Tenneco Reports Third Quarter 2008 Financial Results
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LAKE FOREST, Ill. November 4, 2008: Tenneco Inc. :
Tenneco Inc. 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 $64 million annually by better aligning our operations with the realities of the market.”
Adjusted third quarter 2008 and 2007 results:
|Q3 2008||Q3 2007|
|EBITDA||EBIT||Net Income||Per Share||EBITDA||EBIT||Net Income||Per Share|
|Earnings Measures||$ 84||$ 28||$ (136||)||$ (2.92||)||$ 109||$ 57||$ 21||$ 0.45|
|Adjustments (reflects non-GAAP measures):|
|Restructuring and 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|
Third quarter 2008 adjustments:
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:
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.
|--||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 AND INDIA
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:
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:
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|
|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 Revenue to Non-GAAP Revenue Measures - 3 Months|
|Reconciliation of GAAP Revenue 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.