KEY POINTS
Q1'15 recap. FDML reported Q1 EPS of ($0.07). Excluding $18M of costs related to restructuring, impairments, and the required divestiture of two facilities in connection with the Honeywell brake components acquisition, as well as $27M in costs related to strategic initiatives and the integration of the Affinia and Honeywell acquisitions, Q1 adjusted EPS from continuing operations came in at $0.25. This compares to our estimate and consensus of $0.22 and $0.18 respectively. Revenue increased 3% yr/yr to $1.84B (below our estimate of $1.89B and consensus of $1.95B). Consolidated gross margin decreased 160 bps yr/yr to 13.7% vs. our 14.9% estimate, while operating margin decreased 260 bps yr/yr to 2.6% coming in below our 4.5% estimate. Operational EBITDA decreased 16% yr/yr to $140M, below our $171M estimate, as results were negatively impacted by unfavorable currency fluctuations (roughly $15M).
Powertrain accelerates but currency represents a sizeable speed bump.FDML's Powertrain segment posted 12% revenue expansion on a constant dollar basis driven by organic sales growth in North America, EMEA and ROW of 4% yr/yr. However, reported sales came in flat yr/yr as negative currency movements represented a roughly $111M headwind to sales and $15M headwind to EBITDA. Given expected ongoing currency headwinds ($0.01 rise in the US $ will negatively impact sales and EBITDA by $25M and $3M) we anticipate lower profitability in the near term despite likely continued share expansion and favorable market conditions.
Seeking to repair North American aftermarket business.While motorparts segment revenue expanded roughly 15% yr/yr to $773M on a constant dollar basis and North America segment results improved 3% yr/yr, we note results were primarily buoyed by recent Affinia and Honeywell acquisitions. As core North American aftermarket operations appear to have posted a yr/yr sales decline and share loss largely due to ongoing Affinia integration issues and subsequent DC/IT inefficiencies that continues into Q2, we believe FDML's Motorparts segment faces an uphill climb in seeking to regain NA aftermarket share in 2H'15. However, we believe ongoing spend on new full product line DCs (PA and CA) and IT integration ($13M headwind to Q1 EBITDA) could boost longer term customer "wins" although we expect the strategy will not bear fruit until 2016.
Maintain Hold. Given ongoing restructuring, currency headwinds and uncertainty regarding the pending spin-off of the Motorparts segment, we maintain our Hold rating on the shares. We are lowering our FY'15 EPS estimate to $0.62 from $0.99, previously, to reflect expected negative currency impact and Q1 results.
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