To Our Shareholders:
At the beginning of 2010, we were in the early stages of a global economic recovery with industry production schedules still below historic levels and some uncertainty about what the year would bring. Despite this, we were optimistic that 2010 would be a successful year for Tenneco and I am pleased to report that our optimism was well-founded. The entire global Tenneco team delivered an outstanding year with strong revenue growth, record-high earnings and record-low net debt, all driving an excellent return for our shareholders.
At the heart of Tenneco’s success is our team of 22,000 employees around the world. We set high goals and they met the challenge with a 2010 performance that speaks for itself. The team did an excellent job leveraging a better-than-anticipated industry environment with stronger OE production globally and good demand for our aftermarket products. I sincerely thank them for their dedication, hard work and relentless drive to exceed our customers’ expectations.
Tenneco’s success is driven by our alignment and execution on a three-pillar strategy: generating growth, driving operational excellence and improving financial strength. This is our game plan—unchanged and clearly delivering results. We stayed aligned and executed well in 2010, making great strides in all three areas.
Our first strategic pillar encompasses all the plans we have in place for capturing ride and emission control growth opportunities globally. In a nutshell, these strategic growth initiatives are intact, on target in terms of implementation, and driving strong top-line results. We generated a 28% increase in annual revenue to $5.9 billion in 2010, including exceeding our OE revenue projections for the year.
Volume Recovery One driver of this revenue growth was our ability to capitalize on a stronger OE production environment with our diversified light vehicle platform mix. We have products on 252 light vehicle platforms globally including many of the best-selling models. We are proud of our customer base, which includes virtually every major global vehicle manufacturer in the world. Our position in the light vehicle market is a key component in Tenneco’s growth engine as we continue to win new business and take advantage of stronger production on existing platforms.
Technology-Driven Growth More importantly, underpinning this growth is Tenneco’s advanced technology and engineering expertise. Today, this is most evident in our emission control business where increasingly stringent emissions standards worldwide are creating new opportunities. Tenneco is extremely well-positioned in this market, guided by a roadmap aligning our technology development and commercialization with the mobile emissions regulatory timeline. As a result, we are bringing to market the right solutions at the right times to meet our customers’ needs.
Our full suite of diesel aftertreatment solutions gives us a competitive advantage as we expand in new emission control markets for on-road and off-road commercial vehicles. With standardized processes and application engineering capabilities, we are leveraging Tenneco’s global engineering and manufacturing footprint to win and launch new business with commercial vehicle and engine manufacturers. We work collaboratively with our customers to help them meet stricter diesel particulate and NOx emission regulations—regardless of their engine strategies—with aftertreatment solutions tailored to specific applications.
As a result, Tenneco has won a significant share of this new market. We have diesel aftertreatment programs launching with 13 commercial vehicle and engine manufacturers globally through 2012. These programs are in North America, Europe, China and South America with an impressive list of customers that includes, among others, Caterpillar, Navistar, John Deere, Deutz and First Auto Works–China.
We also see technology-driven growth in our ride control business with a wide range of technologies that improve ride comfort and vehicle handling. Demand for Tenneco’s Continuously Controlled Electronic Suspension (CES) is expanding with the system now available on 36 vehicle models by the end of 2011. In development is our DRiV™ Digital Valve, which offers many of the benefits of the CES suspension but targeted to a broader vehicle market with a lower total system cost.
We have combined two of our advanced ride control technologies—CES and Kinetic®—to develop Tenneco’s Kinetic H2/CES Semi-Active Suspension System. Vehicle Dynamics International magazine named Tenneco supplier of the year for the Kinetic H2/CES system, which recently debuted on the McLaren MP4-12C. Our development doesn’t stop there. We are very excited about Tenneco’s Actively Controlled CAR (ACOCAR™), which is a fully-active suspension system offering the ultimate in ride comfort and handling.
Emerging Markets We made significant progress this year on capturing growth in fast-growing markets including China, India and Thailand. We expanded our well-established footprint in China with a new wholly-owned emission control manufacturing plant in Guangzhou, an emission control joint venture in Beijing and by forming a new joint venture with FAW Sihuan in Changchun to supply both light and commercial vehicles. All of our joint ventures are majority-owned and in 2010, we increased Tenneco’s share of ownership at one of our Dalian JVs to 80%. We also strengthened our emission control engineering center in Shanghai. We now have facilities in every major vehicle manufacturing region in China and are poised to continue our significant growth trajectory.
