Tenneco Reports Record Fourth Quarter and Full-Year 2011 Financial Results

Tenneco Inc (NYSE: TEN) reported record net income of $30 million, or 49-cents per diluted share, compared with a loss of $18 million, or 31-cents per diluted share, in the fourth quarter 2010. On an adjusted basis, net income also increased to $32 million, or 53-cents per diluted share, versus $19 million, or 31-cents per diluted share, a year ago. The tables in the press release reconcile GAAP results to non-GAAP results.

“The double-digit increases in revenues and earnings demonstrate the balance in our growth strategy and set new performance benchmarks for Tenneco,” stated Gregg Sherrill, chairman and CEO. “Our strong position on light vehicle platforms globally, higher aftermarket sales, and technology-driven growth in the commercial vehicle segment, drove the significant revenue gain and delivered earnings growth, EBIT margin improvement, and a stronger financial position.”

Revenue

Total revenue in the quarter was $1.784 billion, up 13% from 2010, representing the company’s highest-ever fourth quarter revenue. Revenue excluding substrate sales and currency was $1.374 billion, a 13% year-over-year increase versus $1.215 billion. Higher OE light vehicle production volumes, incremental revenue from commercial vehicle launches and higher global aftermarket sales all contributed to strong revenue growth in the quarter. Revenue includes a $10 million unfavorable currency impact.

EBIT and EBIT Margin

EBIT (earnings before interest, taxes, and non-controlling interests) increased to $88 million from $62 million in fourth quarter 2010. Adjusted EBIT improved to $89 million, up 31% versus $68 million a year ago. EBIT was driven by stronger OE light vehicle production volumes, the launch and ramp up of new commercial vehicle programs and reduced SG&A costs (related to lower stock-indexed compensation). Partially offsetting these improvements were $9 million in higher year-over-year operational costs in the North American ride control business and $4 million in planned costs associated with expanding manufacturing capabilities and supporting new programs in China. Currency had a $2 million unfavorable impact on EBIT in the fourth quarter.

EBIT as a percent of revenue and EBIT as a percent of value-add revenue (revenue excluding substrate sales) improved year-over-year as noted below.

EBIT margin in North America improved on stronger OE production volumes and the benefit from commercial vehicle emission control business. In Europe, EBIT margin also continued to improve, driven by stronger production on light vehicle platforms that Tenneco supplies. In the Asia Pacific segment, volume strength in China was more than offset by planned investments in China and lower OE production in Thailand, resulting in a lower EBIT margin in the fourth quarter.

Fourth quarter 2011 adjustments:

• Restructuring and related expenses of $1 million pre-tax, or 1-cent per diluted share;
• Net tax charges of $2 million, or 3-cents per share, primarily related to recording a valuation allowance against the foreign losses and withholding taxes on foreign dividends, mostly offset by adjustments to prior year estimates.

Fourth quarter 2010 adjustments:

• Restructuring and related expenses of $4 million pre-tax, or 6-cents per diluted share;
• A charge of $2 million pre-tax, or 2-cents per diluted share, related to an actuarial loss for a lump-sum pension payment;
• Costs of $21 million pre-tax, or 22-cents per diluted share, related to refinancing the company's 8 5/8 percent notes with new 6 7/8 percent notes;
• Non-cash tax charges of $20 million, or 32-cents per diluted share, primarily related to the impact of recording a valuation allowance against the tax benefit for losses in the U.S. and certain foreign jurisdictions.

Cash

Cash generated by operations in the quarter was $201 million, up from $180 million a year ago, driven by higher year-over-year earnings and effective working capital management.

Capital expenditures in the quarter were $80 million, bringing total 2011 spending to $218 million, or 3% of total revenue, in line with the company’s historical range for capital spending. The fourth quarter increase, versus $63 million in 2010, included investments in programs for light and commercial vehicle customers and to expand manufacturing and engineering capabilities in emerging markets.

