Tenneco Reports Third Quarter Financial Results
- Results impacted by significant OE production volume declines
- Cash flow from operations improved $44 million year-over-year
- Company anticipates $64 million in annual savings from recently announced global restructuring initiative
- Loss includes $132 million non-cash charge primarily for valuation allowance on net operating loss deferred tax assets
Lake Forest, November 4, 2008 – Tenneco Inc. (NYSE: TEN) reported a third quarter net loss of $136 million, or $2.92 per basic share, down from net income of $21 million, or 45-cents per diluted share (47-cents per basic share) in third quarter 2007.
Adjusted for the items below, the company had net income of less than $1 million or 1-cent per share, versus net income of $19 million, or 39-cents per diluted share a year ago. The adjustments include non-cash income tax charges of $132 million in the quarter primarily related to a required write-down of a portion of the company’s deferred tax assets. (see explanation below). The tables in this press release reconcile GAAP results to non-GAAP results.
EBIT (earnings before interest, taxes and minority interest) was $28 million, compared with $57 million a year ago. Adjusted EBIT was $34 million, versus $65 million the prior year. EBITDA including minority interest (EBIT before depreciation and amortization) was $84 million, down year-over-year from $109 million. Adjusted EBITDA including minority interest was $90 million, compared to $117 million a year ago. The earnings decrease was due to significantly lower North America industry production volumes and the impact of a shift in vehicle mix, as well as volume declines with key China OE customers.
"The global economic crisis is having a severe impact on the automotive industry resulting in significant OE production volume declines, the negative impact of which was clearly seen in our results this quarter," said Gregg Sherrill, chairman and CEO, Tenneco. "We are responding with aggressive cost reduction and cash generation efforts including implementing a restructuring program that will save $64 million annually by better aligning our operations with the realities of the market."
Adjusted third quarter 2008 and 2007 results:
|Q3 2008||Q3 2007|
|EBITDA||EBIT||Net Income||Per Share||EBITDA||EBIT||Net Income||Per Share|
(reflects non-GAAP measures):
|Restructuring/restructuring related expenses||6||6||4||0.09||3||3||3||0.05|
|New Aftermarket customer changeover costs||-||-||-||-||5||5||3||0.06|
|Non-GAAP earnings measures||$||90||$||34||$||-||$||0.01||$||117||$||65||$||19||$||0.39|
Download and print this summary table (PDF): Adjusted third quarter 2008 and 2007 results
Third quarter 2008 adjustments:
- Restructuring and related expenses of $6 million pre-tax, or 9-cents per diluted share;
- Non-cash tax charges of $132 million, or $2.84 per diluted share primarily for:
- Recording a valuation allowance against the company’s deferred tax assets. In evaluating the future utilization of the company’s net operating losses (NOL), accounting standards require the company to project that the current negative operating environment will continue through the expiration of the net operating loss carry forwards, beginning in 2020 through 2027. This accounting charge has no effect on the continued availability of the NOLs to offset taxable income that may be earned by the company in the future.
- Repatriating $40 million in cash from Brazil as a result of the company’s strong performance in South America over the past several years.
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 revenue was $1.497 billion, down from $1.556 billion in third quarter 2007. Revenue in the quarter included $368 million in substrate sales. Excluding substrate sales and favorable currency, revenue was $1.104 billion, versus $1.126 billion a year ago. The decline was driven by the impact of lower OE production volumes, most significantly in North America, compounded by the vehicle mix shift away from SUVs and light trucks in North America, as well as volume declines with key China customers.
Gross margin in the quarter was 13.3%, down from 15.6% a year ago. The decrease was due to lower industry OE production volumes and the impact of a shift in vehicle mix as well as negative currency effects. The company’s gross margin in third quarter 2008 was also negatively impacted by the timing of steel cost recovery from a major OE customer. Gross margin in both third quarter 2008 and 2007 included $3 million in restructuring related expenses.
Steel costs in the quarter were $11 million higher year-over-year, driven by base price increases and 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 (sales, general, administrative and engineering) expense improved to 7.7% of sales from 8.4% in third quarter 2007, due to lower administrative costs and intense efforts to cut discretionary spending. Engineering expense in the quarter remained relatively even year-over-year as the company focused its spending and continued to make strategic investments in preparation for new platform launches and in the technology necessary for capturing future growth opportunities.
