This week, Durig Capital takes a take a look at an industrial designer, producer and marketer of aftermarket elements for mild automobiles, business vans and different industrial makes use of. Tenneco Inc. lately posted a implausible fourth quarter and full yr outcomes largely as a consequence of its current acquisition of Federal-Mogul. Highlights embrace:
- A 79% improve in fourth quarter income.
- Document revenues for 2018 of $11.eight billion.
- A 21% improve in 2018 adjusted EBITDA.
- 2018 curiosity protection of two.3x.
Later this yr, Tenneco will create two separate, market main corporations from its acquisition of Federal-Mogul. Federal-Mogul brings robust manufacturers, merchandise and capabilities which are complementary to Tenneco’s portfolio. Creating two new product targeted corporations with stronger product portfolios will permit every of them to maneuver quicker in executing on their particular progress priorities. Tenneco has already realized value-added income from the acquisition of Federal-Mogul of $three.6 billion within the fourth quarter alone. This appears to be a sensible play on Tenneco’s half. The corporate’s short-term bonds, maturing in December 2024, are at present buying and selling at a reduction giving them a aggressive yield-to-maturity of about 6.75%. These bonds present a superb diversification alternative in including publicity within the automotive / industrial industries, and as such they make a superb addition to Durig Capital’s Fastened Revenue 2 (FX2) Excessive Yield Managed Revenue Portfolio, the aggregated efficiency of which is proven under.
Fourth Quarter and Full Yr 2018 Outcomes
Tenneco posted incredible fourth quarter outcomes, partially because of the completion of the acquisition of Federal-Mogul in October. This additionally contributed to the corporate’s wonderful full-year outcomes as properly. Nevertheless, even with out the will increase associated to the acquisition, the corporate nonetheless posted wholesome natural progress in its revenues for each the fourth quarter and full-year, exceeding the expansion (or declines) within the corresponding industries. Listed here are some highlights from the corporate’s fourth quarter and full yr outcomes.
- Fourth quarter income totaled $four.three billion reflecting a 79% improve, primarily because of the acquisition of Federal-Mogul. When excluding the consequences of the revenues from Federal-Mogul, revenues nonetheless elevated year-over-year by four% (natural progress). This natural progress outpaced mild car business manufacturing by 10 proportion factors.
- For the complete yr 2018, Tenneco produced document excessive revenues of $11.eight billion, together with the income from Federal-Mogul. Nevertheless, even with out the revenues from the acquisition, Tenneco nonetheless had natural income progress of 6% year-over-year. This natural progress outpaced business manufacturing by 7 proportion factors.
- Adjusted EBITDA for the complete yr elevated 21% over 2017 to $1,046 million.
- Money generated by operations for the complete yr 2018 was $439 million.
Brian Kessler, Tenneco co-CEO commented on the corporate’s fourth quarter and full yr outcomes, together with current and in-process acquisitions. “We closed the Federal-Mogul transaction, accelerating the transformation of the mixed companies into two purpose-built, business main corporations, and our acquisition of Öhlins will gasoline the expansion of superior suspension know-how and improve our portfolio in broader mobility markets.”
Tenneco accomplished the acquisition of Federal-Mogul in October 2018. With this acquisition, Tenneco has already realized value-added income of $three.6 billion for the fourth quarter 2018. Tenneco additionally lately accomplished the acquisition of Öhlins Racing, a Swedish know-how firm that develops premium suspension methods and elements for the automotive and motorsport industries. Each of those acquisitions will contribute to the spin off of 1 firm into two market main corporations with complementary product strains.
Concerning the Issuer
Headquartered in Lake Forest, Illinois, Tenneco is among the world’s main designers, producers and entrepreneurs of Aftermarket, Journey Efficiency, Clear Air and Powertrain merchandise and know-how options for diversified markets, together with mild car, business truck, off-highway, industrial and the aftermarket, with 2018 revenues of $11.eight billion and roughly 81,000 staff worldwide. On October 1, 2018, Tenneco accomplished the acquisition of Federal-Mogul, a number one international provider to unique gear producers and the aftermarket. Moreover, the corporate expects to separate its companies into two new, unbiased corporations, an Aftermarket and Journey Efficiency firm in addition to a brand new Powertrain Know-how firm within the second half of 2019.
One Firm Transforms into Two Corporations
When Tenneco acquired Federal-Mogul, it did so with the intent to spin off two separate entities to create two market main corporations. The acquisition introduced collectively two corporations which have complementary enterprise strains. Submit-spin, the aftermarket and journey efficiency firm will embrace Tenneco Experience Efficiency and Federal-Mogul Motorparts, and the powertrain know-how firm will embrace Tenneco Clear Air and Federal-Mogul Powertrain. Publish-split, the breakout will look one thing like this (see under).