FULL-YEAR 2011 RESULTS

Tenneco reported annual revenue of $7.205 billion, up 21% from $5.937 billion in 2010. Excluding substrate sales and the impact of currency, revenue increased 15% to $ 5.364 billion, versus $4.653 billion the prior year. Increased light vehicle production globally, particularly in North America, South America, and China, stronger global aftermarket sales, and OE revenue from commercial vehicle programs all contributed to Tenneco’s record revenues for the year. Commercial and specialty vehicle OE revenue increased to $660 million in 2011.

The company reported net income of $157 million, or $2.55 per diluted share, up from $39 million or 63-cents per diluted share in 2010. Adjusted for the items below, net income rose to a record high of $163 million, or $2.66 per diluted share, versus $96 million, or $1.57 per diluted share a year ago.

For the year, Tenneco reported a record high EBIT of $379 million, compared with $281 million in 2010. Adjusted for the items below, EBIT increased to $398 million, versus $306 million a year ago.

For the full year, Tenneco delivered EBIT margin improvement as noted below.

Cash

For full-year 2011, even with a greater demand on working capital to support higher revenues, the company generated $245 million in cash from operations, compared with $244 million in 2010.

During the year, Tenneco returned value to shareholders by completing the repurchase of 400,000 shares of the company’s outstanding common stock at a cost of $16 million to offset dilution from shares awarded to employees in 2011. As previously announced, for 2012 the board of directors has authorized a repurchase program of up to 600,000 shares.

Debt

At December 31, 2011, Tenneco's debt net of cash was $1.01 billion, compared with $990 million at the end of 2010. The company's earnings improvement and cash generation resulted in an all-time low leverage ratio (net debt to adjusted EBITDA including noncontrolling interests) of 1.7x at December 31, 2011, continued improvement from the leverage ratio of 1.9x at December 31, 2010.

OUTLOOK

Tenneco’s OE revenue growth will be driven by leveraging higher production volumes, the company’s strong position on top-selling platforms, introducing technology on new and existing platforms, and continuing to launch and ramp up significant commercial vehicle emission control programs. In addition to OE growth, the company expects continued solid performance from the company’s aftermarket business on the strength of its market-leading brands.

The company projects the following OE revenues for 2012 and 2013. Compared to estimates provided a year ago for 2012, the following projections account for lower industry light vehicle production forecasts in Europe, a slower ramp-up of commercial vehicle emission control business in China and lower euro exchange rates.

Tenneco expects its global original equipment revenue will increase to between $10.0 billion and $11.5 billion by 2016, of which 30% to 35% is expected to be commercial vehicle revenue. Substrate sales are expected to be 32% of OE revenue by 2016.

“While we are mindful of global economic and market conditions, especially production forecasts for Europe, our confidence in driving growth and improving profitability remains unchanged,” said Sherrill. “We continue to benefit from the balance across our operations with a strong presence globally including in fast-growing markets, and across vehicle and market segments. In addition, we are at the beginning of the ramp-up of our commercial vehicle emission control business, which will significantly increase over the next five years.”

For on and off-road commercial vehicles, Tenneco offers a comprehensive suite of diesel aftertreatment technologies, giving customers options in meeting increasingly stringent emissions standards, particularly NOx regulations, which are coming into effect for diesel applications around the world.

“Launch execution, operational performance and effectively converting our top-line growth to steady margin improvement remain priorities for Tenneco. In addition to capitalizing on increasing light vehicle production, margin benefit from our commercial vehicle business will accelerate as these programs continue to ramp up,” added Sherrill. “Across our operations, we are working to deliver greater profitability by leveraging our Tenneco Manufacturing System, taking actions to optimize our footprint globally and staying focused on continuous improvement and process excellence.”

