Shareholder Letter


We are optimistic about our revenue growth and ability to leverage this growth with cost structure changes and operational improvements we made over the last year.”

Gregg Sherrill

Dear Shareholders

In last year’s shareholder letter, I said that I was convinced Tenneco would come through the economic crisis leaner, stronger, more innovative and ultimately more profitable. While 2009 was a year marked by unprecedented production declines and significant changes in the automotive industry, we met the challenges with resilience and determination. Our performance was driven by our long-standing alignment in three key areas: financial flexibility, operational excellence and capturing growth. This alignment allowed us to act quickly and effectively to meet volatile market conditions without losing ground on launching new business and preparing for future growth. And, as a result, we are leaner, stronger, more innovative and positioned to take advantage of profitable growth opportunities as the industry recovers.

I am once again grateful for the unparalleled work, dedication and sacrifice of our 21,000 employees worldwide. As a team, we celebrated an important milestone during 2009 – our 10 year anniversary as a stand-alone company. Our employees can be very proud of all of our accomplishments over this 10-year period and we look forward to the next 10 years and beyond with great confidence.

Financial Flexibility

Given the extraordinary depth of the economic crisis and its severe impact on the automotive industry, Tenneco teams around the world aggressively and effectively managed factors within their control to significantly reduce costs and generate cash.

Generating cash and reducing debt have always been top priorities for Tenneco and we made excellent progress this year in improving our balance sheet. Our working capital management, including reducing inventories to match production levels and efficiently collecting receivables, drove an outstanding cash performance of $241 million in cash generated from operations.

Additionally, a significant part of our crisis management was to cut capital spending to $118 million in 2009, nearly half of the $221 million we spent in 2008. This spending reduction was achieved by prioritizing capital needs, redeploying assets freed up by the global production downturn and deferring other capital expenditures, all without sacrificing future growth prospects. We also temporarily reduced salary costs with various pay and work hour reduction programs for our salaried employees worldwide. This sacrifice was shared at every level in the company and these difficult actions delivered $14 million in savings in the second and third quarters. Fortunately, we were able to end nearly all of these temporary salary programs earlier than anticipated, once it became apparent that the worst of the crisis was behind us. We also slashed discretionary spending in 2009. No action was too small as Tenneco employees simply turned off the spending spigots.

As a result of all these actions, we successfully weathered the downturn during the first half of 2009 and were able to leverage improved global production levels during the second half of the year. We also benefited from our global aftermarket business, which held up well throughout the crisis and provided some balance to the negative OE production environment with stable year-over-year results and a solid contribution to earnings and our cash performance.

As part of our strategic imperative to improve financial flexibility, we completed a common stock offering in the fourth quarter. We used the net proceeds of $188 million from the offering and the positive cash flow we generated during the year to strengthen our balance sheet in 2009 by reducing net debt by $272 million.

Operational Excellence

We helped offset steep production volume declines and the impact on earnings by implementing a global restructuring plan to deliver $58 million in annual savings. To further maximize efficiencies, we announced another plant closure in North America in September 2009, further adjusting our capacity to the market and generating an additional $8 million in annual savings once fully implemented at the end of 2010.

Operationally, we use all of our Lean manufacturing, Six Sigma and Global Supply Management tools to ensure that we are running our plants as efficiently as possible at every location around the world. This was evident in our 2009 gross margin performance, which improved year-over-year despite the significantly lower production environment.

Capturing Growth

Despite the downturn, Tenneco continued to make strategic investments in advanced technologies, new partnerships and expanding markets to capture long-term growth opportunities.

Regulations to reduce diesel particulate and nitrogen oxide (NOx) emissions are coming into effect on commercial vehicles in a number of locations around the globe, requiring diesel aftertreatment solutions such as Tenneco’s diesel particulate filters, diesel oxidation catalysts and selective catalytic reduction technologies.

