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YoY shift: Lean -
Year-over-year tone shift - average net-tone change across Risk Factors and MD&A vs the prior 10-K. This filing is -0.31pp more bearish than last year's.
Why YoY instead of absolute: the LM lexicon has ~6.6× more negative words than positive (legal/risk-disclosure language is heavy on hedging), so every 10-K reads bearish on raw tone. Year-over-year change strips that bias and surfaces the actual shift in management's framing.
Tone shift by section
The two components the gauge averages: how Risk Factors and MD&A each shifted in net tone versus last year's 10-K. The headline above is their average, so a green needle over a soft section just means the other section carried it.
Risk Factors
-0.21pp
Flat
Net-tone change vs last year's 10-K.
MD&A
-0.41pp
Lean -
Net-tone change vs last year's 10-K.
Per-snippet highlights
Sentence-level sentiment highlighting with category and subcategory filters is coming once the snippet-scoring pipeline lands. For now, dig into the actual section text on the Sections tab.
Language change vs prior 10-K
Risk Factors (Item 1A) - words with the biggest YoY frequency increase
Negative rising
adversely+8
termination+8
closing+6
against+4
negative+4
Positive rising
effective+4
exclusive+4
satisfied+4
favorable+3
superior+2
Risk Factors (Item 1A)
11,780 words
ITEM 1A. RISK FACTORS.
Business, Operational and Financial Risks
Future deterioration or prolongeddifficulty in economic or market conditions could have a material adverse impact on our business, financial position, and liquidity.
We are a global company and, as such, our businesses are affected by economic conditions in the various geographic regions in which we do business. Economic difficulties generally lead to tightening of credit and liquidity. These conditions often lead to low consumer confidence or changes in consumer spending, which in turn may result in delayed and reduced purchases of durable goods such as automobiles and other vehicles. As a result, during difficult economic times our OE customers can significantly reduce their production schedules. For example, light vehicle production declined significantly during the global pandemic in 2020. Also, persistentchallenges in the Chinese economy beginning in 2018 and continuing into 2022 may result in light vehicle and commercial vehicle production. Additionally, production of off-highway equipment with our content on them have been in certain product applications, such as agricultural and construction equipment in North America and Europe. Any or in economic conditions in any region in which we do business could have a material effect on our business, financial position and liquidity.
Language change vs prior 10-K
MD&A (Item 7) - words with the biggest YoY frequency increase
Negative rising
loss+19
restructuring+16
impairments+14
impairment+11
unfavorable+9
Positive rising
favorable+19
gain+11
benefit+5
improved+3
gains+1
MD&A (Item 7)
15,516 words
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
You should read the following discussion and analysis in conjunction with the consolidated financial statements and related notes included in Item 8, “Financial Statements and Supplementary Data”. All references to “Tenneco,” “we,” “us,” “our” and “the Company” refer to Tenneco Inc. and its consolidated subsidiaries. Notes referenced in this discussion and analysis refer to the notes to consolidated financial statements that are found in Item 8, “Financial Statements and Supplementary Data”.
Refer to Item 1, “Business” for discussion of the Proposed Merger.
OVERVIEW
Our Business
We design, manufacture, market, and distribute products and services for light vehicle, commercial truck, off-highway, industrial, motorsport, and aftermarket customers. Our business consists of four operating segments, Motorparts, Performance Solutions, Clean Air, and Powertrain and serves both original equipment (“OE”) manufacturers and the repair and replacement markets worldwide. We supply OE parts to vehicle manufacturers for use in light vehicles, commercial vehicles, and other mobility markets; and the global aftermarket with replacement parts that are sold to wholesalers, retailers, and installers, as well as original equipment service (“OES”) parts to OE customers to support their service channels. We serve our customers through our brands, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, and Sealed Power®; and others. As of December 31, 2021, we operated 196 manufacturing facilities worldwide and employed approximately 71,000 people to service our customers’ demands.
In addition, economic difficulties often lead to disruptions in the financial markets, which may adversely impact the availability and cost of credit which could materially and negatively affect our company. Future disruptions in the capital and credit markets, including inflation and fluctuations in interest rates, could adversely affect our customers’ and our ability to access the liquidity that is necessary to fund operations on terms that are acceptable to us or at all.
Also, financial or other difficulties at any of our major customers could have a material adverse impact on us, including as a result of lost revenues, significant write downs of accounts receivable, significant impairment charges or additional restructuring beyond our current global plans. Severe financial or other difficulties at any of our major suppliers could have a material adverse effect on us if we are unable to obtain on a timely basis on similar economic terms the quantity and quality of components we require to produce our products.
Moreover, severe financial or operating difficulties at any light vehicle or commercial vehicle manufacturer or other supplier could have a significant disruptive effect on the entire industry, leading to supply chain disruptions and labor unrest, among other things. These disruptions could force original equipment manufacturers and, in turn, other suppliers, including us, to shut down production at plants. While the issues that our customers and suppliers face during economic difficulties may be primarily financial in nature, other difficulties, such as an inability to meet increased demand as conditions recover, could also result in supply chain and other disruptions.
The novel coronavirus (COVID-19) global pandemic has had and is expected to continue to have an adverse effect on our business and results of operations.
In late 2019, a novel strain of coronavirus, COVID-19, was first detected in Wuhan, China. In March 2020, the World Health Organization declared COVID-19 a global pandemic, and governmental authorities around the world have implemented measures to reduce the spread of COVID-19. These measures have adversely affected workforces, customers, consumer sentiment, economies, and financial markets, and, along with decreased consumer spending, reductions in revenue, and delays in payments from customers and partners, have led to an economic downturn in many of our markets. As a result of COVID-19, and in response to government mandates or recommendations, as well as decisions made to protect the health and safety of employees, consumers and communities, we and our customers have experienced significant closures and instances of reduced operations and limited access at corporate offices and other facilities which may negatively impact productivity and cause other disruptions to our business. Also, economic conditions in the wake of the pandemic have included inflationary pressure, which could result in higher operating expenses and project costs for us, as well as higher interest rates.
In mid-2020, there was some loosening of government-mandated COVID-19 restrictions in certain locales in response to improved COVID-19 infection levels. However, upon worsening COVID-19 infection levels in certain localities in late 2020 and in early 2021, local governmental authorities in these localities have re-imposed either some or all of earlier restrictions or imposed other restrictions, all in an effort to prevent the spread of COVID-19. Also, in early 2021, vaccines for combating COVID-19 were approved by health agencies in certain countries/regions in which we operate (including the U.S., U.K., European Union, Canada, and Mexico) and began to be administered. The availability of COVID-19 vaccines and their take-up by individuals is difficult to predict and vaccination levels are likely to vary across jurisdictions. The sustainability of certain economic recovery observed in 2021 remains unclear as inflationary pressures have increased in the U.S. and globally and efforts to combat the virus have been complicated by new variants. In general, the pace and shape of the COVID-19 recovery as well as the impact and extent of COVID-19 variants or potential resurgences is not presently known.
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While certain measures to reduce the spread of COVID-19 continued to be scaled back or done away with throughout 2021, we may face new or longer-term requirements and other operational restrictions due to, among other factors, future variants of COVID-19, vaccination rates and effectiveness, and evolving governmental restrictions. Although vaccines have proven to be effective in mitigating the risks of continued spread of COVID-19, there is no guarantee that the vaccines will continue to be effectiveagainst future variants. In particular, given recent resurgences in the COVID-19 pandemic, the timing and effectiveness of global efforts to roll out vaccines and the impacts of COVID-19 variants around the world, we may have to re-institute earlier measures to reduce the spread of COVID-19.
The uncertainties created by the COVID-19 global pandemic, including the severity, duration and possible resurgence of the outbreak, vaccination rates and impacts, and additional actions, including vaccination mandates, that may be or are being taken by governmental authorities make it difficult to forecast the effects of the virus on the Company’s future results, including our ability to execute our near-term and long-term business strategies and initiatives in the expected time frame. Additionally, it is possible that we may experience businesses being shut down, additional work restrictions and supply chain disruptions as well as labor shortages or increased labor costs as a result of COVID-19, further disrupting operations and impacting revenues negatively. We may also face unforeseen liabilities as a result of the COVID-19 pandemic, including as a result of claimsalleging exposure to COVID-19 in connection with our facilities or operations or we may be subject to fines or penalties to the extent we fail to comply with applicable requirements. To the extent the COVID-19 global pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in our ‘‘Risk Factors’’ section, such as those relating to our level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, our ability to comply with the covenants contained in the agreements that govern our indebtedness and to have access to sufficient liquidity through the COVID-19 pandemic, decreased revenue from loss of customer market share, and working capital requirements.
Increases in the costs and disruption in the availability of raw materials, energy, commodities and product components could adversely impact our financial condition and results of operations.
The principal raw material that we use is steel. 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, 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. In September 2021, IHS Markit lowered its 2022 global light vehicle production forecasts due to the ongoing semiconductor shortage. In addition, we are experiencing other supply chain challenges, and the effects of inflation on commodities and our other costs to manufacture and distribute our products. Increases in the costs and disruption in the availability of raw materials, energy, commodities and product components could adversely impact our financial condition and results of operations.
Factors that reduce demand for our products or reduce prices could materially and adversely impact our financial condition and results of operations.
Demand for and pricing of our products are subject to economic conditions and other factors present in the various domestic and international markets where our products are sold. Demand for our OE products is subject to the level of consumer demand for new vehicles that are equipped with our parts. The level of new light vehicle, commercial truck and off-highway vehicle purchases is cyclical, affected by such factors as general economic conditions, interest rates and availability of credit, consumer confidence, patterns of consumer spending, industrial construction levels, fuel costs, government incentives, and vehicle replacement cycles. Consumer preferences and government regulations also impact the demand for new light vehicle purchases equipped with our products. For example, if consumers increasingly prefer electric vehicles, demand for the vehicles equipped with our clean air and powertrain products could decrease.
Demand for our aftermarket, or replacement, products varies based upon such factors as general economic conditions; the level of new vehicle purchases, which initially displaces demand for aftermarket products; the severity of winter weather, which increases the demand for certain aftermarket products; the number of vehicles in operation; and other factors, including the average useful life of parts and number of miles driven.
The highly cyclical nature of the automotive and commercial vehicle industry presents a risk that is outside our control and that cannot be accurately predicted. Decreases in demand for automobiles and commercial vehicles and vehicle parts generally, or in the demand for our products in particular, could materially and adversely impact our financial condition and results of operations.
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In addition, we believe that increasingly stringent environmental standards for emissions have presented and will continue to present an important opportunity for us to grow our clean air product line. We cannot assure you, however, that environmental standards for emissions will continue to become more stringent or that the adoption of any new standards will not be delayed beyond our expectations.
We may be unable to realize sales represented by our awarded business, which could materially and adversely impact our financial condition and results of operations.
The realization of future sales from awarded business is inherently subject to a number of important risks and uncertainties, including the number of vehicles that our OE customers will actually produce, the timing of that production and the mix of options that our OE customers and consumers may choose. For example, light vehicle production declined significantly during the global pandemic in 2020. Also, persistentchallenges in the Chinese economy in 2018 and going into 2022 may result in declining light and commercial vehicle production in the region. Additionally, we have experienced significant volatility in customer demand throughout 2021 and into 2022, creating risk that the forecasted volumes of sales will not be realized and, in many cases, increasing the costs and challenges inherent in managing our supply chain. In addition to the risks inherent in the cyclicality of vehicle production, our customers generally have the right to replace us with another supplier at any time for a variety of reasons and have demanded price decreases over the life of awarded business. Accordingly, we cannot assure you that we will in fact realize any or all of the future sales represented by our awarded business. Any failure to realize these sales could have a material adverse effect on our financial condition, results of operations, and liquidity.
In many cases, we must commit substantial resources in preparation for production under awarded OE business well in advance of the customer’s production start date. In certain instances, the terms of our OE customer arrangements permit us to recover these pre-production costs if the customer cancels the business through no fault of our company. Although we have been successful in recovering these costs under appropriate circumstances in the past, we can give no assurance that our results of operations will not be materially impacted in the future if we are unable to recover these types of pre-production costs in the event of an OE customer’s cancellation of awarded business.
Our level of debt makes us more sensitive to the effects of economic downturns; and provisions in our debt agreements could constrain our ability to react to changes in the economy or our industry.
Our level of debt makes us more vulnerable to changes in our results of operations because a significant portion of our cash flow from operations is dedicated to servicing our debt and is not available for other purposes and our level of debt could impair our ability to raise additional capital if necessary. Further increases in interest rates will increase the amount of cash required for debt service. Under the terms of our senior secured credit facility, the indentures governing our notes and the agreements governing our other indebtedness, we are limited in the amount of and type of additional indebtedness we can incur in the future. The more we become leveraged, the more we, and in turn our security holders, become exposed to many of the risks described herein.
Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service, capital investment and working capital requirements, we may need to seek additional financing or sell assets. If we require such financing and are unable to obtain it, we could be forced to sell assets under unfavorable circumstances and we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.
In addition, our senior credit facility and our other debt agreements contain covenants that limit our flexibility in planning for or reacting to changes in our business and our industry, including limitations on our ability to:
• declare dividends or redeem or repurchase capital stock;
• prepay, redeem or purchase other debt;
• incur liens;
• make loans, guarantees, acquisitions and investments;
• incur additional indebtedness;
• amend or otherwise alter debt and other material agreements;
• engage in mergers, acquisitions or asset sales; and
• engage in transactions with affiliates.
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Our failure to comply with the covenants contained in our debt instruments, including as a result of events beyond our control, could result in an event of default, which could materially and adversely affect our operating results and our financial condition.
Our senior credit facility and other agreements governing financings we enter into from time to time require us to maintain certain financial ratios. Our senior credit facility and our other financing instruments require us to comply with various operational and other covenants. If there were an event of default under any of our financing instruments that was not cured or waived, the holders of the defaulted financing could cause all amounts outstanding with respect to that financing to be due and payable immediately (which, in turn, could also result in an event of default under one or more of our other financing arrangements). If such event occurs, the lenders under our senior credit facility could elect to terminate their commitments, cease making further loans and institute foreclosure proceedings against our assets, and we could lose access to our factoring and supply chain financing programs. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding financing instruments, either upon maturity or if accelerated, upon an event of default, or that we would be able to refinance or restructure the payments on those financing instruments. This would have a material adverse impact on our liquidity, financial position and results of operations, and on our ability to affect our share repurchase and dividend programs. For example, in 2020 we amended our senior credit agreement to relax the financial ratios we are required to maintain to facilitate operational flexibility in light of our outlook for the second half of 2020. Even though we were able to obtain amendments in 2020, we cannot assure you that we would be able to obtain amendments on commercially reasonable terms, or at all, if required in the future.
Our working capital requirements may negatively affect our liquidity and capital resources.
