Intangible Assets, for additional information on the goodwill and indefinite-lived intangible asset impairments.
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. See Note 6, Goodwill and Other Intangible Assets, for additional information on the goodwill impairment recognized in the three months ended March 31, 2019.
Financial Instruments Not Carried at Fair Value
The estimated fair value of the Company's outstanding debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Fair value
hierarchy
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Long-term debt (including current maturities):
|
|
|
|
|
|
|
|
|
|
Term loans and senior notes
|
Level 2
|
|
$
|
5,128
|
|
|
$
|
3,871
|
|
|
$
|
5,179
|
|
|
$
|
5,113
|
|
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 $183 million and $192 million at March 31, 2020 and December 31, 2019 in other debt whose carrying value approximates fair value, which consists primarily of foreign debt with maturities of one year or less.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
10. Debt and Other Financing Arrangements
Long-Term Debt
A summary of our long-term debt obligations at March 31, 2020 and December 31, 2019 is set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Principal
|
|
Carrying Amount (a)
|
|
Principal
|
|
Carrying Amount (a)
|
Credit Facilities
|
|
|
|
|
|
|
|
Revolver Borrowings
|
|
|
|
|
|
|
|
Due 2023
|
$
|
700
|
|
|
$
|
700
|
|
|
$
|
183
|
|
|
$
|
183
|
|
Term Loans
|
|
|
|
|
|
|
|
LIBOR plus 1.75% Term Loan A due 2019 through 2023
|
1,594
|
|
|
1,584
|
|
|
1,615
|
|
|
1,608
|
|
LIBOR plus 3.00% Term Loan B due 2019 through 2025
|
1,679
|
|
|
1,619
|
|
|
1,683
|
|
|
1,623
|
|
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
|
|
|
494
|
|
Senior Secured Notes
|
|
|
|
|
|
|
|
€415 million 4.875% Euro Fixed Rate Notes due 2022
|
458
|
|
|
470
|
|
|
465
|
|
|
479
|
|
€300 million of Euribor plus 4.875% Euro Floating Rate Notes due 2024
|
331
|
|
|
334
|
|
|
336
|
|
|
340
|
|
€350 million of 5.000% Euro Fixed Rate Notes due 2024
|
386
|
|
|
405
|
|
|
392
|
|
|
413
|
|
Other debt, primarily foreign instruments
|
12
|
|
|
12
|
|
|
14
|
|
|
13
|
|
|
|
|
5,840
|
|
|
|
|
5,375
|
|
Less - maturities classified as current
|
|
|
3
|
|
|
|
|
4
|
|
Total long-term debt
|
|
|
$
|
5,837
|
|
|
|
|
$
|
5,371
|
|
|
|
(a)
|
Carrying amount is net of unamortized debt issuance costs and debt discounts or premiums. Total unamortized debt issuance costs were $78 million and $76 million at March 31, 2020 and December 31, 2019. Total unamortized debt (premium) discount, net was $(33) million and $(37) million at March 31, 2020 and December 31, 2019.
|
Short-Term Debt
The Company's short-term debt at March 31, 2020 and December 31, 2019 consists of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2020
|
|
2019
|
Maturities classified as current
|
$
|
3
|
|
|
$
|
4
|
|
Short-term borrowings(a)
|
171
|
|
|
179
|
|
Bank overdrafts
|
1
|
|
|
2
|
|
Total short-term debt
|
$
|
175
|
|
|
$
|
185
|
|
(a) Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements.
Amortization of debt issuance costs and original issue discounts (premiums)
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) for the three months ended March 31, 2020 and 2019 is:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Amortization of debt issuance fees
|
$
|
5
|
|
|
$
|
5
|
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Included in the table above is the amortization of debt issuance costs on the revolver of $1 million in both the three months ended March 31, 2020 and 2019. These costs are included in other assets in the condensed balance sheets. The amortization of the debt premium on the Senior Secured Notes reduced interest expense by $3 million in both the three months ended March 31, 2020 and 2019.
Credit Facilities
Financing Arrangements
|
|
|
|
|
|
|
|
Committed Credit Facilities
at March 31, 2020
|
|
Term
|
|
Available(b)
|
|
|
|
(in billions)
|
Tenneco Inc. revolving credit facility (a)
|
2023
|
|
$
|
0.8
|
|
Tenneco Inc. Term Loan A
|
2023
|
|
—
|
|
Tenneco Inc. Term Loan B
|
2025
|
|
—
|
|
Subsidiaries’ credit agreements
|
2020 - 2028
|
|
—
|
|
|
|
|
$
|
0.8
|
|
|
|
(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.
|
The Company also has $69 million of outstanding letters of credit under uncommitted facilities at March 31, 2020.
