Tenneco Reports Fourth Quarter and Full-Year 2008 Results

LAKE FOREST, Ill. February 5, 2009: Revenue and EBIT declines reflect a rapid deterioration in global industry conditions in the fourth quarter

Fourth quarter loss includes $215 million in non-cash impairment charges for goodwill and deferred tax assets

Company benefiting from cost reduction and cash preservation actions

Tenneco Inc. reported a fourth quarter net loss of $298 million, or $6.40 per diluted share, compared with a net loss of $72 million, or $1.57 per diluted share in fourth quarter 2007.

Adjusted for the items below, the net loss was $24 million, or 51-cents per diluted share, down from net income of $17 million, or 34-cents per diluted share, a year ago. The adjustments include the non-cash impairment charges for goodwill and deferred tax assets. The tables in this press release reconcile GAAP results to non-GAAP results.

EBIT (earnings before interest, taxes and minority interest) was a loss of $145 million, versus earnings of $43 million a year ago. EBIT was negatively impacted by the goodwill impairment charge, lower OE production volumes globally, lower aftermarket sales and higher restructuring costs, all of which were driven by the severe industry conditions. These factors more than offset the benefits of new OE business launches, reduced overhead spending, and cost savings from restructuring and operational flexing actions implemented worldwide. In addition, the global downturn drove unusual changes in currency exchange rates during the quarter, which reduced EBIT by $21 million due to currency transaction and translation losses. Adjusted EBIT was a loss of $7 million, compared with earnings of $61 million the prior year.

EBITDA including minority interest (EBIT before depreciation and amortization) was a loss of $91 million versus earnings of $98 million in fourth quarter 2007. Adjusted EBITDA including minority interest was $47 million compared with $116 million.

“The fourth quarter saw further vehicle sales and OE production volumes declines in North America, compounded by the dramatic fall-off in Europe and rest of the world due to the global economic crisis and ongoing credit freeze, which has driven every major economy into recession. As with the entire automotive industry, Tenneco has been significantly impacted by these severe and unprecedented external conditions,” said Gregg Sherrill, chairman and CEO, Tenneco. “In response, we have and will continue to take aggressive actions to reduce costs, re-size our operations and generate and preserve cash in order to weather this crisis.”

In the fourth quarter 2008, the company announced a global restructuring program that is expected to generate $58 million in annualized savings once fully implemented by the end of 2009. The restructuring and other actions the company is taking include:

• Eliminating 1,100 jobs worldwide;
• Closing three manufacturing plants and one engineering facility;
• Controlling compensation and benefits costs including:
  • Suspending matching contributions to employee 401(k) programs for 2009;
  • Eliminating 2008 performance bonuses for salaried employees;
  • Reducing total annual compensation for the top 50 executives on average by more than 60%; and
  • Eliminating employee annual salary increases and implementing other salary control actions.
• Continuing to implement hourly layoffs at manufacturing plants worldwide and initiating unpaid furloughs and work hour reductions for some salaried employees to further adjust to declining production volumes;
• Cutting spending on information technology, sales and marketing programs;
• Accelerating working capital improvement opportunities; and
• Reducing capital expenditures by eliminating all discretionary capital spending including eliminating or deferring regional expansion projects and cutting spending tied to delayed customer launches.

Adjusted fourth quarter 2008 and 2007 results:

			Q4 2008													Q4 2007
			EBITDA			EBIT			Net Income			Per Share				EBITDA		EBIT		Net Income				Per Share
Earnings Measures			$ (91	)		$(145	)		$ (298	)		$ (6.40	)			$ 98		$ 43		$ (72	)			$ (1.57	)
Adjustments (reflects non-GAAP measures):
	Restructuring and restructuring related expenses		24			24			16			0.34				18		18		11				0.26
	Goodwill impairment charge		114			114			114			2.44				-		-		-				-
	Charges related to refinancing		-			-			-			-				-		-		14				0.31
	Net tax Adjustments		-			-			144			3.11				-		-		64				1.34
			-			-			-			-
Non-GAAP earnings measures			$ 47			$ (7	)		$ (24	)		$ (0.51	)			$ 116		$ 61		$ 17				$ 0.34

