Form 10-K TENNECO INC For: Dec 31
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
For the fiscal year ended
December 31, 2021
|TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934|
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|Title of each class||Trading Symbol||Name of each Exchange on which registered|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Exchange Act from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
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The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2021, computed by reference to the price at which the registrant’s common stock was last sold on the New York Stock Exchange on June 30, 2021, was approximately $
The number of shares of Class A Voting Common Stock, par value $0.01 per share:
83,132,435 shares outstanding as of February 22, 2022.
Documents Incorporated by Reference:
CAUTIONARY STATEMENT FOR PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, our prospects and business strategies. These forward-looking statements are included in various sections of this report. The words “may,” “will,” “believe,” “should,” “could,” “plan,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof), identify these forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, these expectations may not prove to be correct. Because these forward-looking statements are also subject to risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include, without limitation:
•general economic, business, market and social conditions, including the effects of the COVID-19 pandemic and the impact of inflationary pressures on materials, labor and other costs of doing business;
•our ability (or inability) to successfully execute cost reduction, performance improvement and other plans, including our plans in response to the COVID-19 pandemic and our previously announced accelerated performance improvement plan (“Accelerate”), and to realize the anticipated benefits from these plans;
•disasters, local and global public health emergencies or other catastrophic events, such as fires, earthquakes and flooding, pandemics or epidemics (including the COVID-19 pandemic), where we or our customers do business and any resultant disruptions in the supply or production of goods or services to us or by us in demand by our customers or in the operation of our system, disaster recovery capabilities or business continuity capabilities;
•supply chain disruptions, including constraints on steel and semiconductors and resulting increases in costs, impacting our company, our customers or the automotive industry;
•changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases or fluctuations), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt and our financial flexibility to respond to the COVID-19 pandemic;
•our ability to comply with the covenants contained in the agreements governing our indebtedness and otherwise have sufficient liquidity through the COVID-19 pandemic;
•our working capital requirements;
•our ability to source and procure needed materials, components and other products, and services (including the services of employees) in accordance with customer demand and at competitive prices;
•the cost and outcome of existing and any future claims, legal proceedings or investigations, including, but not limited to, any of the foregoing arising in connection with product performance, product safety or intellectual property rights;
•changes in consumer demand for our original equipment (“OE”) products or aftermarket products, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from historically higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements;
•the continued evolution of the automotive industry towards car and ride sharing, and autonomous vehicles;
•the announced plans, in an effort to reduce greenhouse gas emissions, of governments and vehicle manufactures to limit production of diesel and gasoline powered vehicles in various national and local jurisdictions globally;
•the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector and the impact of vehicle parts’ longer product lives;
•changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, due to difficult economic conditions and/or regulatory or legal changes affecting internal combustion engines and/or aftermarket products;
•new technologies that reduce the demand for certain of our products or otherwise render them obsolete;
•our dependence on certain large customers, including the loss of any of our large OE manufacturer customers (on whom we depend for substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OE-customers or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;
•our ability to introduce new products and technologies that satisfy customers’ needs in a timely fashion;
•the overall highly competitive nature of the automotive and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes over the life of the applicable program);
•the impact of consolidation among vehicle parts suppliers and customers on our ability to compete in the highly competitive automotive and commercial vehicle supplier industry;
•risks inherent in operating a multi-national company, including economic conditions, such as currency exchange and inflation rates, political conditions in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability or instability, tax and other laws, and potential disruptions of production and supply;
•increasing competition from lower cost, private-label products;
•damage to the reputation of one or more of our leading brands;
•the impact of improvements in automotive parts on aftermarket demand for some of our products;
•industry-wide strikes, work stoppages, labor shortages, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers, including increased costs associated with strikes or labor or other economic disruptions;
•developments relating to our intellectual property, including our ability to adapt to changes in technology and the availability and effectiveness of legal protection for our innovations and brands;
•costs related to product warranties and other customer satisfaction actions;
•the failure, breach of, or potential disruption to, our information technology systems, including cyber attacks, such as ransomware or similar intrusions, cyber incidents, or misappropriation, exposure or corruption of sensitive information stored on such systems and the interruption to our business that such failure, breach or disruption may cause;
•changes in distribution channels or competitive conditions in the markets and countries where we operate;
•customer acceptance of new products;
•our ability to successfully integrate, and benefit from, any acquisitions we complete;
•our ability to effectively manage our joint ventures and other third-party relationships;
•the potential impairment in the carrying value of our long-lived assets, goodwill, and other intangible assets or the inability to fully realize our deferred tax assets;
•the negative impact of fuel price volatility on transportation and logistics costs, raw material costs, discretionary purchases of vehicles or aftermarket products and demand for off-highway equipment;
•increases in the costs of raw materials or components, including our ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery, and other methods;
•changes by the Financial Accounting Standards Board (“FASB”) or the Securities and Exchange Commission (“SEC”) of generally accepted accounting principles or other authoritative guidance;
•changes in accounting estimates and assumptions, including changes based on additional information;
•any changes by the International Organization for Standardization (“ISO”) or other such committees in their certification protocols for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market;
•the impact of the extensive, increasing, and changing laws and regulations to which we are subject, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved or increased costs or loss of revenues relating to products subject to changing regulation;
•potential volatility in our effective tax rate;
•acts of war and/or terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the impact of these acts on economic, financial and social conditions in the countries where we operate;
•pension obligations and other postretirement benefits;
•our hedging activities to address commodity price fluctuations; and
•the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.
In addition, this report includes forward-looking statements regarding the Agreement and Plan of Merger (the “Merger Agreement”) that the Company entered into with Pegasus Holdings III, LLC (the “Parent”) and Pegasus Merger Co. on February 22, 2022. Pursuant to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into Tenneco (the “Merger”) with Tenneco continuing as the surviving corporation of the Merger and as a wholly owned subsidiary of Parent. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include (without limitation and in addition to the risks set forth above):
•the inability to consummate the Merger within the anticipated time period, or at all, due to any reason, including the failure to obtain stockholder approval to adopt the Merger Agreement, the failure to obtain required regulatory approvals or the failure to satisfy the other conditions to the consummation of the Merger;
•the risk that the Merger Agreement may be terminated in circumstances requiring us to pay a termination fee;
•the risk that the Merger disrupts our current plans and operations or diverts management’s attention from its ongoing business;
•the effect of the announcement of the Merger on our ability to retain and hire key personnel and maintain relationships with our customers, suppliers and others with whom we do business;
•the effect of the announcement of the Merger on our operating results and business generally;
•the amount of costs, fees and expenses related to the Merger;
•the risk that our stock price may decline significantly if the Merger is not consummated;
•the nature, cost and outcome of any litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against Tenneco and others; and
•other risks to consummation of the proposed Merger, including the risk that the proposed Merger will not be consummated within the expected time period or at all.
The risks included here are not exhaustive. Refer to “Part I, Item 1A — Risk Factors” of this report for further discussion regarding our exposure to risks. Additionally, new risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor to assess the effect such risk factors might have on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Unless otherwise indicated in this report, the forward-looking statements in this report are made as of the date of this report, and, except as required by law, the Company does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements.
TABLE OF CONTENTS
Our company, Tenneco Inc., designs, manufactures, markets, and distributes products and services for light vehicle, commercial truck, off-highway, industrial, motorsport, and aftermarket customers. We manufacture innovative performance solutions, clean air and powertrain products and systems, and serve both original equipment (“OE”) manufacturers and the repair and replacement markets worldwide. As used herein, the term “Tenneco,” “we,” “us,” “our,” or the “Company” refers to Tenneco Inc. and its consolidated subsidiaries.
We were incorporated in Delaware in 1996. In 2005, we changed our name from Tenneco Automotive Inc. to Tenneco Inc. The name Tenneco better represents the expanding number of markets we serve. Our Class A Voting Common Stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “TEN.”
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.
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 leading brand-name products in the global vehicle aftermarket while also servicing the original equipment service (“OES”) market. Motorparts products are organized into categories, including shocks and struts, steering and suspension, braking, sealing, emissions control, engine, and maintenance. Motorparts products are marketed and sold under brand-names including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, Sealed Power®, and others;
•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 (“NVH”) performance materials, advanced suspension technologies (“AST”), 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.
On February 22, 2022, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Pegasus Holdings III, LLC (“Parent”) and Pegasus Merger Co., a wholly owned subsidiary of Parent (“Merger Sub” and together with Parent, “Buyer”). Pursuant to the terms and conditions set forth in the Merger Agreement, Merger Sub will merge with and into Tenneco (the “Merger”) with Tenneco continuing as the surviving corporation of the Merger and as a wholly owned subsidiary of Parent. At the effective time of the Merger (the “Effective Time”), each share of our Class A voting common stock that is issued and outstanding immediately prior to the Effective Time (other than shares to be cancelled pursuant to the Merger Agreement or shares of common stock held by holders who have made a valid demand for appraisal in accordance with Section 262 of the Delaware General Corporation Law), will be automatically converted into the right to receive $20.00 in cash, without interest.
At the Effective Time, subject to the terms and conditions set forth in the Merger Agreement, each restricted share unit award (“RSU”) and each performance share unit award (“PSU”) of Tenneco that is outstanding immediately prior to the Effective Time will automatically be cancelled and converted into the holder’s right to receive a cash amount (subject to any applicable withholding taxes) calculated based on the per-share Merger consideration of $20.00.
