Tenneco Reports Third Quarter Earnings
21 October 1998
Tenneco Reports Third Quarter Earnings of 62 Cents Per Share; Increases Savings Target From Restructuring to $145 Million
GREENWICH, Conn.--Oct. 21, 1998--Tenneco today reported third quarter net income of $103 million, or 62 cents per share, compared to $105 million, or 62 cents per share, in the third quarter of 1997.(a) Tenneco further reported a 5 percent increase in sales to $1.9 billion, up from the $1.8 billion reported the previous year. The company also said that it expects to take pre-tax charges in the fourth quarter of $95 million to $105 million, related to its previously announced $100 million overhead cost reduction plan, which is now projected to result in annualized savings of $130 million to $145 million from additional restructuring in its automotive and packaging businesses.
Tenneco's net income for the quarter also benefited from a $17 million pre-tax gain on the sale of non-strategic timberland assets and a lower effective tax rate. Results further reflected higher costs for new information technology systems initiatives worldwide, including those to address Year 2000 issues.
"Tenneco Automotive's original equipment (OE) and Tenneco Packaging's specialty businesses continue to perform well," said Tenneco Chairman and Chief Executive Officer Dana G. Mead. "We are, however, seeing signs that global economic conditions are beginning to affect parts of our packaging, containerboard and automotive businesses. The restructuring charges announced today reflect an aggressive effort on Tenneco's part to reduce costs and increase efficiency in each line of business," he said.
(a) All earnings per share in this release are reported on a diluted basis.
In the third quarter, Tenneco Automotive's global revenues increased 2 percent to $804 million from $785 million a year earlier. Automotive's operating income declined to $86 million from $119 million, due to a combination of factors, including a weak North American aftermarket, effects of the General Motors (GM) strike and weaker than anticipated economic conditions in Asia and South America.
Tenneco Automotive's worldwide OE business recorded a 14 percent revenue increase, as both North American and European OE posted new highs. Absent the GM strike, worldwide OE revenues would have increased 17 percent. Worldwide OE operating income in the third quarter of 1998 increased 10 percent over the previous year, when worldwide OE income was favorably affected by a $10 million gain from a legal resolution.
Worldwide aftermarket revenue decreased 10 percent. Aftermarket operating income declined 49 percent as a result of continuing weak market conditions and higher marketing costs associated with major new product launches. "We are addressing weak North American aftermarket conditions by reducing costs, rationalizing capacity and further expanding product coverage," Mead said.
"In the North American aftermarket, Tenneco Automotive will rationalize both manufacturing and distribution centers and relocate production to other facilities," he said. "These actions are reflected in a portion of the $95 million to $105 million charges anticipated for the fourth quarter. We are aggressively reducing costs to meet our goal of re-establishing our traditional high levels of profitability in this business segment by re-sizing our structural cost base in response to market realities."
Tenneco Packaging's third quarter revenue increased from $1.0 billion to $1.1 billion and its operating income improved 29 percent - from $107 million to $138 million - with solid performances in specialty and paperboard. Paperboard results were aided by the sale of non-strategic timberland as part of routine land management, which contributed $17 million pre-tax.
Tenneco's specialty revenues increased 3 percent to $701 million, while operating income was up 2 percent to $86 million. Increased sales of consumer, foodservice, and protective and flexible packaging products contributed to results. Tenneco also benefited from new-product growth in its Hefty OneZip(R) line and sales to the fast-growing home meal replacement market.
Tenneco Packaging continues to move its zipper closure technology into broader applications. The first large scale retail package using the Tenneco Slide-Rite(tm) closure system with OneZip(R) zipper technology was introduced for Kimberly-Clark's HUGGIES(R) Supreme Care baby wipes in July. Tenneco Packaging also expanded distribution of the Medi-Zip(tm) medical specimen bag, another new product using Slide-Rite(tm) technology.
Tenneco recently gained important new business for its Modified Atmosphere Packaging system. The new Active Tech(tm) packaging system extends shelf life of fresh meat products by a factor of four. It is ideally suited to complement existing grocery store supply chain economics. Market tests are currently underway with Berliner Marx Veal and a major pork processor, while several beef packers also are evaluating the system for testing by early 1999.