Our working capital requirements can vary significantly, depending in part on the level, variability and timing of our customers’ worldwide vehicle production and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangements to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.
We may be unable to realize the expected benefits of our initiatives to improve operating performance and generate cost savings and improvements.
We regularly implement strategic and other initiatives designed to improve our operating performance. Our inability to implement these initiatives in accordance with our plans or our failure to achieve the goals of these initiatives could have a material adverse effect on our business. We rely on these initiatives to offset pricing pressures from our suppliers and our customers, as described above, as well as to manage the impacts of production cuts. Our implementation of announced initiatives is from time to time subject to legal challenge in certain non-U.S. jurisdictions (where applicable employment laws differ from those in the U.S.). Furthermore, the terms of our senior credit facility and the indentures governing our notes may restrict the types of initiatives we undertake. In the past we have been successful in obtaining the consent of our senior lenders where appropriate in connection with our initiatives. We cannot assure you, however, that we will be able to pursue, successfully implement or realize the expected benefits of any initiative or that we will be able to sustain improvements made to date.
Exchange rate fluctuations could cause a decline in our financial condition and results of operations.
As a result of our international operations, we are subject to increased risk because we generate a significant portion of our net sales and incur a significant portion of our expenses in currencies other than the U.S. dollar. For example, where we have a greater portion of costs than revenues generated in a foreign currency, we are subject to risk if the foreign currency in which our costs are paid appreciates against the currency in which we generate revenue because the appreciation effectively increases our cost in that country.
The financial condition and results of operations of some of our operating entities are reported in foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies generally will have a negative impact on our reported revenues and operating profit while depreciation of the U.S. dollar against these foreign currencies will generally have a positive effect on reported revenues and operating profit.
We do not generally seek to mitigate the impacts of currency through the use of derivative financial instruments. To the extent we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in that currency could have a material adverse effect on our business.
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From time to time we experience significant increases and fluctuations in the pricing of raw materials and the cost of logistics connected to producing and receiving such materials, the cost of utilities required to produce our products and increases in certain lead times; and future changes in the prices of raw materials, logistics, or utility services, or future increases in lead times, could have a material adverse impact on us.
Significant increases in the cost of certain raw materials used in our products, including, among other materials, steel, oil and rubber, or the cost of utility services required to produce these products to the extent they are not timely reflected in the price we charge our customers or are otherwise mitigated could materially and adversely impact our results. During 2021, compared to 2020, market prices increased for key inputs such as carbon steel in North America, copper and aluminum, along with increases in logistics costs connected to producing and receiving such materials.
We attempt to mitigate these increases by evaluating alternative materials and processes, reviewing material substitution opportunities, increasing component sourcing and parts assembly in best cost countries, and strategically pursuing regional and global purchasing strategies for specific commodities. We also negotiate to recover these higher costs from our customers, and in some cases, such as with respect to steel surcharges, we have the contractual right to recover some or all of these higher costs from certain of our customers. However, if we are successful in recovering these higher costs, we may not receive that recovery in the same period that the costs were incurred and the benefit of the recovery may not be evenly distributed throughout the year.
We also continue to pursue productivity initiatives and other opportunities to reduce costs through restructuring activities. During periods of economic recovery, the cost of raw materials, logistics and utility services generally rise. Accordingly, we cannot ensure that we will not face further increased prices in the future or, if we do, whether our actions will be effective in containing them.
By entering into new product lines and employing new technologies, our ability to produce certain of these products may be constrained due to longer lead times for our facilities, as well as those of our suppliers. We attempt to mitigate the negative effects of these longer lead times by improving the accuracy of our long-term planning; however, we cannot provide any certainty that we will be successful in avoiding disruptions to our delivery schedules.
Our aftermarket sales may be negatively impacted by increasing competition from lower cost, private-label products.
Distribution channels in the aftermarket have continued to consolidate and, as a result, our sales to large retail customers represent a significant portion of our aftermarket business. Private-label aftermarket products, which are typically manufactured at a lower cost, often containing little or no premium technology, and are branded with a store or other private-label brand, are increasingly available to these large retail customers. Our aftermarket business is facing increasing competition from these lower cost, private-label products and there is growing pressure to expand our entry-level product lines so that retailers may offer a greater range of price points to their consumer customers. We cannot assure you that we will be able to maintain or increase our aftermarket sales to these large retail customers or that increased competition from these lower cost, private-label aftermarket products will not have an adverse impact on our aftermarket business.
If the reputation of one or more of our leading brands is harmed, aftermarket sales may be negatively impacted.
Our aftermarket sales are dependent on the reputation and success of our brands, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, Sealed Power® and others. Product liability claims or recalls could result in negative publicity that could harm the reputation of our brands. If one or more of our leading brands suffersdamage to its reputation due to real or perceived quality or safety issues, our financial results could be adversely affected.
Improvements in automotive parts are adversely affecting aftermarket demand for some of our products.
The average useful life of automotive parts has steadily increased in recent years due to innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. As a result, a portion of sales in the aftermarket has been displaced. In addition, advancements in technology may lead to enhancements in aftermarket product performance that render our product obsolete. This has adversely impacted, and could continue to adversely impact, our aftermarket sales. Also, any additional increases in the average useful lives of automotive parts or other enhancements in aftermarket performance would further adversely affect the demand for our aftermarket products.
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Natural disasters, local and global public health emergencies, political crises, and other catastrophic events or other events outside of our control may affect our facilities or the facilities of third parties on which we depend and could impact our business and our results of operations and financial condition.
If any of our facilities or the facilities of our suppliers, third-party service providers, or customers, is affected by natural disasters (such as earthquakes, tornados, tsunamis, power shortages or outages, floods or monsoons), public health crises (such as pandemics and epidemics), political crises (such as terrorism, war, political instability or other conflict), or other events outside of our control, our business and our results of operations and financial condition could suffer. Any such disruption could cause delays in the production and distribution of our products and the loss of sales and customers. Moreover, these types of events could negatively impact consumer spending or the economy in the impacted regions or depending upon the severity, globally, which could adversely impact our business and our results of operations and financial condition.
Certain of our operations are conducted through joint ventures, which have unique risks.
Certain of our operations are conducted through joint ventures. Our joint ventures are governed by mutually established agreements that we entered into with our partners, and, as such, we do not unilaterally control the joint ventures. There is a risk that our partners’ objectives for the joint ventures may not be aligned with ours, leading to potential disagreements over management of the joint ventures. At some of our joint ventures, our joint venture partner is also affiliated with the largest customer of the joint venture, which may create a conflict between the interests of our partner and the joint venture. Also, our ability to sell our interest in a joint venture may be subject to contractual and other limitations.
Additional risks associated with joint ventures include our partners failing to satisfy contractual obligations, conflicts arising between us and any of our partners, a change in the ownership of any of our partners and our limited ability to control compliance with applicable rules and regulations. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.
We are subject to risks related to operating a multi-national company.
We have manufacturing and distribution facilities in many regions across six continents. For the fiscal year ended December 31, 2021, a significant portion of our net sales were derived from operations outside North America. Current events including the possibility of renegotiated trade deals and international tax law treaties, create a level of uncertainty, and potentially increased complexity, for multi-national companies. These uncertainties could have a material adverse effect on our business and our results of operations and financial condition. In addition, international operations are subject to various risks which could have a material adverse effect on those operations or our business as a whole, including:
• currency exchange rate fluctuations, including those in countries with hyperinflationary economies;
• exposure to local economic conditions and labor issues;
• exposure to local political conditions, including the risk of seizure of assets by a foreign government;
• exposure to local social conditions, including corruption and any acts of war, terrorism or similar events;
• exposure to local public health issues and the resultant impact on economic and political conditions;
• inflation in certain countries;
• limitations on the repatriation of cash, including imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;
• retaliatory tariffs and restrictions limiting free movement of goods and an unfavorable trade environment, including as a result of political conditions and changes in the laws in the U.S. and elsewhere and as described in more details below; and
• requirements for manufacturers to use locally produced goods.
Entering new markets poses new competitive threats and commercial risks.
As we have expanded into markets beyond light vehicles, we expect to diversify our product sales by leveraging technologies being developed for the light vehicle segment. Such diversification requires investments and resources which may not be available as needed. We cannot guarantee that we will be successful in leveraging our capabilities into new markets and thus, in meeting the needs of these new customers and competing favorably in these new markets. Further, a significant portion of our growth potential is dependent on our ability to increase sales to commercial truck and off-highway vehicle customers. While we believe that we can achieve our growth targets with the production contracts that have been or will be awarded to us, our future prospects will be negatively affected if those customers underlying these contracts experience reduced demand for their products, or financial difficulties.
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We have recorded a significant amount of long-lived assets, goodwill, and other intangible assets, which may become impaired in the future and negatively affect our operating results.
We have recorded a significant amount of long-lived assets, goodwill, and other identifiable intangibles assets, including customer relationships, trademarks and brand names, and developed technologies due to the Federal-Mogul LLC acquisition. Under generally accepted accounting principles in the U.S., long-lived assets, excluding goodwill and indefinite lived intangible assets, are required to be evaluated for impairment whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions or other factors cause profitability and cash flows to decline, we may be required to record non-cash impairment charges. Goodwill and indefinite-lived intangible assets must be evaluated for impairment annually or more frequently if events indicate it is warranted. Impairment of goodwill and other identifiable intangible assets may result from, among other things, deterioration in our performance, adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect the products sold by our business, and a variety of other factors. The amount of any quantified impairment must be expensed immediately and could have a material adverse effect on our financial statements in the event that long lived assets, goodwill or other identifiable intangible assets become impaired.
The value of our deferred tax assets may not be realized, which could materially and adversely affect our operating results.
Our deferred tax assets include net operating loss carryovers and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. Each quarter, we determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results and expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the risk factors described herein or other factors, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material adverse effect on our financial statements.
We may not be able to fully utilize our net operating loss and other tax carryforwards.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), and corresponding provisions of state law, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards and other pre-change tax attributes to offset its post-change income or taxes may be limited. A corporation generally experiences an “ownership change” if the percentage of its shares of stock owned by its “5-percent shareholders,” as such term is defined in Section 382 of the Code, increases by more than 50 percentage points over a rolling three-year period. We may experience ownership changes in the future as a result of subsequent shifts in our stock ownership, some of which may be outside of our control. If an ownership change occurs and our ability to use our tax attributes is materially limited, it would harm our future operating results by effectively increasing our future tax obligations.
Our expected annual effective tax rate could be volatile and materially change as a result of changes in mix of earnings and other factors.
Our overall effective tax rate is equal to our total tax expense as a percentage of our total profit or loss before tax. However, tax expenses and benefits are determined separately for each tax paying entity or group of entities that is consolidated for tax purposes in each jurisdiction. Losses in certain jurisdictions may provide no current financial statement tax benefit. As a result, changes in the mix of profits and losses between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.
The Company’s hedging activities to address commodity price fluctuations may not be successful in offsetting future increases in those costs or may reduce or eliminate the benefits of any decreases in those costs.
In order to mitigate short-term variation in operating results due to the aforementioned commodity price fluctuations, the Company hedged a portion of near-term exposure to certain raw materials used in production processes, primarily copper, nickel, tin, zinc, high-grade aluminum and aluminum alloy. The results of this hedging practice could be positive, neutral or negative in any period depending on price changes in the hedged exposures.
Our hedging activities are not designed to mitigate long-term commodity price fluctuations and, therefore, will not protect from long-term commodity price increases. Our future hedging positions may not correlate to actual raw materials costs, which would accelerate the recognition in our operating results of unrealized g ains and losses on hedging positions.
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If we cannot attract, retain, and motivate employees, we may be unable to compete effectively, and lose the ability to improve and expand our businesses, and increasing competition for highly skilled and talented workers, as well as labor shortages, could adversely affect our business.
Our success and ability to grow depends, in part, on our ability to hire, retain, and motivate sufficient numbers of talented people with the increasingly diverse skills needed to serve clients and expand our business in many locations around the world. We face intense competition for highly qualified, specialized technical, managerial and other personnel. Recruiting, training, retention, and benefit costs place significant demands on our resources. The inability to attract qualified employees in sufficient numbers to meet particular demands or the loss of key management employees or a significant number of our employees could have an adverse effect on us.
A number of factors may adversely affect the labor force available to us or increase labor costs, including high employment levels, federal unemployment subsidies, including unemployment benefits offered in response to the ongoing COVID-19 pandemic, and other government regulations. Although we have not experienced any material labor shortages to date, we have observed an increasingly competitive labor market. The increasing competition for highly skilled and talented employees could result in higher compensation costs and difficulties in maintaining a capable workforce. If we are unable to hire and retain employees capable of performing at a high-level, or if mitigation measures we may take to respond to a decrease in labor availability, such as overtime and third-party outsourcing, have unintendednegative effects, our business could be adversely affected. A sustained labor shortage, lack of skilled labor, increased turnover or labor cost inflation, caused by the ongoing COVID-19 pandemic or as a result of general macroeconomic factors, could lead to increased costs, such as increased overtime to meet demand and increased wage rates to attract and retain employees, which could negatively affect our ability to efficiently operate our manufacturing and distribution facilities and overall business and have other adverse effects on our results of operations and financial condition.
Our business could be adversely impacted as a result of actions by activist stockholders, including potential proxy contests.
We value constructive input from investors and regularly engage in dialogue with our stockholders regarding strategy and performance. The Board of Directors and management team are committed to acting in the best interests of all of our stockholders. There can be no assurance, however, that the actions taken by the Board of Directors and management in seeking to maintain constructive engagement with our stockholders will be successful, and we may be subject to formal or informal actions or requests from stockholders or others. Responding to such actions could be costly and time-consuming, divert the attention and resources of management and employees, and may have an adverse effect on our business, results of operations and cash flow and the market price of our common stock.
Uncertainties related to, or the results of, any actions by activist stockholders could cause our stock price to experience periods of volatility. We cannot predict, and no assurances can be given as to the outcome or timing of any matters relating to actions by activist stockholders or the ultimate impact on our business, liquidity, financial condition or results of operations.
The Company ’ s pension obligations and other postretirement benefits could adversely affect the Company’s operating margins and cash flows.
The automotive industry, like other industries, continues to be affected by the rising cost of providing pension and other postretirement benefits. In addition, the Company sponsors certain defined benefit plans worldwide that are underfunded and will require cash payments. If the performance of the assets in the pension plans does not meet the Company’s expectations, or other actuarial assumptions are updated, the Company’s required contributions may be higher than it expects.
Industry Risks
We are dependent on certain large customers for future revenue. The loss of all or a substantial portion of our revenues from any of these customers or the loss of market share by these customers could have a material adverse impact on us.
