Tenneco Third Quarter Results Benefit From Geographic Balance - Partially Offsets Impact of Significant North American OE Volumes Declines
- European segment EBIT improves 151% year-over-year
- Global aftermarket revenue up 4%
- China growth drives Asia revenue up 76%
- Lower customer production drives down North America OE revenue by 17%
LAKE FOREST, ILLINOIS, OCTOBER 24, 2006 – Tenneco Inc. (NYSE: TEN) reported third quarter 2006 net income of $6 million, or 12-cents per diluted share, versus $10 million, or 23-cents per diluted share in third quarter 2005. Excluding restructuring and restructuring related adjustments, net income was $10 million, or 22-cents per diluted share compared with $12 million, or 27-cents per diluted share a year ago (the attached tables reconcile GAAP results to Non-GAAP results).
EBIT (earnings before interest, taxes and minority interest) was $45 million, down from $50 million a year ago. On an adjusted basis, EBIT was $52 million, flat year-over-year. EBITDA (EBIT before depreciation and amortization) was $90 million, versus $94 million in third quarter 2005. Adjusted EBITDA was $97 million, up from $96 million a year ago.
Tenneco's strong European segment (Europe, South America, India) performance and growth in China and global aftermarket revenues helped counter the significant impact of North American OE light truck and SUV production declines on some of the company's largest platforms. Tenneco's quarterly results were also helped by the company's ability to cut costs, improve manufacturing efficiency and flex down operations as volumes declined.
Adjusted third quarter 2006 and 2005 results:
EBIT (earnings before interest, taxes and minority interest) was $45 million, down from $50 million a year ago. On an adjusted basis, EBIT was $52 million, flat year-over-year. EBITDA (EBIT before depreciation and amortization) was $90 million, versus $94 million in third quarter 2005. Adjusted EBITDA was $97 million, up from $96 million a year ago.
Tenneco's strong European segment (Europe, South America, India) performance and growth in China and global aftermarket revenues helped counter the significant impact of North American OE light truck and SUV production declines on some of the company's largest platforms. Tenneco's quarterly results were also helped by the company's ability to cut costs, improve manufacturing efficiency and flex down operations as volumes declined.
Adjusted third quarter 2006 and 2005 results:
| Q3 2006 | Q3 2005 | |||||||||||||||||
| EBITDA | EBIT | Net Income | Per Share | EBITDA | EBIT | Net Income | Per Share | |||||||||||
| Earnings Measures | $ | 90 | $ | 45 | $ | 6 | $ | 0.12 | $ | 94 | $ | 50 | $ | 10 | $ | 0.23 | ||
| Adjustments (reflects non-GAAP measures): |
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| Restructuring/restructuring related expenses | 7 | 7 | 4 | 0.10 | 2 | 2 | 2 | 0.04 | ||||||||||
| Non-GAAP earnings measures | $ | 97 | $ | 52 | $ | 10 | $ | 0.22 | $ | 96 | $ | 52 | $ | 12 | $ | 0.27 | ||
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Download and print this summary table (PDF): Adjusted third quarter 2006 and 2005 results
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Third quarter 2006 adjustments:
- Restructuring and restructuring related expenses of $7 million pre-tax, or 10-cents per diluted share.
Third quarter 2005 adjustments:
- Restructuring and restructuring related expenses of $2 million pre-tax, or 4-cents per diluted share.
Third quarter revenue was $1.122 billion compared with $1.096 billion the previous year. Favorable currency benefited revenue by $21 million. Substrate sales, which typically carry lower margins, increased to $215 million from $166 million a year ago. Excluding the impact of currency and substrate sales, revenue was $886 million versus $930 million a year ago. The decrease was primarily the result of OE production volume declines in North America.
Gross margin in the quarter was 17.5% versus 18.9% the previous year. European manufacturing productivity improvements and global cost reduction efforts were more than offset by significant OE volume declines in North America, higher steel costs, and higher restructuring costs. In addition, the growth in substrate sales in Europe, driven by more diesel aftertreatment and hot-end exhaust business, diluted gross margin. Steel costs in the quarter increased $9 million year-over-year.
