Tenneco Reports Fourth Quarter and Full Year 1998 Results
26 January 1999
Tenneco Reports Fourth Quarter and Full Year 1998 Results; Strong Automotive OE and Specialty Packaging Offset by Weak Automotive Aftermarket
GREENWICH, Conn.--Jan. 26, 1999--Tenneco today reported 1998 net income of $319 million, or $1.89 per share, on annual revenue of $7.6 billion, compared to $361 million, or $2.11 per share, on revenue of $7.2 billion in 1997.(a) The company reported fourth quarter 1998 net income of 2 cents per share, compared to 44 cents per share, on quarterly revenue of $1.9 billion, up slightly from 1997's fourth quarter revenues.Income for the year and the fourth quarter 1997 was prior to an accounting principle change, and 1998 income for the year and the fourth quarter is before a previously announced pre-tax $100 million charge for restructuring and overhead cost reductions.
The pre-tax charge of $100 million includes a $36 million charge to restructure the company's automotive aftermarket business with the balance of the charges going to reduce overhead and manufacturing costs in every part of Tenneco's businesses. The actions are expected to result in annual savings of at least $135 million, of which 80 percent should be realized in 1999. For purposes of comparison with 1997 results, the operating results in the remainder of this release exclude the impact of the restructuring charge, except for a summary in the last paragraph of the restructuring section.
In a related announcement, Tenneco also said today it has reached a definitive agreement to sell its containerboard business to Madison Dearborn Partners for $2.2 billion as the first step in its strategic restructuring and the repositioning of its automotive and packaging businesses. Tenneco said in the announcement that it will receive $2 billion in cash and retain a 45 percent equity ownership in the business valued at $200 million.
"This sale is an excellent value for our shareholders. It enables a number of financially attractive strategic alternatives for the automotive and specialty packaging businesses, and it allows us to reduce our debt by $2 billion," said Tenneco Chairman and Chief Executive Officer Dana G. Mead.
"Tenneco's automotive original equipment (OE) and specialty packaging businesses turned in strong performances in 1998, but results significantly below expectations in the North American automotive aftermarket reduced the company's fourth quarter earnings, and in turn, weakened overall 1998 results," Mead said. Through the third quarter of 1998, Tenneco reported operating earnings of $1.86 per share, up 12 percent from $1.67 in 1997.
Tenneco Automotive's 1998 global revenue was $3,237 million, compared to $3,226 million in 1997. Global operating income from automotive operations fell 26 percent for the year to $301 million from $407 million in 1997, primarily due to lower aftermarket sales, weak South American and Asian markets, charges for customer bankruptcies, pricing adjustments and increased marketing expenses.
As a result of weak aftermarket sales and softer markets overseas, fourth quarter global automotive revenues declined three percent to $769 million from $790 million a year earlier. These conditions and the items listed in the previous paragraph combined to result in the unit having a loss of $4 million compared to earnings of $77 million in the fourth quarter of 1997.
Tenneco Packaging's full year 1998 worldwide revenues were $4,367 million, up 9 percent from $3,995 million in 1997. Global packaging operating income in 1998 was $494 million, a 33 percent increase over the $371 million recorded for 1997.
Fourth quarter packaging revenue was $1,112 million compared to $1,079 million in the prior year quarter. Fourth quarter 1998 operating income was $98 million versus $102 million in the 1997 fourth quarter.
Tenneco Automotive's worldwide OE business increased revenue and income in 1998 as the company continued placing its ride control and exhaust products on many of the world's best-selling vehicles. Worldwide OE revenue increased 12 percent over 1997. North American OE revenue climbed 11 percent and European OE revenue was up 17 percent. Worldwide OE operating income for the year increased 21 percent from a year earlier.
Worldwide aftermarket revenue fell 13 percent in 1998 as compared to 1997. Aftermarket operating income declined 56 percent compared to 1997. Worldwide aftermarket revenue was off 21 percent in the quarter. Quarterly aftermarket operating income declined to a loss compared to the year earlier period.
Annual OE and aftermarket revenue from the Asia Pacific Rim was off 4 percent, while revenue from South American operations was down 12 percent.
Lower aftermarket demand was driven by customer consolidations that temporarily increased field inventory levels in North America and Europe; milder than normal winter weather; and continuing soft Asian and South American replacement markets. Additionally, Tenneco Automotive continued to reduce its quarterly promotional programs in an effort to better balance supply and demand going into 1999.
"The restructuring of the North American aftermarket business, which began in the fourth quarter, is designed to better match Tenneco Automotive's capacity to market demand," Mead said. Specific actions include reducing personnel and closing plants and distribution facilities to improve capacity utilization. The restructuring is expected to be complete by year-end 1999, and combined with other cost reduction actions, will lower the company's North American aftermarket sales breakeven point by more than 10 percent.