We depend on major vehicle manufacturers for a substantial portion of our revenues. For example, during the fiscal year ended December 31, 2021, General Motors and Ford accounted for 11% and 10% of our net sales. Following the Federal-Mogul LLC acquisition, we are increasingly dependent on certain major aftermarket customers for our revenues. The loss of all or a substantial portion of our revenues from any of our large-volume customers could have a material adverse effect on our financial condition and results of operations by reducing cash flows and our ability to spread costs over a larger revenue base. Circumstances that could result in a loss of revenues from our large-volume customers include, without limitation, the transition away from the production of gasoline powered vehicles (such as the announcements made by General Motors and Ford in 2021) and the transition to electrified powertrains, whether voluntary or mandated. We may experience decreased revenues from these customers for a variety of reasons, including but not limited to: (i) in the case of our OE customers, loss of awarded platforms, reduced demand for our customers’ products, and work stoppages or other disruptions impacting OE production, and (ii) in the case of our aftermarket customers, reduced or delayed consumer requirements and competition from other brands or lower-cost alternatives. Further, our aftermarket customers are generally able to change suppliers more quickly than OE customers, which heightens these risks with respect to our aftermarket business.
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For all of our customers, we face additional risks including (i) national and local mandates to phase-out or limit the use or sale of gasoline or diesel powered vehicles; and (ii) our customers failure to pay us for a variety of other reasons, including their respective financial conditions.
In addition, our customers compete intensively against each other. The loss of market share by any of our major customers could have a material adverse effect on our business unless we are able to achieve increased sales to other major customers.
The hourly workforce in the industry in which we participate is highly unionized and our business could be adversely affected by labor disruptions in the U.S. or internationally.
A portion of our hourly workforce in North America and the majority of our hourly workforce in other regions are unionized. Although we consider our current relations with our employees to be satisfactory, if major work disruptions were to occur, our business could be adversely affected by, for instance, a loss of revenues, increased costs or reduced profitability. We have not experienced a material labor disruption in our recent history, but there can be no assurance that we will not experience a material labor disruption at one of our facilities in the future in the course of renegotiation of our labor arrangements or otherwise.
In addition to the risk of a work stoppage at one of our facilities, labor disruptions at other domestic or international companies may have an adverse effect on us. In the U.S., substantially all of the hourly employees of General Motors, Ford, and Stellantis in North America and many of their other suppliers are represented by The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) under collective bargaining agreements. Internationally, certain vehicle manufacturers, their suppliers and their respective employees are also subject to labor agreements. In September 2019, General Motors hourly workers represented by the UAW went on strike, which affected the volumes at certain of our North American plants in the third quarter of 2019. Although the strike was resolved on October 25, 2019, the strike affected volumes in the fourth quarter of 2019 as well. A work stoppage or strike at one of our production facilities, at those of a customer, or impacting a supplier of ours or any of our customers, either domestically or internationally, could have an adverse impact on us by disrupting demand for our products or our ability to manufacture our products.
We may have difficulty competing favorably in the highly competitive light vehicle and commercial vehicle supplier industry.
The light vehicle and commercial vehicle supplier automotive parts industry is highly competitive. Although the overall number of competitors has decreased due to ongoing industry consolidation, we face significant competition within each of our major product areas, including from new competitors entering the markets which we serve. The principal competitive factors include price, quality, service, product performance, design and engineering capabilities, new product innovation, global presence and timely delivery. As a result, many suppliers have established or are establishing themselves in emerging, low-cost markets to reduce their costs of production and be more conveniently located for customers. We cannot assure you that we will be able to continue to compete favorably in this competitive market or that increased competition will not have a material adverse impact on our business by reducing our ability to increase or maintain sales or profit margins.
In addition, our competitors may foresee the course of market development more accurately than we do, develop products that are superior to ours, adapt more quickly than we do to new technologies or evolving customer requirements or develop or introduce new products or solutions before we do, particularly in respect of potential transformative technologies such as autonomous driving solutions. As a result, our products may not be able to compete successfully with their products. These trends may adversely affect our sales as well as the profit margins on our products. Failure to innovate and to develop or acquire products that capitalize on new technologies could have a material adverse impact on our results of operations.
Furthermore, due to the cost focus of our major OE customers, we have been, and expect to continue to be, requested to reduce prices as part of our initial business quotations and over the life of OE vehicle platforms we have been awarded. We cannot be certain that we will be able to generate cost savings and operational improvements in the future that are sufficient to offset price reductions requested by existing OE customers and necessary to win additional business. OE customers also direct us to engage specific suppliers for component purchases not allowing us to leverage our own supply base and realize cost reductions on this directed spend.
The decreasing number of customers and suppliers in our industry could make it more difficult for us to compete favorably.
Our financial condition and results of operations could be adversely affected because the customer base for our parts and services is decreasing in both the OE market and aftermarket. As a result, we are competing for business from fewer customers. Furthermore, consolidation among suppliers have resulted in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future with these larger companies, our financial condition and results of operations could be adversely affected.
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If we do not respond appropriately, the evolution towards connectivity, autonomy, shared mobility and electrification could adversely affect our business.
The light vehicle industry is increasingly focused on the development of advanced driver assistance technologies, with the goal of developing and introducing a commercially viable, fully autonomous vehicle. Continued focus on climate change and environmental sustainability is increasing the expectations for the auto industry to develop more fuel-efficient solutions from consumers and governments worldwide. For example, General Motors joined other vehicle manufacturers in 2021, including Ford, Nissan and Volvo, in committing to becoming carbon neutral after announcing its plans to reach carbon neutrality by 2040 and to stop selling gasoline powered light vehicles by 2035. To achieve these goals, General Motors is investing substantially in electrification. The increased adoption of electrified powertrains could result in lower demand for some of our products. There has also been an increase in consumer preferences for car and ride sharing, as opposed to automobile ownership, which may result in a long-term reduction in the number of vehicles per capita. The evolution of the industry towards connectivity, autonomy, shared mobility and electrification has also attracted increased competition from entrants outside the traditional light vehicle industry. Failure to innovate and to develop or acquire new and compelling products that capitalize upon new technologies in response to OE and consumer preferences could have a material adverse impact on our results of operations.
Legal, Regulatory and Policy Risks
We are subject to, and could be further subject to, government investigations or actions by other third parties.
We are subject to a variety of laws and regulations that govern our business both in the U.S. and internationally, including antitrust laws, violations of which can involve civil or criminal sanctions. Responding to governmental investigations or other actions may be both time-consuming and disruptive to our operations and could divert the attention of our management and key personnel from our business operations.
We cannot assure you that the reserve we have established to resolve these matters will not change materially from time to time or that the costs, charges and liabilities associated with these matters will not exceed any amounts reserved for them in our consolidated financial statements.
We may incur costs related to product warranties, environmental and regulatory matters, legal proceedings and other claims, which could have a material adverse impact on our financial condition and results of operations.
From time to time, we receive product warranty claims from our customers, pursuant to which we may be required to bear costs of repair or replacement of certain of our products. Vehicle manufacturers require their outside suppliers to guarantee or warrant their products and to be responsible for the operation of these component products in new vehicles sold to consumers. Warranty claims may range from individual customer claims to full recalls of all products in the field. We cannot assure you that costs associated with providing product warranties will not be material, or that those costs will not exceed any amounts reserved in our consolidated financial statements. For a description of our accounting policies regarding warranty reserves, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies”.
Our global operations subject us to extensive governmental regulations worldwide. Foreign, federal, state and local laws and regulations may change from time to time and our compliance with new or amended laws and regulations in the future may materially increase our costs and could adversely affect our results of operations and competitive position. For example, we are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. Soil and groundwater remediation activities are being conducted at certain of our current and former real properties. We record liabilities for these activities when environmental assessments indicate that the remedial efforts are probable and the costs can be reasonably estimated. On this basis, we have established reserves that we believe are adequate for the remediation activities at our current and former real properties for which we could be held responsible. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to change as more information becomes available about the extent of remediation required. In future periods, we could incur cash costs or charges to earnings if we are required to undertake remediation efforts as the result of ongoing analysis of the environmental status of our properties. In addition, violations of the laws and regulations we are subject to could result in civil and criminalfines, penalties and sanctions against us, our officers or our employees, as well as prohibitions on the conduct of our business, and could also materially affect our reputation, business and results of operations.
We also from time to time are involved in a variety of legal proceedings, claims or investigations. These matters typically are incidental to the conduct of our business. Some of these matters involve allegations of damagesagainst us relating to environmental liabilities, intellectual property matters, personal injuryclaims, taxes, employment matters or commercial or contractual disputes or allegations relating to legal compliance by us or our employees. For example, we are subject to a number of lawsuits initiated by a significant number of claimants alleging health problems as a result of exposure to asbestos. Many of these cases involve significant numbers of individual claimants. Many of these cases also involve numerous
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defendants. As major asbestos manufacturers or other companies that used asbestos in their manufacturing processes continue to go out of business, we may experience an increased number of these claims.
We cannot assure you that the costs, charges and liabilities associated with these matters will not be material, or that those costs, charges and liabilities will not exceed any amounts reserved for them in our consolidated financial statements. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental and Legal Contingencies”.
Changes in tax law or trade agreements and new or changed tariffs could have a material adverse effect on us.
Changes in political, regulatory and economic conditions and/or changes in laws and policies governing tax laws, foreign trade (including trade agreements and tariffs), manufacturing, and development and investment in the territories and countries where we and/or our customers operate could adversely affect our operating results and business.
For example, on December 22, 2017, the U.S. President signed into law new legislation that significantly revised the U.S. Internal Revenue Code. The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including the reduction of the corporate income tax rate from a top marginal rate of 35% to a flat rate of 21%, a one-time transition tax on offshore earnings at reduced tax rates regardless of whether the earnings are repatriated, elimination of U.S. tax on foreign dividends (subject to certain important exceptions), new taxes on certain foreign earnings, a new minimum tax related to payments to foreign subsidiaries and affiliates, immediate deductions for certain new investments as opposed to deductions for depreciation expense over time, and the modification or repeal of many business deductions and credits.
In addition, the U.S., Mexico and Canada have renegotiated the North American Free Trade Agreement (“NAFTA”). The revised agreement, the US-Mexico-Canada Agreement (“USMCA”), contains new and revised provisions that alter the prior rules governing when imports and exports of autos and auto parts are eligible for duty-free treatment. Generally, these new rules require a higher percentage of the overall content of the auto or autopart to originate in one of the USMCA’s countries (the U.S., Mexico or Canada). The USMCA was effective July 1, 2020. Our manufacturing facilities in the U.S., Mexico and Canada are dependent on duty-free trade within the USMCA region. We have significant movement of goods within NAFTA region, and the imposition of customs duties on imports could negatively impact our financial performance.
Moreover, in March 2018, the U.S. government imposed a 25% ad valorem tariff on certain steel imports and a 10% ad valorem tariff on certain aluminum imports. These tariffs (known as “Section 232 tariffs”) apply to certain steel and aluminum imports from almost all countries. In addition, over the course of 2018 and 2019, the U.S. government imposed additional tariffs on products from China valued at $550 billion, with some limited exceptions (known as “Section 301 tariffs”). As a result of the tariffs, China and other countries have implemented retaliatory actions with respect to U.S. imports into their countries, which could adversely affect our business, financial condition or results of operations.
Our By-laws designate the Court of Chancery of the State of Delaware, subject to certain exceptions, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders and designate the federal district courts of the United States as the exclusive forum for actions arising under the Securities Act of 1933, as amended, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
The By-laws designate the Court of Chancery of the State of Delaware (or, in the event that the Chancery Court does not have jurisdiction, the federal district court for the District of Delaware or other state courts of the State of Delaware) as the exclusive jurisdiction for (a) any derivative proceeding brought on behalf of the Company, (b) any proceeding asserting a breach of a fiduciary duty owed by any director, officer or stockholder of the Company to the Company or its stockholders, (c) any proceeding pursuant to the Delaware General Corporation Law or the Company’s Amended and Restated Certificate of Incorporation or By-laws or (d) any proceeding asserting a claim against the Company governed by the internal affairs doctrine. In addition, the By-laws provide that the federal district courts of the United States are the exclusive forum for any complaint raising a cause of action arising under the Securities Act of 1933, as amended.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our By-laws described above. These choice of forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our By-laws inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
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Intellectual Property Risks
Developments relating to our intellectual property could materially impact our business.
We and others in our industry hold a number of patents and other intellectual property rights, including licenses, which are critical to our respective businesses and competitive positions. Notwithstanding our intellectual property portfolio, our competitors may develop similar or superior proprietary technologies. Further, as we expand into regions where the protection of intellectual property rights is less robust, the risk of others replicating our proprietary technologies increases, which could result in a deterioration of our competitive position. On occasion, we may assert claimsagainst third parties who are taking actions that we believe are infringing on our intellectual property rights. Similarly, third parties may assert claimsagainst us and our customers and distributors alleging our products infringe upon third party intellectual property rights. These claims, regardless of their merit or resolution, are frequently costly to prosecute, defend or settle and divert the efforts and attention of our management and employees. Claims of this sort also could harm our relationships with our customers and might deter future customers from doing business with us. If any such claim were to result in an adverse outcome, we could be required to take actions which may include: expending significant resources to develop or license non-infringing products; paying substantial damages to third parties, including to customers to compensate them for their discontinued use or replacing infringing technology with non-infringing technology; or cessation of the manufacture, use or sale of the infringing products. Any of the foregoing results could have a material adverse effect on our business, financial condition, results of operations or our competitive position.
We may not be able to respond quickly enough to changes in technology and to develop our intellectual property into commercially viable products.
Changes in competitive technologies may render certain of our products obsolete or less attractive. Our ability to anticipate changes in technology and to successfully develop and introduce new and enhanced products on a timely basis are significant factors in our ability to remain competitive and to maintain or increase our revenues.
We cannot provide assurance that certain of our products will not become obsolete or that we will be able to achieve the technological advances that may be necessary for us to remain competitive and maintain or increase our revenues in the future. We are also subject to the risks generally associated with new product introductions and applications, including lack of market acceptance, delays in product development or production, and failure of products to operate properly. If we are unable to react to changes in the marketplace, including the potential introduction of technologies such as autonomous vehicles, our financial performance could be adversely affected.
Information Technology Risks
We are increasingly dependent on information technology, and if we are unable to protect against service interruptions or security breaches, our business could be adversely affected.
