Tenneco boasts "record" results despite auto sector troubles; bond refinance to cut interest costs

By Paul Deckelman

New York, Jan. 25 - Tenneco Automotive Inc. posted a wider fourth-quarter loss Tuesday versus a year earlier - but the Lake Forest, Ill.-based automotive components manufacturer also boasted "record" revenue levels for the quarter and for the full fiscal year ended Dec. 31, and said that its net debt level and leverage ratio had fallen sharply from a year earlier. It also touted the impact that its bond refinancing in November will have on its interest costs in 2005.

Despite the official net loss of $21 million (49 cents per share) in the fourth quarter, widening out from the year-ago net loss of $2 million (four cents per share), and the fall in full-year net earnings to $13 million (31 cents per share) from $27 million (65 cents per share) in 2003, Tenneco's chairman, president and chief operating officer, Mark P. Frissora, pronounced himself "extremely pleased" with the company's 2004 results.

"We were able to turn in a record year any way you measure it," he declared on a morning conference call with analysts following the release of the company's results, this despite a year which saw raw materials prices - particularly for steel - shoot through the roof, and production slowdowns by such Tenneco customers as Detroit's Big Three automakers.

Among the records Frissora noted, revenues for the year increased 12% from year-earlier levels to $4.2 billion, the highest in Tenneco's five-year history as a stand-alone company, while quarterly revenues were up 15% to $1.1 billion, also a new high. EBITDA, adjusted for certain items, rose 15% in 2004 to $400 million, representing four straight years of improvement in the cash-flow measure.

While the company had net losses on a quarterly and full-year basis, its adjusted earnings - excluding restructuring charges and expenses related to the bond refinancing, as well as one-time tax benefits - rose to $8 million (17 cents per share) in the quarter, from $2 million (six cents per share) a year earlier, while for the full year, adjusted income increased to $52 million ($1.18 per share, a new company record), from 2003's $23 million (55 cents per share).

Tenneco was able to capitalize on higher sales to North American and European car and truck makers, offsetting light vehicle production declines for the industry overall.

Unlike other automotive component companies whose fortunes are tied heavily to those of one or more of the Big Three, Tenneco also benefited by the diversification in its customer base to include sizable sales in Europe and Japan, so that no one original equipment manufacturer - i.e. the carmakers - accounted for more than 19% of its sales, and no one aftermarket customer accounted for more than 2% of sales. The company also attributed its better results to its continued cost-cutting efforts and headcount reduction, as part of its ongoing restructuring.

Net debt at 3x EBITDA

Net debt at the end of the year also stood at a historically low $1.206 billion, a 6% decline from $1.285 billion at the end of 2003. The company said that the net debt was three times adjusted EBITDA as of Dec. 31, in line with its previously stated goal and well down from 3.7 times EBITDA a year earlier.

Total debt was $1.42 billion, down somewhat from $1.43 billion at the end of 2003; the net debt figure was arrived at by calculating the company's $214 million year-end cash balance against the total debt amount.

Frissora noted that in November, Tenneco had successfully refinanced its most expensive piece of outstanding debt, its $500 million of 11 5/8% senior subordinated notes due 2009, by taking them out with the proceeds of its new issue of $500 million of 8 5/8% senior subs due 2014, further improving the company's flexibility in the application of cash flow, creating greater liquidity by extending the company's maturities, with the closest now slated to come due in 2010, and generating pre-tax interest expense savings of about $15 million annually.

Sees $130 million interest expense

Chief financial officer Kenneth Trammell told the conference call that while fourth-quarter interest expense increased to $75 million from $46 million a year earlier, it was due to unusual factors connected with the November refinancing transaction, which produced $42 million in expenses, including $8 million in debt issuance costs, a $29 million premium for calling the 11 5/8s ahead of their scheduled maturity date, and $5 million of overlapping interest expenses during the time between when the new bonds were issued and their proceeds were then used to fund the takeout of the old bonds.

Full-year interest expense for 2004 was $179 million - but Trammell projected that thanks to the substitution of the lower-coupon bonds for the higher-coupon notes they replaced, with its $15 million of anticipated pre-tax interest savings, total interest costs are expected to fall to $130 million this year.

No revolver borrowings

Tenneco completed the fourth quarter with no borrowings outstanding on its $220 million revolving credit facility. It had $46 million in letters of credit issued against its $180 million letter of credit facility, which can be used to make revolving credit loans to the company. Total unused borrowing capacity available from the two facilities as of the end of the quarter was $354 million. Further, the company had $396 million of senior secured term loan borrowings as of Dec. 31, carrying a $4 million annual amortization payment through 2009, or $1 million quarterly.

The CFO said that Tenneco was able to lower its net debt -to-adjusted EBITDA ratio to three times despite having used $51 million of cash from the balance sheet to partially fund the refinancing of the 11 5/8% bonds.

Aiming for investment grade

"For 2005, we expect to make further progress toward our long-term goal of getting to investment grade," Trammell declared, by bringing the net-debt/EBITDA ratio down to 2.8 times.

He also noted that Tenneco is "comfortably" meeting - and exceeding its debt covenant test ratios, through improved performance and debt reduction. As of Dec. 31, its leverage ratio was 3.60, well below the 4.75 limit; its fixed-charge coverage ratio was 1.78, well above the required 1.10; and the interest-coverage ratio was 2.67, easily exceeding the 2.0 minimum.

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