The closing of the Merger is subject to various conditions, including (i) the adoption of the Merger Agreement by holders of a majority of the issued and outstanding shares of our common stock; (ii) the absence of any order, injunction or other legal or regulatory restraint making illegal, enjoining or otherwise prohibiting the closing of the Merger; (iii) the expiration or early termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or HSR Act and the expiration of any waiting period under other applicable competition and/or foreign laws; (iv) the accuracy of the representations and warranties contained in the Merger Agreement, subject to customary materiality qualifications; and (v) compliance with the covenants and agreements contained in the Merger Agreement as of the closing of the Merger. In addition, the obligation of Parent and Merger Sub to consummate the Merger is subject to the absence, since the date of the Merger Agreement, of a Company Material Adverse Effect (as defined in the Merger Agreement under clause (b) of such definition). The closing of the Merger is not subject to a financing condition, and Parent has obtained equity and debt financing commitments for the purpose of financing the Merger and the other transactions contemplated by the Merger Agreement.
Our Board of Directors and the sole member or board of directors, as applicable, of Parent and Merger Sub have each unanimously approved the Merger and the Merger Agreement. If approved by our stockholders, we currently expect the Merger to close in the second half of 2022. Until the closing, we will continue to operate as an independent company.
The foregoing description of the Merger Agreement is qualified in its entirety by reference to the full text of the Merger Agreement, which has been included herein as Exhibit 2.1 to this Annual Report on Form 10-K.
Available Information on our Website
Our Internet address is www.tenneco.com. We make our proxy statements, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, as filed with or furnished to the Securities and Exchange Commission (“SEC”), available free of charge on our website as soon as reasonably practicable after submission to the SEC. Securities ownership reports on Forms 3, 4 and 5 are also available free of charge on our website as soon as reasonably practicable after submission to the SEC.
Our Audit Committee, Compensation Committee, and Nominating and Governance Committee Charters, Corporate Governance Principles, Stock Ownership Guidelines, Audit Committee policy regarding accounting complaints, Code of Ethical Conduct for Financial Managers, Code of Conduct, Policy and Procedures for Transactions with Related Persons, Equity Award Policy, Clawback Policy, Insider Trading Policy, policy for communicating with the Board of Directors, and Audit Committee policy regarding the pre-approval of audit, non-audit, tax and other services are also available free of charge on our website at www.tenneco.com. The contents of our website are not, however, a part of this report.
In addition, we will make a copy of any of these documents available to any person, without charge, upon written request to Tenneco Inc., 500 North Field Drive, Lake Forest, Illinois 60045, Attn: General Counsel. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K and applicable NYSE rules regarding amendments to, or waivers of, our Code of Ethical Conduct for Financial Managers and Code of Conduct by posting this information on our website.
DESCRIPTION OF OUR BUSINESS
We design, manufacture, market, and distribute innovative 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 OE vehicle designers and 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 OES parts to OE customers to support their service channels. Our portfolio of the industry’s most well-respected, enduring brands includes Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, and Sealed Power®; and others. We seek to leverage our OE product engineering and development capability, manufacturing know-how, and expertise in managing a broad and deep range of replacement parts to service the aftermarket. We effectively manage the life cycle of a broad range of products to a diverse customer base.
We source various raw materials and component parts for use in our manufacturing processes through the global supply chain. As a Tier 1 parts supplier, we produce individual component parts for vehicles as well as groups of components that are combined as modules or systems within vehicles. These parts, modules, and systems are sold globally to the world’s leading light vehicle and commercial truck manufacturers as well as aftermarket customers, including a wide range of distributors, retail parts stores, and mass merchants that distribute our products to professional service providers, “do-it-yourself” consumers, and directly to service chains.
The parts industry for vehicles and engines is generally separated into two categories. We operate in both categories which are: (a) OE parts that are sold in large quantities directly for use by manufacturers of light vehicles, commercial vehicles, and other mobility markets; and (b) “aftermarket” or repair and replacement parts that are sold in varying quantities to wholesalers, retailers, and installers, as well as OES parts sold to OE customers to support their service channels. Light vehicles are comprised of passenger cars and light trucks, which include sport-utility vehicles (“SUVs”), crossover vehicles (“CUVs”), pick-up trucks, vans, and multi-purpose passenger vehicles. Commercial vehicles include commercial trucks, off-highway vehicles and industrial equipment. Other mobility markets include rail, two-wheelers (which includes motorcycles and mountain bikes), and motorsports.
Global OE Industry
Products for the global OE industry are sold directly to OE manufacturers that use these parts, which include components, systems, subsystems, and modules, in the manufacture of new light vehicles, commercial vehicles, rail, two-wheeler, and motorsports. Demand for component parts in the OE market is generally a function of the number of new vehicles/engines produced, which is driven by macroeconomic conditions and other factors such as fuel prices, consumer confidence, employment trends, regulatory requirements, technology trends, and trade agreements. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow revenues by increasing their product content per vehicle. Companies, like us, with a global presence, leading technology and innovation; and advanced product, engineering, manufacturing, and customer support capabilities are best positioned to take advantage of these opportunities.
Key Industry Trends Affecting the Global OE Industry
Global Light Vehicle Sales and Production
Our business is directly affected by automotive sales and automotive vehicle production levels. Both depend on a number of factors, including global and regional economic conditions, population growth, public health conditions, and policies. There have been periods of increased market volatility and global economic uncertainty. Most recently, the effects of COVID-19 and shortages of semiconductors has resulted in lower global automotive unit production and 2022 forecasts have been reduced. We expect industry production to remain volatile for the foreseeable future. However, underlying retail sales trends are healthy and inventories in our major geographic markets are below average, which suggest a recovery in light vehicle production will occur once semiconductor availability improves.
In addition, 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.
Sourcing by OE Manufacturers and Component Part Number Proliferation
As OE manufacturers expand their reach, many are looking for suppliers with a global footprint and the capability to supply them with full system integration and solutions, rather than individual standalone products.
Because of these trends, OE manufacturers are increasingly seeking suppliers capable of supporting vehicle platforms on a global basis. They want suppliers like us with design, production, engineering, and logistics capabilities that can be accessed not just in North America and Europe but also in other markets such as India and China. OE manufacturers have standardized on global platforms, designing basic mechanical structures suitable for a number of similar vehicle models and are able to accommodate different features across regions. This standardization will drive growth in production of light vehicles designed on global platforms. Accordingly, global platforms, identified as platforms produced in more than one region, are expected to grow. While the overall number of vehicle platforms will consolidate and decrease, the component level complexity to meet the diversified consumer and regulatory requirements around the world is expected to cause component part number proliferation.
As new and existing OE manufacturers look to simplify and streamline design, they are also increasingly selecting suppliers like us that provide fully-engineered, integrated systems, and solutions. OE manufacturers have steadily outsourced more of the design and manufacturing of vehicle parts and systems to simplify the assembly process, lower costs, and reduce development times. Furthermore, they have demanded from their parts suppliers fully integrated, functional modules, and systems made possible with the development of advanced electronics in addition to innovative, individual vehicle components, and parts that may not readily interface together.
Increasing Technologically Sophisticated Content and Vehicle Complexity
As end users and consumers continue to demand vehicles with improved performance, safety, and functionality at competitive prices, the components and systems in these vehicles are becoming technologically more advanced and sophisticated. Mechanical functions are being replaced with electronics, and mechanical and electronic devices are being integrated into single systems. In addition, value added features delivered through software control algorithms and over-the-air updates are becoming more prevalent, creating new avenues for product differentiation and customization.
Enhanced Vehicle Safety and Handling
To serve the needs of their customers and meet government mandates, OE manufacturers are seeking parts suppliers that invest in new technologies, capabilities, and products, which advance vehicle safety and handling, such as roll-over protection systems, advanced suspension technologies, and safer, more durable materials. Suppliers, like us, that are able to offer such innovative products and technologies have a distinct competitive advantage. We offer adjustable and adaptive damping as well as semi-active suspension systems designed to improve vehicle stability, handling, and control.
We also are a global leader in the development of leading friction formulas that improve vehicle stopping distances and performance. As the commercial truck customers migrate to air disc brake systems, we remain at the forefront of providing the brake friction necessary for these new systems.
Many of our aftermarket products directly affect vehicle performance. Product quality, reliability, and consistency are paramount to our end-customers, the majority of whom are professional service technicians. Our engineering expertise and product capabilities from chassis to braking allow us to provide around-the-wheel offering. Additionally, we have a number of braking products including disc pads for passenger cars, motorcycles, and commercial vehicles; drum brake shoes and linings for commercial vehicles; and brake accessories including rotors, drums, hydraulics, hardware, and brake fluid.
Advanced Suspension, Autonomous Driving, and Shared Mobility
There is a growing demand for autonomy and new mobility services. A number of trends are driving “Auto 2.0,” defined as the transformation of cars into hybrid systems, fully-electric and autonomous vehicles, the consumer shift from individual car ownership to ride-sharing, and multi-modal forms of mobility.
We expect higher levels of autonomy will drive increased passenger expectations for a comfortable ride, which, in turn, will create additional content opportunities per vehicle and heighten demand for advanced suspension technology products, including full-corner/around-the-wheel intelligent suspension systems and broader motion management solutions. Advanced suspension technology is expected to grow with adoption led by existing and emerging global OE manufacturers. Increased connectivity also presents additional prospects for active suspension systems, predictive vehicle diagnostics, and system-based integration within the vehicle as well as broader vehicle to everything (“V2X”) communications. The Öhlins portfolio is expected to continue to accelerate the development of advanced suspension technology solutions, while also fast-tracking time to market. Öhlins also enhances our portfolio in broader mobility markets through a range of premium OE and aftermarket automotive and motorsports performance products.
