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As filed with the Securities and Exchange Commission on September 23, 2013

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Chrysler Group LLC

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware

(State or Other Jurisdiction of

Incorporation or Organization)

 

3711

(Primary Standard Industrial

Classification Code Number)

 

27-0187394

(IRS Employer
Identification Number)

 

 

1000 Chrysler Drive

Auburn Hills, Michigan 48326

(248) 512-2950

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Marjorie H. Loeb, Esq.

Senior Vice President, General Counsel and Secretary

Chrysler Group LLC

1000 Chrysler Drive

Auburn Hills, Michigan 48326

(248) 512-2950

(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

 

Scott D. Miller, Esq.

Sullivan & Cromwell LLP

125 Broad Street

New York, NY 10004

(212) 558-4000

   

William P. Rogers, Jr., Esq.

William V. Fogg, Esq.

Cravath, Swaine & Moore LLP

825 Eighth Avenue

New York, NY 10019

(212) 474-1000

Approximate date of commencement of proposed sale to the public:   As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ¨

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

(Check one):

 

Large accelerated filer   ¨   Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)   Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of securities to be registered   

Proposed maximum

aggregate

offering price(1)

  

Amount of

registration fee

Common stock, par value $0.001 per share

   $100,000,000    $13,640.00

 

 

(1) Estimated solely for purposes of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.


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EXPLANATORY NOTE

Chrysler Group LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Immediately prior to the effectiveness of this registration statement, Chrysler Group LLC will be converted into a Delaware corporation, renamed Chrysler Group Corporation and undergo certain reorganization transactions described herein. Shares of the common stock, par value $0.001 per share, of Chrysler Group Corporation are being offered by the prospectus that forms a part of this registration statement.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION. DATED September 23, 2013.

             Shares

 

LOGO

Common Stock

 

 

This is an initial public offering of shares of common stock of Chrysler Group Corporation, which will be formed as the result of certain reorganization transactions described herein. See Our Structure and Company Conversion.

All of the shares of common stock included in this offering are being sold by the selling stockholder identified in this prospectus. We will not receive any of the proceeds from the sale of the shares sold in this offering. We will bear all of the offering expenses other than the underwriting discounts and commissions.

Prior to this offering, there has been no public market for our common stock. We expect the initial public offering price per share to be between $         and $        . We intend to apply to list our common stock on the              under the symbol “            ”.

Investing in our common stock involves risk. See Risk Factors beginning on page 24 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  
  

 

 

    

 

 

 

Initial public offering price

   $                                    $                                

Underwriting discount

   $         $     
  

 

 

    

 

 

 

Proceeds, before expenses, to the selling stockholder

   $         $     

The selling stockholder has granted the underwriters the option to purchase up to an additional              shares at the initial public offering price less the underwriting discount. We will not receive any proceeds from the sale of any of the additional shares.

 

 

The underwriters expect to deliver the shares of common stock against payment in New York, New York on                     , 2013.

 

 

J.P. Morgan

 

 

Prospectus dated                     , 2013.


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TABLE OF CONTENTS

 

    Page

Prospectus Summary

    1   

Risk Factors

    24   

Cautionary Note Regarding Forward-Looking Statements

    54   

Our Structure and Company Conversion

    56   

Use of Proceeds

    58   

Capitalization

    59   

Dividend Policy and Dividends

    60   

Selected Historical Consolidated Financial and Other Data

    61   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    66   

Business

    139   

Management

    171   

Compensation of Executive Officers and Directors

    184   

Certain Relationships and Related Party Transactions

    212   

Principal Stockholders and Selling Stockholder

    218   

Description of Capital Stock

    220   

Shares Eligible for Future Sale

    227   

Material U.S. Federal Tax Considerations for Non-U.S. Holders of our Common Stock

    229   

Underwriting

    232   

Validity of Common Stock

    238   

Experts

    238   

Where You Can Find More Information

    238   

Index to Consolidated Financial Statements

    F-1   
 

 

 

We are responsible for the information contained in this prospectus and in any free writing prospectus we may authorize to be delivered to you. We have not authorized anyone to give you any other information, and take no responsibility for any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 


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INDUSTRY DATA

In this prospectus, we include and refer to industry and market data obtained or derived from internal surveys, market research, publicly available information and industry publications. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. Although we believe that this information is reliable, we have not independently verified the data from third-party sources. Similarly, while we believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we believe the industry data presented in this prospectus is reliable, our estimates, in particular as they relate to market share and our future expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption Risk Factors.

PRESENTATION OF RESULTS

In this prospectus, unless otherwise specified, the terms “we,” “our,” “us,” “Chrysler Group” and the “Company”:

 

  (i) following the date of the Company Conversion (as defined herein) discussed in Our Structure and Company Conversion, refer to Chrysler Group Corporation and its consolidated subsidiaries, or any one or more of them as the context may require;

 

  (ii) for the period from June 10, 2009 to the date of the Company Conversion, refer to Chrysler Group LLC and its consolidated subsidiaries, or any one or more of them as the context may require, which from May 25, 2011 was a consolidated subsidiary of Fiat North America LLC, or FNA LLC, which holds a 58.5 percent ownership interest in Chrysler Group as of the date of this prospectus; and

 

  (iii) for the period from August 4, 2007 through June 9, 2009, refer to Old Carco LLC (f/k/a Chrysler LLC) and its consolidated subsidiaries, or Old Carco, or any one or more of them as the context may require.

Solely with respect to information relating to financial results and related disclosures for the period from May 25, 2011 to the date of the Company Conversion, the terms “we,” “our,” “us,” “FNA” and the “Company” refer to FNA LLC and its consolidated subsidiaries (which, as described in (ii) above, are Chrysler Group LLC and its consolidated subsidiaries), or any one or more of them as the context may require. “Fiat” refers to Fiat S.p.A., a corporation organized under the laws of Italy, its consolidated subsidiaries (excluding FNA LLC and its consolidated subsidiaries) and entities it jointly controls, or any one or more of them as the context may require.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before deciding to invest in our common stock. You should read this entire prospectus carefully, including (i) the Fiat North America LLC and consolidated subsidiaries audited consolidated financial statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012, the period from May 25, 2011 to December 31, 2011 (Successor as defined below under —Successor and Predecessor Presentation), the period from January 1, 2011 to May 24, 2011 and the year ended December 31, 2010 (Predecessor as defined below under —Successor and Predecessor Presentation), (ii) the Fiat North America LLC and consolidated subsidiaries condensed consolidated financial statements as of June 30, 2013 and the three and six months ended June 30, 2013 and 2012, as well as (iii) the information set forth under the sections Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations, in each case included in this prospectus.

This prospectus relates to an offering of common stock of Chrysler Group Corporation, a Delaware corporation, following certain reorganization transactions described herein that will occur immediately prior to the effectiveness of the registration statement of which this prospectus is a part, which we refer to as the Company Conversion. Refer to Our Structure and Company Conversion for additional information regarding these transactions.

In this prospectus, unless otherwise specified, the terms “we,” “our,” “us,” “Chrysler Group” and the “Company”:

 

  (i) following the date of the Company Conversion discussed in Our Structure and Company Conversion, refer to Chrysler Group Corporation and its consolidated subsidiaries, or any one or more of them as the context may require;

 

  (ii) for the period from June 10, 2009 to the date of the Company Conversion, refer to Chrysler Group LLC and its consolidated subsidiaries, or any one or more of them as the context may require, which from May 25, 2011 was a consolidated subsidiary of Fiat North America LLC, or FNA LLC, which holds a 58.5 percent ownership interest in Chrysler Group as of the date of this prospectus; and

 

  (iii) for the period from August 4, 2007 through June 9, 2009, refer to Old Carco LLC (f/k/a Chrysler LLC) and its consolidated subsidiaries, or Old Carco, or any one or more of them as the context may require.

Solely with respect to information relating to financial results and related disclosures for the period from May 25, 2011 to the date of the Company Conversion, the terms “we,” “our,” “us,” “FNA” and the “Company” refer to FNA LLC and its consolidated subsidiaries (which, as described in (ii) above, are Chrysler Group LLC and its consolidated subsidiaries), or any one or more of them as the context may require. “Fiat” refers to Fiat S.p.A., a corporation organized under the laws of Italy, its consolidated subsidiaries (excluding FNA LLC and its consolidated subsidiaries) and entities it jointly controls, or any one or more of them as the context may require.

Chrysler Group LLC was formed on April 28, 2009 as a Delaware limited liability company to complete the transactions contemplated by the Master Transaction Agreement dated April 30, 2009, among Chrysler Group, Fiat and Old Carco and certain of its subsidiaries, which was approved under section 363 of the U.S. Bankruptcy Code, or the 363 Transaction. On April 30, 2009, Old Carco and its principal domestic subsidiaries filed for bankruptcy protection. On June 10, 2009, Chrysler Group LLC completed the 363 Transaction and purchased the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to acquiring the equity of Old Carco’s principal foreign subsidiaries. As a result of the 363 Transaction, a new basis of accounting was created. As Chrysler Group LLC succeeded to substantially all of the business of Old Carco and as Chrysler Group LLC’s own operations before the succession were insignificant relative to Old Carco’s operations, Old Carco represents the Predecessor to Chrysler Group LLC for accounting and financial reporting purposes for periods prior to June 10, 2009.

 

 

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Fiat North America LLC was formed on May 14, 2009 as a Delaware limited liability company and 100 percent owned indirect subsidiary of Fiat S.p.A., to hold Fiat’s ownership interest in Chrysler Group, a variable interest entity, or VIE. In connection with the closing of the 363 Transaction, Fiat contributed intellectual property rights, or Fiat IP, to FNA LLC that were contributed and licensed to Chrysler Group for its use in exchange for a 20.0 percent ownership interest in Chrysler Group.

Successor and Predecessor Presentation

Through a series of transactions and events, FNA LLC became the primary beneficiary of Chrysler Group on May 25, 2011. As a result, a new basis of accounting was created. As FNA LLC succeeded to substantially all of the business of Chrysler Group, and as FNA LLC’s own operations before the succession were insignificant relative to Chrysler Group’s operations, Chrysler Group represents the predecessor to FNA LLC for accounting and financial reporting purposes. As a result of the Company Conversion that will occur immediately prior to the effectiveness of the registration statement of which this prospectus is a part, which includes the merger of FNA LLC with and into Chrysler Group Corporation, with Chrysler Group Corporation surviving the merger, Chrysler Group Corporation will assume FNA’s accounting basis for financial reporting purposes and will be the successor to Chrysler Group LLC.

For accounting and financial reporting purposes, for the period from May 25, 2011 to the date of the Company Conversion discussed in Our Structure and Company Conversion, FNA is referred to as the “Successor.” For the period from June 10, 2009 to May 24, 2011, Chrysler Group is referred to as “Predecessor A.” For the period from January 1, 2008 to June 9, 2009, Old Carco is referred to as “Predecessor B.” As a result of the Company Conversion, Chrysler Group Corporation will assume FNA’s accounting basis for financial reporting purposes and will be the ultimate successor to Chrysler Group LLC.

Our Business

We design, engineer, manufacture, distribute and sell automobiles, which include passenger cars, utility vehicles (which include sport utility and crossover vehicles), minivans, trucks and commercial vans, under the Chrysler, Jeep, Dodge and Ram brands, as well as the SRT performance vehicle designation, and we sell our authentic service parts and accessories under the Mopar brand. We also sell separately-priced service contracts to customers and provide contract manufacturing services to other vehicle manufacturers, primarily Fiat. As part of our industrial alliance with Fiat, or the Fiat-Chrysler Alliance, we also manufacture certain Fiat vehicles in Mexico, which are distributed throughout North America and sold to Fiat for distribution elsewhere in the world. In addition, Fiat manufactures certain Fiat brand vehicles for us, which we sell in select markets. We sell our products through a network of approximately 2,600 dealers in the U.S. and through distributors and dealers around the world. Over the past four years, we have transformed our business through renewed brand focus, a streamlined distribution network, an improved cost structure, new management and dedication to designing and building a broadened portfolio of high quality vehicles. We have established a clear strategy for each of our brands and are reshaping our product lineup in a way that enhances our brands to be highly differentiated and responsive to consumer preferences. As part of this strategy, we have introduced more than 25 new or significantly refreshed vehicles since we began operations in mid-2009. Our vehicles and service parts and accessories are sold primarily in North America. Over the past three years, the U.S. has been the fastest growing developed vehicle market in the world, and we are one of the fastest growing automakers in the U.S., as measured by growth in market share, during that span. In addition, we are devoting increased attention to key emerging markets, such as China, Brazil and India, to drive future growth. For the twelve months ended June 30, 2013, we shipped 2.4 million vehicles worldwide, generating approximately $66.0 billion in net revenue, $1.6 billion in net income and $5.2 billion in Modified EBITDA. See —Summary Selected Historical Consolidated Financial and Other Data for a reconciliation of Net Income to Modified EBITDA and Management’s Discussion and Analysis of Financial Condition and Results of Operations —Non-GAAP Financial Measures for a description of Modified EBITDA.

 

 

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We believe that the Fiat-Chrysler Alliance has enabled us to accelerate our positive transformation. Through continued operational integration and sharing of best practices across the organizations, we are realizing significant ongoing operating and commercial synergies that enable us to capture the benefits from a substantially greater combined scale. These benefits include access to, and joint development and sharing of, new vehicle platforms and powertrain technologies which substantially reduce our time-to-market for these vehicles and the associated development costs. The Fiat-Chrysler Alliance provides us access to smaller, more fuel-efficient vehicles and technologies for vehicle segments where we have been historically underrepresented. Under the Fiat-Chrysler Alliance, we launched our first ever mini and small car segment vehicles with the Fiat 500 and the all-new 500L in 2011 and 2013, respectively. We re-entered the compact sedan segment with the launch of the Dodge Dart in 2012 and we are now launching the all-new 2014 Jeep Cherokee, both of which are based on the Compact U.S. Wide, or CUSW, platform that we co-developed with Fiat and based on a Fiat platform. In 2014, we expect to launch our first ever sport utility vehicle, or SUV, in the small vehicle market, or B-segment, which will also be based on a jointly-developed platform, which we call the Small Wide platform. We have moved rapidly to operationally integrate our respective companies in order to capitalize on the considerable potential the Fiat-Chrysler Alliance creates.

The success of our product strategy is evidenced by our substantial increase in market share, reduced reliance on sales incentives and more than 150 and 200 product awards received in 2013 (through September 1, 2013) and 2012, respectively. Our U.S. market share increased to 11.2 percent for 2012 from 8.8 percent for 2009. Our average retail sales incentives for our vehicle portfolio in the U.S. have continued to decrease since we began operations in mid-2009. Furthermore, certain of our products have earned key industry press accolades, including: Motor Trend’s 2013 Truck of the Year; 2010–2012 Ward’s Auto 10 Best Engines; Consumers Digest Best Buy; Truck of Texas; IIHS Top Safety Pick; 4x4 of the Year; J.D. Power 2013 U.S. Initial Quality Study SM (IQS) Highest Ranked Minivan; 2012 Kelley Blue Book’s kbb.com award for 10 Best Family Cars; and 2013 Kelley Blue Book’s kbb.com award for 10 Coolest New Cars under $18,000. In addition, we continue to reduce our reliance on fleet sales, which historically have been less profitable for us than sales to retail customers. Our fleet sales as a percentage of total U.S. vehicle sales fell from 36 percent in 2010 to 26 percent in 2012 and to 25 percent in the first half of 2013. Furthermore, as we continue to enhance our product lineup, we are targeting to shift our fleet sales from the long-term daily rental market, which represented approximately 81 percent and 76 percent for 2010 and 2012, respectively, to more profitable fleet channels.

As part of our transformation and the Fiat-Chrysler Alliance, we began to implement World Class Manufacturing, or WCM, principles to improve worker efficiency, productivity, safety and vehicle quality. WCM is an integrated model for the complete organization of a factory, from environmental management and occupational safety to maintenance and logistics, with particular focus on eliminating waste from all processes. We invested approximately $590 million in our manufacturing plants since we began operations in 2009 to improve the infrastructure, efficiency and quality of our production systems. This investment, which was incremental to the investments we made for our new model launches, is part of our continued effort to apply WCM principles to our manufacturing operations. Our significant quality improvement has resulted in a reduction in the number of reported problems for our Chrysler, Jeep, Dodge and Ram brand vehicles from 2009 to 2012. In addition, due to increased reliability, our warranty claim rate, as measured by conditions per 1,000 vehicles, has fallen by over 21 percent since we began operations in mid-2009 to May 2013. Our continuing commitment to vehicle quality is essential in order to keep pace with consumer demands for improved vehicle quality.

See Risk Factors —Risks Related to our Business —We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success and —Meeting our objective of increasing our vehicle sales outside North America is largely dependent upon access to Fiat’s network of distribution arrangements, manufacturing capacity and local alliance partners for a discussion of critical risks related to the Fiat-Chrysler Alliance.

 

 

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Our Competitive Strengths

Our New and Refreshed Product Lineup

As part of our transformation, we have extensively renewed our product lineup with the introduction of over 25 new or significantly refreshed vehicles since we began operations in mid-2009. Our new and refreshed product lineup reflects a renewed commitment to designing and building a compelling portfolio of vehicles in response to consumer demands for improved styling, driving experience, reliability, safety and fuel efficiency. We have increased our annual net research and development expenditures by over 50 percent to $2.3 billion in 2012 as compared to 2010, as part of our efforts to significantly revitalize our product lineup. However, we believe these total expenditures would have been significantly higher, with less assurance of success, had we not had access to Fiat technology and engaged in joint development activities.

