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| TEN > SEC Filings for TEN > Form 10-K on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
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 in ITEM 8.
Executive Summary
We are one of the world's leading manufacturers of emission control and ride control products and systems for light, commercial and specialty vehicle applications. We serve both original equipment (OE) vehicle designers and manufacturers and the repair and replacement markets, or aftermarket, globally through leading brands, including Monroe ®, Rancho®, Clevite® Elastomers, Marzocchi®, Axios™, Kinetic™ and Fric-Rot ™ ride control products and Walker®, XNOx™, Fonos ™, DynoMax®, Thrush™ and Lukey ™ emission control products. We serve more than 63 different original equipment manufacturers and commercial vehicle engine manufacturers, and our products are included on all ten of the top 10 car models produced for sale in Europe and eight of the top 10 light truck models produced for sale in North America for 2012. Our aftermarket customers are comprised of full-line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. As of December 31, 2012, we operated 89 manufacturing facilities worldwide and employed approximately 25,000 people to service our customers' demands.
Factors that continue to be critical to our success include winning new business awards, managing our overall global manufacturing footprint to ensure proper placement and workforce levels in line with business needs, maintaining competitive wages and benefits, maximizing efficiencies in manufacturing processes and reducing overall costs. In addition, our ability to adapt to key industry trends, such 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.
For 2012, light vehicle production continued to improve from recent years in some of the geographic regions in which we operate. Light vehicle production was up 17 percent in North America, though not to levels seen in recent history, and six percent in China. European light vehicle production was down five percent from 2011 levels.
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 Item 1A, "Risk Factors" included in this Annual Report on Form 10-K.
Total revenue for 2012 was $7,363 million, a two percent increase from $7,205 million in 2011. Excluding the impact of currency and substrate sales, revenue was up $411 million, from $5,527 million to $5,938 million, driven primarily by higher year-over-year OE vehicle production volumes, higher North American aftermarket sales and incremental commercial vehicle revenue.
Cost of sales: Cost of sales for 2012 was $6,170 million, compared to $6,037 million in 2011, or 83.8 percent of sales in both years. The following table lists the primary drivers behind the change in cost of sales ($ millions).
Year ended December 31, 2011 $ 6,037
Volume and mix 348
Material (32 )
Currency exchange rates (231 )
Restructuring 1
Other costs 47
Year ended December 31, 2012 $ 6,170
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The increase in cost of sales was due primarily to the year-over-year increase in production volumes and other costs, mainly manufacturing, offset by the impact of foreign currency exchange rates and lower net material costs.
Gross margin: Revenue less cost of sales for 2012 was $1,193 million, versus $1,168 million in 2011, or 16.2 percent of sales in both years. The effects on gross margin resulting from higher volumes and material cost management were offset by a higher mix of OE revenues, negative currency and higher manufacturing costs.
Engineering, research and development: Engineering, research and development expense was $126 million and $133 million in 2012 and 2011, respectively. Increased spending to support customer programs, technology applications, and growth in emerging markets were more than offset by increased engineering cost recoveries and a strong U.S. dollar which drove the decrease in expense year-over-year.
Selling, general and administrative: Selling, general and administrative expense was down $1 million in 2012, at $427 million, compared to $428 million in 2011. Increased costs due to investments in new facilities in China and Thailand were more than offset by lower aftermarket changeover costs, a $5 million benefit from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996 and the stronger U.S. dollar.
Depreciation and amortization: Depreciation and amortization expense in 2012 was $205 million, compared to $207 million in 2011. 2012 includes a $7 million asset impairment charge related to the European ride control business.
Goodwill impairment: There were no goodwill impairment charges in 2012. In 2011 we recorded a goodwill impairment charge of $11 million related to our Australian business.
Earnings before interest expense, taxes and noncontrolling interests ("EBIT") was $428 million for 2012, an improvement of $49 million, when compared to $379 million in the prior year. Stronger light vehicle production volumes in North America and China, the related fixed manufacturing cost absorption, incremental commercial vehicle business, decreased material costs, a benefit of $5 million from property recoveries related to transactions originated by The Pullman Company before being acquired by Tenneco in 1996, higher engineering cost recoveries, and no goodwill impairment charges drove the year-over-year increase to EBIT. Partially offsetting the increase were higher costs due to investments in China and Thailand, contractual price reductions, higher restructuring and related expenses, increased manufacturing and freight expenses and $23 million of negative currency.