Selling, General, Administrative and Engineering (SGA&E) expense in the quarter improved to 9.4% of sales versus 10.8% a year ago. Aggressive efforts to reduce costs globally to help offset North American OE volume declines and tight discretionary spending controls drove the improvement.
Cash flow from operations declined year-over-year. The company used $45 million in cash from working capital during the quarter, up from $11 million in third quarter 2005. The year-over-year changes in cash flow from accounts receivable and accounts payable offset each other in the quarter. Cash flow used for inventory was $18 million higher than a year ago, in part to prepare for platform launches in North America. The remainder of the change in cash flow used for working capital was due to timing on the payment of other current liabilities.
At quarter-end, total debt decreased to $1.403 billion compared with $1.429 billion at the end of third quarter 2005. Debt net of cash balances was $1.287 billion, down from $1.340 billion a year ago. The ratio of debt net of cash balances to adjusted last twelve months EBITDA was 3.1, versus 3.2 for the same period last year. Taking into consideration the projected fourth quarter OE production cuts in North America, Tenneco doesn't anticipate much change at year-end to this ratio, which is higher than the company's year-end goal of 2.8.
NORTH AMERICA
Gross margin in the quarter was 17.5% versus 18.9% the previous year. European manufacturing productivity improvements and global cost reduction efforts were more than offset by significant OE volume declines in North America, higher steel costs, and higher restructuring costs. In addition, the growth in substrate sales in Europe, driven by more diesel aftertreatment and hot-end exhaust business, diluted gross margin. Steel costs in the quarter increased $9 million year-over-year.
Selling, General, Administrative and Engineering (SGA&E) expense in the quarter improved to 9.4% of sales versus 10.8% a year ago. Aggressive efforts to reduce costs globally to help offset North American OE volume declines and tight discretionary spending controls drove the improvement.
Cash flow from operations declined year-over-year. The company used $45 million in cash from working capital during the quarter, up from $11 million in third quarter 2005. The year-over-year changes in cash flow from accounts receivable and accounts payable offset each other in the quarter. Cash flow used for inventory was $18 million higher than a year ago, in part to prepare for platform launches in North America. The remainder of the change in cash flow used for working capital was due to timing on the payment of other current liabilities.
At quarter-end, total debt decreased to $1.403 billion compared with $1.429 billion at the end of third quarter 2005. Debt net of cash balances was $1.287 billion, down from $1.340 billion a year ago. The ratio of debt net of cash balances to adjusted last twelve months EBITDA was 3.1, versus 3.2 for the same period last year. Taking into consideration the projected fourth quarter OE production cuts in North America, Tenneco doesn't anticipate much change at year-end to this ratio, which is higher than the company's year-end goal of 2.8.
NORTH AMERICA
- North America OE revenue was $307 million, versus $369 million a year ago. Excluding the impact of currency and substrate sales, revenue was down 16% to $252 million. The decrease was the result of OE volume declines on key platforms like the Dodge Ram and Ford F-150 pick-up trucks and GM's Trailblazer/Envoy vehicles, three of Tenneco's top ten largest OE platforms. The timing on the transition of Tenneco's emission control business on one of GM's largest light truck platforms also negatively impacted revenue.
- North American aftermarket revenue increased to $135 million from $133 million in third quarter 2005, driven by price increases in both product lines and previously announced new business, which more than offset lower ride control and exhaust unit volumes.
- EBIT for North American operations was $16 million, compared with $37 million the previous year. Third quarter 2006 EBIT includes $3 million in restructuring costs.
- EBIT was primarily impacted by OE volume declines and higher material costs, as well as an increase in warranty costs in the quarter, all of which more than offset SGA&E expense reductions, manufacturing efficiency improvements and the company's efforts to adjust operations to match lower customer demand.
