Tenneco (TEN) showed an improvement in profit to $3 million or 7 cents per share for the third quarter of the year, compared to less than $1 million or 1 cent per share in profit a year ago. This is also better than the Zacks Consensus Estimate of 4 cents per share for the quarter. Adjusted EBIT went up 36% to $46 million from $34 million in the prior-year quarter.
However, lower original equipment (OE) production volumes in Europe, North America and Australia as well as declining European aftermarket sales squeezed revenues by 16% to $1.25 billion. The decline was partially softened by stronger OE production volumes in China and South America as well as higher North American aftermarket sales. In fact, revenue increased 13% from $1.11 billion in the previously reported quarter.
Gross margin of 16.8% depicted an improvement versus 13.3% a year ago despite higher year-over-year restructuring costs in the reported quarter. This was driven by the benefits of restructuring actions implemented in 2008, cost reductions including temporary salary cutback, efficiency improvements, managing material costs and lower substrate sales as a percent of revenue versus a year ago.
Regional Performance (excluding substrate sales & currency fluctuations)
In the North American market, revenue slipped 9% to $433 million. This can be attributed to a 15% decrease in OE revenue to $282 million due to lower industry light vehicle production. A 6% increase in aftermarket revenue to $151 million due to stronger ride control volumes helped offset the decline.
In the European market, revenue shrank 10% to $411 million. Both the OE and aftermarket sales were hampered compared to the year-ago level. OE revenue fell 10% to $310 million, driven by lower production volumes, primarily on emission control supplied platforms. Meanwhile, aftermarket revenue declined 9% to $101 million due to lower sales in both product lines, especially heavy duty ride control sales in Eastern Europe.
The South American and Indian markets performed well, with a 3% rise in revenue to $101 million. This was attributed to higher OE production volumes.
The Asian market saw an impressive 51% improvement in revenue to $81 million, driven by higher OE production volumes in China. However, revenue of $32 million generated from the Australian market fell short of the year-ago quarter by 29% due to lower industry light vehicle production.
Financial Position
Tenneco had cash and cash equivalents of $137 million as on Sept. 30, 2009. Long-term debt amounted to $1.4 billion as of that date.
In the first nine months of the year, Tenneco’s cash flow from operations advanced to $108 million from $34 million in the year-ago period. Working capital improvements, particularly in inventory as well as increased use of the available accounts receivable securitization programs, helped improve the cash flow.
Capital spending was reduced to $86 million in the above period from $192 million in the year-ago period. For 2009, Tenneco expects its capital spending to be $125 million, significantly down from $233 million in the previous year.
At Sept. 30, 2009, Tenneco’s leverage ratio under its senior credit facility was 5.17, below the maximum level of 7.90. The interest coverage ratio was 2.16, above the minimum of 1.55. At the end of the quarter, the company had an EBITDA cushion of $74 million against its tightest ratio.
Going Forward
Tenneco has expressed confidence in its cash flow and earnings performance by restoring salaries for all salaried employees worldwide, effective Oct. 1, which had been reduced approximately 10% on Apr. 1 this year. The company is banking on robust light vehicle production growth in China and India. However, we believe sizable production cuts in the OE market will continue to mar the company’s results. For 2009, the Zacks Consensus Estimate reflects a loss of 76 cents per share. Thus, we stick to our Neutral recommendation for the stock.
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