References herein to "Tenneco", the "Company", "we", "us", and "our" refer to Tenneco Inc. and its consolidated subsidiaries. Unless otherwise stated, all comparisons of June 30, 2022 financial results are to June 30, 2021 financial results.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the condensed consolidated financial statements and related notes included in Item 1 of this quarterly report on Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the Securities and Exchange Commission ("SEC") on February 24, 2022 (the "2021 Form 10-K").
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing and fulfillment footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, positioning the business to adapt to changes in vehicle electrification, and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences to other vehicles in response to higher fuel costs and other economic, social or environmental factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards, and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to economic challenges such as managing the availability of materials or increases in the cost of raw materials and our ability to successfully reduce the effect of any such cost increases through material substitutions, cost reduction initiatives, and other methods.
Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as "Corporate." See Note 14, "Segment Information", in our condensed consolidated financial statements located in Part I, Item 1 of this Form 10-Q for additional information.
Proposed Merger On February 22, 2022, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Pegasus Holdings III, LLC ("Parent") and Pegasus Merger Co., a wholly owned subsidiary of Parent ("Merger Sub" and together with Parent, "Buyer"). Pursuant to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into Tenneco (the "Merger") with Tenneco continuing as the surviving corporation of the Merger and as a wholly owned subsidiary of Parent. Parent and Merger Sub are affiliates of certain funds managed by affiliates of Apollo Global Management, Inc. At the effective time of the Merger (the "Effective Time"), each share of the Company's Class A voting common stock that is issued and outstanding immediately prior to the Effective Time (other than shares to be cancelled pursuant to the Merger Agreement or shares of Class A voting common stock held by holders who have made a valid demand for appraisal in accordance with Section 262 of the Delaware General Corporation Law), will be automatically converted into the right to receive $20.00 in cash, without interest.
At the Effective Time, subject to the terms and conditions set forth in the Merger Agreement, each RSU and each PSU of Tenneco that is outstanding immediately prior to the Effective Time will automatically be cancelled and converted into the holder's right to receive a cash amount (subject to any applicable withholding taxes) calculated based on the per-share Merger consideration of $20.00.
The Company's Board of Directors and the sole member or board of directors, as applicable, of Parent and Merger Sub have each unanimously approved the Merger and the Merger Agreement. On June 7, 2022, the Company's stockholders approved the Merger and Merger Agreement, and the closing of the Merger remains subject to various conditions, including (i) the absence of any order, injunction or other legal or regulatory restraint making illegal, enjoining or otherwise prohibiting the closing of the Merger; (ii) the receipt of clearances and/or approvals under applicable foreign competition and/or other laws; (iii) the accuracy of the representations and warranties contained in the Merger Agreement, subject to customary materiality qualifications; and (iv) compliance with the covenants and agreements contained in the Merger Agreement as of the closing of the Merger. In addition, the obligation of Parent and Merger Sub to consummate the Merger is subject to the absence, since the date of the Merger Agreement, of a Company Material Adverse Effect (as defined in the Merger Agreement under clause (b) of such definition). The closing of the Merger is not subject to a financing condition, and Parent has obtained equity and debt financing commitments for the purpose of financing the Merger and the other transactions contemplated by the Merger Agreement.
All conditions to closing under the Merger Agreement with respect to antitrust and/or foreign direct investment laws have been satisfied or waived in accordance with the terms and conditions of the Merger Agreement except for the conditions pertaining to the antitrust and competition laws of the European Union and Japan. Parent, Merger Sub and Tenneco expect to consummate the Merger promptly upon satisfaction or waiver of the remaining conditions to closing under the Merger Agreement, including receipt of such remaining antitrust and competition law approvals (or expiration of applicable waiting periods), in accordance with the terms of the Merger Agreement. The Merger is expected to close in the second half of 2022. Until the closing, the Company will continue to operate as an independent company.
The Company has incurred and will incur certain significant costs relating to the Merger, such as legal, accounting, financial advisory, printing and other professional services fees, as well as other customary payments. In the event that the merger is terminated, the Company may also be required to pay a cash termination fee to Parent of $54 million, as required under the Merger Agreement under certain circumstances.
Financial Results for the Six Months Ended June 30, 2022 Consolidated revenues were $9,314 million, which was flat as compared to the six months ended June 30, 2022. Lower sales volume of $88 million and the unfavorable effects of foreign currency exchange of $331 million caused a decrease in consolidated revenue, which was completely offset by the net favorable effects of other, which includes recoveries of commodity price increases, of $419 million.