As of March 31, 2020, the Company had liquidity of $1.57 billion, comprised of $770 million cash and $800 million undrawn on its revolving credit facility. Subsequent to March 31, 2020, the Company drew down the remaining amount available under its revolving credit facility to enhance its liquidity position.
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, which has been amended by the first amendment, dated February 14, 2020 ("the "First Amendment"), by the second amendment, dated February 14, 2020 ("the Second Amendment"), and by the third amendment, dated May 5, 2020 (the "Third Amendment"). 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"). The Company paid $8 million in one-time fees in connection with the First Amendment and Second Amendment and paid $10 million in connection with the Third Amendment.
New Credit Facility — Interest Rates and Fees
At March 31, 2020, before giving effect to the Third Amendment, the interest rate on borrowings under the revolving credit facility and the Term Loan A facility was LIBOR plus 2.00% and will remain at LIBOR plus 2.00% for each relevant period for which the Company’s consolidated net leverage ratio (as defined by the New Credit Facility) is equal to or greater than 3.0 to 1. The interest rate on borrowings under the revolving credit facility and the Term Loan A facility are subject to step-downs as follows:
|
|
|
Consolidated net leverage ratio
|
Interest rate
|
greater than 3.0 to 1
|
LIBOR plus 2.00%
|
less than 3.0 to 1 and greater than 2.5 to 1
|
LIBOR plus 1.75%
|
less than 2.5 to 1 and greater than 1.5 to 1
|
LIBOR plus 1.50%
|
less than 1.5 to 1
|
LIBOR plus 1.25%
|
The Third Amendment provides for an increase to the margin applicable to borrowings under the revolving credit facility and
the Term Loan A facility at certain leverage levels as set forth below as one of several conditions for obtaining the less restrictive financial maintenance covenants described below under New Credit Facility — Other Terms and Conditions:
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
|
|
|
Consolidated net leverage ratio
|
Interest rate
|
greater than 6.0 to 1
|
LIBOR plus 2.50%
|
less than 6.0 to 1 and greater than 4.5 to 1
|
LIBOR plus 2.25%
|
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. On June 3, 2019, Moody’s lowered our corporate family rating to B1 and the interest rate on borrowings under the term loan B was raised to LIBOR plus 3.00%.
New Credit Facility — Other Terms and Conditions — Before giving effect to the Third Amendment, the New Credit Facility also contained two financial maintenance covenants for the revolving credit facility and the Term Loan A facility including (i) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility) at the end of each fiscal quarter, with step-downs, as follows:
|
|
|
(i) Consolidated net leverage ratio
|
not greater than 4.50 to 1
|
through March 31, 2021
|
not greater than 4.25 to 1
|
through September 30, 2021
|
not greater than 4.00 to 1
|
through March 31, 2022
|
not greater than 3.75 to 1
|
through September 30, 2022
|
not greater than 3.50 to 1
|
thereafter
|
and (ii) 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.
After giving effect to the Third Amendment, the Company must comply with certain less restrictive financial maintenance covenants for the revolving credit facility and the Term Loan A facility. The financial maintenance covenants are subject to several covenant reset triggers (“Covenant Reset Triggers”) that limit certain activities of the Company by implementing more restrictive affirmative and negative covenants, as more fully described below. If a Covenant Reset Trigger occurs, the financial maintenance covenants revert back to the previous financial maintenance covenants in effect immediately prior to the Third Amendment (and described above) (the “Prior Financial Covenants”). The financial maintenance covenants include (i) a requirement to have a senior secured leverage ratio (as defined in the New Credit Facility), with step-downs, as detailed in the table below; (ii) a requirement to have a consolidated net leverage ratio (as defined in the New Credit Facility), with step-downs, as follows:
|
|
|
|
|
|
(i) Senior secured net leverage ratio
|
|
(ii) Consolidated net leverage ratio
|
not greater than 6.75 to 1
|
at June 30, 2020
|
|
not greater than 4.50 to 1
|
at March 31, 2020
|
not greater than 9.50 to 1
|
at September 30, 2020
|
|
not greater than 5.25 to 1
|
at March 31, 2022
|
not greater than 8.75 to 1
|
at December 31, 2020
|
|
not greater than 4.75 to 1
|
at June 30, 2022
|
not greater than 8.25 to 1
|
at March 31, 2021
|
|
not greater than 4.25 to 1
|
at September 30, 2022
|
not greater than 4.50 to 1
|
at June 30, 2021
|
|
not greater than 3.75 to 1
|
thereafter
|
not greater than 4.25 to 1
|
at September 30, 2021
|
|
|
|
not greater than 4.00 to 1
|
at December 31, 2021
|
|
|
|
and (iii) 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 as of March 31, 2020, 2.00 to 1 as of June 30, 2020, 1.50 to 1 through March 31, 2021, and 2.75 to 1 thereafter.