EUROPE, SOUTH AMERICA AND INDIA
- European OE revenue was $393 million, up from $341 million the prior year. Revenue was driven by the ramp-up on new emission control platforms including more diesel aftertreatment and hot-end exhaust business, which resulted in an increase in substrate sales. Substrate sales were 41% of total OE emission control revenue versus 30% a year ago. Excluding the impact of favorable currency and substrate sales, revenue was $255 million, versus $264 million in third quarter 2005. The decrease was largely due to OE production declines on a number of older vehicle models.
- European aftermarket revenue was $106 million, an increase from $97 million in third quarter 2005. Excluding favorable currency, revenue was still up 5% at $102 million. The increase was largely driven by price increases in both product lines, exhaust market share gains and the introduction of new diesel particulate filter business.
- Stronger OE and aftermarket sales increased South America and India revenue to $70 million, from $62 million the previous year. Excluding $3 million in currency and $9 million in substrate sales, revenue was $58 million, compared with $57 million a year ago.
- EBIT for Europe, South America and India was $24 million, versus $9 million a year ago. Third quarter 2006 and 2005 EBIT both included $2 million in restructuring costs. Third quarter 2006 EBIT included $1 million in favorable currency.
- The 151% year-over-year EBIT improvement was primarily driven by significant manufacturing improvements and SGA&E cost reductions, which more than offset volume declines and higher material costs.
ASIA PACIFIC
- Asian operations generated $66 million in revenue, a 76% increase over $38 million a year ago. Excluding the impact of currency and substrate sales, revenue was up 58%. Quarterly revenue gains were driven by the ramp-up of new OE platform launches in China as well as higher volumes on existing platforms.
- Australian revenue was $45 million, down from $56 million the previous year. Excluding the impact of currency and substrate sales, revenue was down 22%, mostly due to an 18% decline in industry OE production.
- Asia Pacific EBIT was $5 million, versus $4 million in third quarter 2005. Third quarter 2006 EBIT included $2 million in restructuring costs.
- The 85% improvement in EBIT, before restructuring, was due to stronger OE production and new platform launches in China, partially offset by higher warranty costs in the quarter.
OUTLOOK
Tenneco's geographic, market and customer balance, and ability to flex down spending and operations only partially offset the impact of significant North American OE volume declines in the third quarter. The company anticipates continued challenges in the fourth quarter as North American OE production is expected to be down significantly year-over-year, primarily in the light truck and SUV segment. Given the anticipated impact on fourth quarter performance, Tenneco will intensify its efforts to reduce operating costs and continue its focus on improving manufacturing productivity worldwide through programs like Lean and Six Sigma. In addition, the company's strong geographic and market balance with more than 50% of revenue generated outside North America and a strong presence in the global aftermarket should help partially offset the downswing in North America through the end of the year.
Attachment 1:
Tenneco's geographic, market and customer balance, and ability to flex down spending and operations only partially offset the impact of significant North American OE volume declines in the third quarter. The company anticipates continued challenges in the fourth quarter as North American OE production is expected to be down significantly year-over-year, primarily in the light truck and SUV segment. Given the anticipated impact on fourth quarter performance, Tenneco will intensify its efforts to reduce operating costs and continue its focus on improving manufacturing productivity worldwide through programs like Lean and Six Sigma. In addition, the company's strong geographic and market balance with more than 50% of revenue generated outside North America and a strong presence in the global aftermarket should help partially offset the downswing in North America through the end of the year.
Attachment 1:
- Statements of Income - 3 Months
- Statements of Income - 9 Months
- Balance Sheets
- Statements of Cash Flows - 3 Months
- Statements of Cash Flows - 9 Months
Attachment 2:
- Reconciliation of GAAP Net Income to EBITDA - 3 months
- Reconciliation of GAAP to Non-GAAP Earnings Measures - 3 months
- Reconciliation of GAAP Net Income to EBITDA - 9 months
- Reconciliation of GAAP to Non-GAAP Earnings Measures - 9 months
- Reconciliation of GAAP Revenues to Non-GAAP Revenues - 3 months
- Reconciliation of GAAP Revenues to Non-GAAP Revenues - 9 months
- Reconciliation of Non-GAAP Measures - Ratio of Debt Net of Cash to Adjusted EBITDA - LTM
CONFERENCE CALL
The company will host a conference call on Tuesday, October 24, 2006 at 10:30 a.m. EDT. The dial-in number is 888-790-1408 (domestic) or 773-756-0157(international). The passcode is TENNECO. The call and accompanying slides will be available on the financial section of the Tenneco web site at www.tenneco.com. A recording of the call will be available one hour following completion of the call on October 24, 2006. To access this recording, dial 800-947-6450 (domestic) or 203-369-3539 (international). The purpose of the call is to discuss the company's operations for the quarter, as well as other matters that may impact the company's outlook. A copy of the press release is available on the financial and news sections of the Tenneco web site.