• A 21% increase in OE revenue excluding currency and substrate sales was driven by improving light vehicle production and Tenneco content on strong selling vehicles including the Chevy Malibu, Ford Focus, and the Ford F-150 and Super Duty pick-up trucks. Incremental revenue from commercial vehicle programs including Caterpillar and John Deere also drove the increase.
• Aftermarket revenue rose on higher sales in both product lines, including the impact of sales to new customers added earlier in the year.
• EBIT for North American operations increased 70% to $46 million, versus $27 million a year ago. EBIT includes $2 million in unfavorable currency impact.
• Adjusted EBIT was $47 million, up 52% from $31 million a year ago.
  • Fourth quarter 2011 EBIT includes $1 million in restructuring expense.
  • Fourth quarter 2010 EBIT includes $2 million in restructuring expenses and $2 million for a pension charge.
• The EBIT increase was driven by higher OE light vehicle production volumes and the benefit from commercial vehicle revenue. These drivers were partially offset by higher year-over-year OE ride control operational costs of $7 million, a sequential improvement versus third quarter. In addition, EBIT was negatively impacted by costs of $2 million incurred to address a ride control issue on one customer platform.

• Tenneco’s strong platform position including on the Mercedes CLS, Volkswagen Polo, and new Audi A6 in ride control and the Daimler Sprinter, VW Golf, Opel Astra, Ford Focus C-Max and BMW 1-Series and 3-Series in emission control drove Europe OE revenue growth of 12% excluding currency and substrate sales.
• Higher aftermarket ride control revenues, primarily in Eastern Europe, more than offset declines in emission control revenues due to lower demand in most Western European markets.
• South America and India revenue, excluding currency and substrate sales, increased 13%, on higher aftermarket sales in South America and higher OE volumes in both regions.
• EBIT for Europe, South America and India increased 47% to $28 million versus $19 million a year ago and adjusted was $28 million, up from $20 million. Fourth quarter 2010 EBIT includes $1 million in restructuring expense.
• EBIT improvement was driven by stronger OE production volumes and new light vehicle program launches, partially offset by costs associated with customer downtime in South America and India toward the end of the quarter. EBIT includes $2 million in unfavorable currency impact.

• Asia revenue was up driven by strong OE production volumes in China, particularly on key VW, Audi, Nissan and FAW platforms.
• Australia revenue decreased on declining industry production and the slow ramp up on a new model program.
• Asia Pacific EBIT was $14 million, versus $16 million a year ago. Adjusted EBIT was $14 million, compared with $17 million a year ago, which includes $1 million in restructuring expense.
• Higher OE volumes in China were more than offset by planned higher year-over-year expenses in China to support new customer programs and new manufacturing facilities. Lower OE production volumes in Thailand due to the flooding also impacted Asia Pacific EBIT. EBIT includes $2 million in favorable currency impact.

REVENUE ASSUMPTIONS

Revenue estimates in this release are based on OE manufacturers’ programs that have been formally awarded to the company; programs where Tenneco is highly confident that it will be awarded business based on informal customer indications consistent with past practices; Tenneco’s status as supplier for the existing program and its relationship with the customer; and the actual original equipment revenues achieved by the company for each of the last several years compared to the amount of those revenues that the company estimated it would generate at the beginning of each year. These revenue estimates are also based on anticipated vehicle production levels and pricing, including precious metals pricing and the impact of material cost changes. The revenue estimates assume that foreign currency exchange rates will remain constant over the entire period. For a chart showing Tenneco’s revenue estimates, including certain of the assumptions upon which these estimates are based, see the slides accompanying the February 2, 2012 conference call, which will be available on the financial section of the Tenneco website at www.tenneco.com.

CONFERENCE CALL

The company will host a conference call on Thursday, February 2, 2012 at 10:00 a.m. ET. The dial-in number is 800-369-3344 (domestic) or 312-470-7049 (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 February 2, 2012 through March 1, 2012. To access this recording, dial 800-839-3416 (domestic) or 402-998-1103 (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.

2012 ANNUAL MEETING

The Tenneco Board of Directors has scheduled the corporation’s annual meeting of shareholders for Wednesday, May 16, 2012 at 10:00 a.m. CT. The meeting will be held at the corporate headquarters, 500 North Field Drive, Lake Forest, Illinois. The record date for shareholders eligible to vote at the meeting is March 19, 2012.