The electrification of vehicles continues to expand, driven by government regulations, as well as a shift in consumer mobility options from individual mobility to shared mobility. Shared mobility describes a range of transportation options that involve the shared use of a vehicle, motorcycle, scooter, bicycle or other means of travel; it provides users with short-term access to transportation on an as-needed basis. Shared mobility may reduce vehicle volumes in established markets, but it also provides an opportunity for us to develop higher-mileage, durable solutions to meet the needs of new mobility fleets, as well as aftermarket replacement solutions and services. Additionally, ride comfort will become an important differentiator in the future.
Focus on Fuel Efficiency Improvements and Powertrain Evolution, including Electrification
Continued evolution and focus on climate change and environmental sustainability by consumers and governments worldwide is increasing the expectations for the auto industry to develop more fuel-efficient and reduced emissions solutions. 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 in the long-term, 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.
The evolution of alternative powertrain technology, including the increased adoption of fully electric and hybrid powertrains, will also create further opportunities for increased ride performance and NVH capabilities, as consumers look for smoother, quieter, and more efficient rides. Engine downsizing and hybridization will lead to a proliferation of NVH requirements per platform as road noise and other NVH properties that were once masked by engine noise become more apparent to consumers. Furthermore, fully electric vehicles (“EVs”) will likely have a suite of fundamentally different NVH, braking, and ride performance requirements. Our capabilities in the suspension, braking, and NVH performance materials categories provide the opportunity to develop solutions to maximize driving comfort, ride performance, and motion management for consumers worldwide in the increasing electrification and hybridization of the global vehicle fleet.
The demand for smaller but more powerful engines requires more technology per engine to withstand the higher output requirements and reduce friction, which we estimate will result in an increase in content per engine for our powertrain business. With a global manufacturing presence, we believe we are well-positioned to meet expectations of our global customers.
Our business is also directly affected by commercial vehicle sales and production levels. Both of these depend on a number of factors, including global and regional economic conditions, population growth, public health conditions, and policies. In addition, regulations have been adopted to regulate tailpipe emissions of criteria pollutants and greenhouse gasses such as carbon dioxide, as well as brake dust emissions and copper content. Reducing carbon-dioxide (“CO2”) emissions requires improving fuel economy; as a result, improved combustion efficiency and reduction of vehicle mass have become priorities. The products our clean air segment provides reduce the tailpipe emissions of criteria pollutants. As a leading supplier of clean air systems and friction materials with strong technical capabilities in both areas, we believe we are well positioned to benefit from the more rigorous environmental standards being adopted around the world. Current regulations in the developed markets are being adopted in the developing markets and should increase content opportunities for our business in the medium-term.
Global Aftermarket Industry
Products for the global aftermarket are sold directly to a wide range of distributors, retail parts stores, and mass merchants that distribute these products to professional service providers, “do-it-yourself” consumers, and directly to service chains, as well as OES parts sold to OE customers to support their service channels. Demand for aftermarket products historically has been driven by four primary factors:
i.the number of vehicles in operation (“VIO”);
ii.the average age of VIO;
iii.vehicle usage trends, including miles driven and gasoline consumption; and
iv.component replacement and wear rates.
These factors, while applicable in all regions, vary depending on the composition of VIO and other factors.
Key Trends affecting the Global Aftermarket Industry
Global Growth of Vehicles in Operation, Average Vehicle Age, and Vehicle Usage Trends
With increased age and usage, vehicles become subject to maintenance, repair, and component part replacement thereby increasing the overall demand for aftermarket parts. The global number of VIO is expected to grow, with the number of VIO in other markets such as China expected to increase significantly. The number of VIO in mature markets, such as North America and Europe is expected to grow, but to a much lesser extent in Europe. We have strong aftermarket positions in North America, Europe, and South America and a growing aftermarket position in Asia. We expect there to be aftermarket growth opportunities in emerging markets such as China and India where the VIO are expected to increase. We are positioning ourselves to capitalize on this growth by leveraging our industry renowned brands and market-leading capabilities to develop the distributor base, drive brand recognition, increase product coverage, and build the supply chain in emerging growth markets.
Non-Branded Private Labels
We have some of the strongest and most recognized brands in the automotive aftermarket. We will continue to invest in product innovation, marketing, and brand support that differentiates our premium branded products for their quality and performance while also supporting lower priced, mid-grade offerings. Additionally, we will continue to drive productivity and cost reduction efforts and enhance our already strong global sourcing capabilities to remain competitive in each product tier.
Retailers or wholesale distributors creating private label brands still rely on established suppliers to design and manufacture their private label products and, in some cases, utilize co-branding to support their private label offerings. We intend to selectively continue to co-brand with private label distributors where it can help to strategically grow our branded products portfolio.
Supply Chain Velocity and Distribution Capability
Efficient distribution capabilities are essential as the aftermarket industry works to balance product availability with overall inventory in the ecosystem. Installers expect the right product to be available at the right time and the need for fast, predictable local parts delivery is growing as consumers’ expectations for quick, high quality service increase. In addition, we are seeing the developing aftermarket augment traditional distribution and service models with real-time scheduling through personalized internet applications. We are adjusting our fulfillment models to optimize this complexity and better align and synchronize with our customers and supply base to reduce non-value add steps, time, and distance in our value chain. We are also engaging with key customers to jointly optimize product availability and delivery.
The increasing global vehicle population, brand and vehicle complexity, and need for rapid new part introduction, as well as new distribution channels (including e-commerce) continue to drive significant stock keeping unit (“SKU”) proliferation and business complexity. Our recent investments in our supply chain and information technology capabilities are designed to manage this complexity, which we believe will be an important competitive differentiator.
In the more mature markets of North America and Europe, there has been increasing consolidation in the aftermarket distribution channel with larger aftermarket distributors and retailers gaining market share. These distributors generally require larger, more capable suppliers that have the ability to provide world-class product expertise, category management capabilities, brand management, and supply chain support, as well as a competitive manufacturing and sourcing network. We have undertaken many initiatives to enhance the value of our branded products to end-market consumers and diversify our revenue base.
Growth of e-Commerce Capabilities and Changing Consumer Decision Making
Reaching end-customers, which include professional service providers, technicians, and “do-it-yourself” consumers, directly through online and mobile application capabilities, including e-commerce, is expected to have an increasing effect on the global aftermarket industry and how aftermarket products are marketed and sold. The establishment of a robust online presence will be critical for suppliers regardless of whether they intend to participate directly in e-commerce. We invested heavily in e-commerce initiatives to improve our capabilities and connectivity to our end-customers, including a new online order management system, customer relationship management tools, global brand websites, and data analytics capabilities. We will continue to invest in these competencies.
Additionally, consumers increasingly are utilizing online research prior to making buying or repair decisions. We will continue to expand our online presence in order to connect with our customers and more effectively communicate the value of our premium aftermarket brands.
Resilience during Economic Downturn
Aftermarket products are largely stable, non-discretionary, and less susceptible to cyclicality as customers often have no choice but to replace automotive parts that are worn. During the 2008 economic downturn, the number of consumers with the ability to purchase new vehicles declined and led to increased demand for aftermarket parts in order to keep older vehicles road-worthy. During 2020 the COVID-19 global pandemic, we also experienced expanded demand from “do-it-yourself” consumers and e-commerce, which partially offset the short-term demand decline due to lockdowns and travel restrictions.
We strive to develop long-standing business relationships with our customers around the world. We work collaboratively with our OE customers in all stages of production and post production service, including design, development, component sourcing, quality assurance, manufacturing, and delivery. For both OE and aftermarket customers, we provide timely delivery of quality products at competitive prices and deliver customer service. With our diverse product mix and numerous facilities in major markets worldwide, we believe we are well positioned to meet customer needs.
Our OE customers consist of automotive and commercial vehicle manufacturers as well as agricultural, off-highway, two-wheel, marine, railroad, aerospace, high performance, and power generation and industrial application manufacturers. We have well-established relationships with substantially all major American, European, and Asian automotive OE manufacturers. In automotive, legacy OE customer consolidation continues to occur and could increase our exposure to certain customers in the future.
The following customers each accounted for 10% or more of our net sales in any of the last three years.
|General Motors Company||11||%||11||%||11||%|
|Ford Motor Company||10||%||10||%||10||%|
Our aftermarket customers include a wide range of distributors that redistribute products to local parts suppliers, distributors, engine rebuilders, retail parts stores, e-commerce retailers, mass merchants, and service chains. The breadth of our product lines, the value of our reputable brands, the strength of our leading marketing expertise, a sizable sales force, and supply chain and logistics capabilities are central to our success in the aftermarket. We have a large and diverse aftermarket customer base.
We operate in highly competitive markets. Customer loyalty is a key element of competition in these markets and is developed through long-standing relationships, customer service, high quality value-added products, and timely delivery. Product pricing and services provided are other important competitive factors.
As a supplier of OE and aftermarket parts, we compete with vehicle manufacturers, some of which are also customers of ours, and numerous independent suppliers. We believe we are meeting these competitive challenges by developing leading technologies, strengthening our brand proposition, efficiently integrating and expanding our manufacturing and distribution operations, optimizing our product coverage within our core businesses, restructuring our operations and transferring production to best cost countries, and utilizing our worldwide network of technical centers to develop and provide value-added solutions to our customers.
Our businesses are somewhat seasonal. OE production is historically higher in the first half of the year compared to the second half. It typically decreases in the third quarter due to OE plant shutdowns for model changeovers and European holidays, and softens further in the fourth quarter due to reduced production during the end-of-year holiday season in North America and Europe. Shut-down periods in the rest of the world generally vary by country. Our aftermarket operations experience relatively higher demand during the spring as vehicle owners prepare for the summer driving season. While seasonality does affect our business, actual results may vary from the above trends due to global and local economic dynamics; global pandemics; as well as industry-specific platform launches and other production-related events.
