Tenneco's latest results highlight improvements

Tenneco shares are worth more than 30 cents more per diluted share over 2006's second quarter, according to 2007 second quarter numbers the company just released.

Tenneco has reported second quarter 2007 net income of $40 million, or 84-cents per diluted share, a significant increase from $24 million, or 51-cents per diluted share in second quarter 2006. Adjusted for the items below, net income was $41 million, or 87-cents per diluted share, versus $33 million, or 71-cents per diluted share one year ago.

Final 2006 results will be reflected in Tenneco's restated financial statements that it expects to file in August.

EBIT (earnings before interest, taxes and minority interest) increased to $102 million, from $74 million a year ago. Adjusted EBIT was $104 million, compared with $88 million in second quarter 2006. Growth in global sales on OE platforms featuring advanced technology content and operational efficiencies drove the year-over-year profit improvement.

EBITDA (EBIT before depreciation and amortization) was $152 million, up from $121 million and adjusted EBITDA rose to $154 million from $135 million for the same period last year.

Second quarter revenue increased 36 percent to $1.7 billion versus $1.2 billion a year ago. Substrate sales were $460 million, up from $213 million in second quarter 2006. Excluding substrate sales and favorable currency of $49 million, revenue was up 16 percent to $1.16 billion from $1.0 billion. The revenue growth was driven by volume increases on large North American OE emission control platforms as well as continued revenue growth in the European OE businesses and in expanding markets like China, the company says.

"We are very pleased with our results this quarter. In North America, the ramp-up and execution on our large diesel aftertreatment truck business is reaching the production levels we had anticipated," says Gregg Sherrill, Tenneco chairman and CEO. "In addition, we saw robust performance in Europe and China, which reflects Tenneco's strong geographic position."

Gross margin in the quarter was 17.2 percent versus 20.5 percent in second quarter 2006. The decline, according to the company, was driven by substantially higher substrate sales, primarily from volume increases on diesel truck platforms in North America, lower OE ride control sales for commercial vehicles due to the significant production decline in that industry, and a shift toward a lower percentage of total revenue generated by higher margin aftermarket business.

Total steel costs in the quarter increased $18 million year-over-year. The company offset these increases with cost reductions, material substitutions, low cost country sourcing and steel price recovery efforts with aftermarket and OE customers. The company has completed nearly all its customer steel recovery negotiations.

SGA&E (selling, general, administrative & engineering) expenses as a percent of sales decreased to 8.1 percent from 10.5 percent at the end of second quarter 2006. The company held overhead costs flat while increasing revenues and continuing to invest in engineering and technology development for its OE emission control and ride control businesses globally.

EBIT as a percent of revenue in the quarter was up year-over-year. The margin benefit from advanced technology content on new large-volume OE platform launches, cost reduction efforts and an improvement in SGA&E as a percent of sales offset the unfavorable margin impact of higher substrate sales and the shift to a higher percentage of OE revenues.

Interest expense in the quarter was $40 million, up from $35 million a year ago. The requirement to mark Tenneco fixed to floating interest rate swaps to market increased interest expense by $3 million in second quarter 2007, versus an increased expense of $2 million in the second quarter 2006. A higher level of borrowings in the quarter drove the remainder of the interest expense increase.

Tenneco says cash provided by operating activities was an inflow of $67 million, versus $73 million in second quarter 2006. Cash used for working capital was $14 million versus $10 million a year ago despite higher revenues in second quarter 2007.

At quarter-end, debt net of cash balances was $1.282 billion, compared with $1.256 billion a year ago. Total debt was $1.450 billion versus $1.379 billion at the end of second quarter 2006, driven by working capital investments to service a higher level of revenues. At quarter-end, the ratio of debt net of cash balances to adjusted LTM (last twelve months) EBITDA was 2.9x, improved from 3.0x a year ago.

Other key results
Tenneco released other information broken down according to geographical region.

