Chrysler LLC: Unbelievable First Half 2008 Financial Performance and Pending Government Bailout

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August 8, 2008

On August 1, 2007, in an unprecedented move Chrysler LLC announced:

"Chrysler LLC today announced that in spite of the severe economic and industry challenges, we continue to perform ahead of our financial plan for the second quarter and first half of 2008. The Company measures its financial performance against two primary financial metrics: Cash/Marketable Securities and EBITDA (earnings before interest, taxes, depreciation, amortization and restructuring charges). As of June 30, 2008, the Company had Cash/Marketable Securities of $11.7 billion, (including $2.3 billion in Restricted Cash and excluding $2.3 billion in VEBA assets), well ahead of its plan and down slightly from year-end 2007. As well, for the six months ended June 30, 2008, Chrysler posted an EBITDA of approximately $1.1 billion, well ahead of plan.”

It was just before the start of 2008 when Chrysler CEO Robert Nardelli stated the company was functionally bankrupt (cash in is less than cash out). Today the company is alleging an amazing recovery ($1.1 billion more cash in than out) in one of the most difficult economic climates in recent history.

As Chrysler is no longer public, the company has no obligation to publish financial results and the announcement came as a surprise. More unanticipated was that the company claimed an operating profit for the first half of the year given how the market conditions have eroded during that time and the negative financial performance of both GM and Ford in the US. There is no question, since February 2007, Chrysler Group/LLC (Recent history of Chrysler) has gone through an aggressive cost cutting program: eliminating thousands of hourly and salary jobs, closing plants and reducing production. However, I question if the cost cutting has been enough given the significant drop in sales at the company and the already questionable profitability of the vehicles that are sold. Chrysler lost almost $1 billion in the first half of 2007 at a time when high profit truck sales were still strong and generating revenue. Furthermore, unlike a publicly traded company, Chrysler LLC did not provide a full detailed accounting of its financial results. For insight I reviewed former parent Daimler’s latest financial report.

Details of Chrysler’s performance are not clear from Daimler’s financial statements as the company only reports the high level results of its equity stake in the company. (Full Interim Release 2Q 2008) Daimler reported a $500 million non-cash loss in the quarter but cited it reflects Chrysler’s performance in the first quarter because of delays in reporting. The company also wrote down their equity valuation of its interest in Chrysler. Daimler identified the $1.5 billion loan to Chrysler as previously disclosed that is set to be repaid in 2014. This may account for Chrysler’s increased cash position of $11 billion from approximately $9 billion at the start of the year. This loan was agreed upon at the time of the separation. Daimler’s carry amount of its 21% share of Chrysler LLC was $256 million which would value Chrysler at $1.28 billion. In December, Chrysler was valued at $4.5 billion compared to the $7 billion Cerberus paid for the company. (Provided below in the Appendix are Chrysler’s financial results and impact on Daimler.) Beyond the above there is little to learn about Chrysler’s health as reported by Daimler.

Chrysler continues to make adjustments to its business model. The latest was the elimination of leases from its sales incentive strategy. Effective August 1, Chrysler Financial discontinued leases to focus resources on retail installment loans. As a result of the tighter credit conditions in the US and the falling price of residuals on off-lease vehicles, leasing has become expensive for the company. As of June, 15% (Table 1) of all vehicle sales were leases. This compares with 26% for the industry. Although, Chrysler is well underrepresented in leases as a company, leases account for 28% of the Jeep brands delivers. As Jeep only sell SUVs, losses on off-lease vehicles should be substantial. General Motors in its 2Q financial results took a $2 billion write-down of its lease portfolio to account for future losses resulting from declining residuals as high fuel cost continue to suppress demand for used trucks and SUVs. In the near term, I do expect this could hurt Chryslers’ sales as traditional lease customers will move to other companies and further reduce revenues. However, in the long run this will reduce its exposure to uncertainty in off-lease residual valuations and future potential losses. What is not known is the company’s write down of near term off-lease vehicles which could be in the hundreds of millions of dollars.


Lease Percentage of Sales Total Sales Jan – June 2008
Chrysler car 9.90% 121,960
Chrysler truck 12.70% 85,234
Dodge car 12.90% 167,027
Dodge truck 10.10% 292,069
Jeep truck 28.20% 201,536
Total Chrysler car 11.60% 288,987
Total Chrysler truck 16.80% 578,839
Total Chrysler LLC 15.10% 867,826
Industry 26.10% 7,441,148

Table 1: January – to – June Leased Vehicles as a Percentage of Sales

An analysis of the quality of the company's sales was conducted. Chrysler historically has relied on fleet sales to artificially increase its total sales. Fleet sales, predominantly to rental car agencies have exceeded the industry average by almost 100% in recent years (Table 2). This is not a good indication of the consumers’ acceptance of the company’s product.