For OE customers, we generally receive long-term production contracts for specific products supplied for particular vehicles with target volumes. These supply relationships typically extend over the life of the related vehicle, subject to interim design and technical specification revisions. In addition to customary commercial terms and conditions, long-term production contracts generally provide for annual price adjustments based upon expected productivity improvements, material price variation, and other factors. OE customers typically retain the right to terminate agreements due to changing business conditions, but they generally cannot terminate agreements given development cycles and change costs. OE order fulfillment is typically manufactured in response to customer purchase order releases, as we ship directly from a manufacturing location to a customer for use in vehicle production and assembly. Accordingly, our manufacturing locations turn finished goods inventory relatively quickly, producing from on-hand raw materials and work-in-process inventory within relatively short manufacturing cycles. Risks to us include a change in vehicle production, lower than expected vehicle or engine production by one or more of our OE customers, or termination of the business based upon perceived or actual shortfalls in delivery, quality or value.
For our global aftermarket customers, we generally establish arrangements that encompass substantially all parts offered within a particular product line. In some cases, we will enter into agreements with terms ranging from one to three years that cover one or more product lines. Pricing is market responsive and subject to adjustment based upon competitive pressures, material costs, and other commercial factors. Typical price adjustments occur on an annual basis as part of the product line reviews or as environmental factors dictate. Global aftermarket order fulfillment is largely performed from finished goods inventory stocked in our regional distribution centers. Inventory stocking levels in our distribution centers are established based upon historical and anticipated future customer demand, adjusted for lead times, demand variability, and target service levels.
Although customer programs typically extend to future periods, and although there is an expectation we will supply certain levels of OE production over such periods, we believe outstanding purchase orders and product line arrangements do not constitute firm orders. Firm orders are limited to specific and authorized customer purchase order releases placed with our manufacturing and distribution centers for actual production and order fulfillment. Firm orders are typically fulfilled as promptly as possible after receipt from the conversion of available raw materials and work-in-process inventory for OE orders and from current on-hand finished goods inventory for aftermarket orders.
Our Motorparts segment operates 16 manufacturing sites, of which 7 facilities are located in North America, 3 in Europe, 3 in South America, and 3 in Asia Pacific. It also operates 29 distribution centers and warehouses; 6 engineering and technical centers; and 10 various technical training service centers worldwide. Motorparts shares engineering testing facilities with our Performance Solutions segment.
Motorparts designs, manufactures, markets, and distributes leading, brand-name products to a diversified and global aftermarket customer base. Within the business, Motorparts has many of the most recognized brands in the automotive industry, including Monroe®, Champion®, Öhlins®, MOOG®, Walker®, Fel-Pro®, Wagner®, Ferodo®, Rancho®, Thrush®, National®, Sealed Power®, and others. We believe our brand equity in the aftermarket is a key asset especially as customers consolidate and distribution channels converge with many of our brands leading their product categories. We are dedicated to being stewards of these brands and continually strengthening their equity through robust marketing programs. Motorparts products are organized across the following seven categories:
|Shocks and struts||Shock absorbers, strut assemblies, bare strut, coil springs, top mounts, and ride control accessories. |
|Steering and suspension||Control arms, ball joints, tie rod ends, wheel bearings, sway bar links and hub assemblies.|
|Braking||Pads, rotors, drums, and fluids. |
|Sealing||Head gaskets, valve cover gaskets, oil seals, and other gaskets.|
|Engine||Pistons, piston ring set, engine bearings, liners, and pumps.|
|Emissions control||Catalytic converters, exhaust manifolds, exhaust pipes, and mufflers.|
|Maintenance||Spark plugs, air filters, oil filters, cabin air filter, forward lighting, batteries, headlamps, and chemicals.|
Performance Solutions Segment
Our Performance Solutions segment operates 47 manufacturing facilities worldwide, of which 11 facilities are located in North America, 17 in Europe, 2 in South America, and 17 in Asia Pacific; and 15 engineering and technical facilities. Within these manufacturing facilities, we operate 6 joint ventures in which we hold a controlling interest. Performance Solutions shares engineering testing facilities with our Motorparts segment.
Performance Solutions designs, manufactures, markets, and distributes a variety of performance solutions and systems to a global OE customer base, including NVH performance materials, AST, ride control, braking, and systems protection. In addition to automotive light vehicles and commercial vehicles, Performance Solutions also services a wide range of other mobility markets such as rail, two-wheelers (which includes motorcycles and mountain bikes), and motorsports.
The following table sets forth a description of the product lines sold by our Performance Solutions segment:
|NVH performance Materials||Highly engineered NVH isolation technology and value-added products for light vehicle and commercial vehicle markets.|
|AST||Advanced passive and semi-active suspension with tuning support and controls capability for the light vehicle, two-wheel and motorsports markets.|
|Ride control||Providing conventional shocks, struts, and dampers with value-added tuning solutions for the light vehicle and commercial vehicle markets.|
|Systems protection||Systems protection products include protection sleeves for wire harness and for oil and water tubes as well as acoustic and EMI/RFI shielding, heat and abrasion protection, and safety/crash protection for cables and tubes for engines and cars.|
|Braking||Friction materials, including cutting edge formulations for the light vehicle, commercial vehicle, and rail markets.|
Clean Air Segment
Our Clean Air Segment operates 65 manufacturing facilities worldwide, of which 16 facilities are located in North America, 21 in Europe, 2 in South America, and 26 in Asia Pacific; and operates 8 engineering and technical facilities. Within these manufacturing facilities in Asia Pacific, we operate 9 joint ventures in which we hold a controlling interest.
Clean Air designs, manufactures, markets, and distributes a variety of clean air products and systems designed to reduce pollution and optimize engine performance, acoustic tuning, and weight on a vehicle. Vehicle emission control products and systems play a critical role in safely conveying noxious exhaust gases away from the passenger compartment and reducing the level of pollutants and engine exhaust noise emitted to acceptable levels. Precise engineering of the exhaust system - which extends from the manifold that connects an engine’s exhaust ports to an exhaust pipe, to the catalytic converter that eliminates pollutants from the exhaust, and to the muffler that modulates noise emissions - leads to a pleasantly tuned engine sound, reduced pollutants, and optimized engine performance.
The following table sets forth a description of the product lines sold by our Clean Air segment:
|Catalytic converters and diesel oxidation catalysts||Devices consisting of a substrate coated with precious metals enclosed in a steel casing used to reduce harmful gaseous emissions such as carbon monoxide.|
|Diesel particulate filters (DPFs)||Devices to capture and regenerate particulate matter emitted from diesel engines.|
|Burner systems||Devices which actively combust fuel and air inside the exhaust system to create extra heat for DPF regeneration, or to improve the efficiency of selective catalytic reduction (“SCR”) systems.|
|Lean NOx traps||Devices which reduce nitrogen oxide (NOx) emissions from diesel powertrains using capture and store technology.|
|Hydrocarbon vaporizers and injectors||Devices to add fuel to a diesel exhaust system in order to regenerate particulate filters or Lean NOx traps.|
Devices which reduce NOx emissions from diesel powertrains using urea mixers and injected reductants such as Verband der Automobil industrie e.V.’s AdBlue® or Diesel Exhaust Fluid (DEF).
|SCR-coated diesel particulate filters (SDPF) systems||Lightweight and compact devices combining the SCR catalyst and the particulate filter onto the same substrate for reducing NOx and particulate matter emissions.|
|Urea dosing systems||Systems comprised of a urea injector, pump, and control unit, among other parts, that dose liquid urea onto SCR catalysts.|
|Four-way catalysts||Devices that combine a three-way catalyst and a particulate filter onto a single device by having the catalyst coating of a converter directly applied onto a particulate filter.|
|Alternative NOx reduction technologies||Devices which reduce NOx emissions from diesel powertrains, by using, for example, alternative reductants such as diesel fuel, E85 (85% ethanol, 15% gasoline), or solid forms of ammonia.|
|Mufflers and resonators||Devices to provide noise elimination and acoustic tuning.|
|Fabricated exhaust manifolds||Components that collect gases from individual cylinders of a vehicle’s engine and direct them into a single exhaust pipe. Fabricated manifolds can form the core of an emissions module that includes an integrated catalytic converter (maniverter) and/or turbocharger.|
|Pipes||Utilized to connect various parts of both the hot and cold ends of an exhaust system.|
|Hydroformed assemblies||Forms in various geometric shapes, such as Y-pipes or T-pipes, which provide optimization in both design and installation as compared to conventional pipes.|
|Elastomeric hangers and isolators||Used for system installation and elimination of noise and vibration, and for the improvement of useful life.|
|Aftertreatment control units||Computerized electronic devices that utilize embedded software to regulate the performance of active aftertreatment systems, including the control of sensors, injectors, vaporizers, pumps, heaters, valves, actuators, wiring harnesses, relays and other mechatronic components.|
For the catalytic converters, SCR systems, and other substrate-based devices we sell, we need to procure substrates coated with precious metals or purchase the complete systems in the case of catalytic converter systems. We obtain these components and systems from third parties, often at the OE manufacturer’s direction, or directly from OE vehicle and engine manufacturers. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information on our sales of these products.