The Company may make a one-time election to revert back to the Prior Financial Covenants and terminate the Covenant Reset Triggers upon delivery of a covenant reset certificate that attests to compliance with the Prior Financial Covenants as of the end
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
of the relevant fiscal period (“Covenant Reset Certificate”).
The Covenant Reset Triggers include certain limitations on the ability of the Company and its restricted subsidiaries to, among other things, (a) incur additional indebtedness, (b) enter into additional sales and leasebacks, (c) create additional liens over their assets, (d) pay dividends or distributions to Tenneco’s stockholders, (e) prepay certain unsecured indebtedness of the Company or its restricted subsidiaries (as more fully described below), (f) make additional investments, (g) dispose of material intellectual property, and (h) reinvest the proceeds of certain asset sales in the business in lieu of repaying indebtedness, each as more specifically described in the Third Amendment. These limitations are in addition to other affirmative and negative covenants (with customary exceptions, materiality qualifiers and limitations) in the New Credit Agreement, including with respect to: financial reporting; payment of taxes; maintenance of existence; compliance with law and material contractual obligations; maintenance of property and insurance; inspection of property, books and records; notices of certain events; compliance with environmental laws; provision and maintenance of collateral perfection; satisfaction of the financial maintenance covenants described above; incurrence of indebtedness; permitting liens over assets; mergers, consolidations, dispositions or other fundamental transactions; dispositions and asset sales; restricted payments; investments; compliance with limitations on certain transactions with nonconsolidated affiliates; sale and leaseback transactions; changes in fiscal periods; negative pledge clauses in certain contracts; changes to lines of business; prepayments and modifications of certain subordinated indebtedness (as more fully described below); use of proceeds; transactions involving special purpose finance subsidiaries; and transactions related to effectuating a spin-off (as defined in the New Credit Agreement), each as more specifically described in the New Credit Agreement.
After giving effect to the Third Amendment, so long as no default exists under its New Credit Facility, the Company would be permitted to (i) make regularly scheduled interest and principal payments as and when due in respect of the Senior Unsecured Notes, (ii) refinance the Senior Unsecured Notes with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (iii) make payments in respect of the Senior Unsecured Notes in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after May 5, 2020; (iv) convert any Senior Unsecured Notes into qualified capital stock issued after May 5, 2020; and (v) make additional payments of the Senior Unsecured Notes provided that after giving effect to such additional payments the consolidated leverage ratio would be equal to or less than 2.00 to 1 after giving effect to such additional payments. The foregoing limitations regarding repayment and refinancing of the Senior Unsecured Notes and such incremental equivalent debt apply from the effectiveness of the Third Amendment until delivery of a Covenant Reset Certificate.
The covenants in the New Credit Facility generally prohibit the Company from repaying certain subordinated indebtedness. So long as no default exists, the Company would, under its New Credit Facility, be permitted to repay or refinance its subordinated indebtedness (i) with the net cash proceeds of permitted refinancing indebtedness (as defined in the New Credit Facility); (ii) in an amount equal to the net cash proceeds of qualified capital stock (as defined in the New Credit Facility) issued after October 1, 2018; (iii) in exchange for qualified capital stock issued after October 1, 2018; and (iv) with additional payments provided that such additional payments are capped based on a pro forma consolidated leverage ratio after giving effect to such additional payments.
Such additional payments on subordinated indebtedness (x) will not be permitted at any time the pro forma consolidated leverage ratio is greater than 2.00 to 1 after giving effect to such additional payments and (y) will be permitted in an unlimited amount at any time the pro forma consolidated leverage ratio is equal to or less than 2.00 to 1 after giving effect to such additional payments.
The New Credit Facility contains customary representations and warranties, including, as a condition to future revolver borrowings, that all such representations and warranties are true and correct, in all material respects, on the date of borrowing, including representations (with customary exceptions, materiality qualifiers and limitations) as to: existence; compliance with law; power, authority and enforceability; no violation of law or material contracts; material litigation; no default under the New Credit Agreement and related documents; ownership of property, including material intellectual property; payment of material taxes; compliance with margin stock regulations; labor matters; ERISA; Investment Company Act matters; subsidiaries; use of loan proceeds; environmental matters; accuracy of information; security documents; solvency; anti-corruption laws and sanctions; and that since December 31, 2017 there has been no development or event that has had a material adverse effect on the business or financial condition of the Company and its subsidiaries, each as more specifically described in the New Credit Facility.