Our product lineup demonstrates tangible improvements in quality which have helped drive increased sales. Driven by this improved product lineup, through August 31, 2013 we experienced 41 consecutive months of year-over-year U.S. sales gains. We also recorded the second highest retail share gain in the U.S. automotive market for the first half of 2013, exceeding the growth in U.S. automotive industry volumes. Our Jeep lineup continues to deliver strong sales results with its refreshed products and renewed brand equity. In 2012, Jeep set an all-time global sales record for the brand with total sales in excess of 700 thousand vehicles, representing a 19 percent increase over 2011. Our refreshed models of the Jeep Grand Cherokee (the most awarded SUV ever), Dodge Durango and Ram 1500, all use an 8-speed transmission, which is a segment exclusive for trucks. The 8-speed transmission, which is also used in the Chrysler 300 and the Dodge Charger, provides enhanced vehicle performance together with a smoother ride and a more than 10 percent improvement in fuel economy over most of its 5- and 6-speed predecessors. Also, the 2013 Ram 1500 is the first full-size pick-up to achieve a U.S. Environmental Protection Agency, or EPA, rated fuel economy of 25 miles per gallon on the highway.

We are also enhancing our customers’ driving experience with our advanced powertrain technologies which improve fuel efficiency and performance. Our product portfolio is designed to meet increasingly stringent regulatory standards for fuel economy and emissions. The fuel economy of our entire fleet has increased by six percent from 2009 to 2012, with our passenger cars, on average, increasing nearly 11 percent in the same time period. For example, the all-new 2014 Jeep Cherokee, which started production in June 2013 and we expect to be available in dealerships in September 2013, contains the first application of the 3.2L downsized Pentastar V6, the first 9-speed transmission in the segment and the first full four wheel drive disconnect in the industry for front wheel drive based platforms. This four wheel drive disconnect feature allows the vehicle to automatically switch to the more fuel-efficient front wheel drive mode. As a result, the all-new 2014 Jeep Cherokee provides an over 30 percent improvement in fuel economy over the Jeep Liberty, which it replaced. In addition, we intend to launch diesel versions of the Jeep Grand Cherokee in North America in late 2013 and Ram 1500 in North America in the first quarter of 2014.

Benefits from Established Fiat-Chrysler Alliance

The Fiat-Chrysler Alliance has been fundamental to our positive transformation, delivering a number of immediate and ongoing benefits while facilitating incremental efficiencies that position us for substantially greater long-term profitability. Our management structure leverages the expertise of Fiat and Chrysler Group personnel, which we believe provides us with a highly-qualified management team that has fostered collaboration between the two companies and enabled the continued exchange of best practices and strengths. Together with Fiat, we jointly develop certain new products and vehicle platforms, and we increasingly utilize common vehicle platforms, technologies and components to reduce the substantial costs associated with independent design and procurement. The convergence of our vehicle platforms with Fiat will enable us to optimize production capacity and manufacturing flexibility by allowing us to produce vehicles in various locations throughout the world. Additionally, it shortens the time-to-market and improves quality and reliability by using existing and/or commonly validated technology. Furthermore, Fiat’s leading capabilities in small cars

 

 

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complement our historic strength in large cars, SUVs and light-duty trucks, which have enabled us to broaden our product portfolio more rapidly and at a much lower total investment. We believe our joint engineering and development cooperation has resulted in cost savings for us and we expect more savings to be generated in the future from ever increasing integration and higher vehicle sales volumes.

Working with Fiat, we are also realizing substantial joint procurement savings opportunities by capitalizing on approximately $96 billion in combined annual purchasing power in 2012. Furthermore, in 2012, we had approximately 55 percent of our suppliers in common with Fiat based on annual spend, which we believe enables us to seek more competitive bids for new supply contracts, drive common solutions and achieve lower total cost. We believe that we generated meaningful cost savings from the combined supply base in 2012, and expect this to continue in the future.

Significant Improvement in Operating Performance

Our progress in implementing our business plan delivered significantly improved operating and financial performance in line with the targets we set for ourselves and announced on November 4, 2009. Our Modified Operating Profit for the twelve months ended June 30, 2013 was approximately $2.6 billion, representing a margin of 4.0 percent, an improvement of 220 basis points from 2010. See Summary Selected Historical Consolidated Financial and Other Data for a reconciliation of Net Income to Modified Operating Profit and Management’s Discussion and Analysis of Financial Condition and Results of OperationsNon-GAAP Financial Measures for a description and the calculation of Modified Operating Profit. This improvement is primarily due to our enhanced product portfolio, which has driven increased sales volumes and average retail transaction prices. As a result of implementing WCM, our manufacturing operations have achieved a 19 percent increase in first time vehicle assembly quality from the third quarter of 2009 to the second quarter of 2013. Furthermore, we continue to benefit from the more flexible workforce cost structure achieved in cooperation with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, or the UAW, and the National Automobile, Aerospace, Transportation and General Workers Union of Canada, or the CAW (which merged with the Communications, Energy and Paperworkers Union in September 2013 to form a new union called Unifor), which allows us to be more competitive with transplant automotive manufacturers.

We believe the enhancements to our product portfolio improve our competitive position and provide us an opportunity to strategically price our products in order to increase market share, while at the same time improving operating margins and reducing risk during periods of declining vehicle sales.

Well Positioned to Capitalize on Attractive U.S. Industry Fundamentals

The U.S. automotive market is in the midst of what many industry analysts expect to be a period of sustained recovery following industry sales reaching their low in 2009. Both macroeconomic factors, such as growth in per capita disposable income and improved consumer confidence, and automotive-specific factors, such as an increasing age of the vehicle population, the increased availability of affordably priced financing and higher used vehicle prices, have contributed to the recovery. With vehicle sales in North America accounting for approximately 90 percent of our vehicle sales for the first half of 2013 and full year 2012, we expect to benefit from the anticipated continued growth of the U.S. automotive market.

We believe our strong position in pick-up trucks, which represented approximately 17 percent of our U.S. vehicle sales in 2012 and 18 percent of our U.S. vehicle sales in the first half of 2013, will continue to drive incremental growth. The refreshed Ram product lineup has increased market share and sales each year since 2010, and we expect to capture additional growth as the U.S. housing market improves, which tends to drive demand for trucks. Further, Jeep is a globally recognized brand focused on the SUV market. In each of 2010, 2011 and 2012, sales of Jeep vehicles have grown at rates higher than the industry averages in many markets throughout the world where Jeep vehicles are sold. We expect this brand to continue to grow with the introduction of the all-new

 

 

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2014 Jeep Cherokee as well as a B-segment SUV to be launched in 2014. The Dodge and Chrysler brands’ return to the compact and mid-size sedan segments, respectively, with competitive products also represents an opportunity for us to drive future growth while continuing to occupy a strong position in the minivan segment.

Revitalized, Profitable and Consolidated Dealership Network

We maintain a strong network of dealers throughout North America and in select markets internationally. As part of the 363 Transaction, we optimized our U.S. distribution network by reducing the number of Chrysler, Jeep, Dodge and Ram dealers in our U.S. dealer network by approximately 28 percent. These reductions have enabled our U.S. dealer network to deliver a superior customer experience at increased volumes through enhanced customer service and updated stores. Since we began operations in mid-2009, our U.S. Chrysler, Jeep, Dodge and Ram dealers have invested or committed to invest over $650 million as of June 30, 2013 in new and renovated facilities to revitalize their image and improve the customer experience. As of June 30, 2013, approximately 88 percent of our U.S. dealers reported to us that they were profitable. This represents a substantial increase from 2009 when only 70 percent were profitable. Together with the much improved product offerings, we believe this increase in profitability is in part due to the optimization of our dealer networks and consolidation of our Chrysler, Jeep, Dodge and Ram brands under one roof, which 91 percent of our U.S. Chrysler, Jeep, Dodge and Ram dealers had done as of June 30, 2013. The benefits of consolidation for our dealers include increased profit potential and franchise value and improved owner/operator investment returns. At the same time, we achieve higher throughput, enhanced profits and the marketing benefits of more attractive dealer showrooms.

Strategically Important Aftermarket Parts, Service and Customer Care

Under the Mopar brand name, we sell a comprehensive line of aftermarket parts and provide service and customer care, which we believe enhances customer loyalty. We believe that our customers’ future vehicle buying decisions and brand loyalty are significantly influenced by their experience with post-sale service, replacement parts and accessories. Together with Fiat, we continue to employ Mopar’s capabilities on a global basis to ensure the coordinated development and sale of common parts, diagnostic equipment and service tools. There are currently over 70 million Chrysler Group and Fiat vehicles on the road worldwide. Mopar currently oversees 50 parts distribution centers supporting both Chrysler Group and Fiat operations, including an extensive footprint of 20 parts distribution centers in North America. We believe there is strong demand for our Mopar parts and service contracts with over 13 million Chrysler, Jeep, Dodge, Ram and Fiat vehicles under nine years old currently being operated in the U.S. We are also currently in the process of expanding our sale of Mopar service contracts throughout the world.

Strong Leadership Team and Reinvigorated Corporate Culture

Our core management team was formed by drawing experienced leaders from both Chrysler and Fiat. We are led by Sergio Marchionne, who serves as our Chairman and Chief Executive Officer and Fiat’s CEO. Mr. Marchionne joined Fiat’s board of directors in 2003, became CEO of Fiat in 2004 and CEO of Fiat Group Automobiles S.p.A. in 2005, spearheading Fiat’s return to profitability in the first year of his leadership. During his time at Fiat, Mr. Marchionne has led a number of successful new product launches, overseeing a leadership team that has improved vehicle quality, reduced the reliance on sales incentives and improved manufacturing efficiency. Since we began operations in mid-2009, and under the leadership of Mr. Marchionne, we have transformed our corporate culture, meaningfully enhanced the speed of decision-making and improved our customer focus. In addition, we have implemented numerous management process improvements that have facilitated greater collaboration both within Chrysler Group, as well as with Fiat and our dealers and suppliers. Our Chief Executive Officer, along with our Chief Financial Officer and certain of our brand and industrial group heads, serve on the Fiat executive management committee (the Group Executive Council, or GEC) formed to oversee and enhance the operational integration of all Fiat interests, including Chrysler Group. Drawing leaders

 

 

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from both Chrysler Group and Fiat, the GEC has helped both parties to maximize the benefits of the Fiat-Chrysler Alliance. Nonetheless, we continue to independently govern our business decisions to enhance our value.

Our Strategy

Broaden Our Product Portfolio

We intend to continue to broaden our product portfolio to better address consumer demands in segments in which we are currently underrepresented, such as small and compact vehicles and mid-size commercial vans. We plan to launch compelling products that reflect our focus on improved styling, driving experience, quality, reliability, safety and fuel economy. We expect our sales of smaller vehicles with smaller engines, particularly 4-cylinder engines, to substantially increase and sales of vehicles with larger displacement engines as a portion of our total sales to start to decline over time. Our strategy aims to meet consumer needs as well as to comply with increasingly stringent fuel economy regulations. With the Dodge Dart we re-entered the compact sedan segment, adding a Fiat-designed powertrain and delivering an EPA-rated fuel economy of up to 41 highway miles per gallon. Further, we are investing heavily in alternative fuel powertrains to ensure we have a complete product lineup to satisfy consumer and regulatory demands. As part of the Fiat-Chrysler Alliance, we have exclusive distribution rights for Alfa Romeo brand vehicles and service parts in North America. In 2011, we began distributing Alfa Romeo vehicles and service parts in Mexico, and we expect to sell Alfa Romeo vehicles in the U.S. and Canada, which will represent our entry into the premium vehicle market.

Continue to Improve Our Product Quality

While our total quality metrics have improved since we began operations, we are committed to continually improving quality. We have invested over $100 million in new quality tools since we began operations in mid-2009. Due to improved reliability, our warranty claim rate, as measured by conditions per 1,000 vehicles, has fallen by over 21 percent since we began operations in mid-2009 to May 2013. We plan to increase the volume of vehicles from common global architectures to more than 44 percent of our total volumes in 2016, which will enable us to concentrate our product portfolio on a base of strong and validated existing technology, which we believe will further reduce warranty claims and drive improvements in quality metrics. Our WCM initiatives will remain an important part of quality improvement, as WCM initiatives allow us to detect and repair defects more easily. We currently have four manufacturing facilities that have achieved Bronze-level WCM certification and anticipate as many as 20 manufacturing facilities reaching that level or higher in 2015.

Our customer surveys indicate that these improvements have already increased Chrysler Group vehicle owners’ satisfaction with our products and their willingness to recommend our brands to their friends and families. In addition, many of our vehicles have ranked near the top of third-party surveys of consumer satisfaction. We are committed to continuing to invest in a portfolio of technologies and processes to further enhance the quality of our products.

Further Develop Our Differentiated Brands

In mid-2009, we began a multi-year campaign to strengthen and differentiate our Chrysler, Jeep and Dodge brands, to develop Ram as a separate brand, to utilize SRT as a performance vehicle designation and to reintroduce the Fiat brand in the U.S. and Canadian markets. Additionally, we expect to sell Alfa Romeo brand vehicles in the U.S. and Canada to offer a premium branded product. We will seek to differentiate our brands by continuing to refine unique brand attributes, developing differentiated products at appropriate price points that reflect those attributes and investing in targeted marketing efforts to communicate those attributes to consumers. This strategy is already improving our financial performance through increased sales and decreased dependence on sales incentives.

 

 

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By more clearly differentiating our brands and designing vehicles with a sharp focus on a particular brand’s identity, we believe we will more effectively penetrate each brand’s target markets while limiting harmful competition in the marketplace among our brands and products. We are also implementing a strategy to refine the position of each brand and to expand our overall footprint so that our vehicles will appeal to a broader range of consumer segments and better resonate with our target consumer groups.

Enhance Our Product Technology

In order to achieve future regulatory emissions, fuel economy and safety requirements and satisfy consumer demand for driving performance, enhanced technologies and connectivity, we will continue to invest in new and differentiated technology. Our technology strategy is a key element in our ability to increase average retail transaction prices and enhance our overall profitability. As we increase the value proposition of our products through enhanced styling and the appropriate level of content and technology sought by consumers, we expect our average selling prices and margins will continue to increase.

We are focused on delivering improved fuel efficiency and reduced emissions through smaller and optimized engines. Our engine mix is intentionally moving toward smaller, 4-cylinder engines. In 2012, 26 percent of our vehicles incorporated a 4-cylinder engine, as compared to 19 percent in 2010. For the Fiat 500, we manufacture the 1.4L 4-cylinder Fiat Fully Integrated Robotised Engine, or FIRE engine, which added a fuel-efficient small engine to our portfolio. We continue to invest in improving the rest of our engine lineup, including our highly awarded Pentastar V-6 engine, which features a lightweight aluminum block with variable valve timing that improves fuel efficiency over its pre-2010 predecessor engines. We are also investing in alternative fuel powertrains to ensure we are able to provide a broad range of vehicles that are fuel efficient with low emissions and operating costs. In late 2013, we plan to introduce a Jeep Grand Cherokee powered by a diesel engine in North America. We also intend to introduce a diesel engine in North America in a Ram 1500 in the first quarter of 2014. We expect that both applications will deliver best-in-class highway fuel economy and driving range with the lowest carbon dioxide emissions in the respective segments. We are producing vehicles that utilize compressed natural gas and are exploring use of other alternative fuel sources. Ram is the only brand in North America to offer a factory-built pick-up truck powered by compressed natural gas.

We are developing technologies to improve the fuel economy and driving performance of our vehicles through the use of advanced transmissions and axles. We are the first domestic automaker to offer 8- and 9-speed transmissions in the full-size sedan, SUV and truck segments. The 8-speed transmission reduces fuel consumption by up to 12 percent over most of our current 5- and 6-speed transmissions. The 8-speed transmission was introduced in 2011 in the Chrysler 300 and Dodge Charger and in 2013 in the Jeep Grand Cherokee, Dodge Durango and Ram 1500, and we ultimately plan to use the 8-speed transmission in all of our rear-wheel drive vehicles except the heavy-duty version of the Ram truck and the all-new SRT Viper. The 9-speed front-wheel drive transmission was introduced in 2013 in the all-new 2014 Jeep Cherokee, which started production in June 2013 and we expect to be available in dealerships in September 2013, and we plan to use the transmission in other future vehicles.

To fulfill consumer demand for increasingly advanced integrated consumer technology and connectivity in our vehicles, we are investing in new product offerings. Our most recent introduction is our third generation flexible Uconnect system, known as Uconnect Access, which provides our customers access to traditional broadcast media, digital radio, satellite broadcasts, personal content and rear seat entertainment, navigation services, traffic and travel data and hands-free communications. The system builds upon our second generation product that was awarded the Edmunds.com Breakthrough Technology Award for 2012 for its use in the Dodge Charger. Uconnect Access is being incorporated into the new Ram 1500, the all-new SRT Viper and the new Jeep Grand Cherokee and is designed to be leveraged across our entire vehicle lineup and easily upgraded in the future. This platform can be personalized to serve the needs of consumers with varying degrees of technical needs and can be loaded with Chrysler Group-certified applications similar to those on smartphones and tablets. We were the first

 

 

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in the industry to migrate the content of owner’s manuals onto smartphone apps, which improved electronic information accessibility for customers and reduced environmental impact by reducing paper printing. We also incorporated the first cloud-based voice texting services offered by a domestic automaker. Uconnect Access received the first ever “Technology of the Year” award from AOL Autos.

Continue to Leverage the Fiat-Chrysler Alliance to Improve our Operating Efficiency

The Fiat-Chrysler Alliance provides us with a number of short and long-term benefits, including access to new vehicle platforms and powertrain technologies, particularly in smaller, more fuel-efficient segments where we have historically been underrepresented. For instance, we have focused our efforts on entering the mini and small vehicle market, or A- and B-segments, with the launch of the Fiat 500 and the all-new Fiat 500L. In addition, we continue to be focused on the commercial vehicle consumer and in the third quarter of 2013, we launched production of the all-new Ram ProMaster, our all-new full-size commercial van. The all-new Ram ProMaster will put us into the expanding, purpose-built, full-size van segment with best-in-class fuel economy, cargo capacity and payload. Coming from a strong background of commercial vehicles produced by Fiat Professional, the all-new Ram ProMaster is based on the Fiat Professional Ducato light commercial vehicle, which has been in production for over 30 years.