Our Powertrain Segment operates 68 manufacturing sites worldwide, of which 19 facilities are located in North America, 28 are located in Europe, 4 are located in South America, and 17 in Asia Pacific; and operates 9 engineering and technical facilities. Within these manufacturing facilities, we operate 17 joint ventures in which we hold a controlling interest. Powertrain has also invested globally in nonconsolidated affiliates that have multiple manufacturing sites, primarily in China, Turkey, and the United States (“U.S.”).
Powertrain designs, manufactures, markets, and distributes a variety of powertrain products and systems. Powertrain offers its customers a diverse array of market-leading products for OE applications, including pistons, piston rings, piston pins, cylinder liners, valvetrain products, valve seats and guides, ignition products, dynamic seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and seals, engine bearings, industrial bearings, and bushings and washers. In addition, Powertrain supplies OES parts to OE customers to support their service and distribution channels.
The following table sets forth a description of the product lines sold by our Powertrain segment:
|Pistons||Pistons convert the energy created by the combustion event into mechanical energy to drive a car; Pistons can be made from aluminum or steel, both casted and forged; Highly efficient engines impose high demands on pistons in terms of rigidity and temperature resistance.|
|Piston rings||Piston rings are mounted on the piston to seal the combustion chamber while the piston is moving up and down; Modern rings need to resist high temperature and very abrasive environments without significant wear; Rings are critical for low oil consumptions.|
|Cylinder liners||Cylinder liners, or sleeves, are specially engineered where surfaces formed within the engine block, working in tandem with the piston and ring, as the chamber in which the thermal energy of the combustion process is converted into mechanical energy.|
|Valve seats and guides||Valve seats and guides are produced from powdered metal based on sophisticated metal-ceramic structures to meet extreme requirements for hardness.|
|Bearings||Bearings provide the low-friction environment for rotating components like crankshafts and camshafts; Modern bearings are able to deal with very low viscosity oil even in highly repetitive motions like in stop/start-conditions.|
|Spark plugs||Modern spark plugs for engines fueled by gasoline or natural gas have to ignite fuel even at very high combustion pressure and with very clean fuel-air mixture - combined with extended life expectation well over 100,000 miles for turbo-charged engines.|
|Valvetrain products||Valvetrain products include mainly engine valves but also retainers, rotators, cotters, and tappets for use in both diesel and gas engines; the most demanding applications require sodium-filled hollow valves for fast heat dissipation.|
|Seals and gaskets||Cylinder-head gaskets and other hot and cold gaskets are sealing engines and engine components; dynamic and static seals protecting rotating engine and transmission components against oil and gas leakages. Such seals and gaskets are made from high-alloyed steel as well as from sophisticated rubber and polymers.|
Sales, Marketing and Distribution
We have separate and distinct sales and marketing efforts for our OE and aftermarket customers.
For OE sales, our sales and marketing team is an integrated group of sales professionals, including skilled engineers and program managers, who are organized globally by customer business unit and product type (e.g., Performance Solutions, Clean Air, and Powertrain). Our sales and marketing teams are focused on meeting and exceeding our customer’s needs by delivering engineered products and services on time; maximizing profit for our investors while financing continued growth and product development; and developing a common system approach to create a superior customer experience. Our teams provide the appropriate mix of operational and technical expertise needed to interface successfully with OE manufacturers. Our business capture process involves targeting select programs and working closely with the OE manufacturer platform engineering and purchasing teams. Bidding on OE automotive platforms typically encompasses many months of engineering and business development activity. Throughout the process, our sales team, program managers, and product engineers assist the OE customer in defining the project’s technical and business requirements. A normal part of the process includes our engineering and sales personnel working on customers’ integrated product teams, creating a statement of requirements, and assisting our customers with full system or component design and development concepts that deliver on expectations and create value for OE manufacturer customers. Given that Performance Solutions, Clean Air, and Powertrain operations typically involve long-term production contracts awarded on a platform-by-platform basis, our strategy is to leverage our engineering expertise and strong customer relationships to target and win new business and increase operating margins.
For aftermarket sales and marketing, our sales force is generally organized by region and customer and covers multiple product lines. We sell aftermarket products through five primary channels of distribution: (1) traditional three-step distribution system of full-line warehouse distributors, jobbers, and service providers; (2) two-step distribution system of warehouse distributors that distribute directly to the service providers; (3) direct sales to retailers; (4) direct sales to service provider chains; and (5) direct sales through e-commerce channels. Our aftermarket sales and marketing representatives cover all levels of the distribution channel, stimulating interest in our products and helping our products move through the distribution system. Also, to generate demand for our products, we run print, online, outdoor advertisements, digital advertising and social media, as well as training conducted by our field sales force and e-training courses. In addition, we maintain detailed websites for certain of our brands.
We are a leading diversified, global supplier of innovative products and services to light vehicle, commercial truck, off-highway, industrial, and aftermarket customers. Our strategy focuses on addressing the evolving needs of our OE and aftermarket customers around the world to drive growth. The key components of our business strategy are described below:
Continue to optimize operational performance by aggressively pursuing cost competitiveness in all business segments and continuing to drive cash flow generation and meet capital allocation objectives
As we continue to expand our distribution and service capabilities globally, we seek to continue optimizing our performance through enhanced efficiencies in order to meet the world-class delivery performance our customers increasingly require. We have made and will continue to make investments in our global distribution network to optimize our manufacturing and fulfillment footprint and manage complexities of our supply chain. By achieving efficiency gains and cost competitiveness, we strive to generate strong cash flow and meet our capital allocation objectives, including deleveraging our balance sheet.
From a design perspective, we will bring a lean mindset to our portfolio to ensure standardization, remove redundancies, focus on our core business, reduce transit costs, leverage economies of scale, and optimize manufacturing productivity. We will also continually look for ways to innovate and leverage cross- and up-sell opportunities to the market through a customer-centric product development process. From a manufacturing perspective, we will maintain a continuous improvement philosophy by streamlining plant operations and our network, and executing projects to improve efficiency.
Serving our customers also requires that we compete effectively at the unit cost level, in particular with OE customers. We are making concerted and systematic efforts to continuously improve our position on the cost curve for each of our component part categories including deploying value stream simplification principals. In doing so, we will continue to be a preferred supplier to our customers.
We will be mindful of the changing market conditions that might necessitate adjustments to our resources and manufacturing capacity around the world.
Pursue focused transactional opportunities, consistent with our capital allocation priorities, product line enhancements, technological advancements, geographic positioning, penetration of emerging markets and market share growth
Throughout our history, we have successfully identified and capitalized on acquisitions, alliances, and divestitures to achieve strategic growth and alignment. Through these transactions, we have (1) expanded our product portfolio with complementary technologies; (2) realized incremental business from existing customers; (3) gained access to new customers; (4) achieved leadership positions in geographic regions outside North America; and (5) re-focused on areas that will contribute to our profitable growth.
We intend to continue to explore strategic alliances, joint ventures, acquisitions, divestitures, and other transactions that complement, expand, enhance or realign our existing products, technology, systems development efforts, customer base and/or global presence. We are committed to developing a broader ecosystem-based approach that allows us to work with new and existing customers, suppliers, and entrants to provide timely and leading-edge solutions across the mobility market. We will align with companies that have proven products, proprietary technology, advanced research capabilities, broad geographic reach, and/or strong market positions to further strengthen our product leadership, technology position, global reach, and customer relationships.
Adapt cost structure to economic realities
We aggressively respond to difficult economic environments, aligning our operations to any resulting reductions in production levels and replacement demand and executing comprehensive restructuring and cost-reduction initiatives. Suppliers must continually identify and implement product innovation and cost reduction activities to fund customer annual price concession expectations in order to retain current business as well as to be competitively positioned for future new business opportunities.
Original Equipment Specific Strategies
The converging forces of connectivity, autonomy, electrification, and shared mobility are spawning a new age of automotive autonomy and a unique opportunity to position our business for significant growth and profitability. We strive to strengthen our global position by designing, manufacturing, delivering, and marketing technologically innovative products and solutions for OE manufacturers. The key components of our OE strategy are described below:
Capitalize on our breadth of technology, differentiated products, and global reach to support and strengthen relationships with existing and emerging OE customers across the world
We conduct business with nearly all of the major automotive OE customers around the world. Within the highly competitive automotive parts industry, we seek to extend the significant advantages that come from our world-class global manufacturing, engineering and distribution footprint, and global sourcing capabilities. This footprint enables the design, production, and delivery of premium parts emphasizing quality, safety, and reliability virtually anywhere in the world and also supports the continual innovation of new products, technologies, and solutions for new and existing OE customers.
Maintain technological leadership to drive further growth from current market trends
In order to maintain our strong market positions, we are focused on meeting changing performance requirements and keeping up with emerging OE trends such as connectivity, autonomy, shared mobility, and electrification. In pursuit of delivering the ideal ride characteristics for any application, our performance solutions division will leverage its innovative technology, NVH performance materials, differentiated products, and advanced system capabilities to provide innovative solutions. Aligning product lines and technical capabilities creates an ideal foundation to meet changing performance requirements for comfort and safety and again ultimately reinventing the ride of the future. The 2019 acquisition of Öhlins will continue to accelerate the development of advanced technology suspension solutions, while also fast-tracking time to market. That acquisition is yet another example of our strategy to leverage key technologies that will better position us to take advantage of secular trends. It also enhances our portfolio in broader mobility markets through the addition of Öhlins’ range of premium OE and aftermarket automotive and motorsports performance products. In addition, our suite of mobility solutions under development represents an opportunity to drive greater partnership with OE manufacturers and broader mobility ecosystem players, creating and capturing value, and growth with higher value content per vehicle.
