Tenneco Reports Second Quarter Earnings
- Reports global revenues of $1.65 billion on strong Europe and Asia-Pacific sales
- Combined Europe segment and Asia Pacific EBIT up 10% year-over-year
- Expects $10 million in annualized savings from initial restructuring to address North American industry changes
- New off-road commercial vehicle business announced
LAKE FOREST, ILLINOIS, JULY 31, 2008 – Tenneco Inc. (NYSE: TEN) reported second quarter net income of $13 million, or 26-cents per diluted share, compared with $41 million, or 85-cents per diluted share, in second quarter 2007. Adjusted for the items below, net income was $34 million, or 71-cents per diluted share, versus $42 million, or 88-cents per diluted share a year ago. The tables in this press release reconcile GAAP results to non-GAAP results.
EBIT (earnings before interest, taxes and minority interest) was $75 million, versus $103 million a year ago. Solid profit improvements in the company’s Europe and Asia Pacific segments partially offset lower profitability in North America due to significant industry OE production cuts and customer changeover costs for new aftermarket business. Adjusted EBIT was $88 million, compared with $105 million in second quarter 2007. EBITDA including minority interest (EBIT before depreciation and amortization) was $132 million versus $153 million the previous year. Adjusted EBITDA including minority interest was $145 million compared with $155 million a year ago.
"Our strong performance in Europe, South America and Asia this quarter partially offset the impact from tough market conditions in North America, marked by a vehicle mix shift away from light trucks and SUVs and a 15% decline in industry OE production volumes," said Gregg Sherrill, chairman and CEO, Tenneco. "We responded quickly to market changes by aggressively reducing costs across the entire organization and flexing operations at our North American plants as quickly as feasible to adjust to declining customer production schedules."
Adjusted second quarter 2008 and 2007 results:
|Q2 2008||Q2 2007|
|EBITDA||EBIT||Net Income||Per Share||EBITDA||EBIT||Net Income||Per Share|
(reflects non-GAAP measures):
|Restructuring/restructuring related expenses||6||6||4||0.08||2||2||1||0.03|
|New Aftermarket customer changeover costs||7||7||4||0.09||-||-||-||-|
|Non-GAAP earnings measures||$||145||$||88||$||34||$||0.71||$||155||$||105||$||42||$||0.88|
Download and print this summary table (PDF): Adjusted second quarter 2008 and 2007 results
Second quarter 2008 adjustments:
- Restructuring and related expenses of $6 million pre-tax, or 8-cents per diluted share;
- Aftermarket customer changeover costs of $7 million pre-tax, or 9-cents per diluted share related to new aftermarket business (expenses incurred to replace competitors’ products with Tenneco products);
- Non-cash tax expense of $13 million, or 28-cents per diluted share, for tax liabilities related to changes in inter-company billing arrangements.
Second quarter 2007 adjustments:
- Restructuring and related expenses of $2 million pre-tax, or 3-cents per diluted share.
Second quarter revenue was $1.651 billion, compared with $1.663 billion a year ago. Substrate sales in the quarter declined to $401 million from $460 million the previous year. Excluding substrate sales and a currency benefit of $115 million, revenue was $1.161 billion, down 3% from $1.203 billion in second quarter 2007. The revenue decline was driven by lower North America OE revenues due to lower production volumes, a rapid vehicle mix shift and the American Axle strike, which extended two months into the quarter, all of which was compounded by strikes at GM plants producing crossover vehicles and the Chevrolet Malibu.
Cash provided by operations in the quarter was $61 million versus $67 million a year ago. Cash used for working capital was about the same year-over-year. A higher level of securitized accounts receivable in second quarter 2008 offset the impact from lower earnings in the quarter.
At quarter-end, debt net of cash balances was $1.328 billion, compared with $1.282 billion at the end of second quarter 2007. Cash balances were $164 million versus $168 million the prior year. Total debt was $1.492 billion versus $1.450 billion a year ago. At the end of the quarter, the ratio of debt net of cash balances to adjusted LTM (last twelve months) EBITDA including minority interest was 2.8x, compared with 2.9x at the end of second quarter 2007.
Gross margin in the quarter was 16.2% compared with 17.2% in the second quarter 2007. The decline was more than driven by the decline in North America OE production and the mix shift away from light trucks and SUVs. Gross margin included $3 million in restructuring-related expenses in the second quarter 2008, compared to $2 million in second quarter 2007.
Steel costs in the quarter were $17 million higher than one year ago driven by increasing surcharges for chrome purchases in North America. The company is addressing these increases with cost reductions, aftermarket price increases and OE customer recovery efforts.