Our operations rely on a number of information technologies to manage, store, and support business activities. Some of these technologies are managed by third-party service providers and are not under our direct control. We have put in place a number of systems, processes, and practices designed to protect against the failure of our systems, as well as the misappropriation, exposure or corruption of the information stored thereon. Unintentional service disruptions or intentional actions such as intellectual property theft, cyber-attacks, ransomware attacks, unauthorized access or malicious software, may lead to such misappropriation, exposure or corruption if our, or our service providers’, protective measures prove to be inadequate. In addition, the costs to eliminate or alleviate network security problems, bugs, viruses, ransomware, worms, malicious software programs and security vulnerabilities could be significant, and our efforts to address these problems may not be successful, resulting potentially in the theft, loss, destruction or corruption of information that we store electronically. Further, these events may cause operational impediments or otherwise adversely affect our product sales, financial condition and/or results of operations. We could also encounter violations of applicable law, contracts or reputational damage from the disclosure of confidential information belonging to us or our employees, customers or suppliers. In addition, the disclosure of non-public information could lead to the loss of our intellectual property and/or diminished competitive advantages. Should any of the foregoing events occur, we may be required to incur significant costs to protect againstdamage caused by these disruptions or security breaches in the future. In addition, evolving and expanding compliance and operational requirements under the privacy laws of the jurisdictions in which we operate, such as the EU General Data Protection Regulation, or GDPR, which took effect in May 2018, impose significant costs that are likely to increase over time or potential fines for non-compliance.
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Risk Factors related to the Proposed Merger
The proposed Merger is subject to approval of our stockholders as well as the satisfaction of other closing conditions, including government consents and approvals, some or all of which may not be satisfied or completed within the expected timeframe, if at all.
Completion of the Merger is subject to a number of closing conditions, including obtaining the approval of our stockholders, the expiration or termination of any waiting period (and any extension thereof) applicable to the consummation of the Merger under the HSR Act, and the receipt of other required regulatory approvals, consents or clearances with respect to the Merger under applicable competition and/or foreign direct investment laws. We can provide no assurance that all required consents and approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, even if all required consents and approvals can be obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such consents and approvals or the timing of the completion of the Merger. Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, if applicable). Any adverse consequence of the pending Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.
Each party’s obligation to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to customary materiality qualifications) and compliance in all material respects with the covenants and agreements contained in the Merger Agreement as of the closing of the Merger, including, with respect to us, covenants to conduct our business in the ordinary course and to not engage in certain kinds of material transactions prior to closing. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, in connection with a change in the recommendation of our Board of Directors to enter into an agreement for a Superior Proposal (as defined in the Merger Agreement). As a result, we cannot assure you that the Merger will be completed, even if our stockholders approve the Merger, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected time frame.
We may not complete the proposed Merger within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.
The proposed Merger may not be completed within the expected timeframe, or at all, as a result of various factors and conditions, some of which may be beyond our control. If the Merger is not completed for any reason, including as a result of our stockholders failing to adopt the Merger Agreement, our stockholders will not receive any payment for their shares of our common stock in connection with the Merger. Instead, we will remain a public company, our common stock will continue to be listed and traded on the New York Stock Exchange and registered under the Exchange Act of 1934, as amended, and we will be required to continue to file periodic reports with the SEC. Moreover, our ongoing business may be materially adversely affected, and we would be subject to a number of risks, including the following:
• we may experience negative reactions from the financial markets, including negative impacts on our stock price, and it is uncertain when, if ever, the price of the shares would return to the prices at which the shares currently trade;
• we may experience negative publicity, which could have an adverse effect on our ongoing operations including, but not limited to, retaining and attracting employees, customers, partners, suppliers and others with whom we do business;
• we will still be required to pay certain significant costs relating to the Merger, such as legal, accounting, financial advisory, printing and other professional services fees, which may relate to activities that we would not have undertaken other than in connection with the Merger;
• we may be required to pay a cash termination fee to Parent, as required under the Merger Agreement under certain circumstances;
• while the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to engage in certain kinds of material transactions, which could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially adversely affect our business, results of operations and financial condition;
• matters relating to the Merger require substantial commitments of time and resources by our management, which could result in the distraction of management from ongoing business operations and pursuing other opportunities that could have been beneficial to us; and
• we may commit significant time and resources to defendingagainstlitigation related to the Merger.
If the Merger is not consummated, the risks described above may materialize, and they may have a material adverse effect on our business operations, financial results and stock price, particularly to the extent that the current market price of our common stock reflects an assumption that the Merger will be completed.
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We will be subject to various uncertainties while the Merger is pending that may cause disruption and may make it more difficult to maintain relationships with customers and other third-party business partners.
Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the Merger will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the Merger is pending because employees may experience uncertainty about their roles following the Merger. As mentioned above, a substantial amount of our management’s and employees’ attention is being directed toward the completion of the Merger and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with customers and potential customers. For example, customers, suppliers and other third parties may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to or termination of existing business relationships could adversely affect our revenue, earnings and financial condition, as well as the market price of our common stock. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the Merger or termination of the Merger Agreement.
In certain instances, the Merger Agreement requires us to pay a termination fee to Parent, which could affect the decisions of a third party considering making an alternative acquisition proposal.
Under the terms of the Merger Agreement, we may be required to pay Parent a termination fee under specified conditions, including in the event Parent terminates the Merger Agreement before receipt of our stockholders’ approval due to a change in recommendation by our Board of Directors, in the event we terminate the Merger Agreement to enter into a Superior Proposal, or in the event we enter into an alternative transaction within twelve months of termination of the Merger Agreement in certain circumstances and the alternative transaction is consummated. This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could discourage a third party from making a competing acquisition proposal, including a proposal that would be more favorable to our stockholders than the Merger.
We have incurred, and will continue to incur, direct and indirect costs as a result of the Merger.
We have incurred, and will continue to incur, significant costs and expenses, including regulatory costs, fees for professional services and other transaction costs in connection with the Merger, for which we will have received little or no benefit if the Merger is not completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger.
Litigationchallenging the Merger Agreement may prevent the Merger from being consummated within the expected timeframe or at all.
Lawsuits may be filed against us, our Board of Directors or other parties to the Merger Agreement, challenging our acquisition by Parent making other claims in connection therewith. Such lawsuits may be brought by our purported stockholders and may seek, among other things, to enjoin consummation of the Merger. One of the conditions to the consummation of the Merger is that the consummation of the Merger is not restrained, made illegal, enjoined or prohibited by any order or legal or regulatory restraint or prohibition of a court of competent jurisdiction or any governmental entity. As such, if the plaintiffs in such potential lawsuits are successful in obtaining an injunction prohibiting the defendants from completing the Merger on the agreed upon terms, then such injunction may prevent the Merger from becoming effective, or from becoming effective within the expected timeframe.
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.
Change in Reportable Segments
In the first quarter of 2021, we made a change to our operating segments. This change consisted of moving a reporting unit from the Powertrain segment to the Ride Performance segment to align with a change in how our Chief Operating Decision Maker allocates resources and assesses performance against our key growth strategies. With this segment change and our enhanced focus on growth, Ride Performance was renamed Performance Solutions. As such, prior period operating segment results and related disclosures have been conformed to reflect our current operating segments.
Tenneco consists of four operating segments, Motorparts, Performance Solutions, Clean Air, and Powertrain:
• The Motorparts segment designs, manufactures, sources, markets, and distributes a broad portfolio of brand-name products in the global vehicle aftermarket while also servicing the OES market. Motorparts products are organized into categories, including shocks and struts, steering and suspension, braking, sealing, emissions control, engine, and maintenance;
• The Performance Solutions segment designs, manufactures, markets, and distributes a variety of products and systems designed to optimize the ride experience to a global OE customer base, including noise, vibration, and harshness performance materials, advanced suspension technologies, ride control, braking, and systems protection. Performance Solutions is agnostic to powertrain technologies;
• The Clean Air segment designs, manufactures, and distributes a variety of products and systems designed to reduce pollution and optimize engine performance, acoustic tuning, and weight on a vehicle for light vehicle, commercial truck, and off-highway OE customers; and
• The Powertrain segment designs, manufactures, and distributes a variety of OE powertrain products for light vehicle, commercial truck, off-highway, and industrial applications to OE customers for use in new vehicle production and OES parts to support their service and distribution channels.
Costs related to other business activities, primarily corporate headquarter functions, are disclosed separately from the four operating segments as “Corporate.” See Note 18, “Segment and Geographic Area Information”, in our consolidated financial statements included in Item 8 of this Form 10-K for additional information.
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Financial Results for the Year Ended December 31, 2021
Consolidated revenues were $18,035 million, an increase of $2,656 million, or 17%, for the year ended December 31, 2021. The primary driver of the increase is higher sales volume of $2,048 million, largely attributable to the effects of COVID-19 in the prior year. The remaining increase is attributable to the favorable effects of foreign currency exchange of $337 million, and the net favorable effects of other items of $290 million, which includes recoveries of commodity price increases. These were partially offset by the effects of divestitures contributing a $19 million decrease in revenues.
Cost of sales was $15,665 million, an increase of $2,263 million, or 17%, for the year ended December 31, 2021. The primary driver of the increase is from higher sales volume of $1,697 million, largely attributable to the effects of COVID-19 in the prior year. The remaining increase is attributable to the unfavorable effects of materials sourcing of $422 million and the unfavorable effects of foreign currency exchange of $297 million. This was partially offset by the decrease in cost of sales of $18 million related to the net effects of divestitures and the net favorable effects of other costs of $97 million, which includes $9 million of margin during the year ended December 31, 2020 on discontinued product that was previously written-down. In addition, the Motorparts segment recognized a non-cash charge of $44 million in the year ended December 31, 2021 related to the write-down of inventory in connection with its initiative to rationalize its supply chain and distribution network, as compared to $82 million in the year ended December 31, 2020, a decrease of $38 million.
Results for the year ended December 31, 2021 was net income of $100 million as compared to a net loss of $1,460 million for the year ended December 31, 2020. The change from a net loss to net income was primarily driven by:
• a decrease in restructuring charges, net and non-cash asset impairment charges of $553 million primarily attributable to the impairment of long-lived asset groups recognized during year ended December 31, 2020 triggered by the effects of COVID-19 global pandemic on the Company’s projected financial information, and decrease in charges related to global headcount and cost reduction initiatives;
• a decrease in non-cash goodwill and intangible impairment charges of $383 million, which was comprised of $267 million of goodwill impairment charges, $65 million of definite-lived intangible asset impairments, and $51 million of indefinite-lived intangible asset impairments recognized during year ended December 31, 2020;
• a decrease in income tax expense of $277 million primarily due to the full valuation allowances established for U.S. federal and state deferred taxes during the year ended December 31, 2020. This is partially offset by an increase in tax expense for the year ended December 31, 2021 due to higher net taxable income in certain non-U.S. jurisdictions when compared to the results for the year ended December 31, 2020;
• a decrease in depreciation and amortization of $46 million, primarily attributable to the effects of the impairments on property, plant and equipment recognized in the first quarter of 2020, as well as the effects of reductions in capital expenditures; and
• an increase in other income (expense), net of $34 million, primarily attributable to $32 million in gains on sale-leaseback transactions for the year ended December 31, 2021.
These favorable effects were partially offset by:
• an increase in selling, general, and administrative costs of $128 million, primarily due to higher compensation costs during the year ended December 31, 2021 and also includes the effects of cost reduction initiatives implemented in response to the effects of COVID-19, which consisted of unpaid furloughs, net pay decreases, and temporary support programs during the year ended December 31, 2020. T here was also a favorableantitrust reserve change in estimate for $11 million during the year ended December 31, 2020 .
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Recent Trends and Market Conditions
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.
The principal raw material that we use is steel. 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, 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. In September 2021, IHS Markit lowered its 2022 global light vehicle production forecasts due to the ongoing semiconductor shortage. 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 and other purchases. Further, unfavorable conditions such as a general slowdown of the global or U.S. economy, uncertainty and volatility in the financial markets, or inflation (including labor inflation) and rising interest rates could result in higher operating expenses and project costs for us.
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; 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.
Global vehicle production levels
Light vehicle production (According to IHS Markit, February 2022)
Global light vehicle production increased slightly by 3% for the year ended December 31, 2021 compared to 2020. Light vehicle production increased by 28% in India, 16% in South America, and 5% in China, while production levels were flat in North America and down by 4% in Europe.
Commercial truck production (According to IHS Markit, February 2022)
Global commercial truck production was flat for the year ended December 31, 2021 compared to 2020. Commercial truck production increased by 21% in North America, 14% in Europe, 79% in India, and 61% in Brazil, while commercial truck production in China fell 20% in 2021 when compared to 2020 which substantially offset the production increases in other regions.
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.
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RESULTS OF OPERATIONS
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Consolidated Results of Operations
Year Ended December 31
Favorable (Unfavorable)
$ Change
% Change (a)
(millions except percent and per share amounts)
Revenues
Net sales and operating revenues
Costs and expenses
Cost of sales (exclusive of depreciation and amortization)
Selling, general, and administrative
Depreciation and amortization
Engineering, research, and development
Restructuring charges, net and asset impairments
Goodwill and intangible impairment charges
Other income (expense)
Non-service pension and postretirement benefit (costs) credits
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
Gain (loss) on extinguishment of debt
Other income (expense), net
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
Interest expense
Earnings (loss) before income taxes and noncontrolling interests
Income tax (expense) benefit
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Tenneco Inc.
Earnings (loss) per share
Basic earnings (loss) per share:
Earnings (loss) per share
Weighted average shares outstanding
Diluted earnings (loss) per share:
Earnings (loss) per share
Weighted average shares outstanding
(a) Percentages above denoted as “ n/m ” are not meaningful to present in the table.
Revenues
The following table lists the primary drivers behind the change in revenues (amounts in millions):
Year Ended December 31, 2020
Acquisitions and divestitures, net
Drivers in the change of organic revenues:
Volume and mix
Currency exchange rates
Others
Year Ended December 31, 2021
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Cost of sales
The following table lists the primary drivers behind the change in cost of sales (amounts in millions):
Year Ended December 31, 2020
Acquisitions and divestitures, net
Drivers in the change of organic cost of sales:
Volume and mix
Materials sourcing
Currency exchange rates
Inventory write-down
Others
Year Ended December 31, 2021
Selling, general, and administrative (SG&A)
SG&A increased by $128 million to $1,017 million compared to $889 million for the year ended December 31, 2020. The increase was primarily due to higher compensation costs during the year ended December 31, 2021 and also includes the effects of cost reduction initiatives implemented in response to the effects of COVID-19, which consisted of unpaid furloughs, net pay decreases, and temporary support programs during the year ended December 31, 2020 . T here was also a favorableantitrust reserve change in estimate for $11 million during the year ended December 31, 2020 .
Depreciation and amortization
Depreciation and amortization expense decreased by $46 million to $593 million as compared to $639 million for the year ended December 31, 2020, primarily attributable to the effects of the impairments on property, plant and equipment recognized in the first quarter of 2020, as well as the effects of reductions in capital expenditures.
Engineering, research, and development
Engineering, research, and development increased by $12 million to $285 million as compared to $273 million for the year ended December 31, 2020. The increase was due primarily to the favorable effects during the year ended December 31, 2020 of cost reduction initiatives implemented in response to the COVID-19 global pandemic.
