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| TEN > SEC Filings for TEN > Form 10-K on 27-Feb-2009 | All Recent SEC Filings |
27-Feb-2009
Annual Report
As you read the following review of our financial condition and results of operations, you should also read our consolidated financial statements and related notes beginning on page 69.
Executive Summary
We are one of the world's leading manufacturers of automotive emission control and ride control products and systems. We serve both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including MonroeŽ, RanchoŽ, CleviteŽ Elastomers and Fric Rottm ride control products and WalkerŽ, Fonostm, and Gillettm emission control products. Worldwide we serve more than 37 different original equipment manufacturers, and our products or systems are included on eight of the top 10 passenger car models produced for sale in Europe and eight of the top 10 light truck models produced for sale in North America for 2008. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. We operate 83 manufacturing facilities worldwide and employ approximately 21,000 people to service our customers' demands.
The recent unprecedented deterioration in the global economy and global credit markets has negatively impacted global business activity in general, and specifically the automotive industry in which we operate. The market turmoil and tightening of credit, as well as the recent and dramatic decline in the housing market in the United States and Western Europe, have led to a lack of consumer confidence evidenced by a rapid decline in light vehicle purchases in 2008. Light vehicle production decreased by 16 percent in North America and five percent in Europe in 2008 from 2007 levels. General Motors, Ford and Chrysler in particular are burdened with substantial structural cost, such as pension and healthcare, that have impacted their profitability, and may ultimately result in severe financial difficulty, including bankruptcy.
In response to current economic conditions, some of our customers are expected to eliminate certain light vehicle models in order to remain financially viable. Changes in the models produced by our customers may have an adverse effect on our market share. Additionally, while we expect that light vehicle production volumes will recover in future years, continued declines in consumer demand may have an adverse effect on the financial condition of our OE customers, and on our future results of operations.
General Motors, Ford and Chrysler represented 20%, 11% and 2%, respectively, of our 2008 net sales and operating revenues. As of December 31, 2008, we had net receivables due from General Motors, Ford and Chrysler in North America that totaled $142 million. Financial difficulties at any of our major customers could have an adverse impact on the level of our future revenues and collection of our receivables if such customers were unable to pay for the products we provide or we experience a loss of, or significant reduction in, business from such customers. In addition, a bankruptcy filing by a significant customer could result in a condition of default under our U.S. accounts receivables securitization agreement, which would have an adverse effect on our liquidity.
Continued deterioration in the industry, or the bankruptcy or one or more of our major customers, may have an impact on our ability to meet future financial covenants which would require us to enter into negotiations with our senior credit lenders to request additional covenant relief. Such conditions and events may also result in incremental charges related to impairment of goodwill, intangible assets and long-lived assets, and in charges to record an additional valuation allowance against our deferred tax assets.
In the event that such financial difficulties or the bankruptcy of one of our major customers diminishes our future revenues or collection of receivables, we would pursue a range of actions to meet our cash flow needs. Such actions include additional restructuring initiatives and other cost reductions, sales of assets, reductions to working capital and capital spending, issuance of equity and other alternatives to enhance our financial and operating position.
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business
needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes, fixing or eliminating unprofitable businesses and reducing overall costs. In addition, our ability to adapt to key industry trends, such as a shift in consumer preferences to other vehicles in response to higher fuel costs and other economic and social factors, increasing technologically sophisticated content, changing aftermarket distribution channels, increasing environmental standards and extended product life of automotive parts, also play a critical role in our success. Other factors that are critical to our success include adjusting to economic challenges such as increases in the cost of raw materials and our ability to successfully reduce the impact of any such cost increases through material substitutions, cost reduction initiatives and other methods.
We have a substantial amount of indebtedness. As such, our ability to generate cash - both to fund operations and service our debt - is also a significant area of focus for our company. See "Liquidity and Capital Resources" below for further discussion of cash flows and "Risk Factors" included in Item 1A.