Paperboard packaging reported a 13 percent revenue gain - to $412 million from $366 million. Operating income improved from $22 million to $52 million. Tenneco's paperboard business benefited from year-over-year improvements in linerboard, medium and corrugated box volume and pricing, in addition to the previously mentioned land sale. For the quarter, box volume was up 6 percent, compared to an industry average of 0.3 percent.
Special Charges
Tenneco expects to take pre-tax charges in the range of $95 million to $105 million in the fourth quarter of 1998 related to the $100 million overhead cost reduction plan announced last July and the business restructuring outlined above. These actions are expected to create savings of $130 million to $145 million on an annualized basis - a $30 million to $45 million increase over cost reductions previously announced - and will include reductions in administrative and operational overhead in every part of the company's business, as well as consolidation of manufacturing and distribution operations, primarily in automotive parts, and to a lesser degree, in packaging.
"We are focused on steadily improving results in each of Tenneco's businesses," Mead said. "We expect continued good growth in our automotive original equipment and specialty packaging business segments. We are addressing a weak North American aftermarket through capacity consolidation, aggressive cost-cutting and product line expansion, all of which we expect to improve results significantly. As a result of ongoing cost-cutting and productivity improvements, Tenneco's paperboard business is already among the most profitable, low-cost producers in the industry, and we will continue to reduce costs there."
Regarding the restructuring study announced in July, Mead said, "The company's management and board of directors are actively exploring a wide range of options to enhance shareowner value. Tenneco is fully committed to finding and executing the best options to create greater value in its automotive, specialty packaging and containerboard businesses. As soon as any decisions are reached, we will announce our course of action."
Tenneco is an $8 billion global manufacturing company headquartered in Greenwich, Conn., with 50,000 employees worldwide. Tenneco Automotive is one of the world's largest producers and marketers of ride control and exhaust systems and products, which are sold under the Monroe(R) and Walker(R) global brand names. Among its products are Sensa-Trac(R) shocks and struts, Rancho(R) shock absorbers, Walker(R) Quiet-Flow(tm) mufflers and DynoMax(tm) performance exhaust products and Monroe(R) Clevite(tm) vibration control components. Tenneco Packaging is among the world's leading and most diversified packaging companies. Among its products are Hefty(R) trash bags, Hefty OneZip(R) and Baggies(R) food storage bags, E-Z Foil(R) single-use aluminum cookware and Hexacomb(R) paper honeycomb products.
For more information about Tenneco, visit the Tenneco website at http://www.tenneco.com.
TENNECO CONSOLIDATED EARNINGS RESULTS
Unaudited
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------------- ------------------
Net sales and operating revenues:
Automotive $ 804,000,000 $ 785,000,000
Packaging 1,113,000,000 1,045,000,000
Other (2,000,000) 1,000,000
--------------- ------------------
$1,915,000,000 $ 1,831,000,000
=============== ==================
Operating income (loss):
Automotive $ 86,000,000 $ 119,000,000
Packaging 138,000,000(a) 107,000,000
Other (18,000,000) -
--------------- ------------------
206,000,000 226,000,000
Less:
Interest expense (net of
interest capitalized) 61,000,000 59,000,000
Income tax expense 34,000,000 56,000,000
Minority interest 8,000,000 6,000,000
-------------- ------------------
Net income $ 103,000,000(a) $ 105,000,000
============== ==================
Average common shares outstanding:
Basic 168,000,000 170,000,000
============== ==================
Diluted 168,300,000 170,900,000
============== ==================
==
Earnings per share of common stock:
Basic $ .62(a) $ .62
============== ==================
Diluted $ .62(a) $ .62
============== ==================
a) Includes a pretax gain of $17 million from the sale of
non-strategic timberland, $10 million or $.06 per share on an
aftertax basis.