The New Credit Facility includes customary events of default and other provisions that could require all amounts due
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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. These events of default (with customary exceptions, materiality qualifiers, limitations and grace periods) include (i) failure to pay obligations under the New Credit Agreement when due; (ii) material inaccuracy of representations and warranties; (iii) failure to comply with the covenants in the New Credit Facility and related documents (as summarized above); (iv) cross-default to material indebtedness; (v) commencement of bankruptcy or insolvency proceedings; (vi) ERISA events; (vii) certain material judgments; (viii) invalidity of unenforceability of security and guarantee documents; and (ix) change of control, each as more specifically described in the New Credit Facility.
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").
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 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.
At March 31, 2020, the Company was in compliance with all of its financial covenants.
Other Debt
Other debt consists primarily of subsidiary debt.
Accounts Receivable Securitization and Factoring
On-Balance Sheet Arrangements
The Company has securitization programs for some of its accounts receivable, with limited recourse provisions. Borrowings on these securitization programs, which are recorded in short-term debt, at March 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Borrowings on securitization programs
|
$
|
8
|
|
|
$
|
4
|
|
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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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 amount of accounts receivable outstanding and derecognized for these factoring and drafting arrangements was $1.1 billion and $1.0 billion at March 31, 2020 and December 31, 2019. In addition, the deferred purchase price receivable was $37 million and $33 million at March 31, 2020 and December 31, 2019.
Proceeds from the factoring of accounts receivable qualifying as sales and drafting programs was $1.2 billion for both the three months ended March 31, 2020 and 2019.
The following table represents the Company's expenses associated with these arrangements for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Loss on sale of receivables(a)
|
$
|
6
|
|
|
$
|
8
|
|
(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.
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 March 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Pension
|
|
Other Postretirement Benefits
|
|
2020
|
|
2019
|
|
|
U.S.
|
|
Non-U.S.
|
|
U.S.
|
|
Non-U.S.
|
|
2020
|
|
2019
|
Service cost
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
10
|
|
|
4
|
|
|
13
|
|
|
7
|
|
|
2
|
|
|
3
|
|
Expected return on plan assets
|
(16
|
)
|
|
(4
|
)
|
|
(17
|
)
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
Net amortization:
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
2
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
Prior service cost (credit)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Net pension and postretirement costs (credits)
|
$
|
(4
|
)
|
|
$
|
8
|
|
|
$
|
(2
|
)
|
|
$
|
9
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2020, the Company recorded income tax benefit of $94 million on loss from continuing operations before income taxes of $920 million. This compares to recording no income tax expense on losses from continuing operations of $105 million in the three months ended March 31, 2019.
Income tax expense for the three months ended March 31, 2020 differs from the U.S. statutory rate due primarily to $105 million of tax benefit recognized relating to the impairment of $854 million of assets, 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 months ended March 31, 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.
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 operational results decline due to the COVID-19 global pandemic in certain jurisdictions, exceed current estimates, or economic recovery takes longer than currently anticipated, the Company believes it is reasonably possible there may be sufficient negative evidence for a valuation allowance to be recorded in the next twelve months. This may result in a one-time tax expense of up to $550 million, primarily related to the U.S., China, France, Poland, and Spain.
The Company believes it is reasonably possible up to $32 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.
After considering the effect of COVID-19 on the 2020 forecast, the Company is not projecting sufficient income to utilize its 2011 and 2012 foreign tax credit carryforwards of $29 million and $21 million. The Company has certain U.S. reserves that provide positive evidence these foreign tax credits would be utilized in the event of an assessment by the U.S. tax authorities; therefore, it has netted the foreign tax credit carryforward deferred tax assets with its uncertain tax position liability on the
balance sheet. Should the 2011 and 2012 foreign tax credit carryforwards expire without utilization, the foreign tax credit carryforward deferred tax assets would be written off with a charge to income tax expense.
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 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. At March 31, 2020, 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:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Accrued expenses and other current liabilities
|
$
|
7
|
|
|
$
|
8
|
|
Deferred credits and other liabilities
|
28
|
|
|
28
|
|
|
$
|
35
|
|
|
$
|
36
|
|
For those locations where the liability was discounted, the weighted average discount rate used was 0.5% and 1.3% at March 31, 2020 and December 31, 2019.
The Company's expected payments of environmental remediation costs for non-indemnified locations are estimated to be approximately:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
2025 and thereafter
|
Expected payments
|
$
|
6
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
15
|
|
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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Antitrust Investigations and Litigation
On March 25, 2014, representatives of the European Commission (EC) were at Tenneco GmbH's Edenkoben, Germany administrative facility to gather information in connection with an ongoing global antitrust investigation concerning multiple automotive suppliers. On 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, $109 million was paid through March 31, 2020. In connection with the resolution of certain claims, $9 million was released from the reserve in the third quarter of 2019 and $30 million was paid out in the first quarter of 2020 from amounts that were included in the reserve. At March 31, 2020 the reserve was $14 million, of which $2 million was recorded in accrued expenses and other current liabilities and $12 million was recorded in deferred credits and other 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
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
antitrust laws relating to products supplied by the Company, and the Company may be subject to other civil lawsuits and/or related claims, no amount of this reserve is attributable to matters with the DOJ or the EC, and no such amount is expected based on current information.