SGA&E (selling, general, administrative and engineering) expense in the quarter was 8.2% of sales versus 8.0% a year ago, as stepped up cost management actions were offset by $7 million in customer changeover costs for new business and $3 million for restructuring. SGA&E as a percent of sales was also impacted by lower than planned revenue due to the significant drop in North America OE production including the impact of strikes. The company continued to make the necessary planned engineering investments globally for future new business.
- OE revenue was $516 million, down from $661 million a year ago. Excluding substrate sales, revenue was down 18% year-over-year to $324 million from $395 million. Most of the revenue decline occurred in the emission control business, which saw a 23% drop in revenue excluding substrate sales, due to the significant reduction in customer light truck production. Ride control revenue declined 8% as the $12 million in passenger car-related revenue generated in June at the recently acquired Kettering, Ohio ride control operations partially offset the impact of significantly lower light truck and SUV production.
- Aftermarket revenue was up 6% year-over-year to $158 million from $149 million, primarily driven by $6 million in ride control and exhaust product sales to new customers. Excluding favorable currency, revenue was $156 million.
- EBIT for North America operations was $17 million, compared with $50 million a year ago. Excluding the impact of restructuring and aftermarket customer changeover costs for new business, EBIT was $25 million versus $50 million in second quarter 2007.
- The adjusted EBIT decrease was due to the OE vehicle mix shift and industry production volume declines that significantly offset the benefit from higher aftermarket sales and lower SG&A spending. Adjusted EBIT was negatively impacted by:
- The lower sales to OE customers due to light truck and SUV production declines as well as strikes during the quarter. This also negatively impacted Tenneco’s mix. Together, these factors accounted for a $27 million EBIT decline.
- Manufacturing absorption driven by significant downward changes to customer production schedules, which reduced EBIT by an additional $12 million.
- Higher depreciation expense of $2 million resulting from capital expenditures made to support the 2007 emission control platform launches.
- Partially offsetting these declines were the positive benefits of:
- Higher aftermarket volumes and 2008 OE platform launches in both the emission control and ride control businesses, contributing $9 million in year-over-year EBIT improvement.
- Focused spending reduction efforts to help counter the eroding North America industry environment, predominantly in lower SG&A costs.
EUROPE, SOUTH AMERICA, INDIA
- Europe OE revenue was $578 million, up from $513 million a year ago. Excluding the impact of substrate sales and favorable currency, revenue was $370 million, versus $367 million the prior year. The year-over-year revenue comparison also reflects $7 million less in alloy surcharge cost recovery, driven by lower nickel prices. The increased revenue in the quarter included ride control business on vehicles like the VW Passat and Mercedes C-class - both with CES technology – and emission control platforms including the BMW 1 and 3 series, Mini and VW Golf.
- Europe aftermarket revenue was $129 million compared with $124 million a year ago. Excluding the impact of favorable currency, revenue was $114 million. Lower exhaust product sales drove down revenue and were the result of overall exhaust market declines.
- South America and India revenue increased to $108 million from $81 million a year ago, driven by strong aftermarket sales and OE volumes in South America. Excluding substrate sales and currency, revenue was $82 million up from $70 million.
- EBIT for Europe, South America and India increased to $48 million, up year-over-year from $45 million. Adjusted for restructuring in each quarter, EBIT was $51 million, compared with $47 million the prior year. The increase was driven by OE volume increases, strong operational improvements and $2 million in favorable currency, which more than offset the impact from lower Europe aftermarket sales.
- Asia revenue increased 23% to $105 million from $85 million the prior year. Excluding substrate sales and favorable currency, revenue was $68 million versus $55 million. The increase was due to strong OE volumes in China, which drove China revenue up 23% year-over-year.
- Australia revenue was up 13% to $57 million from $50 million a year ago, driven by higher OE production. Excluding substrate sales and currency, revenue was $47 million versus $43 million.
- Asia Pacific EBIT was $10 million, up from $8 million a year ago. Adjusted for $2 million in restructuring costs in second quarter 2008, EBIT was $12 million, versus $8 million. The increase was driven by strong OE volumes in China, operational improvements and $1 million in favorable currency.
Tenneco expects ongoing production volatility in the North America market as its OE customers continue to adjust production schedules to overall weak vehicle sales and the mix shift away from light trucks and SUVs. Although Europe economic indicators are weakening, the company expects overall European production to remain relatively stable in the third quarter with weakening Western Europe industry sales continuing to be offset by Eastern Europe. In China, the company anticipates slowing overall industry growth. Tenneco also expects global aftermarket conditions to remain flat to slightly down.
Tenneco updates its global original equipment revenue guidance annually; however, the company announced today that the guidance provided in its fourth quarter 2007 earnings release is no longer applicable given the challenging economic conditions facing the automotive industry in North America and around the world. The company is not providing a specific update to its 2008 and 2009 guidance due to the volatility of market conditions in North America and the uncertainties around customer restructurings and plant shut-downs.