Results from Operations
Net Sales and Operating Revenues for Years 2012 and 2011
The following tables reflect our revenues for 2012 and 2011. 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 2011 table since this is the base period for measuring the effects of currency during 2012 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 OE revenue represented by substrate sales in the following tables. While we generally have primary design, engineering and manufacturing responsibility for OE emission control systems, we do not manufacture substrates. Substrates are porous ceramic filters coated with a catalyst - typically, precious metals such as platinum, palladium and rhodium. These are supplied to us by Tier 2 suppliers generally as directed by our OE customers. We generally earn a small margin on these components of the system. 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. Presenting revenues that exclude "substrates" used in catalytic converters and diesel particulate filters removes this impact.
Year Ended December 31, 2012
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original
Equipment
Ride Control $ 660 $ (1 ) $ 661 $ - $ 661
Emission Control 2,297 - 2,297 997 1,300
Total North America Original
Equipment 2,957 (1 ) 2,958 997 1,961
North America Aftermarket
Ride Control 553 1 552 - 552
Emission Control 209 - 209 - 209
Total North America
Aftermarket 762 1 761 - 761
Total North America 3,719 - 3,719 997 2,722
Europe Original Equipment
Ride Control 496 (43 ) 539 - 539
Emission Control 1,398 (125 ) 1,523 534 989
Total Europe Original
Equipment 1,894 (168 ) 2,062 534 1,528
Europe Aftermarket
Ride Control 197 (20 ) 217 - 217
Emission Control 106 (9 ) 115 - 115
Total Europe Aftermarket 303 (29 ) 332 - 332
South America & India 570 (89 ) 659 89 570
Total Europe, South America &
India 2,767 (286 ) 3,053 623 2,430
Asia 724 2 722 80 642
Australia 153 (2 ) 155 11 144
Total Asia Pacific 877 - 877 91 786
Total Tenneco $ 7,363 $ (286 ) $ 7,649 $ 1,711 $ 5,938
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Year Ended December 31, 2011
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original
Equipment
Ride Control $ 608 $ - $ 608 $ - $ 608
Emission Control 2,085 - 2,085 971 1,114
Total North America Original
Equipment 2,693 - 2,693 971 1,722
North America Aftermarket
Ride Control 518 - 518 - 518
Emission Control 203 - 203 - 203
Total North America
Aftermarket 721 - 721 - 721
Total North America 3,414 - 3,414 971 2,443
Europe Original Equipment
Ride Control 567 - 567 - 567
Emission Control 1,455 - 1,455 494 961
Total Europe Original
Equipment 2,022 - 2,022 494 1,528
Europe Aftermarket
Ride Control 219 - 219 - 219
Emission Control 140 - 140 - 140
Total Europe Aftermarket 359 - 359 - 359
South America & India 632 - 632 103 529
Total Europe, South America &
India 3,013 - 3,013 597 2,416
Asia 618 - 618 98 520
Australia 160 - 160 12 148
Total Asia Pacific 778 - 778 110 668
Total Tenneco $ 7,205 $ - $ 7,205 $ 1,678 $ 5,527
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Year Ended December 31, 2012
Versus Year Ended December 31, 2011
Dollar and Percent Increase (Decrease)
Revenues
Excluding
Currency and
Substrate
Revenues Percent Sales Percent
(Millions Except Percent Amounts)
North America Original Equipment
Ride Control $ 52 9 % $ 53 9 %
Emission Control 212 10 % 186 17 %
Total North America Original Equipment 264 10 % 239 14 %
North America Aftermarket
Ride Control 35 7 % 34 7 %
Emission Control 6 3 % 6 3 %
Total North America Aftermarket 41 6 % 40 6 %
Total North America 305 9 % 279 11 %
Europe Original Equipment
Ride Control (71 ) (13 )% (28 ) (5 )%
Emission Control (57 ) (4 )% 28 3 %
Total Europe Original Equipment (128 ) (6 )% - 0 %
Europe Aftermarket
Ride Control (22 ) (10 )% (2 ) (1 )%
Emission Control (34 ) (24 )% (25 ) (18 )%
Total Europe Aftermarket (56 ) (16 )% (27 ) (8 )%
South America & India (62 ) (10 )% 41 8 %
Total Europe, South America & India (246 ) (8 )% 14 1 %
Asia 106 17 % 122 23 %
Australia (7 ) (4 )% (4 ) (3 )%
Total Asia Pacific 99 13 % 118 18 %
Total Tenneco $ 158 2 % $ 411 7 %
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Light Vehicle Industry Production by Region for Years Ended December 31, 2012 and 2011(According to IHS Automotive, January 2013)
Year Ended
December 31, Increase
2012 2011 (Decrease) % Increase
(Number of Vehicles in Thousands)
North America 15,414 13,126 2,288 17 %
Europe 19,205 20,159 (954 ) (5 )%
South America 4,289 4,312 (23 ) (1 )%
India 3,791 3,600 191 5 %
Total Europe, South America & India 27,285 28,071 (786 ) (3 )%
China 18,283 17,276 1,007 6 %
Australia 229 222 7 3 %
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North American light vehicle production increased 17 percent, while industry Class 8 commercial vehicle production was up nine percent and industry Class 4-7 commercial vehicle production was up 12 percent in 2012 when compared to 2011. Revenues from our North American operations increased in 2012 compared to last year due to higher OE and aftermarket sales of both product lines. The increase in North American OE revenues was primarily driven by improved production volumes, which accounted for $254 million of the year-over-year change in revenues, on Tenneco-supplied platforms. Also contributing to the increase were incremental commercial vehicle revenues. Currency had a $1 million unfavorable impact on OE revenue year-over-year. The increase in aftermarket revenue for North America was primarily due to higher ride control volumes which resulted in an increase in revenue of $29 million. Favorable currency impacted aftermarket revenue by $1 million year-over-year.