Cost of sales were $8,275 million, an increase of $241 million, or 3%, for the six months ended June 30, 2022. The primary driver of the increase is unfavorable effects of materials sourcing of $493 million, net effects of unfavorable sales volume and mix of $25 million, and net unfavorable effects of other costs of $65 million. These were partially offset by favorable effects of foreign currency exchange of $302 million and a decrease of $40 million in a non-cash write-down of inventory that the Motorparts segment recognized in connection with its initiative to rationalize its supply chain and distribution network as compared to the six months ended June 30, 2021.
Results for the six months ended June 30, 2022 was a net loss of $123 million as compared to net income of $104 million for the six months ended June 30, 2021. Contributing to the change from net income to a net loss are the following: •a decrease in equity in earnings (losses) of nonconsolidated affiliates, net of tax of $15 million, primarily attributable to the decrease in equity in earnings of nonconsolidated affiliates located in Turkey and China; •a non-cash gain on extinguishment of debt of $8 million was recognized for the six months ended June 30, 2021 related to the discharge of the 4.875% euro floating rate notes due 2024 and 5.000% euro fixed rate notes due 2024; and •a decrease in other income (expense), net of $7 million primarily attributable to the losses recognized related to the sale of shares in an unconsolidated affiliate during the six months ended June 30, 2022.
These unfavorable effects were partially offset by: •a decrease in selling, general and administrative expenses of $15 million, primarily attributable to lower net compensation and employee benefits; •a decrease in depreciation and amortization of $11 million, primarily attributable to the effects of reductions in capital expenditures; •a decrease in restructuring charges, net and asset impairments of $10 million primarily due to a decrease of $11 million related to cash severance costs expected to be paid as part of global headcount and cost reduction actions across all segments and regions, including plant relocations and closures; and •a decrease in income tax expense to $73 million in the six months ended June 30, 2022 from $88 million in the six months ended June 30, 2021. This is primarily the effects of pre-tax income that is taxed at rates higher than the U.S. statutory rate and a disproportionate share of pre-tax losses in jurisdictions with valuation allowances for which no tax benefit is recognized, as well as a $7 million non-cash benefit related to the release of a valuation allowance during the six months ended June 30, 2022.
Recent Trends and Market Conditions Recent events affecting our business include the COVID-19 global pandemic (including the recent implementation of government lockdowns in China), the semiconductor shortage, the Russia and Ukraine conflict, other supply chain challenges, and the effects of inflation and rising interest rates on the overall macroeconomic environment. We do not have significant operations in Russia or Ukraine compared to our global operations, but our operations in these regions have been disrupted due to the conflict. Sales from our Russian subsidiaries and sales into Russia and Ukraine from our global subsidiaries were less than 1% of our consolidated "Net sales and operating revenue" for the year ended December 31, 2021.
We use various raw materials, including steel and other metals. We obtain steel from a number of sources pursuant to various contractual and other arrangements. Due to recent supply chain constraints within the automotive industry, which may be exacerbated by the conflict in Ukraine, we may encounter difficulty in obtaining steel and other commodities at current contractual prices and as a result may incur higher costs to procure these items. In addition, the automotive industry continues to face a shortage of semiconductors, which has led to production disruptions globally and created operating challenges for the automotive supplier base. We expect industry production to remain volatile for the foreseeable future and, sustained unfavorable commodity prices, volatility in commodity prices or changes in markets for a given commodity could negatively affect our operations.
We are experiencing other supply chain challenges, along with the effects of inflation on commodities, other purchases, and labor. Further, unfavorable conditions such as a general slowdown of the global or U.S. economy, uncertainty and volatility in the financial markets, or additional inflationary factors and rising interest rates could result in higher operating expenses and project costs for us.
Additionally, the Russia and Ukraine conflict and the sanctions imposed in response to this conflict have increased global economic and political uncertainty. While neither Russia nor Ukraine constitutes a material portion of our business, a significant escalation or expansion of economic disruption or the conflict's current scope could disrupt our supply chain, broaden inflationary costs, and have a material adverse effect on our results of operations.
There is inherent uncertainty in the continuation of the trends discussed below. In addition, there may be other factors or trends that can have an effect on our business. Our business and operating results are affected by the relative strength of:
General economic conditions Our OE business is directly related to automotive vehicle production by our customers. Automotive production levels depend on a number of factors, including global and regional economic conditions. Demand for aftermarket products is driven by four primary factors: the number of vehicles in operation (VIO); the average age of vehicles; vehicle usage trends (primarily miles driven); and component failure and wear rates.