Cash generated by operating activities in the quarter was $40 million, a $44 million improvement over a year ago. The cash performance was primarily driven by working capital improvements, particularly in inventory, which included a significant decrease in cash used for inventories of catalytic converters sourced from South Africa for operations in North America.
The company’s tightest senior credit facility debt-compliance ratio is its leverage ratio. At September 30, 2008, the company’s leverage ratio was 3.27, below the maximum level of 4.0. The interest coverage ratio was 4.08, above the minimum of 2.10. The company has a cushion of $79 million against its tightest covenant for LTM (last twelve month) EBITDA and $318 million for debt.
At quarter-end, total debt was $1.524 billion, compared with $1.536 billion the prior year. Cash balances were $127 million versus $203 million a year ago and debt net of cash balances was $1.397 billion, compared with $1.333 billion at the end of third quarter 2007. The company completed the quarter with $328 million of unused borrowing capacity under its $680 million in revolving credit facilities. At the end of the quarter, the ratio of debt net of cash balances to adjusted LTM EBITDA including minority interest was 3.1x, compared with 2.9x at the end of third quarter 2007.
In September, the company added a new $70 million receivable securitization facility in Europe, which increased its global factoring capacity to $310 million. The terms of the company’s debt agreements limit the amount of receivables it can sell to $250 million. However, this new facility increases and diversifies the company’s funding sources and further strengthens its financial flexibility.
- OE revenue was $520 million, down from $602 million a year ago. Third quarter 2008 revenues included $40 million from the recently acquired Kettering, Ohio ride control operations. Excluding substrate sales, revenue was down 7% year-over-year to $332 million from $357 million. The decrease was due to a 16% year-over-year decline in industry production volumes, including the temporary production shut-down on the Toyota Tundra and Sequoia as well as volume drops on the Ford Super-Duty and F150, GMT900 and the Dodge Ram platforms. These were partially offset by the new Kettering operations passenger car revenue and volume increases on GM crossover vehicles.
- Aftermarket revenue increased to $142 million from $132 million the previous year, driven by higher ride control and exhaust sales volumes and price increases to help offset higher material costs.
- EBIT for North America operations was a loss of $2 million, compared with earnings of $24 million in third quarter 2007. Adjusted for the items below, EBIT was $3 million, compared with $29 million a year ago.
- Third quarter 2008 EBIT included $5 million in restructuring costs and third quarter 2007 EBIT included $5 million in aftermarket customer changeover costs.
- The company was able to offset nearly half of the negative EBIT impact from market and economic conditions in the quarter with new business and substantial cost reductions. The market and economic impacts and operating offsets included:
- Lower OE production volumes and mix, accounting for $28 million of the EBIT decline;
- Manufacturing fixed cost absorption, particularly at plants supplying SUVs and light trucks, reducing EBIT by $14 million;
- Unfavorable currency exchange rates of $6 million, related to the Mexican Peso and Canadian dollar;
- Higher depreciation expense of $1 million;
- Negative impact from timing of steel cost recovery from a major OE customer;
- New OE business and higher aftermarket sales, generating $15 million in EBIT;
- Significant reductions in SGA&E spending.
EUROPE, SOUTH AMERICA, INDIA
- Europe OE revenue was $481 million, versus $478 million a year ago. Excluding substrate sales and favorable currency, revenue was $339 million, versus $344 million the prior year. The decrease was driven by lower volumes on emission control platforms like the Opel Astra and Vectra and the BMW 3 Series, which more than offset higher year-over-year ride control revenues from new business including the CES technology on the VW Passat and Mercedes C-class.
- Europe aftermarket revenue increased to $111 million from $108 million in third quarter 2007. Excluding the impact of favorable currency, revenue was $107 million. Higher ride control sales mostly offset a decrease in exhaust sales.
- South America and India revenue was $115 million, up from $86 million a year ago. Excluding substrate sales and favorable currency, revenue was $88 million, compared with $76 million in third quarter 2007. Higher OE volumes in South America drove the increase.
- EBIT for Europe, South America and India was $24 million, up from $22 million a year ago. Adjusted for the items below, EBIT was $25 million, flat year-over-year. Lower OE production volumes in the emission control business were offset by higher OE ride control volumes and cost reductions.
- Third quarter 2008 EBIT included $1 million in restructuring and third quarter 2007 EBIT included $3 million in restructuring. Currency had a $1 million negative impact on third quarter 2008 EBIT.