Car Truck
Chrysler 44.60% 41.10%
Dodge 48.10% 22.80%
Jeep N/A 17.90%
Industry 19.90% 18.20%

Table 2: 2007 Model Year Fleet Registrations

Since the start of the year, Chrysler sales are down 22.8% in the US. However, Chrysler still has maintained a consistent level of fleet deliveries. For the 2008 Model Year, Chrysler continues to fleet at about 36% of its total sales (Appendix below Table 3). So over a third of their sales have questionable profitability and are there to generate revenue to cover overhead. Of more concern is the company’s retail sales are supported by over $4,000 in incentives. By comparison, Toyota’s incentive support is about $1,000 per vehicle on average.

January through July Chrysler sales have dropped by approximately 300,000 units which I estimate to have reduced revenue by about $5 billion. This would mean that Chrysler would have had to cut their fixed and discretionary cost by about $1 billion* just to break even as I assume the rest of their sales do not generate much profit if any because of cash incentives. If Chrysler is to be believed and the company made a net profit of $1 billion, than either they were able to further cut their costs by an additional billion dollar from what I have estimated they needed to break even or their sales have been more profitable than I expected. With the available data, I have had trouble reconciling Chrysler’s profit announcement and cash reserves. Chrysler announced in January hourly buyouts of up to $100,000 which certainly could have drained cash by $1 – $2 billion alone.

This leads me to what I believe may be the first indication of a government bailout of the US auto manufacturers.  When I first started this site, one of the first articles I wrote was Signs – Cerberus May Have Trouble Raising Capital For Chrysler. At the time I believed Cerberus would sell off assets to raise money for Chrysler. What I was not expecting was the US auto government could be their banker of choice or for congress to authorize a refunding credit against this year’s tax bill of $30 million dollars directly to Chrysler LLC.

Buried in fine print as an earmark was a tax refund for Chrysler in the Housing Assistance Tax Act of 2008 (page 675) signed by the President earlier this month (see Appendix - sections in bold below). Now US Congressman John Dingell of Michigan has requested the Department of Energy to expedite certain sections of the Energy Independence Act of 2007 which authorized billion in low interest loans for US automakers to retool plants for energy efficient vehicles.

These actions by the Federal government have me believing Cerberus-Chrysler and for that matter GM and Ford need access to cash as the credit market have tightened up because of the housing crisis in the US and elsewhere and hence the rush to allow the companies access to the available funds. It is clear GM and Ford have large cash burn rates and I believe Chrysler is in the same situation independent of what Chrysler has stated.

Furthermore, today Moody’s Investors Service downgraded Chrysler’s debt yet again for many of the reasons I cited above. Specifically,

- market and competitive pressure and consumers shift to smaller vehicles which Chrysler lacks,

- lack of small car offering, and

- operating cash flow will likely remain negative.

It appears Moody’s also believes Chrysler’s cash flow is negative despite what the company has said publically. Furthermore, Moody’s goes on to state,

“If Chrysler’s prospects for establishing an adequate robust revenue and product profile remain limited, the long-term viability of the company’s business model could be undermined despite the success of it cost cutting initiatives and the intermediate-term adequacy of it liquidity profile.”

For Chrysler, survivability might rest again on yet another government bailout and it does appear the stars are aligning for just that.

 

 

Note *: Fixed and Discretionary spending as an industry average is about 20% of net sales.


Appendix:

Chrysler LLC Reference in the Housing Assistance Tax Act of 2008

(b) APPLICATION TO CERTAIN AUTOMOTIVE

PARTNERSHIPS.—

(1) IN GENERAL.—If an applicable partnership

elects the application of this subsection—

(A) the partnership shall be treated as

having made a payment against the tax imposed

by chapter 1 of the Internal Revenue

Code of 1986 for any applicable taxable year of

the partnership in the amount determined

under paragraph (3),

(B) in the case of any eligible qualified

property placed in service by the partnership

during any applicable taxable year—

(i) section 168(k) of such Code shall

not apply in determining the amount of the

deduction allowable with respect to such

property under section 168 of such Code,

(ii) the applicable depreciation method

used with respect to such property shall be

the straight line method, and

(C) the amount of the credit determined

under section 41 of such Code for any applicable

taxable year with respect to the partnership

shall be reduced by the amount of the deemed

payment under subparagraph (A) for the

taxable year.