The Company's reserve for its antitrust matters is based upon all currently available information and an assessment of the probability of events for those matters where the Company can make a reasonable estimate of the costs to resolve such outstanding matters. The Company's estimate involves significant judgment, given the number, variety and potential outcomes of actual and potential claims, the uncertainty of future rulings and approvals by a court or other authority, the behavior or incentives of adverse parties or regulatory authorities, and other factors outside of its control. As a result, the Company's reserve may change from time to time, and actual costs may vary. Although the ultimate 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. 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, advertising 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, 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.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
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's ARO liabilities in the condensed consolidated balance sheets are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
Accrued expenses and other current liabilities
|
$
|
3
|
|
|
$
|
3
|
|
Deferred credits and other liabilities
|
12
|
|
|
13
|
|
|
$
|
15
|
|
|
$
|
16
|
|
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 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.
The following represents the changes in the Company's warranty accrual for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2020
|
|
2019
|
Balance at beginning of period
|
$
|
54
|
|
|
$
|
45
|
|
Accruals related to product warranties
|
3
|
|
|
5
|
|
Reductions for payments made
|
(6
|
)
|
|
(2
|
)
|
Foreign currency
|
—
|
|
|
—
|
|
Balance at end of period
|
$
|
51
|
|
|
$
|
48
|
|
14. Share-Based Compensation
Share-Based Compensation Expense (Benefit)
Share-based compensation expense is included in selling, general and administrative expenses in the condensed consolidated statements of income (loss). The total share-based compensation expense is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Cash-settled share-based compensation expense (benefit)
|
$
|
—
|
|
|
$
|
(1
|
)
|
Share-settled share-based compensation expense (benefit)
|
2
|
|
|
7
|
|
|
$
|
2
|
|
|
$
|
6
|
|
Cash-Settled Awards
The Company has granted restricted stock units ("RSUs") to certain key employees that are payable in cash. These awards are classified as liabilities, valued based on the fair value of the award at the grant date, and remeasured at each reporting date until settlement, with compensation expense being recognized in proportion to the completed requisite period up until date of settlement. In the first quarter of 2020, all cash-settled, share-based long-term performance units were paid and none remain outstanding.
At March 31, 2020, approximately $3 million of total unrecognized compensation costs is expected to be recognized on the cash-settled RSU's over a weighted-average period 3 years.
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Share-Settled Awards
The Company has granted restricted stock, RSUs, and performance share units ("PSUs") to its directors and certain key employees that are payable in common stock. These awards are settled in shares upon vesting and recognized in equity based on their fair value.
The following table reflects the status of all nonvested restricted shares, share-settled RSUs, and PSUs for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
35,630
|
|
|
$
|
63.27
|
|
|
1,125,346
|
|
|
$
|
37.91
|
|
|
806,233
|
|
|
$
|
34.12
|
|
Granted
|
169,781
|
|
|
9.15
|
|
|
1,389,681
|
|
|
7.47
|
|
|
—
|
|
|
—
|
|
Vested
|
(196,332
|
)
|
|
39.59
|
|
|
(280,394
|
)
|
|
41.47
|
|
|
—
|
|
|
—
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(238,283
|
)
|
|
34.37
|
|
|
(213,843
|
)
|
|
26.74
|
|
Nonvested balance at end of period
|
9,079
|
|
|
$
|
57.92
|
|
|
1,996,350
|
|
|
$
|
27.84
|
|
|
592,390
|
|
|
$
|
36.25
|
|
At March 31, 2020, approximately $32 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.
15. Shareholders' Equity
Common Stock Outstanding
The Company has authorized 175,000,000 shares ($0.01 par value) of Class A Common Stock at March 31, 2020 and December 31, 2019. The Company has authorized 25,000,000 shares ($0.01 par value) of Class B Common Stock at March 31, 2020 and December 31, 2019.
