DDAIF Mercedes Benz Group AG (PK)

Tenneco Inc. (TEN) recorded a 75% increase in profit to $42 million or 67 cents per share in the third quarter of 2011 from $24 million or 39 cents per share (before special items) during the same quarter of 2010. The company’s profit was in line with the Zacks Consensus Estimate during the quarter.

Revenues in the quarter grew 15% to $1.77 billion from $1.54 billion a year ago. Value-add revenue (revenues excluding substrate sales) was $1.37 billion, a 16% increase from $1.19 billion in the 2010-quarter.

The increase in revenues was driven by stronger original equipment (OE) volumes on current and new platforms along with a 9% rise in global aftermarket sales. The launch and ramp-up of new commercial vehicle platforms led to the increase in commercial and specialty vehicle OE revenues to 12% of total OE revenue.

Adjusted earnings before interest and taxes (EBIT) rose to $99 million from $77 million in the third quarter of 2010. The improvement in EBIT was driven by higher OE light vehicle volumes, new commercial vehicle business, and higher global aftermarket sales.

These factors were partially offset by $10 million in higher operational costs in the North America OE ride control business due to higher material costs and manufacturing inefficiencies. Currency had a favorable impact of $7 million on EBIT.

Segment Results

In North America, OE revenues escalated 10% to $649 million driven by strong volumes on Ford Motor’s (F) F-150 and Focus, and Volkswagen’s (VLKAY) Jetta. Aftermarket revenue rose 12% to $193 million due to impressive growth in emission control business.

EBIT in the segment decreased to $46 million from $51 million a year ago as higher OE volumes and aftermarket sales were offset by higher operational costs in the North America OE ride control business.

Revenues in Europe, South America and India increased 19% to $727 million. In Europe, OE revenues grew 25% to $473 million supported by strong volumes on key platforms including the Mercedes CLS, Volkswagen Polo, Daimler (DDAIF) CLS and Audi A4.

However, aftermarket revenues in the region inched up 1% to $92 million as higher aftermarket ride control revenues were more than offset by lower emission control revenues due to decline in market share.

In South America and India, revenues scaled up 13% to $162 million. EBIT rose to $37 million from $15 million a year ago due to higher OE volumes in all regions and lower deferred and long-term compensation expense, partially offset by an aftermarket mix shift toward Eastern Europe.

In Asia-Pacific, revenues hiked 23% to $204 million, driven by volume growth in China on key platforms with Nissan (NSANY), Audi and Volkswagen. Adjusted EBIT increased to $16 million from $11 million in the third quarter of 2010, driven by higher volumes in China and lower deferred and long-term compensation expense, partially offset by a decline in volumes in Australia.

Financial Position

Tenneco had cash and cash equivalents of $163 million as of September 30, 2011, a decrease from $233 million as of December 31, 2010. Total debt increased to $1.30 billion from $1.22 billion as of December 31, 2010.

Net debt was $1.14 billion as of September 30, 2011 versus $1.11 billion at the end of third quarter of 2010. The leverage ratio (net debt to adjusted LTM EBITDA including non-controlling interests) improved to 1.9x from 2.2x at the end of third quarter of 2010.

In the first nine months of the year, Tenneco’s cash flow from operations deteriorated to $44 million from $64 million despite an improvement in income. The decrease was mainly attributable to unfavorable changes in  working capital.

Capital expenditures in the quarter rose to $50 million from $34 million a year ago due to investments in order to support emission-control technology applications for new customer programs and continued capacity investments for expanding business in China. Tenneco also paid $4 million to acquire the remaining 25% interest in the company’s emission control joint venture in Thailand.

In the first nine months of 2011, capital expenditures (net) increased to $141 million from $102 million. The company continues to expect its capital expenditures in the range of $190 million to $210 million for full year 2011.

Guidance

Tenneco will continue to launch and ramp-up production on new commercial vehicle programs in North America, Europe, China and South America. The company expects commercial vehicle OE revenue of $650 million for the full year due to lower volumes related to launch timing and ramp-up schedules, primarily in the Europe segment.

Our Take

Tenneco is a Lake Forest, Illinois based leading manufacturer and supplier of emission control, ride control systems and systems for the automotive OEMs and the aftermarket. The company has many program launches in the pipeline.

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.

However, the company faces weak demand for aftermarket parts compared to OE. Besides, pricing pressure from OEMs remains a problem for Tenneco. As a result, the company retains a Zacks #3 Rank on its stock, which translates to a short-term rating of “Hold”, and we reiterate our long-term recommendation of “Neutral”.

 
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