Tenneco continued to strengthen its diesel aftertreatment technology and product position in 2009. We announced a licensing agreement with Woodward Governor Company to collaborate on Tenneco’s T.R.U.E.-Clean™ (Thermal Regeneration Unit for Exhaust) aftertreatment technology, a system targeted for on-road diesel truck and bus applications, as well as non-road diesel applications such as construction, forestry and agricultural equipment.

Working in collaboration with GE Transportation, we also made progress on developing hydrocarbon lean NOx catalyst technology (HC-LNC), a next-generation diesel aftertreatment innovation aimed at reducing harmful NOx emissions.

We have made the right investments to ensure that we have the technology and engineering expertise to help our commercial vehicle customers meet these new emissions standards as we launch multiple programs with 11 commercial vehicle customers between fourth quarter 2009 and the end of 2011. We estimate that 15 percent of our global OE revenue in 2011 will be generated by commercial vehicle business. By 2012, commercial vehicle will make up between 25 and 30 percent of our global OE revenue, a significant increase over 7 percent of revenue in 2009.

Our ride control business also offers growth opportunities. Tenneco is at the forefront of electronic damping for improved ride performance and safety. We continue to increase our share of the electronic damping market by winning new business and launching Tenneco’s Continuously Controlled Electronic Suspension (CES) with a number of European customers as well as developing next generation technologies such as Kinetic + CES and Tenneco’s Actively Controlled Car (ACOCAR). These technologies offer increased content opportunities for Tenneco while delivering the most advanced vehicle ride and handling to our customers.

We are also meeting the accelerated demand for lightweight components to help improve vehicle fuel efficiency. Ride control technologies such as hollow rods, variable thickness tubes and plastic spring seats help take weight out of a vehicle without sacrificing ride control performance.

China remains one of the fastest growing vehicle markets in the world and Tenneco gained ground in 2009 by establishing an emission control joint venture partnership with Beijing Hainachuan Automotive Parts Company Limited, resulting in Tenneco’s first-ever business with Hyundai. We also moved forward on establishing a new, wholly-owned emission control facility in Guangzhou to support new business with Nissan. The new JV and our expansion into Guangzhou further diversifies our customer mix in China while building our global business with Japanese and Korean manufacturers.

We further diversified our position earlier this year by creating another joint venture in China, with Changchun FAW Sihuan Group Ltd., to supply emission control components and systems for FAW Group Corporation, one of China’s leading manufacturers of light and commercial vehicles. This new JV, based in Changchun, not only expands our position in the growing passenger vehicle market, but also furthers our access to China’s commercial vehicle segment, which is the largest in the world. We now have seven majority-owned joint ventures in China and have strengthened our position as one of the leading emission control suppliers.

Looking ahead, we are excited about the growth opportunities in 2010, a pivotal year for our company. With global financial turmoil easing and automotive production recovering, we have projected a five-year average compounded annual OE revenue growth rate of 18% to 20% through 2014*. We expect to outpace light vehicle and commercial vehicle industry growth rates as we leverage our strong platform balance in a strengthening production environment; increase emission and ride control content in our light vehicle business; and launch significant emission control business with commercial vehicle customers to meet new on- and off-road emissions standards globally.

In closing, although 2010 production forecasts are improving, they still remain below historical levels. We’re only in the early stages of an industry recovery and a certain level of fragility still remains in the global economy. With that said, we remain optimistic that economies will continue to recover, and confident in our revenue growth and ability to leverage this growth with the cost structure changes and operational improvements we made over the last year. We have improved our ability to quickly adjust our operations based on market demand and have the financial flexibility to take advantage of an upswing in production.

Tenneco is a company that, over the last ten years, has overcome adversity, seized opportunities and applied lessons learned to continuously improve and achieve success. We appreciate the support of shareholders, employees, customers and suppliers as we build on this record for many decades to come.

Gregg Sherrill

Gregg Sherrill
Chairman and Chief Executive Officer
Tenneco Inc.