Tenneco Inc. (ticker: TEN, exchange: New York Stock Exchange)

July 26, 2018

 
TENNECO REPORTS SECOND QUARTER 2018 RESULTS

 

  • Record-high second quarter revenue, outpacing industry production with growth in all three reporting segments
  • Strong cash generation driven by working capital improvements
  • CEOs selected for the new aftermarket and ride performance company and the powertrain technology company

Lake Forest, Illinois, July 27, 2018 – Tenneco Inc. (NYSE: TEN) reported second quarter net income of $50 million, or 98-cents per diluted share, versus a second quarter net loss of $3 million, or 5-cents per diluted share in 2017.  Second quarter 2018 adjusted net income was $99 million, or $1.92 per diluted share, compared with $101 million, or $1.88 per diluted share last year.

Revenue

Total revenue in the second quarter was $2.537 billion, up 9% year-over-year, with revenue growth in Clean Air, Ride Performance and Aftermarket.  On a constant currency basis, total revenue increased 8% driven by strong commercial truck and off-highway programs and higher volumes and incremental content on light vehicles.

On a constant currency basis, value-add revenue increased 6% to $1.889 billion, significantly outpacing industry production*.  Ride Performance revenue increased 13%, Clean Air revenue rose 5%, and global Aftermarket revenue was up 1% compared to last year.

EBIT

Second quarter EBIT (earnings before interest, taxes and noncontrolling interests) was $113 million, compared to $27 million last year.  Adjusted EBIT was $175 million, versus $178 million last year.  Volume increased in both light vehicle and commercial truck and off-highway applications.  Steel commodity costs, launch costs related to a major truck platform and aftermarket versus OE revenue mix impacted margins. 

 

 

Q2 2018   Q2 2017
 
EBIT as a percent of revenue 4.5% 1.2%
EBIT as a percent of value-add revenue 5.9% 1.5%
 
Adjusted EBIT as a percent of revenue 6.9% 7.7%
Adjusted EBIT as a percent of value-add revenue 9.1% 10.0%
 

 

Cash

Cash generated by operations was $75 million, compared with $92 million a year ago.  Improvements in working capital were offset by payments made during the second quarter 2018 of $17 million for antitrust settlements, and $11 million for acquisition related payments.  During the quarter, the company returned $12 million to shareholders through a dividend payment of 25-cents per common share.

“Tenneco’s strong organic growth was two times industry production growth in the second quarter, with higher revenues in all three reporting segments, led by double-digit growth in intelligent suspension technologies and commercial truck and off-highway revenue,” said Brian Kesseler, CEO Tenneco. “In line with our guidance last quarter, the Tenneco team delivered sequential margin improvement in all three reporting segments as we continue to drive operational improvements and address higher steel costs through customer recovery mechanisms.”

Adjusted second quarter 2018 and 2017 results

    Q2 2018   Q2 2017
  (millions except per share amounts) Net income attributable to Tenneco Inc. Earnings Per Share EBIT EBITDA(1)(2) Net income  attributable to Tenneco Inc. Earnings Per Share EBIT EBITDA(1)(2)
 
Earnings Measures $ 50 $ 0.98 $ 113 $ 172   $ (3) $ (0.05) $ 27 $ 82
 
Adjustments (reflects non-GAAP measures):      
  Restructuring and related expenses   21   0.41   31   31     16   0.30   17           16
  Acquisition advisory costs   14   0.27   18   18     -     -     -     -
  Pre-closing structural cost reductions   7   0.12   9   9     -     -     -     -
  Environmental charge   3   0.06   4   4     -     -     -     -
  Antitrust settlement accrual    -     -    -   -     85   1.60   132   132
  Warranty settlement    -     -    -   -     5     0.08     7     7
  Gain on sale of unconsolidated JV    -      -    -   -     (4)   (0.08)   (5)   (5)
  Costs related to refinancing    -      -   -   -     1     0.02     -     -
  Net tax adjustments    4     0.08     -     1   0.01     -     -
 