Specialty Packaging revenues increased 9 percent in 1998 to $2,785 million as compared to $2,553 million in 1997. Fourth quarter specialty revenues rose 3 percent to $723 million from $702 million in the year ago quarter. Operating income from specialty packaging operations for the full year 1998 was $346 million, up 12 percent from $308 million in 1997. Fourth quarter operating income from specialty operations was essentially flat at $85 million as a result of one-time Y2K system expenses in the U.S. and rationalization of the United Kingdom plastics business. Excluding these costs, earnings grew by 11 percent.
Paperboard packaging results improved for the year but were off slightly in the fourth quarter due to lower prices. Paperboard revenues increased over the prior year to $1,582 million compared to $1,442 million in 1997. Paperboard packaging operating income in 1998 was $148 million compared to $63 million in 1997, a 135 percent increase. Fourth quarter revenue from paperboard packaging was $389 million, compared to $377 million in the 1997 fourth quarter, a 3 percent increase. Fourth quarter operating income was $13 million, down 28 percent from $18 million in 1997.
"The containerboard business did well in 1998 despite difficult market conditions, but lower prices in the fourth quarter reduced overall gains in annual profitability," Mead said.
Restructuring
In October 1998, Tenneco said it would take pre-tax charges in the fourth quarter of 1998 related to the previously announced overhead cost reduction plan and the strategic business restructuring. The total charge is $100 million pre-tax, $64 million after-tax or 38 cents per share. "These initiatives position Tenneco for future strategic action, and create annual savings of at least $135 million - 80 percent in 1999," Mead said.
The charge includes: restructuring automotive aftermarket manufacturing and distribution - $36 million; packaging restructuring - $20 million; and staff and related cost reductions across all businesses - $44 million.
After the restructuring charge, Tenneco's 1998 net income was $255 million, or $1.51 per share, and a loss of $60 million or a 36 cent per share loss for the fourth quarter. Tenneco Automotive's global operating income for the year was $248 million after the charge. Tenneco Packaging's operating income was $459 million after the charge.
Outlook
"The potential for continued growth in both our Automotive original equipment and Specialty Packaging businesses is excellent," Mead said.
"In Automotive, our growth prospects in the OE business are solid, given our substantial book of new business contracts and our continuing success at capturing important new global vehicle platforms," he said. "We believe our sales growth and continuing operating efficiency improvements will lead to higher future OE earnings.
"In the automotive aftermarket, sales of our products by wholesale customers to end-use consumers have been steadily increasing, continuing to reduce field inventory levels and therefore returning sales of Tenneco Automotive products to more traditional levels. We are taking aggressive actions to cut structural costs and address weak market demand levels, but do expect challenging business conditions to continue throughout 1999," Mead said.
In Packaging, the outlook for specialty and consumer products in 1999 is optimistic as volume growth, mix management, and cost reductions are expected to improve. Acquisition integration will continue to yield benefits as best practices expand across facilities.
The company will continue actively to pursue opportunities in the fastest growing parts of the packaging industry, including home meal replacement and protective packaging in the electronic, industrial, furniture, and automotive industries.
In paperboard, the company anticipates continued improvement in market conditions. Inventories have fallen as demand increases and price improvements are being seen industry-wide.
Tenneco is a $7.6 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.
(a) All earnings per share in this release are reported on a diluted
basis.
TENNECO CONSOLIDATED EARNINGS RESULTS
Unaudited
YEAR ENDED DECEMBER 31,
1998 1997
Net sales and operating
revenues:
Automotive $ 3,237,000,000 $ 3,226,000,000
Packaging 4,367,000,000 3,995,000,000
Other (7,000,000) (1,000,000)
$ 7,597,000,000 $ 7,220,000,000
Operating income (loss):
Automotive $ 248,000,000 $ 407,000,000
Packaging 459,000,000(a) 371,000,000(c)
Other (66,000,000) (14,000,000)
641,000,000(b) 764,000,000
Less:
Interest expense (net of
interest capitalized) 240,000,000 216,000,000
Income tax expense 116,000,000 163,000,000
Minority interest 30,000,000 24,000,000
Income from continuing
Operations 255,000,000 361,000,000(c)
Cumulative effect of
change in Accounting
principle -- (46,000,000)(d)
Net income $ 255,000,000(a)(b) $ 315,000,000
Average common shares
outstanding:
Basic 168,500,000 170,300,000
Diluted 168,800,000 170,800,000
Earnings (loss) per share
of common Stock:
Basic-
Continuing operations $ 1.52 $ 2.12(c)
Cumulative effect of
change in accounting
principle -- (.27)(d)
$ 1.52(a)(b) $ 1.85
Diluted-
Continuing operations $ 1.51 $ 2.11(c)
Cumulative effect of
change in
accounting principle -- (.27)(d)
$ 1.51(a)(b) $ 1.84
a) Includes a pretax gain of $17 million from the sale of
non-strategic timberland, $10 million or $.06 per share on an
after-tax basis. Also includes a pretax gain of $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 a pretax restructuring charge of $100 million, $64
million or $.38 per share on an after-tax basis.
c) 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.
d) Write-off of technology transformation process reengineering
costs pursuant to FASB Emerging Issues Task Force decision.
