Tenneco Reports Improved Year-Over-Year Third Quarter Results On Record High Revenue Growth
- Revenue up 39% driven by North America diesel launches
- Net income rises to $21 million; EPS up at 45-cents per diluted share
- EBIT up 31%; EBITDA up 24%
LAKE FOREST, ILLINOIS, OCTOBER 30, 2007 – Tenneco (NYSE: TEN) reported third quarter net income of $21 million, or 45-cents per diluted share, up from $7 million, or 16-cents per diluted share in third quarter 2006. Adjusted for the items below, net income was $19 million, or 39-cents per diluted share, versus net income of $11 million, or 26-cents per diluted share a year ago (the tables in this press release reconcile GAAP results to non-GAAP results). The comparative 2006 results reflect adjustments made in Tenneco’s restated financial statements filed in August 2007.
EBIT (earnings before interest, taxes and minority interest) was $57 million, a 31% increase over $43 million a year ago. Adjusted EBIT was $65 million, versus $50 million in third quarter 2006. Strong OE volumes in North America from new diesel platform launches and growth in China drove the improvement.
EBITDA (EBIT before depreciation and amortization) was $109 million, up from $88 million in third quarter 2006. Adjusted EBITDA was $117 million, compared to $95 million the prior year.
Third quarter revenue rose to $1.556 billion from $1.121 billion in third quarter 2006. Revenue in the quarter included $430 million in substrate sales, a 94% increase over third quarter 2006. Excluding substrate sales and favorable currency of $68 million, revenue was $1.069 billion versus $900 million a year ago. The revenue increase was driven by volume ramp-ups on platform launches in North America and higher OE revenues in Europe and Asia, more than offsetting lower aftermarket sales in North America and Europe.
Adjusted third quarter 2007 and 2006 results:
EBIT (earnings before interest, taxes and minority interest) was $57 million, a 31% increase over $43 million a year ago. Adjusted EBIT was $65 million, versus $50 million in third quarter 2006. Strong OE volumes in North America from new diesel platform launches and growth in China drove the improvement.
EBITDA (EBIT before depreciation and amortization) was $109 million, up from $88 million in third quarter 2006. Adjusted EBITDA was $117 million, compared to $95 million the prior year.
Third quarter revenue rose to $1.556 billion from $1.121 billion in third quarter 2006. Revenue in the quarter included $430 million in substrate sales, a 94% increase over third quarter 2006. Excluding substrate sales and favorable currency of $68 million, revenue was $1.069 billion versus $900 million a year ago. The revenue increase was driven by volume ramp-ups on platform launches in North America and higher OE revenues in Europe and Asia, more than offsetting lower aftermarket sales in North America and Europe.
Adjusted third quarter 2007 and 2006 results:
| Q3 2007 | Q3 2006 | |||||||||||||||||
| EBITDA | EBIT | Net Income | Per Share | EBITDA | EBIT | Net Income | Per Share | |||||||||||
| Earnings Measures | $ | 109 | $ | 57 | $ | 21 | $ | 0.45 | $ | 88 | $ | 43 | $ | 7 | $ | 0.16 | ||
| Adjustments (reflects non-GAAP measures): |
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| Restructuring/restructuring related expenses | 3 | 3 | 3 | 0.05 | 7 | 7 | 4 | 0.10 | ||||||||||
| New Aftermarket customer changeover costs | 5 | 5 | 3 | 0.06 | - | - | - | - | ||||||||||
| Tax Adjustments | - | - | (8) | (0.17) | - | - | - | - | ||||||||||
| Non-GAAP earnings measures | $ | 117 | $ | 65 | $ | 19 | $ | 0.39 | $ | 95 | $ | 50 | $ | 11 | $ | 0.26 | ||
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Download and print this summary table (PDF): Adjusted third quarter 2007 and 2006 results
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Third quarter 2007 adjustments:
- Restructuring and restructuring related expenses of $3 million pre-tax, or 5-cents per diluted share;
- Aftermarket customer changeover costs of $5 million pre-tax, or 6-cents per diluted share (customer changeover costs are expenses incurred to replace competitors’ products with Tenneco products);
- Tax benefits of $8 million, or 17-cents per diluted share, related to a reduction in income tax rates in Germany and adjustments for prior year income tax returns.
