Chrysler, Ford Show Strong Financial Results
Yesterday, Chrysler Group LLC reported net income of $473 million USD for the first quarter of 2012. This was a gain of 407 percent over the $116 million USD net income that the Fiat-owned automaker reported for the same quarter in 2011. Chrysler’s numbers were boosted by a 25 percent revenue increase and a 39 percent vehicle sales increase. Chrysler also reported free cash flow of $1.7 billion in the first quarter.
Across town (proverbially speaking), Ford reported a solid quarter with a profit drop compared to an outstanding first quarter in 2011. Net income fell from $2.6 billion to $1.4 billion, but that was better than analysts had expected. Ford’s North American results were the company’s best-ever (at least since it began reporting the region separately in 2000, a dozen years ago). Pretax operating profit in North America was $2.1 billion, while it lost $149 million in Europe amidst that continent’s economic slump, and lost $95 million in Asia as it ramps up investment in that region in an attempt to catch up to other automakers that are more entrenched in the region such as Volkswagen and GM.
GM will not report its first quarter earnings until next week, but the story is expected to be largely parallel to Ford’s, with very good North America results, probably worse results in Europe, and probably better results in Asia, where the company enjoys a strong position in the market and has multiple popular models.
Saving Chrysler from Ford’s (and likely GM’s) fate was Chrysler’s North American-centric geographic footprint. Though Chrysler’s non-US sales grew more rapidly than did its US sales, they are a much smaller slice of the pie than Ford’s or GM’s. More than half of GM’s sales are not in the US, while a vast majority of Chrysler’s are in North America. When the North American market is weak, as it was during the Great Recession of 2007-2009, Chrysler struggled mightily and had no other region to keep its North American business afloat. But when NA is booming, Chrysler is golden. This, by the way, is likely a big part of the reasont that Chrysler has been such a boom-and-bust automaker, enjoying huge swings in its fortune over fairly short time periods. It’s just not hedged.
Aside from the primary news about financial results, both Chrysler and Ford reported some interesting news during their earnings releases. Chrysler will be ending its captive-finance relationship with Ally Bank (formerly GMAC) on April 30, 2013. During its bankruptcy, the government pushed Chrysler into an arrangement with GM’s former captive-finance arm on the weakness of Chrysler Financial. Chrysler Financial at the time was slated to wind down its operations, but in a Rasputin-like move, the company actually recovered somewhat, and was sold to Toronto-Dominion Bank (TD Bank), to be rebranded as TD Auto Finance, back in December 2010. This news means that Chrysler will need to find a new lending partner, which will be critical to help the automaker offer enticing financing options to potential customers and keep its sales momentum going.
Ford’s big news outside of the actual earnings was that the company will offer approximately 90,000 vested retirees a lump-sum buyout of their pension. The purpose of the offer, which Ford is still ironing out the details of with federal regulators, is to reduce volatility in its pension-funding requirements. The company’s pension obligations currently stand at $15.4 billion USD underfunded globally as of the last quarter. However, interest-rate and market volatility mean that the unfunded liability could become much smaller, or much larger. Cashing retirees out of their pension plan means that the liability is set for that individual, paid out of the pension plan, and the liability disappears.
The company believes that the pension-buyout scheme is unprecedented, and it’s not yet certain that it will even pass regulatory muster. If Ford pulls it off, though (and a sizable number of retirees accept the offer), the company will over the course of about five years managed to have shifted its enormous retiree healthcare obligations to the union-run VEBA and shifted some portion of its pension obligations to retirees themselves. Forgive the harsness of the next sentence, but over the coming decades, once Ford’s enormous roll of retirees starts to die off, it will no longer need to have each active worker financing three or four retirees’ pension costs, which will help its results as well.
Bottom line: the auto market in the US is good right now, and it’s getting better. The car industry is healthier than many other industries in the US right now, and is rebounding faster than much of the rest of the economy is. If Ford and GM can manage to fix their European operations (a pretty big “if” right now) and Chrysler can manage to diversify its sales beyond North America with Fiat’s help, these three companies may have a rosy future indeed.