Adjusted Net income, EPS, EBIT and EBITA $ 99 $ 1.92 $ 175 $ 234   $ 101 $ 1.88 $ 178 $ 232
 
 (1) EBITDA including noncontrolling interests 
 
(2) Tables at the end of this press release reconcile GAAP to non-GAPP results

 

OUTLOOK

Third quarter and full year 2018

Tenneco expects constant currency total revenue growth of 5% in the third quarter 2018, outpacing forecasted light vehicle industry production growth of 3%*.  Tenneco estimates currency to have an impact on revenue of -2%, based on currency exchange rates as of June 30, 2018. The company expects organic growth to outpace industry production with growth in light vehicle, commercial truck and off-highway revenue, and a steady contribution from the global aftermarket segment. The company expects third quarter value-add adjusted EBIT margin to be lower than prior year by about 40 to 50 basis points.

For the full year, the company reaffirmed its 2018 full year revenue outlook, and expects 5% constant currency revenue growth, outpacing industry production* by 3 percentage points. Additionally, the company expects currency to have a positive impact on revenue of 1%, based on currency exchange rates as of June 30, 2018. The company expects full year value-add adjusted EBIT margin in the range of 8.5% to 8.7%.

Acquisition of Federal-Mogul LLC

Tenneco signed a definitive agreement on April 10, 2018, to acquire Federal-Mogul, a leading global supplier to original equipment manufacturers and the aftermarket. Tenneco intends to separate the combined businesses into two independent, publicly traded companies through a tax-free spin-off to shareholders that will establish an aftermarket and ride performance company and a powertrain technology company.

The Federal-Mogul acquisition is expected to close early in the fourth quarter of 2018, subject to regulatory and shareholder approvals and other customary closing conditions, with the separation expected to occur in the second half of 2019. The transaction is expected to be value accretive with run-rate earnings synergies of at least $200 million and one-time working capital synergies of at least $250 million within 24 months of closing.

On July 23, Tenneco announced that its board of directors has selected Brian J. Kesseler and Roger J. Wood as the chief executive officers of the two new companies.  Kesseler will become chairman and CEO of the aftermarket and ride performance company, which will be headquartered in Lake Forest, Illinois, and Wood will become chairman and CEO of the new powertrain technology company, which will be headquartered in the Detroit, Michigan area.  Immediately upon closing of the Federal-Mogul acquisition, and prior to separation, Kesseler and Wood will serve as co-CEOs of Tenneco Inc., leading their respective businesses, while preparing each to become a stand-alone entity and helping facilitate a smooth spin-off.  During this period, both CEOs will report to the Tenneco Board of Directors.

In connection with the Federal-Mogul acquisition, the Tenneco Board of Directors has scheduled a special meeting of stockholders for Wednesday, September 12, 2018 at 10:00 a.m. CT. The meeting will be held at the corporate headquarters, 500 North Field Drive, Lake Forest, Illinois. The record date for stockholders eligible to vote at the meeting is July 31, 2018.

*Source: IHS Automotive July 2018 global light vehicle production forecast and Tenneco estimates.

Click here to download the earnings release and all the schedules listed below.

Attachment 1

Statements of Income – 3 Months

Statements of Income – 6 Months

Balance Sheets

Statements of Cash Flows – 3 Months

Statements of Cash Flows – 6 Months

Attachment 2

Reconciliation of GAAP Net Income to EBITDA including noncontrolling interests – 3 Months

Reconciliation of GAAP to Non-GAAP Earnings Measures – 3 Months

Reconciliation of GAAP Net Income to EBITDA including noncontrolling interests – 6 Months

Reconciliation of GAAP to Non-GAAP Earnings Measures – 6 Months

Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – 3 Months

Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – 6 Months

Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – 3 Months and 6 Months

Reconciliation of Non-GAAP Measures – Debt Net of Cash/Adjusted LTM EBITDA including noncontrolling interests

Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – Original Equipment and Aftermarket Revenue – 3 Months and 6 months

Reconciliation of GAAP Revenue and Earnings to Non-GAAP Revenue and Earnings Measures – 3 Months

Reconciliation of GAAP Revenue and Earnings to Non-GAAP Revenue and Earnings Measures – 6 Months

Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – Original Equipment Commercial Truck, Off-Highway and other revenues – 3 Months and 6 months

CONFERENCE CALL

The company will host a conference call on Friday, July 27, 2018 at 9:00 a.m. ET.  The dial-in number is 866-807-9684 (domestic) or 412-317-5415 (international).  The passcode is Tenneco Inc. call.  The call and accompanying slides will be available on the financial section of the Tenneco web site at www.investors.tenneco.com.  A recording of the call will be available one hour following completion of the call on July 27, 2018 through August 3, 2018.  To access this recording, dial 877-344-7529 (domestic), 855-669-9658 (Canada) or 412-317-0088 (international).  The replay access code is 10122424. The purpose of the call is to discuss the company’s operations for the second fiscal quarter of 2018, as well as provide updated information regarding matters impacting the company’s outlook.  A copy of the press release is available on the financial and news sections of the Tenneco web site.

About Tenneco

Tenneco is a $9.3 billion global manufacturing company with headquarters in Lake Forest, Illinois and approximately 32,000 employees worldwide.  Tenneco is one of the world’s largest designers, manufacturers and marketers of ride performance and clean air products and systems for automotive and commercial vehicle original equipment markets and the aftermarket.  Tenneco’s principal brand names are Monroe®, Walker®, XNOx™ and Clevite®Elastomers. 

About the Aftermarket and Ride Performance Company

The aftermarket and ride performance company would have 2017 pro-forma revenues of $6.4 billion, with 57% of those revenues from aftermarket and 43% from original equipment customers.  Following the Federal-Mogul acquisition, the aftermarket and ride performance company will be one of the largest global multi-line, multi-brand aftermarket companies, and one of the largest global OE ride performance and braking companies.  The aftermarket and ride performance company’s principal product brands will include Monroe®, Walker®, Clevite®Elastomers, MOOG®, Fel-Pro®, Wagner®, and Champion®.

About the Powertrain Technology Company

The powertrain technology company would have 2017 pro-forma revenues of $10.7 billion, serving light vehicle, commercial truck, off-highway and industrial markets.  Following the Federal-Mogul acquisition, the powertrain technology company will be one of the world’s largest pure-play powertrain companies serving OE markets worldwide with engineered solutions addressing fuel economy, power output, and criteria pollution requirements for gasoline, diesel and electrified powertrains.

Revenue estimates in this release are based on OE manufacturers’ programs that have been formally awarded to the company; programs where Tenneco is highly confident that it will be awarded business based on informal customer indications consistent with past practices; and Tenneco’s status as supplier for the existing program and its relationship with the customer.  These revenue estimates are also based on anticipated vehicle production levels and pricing, including precious metals pricing and the impact of material cost changes. Unless otherwise indicated, our revenue estimate methodology does not attempt to forecast currency fluctuations, and accordingly, reflects constant currency. Certain elements of the restructuring and related expenses, legal settlements and other unusual charges we incur from time to time cannot be forecasted accurately.  In this respect, we are not able to forecast EBIT (and the related margins) on a forward-looking basis without unreasonable efforts on account of these factors and the difficulty in predicting GAAP revenues (for purposes of a margin calculation) due to variability in production rates and volatility of precious metal pricing in the substrates that we pass through to our customers.  For certain additional assumptions upon which these estimates are based, see the slides accompanying the July 27, 2018 webcast, which will be available on the financial section of the Tenneco website at www.investors.tenneco.com.