- Asia revenue was $77 million, versus $99 million a year ago. The decrease was driven by lower China production volumes and extended plant shut downs with key customers including GM, VW, Ford and Brilliance. Excluding substrate sales and favorable currency, revenue was $49 million, versus $66 million.
- Australia revenue was $51 million, flat year-over-year. Excluding substrate sales and favorable currency, revenue was $46 million, up from $43 million.
- Asia Pacific EBIT was $6 million, versus $11 million a year ago. The decrease was driven by OE production volume declines with key customers in China and related manufacturing costs, partially offset by cost reductions and manufacturing efficiency improvements in Australia.
Tenneco anticipates continued volatility across the global industry driven by the ongoing economic crisis with continued production volume declines in North America and with key customers in China. The company also expects significant volume weakness in Europe in the fourth quarter as the company’s OE customers continue to adjust schedules to weak vehicle sales.
In response, Tenneco announced actions last week, which are expected to generate $64 million in annual savings. These cost reduction and cash generation plans include:
- Eliminating approximately 1,100 jobs worldwide;
- Closing an engineering center and four manufacturing facilities and significantly restructuring another manufacturing plant;
- Implementing targeted reductions in capital spending;
- Significantly reducing and re-prioritizing information technology (IT) spending;
- Cutting aftermarket marketing and sales expenses;
- Implementing other SG&A cost reductions.
Tenneco estimates it will record up to $60 million in charges – approximately $44 million in cash – related to the restructuring initiatives announced last week, $25 million of which it expects to record in the fourth quarter and the remainder through 2009. The company anticipates completing this restructuring by the end of 2009.
"We are acting decisively to address the global economic crisis, which is reshaping the automotive industry. The actions we are implementing will help size our cost structure to the changing market," said Sherrill. "We are determined to manage through this challenging environment and will take additional actions as necessary to deliver on commitments to our shareholders, customers, and employees, as well as position Tenneco to benefit when the industry ultimately recovers."
Tenneco’s long-term growth prospects, primarily regulatory driven, remain strong. Tighter emissions standards are being implemented worldwide, requiring new emission control technologies and higher content on vehicles. The company continues to invest in technologies to capture this growth including significant new business in the commercial vehicle market. Tenneco is also well-positioned globally and is capturing new business in the rapidly growing BRIC markets of Brazil, Russia, India and China and with fast-growing OEMs.
"Tenneco’s growth and increased content opportunities are still on course, driven by the timing of new emissions regulations, demand for new technologies to meet those standards and our further penetration of the on-road and off-road commercial vehicle segments, all of which has not changed," said Sherrill.
In January, Tenneco announced that it expected to achieve a compounded annual OE revenue growth rate of 11% to 13% between 2007 and 2012. It based this projection primarily on the following factors:
- Third-party projections for light vehicle and commercial vehicle build rates in 2012;
- Tenneco’s future market share based on business already won and new business it expected to capture;
- Current mandated timeline for worldwide emissions regulations;
- Increased content, especially for new emission control business, based on new technologies needed to meet future emissions regulations.
Tenneco has stated that most of the growth would occur in the later years (2010-2012), and with about half occurring in the commercial vehicle segment.
"We certainly see lower than planned revenues in 2008 and 2009, and uncertainty remains as to the timing of an industry recovery. However, the most recent third-party projections for 2012 light vehicle and commercial vehicle build rates globally are about the same as we used to make our five-year projection back in January," Sherrill said. "Based on all of this, we believe our 11% to 13% five-year compounded annual OE revenue growth rate is still achievable."
- Statements of Income - 3 Months
- Statements of Income - 9 Months
- Balance Sheet
- Statements of Cash Flow - 3 Months
- Statements of Cash Flow - 9 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 – 9 Months
- Reconciliation of GAAP to Non-GAAP Earnings Measures - 9 Months
- Reconciliation of GAAP Revenues to Non-GAAP Revenue Measures - 3 Months
- Reconciliation of GAAP Revenues to Non-GAAP Revenue Measures - 9 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 Tuesday, November 4, 2008 at 10:00 a.m. EST. 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 November 4, 2008. To access this recording, dial 800-925-0608 (domestic) or 402-220-3037 (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 global 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 the impact of changes in and compliance with laws and regulations, including environmental laws and regulations and the adoption of the current mandated timelines for worldwide emissions 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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