Restructuring charges, net and asset impairments
Restructuring charges, net and asset impairments decreased by $553 million to $69 million as compared to $622 million for the year ended December 31, 2020. The decrease is primarily attributable to the non recurrence of non-cash property, plant and equipment asset impairments in the Performance Solutions segment of $455 million, and non-cash asset impairment charges for operating lease right-of-use asset and property, plant and equipment in the Motorparts segment of $25 million related to its initiative to rationalize its supply chain and distribution network during the year ended December 31, 2020. In addition, there was a decrease of $71 million (inclusive of an increase of $18 million in revisions to previously recorded estimates) for cash severance costs expected to be paid as part of global headcount and cost reduction actions, including plant closures, across all segments and regions, and a decrease of $10 million for operating lease right-of-use asset and property, plant and equipment impairment charges in the corporate component, partially offset by an increase of $8 million in impairments related to assets held for sale for the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Goodwill and intangible impairment charges
Goodwill and intangible impairment charges decreased by $383 million, which was comprised of $267 million of non-cash goodwill impairment charges, $65 million of non-cash definite-lived intangible asset impairments, and $51 million of non-cash indefinite-lived intangible asset impairments during the year ended December 31, 2020, which were the result of the effects of COVID-19 on the projected financial information during the first quarter of 2020.
Non-service pension and postretirement benefit (costs)/credits
Non-service pension and postretirement benefit (costs)/credits decreased by $5 million to a net credit of $13 million as compared to a net credit of $18 million for the year ended December 31, 2020. The change was primarily attributable to the elimination of certain retirement health care benefits for participants in one of our union agreements in the U.S. that resulted in a non-cash curtailmentgain of $21 million for the year ended December 31, 2020. This was partially offset by a decrease in non-cash settlement charges of $6 million in connection with a plant closure. The remaining increase in the net credit is primarily attributable to lower interest costs resulting from lower discount rates, partially offset by higher amortization expense.
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Equity in earnings (losses) of nonconsolidated affiliates, net of tax
Equity in earnings (losses) of nonconsolidated affiliates, net of tax increased by $10 million to $57 million as compared to $47 million for the year ended December 31, 2020. The increase is primarily attributable to the effects of COVID-19 in the prior year affecting the equity in earnings (losses) of nonconsolidated affiliates located in Turkey, China and Korea.
Gain (loss) on extinguishment of debt
A non-cash gain on extinguishment of debt of $8 million was recognized for the year ended December 31, 2021 related to the discharge of the 4.875% euro floating rate notes due 2024 and 5.000% euro fixed rate notes due 2024. A non-cash gain on extinguishment of debt of $2 million was recognized for the year ended December 31, 2020 related to the redemption of the 4.875% euro denominated senior secured notes during the fourth quarter of 2020.
Other income (expense), net
Other income (expense), net increased by $34 million to $72 million as compared to $38 million for the year ended December 31, 2020. The increase was primarily attributable to $32 million in gains on sale-leaseback transactions for the year ended December 31, 2021.
Interest expense
Interest expense decreased by $3 million (substantially all in our U.S. operations) to $274 million as compared to $277 million for the year ended December 31, 2020. The $3 million decrease was primarily due to lower interest expense on lower average outstanding borrowings on the revolver and term loans and the effects of lower interest rates on variable rate debt, partially offset by the effects of higher interest rates on fixed rate debt during the year ended December 31, 2021 as compared to the year ended December 31, 2020. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources” later in this Management’s Discussion and Analysis.
Income tax (expense) benefit
Income tax expense decreased by $277 million to $182 million on earnings before income taxes and noncontrolling interests of $282 million for the year ended December 31, 2021 compared to income tax expense of $459 million on loss before income taxes and noncontrolling interests of $1,001 million for the year ended December 31, 2020. The decrease is primarily due to the full valuation allowances established for U.S. federal and state deferred taxes during the year ended December 31, 2020. This is partially offset by an increase in tax expense for the year ended December 31, 2021 due to higher net taxable income in certain non-U.S. jurisdictions when compared to the results for the year ended December 31, 2020.
Net income (loss)
Results for the year ended December 31, 2021 was net income of $100 million as compared to a net loss of $1,460 million for the year ended December 31, 2020 primarily due to the aforementioned items.
Earnings (loss) before interest expense, income taxes, noncontrolling interests, and depreciation and amortization (“EBITDA including noncontrolling interests”)
The following table presents the reconciliation from EBITDA including noncontrolling interests to net income (loss) (amounts in millions):
Year Ended December 31
EBITDA including noncontrolling interests:
Motorparts
Performance Solutions
Clean Air
Powertrain
Corporate
Depreciation and amortization
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
Interest expense
Income tax (expense) benefit
Net income (loss)
See “Segment Results of Operations” for further information on EBITDA including noncontrolling interests.
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Segment Results of Operations
Overview of Net Sales and Operating Revenues
Our Clean Air segment has substrate sales. Substrates are porous ceramic filters coated with a catalyst - typically, precious metals such as platinum, palladium and rhodium. We do not manufacture substrates, they are supplied to us by Tier 2 suppliers generally directed by our OE customers. We generally earn a small margin on these components of the system. These substrate components have been increasing as a percentage of our revenue as the need grows for more sophisticated emission control solutions to meet more stringent environmental regulations, particularly for commercial on road and off-road vehicles, and as we capture more diesel aftertreatment business. While these substrates dilute our gross margin percentage, they are a necessary component of an emission control system.
We disclose substrate sales amounts because we believe investors utilize this information to understand the effect of this portion of our revenues on our overall business and because it removes the effect of potentially volatile precious metals pricing from our revenues. While our OE customers generally assume the risk of precious metals pricing volatility, it affects our reported revenues.
The table below reflects the main drivers for changes in our segment revenues (amounts in millions):
Segment Revenue
Clean Air
Motorparts
Performance Solutions
Value-add Revenues
Substrate Sales
Total
Powertrain
Total
Year Ended December 31, 2020
Acquisitions and divestitures, net
Drivers in the change of organic revenues:
Volume and mix
Currency exchange rates
Others
Year Ended December 31, 2021
Segment Revenue
The primary factor contributing to the increase in sales volume for the year ended December 31, 2021, as compared to the year ended December 31, 2020, is the effects of COVID-19 in the prior year. Additional factors by segment are discussed below.
Motorparts
Motorparts revenue increased $266 million, or 10%, as compared to the year ended December 31, 2020. Higher sales volume contributed $129 million to the increase, foreign currency exchange had a $28 million favorable effect on Motorparts revenues and other net favorable effects, which includes recoveries of commodity price increases, contributed $128 million to the increase. These favorable effects were slightly offset by the decrease in revenues from divestitures of $19 million.
Performance Solutions
Performance Solutions revenue increased $406 million, or 16%, as compared to the year ended December 31, 2020. Higher light vehicle, commercial truck, and off-highway and other vehicle revenue contributed $288 million to the increase, foreign currency exchange had a $64 million favorable effect on Performance Solutions revenue, while other favorable effects, which includes recoveries of commodity price increases, increased revenue by $54 million.
Clean Air
Clean Air revenue increased $1,414 million, or 21%, as compared to the year ended December 31, 2020. The increase was primarily due to the increase in substrate sales of $936 million and the increase in value-add revenue of $478 million. Overall for the Clean Air segment, the main drivers of the value-add revenue increase was higher volume of $340 million attributable to the revenue from commercial truck, OES and off-highway and other, while light vehicle also improved and contributed to the value-add revenue increase when compared to the prior year. In addition, foreign currency exchange had a $70 million favorable effect on Clean Air value-add revenue, while other favorable effects, which includes recoveries of commodity price increases, increased value-add revenue by $68 million.
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Powertrain
Powertrain revenue increased $570 million, or 17%, as compared to the year ended December 31, 2020. The increase of $453 million is primarily attributable to higher sales volume for commercial truck, light vehicle and OES, while industrial, off-highway and other revenues also improved and contributed to the increase when compared to the prior year . In addition, foreign currency exchange had a $77 million favorable effect on Powertrain revenue, while other favorable effects, which includes recoveries of commodity price increases, increased revenue by $40 million.
EBITDA including noncontrolling interests
The following table presents the EBITDA including noncontrolling interests by segment (amounts in millions):
Year Ended December 31
2021 vs 2020 Change
EBITDA including noncontrolling interests by Segment:
Motorparts
Performance Solutions
Clean Air
Powertrain
Motorparts
Motorparts EBITDA including noncontrolling interests increased $220 million as compared to the year ended December 31, 2020. The increase is primarily attributable to higher sales volume and favorable mix, improved operating performance, favorable material sourcing and the non-recurrence of goodwill and intangible impairment charges of $110 million recognized during the year ended December 31, 2020. Also contributing to the increase in EBITDA including noncontrolling interests is the decrease in a non-cash charge to cost of sales of $38 million related to the write-down of inventory, a decrease in asset impairment charges of $24 million recognized in connection with its initiative to rationalize its supply chain and distribution network, and a decrease in restructuring charges related to cash severance benefits and other costs of $12 million as compared to the year ended December 31, 2020. These favorable factors were partially offset by higher SG&A costs (includes the prior year effects of cost reduction initiatives implemented in response to the effects of COVID-19) during the year ended December 31, 2021 as compared to the year ended December 31, 2020.
Performance Solutions
Performance Solutions EBITDA including noncontrolling interests increased $753 million as compared to the year ended December 31, 2020. The increase is primarily attributable to the non-recurrence of asset impairment charges of $455 million and goodwill and intangible impairment charges of $232 million recognized during the year ended December 31, 2020 . Also contributing to the increase is higher sales volume, lower pension and postretirement benefit costs due to a plant closure during the year ended December 31, 2020, a decrease in restructuring charges related to cash severance benefits and other costs of $13 million, and a decrease in other restructuring related charges of $36 million during the year ended December 31, 2021 as compared to prior year. These favorable factors were partially offset by the effects o f unfavorable materials sourcing, unfavorable operating performance and unfavorable mix during the year ended December 31, 2021 as compared to the year ended December 31, 2020 .
Clean Air
Clean Air EBITDA including noncontrolling interests increased $144 million as compared to the year ended December 31, 2020. The increase is primarily attributable to higher sales volume, favorable operating performance, favorable material sourcing, gains on sale-leaseback transactions for $32 million recognized during the year ended December 31, 2021, and a decrease in restructuring charges related to cash severance benefits and other costs of $15 million during the year ended December 31, 2021 as compared to the year ended December 31, 2020. These favorable factors were partially offset by the effects o f unfavorable mix and other non-restructuring asset impairments of $11 million during the year ended December 31, 2021, and the favorableantitrust reserve change in estimate for $11 million during the year ended December 31, 2020 .
Powertrain
Powertrain EBITDA including noncontrolling interests increased $177 million as compared to the year ended December 31, 2020. The increase is primarily attributable to higher sales volume, favorable operating performance, the non recurrence of goodwill impairment charge of $41 million recognized during the year ended December 31, 2020, and a decrease in restructuring charges related to cash severance benefits and other costs of $28 million, as compared to the year ended December 31, 2020. These favorable factors were partiall y offset by unfavorable material sourcing during the year ended December 31, 2021 as compared to the year ended December 31, 2020.
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The EBITDA including noncontrolling interests results shown in the preceding table include the following items, certain of which may have an effect on the comparability of EBITDA including noncontrolling interests results between periods (amounts in millions):
Reportable Segments
Motorparts
Performance Solutions
Clean Air
Powertrain
Total
Corporate
Total
Year Ended December 31, 2021
Restructuring charges, net
Restructuring related costs
Asset impairmentsrestructuring related
Other non-restructuring asset impairments
Inventory write-down (1)
Other costs (including strategic and transaction related)
Gain on extinguishment of debt
(Gain)/Loss on sale of assets/business (2)
Anti-dumping duty charge
Loss on sale of unconsolidated affiliate
Other
Total adjustments
(1) Non-cash charge of $44 million to write-down inventory in the Motorparts segment in connection with its initiative to rationalize its supply chain and distribution network.
(2) The $32 million gain on sale of assets for Clean Air segment represents gains on sale-leaseback transactions.
Reportable Segments
Motorparts
Performance Solutions
Clean Air
Powertrain
Total
Corporate
Total
Year Ended December 31, 2020
Restructuring charges, net
Restructuring related costs
Asset impairmentsrestructuring related
Other non-restructuring asset impairments
Inventory write-down (1)
Other costs (including strategic and transaction related) (2)
OPEB curtailment (3)
Antitrust reserve change in estimate
Gain on extinguishment of debt
(Gain)/Loss on sale of assets
Goodwill and intangibles impairment charges
Total adjustments
(1) Non-cash charge of $82 million to write-down inventory in the Motorparts segment in connection with its initiative to rationalize its supply chain and distribution network, partially offset by $9 million margin on discontinued product that was previously written-down.
(2) Includes costs related to the acquisitions and expected separation.
(3) OPEB curtailment as a result of an amended union agreement that eliminated healthcare benefits for future retirees.
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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Consolidated Results of Operations
Year Ended December 31
Favorable (Unfavorable)
$ Change
% Change (a)
(millions except percent and per share amounts)
Revenues
Net sales and operating revenues
Costs and expenses
Cost of sales (exclusive of depreciation and amortization)
Selling, general, and administrative
Depreciation and amortization
Engineering, research, and development
Restructuring charges, net and asset impairments
Goodwill and intangible impairment charges
Other income (expense)
Non-service pension and postretirement benefit (costs) credits
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
Gain (loss) on extinguishment of debt
Other income (expense), net
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
Interest expense
Earnings (loss) before income taxes and noncontrolling interests
Income tax (expense) benefit
Net income (loss)
Less: Net income (loss) attributable to noncontrolling interests
Net income (loss) attributable to Tenneco Inc.
Earnings (loss) per share
Basic earnings (loss) per share:
Earnings (loss) per share
Weighted average shares outstanding
Diluted earnings (loss) per share:
Earnings (loss) per share
Weighted average shares outstanding
(a) Percentages above denoted as “ n/m ” are not meaningful to present in the table.
Revenues
Revenues decreased by $2,071 million, or 12%, as compared to the year ended December 31, 2019. The primary driver of the decrease is lower sales volume and unfavorable mix of $1,810 million, largely attributable to the effects of COVID-19. The remaining decrease is attributable to a decrease in revenues of $106 million, or less than 1%, related to the net effects of acquisitions and divestitures, the unfavorable effects of foreign currency exchange of $89 million, and the net unfavorable effects of other of $66 million.