Increased use of common vehicle platforms, systems and components, along with further manufacturing, procurement, tooling and engineering operational integrations, are expected to continue to deliver substantial cost reductions. By sharing platforms, we and Fiat not only save on development costs (which may be as much as $300 million for a new platform), but we will also be able to provide contract manufacturing services to one another more easily, potentially further improving manufacturing capacity utilization rates and enabling us to reduce capital investments in new manufacturing capacity. We intend to use the CUSW and the Small Wide platforms, each co-developed with Fiat, on almost all of our future B-, C- and D-segment (small, compact and mid-size) vehicles. We plan to reduce the total number of passenger car and SUV vehicle platforms from 11 in 2010 to nine by the end of 2014, three of which we will share with Fiat, while increasing the number of vehicle segments addressed with these platforms from four to six, which we expect will result in significant growth in our average models per architecture and the aggregate volume per architecture. We also plan to continue leveraging our combined purchasing power with Fiat to yield preferred pricing and supply terms, as well as gain access to the latest technology and innovations.

Expand our Sales in Markets Outside North America

We will continue to partner with Fiat to efficiently distribute our products internationally where Fiat has a stronger presence than us or has existing relationships with dealers and distributors. Leveraging Fiat’s distribution network reduces the investment and time required if we were to develop the opportunities on our own. In certain markets outside North America, Fiat will distribute vehicles, either under our brands or rebadged under Fiat brands. We are also exploring opportunities for the expansion of the sale of our vehicles and service parts in key emerging markets, such as China, Brazil and India. Our longer-term strategy includes further leveraging off of Fiat’s distribution and manufacturing capacity in these markets to establish or expand local manufacturing and further expand distribution activities in these markets; however, our ability to do so depends on Fiat’s willingness to make such assets and resources available to us. See Risk Factors —Risk Related to our Business —Meeting our objective of increasing our vehicle sales outside North America is largely dependent upon access to Fiat’s network of distribution arrangements, manufacturing capacity and local alliance partners.

Drive Additional Growth with the Support of SCUSA

In February 2013, we entered into a private-label financing agreement with Santander Consumer USA. Inc., or SCUSA, an affiliate of Banco Santander, or the SCUSA Agreement. The new financing arrangement launched on May 1, 2013. Under the arrangement, SCUSA provides a wide range of wholesale and retail financing services to our dealers and retail customers, under the Chrysler Capital brand name. We believe that this strategy provides

 

 

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enhanced access to all levels of financing for our dealers and retail customers. We believe SCUSA provides access to competitive financing alternatives with limited capital exposure by delivering seamless dealer and customer financing capabilities, based on low cost funding, without the substantial capital commitments that would be required for us to establish our own captive finance company. Furthermore, SCUSA manages the credit risks and bears the risk of loss on loans contemplated by the SCUSA Agreement. The parties share in any residual gains and losses in respect of consumer leases, subject to specific provisions in the SCUSA Agreement, including limitations on our participation in gains and losses. SCUSA has committed to certain revenue sharing arrangements, as well as to consider future revenue sharing opportunities.

Our Industry

Designing, engineering, manufacturing and selling vehicles requires significant investments in product design, engineering, research and development, technology, tooling, machinery and equipment, facilities and marketing in order to meet both consumer preferences and regulatory requirements. Automotive original equipment manufacturers, or OEMs, are able to benefit from economies of scale by leveraging their investments and activities on a global basis across brands and models. The automotive industry is also historically highly cyclical, and like most industries, is impacted by changes in the general economic environment. Automotive OEMs that have a diversified revenue base across regions and products, in addition to having access to capital, tend to be better positioned to withstand industry downturns and to benefit from industry growth.

Recovering from the global recession, the U.S. automotive industry has shown steady improvement after facing a sharp decline in demand in 2008 and 2009. The U.S. seasonally adjusted annualized selling rate, or SAAR, including medium- and heavy-duty vehicles increased from 10.6 million in 2009 to 14.8 million in 2012, a growth of approximately 39 percent. Both macroeconomic factors, such as growth in per capita disposable income and improved consumer confidence, and automotive specific factors, such as an increasing age of vehicles in operation, improved consumer access to affordably priced financing and higher prices of used vehicles, contributed to the strong recovery.

Despite the recent improvement, the 2012 U.S. industry sales volume of 14.8 million of light-, medium- and heavy-duty vehicles is still well below the pre-financial crisis level of 17.0 million vehicles, which represents the average annual sales volume from 2003 to 2007. As of August 2013, the year-to-date SAAR, including medium- and heavy-duty vehicles, was 15.9 million vehicles, representing growth of over seven percent from full year 2012 SAAR.

In addition, the truck segment continues to grow at a comparable rate. In 2012, the U.S. large pick-up segment grew nine percent, while our market share grew 19 percent in this segment. With approximately 17 percent of our U.S. vehicle sales in 2012 in the pick-up segment, we are particularly impacted by the growth rate for these vehicles. While demand for pick-up trucks is driven by factors similar to passenger cars, such as used vehicle prices, access to affordably priced financing and the general health of the broader economy, we expect growth for pick-up trucks to be strong as it is also influenced by additional factors such as the recovering U.S. housing market and construction sector. Factors including reduced existing home inventories, slowing rate of foreclosures and increased consumer confidence should continue to drive the improvement of residential construction.

Why We Are Registering Equity Securities

On January 7, 2013, we received a registration demand from the UAW Retiree Medical Benefits Trust, or the VEBA Trust, pursuant to the terms of the shareholders agreement, dated as of June 10, 2009, by and among FNA LLC, the VEBA Trust, the VEBA holding companies identified therein and Chrysler Group LLC. Accordingly, we are undergoing the Company Conversion described below and registering our equity securities to comply with our obligations under such shareholders agreement and Chrysler Group LLC’s governance documents.

 

 

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Risk Factors

Investing in our common stock involves substantial risks. We face risks in operating our business, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition and operating results. Before you invest in our common stock, you should carefully consider all of the information in this prospectus, including matters set forth in the section entitled Risk Factors beginning on page 24.

Our Structure and Company Conversion

The diagram below depicts our organizational structure immediately after the consummation of the Company Conversion and this offering:

 

LOGO

Chrysler Group LLC was formed on April 28, 2009, as a Delaware limited liability company. Prior to the Company Conversion described below, the equity interests in us consisted of our Class A Membership Interests held indirectly by Fiat through its subsidiaries and by the VEBA Trust through thirteen holding companies.

Fiat North America LLC was formed on May 14, 2009 as a Delaware limited liability company and 100 percent owned indirect subsidiary of Fiat to hold Fiat’s ownership interest in Chrysler Group LLC. In connection with the closing of the 363 Transaction, Fiat contributed Fiat IP to FNA LLC that were contributed and licensed to Chrysler Group for its use in exchange for a 20.0 percent ownership interest in Chrysler Group.

As of the date of this prospectus, Fiat held a 58.5 percent ownership interest in Chrysler Group and the VEBA Trust held the remaining 41.5 percent. See Management’s Discussion and Analysis of Financial Condition and Results of Operations —Ownership Interest in Chrysler Group.

Immediately prior to the effectiveness of the registration statement of which this prospectus is a part, we will complete a series of transactions, which we refer to as the Company Conversion, pursuant to which we will convert Chrysler Group LLC from a Delaware limited liability company into a Delaware corporation and undergo certain related transactions. Upon consummation of the Company Conversion and this offering, Fiat, the VEBA Trust and our public stockholders will each own approximately      percent,      percent and      percent of our common stock, respectively (assuming that the underwriters do not exercise their option to purchase additional shares). See Our Structure and Company Conversion for a description of the Company Conversion.

Our Principal Stockholders and the Selling Stockholder

Following this offering, Fiat will own approximately        percent of our outstanding common stock. As a result, Fiat will remain our controlling stockholder and will continue to be able to control our business policies and affairs. See Risk Factors —Risks Related to this Offering and Ownership of Our Common Stock.

 

 

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The selling stockholder is the VEBA Trust. Following this offering, the VEBA Trust will own approximately        percent of our outstanding common stock (assuming that the underwriters do not exercise their option to purchase additional shares). We refer to the VEBA Trust as the selling stockholder.

Our Company Information

Our principal executive office is located at 1000 Chrysler Drive, Auburn Hills, Michigan 48326. Our phone number at this address is (248) 512-2950, and our corporate website is http://                     . We do not incorporate information available on, or accessible through, our corporate website into this prospectus or the registration statement of which it forms a part.

 

 

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THE OFFERING

 

Common stock outstanding immediately prior to this offering

            shares of common stock (resulting solely from the effects of the Company Conversion). See Our Structure and Company Conversion.

 

Common stock offered by the selling stockholder

            shares of common stock.

 

Common stock to be outstanding immediately after this offering

            shares of common stock.

 

Option to purchase additional shares

The underwriters have an option for a period of 30 days to purchase up to             additional shares of our common stock from the selling stockholder.

 

Voting rights

Each share of our common stock entitles its holder to one vote on all matters to be voted on by stockholders generally. See Description of Capital Stock —Common Stock.

 

Use of proceeds

The selling stockholder will receive all of the net proceeds from this offering, and we will not receive any proceeds from the sale of shares in this offering. See Use of Proceeds.

 

Dividend policy

We do not intend to pay any dividends in the foreseeable future, but our board of directors, or the Board, retains the discretion to declare and pay all future dividends, if any. In determining the amount of any future dividends, the Board will take into account any legal or contractual limitations, our actual and anticipated future earnings, cash flow, debt service and capital requirements. See Dividend Policy and Dividends.

 

Listing

We intend to apply to list our common stock on the                         .

 

Proposed Ticker Symbol

“        ”.

 

Risk Factors

The Risk Factors section included in this prospectus contains a discussion of factors that you should carefully consider before deciding to invest in shares of our common stock.

 

Lock-up Period

We and our officers, directors and certain of our stockholders (other than our public stockholders) will agree with the underwriters not to dispose of or hedge any shares of our common stock, or securities convertible into or exchangeable for our common stock, subject to certain exceptions, for the             -day period following the date of this prospectus, without the prior consent of J.P. Morgan Securities LLC and             . J.P. Morgan Securities LLC and              may, in their sole discretion and without notice, release all or any portion of the shares of our common stock from the restrictions in any of the lock-up agreements described above at any time. See Underwriting.

 

 

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Unless otherwise indicated, all information in this prospectus:

 

    assumes no exercise of the underwriters’ option to purchase additional shares;

 

    assumes that the shares of common stock to be sold in this offering are sold at $         per share, which is the midpoint of the range set forth on the cover of this prospectus;

 

    does not give effect to             shares of common stock reserved for issuance under the Chrysler Group LLC Restricted Stock Unit Plan, Amended and Restated Chrysler Group LLC Directors’ Restricted Stock Unit Plan and Chrysler Group LLC’s 2012 Long Term Incentive Plan; and

 

    gives effect to the Company Conversion as described under Our Structure and Company Conversion.

 

 

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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following sets forth selected financial data of FNA (Successor), Chrysler Group (Predecessor A) and Old Carco (Predecessor B). The selected financial data has been derived from:

 

    FNA’s accompanying condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 (Successor);

 

    FNA’s accompanying audited consolidated financial statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and the period from May 25, 2011 to December 31, 2011 (Successor); and for the period from January 1, 2011 to May 24, 2011 and the year ended December 31, 2010 (Predecessor A);

 

    Chrysler Group’s audited consolidated financial statements as of December 31, 2009 and for the period from June 10, 2009 to December 31, 2009 (Predecessor A), which are not included in this prospectus; and

 

    Old Carco’s audited consolidated financial statements as of June 9, 2009 and December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008 (Predecessor B), which are not included in this prospectus.

The accompanying condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 (Successor) have been prepared on the same basis as FNA’s accompanying audited consolidated financial statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.

Fiat North America LLC was formed on May 14, 2009 and through a series of transactions and events, became the primary beneficiary of Chrysler Group LLC, which is a VIE, on May 25, 2011. As a result, a new basis of accounting was created. As FNA LLC succeeded to substantially all of the business of Chrysler Group, and FNA LLC’s own operations before the succession were insignificant relative to Chrysler Group’s operations, Chrysler Group represents Predecessor A to FNA for accounting and financial reporting purposes.

Chrysler Group LLC was formed on April 28, 2009. On June 10, 2009, Chrysler Group purchased the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to acquiring the equity of Old Carco’s principal foreign subsidiaries, in the 363 Transaction approved by the bankruptcy court. Old Carco represents Predecessor B to FNA for accounting and financial reporting purposes.

For financial reporting purposes, FNA is referred to as the Successor prior to the consummation of the Company Conversion summarized above and discussed in Our Structure and Company Conversion. Subsequent to the Company Conversion, Chrysler Group Corporation will be the Successor, as it will assume FNA’s accounting basis for financial reporting purposes. Chrysler Group is referred to as Predecessor A and Old Carco is referred to as Predecessor B.

You should read the following selected historical consolidated financial data together with Our Structure and Company Conversion, Risk Factors, Selected Historical Consolidated Financial and Other Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical consolidated financial statements and the related notes included elsewhere in this prospectus.

 

 

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Comparability of Financial Information

Comparability of FNA and Chrysler Group Financial Information

On May 25, 2011, FNA LLC became the primary beneficiary of Chrysler Group LLC, which is a VIE. The consolidation of Chrysler Group was accounted for as a business combination, achieved in stages, using the acquisition method of accounting. In accordance with the acquisition method, FNA LLC recognized the acquired assets and assumed liabilities at their acquisition date fair values, with certain exceptions as provided in the applicable accounting guidance. These adjustments did not have a material effect on FNA’s consolidated results of operations or cash flows subsequent to May 24, 2011. In addition, FNA does not have significant operations, other than those of Chrysler Group and its consolidated subsidiaries, and its accounting policies are the same as Chrysler Group’s. Therefore, in addition to separately presenting FNA’s financial information for the period from May 25, 2011 to December 31, 2011 and Chrysler Group’s financial information for the period from January 1, 2011 to May 24, 2011, we have combined the respective results for 2011 for purposes of presenting the historical financial data for full year 2011.

Comparability of Chrysler Group and Old Carco Financial Information

In connection with the 363 Transaction, we did not acquire all of the assets or assume all of the liabilities of Old Carco. The assets we acquired and liabilities we assumed from Old Carco were generally recorded at fair value in accordance with business combination accounting guidance, resulting in a change from Old Carco’s accounting basis. In addition, certain of our accounting policies differ from those of Old Carco. For these reasons, we do not present any financial information for the period from June 10, 2009 to December 31, 2009 with Old Carco’s financial information or for the period from January 1, 2009 to June 9, 2009 on a combined basis. The comparability of revenues was not significantly affected by these items.

This presentation is in accordance with the practice of Chrysler Group management. We do not review the results of operations for the Predecessor B period when assessing the performance of our operations. Our business during the Successor and Predecessor A periods compared to the Predecessor B periods has been impacted by the significant changes in capital structure, management, business strategies and product development programs that were implemented subsequent to the 363 Transaction in an effort to realize the benefits of the Fiat-Chrysler Alliance. For further details on our business, refer to Business.

 

 

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     Successor  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in millions of dollars)  

Consolidated Statements of Operations Data:

           

Revenues, net

   $ 17,995          $ 16,803          $ 33,379          $ 33,177      

Gross margin

     2,683            2,555            4,945            5,140      

Selling, administrative and other expenses

     1,256            1,224            2,474            2,439      

Research and development expenses, net

     543            541            1,114            1,126      

Restructuring income, net

     (7)           (34)           (11)           (48)     

Interest expense

     250            262            499            525      

Loss on extinguishment of debt (3)

     9            —            9            —      

Net income

     576            485            764            966      

Net income attributable to noncontrolling interest

     252            194            340            407      

Net income attributable to controlling interest

     324            291            424            559      
                   Successor  
                   Six Months Ended
June 30,
 
                   2013      2012  
                   (in millions of dollars)  

Consolidated Statements of Cash Flows Data:

           

Cash flows provided by (used in):

           

Operating activities

         $ 2,176          $ 4,312      

Investing activities

           (1,647)           (1,734)     

Financing activities

           (43)           201      

Other Financial Information:

           

Depreciation and amortization expense

         $ 1,372          $ 1,388      

Capital expenditures(8)

           1,660            1,854      
                   Successor  
                   June 30, 2013      June 30, 2012  
                   (in millions of dollars)  

Consolidated Balance Sheets Data at
Period End:

           

Cash and cash equivalents

         $ 12,201          $ 12,375      

Restricted cash

           349            407      

Total assets

           56,611            53,495      

Current maturities of financial liabilities

           504            586      

Long-term financial liabilities

           13,074            13,011      

Members’ interest

           5,386            5,687      
     Successor  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in millions of dollars)  

Other Information (unaudited):

           

Worldwide factory shipments (in thousands) (9)(12)

     660            630            1,234            1,237      

Net worldwide factory shipments (in thousands) (10)(12)

     636            625            1,208            1,244      

Worldwide vehicle sales (in thousands) (11)(12)

     643            582            1,206            1,105      

U.S. dealer inventory at period end (in thousands)

           408            358      

U.S. market share (13)

           11.4%         11.2%   

Number of employees at period end (14)

           70,386            62,223      

Adjusted Net Income (15)(16)

   $ 585          $ 485          $ 773          $ 966      

Modified Operating Profit (15)(16)

     804            755            1,236            1,504      

Modified EBITDA (15)(16)

     1,486            1,427            2,536            2,825      

Free Cash Flow (15)(17)

           529            2,536      

 

 

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    Successor     Combined     Successor          Predecessor A          Predecessor B  
    Twelve
Months
Ended June
30, 2013
    Year Ended
December
31, 2012
    Total 2011     Period from
May 25,
2011 to
December
31, 2011
         Period from
January 1,
2011 to May
24, 2011
    Year Ended
December
31, 2010
    Period from
June 10,
2009 to
December
31, 2009
         Period from
January 1,
2009 to June
9, 2009
    Year Ended
December
31, 2008
 
          (in millions     of dollars)                      (in millions of dollars)                (in millions     of dollars)  

Consolidated Statements of
Operations Data:

                         

Revenues, net

  $ 66,011      $ 65,809      $ 55,054      $ 32,936          $ 22,118      $ 41,946      $ 17,710          $ 11,082      $ 48,477   

