Tenneco Inc. (ticker: TEN, exchange: New York Stock Exchange)
October 31, 2019
TENNECO REPORTS THIRD QUARTER 2019 RESULTS
- Revenue growth continues to outpace light vehicle industry production.
- Tenneco reports Q3 earnings per diluted share of $0.87; adjusted EPS of $1.23
- Company evaluating multiple strategic options to deleverage and facilitate the separation of the businesses
Lake Forest, Illinois, Oct. 31, 2019 – Tenneco Inc. (NYSE: TEN) reported third quarter 2019 revenue of $4.3 billion, an 82% increase versus $2.4 billion▲ a year ago, which includes $1.8 billion from acquisitions. On a constant currency pro forma basis, total revenue increased 3% versus last year, while light vehicle industry production* declined 3% in the quarter. Value-add revenue for the third quarter was $3.5 billion.
The company reported net income for third quarter 2019 of $70 million, or $0.87 per diluted share. Third quarter 2018 net income▲ was $57 million, or $1.11 per diluted share. Third quarter 2019 adjusted net income was $99 million, or $1.23 per diluted share, compared with $85 million, or $1.66 per diluted share last year. ▲
Third quarter EBIT (earnings before interest, taxes and noncontrolling interests) was $148 million including the acquired Federal-Mogul business, versus $112 million last year. EBIT as a percent of revenue was 3.4% versus 4.7% last year.
Third quarter adjusted EBITDA was $387 million versus $366 million last year on a pro forma basis. Adjusted EBITDA as a percent of value-add revenue was 10.9%, a 100 basis point improvement on a pro forma basis, which includes a $13 million impact due to a work stoppage at our largest customer. Cash generated from operations was $164 million.
“Tenneco’s revenue growth outpaced industry production by six percentage points, driven by higher light vehicle, off-highway and other revenues,” said Roger Wood, co-CEO, Tenneco. “We also delivered year-over-year margin improvement, driven mainly by effective synergy capture actions, operational improvements and disciplined cost management.”
Fourth Quarter 2019
Light vehicle production in the fourth quarter is expected to be lower year-over-year by 6%, and the commercial truck market is showing signs of softening in the quarter. In this environment, Tenneco expects fourth quarter revenue in the range of $3.95 billion to $4.05 billion. Further, the company expects its fourth quarter adjusted EBITDA to be in the range of $295 million to $315 million, including year-over-year margin improvement of approximately 50 basis points in the DRiV division. The company expects the GM labor stoppage to have a negative impact on EBITDA of approximately $35 million.
Full Year 2019
The company updated its 2019 full year outlook, and now expects:
- Total revenues in the range of $17.25 billion to $17.35 billion.
- Value-add revenues in the range of $14.25 billion to $14.35 billion
- Value-add adjusted EBITDA margin of ~10.0%
- Adjusted EBITDA of $1,425 million to $1,445 million
- Interest expense of ~$325 million
- Cash taxes in the range of $180 million to $190 million
- Capital expenditures of ~$710 million
- Net debt/LTM adjusted EBITDA in the range of 3.4x to 3.5x
The company has made significant progress on the administrative separation of the two business divisions into two independent companies including:
- Earnings synergy capture has been pulled forward ahead of schedule to a full run rate by the end of 2019
- Both management teams in place and focused on their respective businesses
- Financial and operating system separation nearing completion
- Businesses will be ready to operate independently by the end of 2019
Tenneco remains committed to the separation of the businesses and continues to execute its plan for the spin off. Additionally, the company is evaluating multiple strategic options to deleverage and facilitate the separation. Certain of these options could help mitigate the impact of challenging market conditions, which, if current trends were to continue, would likely affect the company’s ability to complete a separation in the mid-year 2020 time range.