The following table lists the primary drivers behind the change in revenues (amounts in millions):
Year Ended December 31, 2019
Acquisitions and divestitures, net
Drivers in the change of organic revenues:
Volume and mix
Currency exchange rates
Others
Year Ended December 31, 2020
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Cost of sales
Cost of sales decreased by $1,510 million, or 10%, as compared to the year ended December 31, 2019. The primary driver of the decrease is from lower sales volume of $1,212 million, largely attributable to the effects of COVID-19. The remaining decrease is attributable to a decrease in cost of sales of $96 million, or less than 1%, related to the net effects of acquisitions and divestitures, the favorable effects of materials sourcing of $87 million, the favorable effects of foreign currency exchange of $60 million, and the net favorable effects of other costs of $137 million. This was partially offset by a non-cash charge of $82 million related to the write-down of inventory in the Motorparts segment in connection with its initiative to rationalize its supply chain and distribution network. Included in other costs of $137 million, is $9 million of margin on discontinued product that was previously written-down.
The following table lists the primary drivers behind the change in cost of sales (amounts in millions):
Year Ended December 31, 2019
Acquisitions and divestitures, net
Drivers in the change of organic cost of sales:
Volume and mix
Material
Currency exchange rates
Inventory write-down
Others
Year Ended December 31, 2020
Selling, general, and administrative
SG&A decreased by $249 million to $889 million compared to $1,138 million in the year ended December 31, 2019. The decrease was primarily due to $88 million in lower acquisition and expected separation costs, and the favorable effects of cost reduction initiatives implemented in response to the effects of COVID-19, including unpaid furloughs, net pay decreases, temporary support programs, and other compensation related expenses during the year ended December 31, 2020. In addition, SG&A includes a reduction of $9 million recognized for a non-income tax refund received in the year ended December 31, 2020.
Depreciation and amortization
Depreciation and amortization expense decreased by $34 million to $639 million compared to $673 million for the year ended December 31, 2019, primarily attributable to the effects of the impairments on property, plant and equipment recognized in the first quarter of 2020.
Engineering, research, and development
Engineering, research, and development decreased by $51 million to $273 million as compared to $324 million for the year ended December 31, 2019. The decrease was due primarily to the effects of COVID-19 and the favorable effects of cost reduction initiatives.
Restructuring charges, net and asset impairments
Restructuring charges, net and asset impairments increased by $496 million to $622 million as compared to $126 million for the year ended December 31, 2019. The increase is primarily attributable to non-cash property, plant and equipment asset impairments in the Performance Solutions segment of $455 million; non-cash asset impairment charges in the Motorparts segment of $25 million related to its initiative to rationalize its supply chain and distribution network; and a non-cash asset impairment charge of $17 million for operating lease right-of-use assets and property, plant and equipment in the corporate component during the year ended December 31, 2020. In addition, there was an increase of $6 million for cash severance costs expected to be paid as part of global headcount and cost reduction actions across all segments and regions, including plant closures, which was more than offset by a decrease of $6 million in impairments related to assets held for sale and a decrease in other asset impairments of $1 million for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
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Goodwill and intangible impairment charges
Goodwill and intangible impairment charges increased by $142 million to $383 million as compared to $241 million for the year ended December 31, 2019. The increase is primarily attributable to $267 million of non-cash goodwill impairment charges, $65 million of non-cash definite-lived intangible asset impairments, and $51 million of non-cash indefinite-lived intangible asset impairments during the year ended December 31, 2020, which was the result of the effects of COVID-19 on the projected financial information during the first quarter of 2020. This compared to $108 million of goodwill impairment charges recognized for three of our reporting units for the year ended December 31, 2019. These non-cash goodwill impairment charges included $69 million in the Performance Solutions segment as a result of our reporting unit reorganization and a $21 million impairment charge in the Motorparts segment, and an $18 million impairment charge in the Powertrain segment as a result of our goodwill impairment assessment in the fourth quarter of 2019. In addition, as a result of our indefinite-lived intangible asset impairment assessment in the fourth quarter of 2019, non-cash intangible asset impairment charges of $133 million were recorded for two reporting units in the Motorparts segment.
Non-service pension and postretirement benefit (costs) credits
Non-service pension and postretirement benefit (costs) credits increased by $29 million to a net credit of $18 million as compared to a net cost of $11 million for the year ended December 31, 2019. This was primarily attributable to the elimination of certain health care benefits in retirement for participants in one of our union agreements that resulted in a non-cash curtailmentgain of $21 million for the year ended December 31, 2020 as compared to a curtailmentgain of $7 million for the year ended December 31, 2019 resulting from the plan amendments approved during 2019 to eliminate postretirement benefits for certain nonunion employees. The remaining change was primarily attributable to a decrease in the discount rate, which was partially offset by a higher amortization and a lower expected return on plan assets due to a lower long-term rate of return.
Equity in earnings (losses) of nonconsolidated affiliates, net of tax
Equity in earnings (losses) of nonconsolidated affiliates, net of tax increased by $4 million to $47 million as compared to $43 million in the year ended December 31, 2019. In the year ended December 31, 2019, a non-cash reduction of $12 million was recognized as a result of finalizing purchase accounting for the Federal-Mogul LLC acquisition, and completing the purchase price allocation for certain equity method investments, which represents amounts to recognize the basis difference between the fair value and book value of certain assets, including inventory, property, plant and equipment, and intangible assets. After the purchase accounting adjustments in the prior year, equity earnings (losses) decreased year over year primarily due to the effects of COVID-19 on the equity in earnings (losses) of our nonconsolidated affiliates located in Turkey, China, Korea, and the U.S. for the year ended December 31, 2020 as compared to the year ended December 31, 2019.
Gain (loss) on extinguishment of debt
A non-cash gain on extinguishment of debt of $2 million was recognized for the year ended December 31, 2020 related to the redemption of the 4.875% euro denominated senior secured notes during the fourth quarter of 2020.
Other income (expense), net
Other income (expense), net decreased by $15 million as compared to the year ended December 31, 2019. The decrease was primarily attributable to a recovery of value-added tax in a foreign jurisdiction for the year ended December 31, 2019.
Interest expense
Interest expense decreased by $45 million to $277 million (substantially all in our U.S. operations), net of interest capitalized of $3 million, for the year ended December 31, 2020 as compared to $322 million (substantially all in our U.S. operations), net of interest capitalized of $5 million, for the year ended December 31, 2019. The $45 million decrease was primarily due to lower interest rates on our variable rate debt, partially offset by higher interest expense on higher average outstanding borrowings on the revolver during the year ended December 31, 2020 as compared to the year ended December 31, 2019. Interest expense also included losses on sales of accounts receivables, which was $20 million in the year ended December 31, 2020 compared to $31 million in the year ended December 31, 2019. For more detailed explanations on our debt structure and senior credit facility refer to “Liquidity and Capital Resources” later in this Management’s Discussion and Analysis.
Income tax (expense) benefit
Income tax expense increased by $440 million to $459 million on loss before income taxes and noncontrolling interests of $1,001 million for the year ended December 31, 2020 compared to income tax expense of $19 million on loss before income taxes and noncontrolling interests of $201 million for the year ended December 31, 2019. The increase is primarily the result of the $507 million in non-cash charges to tax expense relating to the full valuation allowances established for the U.S. deferred taxes for the year ended December 31, 2020 and $98 million in non-cash charges to tax expense for changes in valuation allowance for deferred taxes relating to non-U.S. jurisdictions. This is partially offset by the federal and state tax benefits and foreign rate differential on the change of the loss before income taxes and noncontrolling interests of $186 million for the year ended December 31, 2020.
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Net income (loss)
Net loss increased by $1,240 million to $1,460 million for the year ended December 31, 2020 as compared to $220 million for the year ended December 31, 2019 as a result of the aforementioned items.
EBITDA including noncontrolling interests
The following table presents the reconciliation from EBITDA including noncontrolling interests to net income (loss) (amounts in millions):
Year Ended December 31
EBITDA including noncontrolling interests:
Motorparts
Performance Solutions
Clean Air
Powertrain
Corporate
Depreciation and amortization
Earnings (loss) before interest expense, income taxes, and noncontrolling interests
Interest expense
Income tax (expense) benefit
Net income (loss)
See “Segment Results of Operations” for further information on EBITDA including noncontrolling interests.
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Segment Results of Operations
The table below reflects the main drivers for changes in our segment revenues for the years ended December 31, 2020 and 2019 (amounts in millions) (refer to the “Overview of Net Sales and Operating Revenues” for the year ended December 31, 2021 compared to December 31, 2020 discussion above for a description of why we present these reconciliations of revenue):
Segment Revenue
Clean Air
Motorparts
Performance Solutions
Value-add Revenues
Substrate Sales
Total
Powertrain
Total
Year Ended December 31, 2019
Acquisitions and divestitures, net
Drivers in the change of organic revenues:
Volume and mix
Currency exchange rates
Others
Year Ended December 31, 2020
Segment Revenue
Motorparts
Motorparts revenue decreased $442 million, or 14%, as compared to the year ended December 31, 2019. Lower sales across all regions in which we operate contributed $356 million to the decrease, as well as a decrease in revenues from divestitures of $76 million, and foreign currency exchange had a $55 million unfavorable effect on Motorparts revenues. The unfavorable effects were partially offset by other net favorable effects of $45 million.
Performance Solutions
Performance Solutions revenue decreased $598 million, or 19%, as compared to the year ended December 31, 2019. Lower light vehicle, commercial truck, off-highway, and other vehicle revenues contributed $549 million to the decrease, as well as a decrease in revenues from divestitures of $23 million. Foreign currency exchange had a $6 million unfavorable effect on Performance Solutions revenue, while other unfavorable effects decreased revenue by $20 million.
Clean Air
Clean Air revenue decreased $400 million, or 6%, as compared to the year ended December 31, 2019. The decrease was primarily due to the decrease in value-add revenue of $728 million, partially offset by the increase in substrate sales of $328 million. Overall for the Clean Air segment, lower light vehicle and off-highway and other revenues were the main drivers of the value-add revenue decline while commercial truck improved when compared to the prior year. In addition, foreign currency exchange had a $4 million unfavorable effect on Clean Air value-add revenue while other unfavorable effects decreased value-add revenue by $62 million.
Powertrain
Powertrain revenue decreased $631 million, or 16%, as compared to the year ended December 31, 2019. Lower light vehicle, commercial truck, industrial, and off-highway and other vehicle revenue contributed $580 million to the decrease, as well as a decrease in revenues from divestitures of $7 million. Foreign currency exchange had a $15 million unfavorable effect on Powertrain revenue, while other unfavorable effects decreased revenue by $29 million.
EBITDA including noncontrolling interests
The following table presents the EBITDA including noncontrolling interests by segment (amounts in millions):
Year Ended December 31
2020 vs 2019 Change
EBITDA including noncontrolling interests by Segment:
Motorparts
Performance Solutions
Clean Air
Powertrain
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Motorparts
Motorparts EBITDA including noncontrolling interests decreased $29 million as compared to the year ended December 31, 2019. The decrease is primarily attributable to lower sales volumes and unfavorable mix, an increase in goodwill impairment charge of $49 million and a non-cash charge to cost of sales of $82 million related to the write-down of inventory recognized in connection with its initiative to rationalize its supply chain and distribution network as compared to the year ended December 31, 2019. These unfavorable factors were partially offset by favorable operating performance, lower SG&A costs and a decrease in indefinite-lived intangible asset impairment charges of $93 million as compared to the year ended December 31, 2019.
Performance Solutions
Performance Solutions EBITDA including noncontrolling interests decreased $748 million as compared to the year ended December 31, 2019. The decrease is primarily attributable to asset impairment charges of $455 million and goodwill and intangible impairment charges of $232 million recognized during the year ended December 31, 2020 as compared to a goodwill impairment charge of $69 million recognized during the year ended December 31, 2019. Also contributing to the decrease is lower sales volume and unfavorable mix, partially offset by lower SG&A and engineering, research, and development costs.
Clean Air
Clean Air EBITDA including noncontrolling interests decreased $142 million as compared to the year ended December 31, 2019. The decrease is primarily attributable to lower sales volume and unfavorable mix, partially offset by favorable operating performance and lower SG&A costs during the year ended December 31, 2020 as compared to the year ended December 31, 2019.
Powertrain
Powertrain EBITDA including noncontrolling interests decreased $88 million as compared to the year ended December 31, 2019. The decrease is primarily attributable to lower sales volume and unfavorable mix, an increase in cash severance charges expected to be paid of $19 million, and an increase in goodwill impairment charge of $23 million during the year ended December 31, 2020 as compared to the year ended December 31, 2019. These unfavorable factors were partially offset by favorable operating performance and lower SG&A and engineering, research, and development costs. Included in the lower SG&A costs is a reduction of $9 million for a non-income tax refund received in the year ended December 31, 2020.
The EBITDA including noncontrolling interests results shown in the preceding table include the following items, certain of which may have an effect on the comparability of EBITDA including noncontrolling interests results between periods (amounts in millions):
Reportable Segments
Motorparts
Performance Solutions
Clean Air
Powertrain
Total
Corporate
Total
Year Ended December 31, 2020
Restructuring charges, net
Restructuring related costs
Asset impairmentsrestructuring related
Other non-restructuring asset impairments
Inventory write-down (1)
Other costs (including strategic and transaction related) (2)
OPEB curtailment (3)
Antitrust reserve change in estimate
Gain on extinguishment of debt
(Gain)/Loss on sale of assets
Goodwill and intangibles impairment charges
Total adjustments
(1) Non-cash charge of $82 million to write-down inventory in the Motorparts segment in connection with its initiative to rationalize its supply chain and distribution network, partially offset by $9 million margin on discontinued product that was previously written-down.
(2) Includes costs related to the acquisitions and expected separation.
(3) OPEB curtailment as a result of an amended union agreement that eliminated healthcare benefits for future retirees.
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Reportable Segments
Motorparts
Performance Solutions
Clean Air
Powertrain
Total
Corporate
Total
Year Ended December 31, 2019
Restructuring charges, net:
Restructuring related to synergy initiatives (1)
Other restructuring charges and costs
Total restructuring charges, net
Restructuring related costs
Asset impairments related to restructuring
Other non-restructuring asset impairments
Other costs to achieve synergies (1)
Cost reduction initiatives (2)
Acquisition and expected separation costs (3)
Purchase accounting adjustments (4)
Brazil tax credit (5)
Antitrust reserve change in estimate
Out of period adjustment (6)
Process harmonization (7)
Warranty charge (8)
Pension settlement (9)
Goodwill and intangibles impairment charges
Total adjustments
(1) Cost to achieve synergies related to acquisitions.
(2) Costs related to cost reduction initiatives.
(3) Costs related to acquisitions and costs related to expected separation.
(4) This primarily relates to a non-cash charge to cost of goods sold for the amortization of the inventory fair value step-up recorded as part of the acquisitions.
(5) Recovery of value-added tax in a foreign jurisdiction.
(6) Inventory losses attributable to prior periods.
(7) Charge due to process harmonization.
(8) Charge related to warranty. Although we regularly incur warranty costs, this specific charge is of an unusual nature in the period incurred.
(9) Charges related to settlements of our pension benefit plans in connection with our derisking activities.