Gross margin

    10,294        10,489        8,308        4,787            3,521        6,060        1,599            (1,934     1,928   

Selling, administrative and other
expenses

    5,191        5,156        4,754        2,761            1,993        3,797        4,336            1,599        3,991   

Research and development
expenses, net

    2,290        2,302        1,664        1,058            606        1,500        626            452        1,525   

Restructuring (income) expenses,
net (1)

    (24     (61     3        (5         8        48        34            (230     1,306   

Interest expense (2)

    1,014        1,040        1,210        628            582        1,276        470            615        1,080   

Loss on extinguishment of debt (3)(4)

    9               551                   551                                   

Impairment of brand name
intangible assets (5)

                                                             844        2,857   

Impairment of goodwill (6)

                                                                    7,507   

Reorganization expenses, net (7)

                                                             843          

Net income (loss)

    1,603        1,805        (37     264            (301     (652     (3,785         (4,425     (16,844

Net income attributable to noncontrolling interest

    692        759        101        101                     

Net income (loss) attributable to controlling interest

    911        1,046        (138     163                     

Consolidated Statements of Cash
Flows Data:

                         

Cash flows provided by (used in):

                         

Operating activities

  $ 3,648      $ 5,784      $ 4,603      $ 1,984          $ 2,619      $ 4,320      $ 2,335          $ (7,130   $ (5,303

Investing activities

    (3,470     (3,557     6,120        6,372            (252     (1,167     250            (404     (3,632

Financing activities

    (238     6        (405     1,270            (1,675     (1,526     3,268            7,517        1,058   

Other Financial Information:

                         

Depreciation and amortization
expense

  $ 2,702      $ 2,718      $ 2,885      $ 1,625          $ 1,260      $ 3,051      $ 1,587          $ 1,537      $ 4,808   

Capital expenditures (8)

    3,439        3,633        3,009        2,072            937        2,385        1,088            239        2,765   

Consolidated Balance Sheets Data at Period End:

                         

Cash and cash equivalents

  $ 12,201      $ 11,834      $ 9,601      $ 9,601          $ 8,090      $ 7,347      $ 5,862          $ 1,829      $ 1,898   

Restricted cash

    349        371        461        461            467        671        730            1,133        1,355   

Total assets

    56,611        53,508        49,858        49,858            36,015        35,449        35,423            33,577        39,336   

Current maturities of financial
liabilities

    504        614        281        281            207        2,758        1,092            2,694        11,308   

Long-term financial liabilities

    13,074        12,969        13,087        13,087            12,217        10,973        8,459            1,900        2,599   

Members’ interest (deficit)

    5,386        3,574        4,816        4,816            (4,807     (4,489     (4,230         (16,562     (15,897

Other Information (unaudited):

                         

Worldwide factory shipments (in thousands) (9)(12)

    2,406        2,409        2,011        1,191            820        1,602        670            381        1,987   

Net worldwide factory shipments (in thousands) (10)(12)

    2,396        2,432        1,993        1,198            795        1,581        672            459        2,065   

Worldwide vehicle sales (in
thousands) (11)(12)

    2,295        2,194        1,855        1,140            715        1,516        725            593        2,007   

U.S. dealer inventory at period end
(in thousands)

    408        427        326        326            311        236        179            246        398   

U.S. market share (13)

      11.2     10.5             9.2     8.8           10.8

Number of employees at period
end (14)

    70,386        65,535        55,687        55,687            53,310        51,623        47,326            48,237        52,191   

Adjusted Net Income (Loss) (15)(16)

  $ 1,612      $ 1,805      $ 514      $ 264          $ 250      $ (652   $ (3,785       $ (4,425   $ (16,844

Modified Operating Profit
(Loss) (15)(16)

    2,648        2,916        1,687        835            852        763        (895         (3,352     (2,977

Modified EBITDA (15)(16)

    5,182        5,471        4,475        2,390            2,085        3,461        538            (2,169     250   

Free Cash Flow (15)(17)

    177        2,184        10,037        8,266            1,771        1,480        830           

 

(1) Old Carco initiated multi-year recovery and transformation plans aimed at restructuring its business in 2007, which were refined in 2008 and 2009 due to depressed economic conditions and decreased demand for its vehicles. We have continued to execute the remaining actions initiated by Old Carco. For additional information see Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations.

 

 

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(2) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise.

 

(3) In connection with the June 2013 amendment and re-pricing of Chrysler Group’s credit agreement dated May 24, 2011, which includes the Tranche B Term Loan and revolving credit facility, we recognized a $9 million loss on extinguishment of debt. The charges consisted of the write off of $1 million of unamortized debt issuance costs associated with the original facilities, and $8 million of call premium and other fees associated with the amendment and re-pricing.

 

(4) In connection with the May 2011 repayment of Chrysler Group’s outstanding obligations under the U.S. Treasury first lien credit facilities, or U.S. Treasury credit facilities, and the Export Development Canada Credit Facilities, or EDC credit facilities, we recognized a $551 million loss on extinguishment of debt. The charges consisted of the write off of $136 million of unamortized debt discounts and $34 million of unamortized debt issuance costs associated with the U.S. Treasury credit facilities and $367 million of unamortized debt discounts and $14 million of unamortized debt issuance costs associated with the EDC credit facilities.

 

(5) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million during the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.

 

(6) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.

 

(7) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses during the period from January 1, 2009 to June 9, 2009, from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially offset by a gain on extinguishment of certain financial liabilities and accrued interest.

 

(8) Capital expenditures represent the purchase of property, plant and equipment and intangible assets.

 

(9) Represents our vehicle sales to dealers, distributors and contract manufacturing consumers. For additional information refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations —Worldwide Factory Shipments.

 

(10) Represents our vehicle sales to dealers, distributors and contract manufacturing customers adjusted for Guaranteed Depreciation Program vehicle shipments and auctions. For additional information refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations —Worldwide Factory Shipments.

 

(11) Represents sales of our vehicles, which include vehicles manufactured by Fiat for us, from dealers and distributors to retail customers and fleet customers. Fleet customers include rental car companies, commercial fleet consumers, leasing companies and government entities. Certain fleet sales that are accounted for as operating leases are included in vehicle sales. Beginning January 1, 2013, Chrysler Group vehicle sales in Mexico include Fiat-manufactured Fiat and Alfa Romeo vehicles. Prior to January 1, 2013, these vehicle sales were reported by Fiat.

 

(12) Vehicles manufactured by Chrysler Group for other companies, including for Fiat, are included in our worldwide factory shipments and net worldwide factory shipments, however, they are excluded from our worldwide vehicles sales.

 

(13) U.S. market share as of December 31 for the respective years. 2011 represents the combined annual market share for Successor and Predecessor A. 2009 represents the combined annual market share for Predecessor A and Predecessor B.

 

(14) The number of employees provided for May 24, 2011 and June 9, 2009 are as of May 31, 2011 and June 30, 2009, respectively.

 

(15) Adjusted Net Income (Loss), Modified Operating Profit (Loss), Modified EBITDA and Free Cash Flow (all as defined below) are non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful information about our operating results and enhance the overall ability to assess our financial performance. They provide us with comparable measures of our financial performance based on normalized operational factors which then facilitate management’s ability to identify operational trends, as well as make decisions regarding future spending, resource allocations and other operational decisions. These and similar measures are widely used in the industry in which we operate. These financial measures may not be comparable to other similarly titled measures of other companies and are not an alternative to net income (loss) or income (loss) from operations as calculated and presented in accordance with U.S. GAAP. These measures should not be used as a substitute for any U.S. GAAP financial measures.

 

(16) Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of infrequent charges, which includes losses on extinguishment of debt. We use Adjusted Net Income (Loss) as a key indicator of the trends in our overall financial performance, excluding the impact of such infrequent charges.

We measure Modified Operating Profit (Loss) to assess the performance of our core operations, establish operational goals and forecasts that are used to allocate resources, and evaluate our performance period over period. Modified Operating Profit (Loss) is computed starting with net income (loss), and then adjusting the amount to (i) add back income tax expense and exclude income tax

 

 

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benefits, (ii) add back net interest expense (excluding interest expense related to financing activities associated with the Gold Key Lease vehicle lease portfolio), (iii) add back (exclude) all pension, OPEB and other employee benefit costs (gains) other than service costs, (iv) add back restructuring expense and exclude restructuring income, (v) add back other financial expense, (vi) add back losses and exclude gains due to cumulative change in accounting principles and (vii) add back certain other costs, charges and expenses, which include the charges factored into the calculation of Adjusted Net Income (Loss). We also use performance targets based on Modified Operating Profit (Loss) as a factor in our incentive compensation calculations for our represented and non-represented employees.

We measure the performance of our business using Modified EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We compute Modified EBITDA starting with net income (loss) adjusted to Modified Operating Profit (Loss) as described above, and then adding back depreciation and amortization expense (excluding depreciation and amortization expense for vehicles held for lease). We believe that Modified EBITDA is useful to determine the operational profitability of our business, which we use as a basis for making decisions regarding future spending, budgeting, resource allocations and other operational decisions.

The reconciliation of net income (loss) to Adjusted Net Income (Loss), Modified Operating Profit (Loss) and Modified EBITDA is set forth below (in millions of dollars):

 

     Successor  
     Three Months Ended June 30,     Six Months Ended June 30,  
     2013     2012     2013     2012  

Net income

   $ 576      $ 485      $ 764      $ 966   

Plus:

        

Loss on extinguishment of debt (a)

     9               9          
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

   $ 585      $ 485      $ 773      $ 966   
  

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

        

Income tax expense

     65        89        117        154   

Net interest expense

     241        250        478        503   

Net pension, OPEB and other employee benefit costs (gains) other than service costs

     (89     (38     (132     (76

Restructuring income, net (f)

     (7     (34     (11     (48

Other financial expense, net

     9        3        11        5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Modified Operating Profit

   $ 804      $ 755      $ 1,236      $ 1,504   
  

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

        

Depreciation and amortization expense

     730        715        1,372        1,388   

Less:

        

Depreciation and amortization expense for vehicles held for lease

     (48     (43     (72     (67
  

 

 

   

 

 

   

 

 

   

 

 

 

Modified EBITDA

   $ 1,486      $ 1,427      $ 2,536      $ 2,825   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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    Successor     Combined     Successor     Predecessor A     Predecessor B  
    Twelve
Months Ended
June 30, 2013
    Year Ended
December
31, 2012
    Total 2011     Period from
May 25, 2011
to December
31 2011
    Period from
Jan. 1, 2011
to May 24,
2011
    Year
Ended
December
31, 2010
    Period from
June 10, 2009
to December
31, 2009
    Period from
January 1,
2009 to June
9, 2009
    Year Ended
December 31,
2008
 

Net income (loss)

   $ 1,603          $ 1,805          $ (37)         $ 264          $ (301)         $ (652)         $ (3,785)         $ (4,425)         $ (16,844)     

Plus:

                     

Loss on extinguishment of debt (a)(b)

    9           —           551           —           551           —           —           —           —      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income (Loss)

   $ 1,612          $ 1,805          $ 514          $ 264          $ 250          $ (652)         $ (3,785)         $ (4,425)         $ (16,844)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

                     

Income tax expense (benefit)

    255           292           202           101           101           139           29           (317)          790      
   

Net interest expense (c)

    970           995           1,171           608           563           1,228           359           584           796      

Net pension, OPEB and other employee benefit costs (gains) other than service costs

    (186)        (130)        (214)        (138)        (76)        (52)        136        236        423   

Remeasurement loss on VEBA Trust Note and Membership Interests (d)

    —           —           —           —           —           —           2,051           —           —      

Interest expense and accretion on VEBA Trust Note

    —           —           —           —           —           —           270           —           —      

Loss on Canadian HCT Settlement (e)

    —           —           —           —           —           46           —           —           —      

Restructuring (income) expenses, net (f)

    (24)          (61)          3           (5)          8           48           34           (230)          1,306      

Other financial expense, net

    21           15           11           5           6           6           11           6           82      

Impairment of goodwill (g)

    —           —           —           —           —           —           —           —           7,507      

Impairment of brand name intangible assets (h)

    —           —           —           —           —           —           —           844           2,857      

Impairment of property, plant and equipment (i)

    —           —           —           —           —           —           —           391           —      

Reorganization expense, net (j)

    —           —           —           —           —           —           —           843           —      

Certain troubled supplier concessions

    —           —           —           —           —           —           —           —           106      

Less:

                     

Gain on NSC Settlement (k)

    —           —           —           —           —           —           —           (684)          —      

Gain on Daimler pension contribution (l)

    —           —           —           —           —           —           —           (600)          —      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified Operating Profit (Loss)

   $ 2,648          $ 2,916          $ 1,687          $ 835          $ 852          $ 763          $ (895)         $ (3,352)         $ (2,977)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

                     

Depreciation and amortization expense

    2,702           2,718           2,885           1,625           1,260           3,051           1,587           1,537           4,808      

Less:

                     

Depreciation and amortization expense for vehicles held for lease

    (168)          (163)          (97)          (70)          (27)          (353)          (154)          (354)          (1,581)     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Modified EBITDA

   $ 5,182          $ 5,471          $ 4,475          $ 2,390          $ 2,085          $ 3,461          $ 538          $ (2,169)         $ 250      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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(a) In connection with the June 2013 amendment and re-pricing of Chrysler Group’s credit agreement dated May 24, 2011, we recognized a $9 million loss on extinguishment of debt. The charges consisted of the write off of $1 million of unamortized debt issuance costs associated with the original facilities, and $8 million of call premium and other fees associated with the amendment and re-pricing.
(b) In connection with the May 2011 repayment of Chrysler Group’s outstanding obligations under the U.S. Treasury first lien credit facilities, or U.S. Treasury credit facilities, and the Export Development Canada Credit Facilities, or EDC credit facilities, we recognized a $551 million loss on extinguishment of debt. The charges consisted of the write off of $136 million of unamortized discounts and $34 million of unamortized debt issuance costs associated with the U.S. Treasury credit facilities and $367 million of unamortized discounts and $14 million of unamortized debt issuance costs associated with the EDC credit facilities.
(c) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise.
(d) As a result of the December 31, 2009 remeasurement, the OPEB obligation increased primarily due to a change in discount rate, resulting in a loss. Our policy is to immediately recognize actuarial gains or losses for OPEB plans that are short-term in nature and under which our obligation is capped. Therefore, we immediately recognized a loss of $2,051 million in OPEB net periodic benefit costs due to increases in the fair values of the VEBA Trust Note and Class A Membership Interests issued to the VEBA Trust of $1,540 million and $511 million, respectively, from June 10, 2009 to December 31, 2009.
(e) In August 2010, Chrysler Canada entered into a settlement agreement with the CAW to permanently transfer the responsibility for providing postretirement health care benefits for CAW represented employees, retirees and dependents, or the Covered Group, to a new retiree plan. The new retiree plan will be funded by the Health Care Trust, or HCT. During the year ended December 31, 2010, we recognized a $46 million loss as a result of the Canadian HCT Settlement Agreement.
(f) During 2008, Old Carco developed a multi-year plan, RTP III Plan, to further restructure its business in order to reduce its cost structure in response to continued deterioration of its business. Charges recorded for the RTP III Plan included costs related to workforce reductions, including a curtailment loss as a result of the salaried and hourly workforce reductions, as well as supplier contract cancellation costs and other costs. Restructuring income, net for the period from January 1, 2009 to June 9, 2009 was primarily due to refinements to existing supplier contract cancellation costs and workforce reduction reserves recorded in connection with Old Carco’s RTP I, II and III Plans.
(g) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.
(h) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million during the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.
(i) During the period from January 1, 2009 to June 9, 2009, Old Carco recorded a property, plant and equipment impairment charge of $391 million on the long-lived assets which were not acquired by us. The impairment was primarily the result of the Old Carco bankruptcy cases, continued deterioration of Old Carco’s revenues, ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, as well as taking into consideration the expected proceeds to be received upon liquidation of the assets.
(j) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially off-set by a gain on extinguishment of certain financial liabilities and accrued interest. On April 30, 2010, Old Carco transferred its remaining assets and liabilities to a liquidating trust and was dissolved in accordance with a plan of liquidation approved by the bankruptcy court.
(k) On March 31, 2009, Daimler transferred its ownership of 23 national sales companies, or NSCs, to Chrysler Holding LLC, or Chrysler Holding, which simultaneously transferred the NSCs to Old Carco. Old Carco paid Daimler $99 million in exchange for the settlement of obligations related to the NSCs and other international obligations, resulting in a net gain of $684 million.
(l) On June 5, 2009, Old Carco, Chrysler Holding, Cerberus, Daimler and the Pension Benefit Guaranty Corporation entered into a binding agreement settling various matters. Under the agreement, Daimler agreed to make three equal annual cash payments to Old Carco totaling $600 million, which were to be used to fund contributions into Old Carco’s U.S. pension plans in 2009, 2010 and 2011. This receivable and certain pension plans were subsequently transferred to us as a result of the 363 Transaction.

 

(17) Free Cash Flow is defined as cash flows from operating and investing activities, excluding any debt related investing activities, adjusted for financing activities related to Gold Key Lease. We are currently winding down the Gold Key Lease program. As of June 2012, all Gold Key Lease financing obligations have been repaid and no additional funding will be required. Free Cash Flow is presented because we believe that it is used by analysts and other parties in evaluating the Company. However, Free Cash Flow does not necessarily represent cash available for discretionary activities, as certain debt obligations and capital lease payments must be funded out of Free Cash Flow. We also use performance targets based on Free Cash Flow as a factor in our incentive compensation calculations for our non-represented employees. Free Cash Flow should not be considered as an alternative to, or substitute for, net change in cash and cash equivalents. We believe it is important to view Free Cash Flow as a complement to our consolidated statements of cash flows.