Third quarter 2006 adjustments:
- Restructuring and restructuring related expenses of $7 million pre-tax or 10-cents per diluted share.
Gross margin in the quarter was 15.6% versus 17.5% in third quarter 2006. Higher substrate sales – 28% of total revenue compared with 20% a year ago - accounted for 1.7 percentage points of the decline. Favorable currency and lower restructuring costs were offset by a shift toward a lower percentage of total revenue generated by higher margin aftermarket business.
Total steel costs in the quarter increased $20 million year-over-year, which Tenneco continues to offset with cost reductions, material substitutions, low cost country sourcing and steel cost recovery from customers. The company anticipates that its gross steel costs in the fourth quarter will increase approximately $25 million, year-over-year.
SGA&E (selling, general, administrative & engineering) costs as a percent of sales decreased to 8.4% from 9.4% a year ago as the rate of revenue growth far outpaced that of SGA&E spending. SGA&E in the quarter includes increased investments in engineering for technology development and future platform launches as well as an expense of $5 million for aftermarket customer changeover costs. Excluding third quarter 2007 changeover costs and restructuring costs in the prior year, SGA&E is 8.1% versus 9.3% the prior year.
EBIT as a percent of revenue was 3.7% versus 3.9% a year ago. Higher substrate sales more than accounted for the decrease. The company continues to see margin benefits from advanced technology content on new large-volume OE emission control platforms, which helps counter higher substrate sales and a shift to a higher percentage of OE revenue.
Cash used by operating activities was $9 million versus $5 million generated by operating activities a year ago, driven by a greater use of working capital to support revenue growth, partially offset by higher earnings. The increase in the use of working capital was primarily driven by higher inventories in the North American OE emission control and aftermarket businesses. The majority of the increase was higher inventories of catalytic converters sourced from South Africa to supply operations in North America. Because of changes in OE production schedules and the UAW strike at GM, the amount of inventory supporting these platforms increased.
As expected, cash performance in the quarter was also impacted by higher tax payments. In addition, the company acquired Combustion Components Associates’ ELIM-NOx™ technology, for $16 million. The company also made capital expenditures in the third quarter in preparation for the 2008 launch of newly awarded OE hot-end emission control business in North America, significant business that was recently sourced to Tenneco by one of the company’s largest customers.
At quarter-end, debt net of cash balances was $1.333 billion, compared with $1.294 billion a year ago. Cash balances at quarter-end were $203 million versus $116 million the prior year. Total debt was $1.536 billion, versus $1.410 billion at the end of third quarter 2006. At the end of the quarter, the ratio of debt net of cash balances to adjusted LTM (last twelve months) EBITDA was 2.9x, an improvement over 3.1x a year ago.
"We are pleased with our performance this quarter. Advanced technology continues to fuel our top-line growth with strong OE revenue gains globally and we are improving our EBIT results on value-added sales," said Gregg Sherrill, chairman and CEO, Tenneco. "While our cash performance was not as strong year-over-year, it reflects investments made to grow our businesses including a technology investment, increased engineering spending and capital expenditures to prepare for new emission control business in North America."
NORTH AMERICA
Total steel costs in the quarter increased $20 million year-over-year, which Tenneco continues to offset with cost reductions, material substitutions, low cost country sourcing and steel cost recovery from customers. The company anticipates that its gross steel costs in the fourth quarter will increase approximately $25 million, year-over-year.
SGA&E (selling, general, administrative & engineering) costs as a percent of sales decreased to 8.4% from 9.4% a year ago as the rate of revenue growth far outpaced that of SGA&E spending. SGA&E in the quarter includes increased investments in engineering for technology development and future platform launches as well as an expense of $5 million for aftermarket customer changeover costs. Excluding third quarter 2007 changeover costs and restructuring costs in the prior year, SGA&E is 8.1% versus 9.3% the prior year.