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LIQUIDITY AND CAPITAL RESOURCES
This section discusses our liquidity and capital resources, including cash flow activities for the year ended December 31, 2021 compared to December 31, 2020. Discussion of our cash flow activities for the year ended December 31, 2020 compared to December 31, 2019 can be found under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the Securities and Exchange Commission on February 24, 2021.
Liquidity and Financing Arrangements
For the reasons discussed above under “Recent Trends and Market Conditions - General economic conditions”, there continues to be many uncertainties that remain related to COVID-19 and the ongoing semiconductor shortage, other supply chain challenges, and the effects of inflation on commodities, other purchases, and labor costs that could negatively affect our liquidity and cash flows.
We believe cash flows from operations, combined with our cash on hand and committed and undrawn capacity under our $1.5 billion revolving credit facility, will be sufficient to meet our future capital requirements, including debt amortization, capital expenditures, pension contributions, and other operational requirements, for the following year based on our current estimates and forecasts. We believe we will maintain compliance with our financial ratios set forth in our amended credit agreement. However, our ability to meet the financial covenants depends upon a number of operational and economic factors, many of which are beyond our control. In the event we are unable to meet these financial covenants, we would consider several options 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. We also continue to actively monitor credit market conditions for the right opportunity to replace and extend maturity.
Credit Facilities
The table below shows our borrowing capacity on committed credit facilities at December 31, 2021 (amounts in billions):
December 31, 2021
Term
Available (b)
Tenneco Inc. revolving credit facility (a)
Tenneco Inc. Term Loan A
Tenneco Inc. Term Loan B
Subsidiaries’ credit agreements
(a) We are required to pay commitment fees under the revolving credit facility on the unused portion of the total commitment.
(b) At December 31, 2021, the Company had $69 million of outstanding letters of credit under the revolving credit facility, which reduces the available borrowings under revolving credit facility. We also had $76 million of outstanding letters of credit under our uncommitted facilities at December 31, 2021.
At December 31, 2021, we had liquidity of $2.3 billion comprised of $865 million of cash and $1.4 billion undrawn on our revolving credit facility. We had no outstanding borrowings on our revolving credit facility at December 31, 2021.
During the fourth quarter of 2021, we issued a $42 million letter of credit under our revolving credit facility that is included in the $69 million of total outstanding letters of credit at December 31, 2021, which reduces the available borrowings under our revolving credit facility. The letter of credit supports a 1.7 billion Mexican peso (approximately $82 million using the exchange rate at December 31, 2021) surety bond issued to the Mexican tax authority. The surety bond is required in order for us to enter into the judicial process to appeal a tax assessment and covers the amount of the assessment plus interest. We do not believe it is probable we will have to pay the assessment or related interest. We also received a second assessment during the fourth quarter of 2021 from the Mexican tax authority of 0.6 billion Mexican peso (approximately $28 million using the exchange rate at December 31, 2021) for a separate matter, which has not required the issuance of a surety bond at this time. We do not believe it is probable we will have to pay this second assessment or related interest.
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Term Loans
We entered into a new credit agreement with JPMorgan Chase Bank, N.A., as administrative agent and other lenders (the “New Credit Facility”) in October 2018, which has been amended by the first amendment, dated February 14, 2020 (the “First Amendment”), by the second amendment, dated February 14, 2020 (the “Second Amendment”), and by the third amendment, dated May 5, 2020 (the “Third Amendment”). The New Credit Facility consists of $4.9 billion of total debt financing, consisting of a five-year $1.5 billion revolving credit facility, a five-year $1.7 billion term loan A facility (“Term Loan A”) and a seven-year $1.7 billion term loan B facility (“Term Loan B”). During the year ended December 31, 2020, we paid $18 million in one-time fees in connection with these amendments.
New Credit Facility — Interest Rates
At December 31, 2021, the interest rate on borrowings under the revolving credit facility and the Term Loan A facility was LIBOR plus 1.75% and will remain at LIBOR plus 1.75% for each relevant period for which our consolidated net leverage ratio (as defined in the New Credit Facility) is less than 3.0 to 1 and greater than 2.5 to 1. The interest rate on borrowings under the revolving credit facility and the Term Loan A facility are subject to step downs in accordance with the credit agreement.
The New Credit Facility prescribes for an alternative method of determining interest rates in the event LIBOR is not available.
New Credit Facility — Other Terms and Conditions
The financial ratios required under the New Credit Facility and the actual ratios we calculated at December 31, 2021 are as follows: senior secured net leverage ratio of 2.59 actual versus 4.00 (maximum required under the Third Amendment); and interest coverage ratio of 5.79 actual versus 2.75 (minimum required under the Third Amendment).
Further information on interest rates, fees, and other terms and conditions of the New Credit Facility, refer to Note 9, “Debt and Other Financing Arrangements” included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional details.
Senior Notes
A summary of our senior unsecured and secured notes at December 31, 2021 are as follows (amounts in millions):
Principal
Carrying Amount (a)
Effective Interest Rate
Senior Unsecured Notes
$225 million of 5.375% Senior Notes due 2024
$500 million of 5.000% Senior Notes due 2026
Senior Secured Notes
$500 million of 7.875% Senior Secured Notes due 2029
$800 million of 5.125% Senior Secured Notes due 2029
(a) Carrying amount is net of unamortized debt issuance costs of $29 million at December 31, 2021.
At December 31, 2021 , we had outstanding 5.375% senior unsecured notes due December 15, 2024 (“2024 Senior Notes”) and 5.000% senior unsecured notes due July 15, 2026 (“2026 Senior Notes” and together with the 2024 Senior Notes, the “Senior Unsecured Notes”). We also had outstanding 7.875% senior secured notes due January 15, 2029 (“7.875% Senior Secured Notes”) which were issued on November 30, 2020, and 5.125% senior secured notes due April 15, 2029 (“5.125% Senior Secured Notes”) which were issued on March 17, 2021. The 7.875% Senior Secured Notes and 5.125% Senior Secured Notes (collectively, the “Senior Secured Notes”) were outstanding at December 31, 2021 .
On March 3, 2021, we provided notice of our intention to redeem all of the outstanding 5.000% euro denominated senior secured notes due July 15, 2024 (the “2024 Fixed Rate Secured Notes”) and all of the outstanding floating rate euro denominated senior secured notes due April 15, 2024 (the “2024 Floating Rate Secured Notes” and, together with the 2024 Fixed Rate Secured Notes, the “2024 Secured Notes”). On March 17, 2021, we, using the net proceeds of the offering of 5.125% Senior Secured Notes, together with cash on hand, satisfy and discharge each of the indentures governing the 2024 Secured Notes in accordance with their terms. As a result, we recorded a gain on extinguishment of debt of $8 million for the year ended December 31, 2021 .
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Senior Unsecured Notes and Senior Secured Notes — Other Terms and Conditions
The Senior Unsecured Notes and Senior Secured Notes contain covenants that, among other things, limit our and our subsidiaries’ ability to create liens on our assets and enter into sale and leaseback transactions. In addition, the indentures governing the Senior Secured Notes and 2024 Senior Notes also contain covenants that limit our and our subsidiaries’ ability to: (i) incur additional indebtedness; (ii) pay dividends, make distributions to stockholders and repurchase stock; (iii) make investments; (iv) sell assets; (v) enter into transactions with affiliates; and (vi) undertake mergers and consolidations.
Subject to limited exceptions, all of our existing and future material domestic wholly owned subsidiaries fully and unconditionally guarantee our Senior Unsecured Notes and Senior Secured Notes on a joint and several basis. There are no significant restrictions on the ability of the subsidiaries that have guaranteed our Senior Unsecured Notes and Senior Secured Notes to make distributions to us.
Further information on interest rates, fees, and other terms and conditions of the Senior Unsecured and Senior Secured Notes, refer to Note 9, “Debt and Other Financing Arrangements” included in Part II, Item 8, “Financial Statements and Supplementary Data” for additional details.
Factoring Arrangements
In our accounts receivable factoring programs, accounts receivables are transferred in their entirety to the acquiring entities and are accounted for as a sale. The fair value of assets received as proceeds in exchange for the transfer of accounts receivable under these factoring programs approximates the fair value of such receivables. Some of these programs have deferred purchase price arrangements with the banks.
We are the servicer of the receivables under some of these arrangements and are responsible for performing all accounts receivable administration functions. Where we receive a fee to service and monitor these transferred accounts receivables, such fees are sufficient to offset the costs and as such, a servicing asset or liability is not recorded as a result of such activities.
At December 31, 2021 and 2020, the amount of accounts receivable outstanding and derecognized for factoring arrangements was $1.0 billion and $1.0 billion, of which $0.5 billion and $0.4 billion relate to accounts receivable where we have continuing involvement. In addition, the deferred purchase price receivable was $51 million and $51 million at December 31, 2021 and 2020.
For the years ended December 31, 2021 and 2020, proceeds from the factoring of accounts receivable qualifying as sales were $5.2 billion and $4.1 billion, of which $3.9 billion and $3.3 billion were received on accounts receivable where we have continuing involvement.
For the years ended December 31, 2021 and 2020, our financing charges associated with the factoring of receivables, which are included in “Interest expense” in the consolidated statements of income (loss), were $19 million and $20 million.
If we were not able to factor receivables under these programs, our borrowings under our revolving credit agreement might increase. These programs provide us with access to cash at costs that are generally favorable to alternative sources of financing and allow us to reduce borrowings under our revolving credit agreement.
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Cash Flows
Operating Activities
Operating activities were as follows (amounts in millions):
Year Ended December 31
Operational cash flow before changes in operating assets and liabilities
Changes in operating assets and liabilities:
Receivables
Inventories
Payables and accrued expenses
Accrued interest and accrued income taxes
Other assets and liabilities
Total change in operating assets and liabilities
Net cash (used) provided by operating activities
Net cas h provided by operating activities for the year ended December 31, 2021 was $233 million, a decrease of $396 million compared to the year ended December 31, 2020. The decrease is attributable to an unfavorable change in operating cash flow of $846 million due to unfavorable changes in working capital items, partially offset by an improvement in net cash provided by operating activities before changes in operating assets and liabilities of $450 million . We utilize factoring agreements with deferred purchase price, which are reflected as investing activities and not operating activities. Had we not entered into such agreements, these proceeds would have been reported as cash from operations.
Investing Activities
Investing activities were as follows (amounts in millions):
Year Ended December 31
Proceeds from sale of assets
Collection of divestiture receivable
Net proceeds from sale of business
Proceeds from sale of investment in nonconsolidated affiliates
Cash payments for property, plant and equipment
Proceeds from deferred purchase price of factored receivables
Net cash (used) provided by investing activities
Cash payments for property, plant and equipment were $387 million and $394 million for the years ended December 31, 2021 and 2020.
Proceeds from deferred purchase price of factored receivables were $472 million and $283 million for the years ended December 31, 2021 and 2020.
Collection of divestiture receivable were $27 million and $16 million for the years ended December 31, 2021 and 2020.
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Financing Activities
Financing activities were as follows (amounts in millions):
Year Ended December 31
Proceeds from term loans and notes
Repayments and extinguishment costs of term loans and notes
Borrowings on revolving lines of credit
Payments on revolving lines of credit
Debt issuance costs of long-term debt
Net decrease in bank overdrafts
Distributions to noncontrolling interests
Other
Net cash (used) provided by financing activities
Net cash used by financing activities was $329 million for the year ended December 31, 2021. This included net repayments and extinguishment costs of term loans and notes of $234 million and net repayments under revolving lines of credit of $21 million.
Net cash used by financing activities was $358 million for the year ended December 31, 2020. This included net repayments and extinguishment costs of term loans and notes of $111 million and net repayments under revolving lines of credit of $217 million.
Dividends on Common Stock
We did not pay dividends for the years ended December 31, 2021 and 2020, due to the suspension of the dividend program in 2019.
Material Cash Requirements
Our material cash requirements include the following contractual and other obligations:
Payments due by period:
Next 12 months
Beyond 12 months
Revolver borrowings
Senior term loans
Senior notes
Other subsidiary debt and finance lease obligations
Short-term debt
Total debt obligations
Pension obligations
Operating leases
Purchase obligations (a)
Interest payments
Capital commitments
Total payments
(a) Short-term, ordinary course payment obligations have been excluded.
If we do not maintain compliance with the terms of our New Credit Facility or senior notes indentures described above, all amounts under those arrangements could, automatically or at the option of the lenders or other debt holders, become due. Additionally, each of those facilities contains provisions that certain events of default under one facility will constitute a default under the other facility, allowing the acceleration of all amounts due. We currently expect to maintain compliance with the terms of all of our various credit agreements for the foreseeable future.
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Included in our contractual obligations is the amount of interest to be paid on our long-term debt. As our debt structure contains both fixed and variable rate obligations, we have made assumptions in calculating the amount of future interest payments. Interest on our Senior Unsecured Notes is calculated using the fixed rates of 5.375% and 5.000%, and interest on our fixed rate Senior Secured Notes is calculated using the fixed rates of 7.875% and 5.125%. Interest on our variable rate debt is calculated as LIBOR plus the applicable margin in effect at December 31, 2021 for our term loans. We have assumed that rates will remain unchanged for the outlying years.
We have also included an estimate of expenditures required after December 31, 2021 to complete the projects authorized at December 31, 2021, in which we have made substantial commitments in connection with purchasing property, plant and equipment for our operations. For 2022, we expect our capital expenditures to be between $400 million and $450 million.
We have included an estimate of the expenditures necessary after December 31, 2021 to satisfy purchase requirements pursuant to certain ordinary course supply agreements that we have entered into. With respect to our other supply agreements, they generally do not specify the volumes we are required to purchase. In many cases, if any commitment is provided, the agreements state only the minimum percentage of our purchase requirements we must buy from the supplier. As a result, these purchase obligations fluctuate from year-to-year and we are not able to quantify the amount of our future obligations.
We have not included the potential cash requirement to redeem the shares of one of our noncontrolling interest holders. This became redeemable on January 10, 2022 upon the third anniversary of the Öhlins acquisition. The redemption value of this noncontrolling interest was $41 million at December 31, 2021.
We have not included material cash requirements for unrecognized tax benefits or taxes. It is difficult to estimate taxes to be paid as changes in where we generate income can have a significant effect on our future tax payments.
Based upon current estimates, we believe we will be required to make contributions of approximately $68 million to our pension and postretirement benefits plans in 2022. Pension and postretirement contributions beyond 2022 will be required but those amounts will vary based upon many factors, including the performance of our pension fund investments during 2022 and future discount rate changes. For additional information relating to the funding of our pension and other postretirement plans, refer to Note 11, “Pension Plans, Postretirement and Other Employee Benefits”, in our consolidated financial statements included in Item 8 for additional information.