Safe Harbor

This release contains forward-looking statements. These forward-looking statements include, but are not limited to, (i) all statements, other than statements of historical fact, included in this communication that address activities, events or developments that we expect or anticipate will or may occur in the future or that depend on future events and (ii) statements about our future business plans and strategy and other statements that describe Tenneco’s outlook, objectives, plans, intentions or goals, and any discussion of future operating or financial performance. These forward-looking statements are included in various sections of this communication and the words  “may,” “will,” “should,” “could,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof) are intended to identify forward-looking statements. Forward-looking statements included in this release concern, among other things, the proposed acquisition of Federal-Mogul LLC and related separation transactions, including the expected timing of completion of the proposed acquisition and spin-off; the benefits of the proposed acquisition and spin-off; the combined and separated companies’ respective plans, objectives and expectations; future financial and operating results; and other statements that are not historical facts. Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to materially differ from those described in the forward-looking statements, including the risk that the acquisition transaction may not be completed in a timely manner or at all due to a failure to satisfy certain closing conditions, including any stockholder or regulatory approval or the failure to satisfy other conditions to completion of the transaction; the occurrence of any event, change or other circumstance that could give rise to the termination of the purchase agreement; the outcome of any legal proceeding that may be instituted against Tenneco and others following the announcement of the transactions; the combined company may not complete the separation of the Aftermarket & Ride Performance business from the Powertrain Technology business (or achieve some or all of the anticipated benefits of such a separation); the proposed transactions may have an adverse impact on existing arrangements with Tenneco or Federal-Mogul, including those related to transition, manufacturing and supply services and tax matters; the amount of the costs, fees, expenses and charges related to the transactions may be greater than expected; the ability to retain and hire key personnel and maintain relationships with customers, suppliers or other business partners; the risk that the benefits of the transactions, including synergies, may not be fully realized or may take longer to realize than expected; the risk that the transactions may not advance the combined or separated companies’ respective  business strategy; the risk that the combined company may experience difficulty integrating or separating all employees or operations; the potential diversion of Tenneco management’s attention resulting from the proposed transactions; as well as the risk factors and cautionary statements included in Tenneco’s periodic and current reports (Forms 10-K, 10-Q and 8-K) filed from time to time with the SEC.

In addition, the forward-looking statements contained herein pertaining to the company’s performance are based on the current expectations of the company (including its subsidiaries). Because these forward-looking statements involve risks and uncertainties, the company's plans, actions and actual results could differ materially. Among the factors that could cause these plans, actions and results to differ materially from current expectations are: 

(i) general economic, business and market conditions;

(ii) the company’s ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices;

(iii) 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 the ongoing global antitrust investigation, product performance, product safety or intellectual property rights;

(iv) changes in capital availability or costs, including increases in the company's costs of borrowing (i.e., interest rate increases), the amount of the company's debt, the ability of the company to access capital markets at favorable rates, and the credit ratings of the company’s debt;

(v) changes in consumer demand, prices and the company’s ability to have our products included on top selling vehicles, including any shifts in consumer preferences to lower margin vehicles, for which we may or may not have supply arrangements;

(vi) changes in automotive and commercial vehicle manufacturers' production rates and their actual and forecasted requirements for the company's products such as the significant production cuts during recent years by automotive manufacturers in response to difficult economic conditions;

(vii) the overall highly competitive nature of the automobile and commercial vehicle parts industries, and any resultant inability to realize the sales represented by the company’s awarded book of business which is based on anticipated pricing and volumes over the life of the applicable program;

(viii) the loss of any of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;

(ix) the company's continued success in cost reduction and cash management programs and its ability to execute restructuring and other cost reduction plans, including our current cost reduction initiatives, and to realize anticipated benefits from these plans;

(x) risk inherent in operating a multi-national company, including economic conditions, such as currency exchange and inflation rates, and political environments in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability, and tax and other laws, and potential disruption of production and/or supply;

(xi) workforce factors such as strikes or labor interruptions; 

(xii) increases in the costs of raw materials, including the company’s ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery and other methods; 

(xiii) 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;

(xiv) the cyclical nature of the global vehicular industry, including the performance of the global aftermarket sector and longer product lives of automobile parts;

