(TEN) Tenneco Quarterly Earnings Exceed Estimates

Tenneco Inc. (TEN) showed a profit of $50 million or 81 cents per share (before special items) during the second quarter of the year versus $38 million or 62 cents per share (before special items) in the same quarter of previous year. The profit exceeded the Zacks Consensus Estimate of 75 cents per share.

Revenues in the quarter rose 26% to $1.89 billion driven by a strong original equipment (OE) production volumes across all regions, launch of new commercial vehicle emissions control business, and improvement in aftermarket sales globally. The earthquake in Japan led to a loss of about $60 million in revenues. Excluding substrate sales, revenues went up 21% to $1.45 billion.

Adjusted EBIT (earnings before interest, taxes and non-controlling interests) increased to $115 million from $97 million a year ago, driven by higher OE volumes globally and the launch and ramp-up of higher-margin light and commercial vehicle businesses.

Favorable currency translation effects contributed $10 million to the growth in EBIT.  The improvement was partially offset by previously announced higher year-over-year aftermarket customer changeover costs.

EBIT as a percent of revenue deteriorated marginally to 6.0 from 6.2 a year ago. The comparison reflects an increase in substrate sales to 23% of revenue compared with 20% in the prior year.

EBIT margins benefited from strong OE light vehicle volumes, the ramp-up on commercial vehicle business, new light vehicle launches and higher North America aftermarket sales. However, these were offset by mix shift in the European aftermarket, the timing on price recoveries in the Europe aftermarket and in South America, and a fall in industry production in Australia

Regional Performance

In the North American market, OE revenues hiked 22% to $681 million, driven by strong volumes on Ford Motor’s (F) F-150 pick-up truck and Focus, General Motors’ (GM) Chevrolet Equinox, Sierra/Silverado and Tahoe/Yukon platform. Incremental revenues from commercial vehicle programs with Caterpillar (CAT) and Navistar (NAV) also contributed to the increase in sales. Aftermarket revenues increased 7% to $193 million on the back of higher volumes.

EBIT went up 24% to $62 million from $50 million a year ago on higher OE light vehicle volumes and aftermarket sales and the addition of new commercial vehicle business.

In the European market, OE revenue rose 40% to $536 million driven by strong volumes on key platforms including the Volkswagen Golf and Polo, Audi A6 and A1, Mercedes E-class and Sprinter, Opel Astra and Zafira, and Ford Focus. A rise in commercial and specialty revenue also contributed to the overall increase in sales in the region. The aftermarket revenues grew 18% to $114 million, driven by higher ride control sales.

In South America and India, revenues surged 31% to $167 million, driven by higher aftermarket sales. EBIT for the Europe, South America and India region increased $7 million to $38 million during the quarter.

In the Asian-Pacific market, revenues rose 25% to $197 million, driven by strong volumes in China, particularly on Audi, Ford and Nissan platforms. EBIT in the region improved $1 million to $14 million on strong volumes and operational performance in China.

Financial Position

Tenneco had cash and cash equivalents of $161 million as of June 30, 2011, a decrease from $233 million as of December 31, 2010. Long-term debt declined to $1.23 billion as of June 30, 2011 from $1.16 billion as of December 31, 2010.

Tenneco’s net debt was $1.13 billion as of June 30, 2011 versus $1.11 billion a year ago. The leverage ratio (net debt to adjusted LTM EBITDA including non-controlling interests) was 2.0x, down from 2.3x as of June 30, 2010.

In the first half of the year, Tenneco used cash flow of $36 million from operations versus $47 million generated from operations in the year-ago period, despite an increase in net income. The decline in cash flow was attributable to higher working capital requirements.

Capital expenditures (net) increased to $91 million from $71 million a year ago. This was attributable to Tenneco’s ongoing investments to support new manufacturing facilities in China and new customer programs, particularly commercial vehicle emission control businesses in Europe and South America. The company expects capital expenditures to be in the range of $190 million to $210 million for full year 2011.

In the second quarter, Tenneco announced plans to repurchase up to 400,000 shares of the company’s outstanding common stock to offset dilution from shares issued to employees in 2011. At the end of the quarter, the company has repurchased 270,500 shares for $10.5 million.

Our Take

Tenneco, a Zacks #3 Rank (Hold) stock, is a Lake Forest, Illinois based leading manufacturer and supplier of emission control, ride control systems, and systems for the automotive original equipment manufacturers and the aftermarket.

The company is launching diesel after treatment programs with 13 commercial vehicle and engine manufacturers globally through 2012 in North America, Europe, China and South America. It is also adding Daimler (DDAIF) and MAN, both in South America, to its list of nine previously announced commercial vehicle customers.

In addition, it has recently announced new aftermarket business in North America with seven customers, which is expected to generate more than $15 million in annual revenue.

Tenneco’s primary competitors include Meritor Inc. (MTOR), which will report its quarterly results tomorrow. Meritor has recently lowered its guidance without citing any reason. The company now expects revenues for the period to go up 7%–8% for the third quarter of its fiscal year from the second quarter to $1.28 billion–$1.29 billion, down from the earlier guidance of $1.3 billion–$1.375 billion provided in May.

The company also expects adjusted earnings to lie between $100 million and $104 million in contrast to its earlier outlook of as high as $110 million. It predicted free cash flow to be breakeven compared with the earlier projection of a slightly positive due to investments in inventory.

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TENNECO INC (TEN): Free Stock Analysis Report

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