Chrysler CEO Sergio Marchionne, left, mills around the Dodge truck of the year with Fiat Chairman John Elkann. (Charles V. Tines / The Detroit News)
Chrysler Group LLC made $1.8 billion in 2013, continuing to prop up its financially struggling parent company and demonstrating why the merger announced Wednesday is so important to Fiat SpA.
With Chrysler’s contribution, the Italian automaker made 1.95 billion euros ($2.67 billion) for the year. Without Chrysler’s contribution, Fiat would have posted a loss of 911 million euros ($1.25 billion).
But even with a common name — Fiat Chrysler Automobiles — and a new logo, limits remain on how much of Chrysler’s cash Fiat will be able to tap.
Chrysler earned $659 million in the last three months of 2013, its tenth consecutive quarterly profit. And thanks to Chrysler, Fiat was able to post fourth-quarter net income of almost 1.3 billion euros ($1.77 billion).
That was a big increase over the 224 million euro net profit Fiat reported for the same period in 2012, but most of the gain came from the recognition of deferred tax assets. Excluding such special items, Fiat’s fourth-quarter profit was just 252 million euros ($344 million), down from 336 million euros a year earlier, and the the company only made 943 million euros ($1.29 billion) for the full year, down from 1.14 billion.
The results fell short of expectations on both sides of the Atlantic, and the company’s new forecast for 2014 did little to reassure investors.
The newly merged Fiat-Chrysler group said it expects to make between 600 million and 800 million euros ($819.8 million to $1.09 billion) in 2014 on revenue of approximately 93 billion euros ($127.1 billion).
CEO Sergio Marchionne said the European car market remains weak. He said the only hope of a real rebound in the region lies with Fiat’s luxury brands: Alfa Romeo, Maserati and Ferrari.
“It’s not going to happen selling mass-market cars,” he told analysts and reporters during a conference call following Wednesday’s earnings release. “We have to get out of the sandbox.”
Brazil, which has been Fiat’s second-most important market, is also softening.
Even in the United States, Chrysler fell short of its sales goals — in part because of the delayed launch of the Jeep Cherokee. Marchionne said the company produced about 50,000 fewer vehicles than planned.
Analysts said that Wednesday’s financial results show it will take more than a corporate restructuring to turn Fiat Chrysler Automobiles into a truly competitive global player.
“Resolution of the corporate structure takes one problem off the table, but it does not address the fundamental business concerns still facing the company,” said Stephanie Brinley of IHS Automotive.
“It does not make Europe more profitable, it does not address the gap they face in China with a late arrival, it does not inherently improve Fiat’s overall weak performance, and it doesn’t address brand concerns for the U.S. Chrysler and Dodge lineups, where success is largely driven by Jeep and Ram,” she said in a statement. “Putting two weak companies together does not create one strong company, and FCA is really just beginning their work toward becoming a successful, sustainable and consistently profitable company.”
Fiat ended 2013 with net industrial debt of 6.6 billion euros, down from 8.3 billion euros at the end of the third quarter thanks to strong fourth-quarter cash flow generation of 1.4 billion euros from Chrysler and 300 million euros from Fiat itself.
Total available liquidity at year’s end, including 3 billion euros in undrawn committed credit lines, was 22.7 billion euros.
As a result of its purchase of the rest of Chrysler, Fiat said it expects net industrial debt to grow to the 9.8 billion to 10.3 billion euro range ($13.4 billion to $14.1 billion).
Marchionne was willing to take on that debt because he wants to combine the two companies’ finances. However, even with the merger, Chrysler’s debt covenants limit the amount of cash it can pay to its Italian parent.
“We understand the notion of leverage and the fact that we are carrying a substantial amount of debt on our books,” Marchionne said.
On Wednesday, the company announced a plan to pay off a note held by the UAW trust. Chrysler plans to offer up to $2.7 billion in new secured senior debt securities. It also announced plans to market additional senior secured term loan facilities to raise up to an additional $2 billion.
The automaker intends to use the net proceeds of the debt securities offering, together with borrowings under the senior secured term loan facilities, to repay all amounts outstanding under the unsecured note issued to the trust. But Marchionne acknowledged there is more work to be done on the balance sheet.
Standard & Poor’s Ratings Services assigned a “BB+” rating to Chrysler’s proposed new senior secured term loan Wednesday and affirmed that rating on its existing term loan while lowering its rating to “B” from “B+” on the company’s senior secured second-lien notes.
“We expect the company to use proceeds from the transaction to refinance the $4.7 billion outstanding (UAW) Trust Note and about $0.3 billion of accrued interest. We believe this is likely to result in pretax cash interest savings for Chrysler of more than $100 million on an annual basis,” S&P said, adding that it now views Chrysler as a subsidiary of Fiat. “We expect Chrysler to generate the majority of the group’s 2014 profits and believe the operations of Fiat and Chrysler will be further integrated because Chrysler is integral to Fiat’s global vehicle strategy.”
Moody’s Investors Service assigned a “Ba1” rating to $2 billion of new first-lien term loans and “B1” to $2.7 billion of second-lien secured notes.
“Ongoing weakness in Fiat’s core European and Brazilian markets will continue to stress the operating performance, credit metrics and cash generation of the combined group,” Moody’s said.
Still, Marchionne pointed out that his company has consistently dodged the bullets that Wall Street said were heading its way.
“I would not advise people to short their position on Fiat,” Marchionne said.