Tenneco is a $7.2 billion global manufacturing company with headquarters in Lake Forest, Illinois and approximately 24,000 employees worldwide. Tenneco is one of the world’s largest designers, manufacturers and marketers of emission control and ride control products and systems for automotive and commercial vehicle original equipment markets and the aftermarket. Tenneco markets its products principally under the Monroe®, Walker®, Gillet™ and Clevite®Elastomer brand names.

This press release contains forward-looking statements. Words such as “may,” “expects,” “anticipate,” ”projects,” “will,” and “outlook” and similar expressions identify forward-looking statements. These forward-looking statements are based on the current expectations of the company (including its subsidiaries). Because these forward-looking statements involve risks and uncertainties, the company's plans, actions and actual results could differ materially. Among the factors that could cause these plans, actions and results to differ materially from current expectations are:

(i) general economic, business and market conditions;

(ii) the company’s ability to source and procure needed materials, components and other products and services in accordance with customer demand and at competitive prices;

(iii) changes in capital availability or costs, including increases in the company's costs of borrowing (i.e., interest rate increases), the amount of the company's debt, the ability of the company to access capital markets at favorable rates, and the credit ratings of the company’s debt;

(iv) changes in consumer demand, prices and our ability to have our products included on top selling vehicles, including any shifts in consumer preferences to other lower margin vehicles, for which we may or may not have supply contracts;

(v) changes in automotive manufacturers' production rates and their actual and forecasted requirements for the company's products such as the significant production cuts during recent years by automotive manufacturers in response to difficult economic conditions;

(vi) the overall highly competitive nature of the automobile and commercial vehicle parts industries, and any resultant inability to realize the sales represented by the company’s awarded book of business which is based on anticipated pricing for the applicable program over its life;

(vii) the loss of any of our large original equipment manufacturer (“OEM”) customers (on whom we depend for a substantial portion of our revenues), or the loss of market shares by these customers if we are unable to achieve increased sales to other OEMs;

(viii) workforce factors such as strikes or labor interruptions;

(ix) increases in the costs of raw materials, including the company’s ability to successfully reduce the impact of any such cost increases through materials substitutions, cost reduction initiatives, customer recovery and other methods;

(x) the negative impact of higher fuel prices on transportation and logistics costs, raw material costs and discretionary purchases of vehicles or aftermarket products;

(xi) the cyclical nature of the global vehicular industry, including the performance of the global aftermarket sector and longer product lives of automobile parts;

(xii) the company's continued success in cost reduction and cash management programs and its ability to execute restructuring and other cost reduction plans and to realize anticipated benefits from these plans;

(xiii) product warranty costs;

(xiv) the cost and outcome of existing and any future legal proceedings, and the impact of changes in and compliance with laws and regulations, including environmental laws and regulations and the adoption of the current mandated timelines for worldwide emissions regulations;

(xv) economic, exchange rate and political conditions in the countries where we operate or sell our products;

(xvi) the company's ability to develop and profitably commercialize new products and technologies, and the acceptance of such new products and technologies by the company's customers and the market;

(xvii) changes by the Financial Accounting Standards Board or other accounting regulatory bodies to authoritative generally accepted accounting principles or policies;

(xviii) changes in accounting estimates and assumptions, including changes based on additional information;

(xix) governmental actions, including the ability to receive regulatory approvals and the timing of such approvals, as well as the impact of changes to and compliance with laws and regulations pertaining to environmental concerns, pensions or other regulated activities;

(xx) natural disasters, acts of war and/or terrorism and the impact of these occurrences or acts on economic, financial, industrial and social condition, including, without limitation, with respect to supply chains and customer demand in the countries where the company operates; and

(xxi) the timing and occurrence (or non-occurrence) of transactions and events which may be subject to circumstances beyond the control of the company and its subsidiaries.

The company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this press release. Additional information regarding these risk factors and uncertainties is detailed from time to time in the company's SEC filings, including but not limited to its report on Form 10-K for the year ended December 31, 2010.