Total revenues for 2008 were $5.9 billion, a four percent decrease compared to 2007. Excluding the impact of currency and substrate sales, revenue was down $177 million, or four percent, driven primarily by lower OE production in North America, Europe and China and lower European aftermarket sales. Partially offsetting these declines were increased North American aftermarket sales and higher sales in South America and India.
Gross margin for 2008 was 14.4 percent, down 1.4 percentage points from 15.8 percent in 2007. Lower OE production volumes, the vehicle mix shift away from light trucks, manufacturing fixed cost absorption and currency losses negatively impacted overall gross margin. Partially offsetting these declines were the contributions from our new platform launches and lower restructuring charges.
Selling, general and administrative expense was down $7 million in 2008, at $392 million, including $22 million in restructuring and restructuring-related expense and $7 million in aftermarket changeover costs, compared to $399 million in 2007 which included $3 million in restructuring and restructuring-related expense and $5 million in aftermarket changeover costs. Lower administrative costs and intense efforts to cut discretionary spending drove the improvement. Engineering expense was $127 million and $114 million in 2008 and 2007, respectively, as we continued to make strategic investments in preparation for new platform launches and in the technology necessary for capturing future growth opportunities. In total, we reported selling, general, administrative and engineering expenses in 2008 at 8.8 percent of revenues, as compared to 8.3 percent of revenues in 2007.
Earnings before interest expense, taxes and minority interest ("EBIT") was a loss of $3 million for 2008 compared to earnings of $252 million in 2007. Lower OE production, manufacturing fixed cost absorption, higher depreciation, restructuring and aftermarket changeover costs, the impact of the goodwill impairment charge and the negative impact of currency more than accounted for the year-over-year decline. Partially offsetting the decline were the contributions from our new platform launches, lower selling, general and administrative costs, and savings from our restructuring activities.
Results from Operations
Net Sales and Operating Revenues for Years 2008 and 2007
The following tables reflect our revenues for the years of 2008 and 2007. We present these reconciliations of revenues in order to reflect the trend in our sales in various product lines and geographic regions separately from the effects of doing business in currencies other than the U.S. dollar. We have not reflected any currency impact in the 2007 table since this is the base period for measuring the effects of currency during 2008 on our operations. We believe investors find this information useful in understanding period-to-period comparisons in our revenues.
Additionally, we show the component of our revenue represented by substrate sales in the following table. While we generally have primary design, engineering and manufacturing responsibility for OE emission control systems, we do not manufacture substrates. Substrates are porous ceramic filters coated with a catalyst - precious metals such as platinum, palladium and rhodium. These are supplied to us by Tier 2 suppliers and directed by our OE customers. We generally earn a small margin on these components of the
system. As the need for more sophisticated emission control solutions increases to meet more stringent environmental regulations, and as we capture more diesel aftertreatment business, these substrate components have been increasing as a percentage of our revenue. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system. We view the growth of substrates as a key indicator that our value-add content in an emission control system is moving toward the higher technology hot-end gas and diesel business.
Our value-add content in an emission control system includes designing the system to meet environmental regulations through integration of the substrates into the system, maximizing use of thermal energy to heat up the catalyst quickly, efficiently managing airflow to reduce back pressure as the exhaust stream moves past the catalyst, managing the expansion and contraction of the emission control system components due to temperature extremes experienced by an emission control system, using advanced acoustic engineering tools to design the desired exhaust sound, minimizing the opportunity for the fragile components of the substrate to be damaged when we integrate it into the emission control system and reducing unwanted noise, vibration and harshness transmitted through the emission control system.
We present these substrate sales separately in the following table because we believe investors utilize this information to understand the impact of this portion of our revenues on our overall business and because it removes the impact of potentially volatile precious metals pricing from our revenues. While our original equipment customers generally assume the risk of precious metals pricing volatility, it impacts our reported revenues. Excluding "substrate" catalytic converter and diesel particulate filter sales removes this impact.