In response to the downturn in North American production, Tenneco earlier this week implemented initial restructuring initiatives across its North America OE business units, resulting in the elimination of about 6% of its salaried staff (about 75 salaried positions) through voluntary and involuntary severance programs. The company expects these actions will generate $7 million in annualized savings. In June, the company eliminated 25 salaried positions within its North American aftermarket business unit (7% of its aftermarket salaried staff), which the company expects will result in an additional $3 million in annualized savings. The company recognized $1 million in restructuring expense related to these actions in the second quarter and expects an additional $5 million in restructuring expense in the third quarter.
Tenneco continues to adjust its hourly staff levels at its North American plants in conjunction with customer production schedules. The company is also reviewing its longer-term North American capacity requirements, needing to balance the negative impact of recent light vehicle customer announcements regarding manufacturing operations changes and plant closings with Tenneco’s capacity needs to accommodate its fast-growing commercial vehicle business.
"We continue to closely monitor industry conditions on a regional basis and will take the additional steps necessary to match our operations to the market," Sherrill said. "In the near term, we are committed to making the right changes, particularly in North America, without compromising our long-term growth opportunities."
The company reiterates its expectations to achieve an average compounded annual OE revenue growth rate of 11% to 13% between 2008 and 2012. Tenneco expects half of this growth to be generated in the commercial vehicle market with significant new emissions control business for on-road and off-road applications.
To date, the company has been awarded 37 development or production contracts globally to supply diesel after-treatment technologies to meet stricter emissions regulations that take effect in various regions of the world starting in 2010. These include 21 commercial vehicle contracts for on-road and off-road (construction and agriculture) applications; 15 light vehicle contracts; and one contract to meet locomotive regulations.
Yesterday, the company announced that it is working with Caterpillar Inc. to develop and produce diesel engine after-treatment systems for Caterpillar engines. Tenneco’s advanced after-treatment systems, along with Caterpillar’s leading engine emissions reduction technology, will be used globally to meet stricter diesel emissions regulations that phase in beginning in 2011.
Tenneco continues to win new business in the expanding BRIC markets and is continuing its strong position in North America relative to the emissions control requirements for half-ton and three-quarter ton diesel pick-up trucks.
"Our growth prospects remain robust thanks to our advanced technology to meet future environmental regulations, which is driving more emission control business in both the light vehicle and commercial vehicle segments worldwide," Sherrill said. "Coupled with our unmatched global manufacturing footprint, which is generating new ride control and emission control business in the growth economies of Eastern Europe, as well as Brazil, Russia, India and China, we remain confident in our projection to grow our global OE revenues at an average compounded annual growth rate of 11% to 13% over the next five years."
- Statements of Income - 3 Months
- Statements of Income - 6 Months
- Balance Sheet
- Statements of Cash Flow - 3 Months
- Statements of Cash Flow - 6 Months
- Reconciliation of GAAP Net Income to EBITDA including minority interest – 3 Months
- Reconciliation of GAAP to Non-GAAP Earnings Measures - 3 Months
- Reconciliation of GAAP Net Income to EBITDA including minority interest – 6 Months
- Reconciliation of GAAP to Non-GAAP Earnings Measures - 6 Months
- Reconciliation of GAAP Revenues to Non-GAAP Revenue Measures - 3 Months
- Reconciliation of GAAP Revenues to Non-GAAP Revenue Measures - 6 Months
- Reconciliation of Non-GAAP Measures – Ratio of Debt Net of Cash to Adjusted EBITDA including minority interest – LTM
The company will host a conference call on Thursday, July 31, 2008 at 11:00 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 July 31, 2008. To access this recording, dial 800-294-0991 (domestic) or 402-220-9753 (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 $6.2 billion manufacturing company with headquarters in Lake Forest, Illinois and approximately 21,000 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 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;
(iii) 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;
(iv) 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;
(v) 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;
(vi) 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;
(vii) governmental actions, including the ability to receive regulatory approvals and the timing of such approvals;
(viii) 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;
(ix) the cost and outcome of existing and any future legal proceedings, and compliance with changes in regulations, including environmental regulations;
(x) workforce factors such as strikes or labor interruptions;
(xi) 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;
(xii) further changes in the distribution channels for the company's aftermarket products, further consolidations among automotive parts customers and suppliers, and product warranty costs;
(xiii) changes by the Financial Accounting Standards Board or other accounting regulatory bodies to authoritative generally accepted accounting principles or policies;
(xiv) 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
(xv) 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, 2007. Please see "Outlook" under "Management’s Discussion and Analysis of Financial Conditions and Results of Operations" included in the company’s form 10-K for the year ended December 31, 2007 for information regarding the company’s revenue projection. Further information can be found on the company's web site at www.tenneco.com.
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