Tenneco points to improved balance sheet, aims to cut leverage ratio to 1.0 times EBITDA

By Paul Deckelman

New York, Oct. 1 - Tenneco, Inc. "saw a nice improvement in our leverage ratio" in 2012 from a year earlier, powered by overall better revenue, earnings and cash-flow generation numbers, the automotive components supplier's chief financial officer said on Tuesday.

And Kenneth R. Trammell, who also serves as the executive vice president for the Lake Forest, Ill.-based manufacturer of emission-control equipment, including catalytic converters and ride-control products like shock absorbers, struts and steering components, also said that getting that ratio of net debt as a multiple of last-12-month adjusted EBITDA down to 1.0 times from current levels in the 1.5 to 1.6 times range is a company priority.

Trammell told attendees at the Deutsche Bank Leveraged Finance Conference in Scottsdale, Ariz., that in 2012, the company's total revenue was up by 2% from a year earlier while its value-add revenue rose by 3%, which, in turn, pushed Tenneco's adjusted EBIT up by 11%, "so we had a very strong improvement from an earnings standpoint."

Trammell said that earnings-per-share meantime rose by 25% year-over-year, "so the growth that we are seeing on the top line is translating very rapidly into growth on the earnings line."

And most importantly, he said, balance sheet measures improved even more, with cash flow from operations up by 49% for the year, "so that earnings improvement is flowing through into cash flow."

All-time low leverage

Trammell said that the company is "very proud" of having brought the leverage ratio down to 1.5 times by the end of 2012 from 1.7 times at the end of 2011. In the 2013 second quarter, leverage was up slightly from year-end 2012, at 1.6 times, but was still well down from 1.9 times a year earlier. The 1.5 times leverage ratio was the company's all-time low, while the 1.6 times was the best-ever second-quarter ratio since Tenneco became a separate public company in 1999 (it had previously been part of a conglomerate that also had interests in packaging, energy, shipbuilding, chemicals and farm and construction equipment).

"We're making a lot of progress on that particular statistic," Trammell said, telling the conference attendees that "we had been highly levered. We began focusing on that, obviously, as soon as we left the old Tenneco back in 1999."

In 2000, Tenneco's first full year of operation as a stand-alone company, net debt stood at just under $1.5 billion, and the company's leverage ratio was 4.4 times EBITDA. The latter figure went up the following year to an all-time peak of 4.9 times, although net debt had come down slightly, and since then, "we've had a very solid amount of progress" in terms of declining net debt and leverage ratio levels, the CFO said, "really only interrupted by the financial crisis in 2008 and 2009." That troubled time saw net debt jump by nearly $150 million in 2008 to a recent peak of roughly $1.33 billion, while the leverage measure climbed to 3.5 times from 2.4 times in 2007.

After that, though, "we got right back on track," Trammell said, with the leverage measure steadily declining from 3.5 times in 2008 to 3.1 times in 2009, 1.9 times in 2010, 1.7 times in 2011 and 1.5 times last year. Net debt also declined over that time, standing at $957 million at the end of 2012, its all-time low level for the independent Tenneco, and at $1.04 billion at the end of the second quarter.

As of the end of the quarter on June 30, the company's books showed total debt of $1.28 billion - $1.16 billion of long-term debt and $120 million of short-term debt and the current portion of long-term debt - which was partially offset by $240 million of cash.

"Our goal is a target operating leverage of 1.0 times," Trammell proclaimed. "That gives us enough room to operate through the cycle without having to go back to the banks to get a covenant amendment, and we think that's a good position for the company to be in."

A list of priorities

Trammell said that Tenneco's priorities for using its cash flow would be, "clearly" first funding the company's continued organic growth, followed by funding its previously announced initiatives aimed at reducing the costs of its operations in Europe, and then, third on the list, further reducing its debt and pension liabilities.

"Because we're still not yet at that 1.0 times leverage, we've still got some opportunities to work on the balance sheet. We have a lot of flexibility in our senior credit facility to do that."

Other priorities further down the list include keeping an eye on potential strategic opportunities in terms of acquisition of new technologies that can enhance its current operations - although he stressed that "we are not looking to grow by acquisition" - and returning more capital to its shareholders.

However, he said that Tenneco would consider the latter goal only "once we get to that 1.0 times leverage ratio." Up till now, he said, the company has only been buying back stock that was distributed to its employees via its employee stock ownership plans, "and we do expect to continue to do that for the foreseeable future."

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