“For the full year we expect revenue growth will outpace our underlying markets, despite lower global light vehicle production volumes,” said Brian Kesseler, co-CEO, Tenneco. “Our actions to manage our cost structure against expected volatility in the fourth quarter and into 2020 are generating positive results, and we expect to deliver solid margin rate performance. The entire management team is preparing for the separation, and believes this is the right path to deliver enhanced shareholder value and create an environment for both businesses to be best positioned for long-term success.”
*Source: IHS Markit October 2019 global light vehicle production forecast and Tenneco estimates.
▲ Financial results for the third quarter of 2018 have been revised for certain immaterial adjustments, which are further discussed in Tenneco’s Form 10-Q for the quarter ended September 30, 2019.
See “About revenue and EBITDA guidance” below for further information about revenue guidance and forecasted performance measures.
Click here to download the release and attachments
Statements of Income – 3 Months
Statements of Income – 9 Months
Statements of Cash Flows – 3 Months
Statements of Cash Flows – 9 Months
Reconciliation of GAAP to Non-GAAP Earnings Measures – 3 Months
Reconciliation of GAAP to Non-GAAP Earnings Measures – 9 Months
Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – 3 Months
Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – 9 Months
Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – 3 and 9 Months
Reconciliation of Non-GAAP Measures – Debt Net of Cash/Pro Forma Adjusted LTM EBITDA including noncontrolling interests
Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – Original Equipment and Aftermarket Revenue – 3 and 9 Months
Reconciliation of GAAP Revenue and Earnings to Non-GAAP Revenue and Earnings Measures – 3 Months
Reconciliation of GAAP Revenue and Earnings to Non-GAAP Revenue and Earnings Measures – 9 Months
Reconciliation of GAAP Revenue to Non-GAAP Revenue Measures – Original Equipment Commercial Truck, Off-Highway, Industrial and other revenues – 3 and 9 Months
Reconciliation of GAAP revenue to pro forma revenue and Non-GAAP earnings measures – 2018 quarterly
Reconciliation of GAAP revenue to pro forma revenue and Non-GAAP earnings measures – 2018 and 2017 annual
Division Level Q4 and FY 2019 Outlook
The company will host a conference call on Thursday, October 31, 2019 at 8:30 a.m. ET. The dial-in number is 833-366-1121 (domestic) or 412-902-6733 (international). The passcode is: Tenneco Inc. The call and accompanying slides will be available on the financial section of the Tenneco web site at www.investors.tenneco.com. A recording of the call will be available one hour following completion of the call on October 31, 2019 through November 7, 2019. To access this recording, dial 877-344-7529 (domestic) or 412-317-0088 (international) or 855-669-9658 (Canada). The replay access code is 10135396. The purpose of the call is to discuss the company’s operations for the third fiscal quarter 2019, as well as provide updated information regarding matters impacting the company’s outlook, including the plan to separate its businesses to form two new, independent companies, an Aftermarket and Ride Performance company as well as a new Powertrain Technology company. A copy of the press release is available on the financial and news sections of the Tenneco web site.
Headquartered in Lake Forest, Illinois, Tenneco is one of the world’s leading designers, manufacturers and marketers of Aftermarket, Ride Performance, Clean Air and Powertrain products and technology solutions for diversified markets, including light vehicle, commercial truck, off-highway, industrial and the aftermarket, with 2018 revenues of $11.8 billion and approximately 81,000 employees worldwide. On October 1, 2018, Tenneco completed the acquisition of Federal-Mogul, a leading global supplier to original equipment manufacturers and the aftermarket. Additionally, the company expects to separate its businesses to form two independent companies, an Aftermarket and Ride Performance company as well as a Powertrain Technology company.
About DRiVTM - the future Aftermarket and Ride Performance Company
Following the expected separation of Tenneco to form two new, independent companies, an Aftermarket and Ride Performance company (DRiV™) as well as a new Powertrain Technology company, DRiV will be one of the largest global multi-line, multi-brand aftermarket companies, and one of the largest global OE ride performance and braking companies. DRiV’s principal product brands will feature Monroe®, Öhlins®, Walker®, Clevite®Elastomers, MOOG®, Fel-Pro®, Wagner®, Ferodo®, Champion® and others. DRiV would have 2018 pro-forma revenues of $6.4 billion, with 54% of those revenues from aftermarket and 46% from original equipment customers.