Fourth quarter 2008 adjustments:

• Restructuring and restructuring related expenses of $24 million pre-tax, or 34-cents per diluted share;
• Non-cash asset impairment charges of $114 million, or $2.44 per diluted share, related to goodwill for Tenneco’s 1996 acquisition of Clevite Industries;
• Non-cash tax charges of $144 million, or $3.11 per diluted share, related to the $101 million valuation allowance against the company’s U.S. deferred tax assets, as well as $16 million for the impact of not benefiting U.S. tax losses, $11 million for changes in foreign tax rates, valuation allowances of $4 million in certain foreign countries and other tax adjustments.

Fourth quarter 2007 adjustments:

• Restructuring and restructuring related expenses of $18 million pre-tax, or 26-cents per diluted share;
• A 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 $64 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 $2 million primarily related to adjustments for prior year income tax returns.

Fourth quarter revenue was $1.208 billion, down from $1.565 billion in fourth quarter 2007. The impact of unfavorable currency in the quarter was $123 million. Excluding currency and substrate sales, revenue was $1.025 billion versus $1.125 billion a year ago. The decline was driven by falling production volumes, particularly in the North America and Europe emission control businesses and in China.

Gross margin in the quarter was 12.6%, down from 14.3% a year ago, the result of significant production volume declines, manufacturing fixed cost absorption and the negative impact of currency. Gross margin in fourth quarter 2008 included $8 million in restructuring related expenses and fourth quarter 2007 included $16 million.

Steel costs in the quarter were $13 million higher year-over-year, driven by higher year-over-year base prices and surcharges for chrome purchased in North America. The company addressed these costs with cost reductions, aftermarket price increases and OE customer recoveries.

SGA&E expense was $126 million (10.4% of sales) in fourth quarter 2008, compared with $127 million (8.1% of sales) in fourth quarter 2007. Restructuring costs were $14 million higher in fourth quarter 2008 versus the prior year. Before the impact of higher restructuring costs, SGA&E expense was down year-over-year due to the company’s progress in reducing overhead costs and discretionary spending.

Tenneco generated $126 million in cash flow from operations in fourth quarter 2008, driven by $115 million in cash from working capital, primarily from accounts receivable collections and inventory reductions. The company generated $199 million in cash flow from operations in the fourth quarter 2007. The year-over-year decline in cash flow from operations was due to the significantly lower production environment.

At December 31, 2008, the company’s leverage ratio was 3.66, below the maximum level of 4.25. The interest coverage ratio was 3.64, above the minimum of 2.10. The leverage ratio is the company’s tightest senior credit facility debt-compliance ratio. In December 2008, the company amended the leverage ratio, increasing it for the fourth quarter from 4.0x to 4.25x as a precautionary step during a very volatile quarter.

Tenneco has initiated the process – which it first announced in December – to achieve a longer-term amendment to its senior secured credit facility in anticipation of continued difficult economic and industry conditions globally. The company expects to complete the amendment by the end of February.

Additionally, Tenneco extended its $120 million U.S. receivable securitization facility through March 2, 2009. The revised terms of the facility reduced the percentage of Tenneco’s U.S. accounts receivable that the sponsors purchased. Tenneco estimates that the sponsors will purchase between $10 million and $30 million less of its receivables than in the past. Also, the cost of the facility will increase about $4 million annually. Prior to the expiration date and concurrent with completion of the senior secured credit facility amendment, the company expects to renew the facility for an additional 364 days.

At quarter-end, total debt was $1.451 billion, compared with $1.374 billion a year ago. Cash balances were $126 million versus $188 million the prior year and debt net of cash balances was $1.325 billion, compared with $1.186 billion at December 31, 2007.