In addition, we have not included cash requirements for environmental remediation. Based upon current estimates, we believe we will be required to spend approximately $31 million over the next 30 years, including $8 million of expected payments in 2022. However, due to possible modifications in remediation processes and other factors, it is difficult to determine the actual timing and extent of cash payments. Refer to Note 13, “Commitments and Contingencies”, in our consolidated financial statements included in Item 8 for additional information.
We occasionally provide guarantees that could require us to make future payments in the event that the third-party primary obligor does not make its required payments. We are not required to record a liability for any of these guarantees.
Additionally, we have from time to time issued guarantees for the performance of obligations by some of our subsidiaries, and some of our subsidiaries have guaranteed our debt. Substantially all of our existing and future material domestic subsidiaries fully and unconditionally guarantee our New Credit Facility and our senior notes on a joint and several basis. The New Credit Facility is also secured by first-priority liens on substantially all our domestic assets and pledges of up to 66% of the stock of certain first-tier foreign subsidiaries. As described above, certain of our senior notes are secured by pledges of stock and assets.
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Supplemental Guarantor Financial Information
Basis of Presentation
Substantially all of the Company’s existing and future material domestic 100% owned subsidiaries (which are referred to as the “Guarantor Subsidiaries”) fully and unconditionally guarantee its senior notes on a joint and several basis. However, a subsidiary’s guarantee may be released in certain customary circumstances such as a sale of the subsidiary or all or substantially all of its assets in accordance with the indenture applicable to the notes. The Guarantor Subsidiaries are combined in the presentation below.
Summarized Financial Information
The following tables present summarized financial information for the Parent and the Guarantors on a combined basis after the elimination of (a) intercompany transactions and balances among the Parent and the Guarantors and (b) the equity in earnings from and investments in any subsidiary that is a Nonguarantor (amounts in millions):
Income Statements
Year Ended December 31
Net sales and operating revenues
Operating expenses
Net income (loss)
Net income (loss) attributable to Tenneco Inc.
Balance Sheets
December 31
ASSETS
Current assets
Non-current assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Non-current liabilities
Intercompany due to (due from)
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CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires us to make estimates and assumptions that affect the reported amounts and disclosures in our consolidated financial statements. These estimates are subject to an inherent degree of uncertainty and actual results could differ from our estimates. Our significant accounting policies have been disclosed in Note 2, “Summary of Significant Accounting Policies” in our consolidated financial statements included in Item 8. The following paragraphs include a discussion of certain policies as well as critical areas where estimates are required.
Goodwill and Other Indefinite-Lived Intangible Assets
We evaluate goodwill for impairment during the fourth quarter of each year, or more frequently if events or circumstances indicate goodwill might be impaired. We perform assessments at the reporting unit level by comparing the estimated fair value of our reporting units with goodwill to the carrying value of the reporting unit to determine if a goodwill impairment exists. If the carrying value of our reporting units exceeds the fair value, the goodwill is considered impaired. Our assessment of fair value utilizes a combination of the income approach, market approach, and, in instances where a reporting unit’s free cash flows do not support the value of the underlying assets, an asset approach. In our assessment, for reporting units where the free cash flows support the value of the underlying assets, we apply a 75% weighting to the income approach and a 25% weighting to the market approach. The most significant inputs in estimating the fair value of our reporting units under the income approach are (i) projected operating margins, (ii) the revenue growth rate, and (iii) the discount rate, which is risk-adjusted based on the aforementioned inputs.
Similar to goodwill, we evaluate our indefinite-lived trade names and trademarks for impairment during the fourth quarter of each year, or more frequently if events or circumstances indicated the assets might be impaired. We perform a quantitative assessment of estimating fair values based upon the prospective stream of hypothetical after-tax royalty cost savings discounted at rates that reflect the rates of return appropriate for these intangible assets. The primary inputs utilized in determining fair values of our trade names and trademarks are (i) our projected branded product sales, (ii) the revenue growth rate, (iii) the royalty rate, and (iv) the discount rate, which is risk-adjusted based on our projected branded sales.
The basis of the goodwill impairment and indefinite-lived intangible asset impairment analyses is our annual budget and three-year strategic plan. This includes a projection of future cash flows based on new products, awarded business, customer commitments, and independent market data, which requires us to make significant assumptions and estimates about the extent and timing of future cash flows and revenue growth rates. The key factors that affect our estimates are (i) future production estimates; (ii) customer preferences and decisions; (iii) product pricing; (iv) manufacturing and material cost estimates; and (v) product life / business retention. These estimates and assumptions are subject to a high degree of uncertainty.
While we believe the assumptions and estimates used to determine the estimated fair values are reasonable, due to the many variables inherent in estimating fair value and the relative size of the goodwill and indefinite-lived intangible assets, differences in assumptions could have a material effect on the results of our analysis. Refer to Note 6, “Goodwill and Other Intangible Assets”, in our consolidated financial statements included in Item 8 for additional information regarding our goodwill and indefinite-lived intangible assets.
The following table shows a summary of the number of reporting units with a net carrying value of goodwill in each segment at December 31, 2021 and whether or not the reporting unit ’ s fair value exceeds its carrying value by more or less than 25% based on each respective reporting units most recent goodwill impairment analysis:
Segments
Motorparts
Performance Solutions
Clean Air
Number of reporting units with goodwill
Number of reporting units where fair value exceeds carrying value:
Greater than 25%
Less than 25%
Goodwill for reporting units where fair value exceeds carrying value:
Greater than 25%
Less than 25%
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Impairment of Long-Lived Assets and Definite-Lived Intangible Assets
We monitor our long-lived and definite-lived intangible assets for impairment indicators on an on-going basis. If an impairment indicator exists, we test the long-lived asset group for recoverability by comparing the undiscounted cash flows expected to be generated from the long-lived asset group to its net carrying value. If the net carrying value of the asset group exceeds the undiscounted cash flows, the asset group is written down to its fair value and an impairmentloss is recognized. Even if an impairment charge is not recognized, a reassessment of the useful lives over which depreciation or amortization is being recognized may be appropriate based on our assessment of the recoverability of these assets.
The basis of the recoverability test is our annual budget and three-year strategic plan. This includes a projection of future cash flows based on new products, awarded business, customer commitments, and independent market data, which requires us to make significant assumptions and estimates about the extent and timing of future cash flows and revenue growth rates. The key factors that affect our estimates are (i) future production estimates; (ii) customer preferences and decisions; (iii) product pricing; (iv) manufacturing and material cost estimates; and (v) product life / business retention. These estimates and assumptions are subject to a high degree of uncertainty.
While we believe the projections of anticipated future cash flows and related assumptions are reasonable, differences in assumptions could have a material effect on the results of our analysis.
Pension and Other Postretirement Benefits
We sponsor defined benefit pension and postretirement benefit plans for certain employees and retirees around the world. Our defined benefit plans are accounted for on an actuarial basis, which requires the selection of various assumptions, including an expected long-term rate of return, discount rate, mortality rates of participants, expected rates of mortality improvement, and health care cost trend rates.
The approach to establishing the discount rate assumption for both our domestic and international plans is based on high-quality corporate bonds. The weighted average discount rates used to calculate net periodic benefit cost for 2021 and year-end obligations at December 31, 2021 were as follows:
Pension Benefits
Other Postretirement
Non-U.S.
Plans
Plans
Benefits
Used to calculate net periodic benefit cost
Used to calculate benefit obligations
Our approach to establishing the assumption for the expected return on assets utilizes estimates of future long-term investment performance for the plan based upon the asset allocation strategy and is primarily a long-term prospective rate. As a result, our estimate of the weighted average long-term rate of return on plan assets for all of our pension plans decreased to 4.7% in 2021 from 5.1% in 2020.
Our pension plans generally do not require employee contributions. Our policy is to fund these pension plans in accordance with applicable domestic and international government regulations. At December 31, 2021, all legal funding requirements had been met.
The following table illustrates the sensitivity to a change in certain assumptions for our pension and postretirement benefit plan obligations. The changes in these assumptions have no effect on our funding requirements.
Pension Benefits
Other Postretirement
Benefits
U.S. Plans
Non-U.S. Plans
Change
pension
expense
Change
PBO
Change
pension
expense
Change
PBO
Change
pension
expense
Change
PBO
25 basis point (“bp”) decrease in discount rate
25 bp increase in discount rate
25 bp decrease in return on assets rate
25 bp increase in return on assets rate
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The assumed health care trend rate affects the amounts reported for our postretirement benefit plan obligations. The following table illustrates the sensitivity to a change in the assumed health care trend rate:
Total service and
interest cost
APBO
100 bp increase in health care cost trend rate
100 bp decrease in health care cost trend rate
Refer to Note 11, “Pension Plans, Postretirement and Other Employee Benefits”, in our consolidated financial statements included in Item 8 for additional information regarding our pension and other postretirement employee benefit costs and assumptions.
Warranty Reserves
We provide warranties on some, but not all, of our products. The warranty terms vary but range from one year up to limited lifetime warranties on some of our premium aftermarket products. Provisions for estimated expenses related to product warranty are made at the time products are sold or when specific warranty issues are identified on OE products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims and upon specific warranty issues as they arise. While we have not experienced any material differences between these estimates and our actual costs, it is reasonably possible that future warranty issues could arise that could have a material effect on our consolidated financial statements.
Income Taxes
We recognize deferred tax assets and liabilities which reflect the temporary differences between the financial statement carrying value of assets and liabilities and the tax reporting values. Future tax benefits of net operating losses (“NOL”) and tax credit carryforwards are also recognized as deferred tax assets on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid. Changes in tax laws or accounting standards and methods may affect recorded deferred taxes in future periods.
Valuation allowances are recorded to reduce our deferred tax assets to an amount that is more likely than not to be realized. The ability to realize deferred tax assets depends on our ability to generate sufficient taxable income within the carryforward periods provided for in the tax law for each tax jurisdiction. In the event our operating performance deteriorates in a filing jurisdiction or entity, future assessments could conclude that a larger valuation allowance will be needed to further reduce the deferred tax assets. However, due to the complexity of some of these uncertainties, the ultimate resolution may be materially different from the current estimate. Refer to Note 12, “Income Taxes”, in our consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” for additional information.
In addition, the calculation of our tax benefits and liabilities includes uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. We recognize tax benefits and liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. We adjust these liabilities based on changing facts and circumstances; however, due to complexity of some of these uncertainties and the effect of any tax audits, the ultimate resolutions may be materially different from our estimated liabilities.
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MARKET RISK SENSITIVITY
We are exposed to certain global market risks, including foreign currency exchange rate risk, commodity price risk, interest rate risk associated with our debt, and equity price risk associated with our share-based compensation awards.
Foreign Currency Exchange Rate Risk
We manufacture and sell our products globally. As a result, our financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets in which we manufacture and sell our products. We generally try to use natural hedges within our foreign currency activities to minimize foreign currency risk. Where natural hedges are not in place, we consider managing certain aspects of our foreign currency activities and larger transactions through the use of foreign currency options or forward contracts.
Foreign Currency Forward Contracts
We enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables and intercompany loans. The fair value of these derivative instruments is not considered material to the consolidated financial statements.
The following table summarizes by position the notional amounts for foreign currency forward contracts at December 31, 2021, all of which mature in the next twelve months (amounts in millions):
Notional Amount
Long positions
Short positions
A hypothetical 10% adverse change in the U.S. relative to all other currencies would not materially affect our consolidated financial position, results of operations or cash flows with regard to changes in the fair values of foreign currency forward contracts.
We are exposed to foreign currency risk due to translation of the results of certain international operations into U.S. dollars as part of the consolidation process. Fluctuations in foreign currency exchange rates can therefore create volatility in the results of operations and may adversely affect our financial condition.
The following table summarizes the amounts of foreign currency translation and transaction losses (amounts in millions):
Year Ended December 31
Translation gains (losses) recorded in accumulated other comprehensive income (loss)
Transaction gains (losses) recorded in earnings
Commodity Price Risk
Our production processes are dependent upon the supply of certain raw materials that are exposed to price fluctuations on the open market. Commodity rate price forward contracts are executed to offset a portion of our exposure to the potential change in prices for raw materials. We monitor our commodity price risk exposures regularly to maximize the overall effectiveness of our commodity forward contracts. The fair value of our commodity price forward contracts is not considered material to the consolidated financial statements.
Interest Rate Risk
Our financial instruments that are sensitive to market risk for changes in interest rates are primarily our debt securities. We use our revolving credit facility to finance our short-term and long-term capital requirements. We pay a current market rate of interest on these borrowings. Our long-term capital requirements have been financed with long-term debt with original maturity dates ranging from five to ten years. At December 31, 2021, we had $2.0 billion par value of fixed rate debt and $3.1 billion par value of floating rate debt. Of the fixed rate debt, $225 million is fixed through 2024, $500 million is fixed through 2026, and $1.3 billion is fixed through 2029. For more detailed explanations on our debt structure and New Credit Facility, refer to “Liquidity and Capital Resources — Liquidity and Financing Arrangements” earlier in this Management’s Discussion and Analysis.
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We estimate the fair value of our long-term debt at December 31, 2021 was approximately 101% of its book value. A one percentage point increase or decrease in interest rates related to our variable interest rate debt would increase or decrease the annual interest expense we recognize in the consolidated statements of income (loss) and the cash we pay for interest expense by approximately $32 million.
Equity Price Risk
We have certain employee compensation arrangements, including deferred compensation and cash-settled share-based units granted under our long-term incentive plan, that are valued based on the Tenneco Inc. stock price. The share equivalents outstanding related to deferred compensation and cash-settled share-based awards are as follows:
December 31
Restricted Stock Units (RSUs)
Performance Share Units (PSUs)
Deferred compensation arrangements (a)
(a) At December 31, 2021, there are no share equivalents outstanding that are based on the Company’s stock price. On a prospective basis, the alternative for employees to invest their deferred compensation into these arrangements no longer exists.
At December 31, 2021, a change in the Tenneco Inc. share price of 10% would cause a change to the compensation liability of approximately $2 million, and would change the cash payout of all share equivalents, once fully vested at 100%, by $5 million.
We have entered into financial instruments to mitigate the risk associated with both the vested and unvested portions of our cash-settled share-based incentive compensation awards and, prior to September 30, 2021, our deferred compensation liability. The number of common share equivalents under these agreements at December 31, 2021 and 2020 was 3,100,000 and 1,700,000. These financial instruments move in the opposite direction of the compensation payouts, allowing us to mitigate the risk associated with changes in the Tenneco Inc. share price of the final cash settlement.
Effective in the third quarter of 2021, investment options based on the Company’s stock price no longer exist under the incentive deferral plan and, at December 31, 2021, there are no deferred compensation balances correlated to the Company’s stock price.
ENVIRONMENTAL MATTERS, LEGAL PROCEEDINGS AND PRODUCT WARRANTIES
Note 13, “Commitments and Contingencies” of the consolidated financial statements included in Item 8, “Financial Statements and Supplemental Data” is incorporated herein by reference.
