Tenneco reports record high fourth quarter, predicts ongoing year-over-year growth

Jan. 1, 2020
Tenneco recently reported a record high fourth quarter, derived largely in part from the company's stategically implemented global positioning and technology-driven new business. Although refinancing costs and tax charges to realign European ownershi

Tenneco recently reported a record high fourth quarter, derived largely from the company's stategically implemented global positioning and technology-driven new business. Although refinancing costs and tax charges to realign European ownership structure caused the company a net loss of $72 million, the company still came out ahead. It reported an adjusted net income of $15 million, or $.034 per diluted share, and is predicting a compounded annual OE revenue growth rate of 11 percent to 13 percent between 2008 and 2012.

"Tenneco delivered excellent results this quarter thanks to technology-driven growth and our global geographic balance, particularly in expanding markets like China and South America," says Gregg Sherrill, chairman and CEO, Tenneco. "A relentless focus on working capital improvements drove strong cash performance in the quarter. Our execution on managing accounts receivable and inventories helped convert earnings into strong cash flow."

EBIT (earnings before interest, taxes and minority interest) was $43 million versus $39 million a year ago. Adjusted EBIT was $61 million, up 53 percent from $41 million in fourth quarter 2006. EBITDA (EBIT before depreciation and amortization) was $98 million, up from $87 million the previous year. Adjusted EBITDA was $116 million, a 30 percent increase over $89 million a year ago.

Fourth quarter 2007 adjustments included:

  • Restructuring and restructuring related expenses of $18 million pre-tax, or 26-cents per diluted share, primarily related to a previously announced facility closing;
  • Charge of $21 million pre-tax, or 31-cents per diluted share, for refinancing a portion of the company's debt;
  • Net tax expenses of $62 million, or $1.34 per diluted share, including $66 million in non-cash expenses to realign the European ownership structure and a net benefit of $4 million primarily related to adjustments for prior year income tax returns.

Fourth quarter revenues increased 29 percent to $1.565 billion versus $1.209 billion a year ago. Substrate sales grew to $440 million from $297 million in fourth quarter 2006. Excluding substrate sales and favorable currency, revenue was $1.054 billion, up 16 percent from $912 million the previous year. The revenue increase was driven by higher volumes on new diesel platforms in North America, volume increases on key European emission control platforms and growth in China.

EBIT margin declined to 2.8 percent versus 3.2 percent in fourth quarter 2006, primarily due to a 48 percent increase in substrate sales, higher restructuring costs and a lower percentage of revenue generated from aftermarket sales, which typically carry higher margins. These factors also negatively impacted gross margin, which was 14.3 percent compared with 15.7 percent in fourth quarter 2006. The negative impact of these factors was partially offset by the sale of higher margin OE emission control technologies in the quarter.

Adjusted EBIT as a percent of value-added sales (revenue excluding substrate sales) grew to 5.4 percent from 4.4 percent, an indication that the company is realizing the margin benefit from its advanced hot-end and diesel aftertreatment technologies.

Cash generated by operations in the quarter was $200 million, up significantly from $138 million a year ago. The increase was driven by higher earnings and working capital improvements. The company generated $175 million in cash from working capital versus $130 million a year ago.

"Our ability to generate cash flow in the quarter helped us to end the year with a 45 percent increase in cash from operations, resulting in nearly flat year-over-year net debt," Sherrill says. "This was particularly outstanding given that we made significant investments throughout the year to fund our business growth with higher spending on engineering, capital expenditures and an emissions control technology acquisition."

At quarter-end, debt net of cash balances was $1.186 billion, compared with $1.183 billion at the end of fourth quarter 2006. Cash balances were $188 million versus $202 million the prior year. Total debt was $1.374 billion, versus $1.385 billion a year ago. At the end of the quarter, the ratio of debt net of cash balances to adjusted annual EBITDA was 2.4x, down from 2.9x at the end of fourth quarter 2006.

Total steel costs in the quarter increased $17 million year-over-year. These costs were offset by material substitutions, low-cost country sourcing, steel cost recovery from customers and other cost reductions.

The rate of revenue growth in the quarter continued to outpace overhead spending to support that growth. SGA&E (selling, general, administrative and engineering) costs as a percent of sales decreased to 8.1 percent versus 8.7 percent a year ago despite an increase in engineering spending to support technology development and future new business launches.

In North America, OE revenue was $592 million, up 63 percent from $363 million a year ago. Excluding substrate sales and currency, revenue was $342 million, a 26 percent year-over-year increase from $272 million. The increase was driven by incremental volume from diesel pick-up truck platforms like the Ford SuperDuty, GM Duramax engine vehicles and International's medium duty commercial trucks. Emission control content on GM crossover vehicles, the Toyota Tundra and ride control business on GM platforms that include the Suburban, Yukon, Silverado, Sierra, Trailblazer and Envoy also drove the increase. The increase was partially offset by volume declines on existing platforms. Aftermarket revenue was $122 million, up 5 percent from $115 million in fourth quarter 2006. New business and increases in both ride control and exhaust sales drove the increase.

EBIT for North America operations was $16 million versus $18 million in fourth quarter 2006. Fourth quarter 2007 EBIT includes $2 million in restructuring costs. Fourth quarter 2006 EBIT includes $3 million in restructuring costs, a $3 million reserve for receivables from a former affiliate and a $7 million benefit for the U.S. pension plan replacement. Adjusted for these items, EBIT was $18 million, up $1 million year-over-year. The EBIT benefit from higher volumes on new emission and ride control platforms was mostly offset by: $5 million in higher net engineering spending due to customer recovery timing; $2 million for inventory shrinkage on substrates at one Mexican emissions control facility; $3 million in accelerated depreciation on OE service-part equipment; and the impact of lower commercial vehicle ride control production volumes.