NORTH AMERICA

• OE revenue was $498 million, down 16% year-over-year from $592 million. Excluding currency and substrate sales, revenue was down 4% to $331 million from $345 million. Fourth quarter 2008 revenues included $32 million from the Kettering, Ohio ride control operations, which the company acquired earlier in 2008. A 24% drop in industry light vehicle production drove the decline, including substantial volume declines across all Tenneco’s customers.

• Aftermarket revenue was $113 million, versus $122 million the prior year, driven by lower ride control and exhaust sales, partially offset by price increases for higher material costs. Excluding the impact of currency, revenue was $116 million.
• EBIT for North America operations was a loss of $131 million, driven by the goodwill impairment charge and volume declines, versus earnings of $16 million a year ago. Adjusted for the items below, EBIT was a loss of $8 million, compared with earnings of $18 million the prior year.
• Fourth quarter 2008 EBIT included $9 million in restructuring costs and $114 million of goodwill impairment charges. Fourth quarter 2007 EBIT included $2 million in restructuring costs.
• The benefits to adjusted EBIT from lower SGA&E spending and new OE business partially offset the impact from negative EBIT drivers including:
  • Lower OE production volumes, unfavorable vehicle mix and related manufacturing fixed cost absorption as well as aftermarket sales volume declines that together reduced EBIT by $29 million;
  • Unfavorable currency related to translation and transaction losses on the Canadian dollar and Mexican peso, which reduced EBIT by $14 million.

EUROPE, SOUTH AMERICA AND INDIA

• Europe OE revenue was $352 million, down 31% year-over-year from $511 million. Excluding currency and substrate sales, revenue was down 12% to $329 million from $373 million. Fourth quarter 2008 revenues included $18 million from the recently acquired suspension business of Gruppo Marzocchi. The decline was due to sharply falling production volumes, which accelerated in the second half of the quarter, primarily with emission control customers. Industry light vehicle production was down 27% year-over-year.
• Europe aftermarket revenue was $76 million, versus $96 million the prior year, driven by lower ride control and exhaust sales volumes, partially offset by price increases for higher material costs. Excluding the negative impact of currency, revenue was $89 million.
• South America and India revenue was $72 million, down from $96 million in fourth quarter 2007. Excluding the impact of currency and substrate sales, revenue was down 4% to $80 million from $84 million. The decline was largely driven by OE production declines in Brazil and Argentina.

• EBIT for Europe, South America and India was a loss of $12 million, compared with earnings of $19 million a year ago. Adjusted for the items below, EBIT was $3 million, versus $35 million in fourth quarter 2007.
• Fourth quarter 2008 EBIT included $15 million in restructuring costs and fourth quarter 2007 EBIT included $16 million in restructuring costs.
• The benefits to adjusted EBIT from lower SGA&E spending, new OE business and lower alloy surcharges partially offset the impact from negative EBIT drivers including:
  • Lower OE production volumes, unfavorable vehicle mix and related manufacturing fixed cost absorption, as well as aftermarket sales volume declines that together decreased EBIT by $29 million;
  • Unfavorable currency related to translation and transaction losses, primarily on the Euro and Brazilian real, which reduced EBIT by $7 million.

ASIA PACIFIC

• Asia revenue was $70 million, down 28% from $98 million the prior year, driven by sharp OE production volume declines in China. Excluding currency and substrate sales, revenue was $46 million, compared with $62 million.
• Australia revenue was $27 million, down 46% from $50 million in fourth quarter 2007. Excluding currency and substrate sales, revenue was $34 million, versus $43 million. The decline was primarily driven by lower OE production volumes.
• Asia Pacific EBIT was a loss of $2 million, compared with earnings of $8 million a year ago.
• Lower OE production volumes, primarily in China and Australia, and related manufacturing fixed cost absorption accounted for the EBIT decline.

