Tenneco Inc. has reported second quarter net income of $50 million, or 98 cents per diluted share, versus a second quarter net loss of $3 million, or 5 cents per diluted share in 2017. Second quarter 2018 adjusted net income was $99 million, or $1.92 per diluted share, compared with $101 million, or $1.88 per diluted share last year.
Revenue
Total revenue in the second quarter was $2.537 billion, up 9 percent year-over-year, with revenue growth in Clean Air, Ride Performance and Aftermarket. On a constant currency basis, total revenue increased 8 percent percent driven by strong commercial truck and off-highway programs and higher volumes and incremental content on light vehicles.
On a constant currency basis, value-add revenue increased 6 percent to $1.889 billion, significantly outpacing industry production*. Ride Performance revenue increased 13 percent, Clean Air revenue rose 5 percent and global aftermarket revenue was up 1 percent compared to last year.
“Tenneco’s strong organic growth was two times industry production growth in the second quarter, with higher revenues in all three reporting segments, led by double-digit growth in intelligent suspension technologies and commercial truck and off-highway revenue,” said Brian Kesseler, CEO of Tenneco. “In line with our guidance last quarter, the Tenneco team delivered sequential margin improvement in all three reporting segments as we continue to drive operational improvements and address higher steel costs through customer recovery mechanisms.”
Third Quarter and Full Year 2018
Tenneco expects constant currency total revenue growth of 5 percent in the third quarter 2018, outpacing forecasted light vehicle industry production growth of 3 percent*. Tenneco estimates currency to have an impact on revenue of -2 percent, based on currency exchange rates as of June 30, 2018.
The company expects organic growth to outpace industry production with growth in light vehicle, commercial truck and off-highway revenue, and a steady contribution from the global aftermarket segment. The company expects third quarter value-add Adjusted EBIT margin to be lower than prior year by about 40 to 50 basis points.
For the full year, Tenneco reaffirmed its 2018 full year revenue outlook, and expects 5 percent constant currency revenue growth, outpacing industry production* by 3 percentage points. In addition, Tenneco said it expects currency to have a positive impact on revenue of 1 percent, based on currency exchange rates as of June 30, 2018. The company expects full-year value-add Adjusted EBIT margin in the range of 8.5 to 8.7 percent.
Acquisition of Federal-Mogul LLC
Tenneco signed a definitive agreement on April 10, to acquire Federal-Mogul. The company says it intends to separate the combined businesses into two independent, publicly traded companies through a tax-free spin-off to shareholders that will establish an aftermarket and ride performance company and a powertrain technology company.
The Federal-Mogul acquisition is expected to close early in the fourth quarter of 2018, and is subject to regulatory and shareholder approvals and other customary closing conditions, with the separation expected to occur in the second half of 2019. The transaction is expected to be value accretive with run-rate earnings synergies of at least $200 million and one-time working capital synergies of at least $250 million within 24 months of closing.
On July 23, Tenneco announced that its board of directors has selected Brian Kesseler and Roger Wood as the CEOs of the two new companies. Kesseler will become chairman and CEO of the aftermarket and ride performance company, which will be headquartered in Lake Forest, Illinois, and Wood will become chairman and CEO of the new powertrain technology company, which will be headquartered in the Detroit area. Immediately upon closing of the Federal-Mogul acquisition, and prior to separation, Kesseler and Wood will serve as co-CEOs of Tenneco Inc., leading their respective businesses, while preparing each to become a stand-alone entity and helping facilitate a smooth spin-off. During this period, both CEOs will report to the Tenneco Board of Directors.
In an investor call today, both Kessler and Wood shared additional details on plans for the two new companies.
“As we move ahead we will continue to work with speed, focus and commitment to execute our growth strategy, satisfy our customers and improve our profitability,” said Kessler. “Through the transformational acquisition and ultimate separation, we will create two focused, purpose-built industry leaders in their respective markets. This unique strategic combination creates strong new businesses with greater scale and each with the strategic and financial flexibility to drive long-term value creation.”
During the investor call, Tenneco Chief Financial Officer Jason Hollar shared that the company incurred $18 million in acquisition advisory costs and $9 million in “structural cost improvements by reducing salaried head count in advance of the closing of the transaction.”
Wood spoke about his enthusiasm to be involved in the deal.
“Having spent 30 years in the powertrain business with BorgWarner and Dana, I feel right at home with this outstanding opportunity,” said Wood. “I’m excited about creating a company that will become one of the largest pure play powertrain companies serving OE markets worldwide.”
Wood has been on the Tenneco board of directors for more than two years and has been involved with the acquisition from the beginning. He said there is no other powertrain company today that can match the range of product capabilities this new company will offer to address fuel economy, power output and criteria pollution requirements for gasoline, diesel and electrified powertrains.
The company expects the acquisition to close early in the fourth quarter with the spin-off of the Aftermarket business expected to be complete late next year.
Kesseler added that significant progress has been made on the acquisition. “We continue to make good progress with regulatory approvals and have received anti-trust clearance from key jurisdictions, including the U.S., China, Brazil, India and others, with only Europe and Mexico remaining.”
