Tenneco announces third quarter earnings

Tenneco reported improved year-over-year third quarter results, which it credited to its North American diesel launches. The company's third quarter net income reached $21 million, or $.45 per diluted share, up from $7 million, or $.16 per diluted share in third quarter 2006. Net income was $19 million, or $.39 per diluted share, versus net income of $11 million, or $.26 per diluted share a year ago.

The company's EBIT (earnings before interest, taxes and minority interest) was $57 million, a 31 percent 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 percent 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.

The company reported gross margins of 15.6 percent versus 17.5 percent in third quarter 2006. Higher substrate sales — 28 percent of total revenue compared with 20 percent 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 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 percent from 9.4 percent 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 percent versus 9.3 percent the prior year.

EBIT as a percent of revenue was 3.7 percent versus 3.9 percent 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.

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 imrovement 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," says 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."

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.

For more information about Tenneco, visit the company's Web site..