 

 

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The following is a reconciliation of Net Cash Provided by (Used in) Operating and Investing Activities to Free Cash Flow (in millions of dollars):

 

    Successor     Combined     Successor          Predecessor A  
    Six Months
Ended
June 30, 2013
    Six Months
Ended
June 30,
2012
    Twelve Months
Ended
June 30, 2013
    Year Ended
December
31, 2012
    Total 2011     Period from
May 25, 2011
to December
31, 2011
         Period from
January 1,
2011 to May
24, 2011
    Year Ended
December
31, 2010
    Period from
June 10, 2009
to December
31, 2009
 

Net Cash Provided by
OperatingActivities

   $ 2,176          $ 4,312          $ 3,648          $ 5,784          $ 4,603          $ 1,984              $ 2,619          $ 4,320          $ 2,335      

Net Cash Provided by
(Used in) Investing Activities(a)

    (1,647 )        (1,734 )        (3,470 )        (3,557 )        6,120           6,372               (252 )        (1,167 )        250      

Investing activities
excluded
from Free Cash Flow:

                     

Proceeds from USDART (b)

    —           —           —           —           (96 )        —               (96 )        —          (500 )   

Change in loans and
notes receivables

    —           (1 )        (1 )        (2 )        (6 )        (3 )            (3 )        (36 )        (7 )   

Financing activities
included in
Free Cash Flow:

                     

Proceeds from Gold
Key Lease financing

    —           —           —           —           —           —               —           266           —      

Repayments of Gold
Key Lease financing

    —           (41 )        —           (41 )        (584 )        (87 )            (497 )        (1,903 )        (1,248 )   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

Free Cash Flow

   $ 529          $ 2,536          $ 177          $ 2,184          $ 10,037          $ 8,266              $ 1,771          $ 1,480          $ 830      
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

 

 

(a) Net Cash Provided by (Used in) Investing Activities for the period from May 25, 2011 to December 31, 2011 and for the combined results for 2011 includes $8,090 million of cash acquired in connection with the consolidation of Chrysler Group on May 25, 2011. Refer to —Management’s Discussion and Analysis of Financial Condition and Results of Operations —Critical Accounting Estimates —Business Combination Accounting, for additional information.
(b) U.S. Dealer Automotive Receivables Transition LLC, or USDART.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider each of the risks below, together with all of the other information contained in this prospectus, before deciding to invest in shares of our common stock. If any of the following risks develops into an actual event, our business, financial condition or results of operations could be negatively affected, the market price of your shares could decline and you could lose all or part of your investment.

Risks Related to our Business

We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success.

In connection with the transaction approved under section 363 of the U.S. Bankruptcy Code, or the 363 Transaction, we entered into an alliance with Fiat, or the Fiat-Chrysler Alliance, in which Fiat became our principal industrial partner. The Fiat-Chrysler Alliance was a required component to the determination by the United States Department of the Treasury, or U.S. Treasury, that we could be a viable company and would be eligible for government funding as part of the 2009 restructuring of the U.S. automotive industry. The Fiat-Chrysler Alliance is intended to provide us with a number of long-term benefits, including access to new vehicle platforms and powertrain technologies, particularly in smaller, more fuel-efficient segments where we historically did not have a significant presence, as well as procurement benefits, management services and global distribution opportunities. The Fiat-Chrysler Alliance is also intended to facilitate our penetration into many international markets where we believe our products would be attractive to consumers, but where we historically did not have significant penetration or existing dealer and distribution networks.

We believe that our ability to realize the benefits of the Fiat-Chrysler Alliance is critical for us to compete with our larger and better-funded competitors. If we are unable to convert the opportunities presented by the Fiat-Chrysler Alliance into long-term commercial benefits, either by improving sales of our vehicles and service parts, reducing costs or both, and reducing our reliance on North American vehicle sales, our financial condition and results of operations may be materially adversely affected.

Because of our dependence on the Fiat-Chrysler Alliance, any adverse development in the Fiat-Chrysler Alliance could have a material adverse effect on our business prospects, financial condition and results of operations. For instance, the Fiat-Chrysler Alliance may not bring us its intended benefits, or there may be adverse changes in the Fiat-Chrysler Alliance due to disagreements between the parties or changes in circumstances at Fiat or at our Company. Fiat has informed us that it is evaluating the various potential impacts that a public offering and the consequential introduction of public stockholders may have on its views of the Fiat-Chrysler Alliance, and as such, is considering whether or not to continue expanding the Fiat-Chrysler Alliance beyond its existing contractual commitments in accordance with historical practice and as envisioned by the Company’s 2010-2014 Business Plan. If Fiat becomes unwilling to work with us beyond the scope of its existing contractual obligations, there may be a material adverse effect on our business prospects, financial condition and results of operations.

The Fiat-Chrysler Alliance exposes us indirectly to risks associated with Fiat’s own business and financial condition. Although Fiat has executed its own significant industrial restructuring and financial turnaround, it, like us, remains smaller and less well-capitalized than many of its principal competitors in its home market and globally, and Fiat has historically operated with more limited capital than many other global automakers. Moreover, Fiat’s sales and revenue have been negatively affected by the continuing economic weakness in several European countries, especially in its domestic market, Italy. Like other manufacturers and suppliers in Europe, Fiat has considerable excess manufacturing capacity. As a result, Fiat has significantly revised its business plan, including its planned focus for product development and manufacturing operations. If this revised business plan affects Fiat’s ability to fulfill its obligations under, or otherwise impairs its dedication to, the Fiat-Chrysler Alliance or otherwise diverts management or operational attention away from our alliance, we may not realize all of the benefits we anticipate from the Fiat-Chrysler Alliance, which would adversely affect our financial condition and results of operations.

 

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A termination of the Fiat-Chrysler Alliance would likely have a material adverse effect on us. Fiat may terminate the master industrial agreement dated June 10, 2009 and related ancillary agreements at any time on 120 days’ prior written notice. In addition, either we or Fiat may terminate the master industrial agreement and related ancillary agreements if the other party either commits a breach that is material, considering all ancillary agreements taken as a whole, or in the event of certain bankruptcy, liquidation or reorganization proceedings. Although each party would be required to continue to provide certain distribution services and technology rights and other items provided under the agreement for certain transition periods as described below under Certain Relationships and Related Party Transactions —Transactions with Fiat under the Fiat-Chrysler Alliance, any such termination would likely cause at least temporary disruptions to our business as well as the loss of significant long-term benefits.

Notwithstanding our close industrial alliance, Fiat’s significant control over our management, operations and corporate decisions may result in conflicts of interest.

Chrysler Group LLC’s governance documents accord, and the stockholders’ agreement that the Company will enter into with each of Fiat and the UAW Retiree Medical Benefits Trust, or the VEBA Trust, immediately prior to the effectiveness of the registration statement of which this prospectus is a part, or the Stockholders’ Agreement, will continue to accord, significant management oversight and governance rights to Fiat as the holder of the majority of our common stock following the consummation of the Company Conversion and this offering. Fiat currently holds a majority ownership interest in us, and has the right to appoint a majority of our board of directors, or the Board, and Fiat will own a majority of our common stock and will have the ability to nominate a majority of the Board following the Company Conversion. As a result, Fiat has the ability to control our management and operations, including with respect to significant corporate transactions such as mergers and acquisitions, asset sales, borrowings, issuances of securities and our dissolution, as well as amendments to our organizational documents. Fiat’s control has been subject only to a requirement in Chrysler Group LLC’s governance documents that the Board and the Company must have the consent of the VEBA Trust to make certain major decisions, if they both adversely and disproportionately affect the VEBA Trust as a member, and that any transaction by Chrysler Group with Fiat in excess of $25 million must be approved by a majority of disinterested members of the Board. Our Stockholders’ Agreement and bylaws will continue such limitations following the Company Conversion. See Description of Capital Stock —Major Decisions. Despite processes we have implemented to guard against conflicts of interest (including such actual or perceived conflicts of interest described below) and to review affiliate transactions, Fiat may take actions or cause the Company to take actions that are not in the best interests of the Company or that disproportionately benefit Fiat as compared to us. See Certain Relationships and Related Party Transactions —Policies and Processes for Transactions Involving Related Parties for a description of the review processes in place.

In addition, our certificate of incorporation will contain provisions relieving our directors of certain fiduciary duties in certain contexts, similar to those included in Chrysler Group LLC’s governance documents. Our directors – including any director employed by Fiat – are not, and will not be, required to offer us an opportunity to participate in business opportunities presented to them even if the opportunity is one that we might reasonably have pursued. Additionally, our directors will not be liable to us or our stockholders for breach of any fiduciary or other duty by reason of any such activities. See Description of Capital Stock —Corporate Opportunities.

Actual or perceived conflicts of interest may arise between us and Fiat in a number of areas relating to the Fiat-Chrysler Alliance and management of the Company. These may include:

Management

We benefit from the significant management experience of Fiat’s leadership team. Our current Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer serve in those same roles for Fiat. In addition, our current Chief Executive Officer, Chief Financial Officer and certain of our other executive officers and employees serve on a Fiat executive management committee (the Group Executive Council, or GEC) formed to oversee the management and integration of all Fiat interests, including its interest in Chrysler Group. Chrysler Group executives who serve on the GEC owe duties to Chrysler Group and therefore may have conflicts of

 

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interest with respect to matters involving both companies. Moreover, although the GEC cannot contractually bind Chrysler Group, and recommendations made by the GEC to Chrysler Group, including transactions with Fiat affiliates, are subject to our own internal review and approval procedures, these potential conflicts may still affect us. See Certain Relationships and Related Party Transactions —Policies and Processes for Transactions Involving Related Parties for a description of the review processes in place.

Moreover, in addition to serving as Chief Executive Officer of both Fiat and Chrysler Group, Mr. Marchionne also serves as Chairman or Chief Executive Officer for key Fiat subsidiaries including Fiat Group Automobiles S.p.A., or Fiat Group Automobiles, and for other current or former affiliates of Fiat, including CNH Industrial N.V., or CNH Industrial, which operates the capital goods business formerly owned by Fiat. Mr. Marchionne has not received any salary compensation from us for serving as our Chief Executive Officer other than the compensation provided to our directors generally.

We do not have a specified allocation of required time and attention for Mr. Marchionne, our Chief Financial Officer or certain other members of management. If any of them allocates more of their time and attention to non-Chrysler matters, our business, financial condition and results of operations may suffer.

For so long as Fiat has the right to designate a director, the appointment of our Chief Executive Officer will require the prior approval of Fiat, and the Chief Executive Officer cannot be removed or replaced without Fiat approval.

Further, Fiat has expressed its desire to acquire all of our outstanding equity or otherwise create a simplified, unified capital structure through the acquisition of the minority ownership in us held by the VEBA Trust, a portion of which will be sold in this offering. Completion of this offering will prevent or delay Fiat from meeting this objective, and Fiat has stated that it believes a publicly-traded Chrysler Group will prevent or delay the full realization of the benefits of the Fiat-Chrysler Alliance. Fiat has informed us that it is reconsidering the benefits and costs of further expanding its relationship with us and the terms on which Fiat would continue the sharing of technology, vehicle architectures and platforms, distribution networks, production facilities and engineering and management resources. In light of Fiat’s concern that the full realization of the benefits of the Fiat-Chrysler Alliance may be prevented or delayed, Fiat therefore may also exercise its governance rights in a manner that it perceives will enhance the value of the Fiat-Chrysler Alliance to Fiat, rather than to Chrysler. This could include decisions on capital preservation or allocation, investments and location of production facilities and other operational decisions. Further, Fiat may at any time, or from time to time, purchase or, following expiration of the lock-up period, sell shares of common stock on the open market (subject only to compliance with applicable securities laws). There can be no guarantee that Fiat will not pursue such a plan to achieve its objectives.

Industrial Alliance

We have entered into a number of agreements with Fiat to implement and extend the Fiat-Chrysler Alliance. Under these agreements, we and Fiat have each agreed to provide the other with goods, services and other resources. We expect to enter into additional agreements in connection with the Fiat-Chrysler Alliance from time to time. Although we believe that these arrangements facilitate cooperation and mutual dependence between the two companies, conflicts may arise in the performance of the parties’ obligations under these agreements or in the interpretation, renewal or negotiation of these arrangements. Although the terms of any such transactions with Fiat will be established based upon negotiations between us and Fiat and, with respect to all transactions involving aggregate payments in excess of $25 million, will be subject to the approval of the “disinterested” members of the Board, the terms of any such transactions may not be as favorable to us as we may otherwise have obtained in a transaction with a party other than Fiat, particularly in future transactions, when our use of shared vehicle platforms have become significantly overlapped and our joint procurement and engineering efforts have become further integrated. In addition, while our senior secured credit agreement and the indenture governing the Secured Senior Notes (as defined herein) include covenants requiring certain approval processes for transactions between us and Fiat, compliance with these covenants may not prevent us from entering into transactions that are or turn out to be, particularly with the benefit of future hindsight, unfavorable to us. In connection with the offering, Fiat has advised us that it intends to establish a management committee to evaluate

and, if appropriate, approve material related party transactions between Fiat and Chrysler Group, to ensure that

 

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they are fair and in the best interest of Fiat. The operations of these overlapping governance processes may make future agreements to implement or extend the Fiat-Chrysler Alliance more difficult or time consuming to complete, which may delay or prevent implementation of these arrangements, which in turn may adversely affect our business, financial condition and results of operations.

Further, the business plan and related performance targets we announced on November 4, 2009 for the 2010 through 2014 period, or the 2010-2014 Business Plan, and our operations, have become significantly intertwined with those of Fiat, and we rely heavily upon Fiat for joint procurement, contract manufacturing, international distribution and engineering and technological development. As a result, unwinding our industrial relationship for any reason would likely have a material adverse effect on our business prospects, financial condition and results of operations. Further, certain of our vehicles have been designed to be used with components and parts supplied by Fiat, its affiliates or third-party suppliers that have traditionally had long-standing relationships with Fiat, further concentrating our choice of suppliers in any vehicle program. As with any supplier, the cost of components or parts from Fiat may increase or the certainty of their supply may be subject to limits, and in these circumstances, it may be difficult to replace Fiat’s components and parts with those of another supplier on short notice or at a competitive cost. See —We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success above and —If our suppliers fail to provide us with the raw materials, systems, components and parts that we need to manufacture our automotive products, our operations may be disrupted which would have a material adverse effect on our business, below.

As a distributor of Fiat vehicles, we also depend on Fiat for the supply of vehicle inventory of certain Fiat products. Further, beginning with the production of the all-new Fiat 500L, Fiat contract manufactures some of the vehicles we sell from which we derive original equipment manufacturer, or OEM, profits. If Fiat’s supply of vehicles to us is disrupted, or if consumer demand for Fiat vehicles changes, our revenue from the distribution and sales of Fiat vehicles could be adversely affected. See —We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success, above.

Additionally, those Fiat vehicles that we sell in the U.S. must be included in our Corporate Average Fuel Economy, or CAFE, fleet compliance report we submit to the National Highway Traffic Safety Administration, or NHTSA, pursuant to the Energy Independence and Security Act, or EISA, as well as in our fleet compliance report we submit to the Environmental Protection Agency, or EPA, pursuant to the MY 2012-2016 Light Duty Vehicle Greenhouse Gas Rule. A disruption of Fiat’s supply of such vehicles, or of technology or powertrains, to us could have an effect on the model year average fuel economy ratings of our fleet, which, in turn, could affect consumer perception of our company and our sales. Similarly, Fiat could seek to be compensated by us in the future for any savings we find in including sales of Fiat vehicles in our CAFE fleet compliance reports.

Finally, not only may such arrangements result in actual or perceived conflicts of interest, but as both parties pursue cost savings through joint procurement, contract manufacturing and engineering and technological development, we each become more reliant on the other and may become exposed to any risks to each other’s business and financial condition, or may disagree as to the best method to share any benefits, which may in turn exacerbate the potential for conflicts of interest.

Governance

Fiat has significant governance rights, including the right to directly appoint a majority of our Board and indirectly to elect all but one of the other members of our Board. In addition, Fiat has, through its designation of a non-independent Board member, the right to approve a range of actions including capital investments that exceed $250 million and certain other transactions that deviate from Chrysler Group’s 2010-2014 Business Plan as approved by the Board or annual operating budgets approved by the Board. If Fiat were to choose not to approve any of these actions, we may be unable to make investments or enter into other arrangements and transactions we feel are necessary to meet our short- and long-term business objectives, which may adversely affect our business, financial condition and results of operations.

 

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Business Opportunities

Although we believe that our operational strengths complement those of Fiat, which we believe should limit the scope for business conflicts, there are areas in which the companies’ interests are likely to diverge, including with respect to business opportunities that may be of interest to both parties. We may be restricted from pursuing such opportunities by virtue of Fiat’s control of us.

Fiat is free to sell, in whole or in part, its equity ownership in us, which could reduce Fiat’s incentive to support our industrial alliance and may subject us to the control of a presently unknown third party.

Following the completion of this offering, Fiat will continue to own a majority of our equity. Fiat will have the ability, should it choose to do so, to sell some or all of its shares of our common stock in a privately negotiated transaction or in capital markets offerings pursuant to its registration rights. The benefits of the Fiat-Chrysler Alliance are enhanced by Fiat’s interest in our success as a result of its majority ownership of our common stock, and if Fiat were to reduce or eliminate its equity stake in us, whether voluntarily in a strategic transaction or in response to its own capital needs, its incentives may no longer be as closely aligned with ours. A reduction in Fiat’s commitment to the Fiat-Chrysler Alliance could adversely affect us through potential changes to our common management, a reduction in resources contributed to the Fiat-Chrysler Alliance or the termination of the Fiat-Chrysler Alliance entirely. Furthermore, if Fiat were to sell a sufficiently large portion of its interest in us, such a transaction could result in a change in control of us, which could also trigger an event of default under certain of our debt agreements. The ability of Fiat to privately sell such shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may otherwise accrue to Fiat upon its private sale of our common stock. Additionally, if Fiat privately sells a significant equity interest in us, we may become subject to the control of a presently unknown third party. Such third party may have its own conflicts of interest with the interests of other stockholders, may have an entirely different management philosophy and strategy and may lack benefits such as those of the Fiat-Chrysler Alliance.

Our profitability depends on reaching certain minimum vehicle sales volumes. If vehicle sales do not continue to increase, or if they deteriorate, our results of operations and financial condition will suffer.