(xv) product warranty costs;

(xvi) the failure or breach of our information technology systems and the consequences that such failure or breach may have to our business;

(xvii) the company's ability to develop and profitably commercialize new products and technologies, and the acceptance of such new products and technologies by the company's customers and the market; 

(xviii) changes by the Financial Accounting Standards Board or other accounting regulatory bodies to authoritative generally accepted accounting principles or policies;

(xix) changes in accounting estimates and assumptions, including changes based on additional information;

(xx) 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; 

(xxi) natural disasters, acts of war and/or terrorism and the impact of these occurrences or acts on economic, financial, industrial and social condition, including, without limitation, with respect to supply chains and customer demand in the countries where the company operates; and

(xxii) the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond the control of the company and its subsidiaries.

Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Unless otherwise indicated, the forward-looking statements in this release are made as of the date of this communication, and, except as required by law, Tenneco does not undertake any obligation, and disclaims any obligation, to publicly disclose revisions or updates to any forward-looking statements. Additional information regarding these risk factors and uncertainties is detailed from time to time in the company's SEC filings, including but not limited to its annual report on Form 10-K for the year ended December 31, 2017. 

Additional Information and Where to Find It

In connection with the proposed transaction between Tenneco Inc. (the “Company”) and Federal-Mogul LLC, the Company intends to file relevant materials with the U.S. Securities and Exchange Commission (the “SEC”), including a preliminary proxy statement on Schedule 14A. Following the filing of the definitive proxy statement with the SEC, the Company will mail the definitive proxy statement and a proxy card to each stockholder entitled to vote at the special meeting relating to the proposed transaction. This communication is not a substitute for the proxy statement or other document(s) that the Company may file with the SEC in connection with the proposed transaction. INVESTORS AND SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ CAREFULLY THE PROXY STATEMENT (INCLUDING ANY AMENDMENTS OR SUPPLEMENTS THERETO) AND OTHER DOCUMENTS FILED WITH THE SEC WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT THE COMPANY, FEDERAL-MOGUL AND THE PROPOSED TRANSACTION. Investors and security holders may obtain free copies of the proxy statement and other relevant materials (when they become available), and any and all documents filed by the Company with the SEC may be obtained for free at the SEC’s website at www.sec.gov. In addition, stockholders may obtain free copies of the documents filed with the SEC by the Company via the Company’s Investor Relations section of its website at investors.tenneco.com or by contacting Investor Relations by directing a request to the Company, Attention: Investor Relations, 500 North Field Drive in Lake Forest, Illinois 60045 or by calling (847) 482-5162.

Certain Information Regarding Participants

The Company and its respective directors and executive officers may be deemed participants in the solicitation of proxies in connection with the proposed transaction. Information about the persons who may, under the rules of the SEC, be considered to be participants in the solicitation of the Company’s stockholders in connection with the proposed transaction, and any interest they have in the proposed transaction, will be set forth in the definitive proxy statement when it is filed with the SEC. Additional information regarding these individuals is set forth in the Company’s proxy statement for its 2018 Annual Meeting of Stockholders, which was filed with the SEC on April 4, 2018, its Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which was filed with the SEC on February 28, 2018, and its Current Reports on Form 8-K filed with the SEC on July 23, 2018. You may obtain these documents (when they become available) free of charge at the SEC’s web site at www.sec.gov and from Investor Relations at the Company.

No Offers or Solicitations

This document shall not constitute an offer to sell or the solicitation of an offer to buy any securities, nor shall there be any sale of securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. No offering of securities shall be made except by means of a prospectus meeting the requirements of Section 10 of the U.S. Securities Act of 1933, as amended.

###

Tenneco investor inquiries:
Linae Golla
847 482-5162 (office)
224 632-0986 (cell)
lgolla@tenneco.com

Tenneco media inquiries:
Bill Dawson
847 482-5807 (office)
224 280-4308 (cell)
bdawson@tenneco.com

 

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