Year Ended December 31, 2008
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original Equipment
Ride Control $ 493 $ (5 ) $ 498 $ - $ 498
Emission Control 1,591 (2 ) 1,593 773 820
Total North America Original Equipment 2,084 (7 ) 2,091 773 1,318
North America Aftermarket
Ride Control 390 - 390 - 390
Emission Control 156 - 156 - 156
Total North America Aftermarket 546 - 546 - 546
Total North America 2,630 (7 ) 2,637 773 1,864
Europe Original Equipment
Ride Control 479 27 452 - 452
Emission Control 1,487 54 1,433 498 935
Total Europe Original Equipment 1,966 81 1,885 498 1,387
Europe Aftermarket
Ride Control 213 10 203 - 203
Emission Control 190 7 183 - 183
Total Europe Aftermarket 403 17 386 - 386
South America & India 389 17 372 52 320
Total Europe, South America & India 2,758 115 2,643 550 2,093
Asia 342 29 313 101 212
Australia 186 6 180 15 165
Total Asia Pacific 528 35 493 116 377
Total Tenneco $ 5,916 $ 143 $ 5,773 $ 1,439 $ 4,334
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Year Ended December 31, 2007
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original Equipment
Ride Control $ 514 $ - $ 514 $ - $ 514
Emission Control 1,850 - 1,850 924 926
Total North America Original Equipment 2,364 - 2,364 924 1,440
North America Aftermarket
Ride Control 385 - 385 - 385
Emission Control 152 - 152 - 152
Total North America Aftermarket 537 - 537 - 537
Total North America 2,901 - 2,901 924 1,977
Europe Original Equipment
Ride Control 427 - 427 - 427
Emission Control 1,569 - 1,569 556 1,013
Total Europe Original Equipment 1,996 - 1,996 556 1,440
Europe Aftermarket
Ride Control 201 - 201 - 201
Emission Control 207 - 207 - 207
Total Europe Aftermarket 408 - 408 - 408
South America & India 333 - 333 41 292
Total Europe, South America and India 2,737 - 2,737 597 2,140
Asia 352 - 352 125 227
Australia 194 - 194 27 167
Total Asia Pacific 546 - 546 152 394
Total Tenneco $ 6,184 $ - $ 6,184 $ 1,673 $ 4,511
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Revenues from our North American operations decreased $271 million in 2008 compared to 2007. Higher aftermarket sales were more than offset by lower North American OE revenues. North American OE emission control revenues were down $259 million in 2008. Excluding substrate sales and currency, revenues were down $106 million compared to last year. This decrease was primarily due to a 16% year-over-year decline in industry production volumes, including a temporary stop of production on the Toyota Tundra, as well as significant reduction in customer light truck production which included the Ford Super Duty and F150, GMT 900 and the Chevrolet Trailblazer and GMC Envoy. North American OE ride control revenues for 2008 were down $21 million from the prior year or down $16 million excluding unfavorable currency. Revenues of $84 million from our recently acquired Kettering, Ohio ride-control operations helped offset the significantly lower light truck production. Our total North American OE revenues, excluding substrate sales and currency, decreased nine percent in 2008 compared to 2007. The North American light truck production rate decreased 25 percent while production rates for passenger cars decreased three percent. Aftermarket revenues for North America were $546 million in 2008, an increase of $9 million compared to the prior year, driven by higher volumes in both product lines as well as higher pricing to offset material cost increases. Aftermarket ride control revenues increased one percent in 2008 while aftermarket emission control revenues increased three percent in 2008.