Total common stock outstanding and changes in common stock issued are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Class A Common Stock
|
|
Class B Common Stock
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Shares issued at beginning of period
|
71,727,061
|
|
|
71,675,379
|
|
|
23,793,669
|
|
|
23,793,669
|
|
Issuance (repurchased) pursuant to benefit plans
|
450,175
|
|
|
120,622
|
|
|
—
|
|
|
—
|
|
Restricted stock forfeited and withheld for taxes
|
(119,644
|
)
|
|
(54,293
|
)
|
|
—
|
|
|
—
|
|
Stock options exercised
|
—
|
|
|
8,438
|
|
|
—
|
|
|
—
|
|
Shares issued at end of period
|
72,057,592
|
|
|
71,750,146
|
|
|
23,793,669
|
|
|
23,793,669
|
|
|
|
|
|
|
|
|
|
Treasury stock
|
14,592,888
|
|
|
14,592,888
|
|
|
—
|
|
|
—
|
|
Total shares outstanding
|
57,464,704
|
|
|
57,157,258
|
|
|
23,793,669
|
|
|
23,793,669
|
|
Class B Common Stock Conversion
Effective April 1, 2020, Icahn Enterprises L.P. ("IEP") exercised its right to convert 3,485,215 shares of the Company’s Class B Common Stock into 3,485,215 shares of the Company’s Class A Common Stock. As a result, IEP holds 9,136,392 shares, or approximately 14.99%, of the Company’s outstanding Class A Common Stock and 20,308,454 shares of the Company’s Class B Common Stock.
Preferred Stock
The Company had 50,000,000 shares of preferred stock ($0.01 par value) authorized at both March 31, 2020 and December 31, 2019. No shares of preferred stock were issued or outstanding at those dates.
Shareholder Rights Plan
On April 15, 2020, the Company's Board of Directors approved a Section 382 Rights Plan, which will expire on the earliest to occur of (i) the close of business on the day following the certification of the voting results of the Company’s 2021 annual meeting of stockholders, if at such stockholder meeting or any other meeting of stockholders of the Company duly held prior to such meeting, a proposal to ratify the Section 382 Rights Plan has not been passed by the requisite vote of the Company’s
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
stockholders; (ii) the date on which the Board of Directors determines in its sole discretion that (x) the Section 382 Rights Plan is no longer necessary for the preservation of material valuable tax attributes or (y) the tax attributes have been fully utilized and may no longer be carried forward; and (iii) the close of business on October 2, 2021.
Pursuant to the Section 382 Rights Plan, our Board of Directors declared a dividend of (i) one preferred share purchase right (a “Class A Right”), payable on April 27, 2020, for each share of Class A Voting Common Stock and (ii) one preferred share purchase right (a “Class B Right” and, together with the Class A Rights, the “Rights”), payable on April 27, 2020, for each share of Class B Non-Voting Common Stock, in each case, outstanding on April 27, 2020 to the stockholders of record on that date. Each Right, which is exercisable only in the event that any person or group acquires 4.9% or more of the Company’s outstanding shares of Class A Voting Common Stock (with certain limited exceptions), would entitle any holder other than the person or group whose ownership position has exceeded the ownership limit to purchase common stock having a value equal to twice the exercise price of the Right, or, at the election of the Board of Directors, to exchange each Right for one share of Class A Common Stock per Class A Right or one share of Class B Non-Voting Common Stock per Class B Right.
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 months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
Foreign currency translation adjustments and other:
|
|
|
|
Balance at beginning of period
|
$
|
(369
|
)
|
|
$
|
(395
|
)
|
Other comprehensive income (loss) before reclassifications adjustments
|
(199
|
)
|
|
27
|
|
Reclassification from other comprehensive income (loss)
|
—
|
|
|
—
|
|
Other comprehensive income (loss)
|
(199
|
)
|
|
27
|
|
Income tax provision (benefit)
|
—
|
|
|
2
|
|
Balance at end of period
|
(568
|
)
|
|
(366
|
)
|
|
|
|
|
Pensions and other postretirement benefits:
|
|
|
|
Balance at beginning of period
|
(342
|
)
|
|
(297
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
—
|
|
Reclassification from other comprehensive income (loss)
|
3
|
|
|
1
|
|
Other comprehensive income (loss)
|
3
|
|
|
1
|
|
Income tax provision (benefit)
|
1
|
|
|
—
|
|
Balance at end of period
|
(338
|
)
|
|
(296
|
)
|
|
|
|
|
Cash flow hedge instruments
|
|
|
|
Balance at beginning of period
|
—
|
|
|
—
|
|
Other comprehensive income (loss) before reclassifications
|
(3
|
)
|
|
4
|
|
Reclassification from other comprehensive income (loss)
|
—
|
|
|
—
|
|
Other comprehensive income (loss)
|
(3
|
)
|
|
4
|
|
Income tax provision (benefit)
|
1
|
|
|
—
|
|
Balance at end of period
|
(2
|
)
|
|
4
|
|
|
|
|
|
Accumulated other comprehensive loss at end of period
|
$
|
(908
|
)
|
|
$
|
(658
|
)
|
|
|
|
|
Other comprehensive income (loss) attributable to noncontrolling interests
|
$
|
(20
|
)
|
|
$
|
6
|
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
16. Segment Information
The Company intends to separate its businesses to form two independent companies: New Tenneco and DRiV. The future New Tenneco consists of two operating segments: Powertrain and Clean Air. DRiV also consists of two operating segments: Motorparts and Ride Performance. Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as "Corporate."