Our success requires us to achieve certain minimum vehicle sales volumes. As is typical for an automobile manufacturer, we have significant fixed costs and, therefore, changes in our vehicle sales volume can have a disproportionately large effect on profitability. In addition, we generally receive payments from vehicle sales to dealers in North America within a few days of shipment from our assembly plants, whereas there is a lag between the time we receive parts and materials from our suppliers and the time we are required to pay for them. As a result, we tend to operate with working capital supported by these terms with our suppliers, and therefore if vehicle sales decline we will suffer a significant negative impact on our cash flow and liquidity. If our vehicle sales do not continue to increase, or if they were to decline to levels significantly below our assumptions, due to financial crisis, renewed recessionary conditions, changes in consumer confidence, geopolitical events, inability to produce sufficient quantities of certain vehicles, limited access to financing or other factors, our financial condition and results of operations would be materially adversely affected.

Economic weakness, including elevated unemployment levels, has at times adversely affected our business, particularly in our principal market, North America. If economic conditions do not continue to improve, or if they weaken, or if unemployment levels do not improve at the same pace as general economic conditions, our results of operations could be negatively affected. Additionally, North American demand for vehicles has steadily increased from 2010; however, that increase may be partially attributable to the average age of vehicles on the road following the sustained downturn from 2007 to 2010 and historically low industry sales in 2011 and 2012. To the extent the increase in vehicle demand is attributable to pent-up demand rather than overall economic growth, future vehicle sales may lag behind improvements in general economic conditions or employment levels.

Our business, financial condition and results of operations have been, and may continue to be, adversely affected by worldwide economic conditions. Overall demand for our vehicles, as well as our profit margins, could decline

 

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as a result of many factors outside our control, including economic recessions, changes in consumer preferences, increases in commodity prices, changes in laws and regulations affecting the automotive industry and the manner in which they are enforced, inflation, fluctuations in interest and currency exchange rates and changes in the fiscal or monetary policies of governments in the areas in which we operate, the effect of which may be exacerbated during periods of general economic weakness. Depressed demand for vehicles affects our suppliers as well. Any decline in vehicle sales we experience may, in turn, adversely affect our suppliers’ ability to fulfill their obligations to us, which could result in production delays, defaults and inventory management challenges. These supplier events could further impair our ability to build and sell vehicles.

Current financial conditions and, in particular, unemployment levels and relatively low consumer confidence levels risk placing significant economic pressures on consumers and our dealer network and may negatively impact our vehicle sales going forward. Any significant further deterioration in economic conditions may further impair the demand for our products, and our financial condition and results of operations could be materially and adversely affected. Further, even if economic conditions stabilize or improve, a corresponding increase in vehicle sales may not occur due to other factors such as rising interest rates (see —Vehicle sales depend heavily on adequacy of vehicle financing options, which have been at historically low interest rates. To the extent that interest rates for vehicle financing rise, consumers may be unable to afford vehicles as a result of higher interest payments, or we may need to increase our use of subvention programs to maintain or increase our vehicle sales, either of which would adversely affect our financial condition and results of operations, below), changes in consumer spending habits and other factors, or the failure of unemployment levels to improve at the same pace as general economic conditions, which may constrain demand for our products and adversely affect our financial condition and results of operations.

As in prior years, in 2012, approximately 90 percent of our vehicle sales were to customers in the U.S., Canada and Mexico. In the U.S., where we sell most of the vehicles we manufacture, industry-wide vehicle sales declined from 16.5 million vehicles in 2007 to 10.6 million vehicles in 2009. After several years of gradual economic recovery, U.S. vehicle sales reached 14.8 million in 2012, and Chrysler Group’s U.S. sales exceed Old Carco’s U.S. sales for 2008. We believe the growth in our sales occurred largely because of our significant investments in vehicle design, engineering and manufacturing through which we broadened and upgraded our product portfolio. Overall, however, economic recovery in North America has been slower and less robust than many industry analysts predicted. This limited recovery in vehicle sales may not be sustained. For instance, renewed weakness in the U.S. new home construction market would likely depress sales of pick-up trucks, one of our strongest selling products, representing approximately 17 percent of our U.S. vehicle sales in 2012 and 18 percent of our U.S. vehicle sales in the six months ended June 30, 2013. In addition, such recovery may be partially attributable to the pent-up demand and average age of vehicles on the road following the extended economic downturn so there can be no assurances that continuing improvements in general economic conditions or employment levels will lead to corresponding increases in industry-wide vehicles sales. As a result, we may experience further declines in vehicle sales in the future, and we may not realize a sufficient return on the investments we have made or that we plan to make in the future. As a result, our financial condition and results of operations would be materially affected.

Although we are increasing our vehicle sales outside of North America, we anticipate that our results of operations will continue to depend substantially on vehicle sales in the North American markets. Our vehicle sales in North America will therefore continue to be critical to our plans to maintain and improve current levels of profitability. Our principal competitors, including General Motors Company, Ford Motor Company and Toyota Motor Sales, U.S.A., Inc., however, are more geographically diversified and are less dependent on sales in North America. As a result, any decline in demand in the North American market would have a disproportionately large negative effect on our vehicle sales and profitability relative to our principal competitors, whose vehicle sales are not similarly concentrated.

 

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We may not be successful in increasing our vehicle sales outside of North America, and if we do increase our vehicle sales outside of North America we will be exposed to additional risks of operating in different regions and countries.

We generate a small, but growing, proportion of our vehicle sales outside of North America, with approximately 10 percent of our vehicle sales occurring outside North America in 2012 and the six months ended June 30, 2013. Currently we have very limited manufacturing operations outside of North America and substantially rely on exporting vehicles made in North America to generate vehicles sales outside of North America. This makes us particularly vulnerable to increases in import restrictions and other trade barriers as well as foreign currency exchange rate changes. For example, Brazil’s decision to abrogate its free trade agreement with Mexico and impose import quotas has impacted our plans to leverage our manufacturing capacity in Saltillo, Mexico, where we will make the all-new ProMaster commercial van as part of our Ram lineup, to manufacture additional commercial vans for Fiat to sell under the Ducato name plate in Brazil. One of our longer-term strategic objectives is to capitalize on opportunities presented by the Fiat-Chrysler Alliance, and we intend to actively pursue growth opportunities in a number of markets outside North America. To the extent that we seek to leverage Fiat’s international network and reach, we may have conflicts with Fiat as to the appropriate allocation of risks and benefits of growing in international markets. On the other hand, if we seek to expand internationally on our own, we may be unable to profitably capitalize on opportunities that may arise in light of the significant capital requirements and other risks of expanding internationally, particularly from a low base.

Expanding our operations and vehicle sales internationally may subject us to additional regulatory requirements and cultural, political and economic challenges, including the following:

 

    securing relationships to help establish our presence in local markets, including distribution and vehicle finance relationships;

 

    hiring and training personnel capable of marketing our vehicles, supporting dealers and retail customers, and managing operations in local jurisdictions;

 

    identifying and training qualified service technicians to maintain our vehicles, and ensuring that they have timely access to diagnostic tools and parts;

 

    localizing our vehicles to target the specific needs and preferences of local consumers, including with respect to vehicle safety, fuel economy and emissions, which may differ from our traditional retail customer base in North America;

 

    implementing new systems, procedures and controls to monitor our operations in new markets;

 

    multiple, changing and often inconsistent enforcement of laws and regulations;

 

    satisfying local regulatory requirements, including those for vehicle safety, content, fuel economy or emissions;

 

    competition from existing market participants that have a longer history in, and greater familiarity with, the local markets we enter;

 

    differing labor regulations and union relationships;

 

    consequences from changes in tax laws;

 

    tariffs and trade barriers;

 

    laws and business practices that favor local competitors;

 

    anti-corruption and anti-bribery laws;

 

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    fluctuations in currency exchange rates;

 

    extended payment terms and the ability to collect accounts receivable;

 

    imposition of limitations on conversion of foreign currencies into U.S. dollars, or USD, or remittance of dividends and other payments by foreign subsidiaries; and

 

    changes in a specific country’s or region’s political or economic conditions.

For example, the Venezuelan legislature has recently approved a law, which is awaiting final enactment and publication, that imposes price controls on new and used vehicles in an attempt to slow inflation. Once enacted, the new law would make it unlawful to sell a new or used vehicle above the maximum price set for such vehicle by the Venezuelan government. In addition to the limitation on our ability to access and transfer liquidity out of Venezuela as a result of certain Venezuelan foreign currency exchange regulation, see —Laws, regulations or governmental policies in foreign countries may limit our ability to access our own funds, below, such cap on vehicle prices and the general economic and political instability in Venezuela may significantly limit our ability to continue our existing operations in Venezuela.

Moreover, for the past several years, sustained economic weakness in several European countries has slowed our plans to sell more vehicles through the Fiat dealer network in that region.

If we fail to address these challenges and other risks associated with international expansion, we may encounter difficulties implementing our strategy, which could impede our growth or harm our operating results.

Meeting our objective of increasing our vehicle sales outside North America is largely dependent upon access to Fiat’s network of distribution arrangements, manufacturing capacity and local alliance partners.

We are heavily focused on North America and have not yet been able to establish any significant presence in some of the fastest growing automotive markets, specifically China, India and Brazil. To capitalize on growth opportunities in markets outside North America profitably, we will likely need to leverage Fiat’s infrastructure of distribution arrangements, manufacturing facilities and local alliance partners because the alternative of developing our own infrastructure would be time consuming, capital intensive, inefficient and risk prone.

Our international growth ambitions may conflict with Fiat’s interests in the regions in which we may wish to increase sales, particularly in Latin America where Fiat has a history of successful operations and in other emerging markets, such as China, where Fiat has invested significant resources to develop local infrastructure and alliance partners to facilitate its own successful product launches.

Fiat may seek to recoup some of its historic investment in developing these markets in connection with providing us access to Fiat’s infrastructure or relationships in these international markets which may make our efforts to increase sales in these regions less profitable. We may also be unable to successfully implement our international growth strategy alongside Fiat on terms that do not disproportionately benefit Fiat.

Our future success depends on our continued ability to introduce new and refreshed vehicles that appeal to a wide base of consumers and to respond to changing consumer preferences, quality demands, economic conditions, and government regulations. In addition, we must continue to successfully and timely execute our ambitious launch program designed to substantially refresh and expand our vehicle portfolio, to realize a return on the significant investments we have made, to sustain market share and to achieve competitive operating margins.

Until 2011, our vehicle portfolio had fewer new or significantly refreshed vehicle models than many of our competitors, largely due to capital constraints experienced by Old Carco over the period from 2007 to 2009 and in the years immediately preceding that period. Our relative lack of new or significantly refreshed product offerings during this period continues to have an adverse effect on our vehicle sales, market share, average

 

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selling price and profitability. Until the launch of the Dodge Dart in 2012, we did not have an entry in the compact sedan segment, which is the second largest vehicle segment in the U.S. In addition, we did not have competitive entries in either the mid-size sedan segment (the largest segment in the U.S.) or mid-size sport utility vehicle, or SUV, segment (the largest SUV segment in the U.S.). Since we began operations in mid-2009, we have significantly upgraded, updated and broadened our product offerings to meet consumers’ changing demands and expectations as described in detail under Business Chrysler Overview —Products. In order to meet these goals, we invested heavily in vehicle, engine and powertrain design, engineering and manufacturing. These investments have accelerated in 2012 and the first half of 2013, reducing our Free Cash Flow significantly. Our ability to realize acceptable returns on these investments will depend in large part on consumers’ acceptance of our new or significantly refreshed vehicles, as well as our ability to timely complete the aggressive launch schedule we have planned without sacrificing quality. See —Vehicle defects may delay vehicle launches, or increase our warranty costs, below. For a description of our Free Cash Flow, see Management’s Discussion and Analysis of Financial Condition and Results of OperationsNon-GAAP Financial Measures.

We undertake significant market research and testing prior to developing and launching new or significantly refreshed vehicles. Nevertheless, market acceptance of our products depends on a number of factors, many of which are outside of our control and require us to anticipate consumer preferences and competitive products several years in advance. These factors include the market perception of styling, safety, reliability, capability and cost of ownership of our vehicles as compared to those of our competitors, as well as other factors that affect demand, including price competition and financing or lease programs. If we fail to continue to introduce new and/or significantly refreshed vehicles that can compete successfully in the market, or if we fail to successfully reduce our concentration in vehicle segments with declining consumer preferences, our financial condition and results of operations could deteriorate.

Competition has traditionally been intense in the automotive industry and has intensified further in recent years, including in the utility vehicle, minivan and truck segments that historically have represented most of our U.S. vehicle sales. For 2012 and the six months ended June 30, 2013, these segments accounted for approximately 70 percent and 65 percent, respectively, of our vehicle sales in the U.S. whereas, for the overall U.S. market, utility vehicle, minivan and truck sales accounted for only about 52 percent and 53 percent, respectively. In prior years, our competitors had been successful in introducing new vehicles in these segments that have taken market share away from us. At times, consumer preference has shifted away from these vehicles, many of which have relatively low fuel economy, due to elevated fuel prices, environmental concerns, economic conditions, governmental actions or incentives, and other reasons, adversely affecting our overall market share and profitability. Despite our heavy cadence of new vehicle introductions since mid-2009, we still have fewer competitive passenger cars and utility vehicles, particularly smaller, fuel-efficient vehicles, than our competitors. Therefore, a return to higher fuel prices, continued volatility in fuel prices or fuel shortages, particularly in the U.S. could have a disproportionate effect on our vehicle sales as compared to our competitors.

If our new or significantly refreshed products are not received favorably by consumers, our vehicle sales, market share and profitability will suffer. If we are required to cut capital expenditures due to insufficient vehicle sales and profitability or if we decide to reduce costs and conserve cash, our ability to continue our program of improving and updating our vehicle portfolio and keeping pace with product and technological innovations introduced by our competitors will be diminished, which may further reduce demand for our vehicles.

Product development cycles can be lengthy, and there is no assurance that new designs will lead to revenues from vehicle sales, or that we will be able to accurately forecast demand for our vehicles, potentially leading to inefficient use of our production capacity, which could harm our business.

It generally takes two years or more to design and develop a new product, and there may be a number of factors that could lengthen that schedule. Because of this product development cycle and the various elements that may contribute to consumers’ acceptance of new vehicle designs, including competitors’ product introductions, fuel prices, general economic conditions, changes in perceptions about our brands’ images and changes in styling preferences, we cannot be certain that an initial product concept or design that appears to be attractive will result

 

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in a production model that will generate sales in sufficient quantities and at high enough prices to be profitable. If our designs do not result in the development of products that are accepted in the market, our financial condition and results of operations may be adversely affected. Additionally, our high proportion of fixed costs, both due to our significant investment in property, plant and equipment as well as the requirements of our collective bargaining agreements, which limit our flexibility in quickly calibrating personnel costs to changes in demand for our products, further exacerbate the risks associated with incorrectly assessing demand for our vehicles.

The North American automotive industry has undergone substantial restructuring over the past several years, resulting in widespread consolidation among vehicle manufacturers and suppliers. This restructuring was aimed largely at reducing the substantial excess capacity that existed throughout the automotive supply chain prior to 2009. While the industry’s successful reduction in capacity has lowered break-even production rates, many companies are still adjusting to these changes and have limited access to capital. Accordingly, there is currently little available capacity for certain materials, parts and components to respond in the short term to an unanticipated increase in demand. For the past three years, we have encountered challenges in our operations with:

 

    Our ability to rapidly increase production levels inhibited by our suppliers’ inability to provide greater than forecasted volumes of raw materials and components, and those suppliers’ inability to increase their own production rapidly enough to meet our demand, particularly in light of our industry’s focus on just-in-time inventory systems;

 

    Launch delays for certain of our vehicles, particularly the Jeep Grand Cherokee, Ram Heavy Duty and Jeep Cherokee in 2013, partially due to our plants and suppliers operating at or in excess of full capacity, causing lost production compared to our original planning assumptions; and

 

    Increased costs due to employee overtime, expedited procurement of raw materials and parts, component banking costs, and other expenditures, all of which have driven up costs for manufacturing and logistics and, which, if not addressed, may further impact our profitability over the long term.

These rapid increases in manufacturing volumes may also adversely affect our manufacturing quality, partly due to the challenge of hiring, training and overseeing a growing workforce. Such downturns in quality could delay production and deliveries, or could generate product recalls and warranty claims. These results could reduce our margins and adversely impact consumer satisfaction. In addition, we may not be able to properly repair or maintain our equipment in these conditions, which could cause us to lose valuable manufacturing capability in the long run.

If, on the other hand, demand does not develop as we forecast, we could have excess inventory, and we may need to increase sales incentives to sell off inventory, and/or take impairments or other charges. Furthermore, increases in manufacturing volumes to meet forecasted demand may require increases in fixed and other costs, and without a corresponding increase in vehicle sales, our profitability and cash flow could decline. Lower than forecasted demand could also result in excess manufacturing capacity and reduced manufacturing efficiencies, which could reduce margins and profitability.

Constraints on our ability to increase production capacity using our existing manufacturing facilities may limit our vehicle sales and growth opportunities without significant capital expenditures to increase our manufacturing capacity.

Our ability to increase vehicle sales depends on our manufacturing facilities’ capacity to meet demand for our vehicles. If we are not able to adjust our manufacturing capacity to meet rising demand for our products, our prospects for growth and our operating results will be adversely affected. In 2012, our North American assembly manufacturing facilities were operating, on average, at 106 percent of Harbour capacity (the capacity of two eight-hour shifts a day for 235 workdays per year, a common manufacturing metric of productivity) and some of our manufacturing facilities have already reached their maximum production capacity (three shifts or crews and maximum overtime). In the future, we may only be able to increase our vehicle output for certain vehicles by making significant capital investments in new or expanded manufacturing facilities, or by relying on available

 

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manufacturing capacity of other parties—including Fiat— however our ability to use such manufacturing capacity of other parties is dependent on such other parties having open capacity that they do not have plans to utilize, and is also dependent on our ability to reach agreement with such parties on commercial terms and conditions, including economics, for the use of such manufacturing capacity.

