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Tenneco Inc. (TEN - Analyst Report) reported an adjusted profit of $40.0 million or 66 cents per share in the fourth quarter 2012, up 25% from $32.0 million or 53 cents in the corresponding quarter a year ago. However, earnings missed the Zacks Consensus Estimate by 2 cents. On a reported basis, the company’s profit was $33.0 million or 54 cents per share compared with $30.0 million or 49 cents in the fourth quarter of 2011.

Revenues decreased 1.7% to $1.75 billion, which was lower than the Zacks Consensus Estimate of $1.78 billion. Excluding substrate sales and currency impact, revenues increased 1.9% to $1.39 billion. The year-over-year increase in revenues was attributable to a rise in sales volume of light vehicles in North America and China and higher North American aftermarket sales.

Adjusted EBIT (earnings before interest, taxes and non-controlling interests) improved 5.6% to $94.0 million from $89.0 million in the year-ago quarter. The improvement was driven by higher light vehicle sale and effective operational cost control measures.

Segment Results

Revenues from North America remained flat at $846.0 million on a year-over-year basis. The North America original equipment business reporting flat revenues of $682.0 million in the quarter compared with the year-ago level. Meanwhile, Aftermarket revenues grew marginally by 1% to $164.0 million.

Adjusted EBIT augmented 17% to $55.0 million from $47.0 million a year ago. The rise in EBIT was driven by higher volumes from OE (original equipment) businesses, improved aftermarket sales and effective operational cost control measures.

Revenues from Europe went down 9% to $666.0 million. Revenues from European OE declined 9% to $453.0 million, due to a 17% fall in revenues from the Ride Control business and a 6% dip in revenues from the Emission Control business. European aftermarket revenues fell 9% to $72.0 million, mainly due to a 19% decrease in revenues from Emission Control business.

Revenues from South America and India slid 7% to $141.0 million. Adjusted EBIT from Europe, South America and India decreased 35.7% to $18.0 million from $28.0 million a year ago.

Revenues from Asia Pacific (Asia and Australia) increased 15% to $241.0 million, driven by a 19% increase in revenues from Asia. Adjusted EBIT from Asia Pacific jumped 50% to $21.0 million from $14.0 million a year ago. The growth in EBIT was due to higher sales volume in China and Thailand and improved manufacturing efficiency in the new plants.

Financial Position

Tenneco had cash and cash equivalents of $223.0 million as of Dec 31, 2012, up from $214.0 million as of Dec 31, 2011. Net debt was $1.18 billion as of Dec 31, 2012 compared with $1.22 billion as of Dec 31, 2011.

For the full year 2012, the company had cash flow from operating activities of $244.0 million, up from $201.0 million in the year-ago period. Capital expenditures for the year were $263.0 million compared with $218 million in 2011.

Fiscal 2012

Tenneco reported 2012 adjusted earnings per share of $3.32, up 24.8% from $2.66 a year ago. Reported earnings increased to $275.0 million or $4.50 per share from $157.0 million or $2.55 in 2011. Revenues increased 2.2% to $7.4 billion from $7.2 billion in 2011.

Outlook

Based on IHS forecasts, the company expects that light vehicle production will decrease by 2% in the first quarter of 2013, with a 2% decrease in North America, 10% fall in Europe, and 12% decline in India. However, China and South America are expected to report  volume increase of 8% and 5%, respectively.

Our Take

Tenneco is a leading manufacturer and supplier of emission control, ride control systems, and systems for the automotive original equipment manufacturers (OEMs) and the aftermarket.

We appreciate the company’s performance in commercial vehicle business and expect that it will benefit from the tighter emission regulation through 2015. However, the company faces risk from the relatively weak demand for high-margin aftermarket parts. The company retains a Zacks Rank #3 (Hold).

Commercial Vehicle Group Inc. (CVGI - Snapshot Report), Oshkosh Corporation (OSK - Snapshot Report) and Strattec Security (STRT - Snapshot Report) with Zacks Rank #1 (Strong Buy) are performing well in the same industry where Tenneco operates.

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