Management uses EBITDA including noncontrolling interests as the key performance measure of segment profitability and uses the measure in its financial and operational decision-making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. Segment assets are not presented as it is not a measure reviewed by the Chief Operating Decision Maker in allocating resources and assessing performance.
EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with U.S. GAAP and should not be considered an alternative to net income, which is the most directly comparable financial measure to EBITDA including noncontrolling interests that is in accordance with U.S. GAAP. EBITDA including noncontrolling interests, as determined and measured by the Company, should not be compared to similarly titled measures reported by other companies.
Segment results for the three months ended March 31, 2020 and 2019 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
|
|
|
|
|
|
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Total
|
|
Corporate
|
|
Reclass & Elims
|
|
Total
|
For the Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
1,545
|
|
|
$
|
997
|
|
|
$
|
588
|
|
|
$
|
706
|
|
|
$
|
3,836
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,836
|
|
Intersegment revenues
|
$
|
6
|
|
|
$
|
38
|
|
|
$
|
29
|
|
|
$
|
9
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
(82
|
)
|
|
$
|
—
|
|
Equity in earnings of nonconsolidated affiliates, net of tax
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
For the Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers
|
$
|
1,779
|
|
|
$
|
1,175
|
|
|
$
|
733
|
|
|
$
|
797
|
|
|
$
|
4,484
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,484
|
|
Intersegment revenues
|
$
|
—
|
|
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
11
|
|
|
$
|
103
|
|
|
$
|
—
|
|
|
$
|
(103
|
)
|
|
$
|
—
|
|
Equity in earnings of nonconsolidated affiliates, net of tax
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
Segment EBITDA including noncontrolling interests and the reconciliation to earnings before interest expense, income taxes, and noncontrolling interests are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2020
|
|
2019
|
EBITDA including noncontrolling interests by Segments:
|
|
|
|
Clean Air
|
$
|
99
|
|
|
$
|
131
|
|
Powertrain
|
(70
|
)
|
|
113
|
|
Ride Performance
|
(577
|
)
|
|
(45
|
)
|
Motorparts
|
(40
|
)
|
|
45
|
|
Total Reportable Segments
|
(588
|
)
|
|
244
|
|
Corporate
|
(86
|
)
|
|
(99
|
)
|
Depreciation and amortization
|
(171
|
)
|
|
(169
|
)
|
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
|
(845
|
)
|
|
(24
|
)
|
Interest expense
|
(75
|
)
|
|
(81
|
)
|
Income tax (expense) benefit
|
94
|
|
|
—
|
|
Net income (loss)
|
$
|
(826
|
)
|
|
$
|
(105
|
)
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Disaggregated Revenue
Original Equipment
Value-Added Sales
OE revenue is generated from providing original equipment manufacturers and servicers with products for automotive, heavy duty, and industrial applications. Supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions, and do not require the customer to purchase a minimum quantity.
Substrate/Passthrough Sales
Generally, in connection with the sale of exhaust systems to certain OE manufacturers, the Company purchases catalytic converters and diesel particulate filters or components thereof including precious metals (“substrates”) on behalf of its customers which are used in the assembled system. These substrates are included in inventory and are “passed through” to the customer at cost, plus a small margin. Since the Company takes title to the substrate inventory and has responsibility for both the delivery and quality of the finished product including the substrates, the revenues and related expenses are recorded at gross amounts.
Aftermarket
Aftermarket revenue is generated from providing products for the global vehicle aftermarket to a wide range of warehouse distributors, retail parts stores, and mass merchants that distribute these products to customers ranging from professional service providers to “do-it-yourself” consumers.