EBIT as a percent of revenue was 3.7% versus 3.9% a year ago. Higher substrate sales more than accounted for the decrease. The company continues to see margin benefits from advanced technology content on new large-volume OE emission control platforms, which helps counter higher substrate sales and a shift to a higher percentage of OE revenue.
Cash used by operating activities was $9 million versus $5 million generated by operating activities a year ago, driven by a greater use of working capital to support revenue growth, partially offset by higher earnings. The increase in the use of working capital was primarily driven by higher inventories in the North American OE emission control and aftermarket businesses. The majority of the increase was higher inventories of catalytic converters sourced from South Africa to supply operations in North America. Because of changes in OE production schedules and the UAW strike at GM, the amount of inventory supporting these platforms increased.
As expected, cash performance in the quarter was also impacted by higher tax payments. In addition, the company acquired Combustion Components Associates’ ELIM-NOx™ technology, for $16 million. The company also made capital expenditures in the third quarter in preparation for the 2008 launch of newly awarded OE hot-end emission control business in North America, significant business that was recently sourced to Tenneco by one of the company’s largest customers.
At quarter-end, debt net of cash balances was $1.333 billion, compared with $1.294 billion a year ago. Cash balances at quarter-end were $203 million versus $116 million the prior year. Total debt was $1.536 billion, versus $1.410 billion at the end of third quarter 2006. At the end of the quarter, the ratio of debt net of cash balances to adjusted LTM (last twelve months) EBITDA was 2.9x, an improvement over 3.1x a year ago.
"We are pleased with our performance this quarter. Advanced technology continues to fuel our top-line growth with strong OE revenue gains globally and we are improving our EBIT results on value-added sales," said Gregg Sherrill, chairman and CEO, Tenneco. "While our cash performance was not as strong year-over-year, it reflects investments made to grow our businesses including a technology investment, increased engineering spending and capital expenditures to prepare for new emission control business in North America."
NORTH AMERICA
- OE revenue was $602 million, versus $307 million in third quarter 2006. Excluding substrate sales, revenue was $357 million, up 41% year-over-year from $253 million. Industry production was up 3%. The significant year-over-year increase was driven by Tenneco’s presence on diesel pick-up truck platforms like the Ford Super-Duty, GM Silverado and Sierra, the Dodge heavy duty Ram and International’s medium duty commercial trucks as well as the Toyota Tundra and GM’s crossover vehicles.
- Aftermarket revenue was $132 million, compared with $134 million a year ago. A decrease in emission control sales due to lower replacement rates more than offset an increase in ride control sales.
- EBIT for North American operations was $24 million, up from $15 million a year ago. Adjusted for the items below, EBIT was $29 million compared with $18 million a year ago. EBIT improvement was driven by higher OE volumes including new OE ride control launches and more efficient production on the company’s diesel pick-up truck platforms launched earlier this year. These volume increases more than offset aftermarket customer changeover costs and the impact of the UAW strike at General Motors.
- Third quarter 2007 EBIT includes $5 million in aftermarket changeover costs and third quarter 2006 includes $3 million in restructuring costs.
EUROPE, SOUTH AMERICA AND INDIA
- OE revenue was $478 million, versus $393 million in third quarter 2006. Excluding substrate sales and favorable currency, revenue was $315 million compared with $263 million. Higher emission control and ride control volumes and content on strong selling platforms like the BMW 1 and 3 Series, Daimler Sprinter, Ford Mondeo and the Volvo V70, drove the revenue gain and outpaced a 6% increase in industry production.
- Aftermarket revenue was $108 million, versus $106 million a year ago. Excluding favorable currency, revenue was $100 million. The decline was driven by lower exhaust product sales.