Our European, South American and Indian segment's revenues decreased in 2012 compared to last year, due to unfavorable currency, decreased OE ride control and aftermarket sales in Europe and lower revenues in South America. The full year total European light vehicle industry production was down five percent, while industry Class 8 commercial vehicle production and industry Class 4-7 commercial vehicle production were each down six percent in 2012 when compared to 2011. Excluding negative currency, our Europe OE emission control revenues increased on improved volumes due to higher OE production on Tenneco-supplied platforms, as well as the beginning of the ramp-up on commercial vehicle programs which combined contributed to an increase in revenue of $73 million. Excluding currency, European OE ride control revenues decreased $28 million due to lower volumes. Excluding currency, European ride control aftermarket revenues were down compared to last year due to lower sales volumes which had a $4 million impact. Excluding currency, European emission control aftermarket sales were down due to lower volumes which impacted revenue by $24 million. Light vehicle production decreased one percent in South America but increased five percent in India in 2012 when compared to 2011. Excluding negative currency, combined South American and Indian revenues were higher in 2012 when compared to the prior year primarily due to improved pricing in South America and stronger volumes in India partially offset by lower volumes in South America, which combined improved revenue by $27 million.
Industry light vehicle production increased six percent year-over-year in China and three percent year-over-year in Australia. Revenues from our Asia Pacific segment increased mainly due to higher sales in Asia. Asian revenues for 2012 improved from last year, primarily due to $120 million from stronger production volumes, particularly in China on key Tenneco-supplied platforms. Lower OE production volumes in Australia drove a $5 million negative impact on revenue for 2012 over 2011.
Net Sales and Operating Revenues for Years 2011 and 2010
The following tables reflect our revenues for the years of 2011 and 2010. See
"Net Sales and Operating Revenues for Years 2012 and 2011" for a description of
why we present these reconciliations of revenue.
Year Ended December 31, 2011
Revenues
Substrate Excluding
Revenues Sales Currency and
Currency Excluding Excluding Substrate
Revenues Impact Currency Currency Sales
(Millions)
North America Original
Equipment
Ride Control $ 608 $ 4 $ 604 $ - $ 604
Emission Control 2,085 - 2,085 971 1,114
Total North America Original
Equipment 2,693 4 2,689 971 1,718
North America Aftermarket
Ride Control 518 5 513 - 513
Emission Control 203 3 200 - 200
Total North America
Aftermarket 721 8 713 - 713
Total North America 3,414 12 3,402 971 2,431
Europe Original Equipment
Ride Control 567 31 536 - 536
Emission Control 1,455 81 1,374 464 910
Total Europe Original
Equipment 2,022 112 1,910 464 1,446
Europe Aftermarket
Ride Control 219 12 207 - 207
Emission Control 140 8 132 - 132
Total Europe Aftermarket 359 20 339 - 339
South America & India 632 8 624 102 522
Total Europe, South America &
India 3,013 140 2,873 566 2,307
Asia 618 29 589 93 496
Australia 160 20 140 10 130
Total Asia Pacific 778 49 729 103 626
Total Tenneco $ 7,205 $ 201 $ 7,004 $ 1,640 $ 5,364
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