The COVID-19 global pandemic has negatively affected the global economy, disrupted global supply chains, and created extreme volatility and disruptions to capital and credit markets in the global financial markets. The extent of the effects of the COVID-19 pandemic will depend on a number of factors, including the duration and severity of the pandemic or subsequent resurgence of the outbreaks, the effects and extent of COVID-19 variants, related government responses, the rate of economic recovery from the pandemic, vaccination rates, and the effectiveness of available vaccines. There continues to be many uncertainties that remain related to COVID-19 that could negatively affect our results of operations, financial position, and cash flows.
The uncertain nature, magnitude, and duration of hostilities stemming from Russia's recent military invasion of Ukraine, including the potential effects of sanctions limitations, retaliatory cyber-attacks, and potential shipping delays, have contributed to increased market volatility and economic uncertainty. The effect of the invasion of Ukraine, including economic sanctions or additional war or military conflict, as well as potential responses by Russia, is currently unknown and could adversely affect the Company's business, supply chain, suppliers, customers and potential consumer demand for our products.
Global vehicle production levels Global light vehicle production levels (According to IHS Markit, July, 2022) For the three months ended June 30, 2022, global light vehicle production was flat overall compared to the same period in the prior year. Light vehicle production levels were up in North America by 12%, South America by 13%, and India by 32%, which were substantially offset by the decline in light vehicle production levels in Europe by 5% and China by 6%.
For the six months ended June 30, 2022, global light vehicle production was down 2% overall compared to the same period in the prior year, primarily due to the semiconductor supply shortage and other supply chain challenges during the six months ended June 30, 2022. Light vehicle production levels declined by 12% in Europe, while production levels increased by 5% in North America, 1% in China and 16% in India. South America production was flat compared to the same period in prior year.
Global commercial truck production levels (According to IHS Markit, May, 2022) For the three months ended June 30, 2022, global commercial truck production decreased 22% as compared to the same period in the prior year. Production declined by 44% in China, 19% in Europe, and 12% in Brazil, while production levels were up 17% in North America and 72% in India. The significant production decline in China is primarily due to the effects of COVID-19 and the ongoing semiconductor supply shortage.
For the six months ended June 30, 2022, global commercial truck production decreased 26% as compared to the same period in the prior year. Production declined by 50% in China, 14% in Europe, and 8% in Brazil, while production levels were up 15% in North America and 23% in India. The significant production decline in China is primarily due to the effects of COVID-19 and the ongoing semiconductor supply shortage, and the challenging growth comparisons in the first quarter of 2022.
Fuel efficiency, powertrain evolution, and vehicle electrification Various jurisdictions around the world have announced plans to limit the production of new diesel and gasoline powered vehicles in the future. Major vehicle manufacturers have announced their intention to reduce and phase out production of diesel and gasoline powered vehicles during the next two decades. However, for the foreseeable future, it is expected that the majority of the powertrains for light and commercial vehicles will be gasoline and diesel engines (including hybrids, which combine a battery electric drive with a combustion engine). While we see similar electrification trends for light vehicle and commercial vehicle, we expect light vehicles will experience those trends in advance of commercial vehicles. We expect to monitor those trends and adopt our business strategy accordingly.
Aftermarket Specific Strategies Our aftermarket business strategy incorporates a go-to-market model that we believe differentiates us from our competitors and creates structural support for sustained revenue growth. The model is designed to drive revenue growth by capitalizing on three of our key competitive strengths: a leading portfolio of products and brands; extensive global manufacturing, distribution and service capabilities; and market intelligence gathered from our distributors, installers, and consumers.
Non-GAAP Measures We use EBITDA including noncontrolling interests as the key performance measure of segment profitability and use the measure in our financial and operational decision-making processes, for internal reporting, and for planning and forecasting purposes to effectively allocate resources. EBITDA including noncontrolling interests is defined as earnings before interest expense, income taxes, noncontrolling interests, and depreciation and amortization. EBITDA including noncontrolling interests should not be considered a substitute for results prepared in accordance with 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 us, should not be compared to similarly titled measures reported by other companies.
For the Three and Six Months Ended June 30, 2022 compared to the Three and Six Months Ended June 30, 2021
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