OE manufacturers are responding to changing end customer trends and preferences alongside their own challenging cost structures by reducing design and production complexities and investing in advanced technologies that enable vehicle electrification and autonomy. We anticipate that OE suppliers with high technology capabilities in vehicle system integration will be able to enable a more seamless transition to next-generation electric vehicles and become preferred suppliers to OE manufacturers. Though many vehicle and customer requirements will evolve, we believe one of the remaining characteristics that will continue to provide differentiated experience and value in the future of mobility is the ride experience. By leveraging our deep component level expertise as well as working with partners across the broader mobility ecosystem, our intent is to lead in the next generation development of motion management products, systems and solutions to engineer the ideal ride for any customer.
Invest in applications that benefit from global light vehicle battery electric vehicle (BEV) adoption
We continually assess our growth investment priorities. Industry forecasts project global light vehicle BEV penetration rates to increase steadily in the current decade. In response, we have prioritized investments in light vehicle product lines and applications that have content growth opportunities in light vehicle BEV and are agnostic to an anticipated increase in adoption rates.
Penetrate adjacent market segments
We seek to penetrate a variety of adjacent sales opportunities and achieve growth in higher-margin businesses by applying our design, engineering and manufacturing capabilities. For example, we aggressively leverage our technology and engineering leadership in Motorparts, Performance Solutions, Clean Air, and Powertrain into adjacent sales opportunities for commercial trucks, buses, agricultural equipment, construction machinery, and other vehicles in other regions around the world.
We design and launch clean air products for commercial vehicle customers such as Caterpillar, John Deere, Navistar, Deutz, Daimler Trucks, Scania, Weichai Power, FAW Group, and Kubota. We also engineer and build modular NOx-reduction systems for large engines that meet standards of the International Maritime Organization, among others.
Aftermarket Specific Strategies
Our aftermarket business strategy incorporates a go-to-market model that we believe differentiates us from our competitors and creates structural support for sustained revenue growth. The model is designed to drive revenue growth by capitalizing on three of our key competitive strengths: a leading portfolio of products and brands; extensive global manufacturing, distribution and service capabilities; and market intelligence gathered from our distributors, installers, and consumers.
We expect this distinctive go-to-market model will result in a sustainable competitive advantage, particularly as the industry trends previously mentioned disrupt the traditional aftermarket landscape and business practices. We expect the demand for replacement parts to increase as a result of the increase in the average age of VIO and the increase in the average miles driven per year. The characteristics of aftermarket sales and distribution are defined regionally, which require localized strategies to address the key success factors of our customers. The key components of our aftermarket strategy are described below:
In the second quarter of 2020, the Motorparts segment initiated a rationalization of its supply chain and distribution network to achieve supply chain efficiencies and improve throughput to its customers. As a result, it was determined that certain assets including inventory, real estate, and personal property, would no longer be utilized. As part of our ongoing efforts related to this initiative, during the year ended December 31, 2021, the Motorparts segment recognized a non-cash charge of $44 million to write-down inventory to its net realizable value, a $1 million impairment charge to write-down property, plant, and equipment, and $3 million in restructuring charges related to cash severance benefits and other costs. During the year ended December 31, 2020, the Motorparts segment recognized an $82 million non-cash charge to write-down inventory to its net realizable value, a $16 million impairment charge to write-down property, plant, and equipment to its fair value, and a $9 million impairment charge to its operating lease right-of-use assets. Additionally, the Motorparts segment recognized $4 million in restructuring charges during the year ended December 31, 2020 related to cash severance expected to be paid in connection with this action.
Leverage the strength of our global aftermarket leading brand positions, product portfolio and range, marketing and selling expertise, and distribution and logistics capabilities for global growth
We are well-positioned to capitalize on aftermarket trends and expand in mature markets (e.g. North America, Europe, and Australia) as well as high-growth regions (i.e. China, South America, India, and Southeast and Northeast Asia). Important factors enabling our growth strategy include our brand strength, broad product portfolio and range, sales and marketing expertise, supply chain, and distribution capability. In addition, we also strive to maintain very close relationships with our customers and help position them for success.
Our aftermarket business includes multiple leading brands with strong product offerings. Our portfolio includes the industry’s most well-respected and enduring brands. We will leverage our go-to-market model to build upon our brand strengths and grow our global aftermarket business by consistently delivering differentiated benefits, by growing our brand equity among our target end-customers, and by leveraging our broad product coverage and extensive distribution network. We are dedicated to being stewards of these brands and continually strengthening their equity through robust marketing programs. We are also focusing on leveraging our market connectivity to drive innovative solutions in both products and service to support or channel partners.
Continue to strengthen our aftermarket capabilities and product offerings in mature markets, including North America and Europe
The scale of our aftermarket business allows for strong distribution channels that significantly enhance our go-to-market capabilities across mature markets in North America and Europe. We continually rationalize our already strong distribution networks with the goal of improved customer service at a lower cost. This is achieved by continually harnessing and leveraging market intelligence, and sharing information with our channel partners to drive best practices in go-to-market, manufacturing and distribution processes.
The North America and Europe go-to-market capabilities will be defined by positioning our distribution and installer partners for success. We believe this will require maintaining an extensive catalog of products to provide the ability to address customer requirements quickly and easily. Managing a large and complex catalog of products requires an understanding of the composition of the car parc within the regions including wear patterns, typical replacement rates based on weather, road quality, and average miles driven annually. These compositions differ significantly by region, which will affect the range and frequency of replacement part requirements. The understanding of these regional dynamics will help us provide the right parts when they are needed and achieve the industry’s best “Order to Delivery” times. We will continue to innovate product solutions that will be cost competitive and reliable, reduce install time, reduce the number of unique parts that installers need to inventory on-site, reduce the number of unique installer tools and equipment required, and improve installer safety.
In addition to having a comprehensive product offering, we also strive to maintain very close relationships with our customers and help position them for success. We have a series of “Tech First” initiatives to provide online, on demand, and onsite technical training and support to vehicle repair technicians who use and install our products in North America, Europe, and China and plan to expand into South America. This includes a network of Garage Gurus™ technical support centers that provide some of the most comprehensive training programs in the industry to educate our partners and customers with emerging vehicle technologies and vehicle repair operational skills. We believe it is key to our strategy to provide aftermarket parts that are simple to install and to make sure our customers have the resources to know how to install these parts properly. In having the right products and resources for our customers, we believe we will continue to be a preferred aftermarket supplier and continue to drive growth in the Americas and emerging economic areas.
Increase aftermarket position in high-growth regions, notably in Asia Pacific
The Asia Pacific region, particularly the high-growth markets of China and India, presents a significant opportunity for us to expand our business. We have made investments in distribution and in our sales force in both China and the rest of Asia to help drive growth in this increasingly important region. We must take into account the different operational requirements in Asia Pacific in order to drive aftermarket growth in this region.
The Asia Pacific light vehicle and commercial vehicle aftermarket industry is fragmented with a large number of small distributors and installers that require different strategies and solutions than more mature consolidated markets. Distribution in smaller volumes will require us to utilize a unique approach, as compared to the approach in mature markets, in order to compete on the basis of optimal “Order to Delivery” timeliness while maintaining a broad range of products.
Additionally, buying online is the preferred purchase method for many smaller distribution and installer partners. The sophistication of the existing online marketplaces in Asia Pacific will require us to develop adaptive and flexible omnichannel tools in order to compete effectively. We believe that developing a competitive online platform for our Asia Pacific customers will be the foundation for us to build a digital platform that will improve our competitiveness globally.
For additional information regarding environmental matters, see Item 3, “Legal Proceedings,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Environmental Matters” and Note 13, “Commitments and Contingencies” of the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data.”
Human Capital Resources
Our employees set the foundation for our ability to achieve our strategic objectives. As of December 31, 2021, we had approximately 71,000 employees with approximately 42% located in the Americas, 38% located in EMEA and 20% located in China and Asia Pacific. As of December 31, 2021, approximately 62% of our employee base was covered by collective bargaining agreements. With the exception of two facilities in the U.S., most of our unionized manufacturing facilities have their own contracts with their own expiration dates and, as a result, no contract expiration date affects more than one facility. Management believes that employee relations are favorable.
Safety, Health and Wellness
The health and safety of our employees and anyone who enters our workplace is of utmost importance to us. Our commitment to environmental, health, and safety applies to all of our locations and all leadership levels within the organization. We utilize a robust tool kit of programs to achieve our health and safety goals.
Throughout 2020 and 2021, we introduced a range of new safety protocols in our facilities in an effort to protect our employees and support appropriate health and safety protocols in response to COVID-19 and the global pandemic. Through the use of education and awareness, provision of necessary personal protective equipment, and changes to our manufacturing sites and screening, we strive to make our workplaces a safe place for employees during the workday.
Creating a culture where all of our employees feel supported and valued is vital to Tenneco’s values. We strive to ensure the health, safety and general well-being of our employees. We continue to evolve our programs to meet our employees’ health and wellness needs, which we believe is critical to attract and retain employees, and we offer a competitive benefits package focused on fostering work/life integration.
Inclusion, Diversity and Equity
At Tenneco, we embrace the unique needs of each geographical market from customer requirements to team member cultures. We believe that a commitment to Inclusion, Diversity and Equity (“ID&E”) is a business imperative, not just the right thing to do. When done well it allows us to become an employer of choice who can attract, develop and retain the best talent, drive innovation and meaningful results through high performing diverse teams who deliver an unmatched customer experience, develop leaders that champion a culture of inclusion and engagement, and help strengthen the communities where we live and work.