TENNECO CONSOLIDATED EARNINGS RESULTS
Unaudited
THREE MONTHS ENDED DECEMBER 31,
1998 1997
Net sales and operating
revenues:
Automotive $ 769,000,000 $ 790,000,000
Packaging 1,112,000,000 1,079,000,000
Other (4,000,000) (1,000,000)
$ 1,877,000,000 $ 1,868,000,000
Operating income (loss):
Automotive $ (57,000,000) $ 77,000,000
Packaging 63,000,000 102,000,000
Other (33,000,000) (12,000,000)
(27,000,000)(a) 167,000,000
Less:
Interest expense
(net of Interest
capitalized) 62,000,000 59,000,000
Income tax expense (35,000,000) 25,000,000
Minority interest 6,000,000 7,000,000
Income (loss) from
continuing Operations (60,000,000) 76,000,000
Cumulative effect of
change in Accounting
principle - (46,000,000)(b)
Net income (loss) $ (60,000,000)(a) $ 30,000,000
Average common shares
outstanding:
Basic 167,300,000 169,800,000
Diluted 167,500,000 170,400,000
Earnings (loss) per share of
common Stock:
Basic-
Continuing operations $ (.36)(a) $ .45
Cumulative effect of
change in accounting
principle - (.27)(b)
$ (.36) $ .18
Diluted-
Continuing operations $ (.36)(a) $ .44
Cumulative effect of
change in accounting
principle - (.27)(b)
$ (.36) $ .17
a) Includes a pretax restructuring charge of $100 million, $64
million or $.38 per share on an after-tax basis.
b) Write-off of technology transformation process reengineering
costs pursuant to FASB Emerging Issues Task Force decision.
Segment Analysis Automotive
"We are pleased with the amount and quality of new OE business Tenneco Automotive was awarded in 1998 - incremental business that builds to more than $500 million annually by 2003," Mead said. "Tenneco Automotive's already substantial book of business included placing the company's products on a record 44 new car platform launches in 1998. We continue to improve our strategic positioning on many of the world's best-selling light trucks and sport utility vehicles, including launches with Ford, DaimlerChrysler, GM, Honda, Toyota, BMW, Porsche, Audi, Nissan, Mitsubishi, and other major world OEMs.
"Tenneco Automotive again placed its products on all 10 of the best-selling light trucks in North America and its exhaust and/or ride control products on 11 of the top 15 best-selling vehicles in the world," Mead said.
Significant new platforms expanded Tenneco Automotive's reach in 1998, and included: exhaust production for the 1999 Honda minivan - the first time Honda has produced its popular minivan in North America; a full range of products, including exhaust, ride control, and elastomers for General Motors' GMT800 pick-up truck program - the first redesign of GM's full-sized truck platform in 10 years; and in Europe, business with Mercedes, Nissan, Volvo, Volkswagen, GM/Opel, BMW/Rover, Porsche, Toyota, Peugeot, Citroen, and Jaguar.
Contracts for future new business will continue to strengthen Tenneco Automotive's position as a Tier 1 supplier, and include: exhaust business for General Motors' Epsilon mid-sized platform, the largest contract ever awarded Tenneco Automotive; exhaust for the mid-sized Astro/Safari van and the Blazer and Jimmy SUV through the year 2001; the full exhaust system on the updated Ford Navigator/Expedition for 2001; ride control on the new Lincoln F-series pickup truck for 2000; the remake of the classic Thunderbird - set to feature both Tenneco ride control and exhaust products; and exhaust business for Chrysler's full-sized Ram pick-up to begin in 2001. Tenneco Automotive also entered a joint agreement with Shanghai Tractor to produce automotive exhaust systems for the VW Passat platform in China.
Tenneco Automotive continued to expand its new product technology base in advanced ride control, recently forming strategic alliances with Siemens Automotive and Ohlins Racing to develop advanced ride control systems for a wider array of high-end passenger cars. The company also received DaimlerChrysler's Technology Role Model Award for 1998.
Despite setbacks, Tenneco Automotive's aftermarket business took steps for the future, rolling out new products and programs, by year-end completing full field introduction of both the Walker(R) Quiet Flow(tm) premium muffler, and an updated Monroe(R) Sensa-Trac(R) premium shock and strut line with Safe-Tech(tm) technology. The company aggressively expanded its Rancho(R) brand of high performance products and introduced the Z-Plus exhaust(tm) and Fast Start(tm) product marketing programs.