In Europe, South America and India, OE revenue was $511 million, a 13 percent increase from $452 million a year ago. Excluding substrate sales and the impact of favorable currency, revenue was $337 million versus $285 million, an 18 percent increase. The increase was driven by higher volumes on platforms with hot-end and diesel aftertreatment technology like the Daimler Sprinter, the BMW 1 and 3 Series and the Audi A4. Aftermarket revenue was $96 million, up from $90 million a year ago.

Excluding favorable currency, revenue was $87 million. Lower exhaust sales more than offset increases in ride control sales. South America and India revenue increased to $96 million from $71 million in fourth quarter 2006. Excluding substrate sales and the impact of favorable currency, revenue was $74 million compared with $63 million. The increase was due to higher OE volumes in South America. EBIT for Europe, South America and India was $19 million, up from $16 million a year ago. Favorable currency benefited EBIT by $2 million. Adjusted EBIT was up 84 percent to $35 million from $19 million a year ago. The EBIT increase was driven by strong manufacturing performance and OE volume increases, which more than offset higher material costs and lower aftermarket emission control sales. Fourth quarter 2007 EBIT includes $16 million in restructuring and restructuring related costs and fourth quarter 2006 includes $3 million in restructuring and restructuring related costs.

In the Asia Pacific region, the company's revenue increased 35 percent to $98 million from $73 million a year ago. Excluding substrate sales and favorable currency, revenue was up 18 percent to $55 million from $47 million. The increase was due to growth in China with new OE business and higher OE volumes. Australia revenue increased 12 percent to $50 million compared with $45 million in fourth quarter 2006. Excluding substrate sales and the impact of favorable currency, revenue was $37 million versus $40 million a year ago, primarily the result of lower aftermarket sales. Asia Pacific EBIT was $8 million, a 59 percent increase over $5 million a year ago. Favorable currency benefited EBIT by $1 million. Operational efficiencies and strong OE volumes in China drove the EBIT increase.

Tenneco reported record high annual revenue of $6.2 billion, a 32 percent increase over $4.7 billion in 2006. Substrate sales grew to $1.673 billion from $927 million in 2007. Excluding substrate sales and favorable currency, revenue was up 15 percent . New diesel aftertreatment business on pick-up truck platforms in North America, growth in China and strong OE volumes in Europe drove the significant increase.

The company reported a net loss of $5 million, or 11-cents per diluted share, compared with net income of $49 million, or $1.05 per diluted share in 2006.

Adjusted for $66 million in non-cash tax charges to realign the European ownership structure, net income was up 69 percent to $86 million, or $1.82 per diluted share, from $51 million, or $1.12 per diluted share in 2006.

Full year EBIT was $252 million, a 28 percent increase over $196 million a year ago. Adjusted EBIT was $282 million, a 25 percent increase from $225 million in 2006. 2007 EBITDA was $457 million, up from $380 million in 2006. Adjusted EBITDA was $487 million, a 19 percent increase from $409 million a year ago.

EBIT margin for the year declined to 4.1 percent versus 4.2 percent in 2006 due to an increase in substrate sales and a lower percentage of revenue generated from aftermarket sales, which typically carry higher margins. These factors also negatively impacted gross margin, which was 15.8 percent compared with 18.1 percent in 2006. The negative impact of these factors was partially offset by the sale of higher margin OE emission control technologies.

Adjusted EBIT as a percent of value-added sales (revenue excluding substrate sales) grew to 6.2 percent from 6.0 percent , which reflects the improved margin benefit from sales of the company's advanced hot-end and diesel aftertreatment technologies. SGA&E as a percent of sales for 2007 was 8.3 percent , a significant improvement from 9.8 percent in 2006.

"Tenneco performed exceptionally well in a year marked by industry challenges. We profitably launched more than $1 billion in new OE business globally, the majority of which featured advanced technology products and systems," Sherrill adds. "We executed on our global growth strategies by investing in growing markets like Russia and China, and making strategic investments in engineering and innovative technologies that are already generating new business. At the same time, we improved our financial flexibility and successfully managed our overhead costs."

Tenneco anticipates ongoing industry volatility in 2008. The company expects that North America industry OE production volumes will be lower, Europe OE volumes will remain relatively stable, and strong sales growth in expanding markets like China, India and Brazil will continue.

In the first quarter, Tenneco expects higher year-over-year revenues in North America given its market position and the anticipated benefit of incremental sales from new OE emission control business it launched in 2007, which will be at higher production levels compared to first quarter last year. In Europe, the company also expects to benefit from its strong position in Eastern Europe and Russia, where industry growth is predicted.

In 2007, Tenneco generated $5.1 billion in global original equipment revenues. Adjusted for substrate sales, global original equipment value-added sales were $3.4 billion. Tenneco estimates that its global original equipment revenues will be approximately $5.5 billion in 2008 and $6.0 billion in 2009. Adjusted for substrate sales, original equipment value-added sales are estimated to be approximately $3.7 billion in 2008 and $4.1 billion in 2009.

The company expects the pricing environment for steel will increase gross steel costs year-over-year by up to $40 million in 2008, which it anticipates fully offsetting through cost reductions, manufacturing efficiencies, material substitutions, low-cost country sourcing and customer recovery.

"Tenneco has a proven track-record of execution and implementing the right strategies to be successful, even in tough markets," Sherrill concludes. "Given our leading technology and engineering capabilities, favorable geographic and customer balance, cost flexibility and a relentless focus on managing costs and improving operations, Tenneco is well-positioned to address the industry challenges in 2008 while capturing additional new business opportunities, which will fuel our growth globally over the next five to seven years."

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