North America:
• North America OE revenue increased 80 percent to $661 million from $367 million a year ago. Industry production was down 3 percent in the quarter. Excluding substrate sales, revenue was $395 million, up 29 percent year-over-year from $306 million. Higher volumes on the Toyota Tundra, GM cross-over vehicles and the ramp-up on significant new diesel emission control platforms including the Ford Super-Duty, the GM Duramax engines, the Dodge heavy-duty Ram and International's medium-duty diesel trucks drove the increase.
• North America aftermarket revenue was down 5 percent to $149 million from $156 million a year ago. Softer market conditions for both ride and emission control products were partially offset by price increases to recover steel costs.
• EBIT for North American operations was $49 million, versus $37 million a year ago. Adjusted for the items below, EBIT was $49 million, versus $47 million in second quarter 2006. Strong OE emission control volumes and manufacturing efficiencies, particularly the efficient ramp-up on key emission control truck platforms, offset lower aftermarket volumes and higher material costs.
• Second quarter 2006 EBIT includes $4 million in restructuring and $6 million for customer changeover costs.

Europe, South America and India:
• Europe OE revenue was $513 million, up 25 percent from $412 million in second quarter 2006. Industry production increased 4 percent in the quarter. Excluding $29 million in favorable currency and higher substrate sales, revenue was $347 million, up 18 percent compared with $292 million a year ago. The increase was largely driven by increased volumes on emission control platforms and new ride control model launches.
• Europe aftermarket revenue increased 5 percent to $124 million from $118 million the previous year. Excluding favorable currency, revenue was relatively flat year-over-year. Stronger ride control volumes were offset by lower emission control product sales.
• South America and India revenue increased to $81 million from $66 million the previous year, driven by favorable currency and stronger volumes in South America. Excluding currency and substrate sales, revenue was $65 million, versus $58 million a year ago, an increase of 12 percent.
• EBIT for Europe, South America and India increased 29 percent to $45 million, versus $35 million a year ago. Stronger OE volumes and operating efficiency improvements more than offset the impact of higher material costs. Favorable currency had a $3 million impact on EBIT. Adjusted for the items below, EBIT was $47 million, versus $38 million in second quarter 2006.
• Second quarter 2007 EBIT includes $2 million in restructuring costs and second quarter 2006 EBIT includes $3 million in restructuring costs.

Asia Pacific
• Asia revenue was up 48 percent to $85 million, compared with $58 million a year ago. Excluding substrate sales, Asia revenue was up 43 percent to $55 million from $39 million a year ago. The China operations drove the increase with strong OE volumes and a 57 percent year-over-year revenue gain.
• Australia revenue increased 14 percent to $50 million from $44 million in second quarter 2006. Excluding favorable currency and substrate sales, revenue was $37 million, down from $39 million a year ago.
• Asia Pacific EBIT was $8 million, up from $2 million in second quarter 2006, driven by OE volume growth in China. Excluding the items below, EBIT increased 146 percent.
• Second quarter 2006 EBIT includes $1 million in restructuring costs.

Into the next quarter
Industry predictions indicate stronger year-over-year OE production in North America through the remainder of the year and Tenneco says it is well-positioned to benefit with its new diesel pick-up truck platforms and a good position on strong-selling cross-over vehicles. However, the company will continue to closely monitor market uncertainties, namely rising inventory levels and labor negotiations in North America.

The company notes it also expects its strong performance will continue in Europe and in emerging markets like China, where industry conditions are expected to remain positive. In the aftermarket, the company continues to support its strong brands and aggressively pursue new customers, actions that it hopes will counter any continued softness in the European and North American markets.

Tenneco will continue to invest in engineering and new technologies, primarily to develop next generation emissions and ride control products. The company's diesel aftertreatment capabilities and innovative hot-end emission control solutions are generating new business opportunities and positioning Tenneco for future growth.

"The next five years offer significant opportunities for Tenneco as emissions standards tighten in key markets worldwide. We are staying focused on using our technology and global footprint to capture this new business," Sherrill says. "Equally important, we are working to continue growing profitably, keeping a sharp eye on costs and continuously improving our manufacturing efficiency."