We have made progress in inclusion and diversity through a variety of diverse partnerships and organizations. Additionally, in 2021, to drive further changes in inclusion and diversity, we accelerated momentum of an IDEA (Inclusion, Diversity, Equity and Action) Board commissioned in 2020 which partners with management to deliver a robust inclusion and diversity strategy for the future, through a long-range roadmap of programs intrinsic to our people strategy. Tenneco’s IDEA Board is sponsored by the Chief Executive Officer and the Executive Vice President and Chief Human Resources Officer and is made up of members from the Company representing locations, functions and business segments across the globe. In 2021, the IDEA Board extended its reach with the engagement of 5 regional action teams to ensure ID&E strategy is delivered regionally and in keeping with differing local needs and cultural nuances.
Our compensation programs are designed to align the compensation of our employees with the Company’s performance and to provide proper incentives to attract, retain and motivate employees to achieve superior results. We believe the structure of our compensation programs balance incentive earnings for both short-term and long-term performance. Further, we are committed to fair pay and strive to be externally competitive while ensuring internal equity across the enterprise.
We have developed initiatives and opportunities to empower team members to progress their skill sets, focusing on tools and training to build technical, professional and leadership skills throughout our organization, as well as use a progressive learning approach of “learn-do-lead” to develop our future leaders. We provide development programs in a variety of areas which cover both interpersonal and technical skills. We also have management development resources to continue to build tools for leaders to develop their teams on the job and in roles to create new opportunities to learn and grow using a 70/20/10 approach. Core development programs are detailed in our most recent Sustainability Report.
Team member engagement is critical to our success. To assess and improve employee retention and engagement, Tenneco surveys employees with the assistance of a third-party system and governance, then takes actions to understand our current engagement levels and to develop actions to address areas for improvement, communicating transparently about findings and progress with the global team.
Tenneco is also focused on ensuring effective and regular talent and performance reviews to strengthen our talent pipeline. Our in-depth talent reviews serve to identify high potential talent to advance in roles with greater responsibility, assess learning and development needs, and establish and refresh succession plans for critical leadership roles across the enterprise. Our performance review process promotes transparent communication of team member performance; in both the “what” and the “how”, which we believe is a key factor in our success. The performance and the talent reviews enable ongoing assessments, reviews, and mentoring to identify career development and training opportunities for our employees.
We purchase various raw materials and component parts for use in our manufacturing processes, including ferrous and non-ferrous metals, non-metallic raw materials, stampings, castings, and forgings. We also purchase parts manufactured by other manufacturers for sale in the aftermarket. The principal raw material that we use is steel. We obtain steel from a number of sources pursuant to various contractual and other arrangements. We believe that an adequate supply of steel can presently be obtained from a number of different domestic and foreign suppliers. We address price increases by evaluating alternative materials and processes, reviewing material substitution opportunities, increasing component sourcing and parts assembly in best cost countries, strategically pursuing regional and global purchasing strategies for specific commodities, and aggressively negotiating with our customers to allow us to recover these higher costs from them.
We are the owner of a large number of U.S. and foreign country patents and trademarks relating to our products and businesses. We manufacture and distribute our aftermarket products and products sold directly to OE manufacturers under a number of trademarks that are well-recognized in the marketplace. The patents, trademarks and other intellectual property owned by or licensed to us are important in the manufacturing, marketing, and distribution of our products. The primary purpose in obtaining patents is to protect our designs, technologies, and products. However, we do not materially rely on any single patent, nor will the expiration of any single patent materially affect our business. While our current patents will expire in the normal course at various times between now and, as of year-end, 2041, we continually develop new technologies and products and apply for and obtain new U.S. and foreign patents.
ITEM 1A.RISK FACTORS.
Business, Operational and Financial Risks
Future deterioration or prolonged difficulty 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, persistent challenges in the Chinese economy beginning in 2018 and continuing into 2022 may result in declining light vehicle and commercial vehicle production. Additionally, production of off-highway equipment with our content on them have been weak in certain product applications, such as agricultural and construction equipment in North America and Europe. Any deterioration or prolonged difficulty in economic conditions in any region in which we do business could have a material adverse effect on our business, financial position and liquidity.
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.
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 effective against 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 claims alleging 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.
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, persistent challenges 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;
•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.
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.
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 suffers damage 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.
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.
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 gains and losses on hedging positions.
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 unintended negative 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.
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.
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.
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 criminal fines, 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 damages against us relating to environmental liabilities, intellectual property matters, personal injury claims, 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
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.
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 claims against third parties who are taking actions that we believe are infringing on our intellectual property rights. Similarly, third parties may assert claims against 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 against damage 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.
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 defending against litigation 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.
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.
Litigation challenging 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.
ITEM 1B.UNRESOLVED STAFF COMMENTS.
ITEM 2. PROPERTIES.
We lease our principal executive offices, which are located at 500 North Field Drive, Lake Forest, Illinois, 60045.
|Motorparts||Performance Solutions||Clean Air||Powertrain||Total|
|Engineering and technical facilities||6||15||8||9||38|
|Distribution centers and warehouses||29||—||—||—||29|
|Total at December 31, 2021||51||62||73||77||263|
|Total at December 31, 2021||51||62||73||77||263|
Our manufacturing facilities are located in Argentina, Australia, Belgium, Brazil, Canada, China, Czech Republic, France, Germany, Hungary, India, Italy, Japan, Mexico, Morocco, Philippines, Poland, Portugal, Romania, Russia, South Africa, South Korea, Spain, Sweden, Thailand, the United Kingdom, the U.S., and Vietnam.
Within our manufacturing facilities listed above, we operate 34 joint ventures in which we own a controlling interest. In addition, we have numerous joint ventures in which we hold a noncontrolling interest that operate manufacturing facilities primarily in China, Turkey, and the U.S., which are not included in the table above.
Certain of our engineering and technical facilities listed above are located at our manufacturing facilities. We also have warehouses and distribution facilities at our manufacturing sites and a few off-site locations, substantially all of which we lease, and a network of 10 technical support centers that provide some of the most comprehensive training programs in the industry that educate our partners and customers with emerging vehicle technologies and vehicle repair operational skills.
We believe that substantially all of our plants and equipment are, in general, well maintained and in good operating condition. They are considered adequate for present needs and, as supplemented by planned construction, are expected to remain adequate for the near future.
We also believe that we generally have satisfactory title to the properties owned and used in our respective businesses. In the United States, substantially all of our owned real property is pledged to secure our obligations under our senior credit facility.
ITEM 3.LEGAL PROCEEDINGS.
We are involved in environmental remediation matters, legal proceedings, claims (including warranty claims), and investigations. These matters are typically incidental to the conduct of our business and create the potential for contingent losses. We accrue for potential contingent losses when our review of available facts indicates that it is probable a loss has been incurred and the amount of the loss is reasonably estimable. Each quarter, we assess our loss contingencies based upon currently available facts, existing technology, presently enacted laws and regulations, and taking into consideration the likely effects of inflation and other societal and economic factors and record adjustments to these reserves as required. As an example, we consider all available evidence, including prior experience in remediation of contaminated sites, other companies’ cleanup experiences and data released by the U.S. Environmental Protection Agency or other organizations when we evaluate our environmental remediation contingencies. All of our loss contingency estimates are subject to revision in future periods based on actual costs or new information. With respect to our environmental liabilities, where future cash flows are fixed or reliably determinable, we have discounted those liabilities. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our consolidated financial statements.
We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We have been notified by the U.S. Environmental Protection Agency, other national environmental agencies, and various provincial and state agencies that we may be a potentially responsible party (“PRP”) under such laws for the cost of remediating hazardous substances pursuant to the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”) and other national and state or provincial environmental laws. PRP designation typically requires the funding of site investigations and subsequent remedial activities. Many of the sites that are likely to be the costliest to remediate are often current or former commercial waste disposal facilities to which numerous companies sent wastes. Despite the potential joint and several liability which might be imposed on us under CERCLA and some of the other laws pertaining to these sites, our share of the total waste sent to these sites generally has been small. We believe our exposure for liability at these sites is limited.
On a global basis, we have also identified certain other present and former properties at which we may be responsible for cleaning up or addressing environmental contamination, in some cases, as a result of contractual commitments and/or federal or state environmental laws. We are actively seeking to resolve our actual and potential statutory, regulatory, and contractual obligations.
At December 31, 2021, we have an obligation to remediate or contribute towards the remediation of certain sites, including the sites discussed above at which we may be a PRP.
Our estimated share of environmental remediation costs for all these sites is recognized in the consolidated balance sheets and the amounts are as follows:
|Accrued expenses and other current liabilities||$||8||$||8|
|Deferred credits and other liabilities||23||26|
In addition to amounts described above, we estimate that we will make expenditures for property, plant and equipment for environmental matters of approximately $9 million in 2022 and $1 million in 2023.
Based on information known to us from site investigations and the professional judgment of consultants, we have established reserves that we believe are adequate for these costs. Although we believe these estimates of remediation costs are reasonable and are based on the latest available information, the costs are estimates, difficult to quantify based on the complexity of the issues, and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, certain environmental statutes provide that our liability could be joint and several, meaning that we could be required to pay amounts in excess of our share of remediation costs. The financial strength of other PRPs at these sites has been considered, where appropriate, in our determination of our estimated liability. We do not believe that any potential costs associated with our current status as a PRP, or as a liable party at the other locations referenced herein, will be material to our consolidated financial position, results of operations, or liquidity.
At December 31, 2021 and 2020, we have indemnifications in place on certain of these environmental reserves, which is not considered material to our consolidated financial statements.
Other Legal Proceedings, Claims and Investigations
For many years, we have been and continue to be subject to lawsuits initiated by claimants alleging health problems as a result of exposure to asbestos. Our current docket of active and inactive cases is less than 500 cases in the U.S. and less than 50 in Europe.
