DETROIT - When Tenneco Automotive Inc. was created a year ago this week, the roar of a Top Fuel dragster heralded the event outside the New York Stock Exchange. What a year it has been.
Tenneco's road has been littered with a corporate breakup and an abortive sale attempt. Now that it finally is focusing on its auto parts business, the is out because of slowing vehicle sales.
Tenneco Chairman Mark Frissora is unmoved by the obstacles. He said the company is prepared to show Wall Street that it can perform - recession or no recession.
'We're confident of our ability to perform in a really difficult market,' he said.'We are lean and mean, and that will show up in our operating results next year.'
The Lake Forrest, Ill., global supplier of Monroe shock absorbers and Walker mufflers moved quickly in that direction last month after it announced that third quarter earnings slid 67 percent to $9 million from $27 million in the year-ago quarter.
The company said it plans to cut as many as 700 jobs, or 16 percent of its salaried work force. Still more cuts and factory closings may be necessary next year if the industry continues its sales slide and Tenneco's profit margins remain under pressure.
Tenneco and others are struggling in the high-profit aftermarket because better-built cars and trucks remain on the road longer and need fewer replacement parts.
Sixty-five percent of Tenneco's $3.3 billion in sales last year of shocks, struts and exhaust products went to the automakers. The more lucrative aftermarket accounted for the other 35 percent.
The Tenneco story illustrates how even smart auto parts makers with solid brands can run afoul of the market. The confluence of global economic problems can upset even the best laid efforts to diversify by product, market and geography.
'Tenneco will continue to face an uphill battle,' said analyst Eric Goldstein, because of 'difficult global aftermarket conditions, softening light-vehicle production and weak heavy-duty truck demand in North America.'
DISTRACTED BY SALE
It was just a year ago that Tenneco Inc. was broken into two pieces. Trading in the public shares of the company began as five-time Top Fuel champion Joe Amato startled the Wall Street crowd with the sound of his dragster.
Tenneco Automotive Inc. was designed to be a major stand-alone supplier of shocks, struts, mufflers and pipes. Its sister company, the maker of Hefty bags, was spun off as Pactiv Corp.
But as with drag racing, new corporations sometimes face false starts. Eight months earlier, Tenneco Inc. shifted gears and attempted to sell its automotive group, which had $3.3 billion in sales, to the smaller Tower Automotive Inc., a chassis maker in Grand Rapids, Mich.
A Tenneco-Tower deal would have created a supplier with $5.1 billion in sales. More important, it would have positioned the company as a key supplier of a vehicle's 'corners,' which include the suspension, brakes and wheels. Tenneco's shocks and struts would have complemented Tower's suspensions and structural stampings.
Instead, the deal foundered on cultural differences, Frissora said. But the delayed spinoff of Tenneco Automotive Inc. distracted management's focus on running the company, analysts said.
DRIVEN BY DEBT
The $1.7 billion in debt Tenneco's parent handed Frissora and his team at the breakup didn't help. Even today, with that burden cut to $1.54 billion as of Oct. 30, long-term debt is 81 percent of Tenneco's capital. That is by far the highest percentage among its peer group, according to Standard & Poor's.
That debt and other liabilities are part of the costs of being a stand-alone company. But the company argues that the $8 million it earned as a division in the third quarter of last year compares well with the $9 million it recently earned - despite its higher costs today.
Debt is driving Frissora's efforts to slash costs, including a cut in capital spending of $60 million annually. His advanced ride-control programs have been reduced from 13 to seven because of a lack of customer support.
Frissora is in a hurry because his competitors faced none of his delays or debt burden. Arvin Industries Inc. and Meritor Automotive Inc., formidable in their own right, became a bigger threat with their April 6 merger announcement.
ArvinMeritor Inc., a global powerhouse with sales of $7.7 billion for the fiscal year that ended Sept. 30, has made no secret of plans to double in size in a few years.
Still, Frissora and his management team have built what Standard & Poor's calls the world's leading producer of ride-control and exhaust products and systems. The company has booked $500 million in new business through 2004, he said.
New products and greater content per vehicle are expected to help in a downturn. Tenneco's ride-control and exhaust systems were featured on 25 vehicle launches in the third quarter of this year.
On the exhaust side, Frissora is going after the high-profile muffler and tailpipe contract for the next-generation Corvette for 2004. It is a titanium system supplied by ArvinMeritor.
Tenneco, too, is joining the industry rush to add high-tech features to strengthen profit margins. It will begin supplying its Kinetic hydraulic suspension system, which reduces the risk of rollover. The system, which costs automakers $1,800 per vehicle, will debut on a 2002 model, believed to be the Jeep Grand Cherokee. The contract is worth $80 million in its first year.
Those developments, strong revenue gains in Europe and a rebound in sales in South America and Asia bode well for the future, said analyst Goldstein of Bear, Stearns & Co. Inc. of New York.
It's the near term analysts worry about.
Investors are uneasy with the state of the auto parts industry. Stock prices for most auto parts suppliers are near five-year lows.
Tenneco hoped to offset the automotive cycle. It moved into India and East Asia. It has made several acquisitions and has entered into several joint ventures.
While it generally has positioned itself in fast-growing, less cyclical niches in the auto parts industry, according to Standard & Poor's, 'it is still vulnerable to economic downturns.'
Those downturns already have begun in Tenneco's global aftermarket business. The rapid decline in the North American heavy truck business has hurt, as has the weak euro.
Investors have responded by beating the stock price down more than 59 percent to $4.31 last week, from its high of $10.48 earlier this year.
Frissora said his restructuring would help. He expects to save $45 million annually. The 700 expected layoffs will require a charge of $60 million in the final quarter of this year.
That charge also will include the consolidation of its North American replacement exhaust production from two plants. He also plans to scrap or sell up to 20 percent of his inventory - as many as 6,000 different part numbers of shocks and struts and 15,000 part numbers for exhaust components.
Frissora said he plans to impress Wall Street with future quarterly earnings, but he is cautious about promising too much: 'Our mantra is to underpromise and overdeliver.'