About the new Tenneco - the future Powertrain Technology company
Following Tenneco’s expected separation to form two new, independent companies, an Aftermarket and Ride Performance company (DRiV™), as well as a new Powertrain Technology company, the new Tenneco will be one of the world’s largest pure-play powertrain companies serving OE markets worldwide with engineered solutions addressing fuel economy, power output, and criteria pollution requirements for gasoline, diesel and electrified powertrains. The new Tenneco would have 2018 pro-forma revenues of $11.4 billion, serving light vehicle, commercial truck, off-highway and industrial markets.
About Revenue and EBITDA Guidance
Revenue estimates and other forecasted information in this release are based on OE manufacturers’ programs that have been formally awarded to the company; programs where Tenneco is highly confident that it will be awarded business based on informal customer indications consistent with past practices; and Tenneco’s status as supplier for the existing program and its relationship with the customer. This information is also based on anticipated vehicle production levels and pricing, including precious metals pricing and the impact of material cost changes. Unless otherwise indicated, our methodology does not attempt to forecast currency fluctuations, and accordingly, reflects constant currency. Certain elements of the restructuring and related expenses, legal settlements and other unusual charges we incur from time to time cannot be forecasted accurately. In this respect, we are not able to reconcile forecasted adjusted EBITDA (and the related margins) on a forward-looking basis to the most comparable GAAP measures without unreasonable efforts on account of these factors and other factors not in our control. For certain additional assumptions upon which these estimates are based, see the slides accompanying the October 31, 2019 webcast, which will be available on the financial section of the Tenneco website at www.investors.tenneco.com.
About Forward-Looking Statements
This press release contains forward-looking statements. The words “may,” “will,” “believe,” “should,” “could,” “plan,” “expect,” “anticipate,” “estimate,” and similar expressions (and variations thereof), identify these forward-looking statements. These forward-looking statements are based on the current expectations of the company (including its subsidiaries). Because these statements involve risks and uncertainties, actual results may differ materially from the expectations expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:
• general economic, business and market conditions;
• our ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices;
• the cost and outcome of existing and any future claims, legal proceedings or investigations, including, but not limited to, any of the foregoing arising in connection with the ongoing global antitrust investigation, product performance, product safety or intellectual property rights;
• changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences away from historically higher margin products for our customers and us, to other lower margin vehicles, for which we may or may not have supply arrangements, and the cyclical nature of the global vehicle industry, including the performance of the global aftermarket sector;
• changes in consumer demand for our original equipment products or aftermarket products, or changes in automotive and commercial vehicle manufacturers’ production rates and their actual and forecasted requirements for our products, due to difficult economic conditions and/or regulatory or legal changes affecting internal combustion engines and/or aftermarket products;
• our dependence on certain large customers, including the loss of any of our large original equipment manufacturer customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other customers or any change in customer demand due to delays in the adoption or enforcement of worldwide emissions regulations;
• new technologies that reduce the demand for certain of our products or otherwise render them obsolete;
• our ability to introduce new products and technologies that satisfy customers' needs in a timely fashion;
• the overall highly competitive nature of the automotive and commercial vehicle parts industries, and any resultant inability to realize the sales represented by our awarded book of business (which is based on anticipated pricing and volumes over the life of the applicable program);
• changes in capital availability or costs, including increases in our cost of borrowing (i.e., interest rate increases), the amount of our debt, our ability to access capital markets at favorable rates, and the credit ratings of our debt;
• our ability to comply with the covenants contained in our debt instruments;
• our working capital requirements;
• our ability to successfully execute cash management and other cost reduction plans, and to realize the anticipated benefits from these plans;
• risks inherent in operating a multi-national company, including economic conditions, such as currency exchange and inflation rates, and political conditions in the countries where we operate or sell our products, adverse changes in trade agreements, tariffs, immigration policies, political stability, and tax and other laws, and potential disruptions of production and supply;