FULL-YEAR 2008 RESULTS

Tenneco reported annual revenue of $5.916 billion, down from $6.184 billion in 2007. Excluding currency and substrate sales, revenue was $4.334 billion, compared with $4.511 billion the year before. The year-over-year decrease was driven by significantly lower OE production volumes, primarily in North America and the rapid decline in Europe and China in the fourth quarter.

The company reported a net loss of $415 million, or $8.95 per diluted share, compared with a net loss of $5 million, or 11-cents per diluted share in 2007. Adjusted for the items below, net income was $20 million, or 42-cents per diluted share, versus net income of $88 million, or $1.82 per diluted share a year ago.

Full-year EBIT was a loss of $3 million, down from earnings of $252 million in 2007. Adjusted EBIT was $158 million, compared with $282 million in 2007. EBIT for full-year 2008 includes the negative impact of $22 million in currency. EBITDA for full-year 2008 was $219 million, compared with $457 million in 2007. Adjusted EBITDA was $380 million, a 22% decrease from $487 million a year ago.

Adjusted full-year 2008 and 2007 results:

			YTD 2008												YTD 2007
			EBITDA		EBIT			Net Income			Per Share				EBITDA		EBIT		Net Income			Per Share
Earnings Measures			$ 219		$ (3	)		$ (415	)		$ (8.95	)			$ 457		$ 252		$ (5	)		$ (0.11	)
Adjustments (reflects non-GAAP measures):
	Restructuring and restructuring related expenses		40		40			27			0.58				25		25		16			0.35
	New aftermarket customer changeover costs		7		7			4			0.09				5		5		3			0.06
	Goodwill impairment charge		114		114			114			2.45				-		-		-			-
	Charges related to refinancing		-		-			-			-				-		-		18			0.37
	Net tax Adjustments		-		-			290			6.25				-		-		56			1.15
Non-GAAP earnings measures			$ 380		$ 158			$ 20			$ 0.42				$ 487		$ 282		$ 88			$ 1.82

SGA&E costs as a percent of sales for 2008 was 8.8% compared with 8.3% in 2007, primarily driven by the revenue decline and higher restructuring costs.

Capital spending in 2008 was $221 million, versus $198 million in 2007. The increase reflects higher year-over-year spending in the first half of 2008 in preparation for new business launches and new programs in faster-growing markets like China, India and Russia.

OUTLOOK

Tenneco will continue to address the impact from the global economic crisis with its cost reduction and cash generation actions including:

• Aggressive global restructuring initiatives;
• Continuing reduced compensation and benefits actions;
• Ongoing discretionary spending cuts;

• Generating additional cash from all components of working capital, especially through continued inventory reductions globally, and
• Reducing capital expenditures to about $160 million, a 28% reduction over 2008.

“Cash preservation and generation remains our top priority and we continue to implement actions at all levels of our operations to improve cash flow and help ensure that we meet our liquidity requirements through our existing credit facilities,” Sherrill said.

Tenneco also announced it is not providing any OE revenue guidance at this time due to the extreme volatility in global automotive production and overall uncertainty in the ultimate depth and length of the global economic crisis. The company will re-evaluate providing OE revenue and long-term growth guidance as markets stabilize and some measure of predictability returns.

“Future global OE production projections are just too unreliable at this time for us to provide guidance regarding OE revenue,” said Sherrill. “However, what has not changed is the fact that Tenneco continues to benefit from new stricter emissions regulations. Tenneco's highly competitive technology is driving content growth and new business in traditional as well as adjacent markets, including on and non-road commercial vehicles and locomotives, over the next five years.”

Tenneco continues to win new business globally. Earlier this week, Tenneco announced a joint development agreement with GE Transportation, a unit of General Electric, to develop a proprietary selective catalytic reduction aftertreatment technology for various transportation and other applications. As part of the agreement, Tenneco has been awarded a development contract for locomotive projects and is positioned to become a long-term strategic supplier of diesel aftertreatment solutions to GE Transportation.