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Tenneco Reports First Quarter Results

From aftermarketnews| April 30,2007

Tenneco has reported first quarter 2007 net income of $3 million, or 7-cents per diluted share, compared with $7 million, or 14-cents per diluted share, in first quarter 2006. Adjusted for the items below, net income was $8 million, or 17-cents per diluted share, versus $8 million, or 17-cents per diluted share, a year ago.

EBIT (earnings before interest, taxes and minority interest) increased to $50 million, from $42 million a year ago. On an adjusted basis, EBIT was $52 million, up from $48 million in first quarter 2006. EBITDA (EBIT before depreciation and amortization) was $98 million, versus $86 million a year ago. Adjusted EBITDA was $100 million, compared with $92 million in first quarter 2006.

First quarter revenue increased 24 percent to $1.4 billion from $1.1 billion a year ago. Substrate sales were up 73 percent to $339 million from $196 million in first quarter 2006. Excluding substrate sales and favorable currency of $49 million, revenue was up 9 percent to $1 billion from $936 million a year ago. The company said it benefited from its balanced operations as revenue growth in Europe and China as well as the launch of incremental new emission control business in North America helped offset an 8 percent industry OE production decline in North America.

"We're pleased with how Tenneco is positioned with a well-balanced global footprint, a good mix of OE and aftermarket customers, technology-driven growth on new platforms and a relentless focus on controlling costs, all which helped counter North American OE industry production declines this quarter," said Gregg Sherrill, chairman and CEO, Tenneco. "We remain intensely focused on generating growth with our advanced technology capabilities, particularly as emission control opportunities expand with tighter emissions regulations. Equally important is our focus on launching new OE platforms flawlessly, improving our operating efficiency and offsetting higher material costs."

Gross margin in the quarter was 15.7 percent versus 18.6 percent a year ago. The significant diesel platform launches in North America resulted in a higher mix of substrate sales. Substrates, an integral part of the emission control system, typically carry lower margins. These large OE launches also shifted the revenue balance between OE and aftermarket. Other items including higher material costs, lower restructuring and benefits from Lean manufacturing and Six Sigma programs impacted gross margin to a lesser degree.

Total steel costs in the quarter increased $14 million year-over-year. Tenneco is working aggressively to minimize these higher costs through cost reductions, material substitutions and low-cost country sourcing. The company is also recovering some of these costs with aftermarket price increases and with OE customers, having already completed negotiations on some OE platforms. The company is still negotiating with other OE customers and anticipates completing nearly all the agreements by the end of the second quarter.

SGA&E (selling, general, administrative and engineering) expenses as a percent of sales decreased to 8.7 percent versus 10.9 percent a year ago. Tenneco successfully leveraged its revenue growth in the quarter while reducing SGA costs and continuing to invest in engineering for new platform launches and to meet changes in future emissions regulations.

EBIT margin in the quarter was relatively even year-over-year. The SGA&E percentage improvement helped offset the impact of the gross margin percentage decline.

Interest expense in the quarter increased to $42 million, versus $34 million in first quarter 2006, mostly due to the $5 million expense for successfully refinancing the company's senior credit facility in March. The transaction enhances Tenneco's financial flexibility by extending the expiration of its revolving line of credit; extending the maturities of its term loan facility; and enhancing debt covenant flexibility.

As expected, significant business growth in North America drove up cash use in the quarter to an outflow of $95 million versus an outflow of $25 million a year ago. The company's 24 percent revenue increase resulted in higher accounts receivable and also impacted inventory as two of the new platforms use converters sourced from the company's South Africa operations. Seasonal build-up in the aftermarket also increased inventory.

At quarter-end, debt net of cash balances was $1.317 billion, compared with $1.288 billion a year ago and total debt was $1.453 billion, versus $1.384 billion at the end of first quarter 2006. At quarter-end, the ratio of debt net of cash balances to adjusted LTM (last twelve months) EBITDA was 3.1x, equal to a year ago.

"We're optimistic as we look ahead to the second quarter based on today's production schedules. We expect continued revenue growth from our emission control truck business as the ramp-up on these major platforms accelerates," said Sherrill. "We also expect the European segment and China operations will continue to perform well, which will help balance anticipated industry-wide OE production declines in North America. In addition, we will continue to benefit from our intense focus on all aspects of cost improvement and manufacturing efficiencies and anticipate finalizing nearly all of our negotiations with OE customers on steel cost recovery by the end of the quarter."

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