TENNECO CONSOLIDATED EARNINGS RESULTS
Unaudited
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
----------------------------------
Net sales and operating revenues:
Automotive $ 2,468,000,000 $ 2,436,000,000
Packaging 3,255,000,000 2,916,000,000
Other (3,000,000) -
----------------------------------
$ 5,720,000,000 $ 5,352,000,000
==================================
Operating income (loss):
Automotive $ 305,000,000 $ 330,000,000
Packaging 396,000,000(a) 269,000,000(b)
Other (33,000,000) (2,000,000)
----------------------------------
668,000,000 597,000,000
Less:
Interest expense (net of
interest capitalized) 178,000,000 157,000,000
Income tax expense 151,000,000 138,000,000
Minority interest 24,000,000 17,000,000
----------------------------------
Net income $ 315,000,000(a) $ 285,000,000(b)
==================================
Average common shares outstanding:
Basic 168,900,000 170,400,000
==================================
Diluted 169,400,000 171,000,000
==================================
Earnings per share of common stock:
Basic $ 1.87(a) $ 1.67(b)
==================================
Diluted $ 1.86(a) $ 1.67(b)
==================================
a) Includes a pretax gain of $17 million from the sale of
non-strategic timberland, $10 million or $.06 per share on an
aftertax basis. Also includes $15 million on the sale of
Tenneco's remaining interest in the joint venture with Caraustar,
$9 million or $.05 per share on an aftertax basis.
b) Includes operating income gain of $38 million on refinancing of
two containerboard mill leases, which had a net income impact of
$23 million or $.13 per share.
Segment Analysis Automotive
Tenneco Automotive OE continued to receive significant new business contracts and place its products on important new global platforms. "Prospects for growth in our OE business are good," Mead said. "The addition of new business and the expansion of current business give us great confidence for the future of our OE business and its continued profitability."
Tenneco Automotive's North American OE business launched exhaust production for the 1999 Honda minivan in the third quarter, marking the first time Honda has produced its popular minivan in North America. Production is forecast to exceed 70,000 vehicles annually.
Following the GM strike, the General Motors C/K light truck platform again began production in the third quarter. Tenneco Automotive is producing a full-range of products, including exhaust, elastomers, and ride control for this vehicle. Tenneco also will supply exhaust system components for General Motors' major commercial truck platform starting in 2001, and will continue to supply the exhaust business for GM's light truck platform through 2003.
Chrysler awarded Tenneco the exhaust business for the Ram full-sized pick-up truck, expected to begin production in 2001, and Tenneco Automotive received the Meritor/Chrysler bushing business for the 2001 model year Jeep Cherokee.
Nissan Mexicana selected Tenneco Automotive as the supplier for ride control products for the 2000 Model Year HS Sentra to be manufactured in Mexico. Production of 125,000 vehicles annually is scheduled to start in January 2000.
Production has begun for exhaust components for the Cami J2 and the Vitara, the replacement vehicles for the Geo Tracker and Suzuki Sidekick, respectively. Full production in early 1999 is expected to reach 80,000 vehicles annually.
Recently launched OE business in Europe includes the Meritor HVS Trailer suspension and the entire exhaust system for the Ford Escort C170. The supply of bushings for Mercedes-Benz and Randon trucks, and front and rear shocks for Ford H215 heavy-duty trucks and P131 light trucks began in South America.
New heavy-duty business includes the first major commercial truck platform awarded Tenneco Automotive by GM, covering Class 3 through 8 commercial trucks. Additionally, Freightliner has renewed Tenneco as sole supplier of high volume, heavy-duty bushing, with volumes due to increase annually from initial production of 300,000.
"Our success in the aftermarket has always been the result of a competitive cost structure, new products, innovative marketing and superior distribution," Mead said. "In addition to further reducing costs and rationalizing capacity, Tenneco Automotive is continuing to launch new products and programs."
The company is expanding its launch of Z-Plus(tm) mufflers, an extension of the successful Quiet Flow(tm) muffler for the installer channel. Z-Plus(tm) muffler features include an open flow design with 24 percent more exhaust flow, sound absorbing fibre for a quiet ride, coverage for both direct and universal fit applications, and a risk free 60-day satisfaction guarantee. Z-Plus(tm) mufflers extend Tenneco Automotive's commitment to helping the installer channel successfully promote and sell premium brand products to consumers.
Also in the aftermarket, the Foreign Nameplate program of new welded assembly products was launched. This initiative leverages Tenneco Automotive's significant experience in producing OE exhaust systems for the leading imported vehicles. The program includes 79 product systems and five accessories engineered with Quiet-Flow(tm) muffler technology and includes a limited lifetime warranty.
Packaging
Specialty Packaging
Tenneco Packaging's specialty business continued to achieve significant growth in unit volume in most product lines. Revenues grew at a slower pace as declining resin costs resulted in lower product pricing to customers. Overall, product margins were on or above targets.