Our European, South American and Indian segment's revenues increased $21 million or one percent in 2008 compared to last year. Total Europe OE revenues were $1,966 million, down one percent from last year. Excluding favorable currency and substrate sales, total European OE revenue was down four percent while total light vehicle production for Europe was down five percent. Europe OE emission control revenues decreased five percent to $1,487 million from $1,569 million in the prior year. Excluding substrate sales and a favorable impact of $54 million due to currency, Europe OE emission control revenues decreased eight percent from 2007, primarily
due to lower volumes on the Opel Astra and Vectra, the BMW 3 Series and Volvo. Improved volumes on the BMW 1 series, VW Golf, the new Jaguar XF, and the Ford Mondea and C-Max helped partially offset the emission control decrease. Europe OE ride control revenues of $479 million in 2008 were up 12 percent year-over-year. Excluding currency, revenues increased by six percent in 2008 due to favorable volumes on the Suzuki Splash, VW Passat and Transporter, Ford Focus, the new Mazda 2 and Mercedes C-class. Also benefiting 2008 Europe OE ride control revenues were $18 million from our recently acquired suspension business of Gruppo Marzocchi. European aftermarket revenues decreased $5 million in 2008 compared to last year. When adjusted for currency, aftermarket revenues were down $22 million year-over-year. Excluding the $10 million favorable impact of currency, ride control aftermarket revenues were $2 million better when compared to prior year. Emission control aftermarket revenues were down $24 million, excluding $7 million in currency benefit, due to overall market declines. South American and Indian revenues were $389 million during 2008, compared to $333 million in the prior year. Stronger OE and aftermarket sales and currency appreciation drove this increase.
Revenues from our Asia Pacific segment decreased $18 million to $528 million in 2008 compared to $546 million in 2007. Excluding the impact of substrate sales and currency, revenues decreased to $377 million from $394 million in the prior year. Asian revenues for 2008 were $342 million, down three percent from last year. Although overall China OE production was up slightly, GM, Volkswagen, Ford and Brilliance, our largest customers in this region, all took unplanned downtime during the year. Revenues for Australia were down $8 million, to $186 million in 2008 compared to $194 million in the prior year. Excluding substrate sales and favorable currency of $6 million, Australian revenue was down $2 million versus 2007.
Net Sales and Operating Revenues for Years 2007 and 2006
The following tables reflect our revenues for the years of 2007 and 2006. See
"Net Sales and Operating Revenues for Years 2008 and 2007" for a description of
why we present these reconciliations of revenue.
Year Ended December 31, 2007
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original Equipment
Ride Control $ 514 $ - $ 514 $ - $ 514
Emission Control 1,850 5 1,845 924 921
Total North America Original Equipment 2,364 5 2,359 924 1,435
North America Aftermarket
Ride Control 385 - 385 - 385
Emission Control 152 - 152 - 152
Total North America Aftermarket 537 - 537 - 537
Total North America 2,901 5 2,896 924 1,972
Europe Original Equipment
Ride Control 427 37 390 - 390
Emission Control 1,569 120 1,449 511 938
Total Europe Original Equipment 1,996 157 1,839 511 1,328
Europe Aftermarket
Ride Control 201 15 186 - 186
Emission Control 207 16 191 - 191
Total Europe Aftermarket 408 31 377 - 377
South America & India 333 24 309 39 270
Total Europe, South America & India 2,737 212 2,525 550 1,975
Asia 352 15 337 123 214
Australia 194 23 171 25 146
Total Asia Pacific 546 38 508 148 360
Total Tenneco $ 6,184 $ 255 $ 5,929 $ 1,622 $ 4,307
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Year Ended December 31, 2006
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original Equipment
Ride Control $ 483 $ - $ 483 $ - $ 483
Emission Control 928 - 928 272 656
Total North America Original Equipment 1,411 - 1,411 272 1,139
North America Aftermarket
Ride Control 383 - 383 - 383
Emission Control 162 - 162 - 162
Total North America Aftermarket 545 - 545 - 545
Total North America 1,956 - 1,956 272 1,684
Europe Original Equipment
Ride Control 380 - 380 - 380
Emission Control 1,264 - 1,264 519 745
Total Europe Original Equipment 1,644 - 1,644 519 1,125
Europe Aftermarket
Ride Control 178 - 178 - 178
Emission Control 211 - 211 - 211
Total Europe Aftermarket 389 - 389 - 389
South America & India 272 - 272 32 240
Total Europe, South America and India 2,305 - 2,305 551 1,754
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