- South America and India revenue increased to $86 million from $70 million a year ago. Excluding the impact of substrate sales and favorable currency, revenue was $70 million compared with $61 million. Higher OE volumes in South America drove the increase.
- EBIT for Europe, South America and India was $22 million compared with $23 million a year ago. Third quarter 2007 EBIT includes $3 million in restructuring expenses and third quarter 2006 EBIT includes $2 million in restructuring expense. Adjusted EBIT was flat year-over-year.
- EBIT was impacted by a strike at the company’s Wissembourg, France facility due to announcing the intention to close the facility and an industry-wide strike at its South Africa facilities; higher material costs; and an increase in production costs at the Edenkoben, Germany manufacturing facility as a result of a significant stamping equipment breakdown resulting in temporary outsourcing. All of these issues more than offset higher OE volumes and operating efficiencies in other areas of the business.
ASIA PACIFIC
- Asia revenue rose 51% to $99 million from $65 million a year ago. Excluding substrate sales and favorable currency, revenue was $60 million versus $42 million a year ago. The increase was driven by strong OE volumes in China, particularly with VW, GM and Brilliance.
- Australia revenue was $51 million compared with $46 million in third quarter 2006. Excluding the impact of substrate sales and favorable currency, revenue was $37 million, down from $41 million a year ago. The decline was driven by lower OE volumes and aftermarket sales.
- Asia Pacific EBIT was $11 million, more than doubling the prior year at $5 million. Third quarter 2006 EBIT includes $2 million in restructuring costs. EBIT improvement was also driven by strong OE volumes in China and the benefits of 2006 restructuring initiatives in Australia.
"We don’t expect global market conditions to change significantly through the remainder of the year. While industry light vehicle production in North America is projected to be down year-over-year in the fourth quarter, we believe continued growth from our North American diesel pick-up truck platform launches and a favorable platform mix will help us better manage these production declines. We also believe the global aftermarket will remain relatively soft," said Sherrill. "The fourth quarter is typically our strongest quarter for generating cash and we expect this trend to repeat itself this year. We also are confident we have the third quarter issues in Europe behind us."
The company continues to generate growth with advanced technology, and by capturing opportunities in emerging markets and with fast-growing customers. Tenneco recently announced that its venture in Shanghai has won its first commercial vehicle development contract to supply a SCR diesel aftertreatment system with ELIM-NOx, the company’s recently acquired advanced diesel emission control technology. The contract is with a major domestic commercial vehicle engine manufacturer in China and is currently scheduled to launch in 2011.
Attachment 1:
The company continues to generate growth with advanced technology, and by capturing opportunities in emerging markets and with fast-growing customers. Tenneco recently announced that its venture in Shanghai has won its first commercial vehicle development contract to supply a SCR diesel aftertreatment system with ELIM-NOx, the company’s recently acquired advanced diesel emission control technology. The contract is with a major domestic commercial vehicle engine manufacturer in China and is currently scheduled to launch in 2011.
Attachment 1:
- Statements of Income - 3 Months
- Statements of Income - 9 Months
- Balance Sheets
- Statements of Cash Flow - 3 Months
- Statements of Cash Flow - 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
- Reconciliation of GAAP to Non-GAAP Earnings Measures – Adjusted SGA&E as a Percent of Net Sales
CONFERENCE CALL
The company will host a conference call on Tuesday, October 30, 2007 at 10:00 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 30, 2007. To access this recording, dial 800-509-8621 (domestic) or 203-369-3807 (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 $4.7 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.
This press release contains forward-looking statements. Words such as "hopes," "may," "expects," "anticipate," "will," and "outlook" 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 more than 10% of its 2006 net sales, announced in 2006 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 10K/A for the year ended December 31, 2006. Further information can be found on the company's web site at www.tenneco.com.
Tenneco is a $4.7 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.
This press release contains forward-looking statements. Words such as "hopes," "may," "expects," "anticipate," "will," and "outlook" 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 more than 10% of its 2006 net sales, announced in 2006 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 10K/A for the year ended December 31, 2006. 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