Our ability to achieve cost reductions and to realize production efficiencies is critical to maintaining our competitiveness and long-term profitability.

We are continuing to implement a number of cost reduction and productivity improvement initiatives in our automotive operations, through the Fiat-Chrysler Alliance and otherwise, including, for example, increasing the number of our vehicles that are based on common platforms, reducing our dependence on sales incentives offered to dealers and consumers, leveraging our purchasing capacity and volumes with Fiat’s and implementing World Class Manufacturing, or WCM, principles. Our future success depends upon our ability to implement these initiatives throughout our operations. In addition, while some of the productivity improvements are within our control, others depend on external factors, such as commodity prices, supply capacity limitations, or trade regulation. These external factors may impair our ability to reduce our costs as planned, and we may sustain larger than expected production expenses, materially affecting our business and results of operations. Furthermore, reducing costs may prove difficult due to our focus on introducing new and improved products in order to meet consumer expectations.

The automotive industry is highly competitive. Our competitors’ efforts to increase their share of vehicle sales could have a significant negative impact on our vehicle pricing, market share and operating results.

The automotive industry is highly competitive, particularly in the U.S., our primary market. Our competitors, particularly those who are better capitalized, with larger market shares and with captive finance companies, may respond to negative market conditions by not only adding vehicle enhancements and offering option package discounts to make their vehicles more attractive but also providing subsidized financing or leasing programs, offering price rebates or other sales incentives or by reducing vehicle prices in certain markets. We may not be able to take similar actions or be able to sustain such actions without significantly eroding our margins and financial performance even if we are able to maintain market share. In addition, manufacturers in countries such as China and India, which have lower production costs, have announced that they intend to export lower-cost automobiles to established markets, including North America. With excess manufacturing capacity growing in Europe, historically higher-priced, desirable vehicles from that region may become available for sale in North America at lower prices. These actions have had, and are expected to continue to have, a significant negative impact on our vehicle pricing, market share, and operating results, and present a significant risk to our ability to improve or even maintain our average selling price per vehicle.

Offering desirable vehicles that appeal to consumers can mitigate the risks of increased price competition, but vehicles that are perceived to be less desirable, whether in terms of price, quality, styling, safety, fuel efficiency or other attributes, can exacerbate these risks.

Dealer sourcing and inventory management decisions could adversely affect sales of our vehicles and service parts.

We sell most of our vehicles and service parts through our dealer network. Our vehicle and service part sales depend on the willingness and ability of our dealer network to purchase vehicles and service parts for resale to consumers. Our dealers’ willingness and ability to make these purchases depends, in turn, on the rate of their retail vehicle sales, as well as the availability and cost of capital and financing necessary for dealers to acquire and hold inventories for resale. The dealers carry inventories of vehicles and service parts in their ongoing operations and they adjust those inventories based on their assessment of future sales prospects, their ability to obtain wholesale financing and other factors. Certain of our dealers may also carry products or operate separate dealerships that carry products of our competitors and may focus their inventory purchases and sales efforts on products of our competitors due to industry and product demand or profitability. These inventory and sourcing decisions can adversely impact our sales, financial condition and results of operations.

 

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Availability of adequate financing on competitive terms for our dealers and consumers is critical to our success. Our lack of a captive finance company could place us at a competitive disadvantage to competitors that have a captive finance company and therefore may be able to offer consumers and dealers financing and leasing on better terms than customers and dealers are able to obtain. In lieu of a captive finance company, we will depend on our relationship with SCUSA to supply a significant percentage of this financing, and we continue to depend on our former partner, Ally, as we transition to the new SCUSA relationship.

Our dealers enter into wholesale financing arrangements to purchase vehicles from us to hold in inventory to facilitate vehicle sales, and retail customers use a variety of finance and lease programs to acquire vehicles. Leasing volumes for our vehicles are significantly below market levels. Our inability to offer competitive leases may negatively impact our vehicle sales volumes and market share. Our results of operations therefore depend on establishing and maintaining appropriate sources of financing for our dealers and retail customers.

Unlike most of our competitors who operate and control affiliated finance companies, we do not have a finance company dedicated solely to our operations. Our competitors with dedicated or wholly-owned finance companies may be better able to implement financing programs designed principally to maximize vehicle sales in a manner that optimizes profitability for them and their finance companies on an aggregate basis, including with respect to the amount and terms of the financing provided. If such competitors offer retail customers and dealers financing and leasing on better terms than our dealers are able to obtain, consumers may be more inclined to purchase or lease our competitors’ vehicles and our competitors’ dealers may be better able to stock our competitors’ products, each of which could adversely affect our results of operations. In addition, unless financing arrangements other than for retail purchase continue to be developed and offered by banks to retail customers in Canada, our lack of a captive finance company could present a competitive disadvantage in Canada, since banks are restricted by law from providing retail lease financing in Canada.

On May 1, 2013, Santander Consumer USA Inc., or SCUSA, began serving as our private-label financing provider under the Chrysler Capital brand name and managing retail and wholesale financing needs for our dealers and retail customers following the termination of our relationship with Ally Financial Inc., or Ally, in April 2013. Our decision to transition our financing services relationship to SCUSA and to develop a private-label financing solution subjects us to significant risks, particularly in the short term as SCUSA ramps up its operations to serve the financing needs of our dealers and retail customers. If SCUSA is unable to timely provide an acceptable level of service including response time, approval rates and a full range of competitive financing products at competitive rates, our vehicle sales may suffer. As of June 30, 2013, SCUSA was providing wholesale lines of credit to less than one percent of our dealers in the U.S. and as of December 31, 2012, Ally was providing wholesale lines of credit to approximately 51 percent of our dealers in the U.S. Ally has continued to provide dealer financing since the termination of our relationship with them, though they are no longer obligated to provide such financing.

Any financing services provider, including SCUSA, will face other demands on its capital, including the need or desire to satisfy funding requirements for dealers or customers of our competitors as well as liquidity issues relating to other investments. Furthermore, SCUSA is highly dependent on its relationship with Banco Santander, S.A. for funding. Also, because SCUSA is not a depository institution, SCUSA does not have access to low cost insured deposit funding, but is subject to certain state licensing regimes and various operational compliance requirements that lenders who are depository institutions do not face. SCUSA is sensitive to regulatory changes that may increase its costs through stricter regulations or increased fees pursuant to such regulations. If SCUSA fails to adequately comply with regulations, or faces a significant increase in compliance costs or fees, SCUSA’s ability to provide competitive financing products to our dealers and retail customers may suffer. Further, in September 2013, Ally sued SCUSA alleging breaches of copyright and misappropriation of trade secrets in connection with SCUSA’s entry into the arrangement with us and provision of financing solutions to our dealers and retail customers. This litigation is pending in federal court. There can be no assurances that an outcome that is adverse to SCUSA would not affect SCUSA’s ability to provide services contemplated by our agreement. Therefore, SCUSA may not have the capital and liquidity necessary to support our vehicle sales, and even with sufficient capital and liquidity, they may apply lending criteria in a manner that will adversely affect our vehicle sales.

 

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Additionally, a relatively high percentage of the customers who seek financing may not qualify for conventional automotive finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. If interest rates increase substantially or if financing service providers, including SCUSA, tighten their lending standards or restrict their lending to certain classes of credit, consumers may not be able to obtain financing to purchase or lease our vehicles.

To the extent that either SCUSA is unable or unwilling to provide sufficient financing at competitive rates to our dealers and consumers, or we encounter challenges in our transition from Ally to Chrysler Capital, our dealers and consumers may not have sufficient access to such financing. As a result, our vehicle sales and market share may suffer, which would adversely affect our financial condition and results of operations.

Vehicle sales depend heavily on adequacy of vehicle financing options, which have been at historically low interest rates. To the extent that interest rates for vehicle financing rise, consumers may be unable to afford vehicles as a result of higher interest payments, or we may need to increase our use of subvention programs to maintain or increase our vehicle sales, either of which would adversely affect our financial condition and results of operations.

Financing for new vehicle sales has been available at relatively low rates for several years and rates are generally predicted to rise over the next several years. The low interest rates available to consumers to finance vehicles have resulted in lower monthly payments for such vehicles. Our agreement with SCUSA provides that SCUSA will use best efforts to charge consumers interest rates that are competitive in the market place. To the extent that interest rates rise generally in the U.S., market rates for new vehicle financing are expected to rise as well. This would result in consumers paying a higher monthly payment for the same amount financed, which may decrease the number of vehicles that consumers are able to afford or steer consumers to less expensive vehicles, adversely affecting our financial condition and results of operations. Furthermore, because many of our customers have relatively low credit scores and may therefore be more sensitive to changes in the availability and adequacy of financing and macroeconomic conditions than more affluent customers, our vehicle sales may be disproportionately affected by changes in financing conditions relative to the vehicle sales of our competitors.

Alternatively, in order to maintain our vehicle sales, we may be required to enter into additional subvention programs under our private-label financing agreement with SCUSA, or the SCUSA Agreement, or increase the amount of interest rates we subsidize in our subvention programs. See Business —Chrysler Overview —Dealer and Customer Financing for a description of the practice of subvention. In the case of subvention programs, we subsidize interest rates or cash payments at the inception of a financing arrangement. In the event we added additional subvention programs or increased the amount of the subsidy on any subvention program in order to keep the rates paid by our customers in line with current rates following a rise in market interest rates, our payments to SCUSA would increase under the terms of the SCUSA Agreement, which would adversely affect our financial condition and results of operations.

Our business plan depends, in part, on reducing the extent to which we depend on dealer and retail incentives to sell vehicles, and our ability to modify these market practices is uncertain.

The intense competition and limited ability to reduce fixed costs that characterize the automotive industry has in many cases resulted in significant over-production of vehicles. These factors, together with significant excess manufacturing capacity, have driven manufacturers, including us, to rely heavily on sales incentives to drive vehicle sales. These incentives have included both dealer incentives, typically in the form of dealer rebates or volume-based awards, as well as retail incentives in a variety of forms, including subsidized financing, price rebates and other incentives. As part of the 2010-2014 Business Plan, we are attempting to reduce our reliance on incentives, which might negatively affect our sales volumes. However, we expect the impact of any reduction in vehicle sales to be offset by improved and more predictable pricing and margins on vehicle sales. If, despite our efforts, we are unable to reduce our reliance on short-term sales incentives, and maintain price discipline, our financial condition and results of operations may be adversely affected.

 

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Vehicle defects may delay vehicle launches, or increase our warranty costs.

Manufacturers are required to remedy defects related to motor vehicle safety and to emissions through recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with an applicable Federal Motor Vehicle Safety Standard, or FMVSS. In addition, if we determine that a safety or emissions defect or a non-compliance exists with respect to certain of our vehicles prior to the start of production, the launch of such vehicle could be delayed until we remedy the defect or non-compliance. The costs associated with any protracted delay in new model launches necessary to remedy such defect, and the cost of providing a free remedy for such defects or non-compliance in vehicles that have been sold, could be substantial. Additionally, potential issues relating to our use of new powertrain technology in certain of our new vehicles may create delays, and the cost of remedying defects in engines and transmissions can be substantial. We are also obligated under the terms of our warranty to make repairs or replace parts in our vehicles at our expense for a specified period of time. Therefore, any failure rate that exceeds our expectations may result in unanticipated losses. Furthermore, an integral part of the 2010-2014 Business Plan is the continued refresh and growth of our vehicle portfolio, and we have committed significant capital and resources toward an aggressive launch program of completely new vehicles—on all new platforms, with additions of new powertrain and transmission technology. This is in contrast to many of our competitors with a more diverse and updated portfolio and makes us comparatively more vulnerable to launch delays. See —Our future success depends on our continued ability to introduce new and refreshed vehicles that appeal to a wide base of consumers and to respond to changing consumer preferences, quality demands, economic conditions, and government regulations. In addition, we must continue to successfully and timely execute our ambitious launch program designed to substantially refresh and expand our vehicle portfolio, to realize a return on the significant investments we have made, to sustain market share and to achieve competitive operating margins, above.

Product recalls may result in direct costs and loss of vehicle sales that could have material adverse effects on our business.

From time to time, we have been required to recall vehicles to address performance, compliance or safety-related issues. The costs we incur to recall vehicles typically include the cost of the new remedy parts and labor to remove and replace the problem parts, and may substantially depend on the nature of the remedy and the number of vehicles affected. Product recalls also harm our reputation and may cause consumers to question the safety or reliability of our products. For example, we estimate that we will incur costs of $151 million in connection with a voluntary safety recall for the 1993-1998 Jeep Grand Cherokee and the 2002-2007 Jeep Liberty and a customer satisfaction action for the 1999-2004 Jeep Grand Cherokee, both of which we initiated following a recall request from NHTSA related to the risk of fuel tank fire from rear impact collisions. NHTSA originally requested the recall for the 1993-2004 Jeep Grand Cherokee and the 2002-2007 Jeep Liberty, a total of approximately 2.7 million vehicles, which would have resulted in a much larger cost to the Company. NHTSA’s investigation into this matter remains open at this time and we cannot predict the time it will take for NHTSA to fully evaluate the data we provided in response to its initial recall request before closing the investigation nor whether NHTSA will issue further requests for remediation, which could further harm our reputation and result in additional direct costs.

Any costs incurred, or lost vehicle sales, resulting from product recalls could materially adversely affect our business. Moreover, if we face consumer complaints, or we receive information from vehicle rating services that calls into question the safety or reliability of one of our vehicles and we do not issue a recall, or if we do not do so on a timely basis, our reputation may also be harmed and we may lose future vehicle sales.

If our suppliers fail to provide us with the raw materials, systems, components and parts that we need to manufacture our automotive products, our operations may be disrupted which would have a material adverse effect on our business.

Our business depends on a significant number of suppliers, which provide the raw materials, components, parts and systems we require to manufacture vehicles and parts and to operate our business. We use a variety of raw materials in our business including steel, aluminum, lead, resin and copper, and precious metals such as

 

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platinum, palladium and rhodium. The prices for these raw materials often fluctuate. We seek to manage this exposure, but we may not always be successful in hedging these risks. See —We may be adversely affected by fluctuations in foreign currency exchange rates, commodity prices, or interest rates, below. Substantial increases in the prices for our raw materials increase our operating costs and could reduce our profitability if we cannot recoup the increased costs through increased vehicle prices or offset the impact with productivity gains. In addition, raw materials are sourced from a limited number of suppliers and from a limited number of countries. We cannot guarantee that we will be able to maintain arrangements with these suppliers and ensure our access to these raw materials, and in some cases this access may be affected by factors outside of our control and the control of our suppliers. For instance, in 2012, the industry wide increase in sales of vehicles in the U.S. caused some constraints in tire supply.

As with raw materials, we are also at risk for supply disruption and shortages in parts and components for use in our vehicles for many reasons including, but not limited to tight credit markets or other financial distress, natural or man-made disasters, or production difficulties. We will continue to work with our suppliers to monitor potential shortages and to mitigate the effects of any emerging shortages on our production volumes and revenues; however, there can be no assurances that these events will not have an adverse effect on our production in the future, and any such effect may be material.

Moreover, we rely on specific suppliers to provide certain components, parts and systems that are required to manufacture our vehicles, and in most circumstances we rely exclusively on one such supplier. Over the past several years, we have worked to reduce or eliminate our dependence on certain suppliers that we believed were financially at risk; however, this has increased our dependence on, and the concentration of our credit risk, to our remaining suppliers. As volumes increase throughout the industry, some of our suppliers must make capital investments to keep pace with demand. Due to the long lead times for such investment, if our suppliers delay in making such investments or do not have sufficient access to capital, that could limit the ability of such suppliers to meet our full demands. Further, if our suppliers seek to increase prices to offset these capital investments, and we are unable to capture those additional costs through pricing on our vehicles, or counter with productivity gains, this may result in an impact on our profitability.

At the same time, many of our suppliers located in Europe, or whose customers are concentrated in Europe, are currently experiencing financial difficulties similar to those in North America between 2008 and 2010 due to the combination of general economic weakness, sharply declining vehicle sales and tightened credit availability in the region. When key suppliers on which we depend have experienced financial difficulties in the past, they often sought to increase prices, accelerate payments or seek other relief. Some of those suppliers have ceased doing business or sought bankruptcy court protection. Any such actions would likely increase our costs, impair our ability to meet design and quality objectives and in some cases make it difficult or impossible for us to produce certain vehicles. We may take steps to assist key suppliers to remain in business and maintain operations, but this would require us to divert capital from other needs and adversely affect our liquidity. It may also be difficult to find a replacement supplier without significant delay.

Any interruption in the supply or any increase in the cost of raw materials, parts, components and systems could negatively impact our ability to achieve our vehicle sales objectives and profitability. Long-term interruptions in supply of raw materials, parts, components and systems may result in a material impact on vehicle production, vehicle sales objectives, and profitability. Cost increases which cannot be recouped through increases in vehicle prices, or countered by productivity gains, may result in a material impact on profitability.

From time to time we enter into supply arrangements that commit us to purchase minimum or fixed quantities of certain parts or materials, or to pay a minimum amount to a supplier, or “take-or-pay” contracts, through which we may incur costs that cannot be recouped by vehicles sales, increases in prices for vehicles, or countered by productivity gains.

From time to time, we enter into supply contracts that require us to purchase a minimum or fixed quantity of parts, components, or raw materials to be used in the production of our vehicles. If our need for any of these parts, components, or raw materials were to lessen, we would still be required to purchase a specified quantity of

 

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the part, component, or raw materials or pay a penalty for failure to meet the minimum purchase obligation. Additionally, we have changed the way in which we do business with certain key suppliers by paying separately and as work is completed for engineering, design and development costs, rather than embedding these costs in production component or materials pricing. We believe that this shift will help financially stabilize our suppliers, help find cost efficiency through better transparency, help ensure security of supply and encourage supplier investment in our business. However, as a result, we will now bear certain of the costs of new product development years before we will realize any revenue on that new product, which reduces our liquidity. In the event that part or component production volumes are lower than forecast, or a supplier does not meet its supply obligations, we may experience financial losses that we would not otherwise have incurred under the prior payment system.