• increasing competition from lower cost, private-label products;
• damage to the reputation of one or more of our leading brands;
• the effect of improvements in automotive parts on aftermarket demand for some of our products;
• industrywide strikes, labor disruptions at our facilities or any labor or other economic disruptions at any of our significant customers or suppliers or any of our customers’ other suppliers;
• developments relating to our intellectual property, including our ability to adapt to changes in technology;
• costs related to product warranties and other customer satisfaction actions;
• the failure or breach of our information technology systems, including the consequences of any misappropriation, exposure or corruption of sensitive information stored on such systems and the interruption to our business such failure or breach may cause;
• the effect of consolidation among vehicle parts suppliers and customers on our ability to compete in the highly competitive automotive and commercial vehicle supplier industry;
• changes in distribution channels or competitive conditions in the markets and countries where we operate;
• the evolution towards autonomous vehicles and car and ride sharing;
• customer acceptance of new products;
• our ability to successfully integrate, and benefit from, any acquisitions we complete;
• our ability to effectively manage our joint ventures and other third-party relationships;
• the potential impairment in the carrying value of our long-lived assets, goodwill, or indefinite-lived intangible assets or our inability to realize our deferred tax assets;
• the negative effect of fuel price volatility on transportation and logistics costs, raw material costs, discretionary purchases of vehicles or aftermarket products, and demand for off-highway equipment;
• increases in the costs of raw materials or components, including our ability to successfully reduce the effect of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery, and other methods;
• changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies;
• changes in accounting estimates and assumptions, including changes based on additional information;
• any changes by the International Organization for Standardization (ISO) or other such committees in their certification protocols for processes and products, which may have the effect of delaying or hindering our ability to bring new products to market;
• the effect of the extensive, increasing, and changing laws and regulations to which we are subject, including environmental laws and regulations, which may result in our incurrence of environmental liabilities in excess of the amount reserved or increased costs or loss of revenues relating to products subject to changing regulation;
• potential volatility in our effective tax rate;
• disasters, such as fires, earthquakes and flooding, and any resultant disruptions in the supply or production of goods or services to us or by us, in demand by our customers or in the operation of our system, disaster recovery capabilities or business continuity capabilities;
• acts of war and/or terrorism, as well as actions taken or to be taken by the United States and other governments as a result of further acts or threats of terrorism, and the effect of these acts on economic, financial, and social conditions in the countries where we operate;
• pension obligations and other postretirement benefits;
• our hedging activities to address commodity price fluctuations; and
• the timing and occurrence (or non-occurrence) of other transactions, events and circumstances which may be beyond our control.
In addition, important factors related to the acquisition of Federal-Mogul LLC ("Federal-Mogul") and the planned separation of our company into a powertrain technology company and an aftermarket and ride performance company that could cause actual results to differ materially from the expectations reflected in the forward-looking statements, including:
• the risk the Company may not complete a separation of its powertrain technology business and its aftermarket and ride performance business (or achieve some or all of the anticipated benefits of the separation);
• the risk the combined company and each separate company following the separation will underperform relative to our expectations;
• the ongoing transaction costs and risk we may incur greater costs following separation of the business;
• the risk the spin-off is determined to be a taxable transaction;
• the risk the benefits of the acquisition of Federal-Mogul, including synergies, may not be fully realized or may take longer to realize than expected;
• the risk the acquisition of Federal-Mogul may not advance our business strategy;
• the risk we may experience difficulty integrating or separating employees or operations; and
• the risk the transaction may have an adverse effect on existing arrangements with us, including those related to transition, manufacturing and supply services and tax matters; our ability to retain and hire key personnel; or our ability to maintain relationships with customers, suppliers or other business partners.
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, and will be, detailed from time to time in the company's SEC filings, including but not limited to its annual report on Form 10-K for the year ended December 31, 2018.