In February, Tenneco introduced the identify of the brand new Aftermarket and Journey Efficiency Firm – the brand new firm is known as DRiV. Following the separation, DRiV can be one of many largest international multi-line, multi-brand aftermarket corporations, and one of many largest international OE experience efficiency and braking corporations. DRiV’s principal product manufacturers will function Monroe®, Öhlins® Walker®, Clevite®Elastomers, MOOG®, Fel-Professional®, Wagner®, Ferodo®, Champion® and others. DRiV would have the brand new Tenneco as one of many world’s largest pure-play powertrain corporations serving OE markets worldwide with engineered options addressing gasoline financial system, energy output, and standards air pollution necessities for gasoline, diesel and electrified powertrains.
Present Value Synergies
Since its acquisition of Federal-Mogul, Tenneco has been working exhausting to understand value synergies between the 2 corporations and is making good progress in the direction of attaining their focused objectives. Tenneco has focused $200 million in earnings synergies within the areas of engineering, common and administrative (G&A) prices, and provide chain and gross sales drive prices. By the top of This fall, Tenneco had achieved a synergy run fee of roughly $100 million and the corporate is nicely on its option to meet its aim of $150 million by its third quarter 2019. Additionally, Tenneco has focused $250 million for its one-time working capital synergies from stock reductions and changes to accounts payable phrases. The corporate has already reached 50% of that focus on and expects to realize the rest by Q3 2020.
Curiosity Protection and Liquidity
For bondholders, curiosity protection conveys the power of the bond issuer to cowl and repair its present debt load. For 2018, Tenneco had working revenue of $306 million and curiosity expense of $132 million for an curiosity protection of two.3x. When it comes to liquidity, as of December 31, 2018, Tenneco had money and money equivalents of $697 million.
The danger for bondholders is whether or not Tenneco can efficiently spin the one firm into two whereas sustaining profitability and price containment. Tenneco has masterfully mixed two corporations (itself and Federal-Mogul) with complementary enterprise strains and is within the means of redistributing these product strains to type two main corporations within the industries which they serve. For 2019, Tenneco offered steerage that estimates, on a professional forma foundation, fixed greenback income progress within the vary of four% to five%. The corporate additionally expects that in 2019, its income progress will outpace international business manufacturing. With the anticipated strong progress in revenues towards a backdrop of forecasted mild car manufacturing declines, the yield-to-maturity of roughly 6.75% on Tenneco’s 2024 bonds does seem to outweigh the dangers recognized.
Basically, bond costs rise when rates of interest fall and vice versa. This impact tends to be extra pronounced for decrease couponed, longer-term debt devices. Any fastened revenue safety bought or redeemed previous to maturity could also be topic to a achieve or loss. Greater yielding bonds sometimes have decrease credit score scores, if any, and subsequently contain greater levels of danger and will not be appropriate for all buyers.
Abstract and Conclusion
Tenneco has shrewdly mixed its market main product strains with these of Federal-Mogul, additionally a market chief in its area. Combining after which redistributing these product strains to enrich one another in two separate and distinct corporations creates two targeted, purpose-built, business leaders of their respective markets with larger scale, with each strategic and monetary flexibility. The corporate’s short-term maturity bonds maturing in 67 months, couponed at 5.375% are at present buying and selling at a reduction, giving them a yield-to maturity of about 6.75%. In mild of the corporate’s wonderful fourth quarter and full yr 2018 outcomes, in addition to the promising prospects for the 2 new corporations being created later this yr, these aggressive yielding notes make a really perfect addition to Durig Capital’s Fastened Revenue 2 (FX2) Excessive Yield Managed Revenue Portfolio, proven above.
Issuer: Tenneco Inc.
Scores: B2 / BB-
Worth: ~ 93.zero
Yield to Maturity: ~6.75%
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About Durig Capital
Durig Capital supplies buyers with a specialised, clear fiduciary service at a really low value. Our FX2 (Discretionary Administration) Portfolio over time has tremendously outperformed our FX1 (Non-discretionary) Portfolio, giving considerably larger (at occasions double) the returns of FX1. Our skilled service allows entry to a broad spectrum of bond, excessive yields, and lower cost factors which are typically present in much less environment friendly markets, however not evidenced in lots of bond providers. Most of our shopper accounts are custodied in their very own identify at TD Ameritrade Institutional, a big low cost service supplier that’s SPIC insured, or at Interactive Brokers. We’ve now began providing our extremely profitable FX2 service to shoppers of different Registered Funding Advisors via segregated accounts at TD Ameritrade. Please ask us to find out how this may be just right for you and your present advisor.
Disclosure: Durig Capital and sure shoppers might maintain positions in Tenneco’s December 2024 bonds.
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