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Tenneco Inc. (TEN - Analyst Report) posted its second-quarter 2012 profit of $70 million or $1.14 per share, up 40% from $50 million or 81 cents in the comparable quarter of 2011 (excluding special items). With this, it surpassed the Zacks Consensus Estimate by 17 cents.

On a reported basis, earnings were $87 million, or $1.42 per share, compared with $50 million, or 81 cents, in the second quarter of 2011.

The company’s revenues for the quarter went up marginally to $1.92 billion from $1.89 billion in the year-ago quarter. However, it was lower than the Zacks Consensus Estimate of $2.04 billion.

The increase in revenues was attributable to a rise in production of light vehicles in North America and China and higher commercial vehicle revenues around the world. Excluding substrate sales and currency impact, revenues increased 9% to $1.59 billion. Revenues from original equipment (OE) commercial and specialty vehicles boosted 36% to $226 million in the reported quarter.
 
Adjusted EBIT improved 21% to $139 million from the year-ago level. The year-over-year improvement was driven by strong operating performance on light vehicle production volumes and swelled commercial vehicle revenues.

Segment Results

Revenues from North American OE rose 16% to $790 million due to higher revenues from emission control business. Aftermarket revenues grew 7% to $206 million. Adjusted EBIT increased 36.5% to $86 million from $63 million a year ago. The hike in EBIT was driven by a strong operational performance on higher volumes, mainly in the OE emissions control business, including the commercial vehicle segment.

Revenues from European OE went down 10% to $481 million. The decrease in revenues was due to a 13% fall in revenues from the ride control business and a 9% decline in revenues from the emission control business. The European aftermarket depicted a 24% fall in revenues to $87 million, due to a 32% decrease in revenues from emission control business.

Revenues from South America and India slid 16% to $142 million. Adjusted EBIT from Europe, South America and India was $34 million versus $38 million in the corresponding quarter of 2011.

Revenues from Asia Pacific (Asia and Australia) escalated 9% to $214 million. Revenues were positively affected by a 14% increase in revenues from Asia. Adjusted EBIT from Asia Pacific was $19 million compared with $14 million a year ago. The growth in EBIT was due to higher sales volume of new light vehicles in China and operating benefits in Australia.

Financial Position

Tenneco had cash and cash equivalents of $181 million as of June 30, 2012, a decline from $214 million as of December 31, 2011. Net debt increased marginally to $1.18 billion as of June 30, 2012 from $1.13 billion as of December 31, 2011. Tenneco’s leverage ratio – net debt to adjusted EBITDA including non-controlling interests – reduced to 1.9X from 2.0X a year ago.

For the first six months of 2012, the company had cash inflow from operating activities of $1 million compared with a cash outflow of $36 million in the year-ago quarter. Capital expenditures increased to $62 million from $47 million a year ago. The increase in capital expenditure was owing to the launch of new light and commercial vehicles in North America and Europe.

Share Repurchase

In January 2012, the Board of Directors of Tenneco authorized share repurchase of 600,000 shares during the twelve months period. In the second quarter of 2012 the company repurchased 600,000 shares for $18 million, as announced by it earlier.

Outlook

Tenneco anticipates growth in revenues, margins and record earnings in 2012. The company expects revenues to be positively affected by a strong growth in North American vehicle production. According to IHS Inc. (IHS - Snapshot Report), light vehicle production is expected to go up in most of the company’s markets except Europe.

Our Take

Tenneco, based in Lake Forest, Illinois, is a leading manufacturer and supplier of emission control, ride control systems, and systems for the automotive original equipment manufacturers (OEMs) and the aftermarket. The company competes with Meritor Inc. (MTOR - Analyst Report).  Currently, it retains a Zacks #3 Rank, which translates into a short-term (1 to 3 months) Hold rating.

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