Tenneco Automotive's Fast Start(tm) program marketed Quiet Flow(tm) mufflers to warehouse distributors and the company launched Tru Fit(R) expanded coverage of mufflers with direct fit applications. Recently introduced flanker brand line extensions of ride control and exhaust products and DynoMax(tm) exhaust high-performance products now give Tenneco the most extensive product lineup and vehicle coverage in the industry.
Packaging
Tenneco Packaging achieved revenue and income growth and made a number of important strategic acquisitions. In May, Tenneco Packaging acquired Richter Manufacturing, a leading producer of protective packaging for the western United States, with sales of more than $60 million. The acquisition gives Tenneco protective packaging brand and product extension coast-to-coast, producing protective packaging for the electronics, automotive parts, furniture and agricultural packaging industries.
In September, Tenneco Packaging acquired Champion International's ovenable paperboard tray manufacturing facility, primarily making food containers for the packer-processor market. The business is a strategic fit with the processed-food segment of Tenneco Packaging's specialty business.
In December, Tenneco Packaging formed a global joint venture with Sentinel Products Corporation, to be called Sentinel Polyolefins L.L.C., expanding Tenneco's interests in specialty packaging with a focus on specialty foams.
Growth in polystyrene based products contributed to positive specialty packaging results. Consumer tableware volume growth of six percent continued to outpace the market. Supermarket and foodservice container volume grew five percent, growing faster than that market, driven by strong demand for home meal replacement packaging. Meat trays used by meat packers grew rapidly, reflecting the trend to centralized meat processing and improved account penetration.
In polyethylene, margins improved across the board as resin prices declined versus a year earlier. Strong new housing starts drove double digit growth in Building Products.
During the year, Specialty expanded sales of its Hefty OneZip(R) food bags, rolled-out Hefty(R) Fast-Pak(R) deli bags and Hefty(R) Easy Flaps(tm) waste bags, and tested a jumbo version (2.5 gallon) Hefty OneZip(R) bag. Market introduction of the Hefty Slide-Rite(tm) bag closure system proceeded on schedule. Medi-Zip(tm) medical and laboratory bags using Slide-Rite(tm) bag closure technology and improved Hefty Handle Sak(tm) waste bags were introduced.
Market tests of the revolutionary new ActiveTech(tm) packaging system continue, focusing on more economical case ready meat packaging versus traditional store cutting and packaging.
In the North American Protective Packaging business, enhanced margins were driven by the successful integration of the Richter acquisition, increased volumes, new product introductions, and cost reduction initiatives. The acquisition allows Tenneco Packaging's AVI business to serve the entire U.S. market, opening the door to some immediate bottom line improvements in both businesses.
In the fourth quarter, declines in the lower margin general flexible packaging business were offset by growth in the higher margin medical business. Medical packaging growth has been spurred by introduction of the Propyflex(R) bag and growth in the specialized disposable operating drape business.
In Paperboard, Tenneco Packaging emphasized productivity and cost reduction to improve profitability, removing more than $35 million in costs from containerboard mill operations. The company's corrugated converting operations also concentrated on cost reduction and productivity efforts, reducing the average conversion cost by 3 percent.
Tenneco Packaging's Counce, Tenn., mill expanded production of mottled white liner, and ships the high quality, efficient product to numerous Tenneco plants. The company's Tomahawk, Wis., mill began producing and supplying high performance lightweight medium to Tenneco converting facilities.
Several statements in this press release are forward looking and are identified by the use of forward looking words and phrases, such as "first step," "enables," "allows," "is designed to," "prospects," "to result in," "shows signs of," "future," "potential," "anticipates," "expected," "outlook," "will," "future strategic action," "should," "continue," "trends," and "position." 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) results of analysis regarding strategic alternatives; (v) changes in consumer demand and prices, including decreases in demand for the Company's products and the resulting negative impact on the Company's revenues and margins from such products; (vi) the cost of compliance with changes in regulations, including environmental regulations; (vii) workforce factors such as strikes or labor interruptions; (viii) material substitutions and increases in the costs of the Company's raw materials; (ix) the Company's ability to integrate operations of acquired businesses quickly and in a cost-effective manner; (x) new technologies; (xi) the ability of the Company and those with whom it conducts business to timely resolve the Year 2000 issue (relating to potential equipment and computer failures by or at the change of the century), unanticipated costs of, problems with, or delays in resolving the Year 2000 issue, and the costs and impacts if the Year 2000 issue is not timely resolved; (xii) changes by the Financing Accounting Standards Board or other accounting regulatory bodies of authoritative generally accepted accounting principles or polices; and (xiii) the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond the Company's control.