Consumer product volumes were up 7 percent across the board, led by exceptional growth in Hefty(R) wastebags and disposable tableware. Foodservice and institutional volume increased 5 percent, with foam products up 5 percent, molded fibre up 9 percent and microwavable products up 23 percent.
Tenneco's global protective packaging business, the most recent growth platform, had revenue growth of over 18 percent in the quarter with operating margins of nearly 14 percent. Strong performance in the North American protective business of 26 percent revenue growth was led by Hexacomb, the world leader in honeycomb packaging, and AVI and Richter Manufacturing, leaders in cushion and surface protection. European protective revenues grew by 10 percent.
Overall, the growth was offset by weak performance in the UK plastics and German based non-medical flexible businesses. In addition, approximately $5 million in one-time start-up costs associated with a systems project in North America were incurred.
During the quarter, Tenneco acquired Champion International's ovenable paperboard tray manufacturing facility in Belvidere, Illinois, for $22.5 million. The plant had 1997 sales of $27 million, manufacturing food containers primarily for the packer-processor market. The Belvidere facility provides an excellent strategic fit with the processed-food segment of Tenneco Packaging's specialty business, offering customers greater value and choice among packaging products.
Among specialty's new products, five new dual-color, hinged containers were launched nationally during the second quarter and are experiencing strong sales. Called Smartlock Hexware(R), these upscale containers feature the highly successful Smartlock closure system and make an audible "click" when the container is securely closed.
Paperboard Packaging
Paperboard continues to focus on productivity and cost reduction to improve profitability. Approximately $30 million in costs were cut from containerboard mill operations during the first nine months of 1998, helping offset inflation and higher costs for southern pine. These savings were part of a previously announced $80 million cost reduction program, which is nearing completion. Average conversion costs for corrugated converting operations also have been reduced 2 percent in the first nine months of the year.
Outlook
"Looking forward, we expect our automotive OE business to remain strong," Mead said. "We continue to receive significant contracts to supply Tenneco ride control and exhaust equipment for new full systems and modular assembly business on key global platforms.
"While the North American automotive aftermarket is challenging, we are taking aggressive steps to cut costs, reduce capacity and expand our marketing efforts, all of which should improve our results significantly.
"In specialty packaging, we continue to develop new ways to meet customer demands for creative packaging solutions and take advantage of important market trends, such as home meal replacement. We are well-positioned for growth in consumer, foodservice and protective packaging. We expect volume growth, new products and a strong focus on cost reduction to provide continued improvement in bottom-line results.
"The outlook in Paperboard is mixed," Mead said. "Although domestic demand is up slightly, there's been a large reduction in exports. And while some producers have taken downtime, inventories have not fallen enough to reduce pressure on realizations. Therefore, while our paperboard business is outperforming the industry, we will remain focused on internal growth, cost reductions and productivity to provide revenue and operating income improvements and maintain our position as the low-cost producer."
Several statements in this press release are forward looking and are identified by the use of forward looking words and phrases, such as "expect," "expects," "expected," "projected," "continue," "will continue," "continues," "continuing," "anticipated," "prospects for growth," "production is forecast," "will supply," "will continue to supply," "is scheduled to," "volumes due to increase," "outlook ... is," "looking forward," "should improve," and "well-positioned for growth." These forward looking statements are based on the Company's current expectations. Because forward looking statements involve risks and uncertainties, the Company's plans, actions and actual results could differ materially. Among the factors that could cause plans, actions and results to differ materially from current expectations are: (i) the general political, economic and competitive conditions in markets and countries where the Company and its subsidiaries operate, including currency fluctuations and other risks associated with operating in foreign countries; (ii) governmental actions, including the ability to receive regulatory approvals and the timing of such approvals; (iii) changes in capital availability or costs; (iv) changes in consumer demand and prices, including decreases in demand for Company products and the resulting negative impact on the Company's revenues and margins from such products (v); the cost of compliance with changes in regulations, including environmental regulations; (vi) workforce factors such as strikes or labor interruptions; (vii) material substitutions and increases in the costs of the Company's raw materials; (viii) the Company's ability to integrate operations of acquired businesses quickly and in a cost-effective manner; and (ix) the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond the Company's control.