Tenneco is a $4.4 billion manufacturing company with headquarters in Lake Forest, Illinois and approximately 19,000 employees worldwide. Tenneco is one of the world's largest designers, manufacturers and marketers of emission control and ride control products and systems for the automotive original equipment market and the aftermarket. Tenneco markets its products principally under the Monroe®, Walker®, Gillet® and Clevite®Elastomer brand names. Among its products are Sensa-Trac® and Monroe Reflex® shocks and struts, Rancho® shock absorbers, Walker® Quiet-Flow® mufflers, Dynomax® performance exhaust products, and Clevite®Elastomer noise, vibration and harshness control components.
This press release contains forward-looking statements. Words such as "hopes," "estimates," "continue," "will," "plans," "outlook" and "goal" and similar expressions identify forward-looking statements. These forward-looking statements 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) changes in automotive manufacturers' production rates and their actual and forecasted requirements for the company's products;
(ii) the overall highly competitive nature of the automotive parts industry, including pricing pressure from the company's OE customers and the loss of any awards of business, or the failure to obtain new awards of business, from our large customers, on which we are dependent for a substantial portion of our revenues; for example, Ford, from whom the company derived 12% of its 2005 net sales, recently announced a plan to significantly reduce the number of its global suppliers. While the company currently believes that its relationship with Ford will not be impacted by this plan, any significant reduction in sales to Ford could have a material adverse effect on the company;
(iii) the company's resultant inability to realize the sales represented by its awarded book of business which is based on anticipated pricing for the applicable program over its life, and is subject to increases or decreases due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by customers;
(iv) 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;
(v) the cyclical nature of the global vehicular industry, including the performance of the global aftermarket sector, and changes in consumer demand and prices, including longer product lives of automobile parts and the cyclicality of automotive production and sales of automobiles which include the company's products, and the potential negative impact on the company's revenues and margins from such products;
(vi) the company's continued success in cost reduction and cash management programs and its ability to execute restructuring and other cost reduction plans and to realize anticipated benefits from these plans;
(vii) the general political, economic and competitive conditions in markets and countries where the company and its subsidiaries operate, including the strength of other currencies relative to the U.S. dollar and currency fluctuations and other risks associated with operating in foreign countries;
(viii) governmental actions, including the ability to receive regulatory approvals and the timing of such approvals;
(ix) 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 and the credit ratings of the company's debt;
(x) the cost and outcome of existing and any future legal proceedings, and compliance with changes in regulations, including environmental regulations;
(xi) workforce factors such as strikes or labor interruptions;
(xii) 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;
(xiii) further changes in the distribution channels for the company's aftermarket products, further consolidations among automotive parts customers and suppliers, and product warranty costs;
(xiv) changes by the Financial Accounting Standards Board or other accounting regulatory bodies to authoritative generally accepted accounting principles or policies;
(xv) acts of war, riots or terrorism, including, but not limited to the events taking place in the Middle East, the current military action in Iraq and the continuing war on terrorism, as well as actions taken or to be taken by the United States or 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 the company operates; and
(xvi) 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. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this press release.
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 report on Form 10-K for the year ended December 31, 2005. Further information can be found on the company's web site at www.tenneco.com.