With respect to the claims filed in the U.S., the substantial majority of the claims are related to alleged exposure to asbestos in our line of Walker® exhaust automotive products although a significant number of those claims appear also to involve occupational exposures sustained in industries other than automotive. A small number of claims have been asserted against one of our subsidiaries by railroad workers alleging exposure to asbestos products in railroad cars. We believe, based on scientific and other evidence, it is unlikely that U.S. claimants were exposed to asbestos by our former products and that, in any event, they would not be at increased risk of asbestos-related disease based on their work with these products. Further, many of these cases involve numerous defendants. Additionally, in many cases the plaintiffs either do not specify any, or specify the jurisdictional minimum, dollar amount for damages.
With respect to the claims filed in Europe, the substantial majority relate to occupational exposure claims brought by current and former employees of Federal-Mogul facilities in France and amounts paid out were not material. A small number of occupational exposure claims have also been asserted against Federal-Mogul entities in Italy and Spain.
As major asbestos manufacturers and/or users continue to go out of business or file for bankruptcy, we may experience an increased number of these claims. We vigorously defend ourselves against these claims as part of our ordinary course of business. In future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved unfavorably to us. To date, with respect to claims that have proceeded sufficiently through the judicial process, we have regularly achieved favorable resolutions. Accordingly, we presently believe that these asbestos-related claims will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.
We are also from time to time involved in other legal proceedings, claims or investigations. Some of these matters involve allegations of damages against us relating to environmental liabilities (including toxic tort, property damage and remediation), intellectual property matters (including patent, trademark and copyright infringement, and licensing disputes), personal injury claims (including injuries due to product failure, design or warning issues, and other product liability related matters), taxes, unclaimed property, employment matters, and commercial or contractual disputes, sometimes related to acquisitions or divestitures. Additionally, some of these matters involve allegations relating to legal compliance.
While we vigorously defend ourselves against all of these legal proceedings, claims and investigations and take other actions to minimize our potential exposure, in future periods, we could be subject to cash costs or charges to earnings if any of these matters are resolved on unfavorable terms. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on current information, including our assessment of the merits of the particular claim, we do not expect the legal proceedings, claims or investigations currently pending against us will have any material adverse effect on our consolidated financial position, results of operations or liquidity.
We provide warranties on some 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 with our products. These estimates are established using historical information about the nature, frequency, and average cost of warranty claims. We believe that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve. The reserve is included in both current and long-term liabilities on the consolidated balance sheets.
ITEM 4.MINE SAFETY DISCLOSURES.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following provides information concerning the persons who serve as our executive officers as of February 24, 2022.
|Name and Age||Offices Held|
|Brian J. Kesseler (55)||Chief Executive Officer|
|Kevin W. Baird (60)||Executive Vice President and Chief Operating Officer|
|Matti Masanovich (50)||Executive Vice President and Chief Financial Officer|
|Rainer Jueckstock (62)||Executive Vice President and President Powertrain|
|Scott Usitalo (63)||Executive Vice President and President Motorparts|
John W. Wehrenberg (54)
|Executive Vice President and President Performance Solutions|
|Thomas J. Sabatino, Jr. (63)||Executive Vice President, General Counsel and Corporate Secretary|
|Kaled Awada (47)||Executive Vice President and Chief Human Resources Officer|
|John S. Patouhas (55)||Vice President and Chief Accounting Officer|
Brian J. Kesseler — Mr. Kesseler became Chief Executive Officer in January 2020. He served as Co-Chief Executive Officer from October 2018 to January 2020. He was previously Chief Executive Officer from May 2017 to September 2018. He served as Chief Operating Officer from January 2015 to May 2017. Prior to joining Tenneco, he spent more than 20 years working for Johnson Controls Inc., most recently serving as President of the Johnson Controls Power Solutions business. In 2013, he was elected a corporate officer, and was a member of the Johnson Controls executive operating team. Mr. Kesseler also served as the sponsor of Johnson Controls’ Manufacturing Operations Council. Mr. Kesseler joined JCI in 1994 and during his tenure held leadership positions in all of the company’s business units, including serving as Vice President and General Manager, Service-North America, Systems and Services Europe, and Unitary Products Group, for the Building Efficiency business. He began his career with the Ford Motor Company in 1989 and worked in North America Assembly Operations for five years, specializing in manufacturing management. Mr. Kesseler became a director of our company in October 2016.
Kevin W. Baird — Mr. Baird joined Tenneco as the Executive Vice President and Chief Operating Officer in August 2020. Prior to joining Tenneco, Mr. Baird was at Guardian Industries (“Guardian”), a wholly owned subsidiary of Koch Industries, Inc., where he spent the prior six years serving as the Chief Executive Officer of its Guardian Glass business. Baird joined Guardian in 2008 as the Chief Executive Officer of SRG Global, Inc., Guardian’s automotive trim business.
Matti Masanovich — Mr. Masanovich joined Tenneco as the Executive Vice President and Chief Financial Officer in August 2020. Prior to joining Tenneco, Mr. Masanovich was Chief Financial Officer of Superior Industries International, Inc. since September 2018. Previously, he was with General Cable Corporation, serving from November 2016 to July 2018 as Senior Vice President and Chief Financial Officer. Prior to that, Mr. Masanovich served as the short-term Vice President and Controller of International Automotive Components, an automotive interiors supplier, from August 2016 to October 2016. From November 2013 to April 2016, Mr. Masanovich served as Global Vice President of Finance, Packard Electrical and Electronic Architecture (E/EA) Division in Shanghai, China at APTIV (formerly Delphi Automotive).
Rainer Jueckstock — Mr. Jueckstock joined Tenneco as Executive Vice President and President Powertrain in October 2018. Prior to joining Tenneco, Mr. Jueckstock was Co-Chairman of the Board and Co-Chief Executive Officer of Federal-Mogul LLC from 2014 to 2018, and Chief Executive Officer, Federal-Mogul Powertrain from 2012 to 2018. Prior to his Co-Chairman and Co-Chief Executive Officer positions, Mr. Jueckstock was Senior Vice President, Powertrain Energy from 2005 to 2012, a member of the Strategy Board from 2005 to 2012 and an officer of Federal-Mogul Corporation from 2005 to 2012. He is a director of Plexus Corp.
Scott Usitalo — Mr. Usitalo has served as our Executive Vice President and President Motorparts since February 2020. Mr. Usitalo joined Tenneco as Senior Vice President and Chief Marketing Officer in November 2018. Prior to joining Tenneco, Mr. Usitalo was a marketing executive of Kimberly-Clark Company from 2007 to November 2018, most recently serving as Chief Marketing Officer. Prior to his role at Kimberly-Clark Company, Mr. Usitalo spent over 20 years with Procter & Gamble Company.
John W. Wehrenberg — Mr. Wehrenberg was named Executive Vice President, President of Performance Solutions in April 2021. Mr. Wehrenberg joined Tenneco in January 2018 and prior to his current role, he served as Tenneco’s vice president and general manager. Prior to joining Tenneco, Mr. Wehrenberg was the chief operating officer for North America at Futuris Group from March 2015 to November 2017.
Thomas J. Sabatino, Jr. — Mr. Sabatino joined Tenneco as Executive Vice President, General Counsel and Corporate Secretary in February 2021. Prior to joining Tenneco, Mr. Sabatino served as the executive vice president and general counsel of Aetna from April 2016 to December 2018. Prior to joining Aetna, Mr. Sabatino served as senior executive vice president, chief administrative officer and general counsel of Hertz Global Holdings, Inc. from February 2015 through April 2016 and executive vice president, global legal and chief administrative officer of Walgreens Boots Alliance from September 2011 through January 2015.
Kaled Awada — Mr. Awada joined Tenneco as Senior Vice President and Chief Human Resources Officer in September 2018 and became the Executive Vice President and Chief Human Resources Officer in 2021. Prior to joining Tenneco, Mr. Awada held Human Resources leadership positions of increasing responsibility at Aptiv PLC for three years, most recently Global Vice President, Human Resources, for the company’s electrical distribution systems business. He previously held global Human Resources roles with Eaton Corporation, Textron Fastening Systems, and Faurecia Exhaust Systems.
John S. Patouhas — Mr. Patouhas has served as our Vice President and Chief Accounting Officer since February 2019. Mr. Patouhas served since 2015 as Vice President and Chief Accounting Officer of Federal-Mogul (a subsidiary of Tenneco since October 2018). From 2011 to 2015, Mr. Patouhas was Vice President and Corporate Controller at Altair Engineering, a product design and development, engineering software and cloud computing software provider. He has over 20 years’ experience in financial reporting and corporate accounting at a variety of companies, and began his career as an auditor with Deloitte. Mr. Patouhas is a CPA and CGMA, and has an MBA from Wayne State University.
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our outstanding shares of Class A Common Stock, par value $0.01 per share, are listed on the New York Stock Exchange under the symbol “TEN.” As of February 22, 2022, there were approximately 8,200 holders of record of our Class A Common Stock, including brokers and other nominees.
Purchase of equity securities by the issuer and affiliated purchasers
The following table provides information relating to our purchase of shares of our class A Common Stock in the fourth quarter of 2021. These purchases include shares withheld upon vesting of restricted stock for minimum tax withholding obligations. We generally intend to continue to satisfy statutory minimum tax withholding obligations in connection with the vesting of outstanding restricted stock through the withholding of shares.
Total Number of
Shares Purchased (1)
|Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs||Maximum Value of Shares That May Yet be Purchased Under These Plans or Programs|