There are a couple primary reasons for the divergence in top and bottom-line performance. First, its EBITDA margins slid by 150 basis points to 8.7% due to lower volume in China, as well as softness in the North American aftermarket industry. A delay in expected synergies resulting from the integration of Federal-Mogul also weighed on results.
As for its outlook, TEN guided for Q2 revenue of $4.45-$4.55 bln vs. the $4.65 bln consensus and Adj. EBITDA of $375-$395 mln, representing a 20% sequential improvement. For FY19, the company expects to generate revenue of $17.7-$18.1 bln vs. its original expectation of $18.2-$18.4 bln.
Click here to access TEN's earnings press release.
With about 15% of revenue coming from China, TEN's exposure to the weak auto industry there is meaningful. In March, vehicle sales in China slid by 5.2%, following a 13.8% dive in February. But, the softness in China is widely known and the company anticipated that it would impact its financial results.
What came as a surprise to the company was the downturn in the North American aftermarket industry. TEN's aftermarket business is part of its newly-formed DRiV's segment, which is in the process of being spun-off into a separate business. The segment experienced a 3% dip in revenue in Q1.
During the earnings call this morning, management stated that it believes weather played a role. This is because most of the highest performing product categories aren’t carried during cold snaps. Furthermore, it commented that April comps have swung back into positive territory. Therefore, the company expects aftermarket revenues in Q2 to normalize, leading to a 200 basis point improvement for Adj EBITDA on a sequential basis.
The other unexpected issue that cropped up is related to the integration of Federal-Mogul, which it acquired in April 2018. Federal-Mogul is an $8 bln business that designs and manufacturers powertrain components and systems for auto OEMs, in addition to selling a range of aftermarket products. There is plenty of overlap between TEN and Federal-Mogul.
While the acquisition was happening, TEN announced that it would split into two separate businesses: The new "DRiV" company would include TEN's aftermarket and ride performance products, along with Federal-Mogul's motorparts business; the New Tenneco would include TEN's clear air line and Federal-Mogul's powertrain business.
As part of this transition, TEN is in the process of relocating its China ride performance production plant and consolidating some facilities in North America. This move has disrupted volumes, which in turn has pressured margins. These actions have also ramped up its capex, now expected to range from $250-$275 mln for the year.
At the same time, TEN continues to face challenging conditions in both China and Europe. Consequently, it has decided to delay the spin-off of DRiV into mid-2020 in order to give the companies more time to stabilize business processes and systems and solidify their margins and cash flow metrics.
This news only adds fuel to the fire in terms of today's sell-off as its execution comes into question.
Key Takeaways: TEN is getting hit on multiple fronts. Yes, the weak auto industry in China is hurting its business, as expected. But, some of its troubles seem to be self-inflicted as it is having difficulty wrapping its arms around its Federal-Mogul acquisition and the accompanying split of the company.
The magnitude of its bottom-line miss brings into question why the company didn't provide updated guidance for the quarter. The apparent integration issues and delay in the split doesn't lend confidence either.
In other words, the nose-dive in the stock today may have as much to do with the bad quarter as it does with confidence in the management team.