The company will host a conference call on Tuesday, October 24, 2006 at 10:30 a.m. EDT. The dial-in number is 888-790-1408 (domestic) or 773-756-0157(international). The passcode is TENNECO. The call and accompanying slides will be available on the financial section of the Tenneco web site at www.tenneco.com. A recording of the call will be available one hour following completion of the call on October 24, 2006. To access this recording, dial 800-947-6450 (domestic) or 203-369-3539 (international). The purpose of the call is to discuss the company's operations for the quarter, as well as other matters that may impact the company's outlook. A copy of the press release is available on the financial and news sections of the Tenneco web site.
Tenneco is a $4.4 billion manufacturing company with headquarters in Lake Forest, Illinois and approximately 19,000 employees worldwide. Tenneco is one of the world's largest designers, manufacturers and marketers of emission control and ride control products and systems for the automotive original equipment market and the aftermarket. Tenneco markets its products principally under the Monroe®, Walker®, Gillet® and Clevite®Elastomer brand names. Among its products are Sensa-Trac® and Monroe Reflex® shocks and struts, Rancho® shock absorbers, Walker® Quiet-Flow® mufflers, Dynomax® performance exhaust products, and Clevite®Elastomer noise, vibration and harshness control components.
This press release contains forward-looking statements. Words such as "hopes," "estimates," "continue," "will," "plans," "outlook" and "goal" and similar expressions identify forward-looking statements. These forward-looking statements 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) changes in automotive manufacturers' production rates and their actual and forecasted requirements for the company's products;
(ii) the overall highly competitive nature of the automotive parts industry, including pricing pressure from the company's OE customers and the loss of any awards of business, or the failure to obtain new awards of business, from our large customers, on which we are dependent for a substantial portion of our revenues; for example, Ford, from whom the company derived 12% of its 2005 net sales, recently announced a plan to significantly reduce the number of its global suppliers. While the company currently believes that its relationship with Ford will not be impacted by this plan, any significant reduction in sales to Ford could have a material adverse effect on the company;
(iii) the company's resultant inability to realize the sales represented by its awarded book of business which is based on anticipated pricing for the applicable program over its life, and is subject to increases or decreases due to changes in customer requirements, customer and consumer preferences, and the number of vehicles actually produced by customers;
(iv) 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;
(v) the cyclical nature of the global vehicular industry, including the performance of the global aftermarket sector, and changes in consumer demand and prices, including longer product lives of automobile parts and the cyclicality of automotive production and sales of automobiles which include the company's products, and the potential negative impact on the company's revenues and margins from such products;
(vi) the company's continued success in cost reduction and cash management programs and its ability to execute restructuring and other cost reduction plans and to realize anticipated benefits from these plans;
(vii) the general political, economic and competitive conditions in markets and countries where the company and its subsidiaries operate, including the strength of other currencies relative to the U.S. dollar and currency fluctuations and other risks associated with operating in foreign countries;
(viii) governmental actions, including the ability to receive regulatory approvals and the timing of such approvals;
(ix) 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 and the credit ratings of the company's debt;
(x) the cost and outcome of existing and any future legal proceedings, and compliance with changes in regulations, including environmental regulations;
(xi) workforce factors such as strikes or labor interruptions;
(xii) 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;
(xiii) further changes in the distribution channels for the company's aftermarket products, further consolidations among automotive parts customers and suppliers, and product warranty costs;
(xiv) changes by the Financial Accounting Standards Board or other accounting regulatory bodies to authoritative generally accepted accounting principles or policies;
(xv) acts of war, riots or terrorism, including, but not limited to the events taking place in the Middle East, the current military action in Iraq and the continuing war on terrorism, as well as actions taken or to be taken by the United States or 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 the company operates; and
(xvi) 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. The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this press release.
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 report on Form 10-K for the year ended December 31, 2005. Further information can be found on the company's web site at www.tenneco.com.
CONTACT:
Tenneco Media Relations
Jane Ostrander
(1) 847 482 5607
jostrander@tenneco.com
Tenneco Investor Relations
Leslie Hunziker
(1) 847 482 5042
lhunziker@tenneco.com