(2) TREATMENT OF DEEMED PAYMENT.—

(A) IN GENERAL.—Notwithstanding any

other provision of the Internal Revenue Code of

1986, the Secretary of the Treasury or his delegate

shall not use the payment of tax described

in paragraph (1) as an offset or credit against

any tax liability of the applicable partnership or

any partner but shall refund such payment to

the applicable partnership.

(B) NO INTEREST.—The payment described

in paragraph (1) shall not be taken into

account in determining any amount of interest

under such Code.

(3) AMOUNT OF DEEMED PAYMENT.—The

amount determined under this paragraph for any

applicable taxable year shall be the least of the

following:

(A) The amount which would be determined

for the taxable year under section

168(k)(4)(C)(i) of the Internal Revenue Code of

1986 (as added by the amendments made by

this section) if an election under section

168(k)(4) of such Code were in effect with

respect to the partnership.

(B) The amount of the credit determined

under section 41 of such Code for the taxable

year with respect to the partnership.

(C) $30,000,000, reduced by the amount

of any payment under this subsection for any

preceding taxable year.

(4) DEFINITIONS.—For purposes of this

subsection—

(A) APPLICABLE PARTNERSHIP.—The

term ‘‘applicable partnership’’ means a

domestic partnership that—

(i) was formed effective on August 3,

2007, and

(ii) will produce in excess of 675,000

automobiles during the period beginning on

January 1, 2008, and ending on June 30,

2008.

(B) APPLICABLE TAXABLE YEAR.—The

term ‘‘applicable taxable year’’ means any

taxable year during which eligible qualified

property is placed in service.

(C) ELIGIBLE QUALIFIED PROPERTY.—

The term ‘‘eligible qualified property’’ has the

meaning given such term by section

168(k)(4)(D) of the Internal Revenue Code of

1986 (as added by the amendments made by

this section).

(c) CONFORMING AMENDMENT.—Section 1324(b)(2)

of title 31, United States Code, as amended by this Act,

is amended—

(1) by inserting ‘‘168(k)(4)(F),’’ after ‘‘36,’’,

and

(2) by inserting ‘‘, or due under section

3081(b)(2) of the Housing Assistance Tax Act of

2008’’ before the period at the end.

(d) EFFECTIVE DATE.—The amendments made by

this section shall apply to taxable years ending after

March 31, 2008.


Model Fleet Retail Total Fleet Percentage
Chrysler 300 23,461 30,584 54,045 43.40%
Chrysler Aspen 4,237 9,941 14,178 29.90%
Chrysler Pacifica 6,235 8,592 14,827 42.10%
Chrysler PT Cruiser 24,370 13,810 38,180 63.80%
Chrysler Sebring 22,970 13,949 36,919 62.20%
Chrysler Sebring 12,251 5,264 17,515 69.90%
Chrysler Town & Country 21,673 49,577 71,250 30.40%
Dodge Avenger 32,456 17,067 49,523 65.50%
Dodge Caliber 28,256 21,682 49,938 56.60%
Dodge Caravan 38,738 36,282 75,020 51.60%
Dodge Charger 28,870 26,605 55,475 52.00%
Dodge Dakota 5,009 12,690 17,699 28.30%
Dodge Durango 9,403 7,202 16,605 56.60%
Dodge Journey 804 2,028 2,832 28.40%
Dodge Magnum 10,654 3,470 14,124 75.40%
Dodge Nitro 7,907 25,843 33,750 23.40%
Dodge Ram 20,091 125,160 145,251 13.80%
Jeep Commander 5,339 17,255 22,594 23.60%
Jeep Compass 3,505 14,608 18,113 19.40%
Jeep Grand Cherokee 10,825 38,314 49,139 22.00%
Jeep Liberty 9,855 35,406 45,261 21.80%
Jeep Patriot 4,786 23,601 28,387 16.90%
Jeep Wrangler 1,594 46,214 47,808 3.30%
Total 333,289 585,144 918,433 36.30%

Table 3: 2008 Model Year – Mid Year Registrations


Entire contents © 2008 The Automotive Lyceum All Rights Reserved

 



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