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 March 31, 2020
|
|
|
|
|
|
|
|
|
|
OE - Substrate
|
$
|
700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
700
|
|
OE - Value add
|
845
|
|
|
997
|
|
|
588
|
|
|
—
|
|
|
2,430
|
|
Aftermarket
|
—
|
|
|
—
|
|
|
—
|
|
|
706
|
|
|
706
|
|
Total
|
$
|
1,545
|
|
|
$
|
997
|
|
|
$
|
588
|
|
|
$
|
706
|
|
|
$
|
3,836
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
OE - Substrate
|
$
|
706
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
706
|
|
OE - Value add
|
1,073
|
|
|
1,175
|
|
|
733
|
|
|
—
|
|
|
2,981
|
|
Aftermarket
|
—
|
|
|
—
|
|
|
—
|
|
|
797
|
|
|
797
|
|
Total
|
$
|
1,779
|
|
|
$
|
1,175
|
|
|
$
|
733
|
|
|
$
|
797
|
|
|
$
|
4,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reportable Segments
|
By Geography
|
Clean Air
|
|
Powertrain
|
|
Ride Performance
|
|
Motorparts
|
|
Total
|
Three Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
704
|
|
|
$
|
344
|
|
|
$
|
198
|
|
|
$
|
476
|
|
|
$
|
1,722
|
|
Europe, Middle East and Africa
|
565
|
|
|
492
|
|
|
297
|
|
|
197
|
|
|
1,551
|
|
Rest of world
|
276
|
|
|
161
|
|
|
93
|
|
|
33
|
|
|
563
|
|
Total
|
$
|
1,545
|
|
|
$
|
997
|
|
|
$
|
588
|
|
|
$
|
706
|
|
|
$
|
3,836
|
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
North America
|
$
|
793
|
|
|
$
|
405
|
|
|
$
|
232
|
|
|
$
|
507
|
|
|
$
|
1,937
|
|
Europe, Middle East and Africa
|
641
|
|
|
575
|
|
|
378
|
|
|
237
|
|
|
1,831
|
|
Rest of world
|
345
|
|
|
195
|
|
|
123
|
|
|
53
|
|
|
716
|
|
Total
|
$
|
1,779
|
|
|
$
|
1,175
|
|
|
$
|
733
|
|
|
$
|
797
|
|
|
$
|
4,484
|
|
TENNECO INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
17. Related Party Transactions
The following table summarizes the net sales, purchases, and royalty and other income from related parties for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2020
|
|
Three Months Ended March 31, 2019
|
|
Net Sales
|
|
Purchases
|
|
Royalty and Other Income
|
|
Net Sales
|
|
Purchases
|
|
Royalty and Other Income
|
Anqing TP Goetze Piston Ring Company Limited
|
$
|
4
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
—
|
|
Anqing TP Powder Metallurgy Company Limited
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Dongsuh Federal-Mogul Industrial Co., Ltd.
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
Federal-Mogul Powertrain Otomotiv A.S.
|
$
|
12
|
|
|
$
|
59
|
|
|
$
|
4
|
|
|
$
|
28
|
|
|
$
|
59
|
|
|
$
|
1
|
|
Federal-Mogul TP Liner Europe Otomotiv Ltd. Sti.
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
Federal-Mogul TP Liners, Inc.
|
$
|
4
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Icahn Automotive Group LLC
|
$
|
33
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
43
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Montagewerk Abgastechnik Emden GmbH
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
PSC Metals, Inc.
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The following table is a summary of amounts due to and from the Company's related parties at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Receivables
|
|
Payables and accruals
|
|
Receivables
|
|
Payables and accruals
|
Anqing TP Goetze Piston Ring Company Limited
|
$
|
6
|
|
|
$
|
17
|
|
|
$
|
1
|
|
|
$
|
26
|
|
Anqing TP Powder Metallurgy Company Limited
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Dongsuh Federal-Mogul Industrial Co., Ltd.
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Farloc Argentina SAIC
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Federal-Mogul Powertrain Otomotiv A.S.
|
$
|
7
|
|
|
$
|
25
|
|
|
$
|
8
|
|
|
$
|
31
|
|
Federal-Mogul TP Liners, Inc.
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
7
|
|
Icahn Automotive Group LLC
|
$
|
41
|
|
|
$
|
8
|
|
|
$
|
52
|
|
|
$
|
10
|
|
Montagewerk Abgastechnik Emden GmbH
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
See Note 7, Investment in Nonconsolidated Affiliates, for further information for companies within the tables above that represent equity method investments.
Amounts presented as Icahn Automotive Group LLC represent the Company's activity with Auto Plus and Pep Boys.
As part of the Federal-Mogul Acquisition, the Company acquired a redeemable noncontrolling interest related to a subsidiary in India. In accordance with local regulations, the Company initiated a process to make a tender offer of the shares it did not own due to the change in control triggered by the Federal-Mogul Acquisition. The Company entered into separate agreements with IEP subsequent to the purchase agreement whereby IEP agreed to fund and execute the tender offer for the shares on behalf of the Company. During the three months ended March 31, 2020, the tender offer for the shares was completed. Since the transaction was funded and executed by IEP, the completion of the tender offer resulted in an adjustment to additional paid-in capital during the three months ended March 31, 2020. Immediately following the completion of the tender offer, the shares of this noncontrolling interest not owned by the Company were no longer redeemable, or probable of becoming redeemable; therefore, the noncontrolling interest was reclassified from temporary equity to permanent equity during the three months ended March 31, 2020. See Note 2, Summary of Significant Accounting Policies, for further information on this redeemable noncontrolling interest.