Our investments in emerging markets also extended to India and Thailand. In India, we opened a new facility in Chennai, which marks our seventh manufacturing operation in this growing market. We are now positioned in all three of India’s major vehicle producing hubs. In Thailand, we grew our presence with the opening of a new ride control plant, adjacent to our existing emission control plant near Bangkok.
Our strong presence in these markets, and in others such as Brazil, is driving incremental growth with customers looking for suppliers who can serve global vehicle platforms in multiple regions, including Japan-based customers who are rapidly expanding in these regions. We have captured 14 global car platforms including successfully launching global small car platforms in 2010 with Nissan, Toyota, GM and Ford.
Finally, I’m excited to talk about our aftermarket business, driven by our leading market positions in North America, Europe and South America. In 2010, the aftermarket delivered a 13% revenue gain globally. We won important new business with customers including Unipart, one of Europe’s largest retail distributors, and NAPA Canada in North America. In addition to winning new business, we drove higher demand for our products by leveraging Tenneco’s strong brands, distribution capabilities and customer marketing support. All in all, our aftermarket teams were very important contributors to Tenneco’s successful year and we expect the same going forward.
Driving Operational Excellence
Our operations determine our success in terms of quality, delivery and cost-effective solutions for our customers, and profit and margin growth for our shareholders. In 2010, we took key steps in Tenneco’s continuous drive for operational excellence.
Hari Nair was named to the newly created position of chief operating officer. We brought together all regions, supply chain management and manufacturing into one global organization reporting to him. As we have grown—and in planning for future growth—we need the right structure in place to drive even further integration of our operations as our customers increasingly look for seamless global support from their suppliers. We are already beginning to see the benefits of this organizational change—from expanding our global aftermarket ride control coverage to leveraging commercial vehicle engineering and sales expertise worldwide—and I expect more operational synergies and savings to come.
Additionally, we continue working to improve operating margins by:
- Implementing the Tenneco Manufacturing System and Lean manufacturing tools;
- Employing Six Sigma;
- Efficiently managing our supply chain globally;
- Optimizing our manufacturing footprint; and
- Driving consistency across Tenneco’s global operations.
All of these tools, coupled with a lower cost structure implemented during the 2008-2009 downturn, drove our earnings improvement in 2010 and will continue to do so going forward. We finished 2010 with an all-time high adjusted EBIT of $306 million, a $188 million increase over 2009 and adjusted net income of $96 million, also a Tenneco record.
Improving Financial Strength
We achieved several key targets that demonstrate outstanding progress in continuing to strengthen Tenneco’s balance sheet and improve our financial flexibility, thus further strengthening our ability to fund future growth.
Our entire organization remains focused on generating cash. For the full year, we generated $244 million in cash from operations, up from last year and notable given the greater demand for working capital to support substantially higher revenues. This strong cash performance was the result of improved earnings coupled with a disciplined and strategic approach to managing working capital.
As a result, we strengthened our balance sheet during the year with a $63 million reduction in net debt. I am proud to report that Tenneco finished 2010 with net debt of $990 million, our lowest-ever and an outstanding accomplishment for our entire team.
We also delivered our highest-ever adjusted EBITDA* of $517 million for the year, which drove our leverage ratio (net debt/adjusted EBITDA*) to a record low 1.9x.
Finally, we improved our financial flexibility with two debt refinancing transactions in 2010. In managing our balance sheet, our strategy has always been to refinance when the markets are attractive and not just according to Tenneco’s timeline for debt maturities. These transactions reduced the complexity of our debt, extended the maturity dates of the refinanced bonds and lowered our annual interest expense by $15 million.
We have tremendous growth opportunities before us, in both the light and commercial vehicle markets, and the right strategies to capture that growth. The numbers are impressive. In 2011, we expect Tenneco’s global OE revenue will grow to $5.9 billion, which includes doubling commercial and specialty vehicle (CVS) revenue to $0.8 billion, and in 2012 our global OE revenue will total $7.1 billion with CVS revenue doubling again to $1.6 billion. Looking beyond, we anticipate that our global OE revenue will increase to between $9.5 billion and $11 billion by 2015 with commercial and specialty vehicles making up 30% to 35% of that revenue.
Supporting this growth is our strengthening balance sheet and our relentless focus on operational excellence.
In closing, I am as enthused as I have ever been about Tenneco’s future. We are carrying the momentum and high performance of last year into 2011 and I am confident that we are on the right track to achieving further success. The entire Tenneco team appreciates the support of our shareholders, customers and suppliers as we work toward a very bright future together.
Chairman and Chief Executive Officer
*Including noncontrolling interests