Limitations on our liquidity and access to funding may limit our ability to execute our business plan and improve our financial condition and results of operations.

Our business is capital intensive and we require significant liquidity to support the 2010-2014 Business Plan and meet other funding requirements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources for a more detailed discussion of our liquidity and capital requirements. In addition, during periods of vehicle sales decreases, our cash flow and liquidity may be significantly negatively impacted because we typically receive revenues from vehicle sales before we are required to pay our suppliers. Any limitations on our liquidity, due to decreases in vehicle sales, the amount of or restrictions in our existing indebtedness, conditions in the credit markets, general economic conditions or otherwise, may adversely impact our ability to execute the 2010-2014 Business Plan and improve our business prospects, financial condition and results of operations. In addition, any actual or perceived limitations of our liquidity may limit the ability or willingness of counterparties, including dealers, consumers, suppliers and financial service providers, to do business with us, which may adversely affect our business, financial condition and results of operations.

Further, our operations have become significantly intertwined with those of Fiat, and we rely heavily upon Fiat directly and indirectly for an array of services and products. Limitations on Fiat’s liquidity, which may be due to reduced sales of their vehicles, the amount of or restrictions in their existing indebtedness, conditions in the credit markets, general economic conditions or otherwise, could reduce Fiat’s ability to provide these services and products to us or purchase goods or services as part of a joint procurement arrangement, which could jeopardize the benefits of the Fiat-Chrysler Alliance and have a material adverse effect on our business, financial condition and results of operations. In addition, FNA LLC has entered into financing arrangements with Fiat Finance North America Inc., or FFNA, a subsidiary of Fiat. We cannot guarantee that such facilities will remain available to us in the future. Refer to Management’s Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesFiat Finance North America Inc. Credit Facilities, for additional information related to these financing arrangements.

Our defined benefit pension plans are currently underfunded and our pension funding obligation could increase significantly due to a reduction in funded status as a result of a variety of factors, including weak performance of financial markets, investment risks inherent in our investment portfolio, and unanticipated changes in interest rates resulting in a decrease in the value of certain plan assets or increase in the present value of plan obligations, which could have a material adverse effect on our business, financial condition and results of operations.

Our defined benefit pension plans are currently underfunded. At the end of 2012, our defined benefit pension plans were underfunded by approximately $8.9 billion. Our pension funding obligations may increase significantly if investment performance of plan assets does not keep pace with our benefit payment obligations and we do not make additional contributions to offset these impacts. See Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources —Defined Benefit Pension Plans and OPEB Plans —Contributions and Funded Status —Defined Benefit Pension Plans —Funded Status, and —Critical Accounting Estimates —Pension.

 

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Mandatory funding obligations may increase based upon lower than anticipated returns on plan assets whether as a result of overall weak market performance or particular investment decisions, changes in the level of interest rates used to determine required funding levels, changes in the level of benefits provided for by the plans, and any changes in applicable law related to funding requirements.

Our defined benefit pension plans currently hold significant investments in equity and fixed income securities, as well as investments in less liquid instruments such as private equity, real estate and certain hedge funds. Due to the complexity and magnitude of certain of our investments, additional risks may exist, including significant changes in investment policy, insufficient market capacity to complete a particular investment strategy and an inherent divergence in objectives between the ability to manage risk in the short term and our ability to quickly rebalance illiquid and long-term investments.

To determine the appropriate level of funding and contributions to our defined benefit pension plans, as well as the investment strategy for the plans, we are required to make various assumptions, including an expected rate of return on plan assets and a discount rate used to measure the obligations under our defined benefit pension plans. Interest rate increases generally will result in a decline in the value of investments in fixed income securities and the present value of the obligations. Conversely, interest rate decreases will generally increase the value of investments in fixed income securities and the present value of the obligations. We are required to re-measure our discount rate annually and did so at December 31, 2012, with the result that our pension obligations increased. During the second quarter of 2013, we made changes to our U.S. and Canadian salaried defined benefit pension plans that reduced our pension obligations by $218 million. These changes were made primarily to comply with Internal Revenue Service, or IRS, regulations for the U.S. salaried defined benefit plans. Any reduction in investment returns or the value of plan assets or any increase in the present value of obligations may increase our pension expenses and required contributions, and as a result constrain our liquidity and materially adversely affect our financial condition and results of operations. If we fail to make required minimum funding contributions, we could be subjected to reportable event disclosure to the Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount of any funding deficiency.

We may be adversely affected by fluctuations in foreign currency exchange rates, commodity prices, or interest rates.

Our manufacturing and sales operations are exposed to a variety of market risks, including the effects of changes in foreign currency exchange rates, commodity prices and interest rates. We monitor and manage these exposures as an integral part of our overall risk management program, which is designed to reduce the potentially adverse effects of these fluctuations. Nevertheless, changes in these market indicators cannot always be predicted or hedged. In addition, because of intense price competition, our significant fixed costs and our financial and liquidity restrictions, we may not be able to minimize the impact of such changes, even if they are foreseeable. As a result, substantial unfavorable changes in foreign currency exchange rates, commodity prices or interest rates could have a material adverse effect on our revenues, financial condition and results of operations.

Laws, regulations or governmental policies in foreign countries may limit our ability to access our own funds.

When we sell vehicles in countries other than the U.S., we are subject to various laws, regulations and policies regarding the exchange and transfer of funds back to the U.S. In rare cases, we may be limited in our ability to transfer some or all of our funds for unpredictable periods of time. In addition, the local currency of a country may be devalued as a result of adjustments to the official exchange rate made by the government with little or no notice. For instance, we are subject to the rules and regulations of the Venezuelan government concerning our ability to exchange cash or marketable securities denominated in Venezuelan bolivar, or VEF, into USD. Under these regulations, the purchase and sale of foreign currency must be made through the Commission for the Administration of Foreign Exchange, or CADIVI, at official rates of exchange and subject to volume restrictions. These factors limit our ability to access and transfer liquidity out of Venezuela to meet demands in other countries and also subject us to increased risk of devaluation or other foreign exchange losses. On December 30, 2010, the Venezuelan government announced an adjustment to the official CADIVI exchange rate, which

 

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resulted in a devaluation of our VEF denominated balances as of December 31, 2010. The Venezuelan government announced a further devaluation of the VEF relative to the USD, effective February 13, 2013, which resulted in a further devaluation of our VEF denominated balances.

Our substantial indebtedness could adversely affect our financial condition, our cash flow, our ability to operate our business and could prevent us from fulfilling our obligations under the terms of our indebtedness.

We have a substantial amount of indebtedness. As of June 30, 2013, our total debt, including the debt of our subsidiaries, was $13.7 billion (based on the outstanding principal balance of such indebtedness), excluding undrawn commitments of $1.3 billion under our revolving credit facility, or Revolving Facility. Despite our substantial amount of indebtedness, we may be able to incur significant additional debt, including secured and unsecured debt, in the future. Although restrictions on the incurrence of additional debt are contained in the terms of our $4.3 billion senior secured credit agreement, which includes a tranche B term loan (of which $2.9 billion was outstanding as of June 30, 2013), or Tranche B Term Loan, and the Revolving Facility, collectively referred to as the Senior Credit Facilities, in the indenture governing the secured senior notes due in 2019 and 2021 totaling $3.2 billion (which restricts only secured debt), or the Secured Senior Notes, in the indenture governing our senior unsecured note issued to the VEBA Trust with a face value of $4,587 million, or the VEBA Trust Note, and in our other financing arrangements, these restrictions are subject to a number of qualifications and exceptions. See Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources. The more leveraged we become, the more we are exposed to the further risks associated with substantial leverage described below.

Our debt levels and financing agreements could have significant negative consequences, including, but not limited to:

 

    making it more difficult to satisfy our obligations, including our obligations with respect to the Senior Credit Facilities and the Secured Senior Notes;

 

    diminishing our future earnings;

 

    limiting our ability to obtain additional financing;

 

    requiring us to issue debt or raise equity or to sell some of our principal assets, possibly on unfavorable terms, to meet debt payment obligations;

 

    exposing us to risks that are inherent in interest rate and currency fluctuations because certain of our indebtedness bears variable rates of interest and is in various currencies;

 

    subjecting us to financial and other restrictive covenants, and if we fail to comply with these covenants and that failure is not waived or cured, could result in an event of default under our indebtedness;

 

    requiring us to devote a substantial portion of our available cash and cash flow to make interest and principal payments on our debt, thereby reducing the amount of cash available for other purposes, including for vehicle design and engineering, manufacturing improvements, other capital expenditures and other general corporate uses;

 

    limiting our financial and operating flexibility in response to changing economic and competitive conditions or exploiting strategic business opportunities; and

 

    placing us at a disadvantage compared to our competitors that have relatively less debt and may therefore be better positioned to invest in design, engineering and manufacturing improvements.

If our debt obligations materially hinder our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenues may decline and our operating results may suffer. If we do not have sufficient earnings to service our indebtedness, we may be required to refinance all or part of our indebtedness, sell assets, borrow more money or sell securities, which we may not be able to do on acceptable terms if at all.

 

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Our ability to generate sufficient cash flow from operations to make scheduled payments on our debt depends on our financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and to financial and business-related factors. Our ability to refinance obligations on acceptable terms under our debt depends on these economic and competitive conditions, as well as our credit ratings, which also may be beyond our control.

Additionally, we are significantly more leveraged than our principal competitors. This reduces our flexibility in accessing capital markets and may leave our competitors in a better position than us to deal with changing consumer demands, new and potentially burdensome regulations or a significant economic downturn, which may put us at a competitive disadvantage.

Restrictive covenants in the agreements governing our indebtedness could adversely affect our business by limiting our operating and strategic flexibility.

In connection with our debt refinancing on May 24, 2011, we entered into a $4.3 billion senior secured credit agreement, or the Original Credit Agreement, which includes the Tranche B Term Loan and Revolving Facility. We also issued the Secured Senior Notes. In June 2013, we amended and restated the Original Credit Agreement to lower applicable interest rates, among other things. The amendments to the Original Credit Agreement were given effect in the amended and restated credit agreement dated as of June 21, 2013, or the Credit Agreement. Our Credit Agreement and indenture governing the Secured Senior Notes, contain restrictive covenants that limit our ability to, among other things:

 

    incur or guarantee additional secured and unsecured indebtedness;

 

    pay dividends or make distributions or purchase or redeem capital stock;

 

    make certain other restricted payments;

 

    incur liens;

 

    sell assets;

 

    enter into sale and lease-back transactions;

 

    enter into transactions with affiliates; and

 

    effect a consolidation, amalgamation or merger.

These restrictive covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions, joint ventures or other corporate opportunities. In addition, the Credit Agreement requires us to maintain a minimum ratio of borrowing base to covered debt, as well as a minimum liquidity of $3.0 billion, which includes any undrawn amounts on the Revolving Facility. Also, the Credit Agreement, and the indentures governing the Secured Senior Notes and the VEBA Trust Note, may limit our ability and the ability of our subsidiaries to incur debt. See Management’s Discussion and Analysis of Financial Condition and Results of Operation —Liquidity and Capital Resources for a further description of our indebtedness. Any new financing may include additional, and potentially more burdensome, covenants and restrictions on our operations and financial flexibility. Moreover, if we are unable to comply with the terms applicable to our indebtedness, including all the covenants under the indenture governing the Secured Senior Notes, the terms of the Credit Agreement or any of our other indebtedness, we may be in default, which could result in cross-defaults under certain of our indebtedness and the acceleration of our outstanding indebtedness and foreclosure on our mortgaged properties. If acceleration occurs, we may not be able to repay our debt as it is unlikely that we would be able to borrow sufficient additional funds to refinance our debt. Even if new financing is made available to us in such circumstances, it may not be available on acceptable terms. Non-compliance with our debt covenants could have a material adverse effect on our business, financial condition and results of operations.

 

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Laws, regulations and governmental policies, including those regarding increased fuel economy requirements and reduced GHG emissions, may have a significant effect on how we do business and may adversely affect our results of operations.

In order to comply with government regulations related to fuel economy and emissions standards, we must devote significant financial and management resources, as well as vehicle engineering and design attention to these legal requirements. We expect the number and scope of these regulatory requirements, along with the costs associated with compliance, to increase significantly in the future. In the U.S., for example, governmental regulation is driven by a variety of sometimes conflicting concerns, including vehicle safety, fuel economy and environmental impact (including greenhouse gas emissions, or GHG emissions). Complying with these regulatory requirements despite competing policy goals could significantly affect our plans for product development, particularly our plans to further integrate product development with our industrial partner, Fiat, and may result in substantial costs, including civil penalties, if we are unable to comply fully. They may also limit the types of vehicles we produce and sell and where we sell them, which can affect our vehicle sales and revenues. These requirements may also limit the benefits of the Fiat-Chrysler Alliance, as we expend financial, vehicle design and engineering resources to the localization of Fiat vehicle platforms and adapt other Fiat technologies for use in our principal markets in North America, where Fiat has had a limited presence in recent years.

Among the most significant regulatory changes we face over the next several years are the heightened requirements for fuel economy and GHG emissions. CAFE provisions under EISA mandate that, by 2025, car and truck fleet-wide average fuel economy must be materially higher than that required today. In addition, as a result of the recent revelation that certain automakers’ reported fuel economy ratings were higher than EPA verification testing showed, EPA has increased its scrutiny of all automakers’ fuel economy claims. This increased scrutiny could have an effect on the fuel economy ratings of certain of our vehicles, which, in turn, could affect our consumer perception and sales, and our ability to meet our CAFE obligations in the long term.

The State of California, through the California Air Resources Board, or CARB, is implementing its own program to regulate vehicle emissions that would require even further improved fuel economy. This California program currently has standards established for the 2009 through 2016 model years. Some additional states and Canadian provinces have also adopted variations of the California emissions standards.

In May 2009, President Obama announced a goal of implementing harmonized federal standards for fuel economy and GHG emissions. EPA and NHTSA issued a joint final rule to implement this new federal program in May 2010. These standards apply to passenger cars, light-duty trucks, and medium-duty passenger vehicles built in model years 2012 through 2016, and CARB has agreed that compliance with these federal emissions standards will be deemed compliance with the California emissions standards for the 2012 through 2016 model years. In the absence of these rules, we would be subject to conflicting and in some cases more onerous requirements enacted by California and adopted by other states. Moreover, in August 2012, EPA and NHTSA issued a joint final rule increasing the emissions standards from 2017 through 2025, such that the car and truck fleet-wide average fuel economy must achieve 54.5 miles per gallon by 2025. As with the model year 2012-2016 rule, compliance with the joint rule will be deemed compliance with California emissions requirements. Implementation of this rule will require us to take costly design actions and implement vehicle technologies that may not appeal to consumers. In addition, if circumstances arise where CARB and EPA regulations regarding GHG emissions and fuel economy conflict, this too could require costly actions or limit the sale of certain of our vehicles in certain states. We could also be adversely affected if pending litigation by third parties outside of the automotive industry challenging EPA’s regulatory authority with respect to GHG emissions is successful and as a result, CARB were to enforce its own GHG emissions standards.

We are committed to meeting these new regulatory requirements. While we believe that our current product plan will meet the applicable federal and California GHG/fuel economy standards established through model year 2016, our compliance is dependent on our ability to purchase the ultra-low global warming potential refrigerant HFO1234yf, which would generate GHG credits pursuant to EPA’s GHG rule for model years 2012 through

 

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2016. Manufacturing delays and consequential product shortages outside of our control could threaten the supply of the refrigerant in sufficient volumes to meet our compliance needs. Moreover, our current vehicle technology cannot yield the improvement in fuel efficiency necessary to achieve compliance with the requirements of the proposed 2017-2025 joint rule, and certain regulatory provisions dictate that our fleet of vehicles must be combined with the fleet of vehicles from our industrial partners Fiat Group Automobiles and Maserati S.p.A. for GHG and CAFE purposes. These matters may cause additional strain on our ability to comply with those requirements. Even in the years leading up to 2016, we may not be able to develop appealing vehicles that comply with these requirements that can be sold at a competitive price. In addition, depending on the type and volume of our customers’ purchases, we may not be able to achieve the vehicle fleet mix that would enable us to meet the more stringent fuel economy requirements.

Canadian federal emissions regulations largely mirror the U.S. regulations.

The EU promulgated new passenger car carbon dioxide, or CO2, emissions regulations beginning in 2012. This directive sets an industry target for 2020 of a fleet average measured in grams per kilometer, with the requirements for each manufacturer calculated based on the average weight of vehicles across its fleet. In addition, some EU member states have adopted or are considering some form of CO2 based vehicle tax, which may affect consumer preferences for certain vehicles in unpredictable ways, and which could result in specific market requirements that are more stringent than the European Union, or EU, emissions standards.

Other countries are also developing or adopting new policies to address these issues. These policies could significantly affect our product development and international expansion plans and, if adopted in the form of new laws or regulations, could subject us to significant civil penalties or require that we modify our products to remain in compliance. Any such modifications may reduce the appeal of our vehicles to consumers.

Additionally, any new regulations could result in substantial increased costs, which we may be unable to pass through to consumers, and could limit the vehicles we design, manufacture and sell and the markets we can access. These changes could adversely affect our business, financial condition and results of operations. For example, pending litigation may prompt EPA to reexamine the use of selective catalyst reduction technology in diesel engines. Regulatory constraints on such use could adversely affect our ability to sell heavy-duty vehicles.

Safety standards set by regulatory authorities, as well as design, safety and quality ratings by widely accepted independent parties may have a significant negative effect on our costs and our vehicle sales.

Our vehicles must satisfy safety requirements that are developed and overseen by a variety of governmental bodies within the U.S. and in foreign countries. Our vehicles are also tested by independent vehicle rating programs such as the Insurance Institute for Highway Safety, or IIHS. In addition, independent ratings services such as Consumers Reports and J.D. Power perform reviews on safety, design and quality issues, which often influence consumers’ purchase decisions.

Meeting or exceeding government-mandated safety standards and improving independent safety, design and quality ratings can be difficult and costly. Often, safety requirements or desired quality and design attributes hinder our efforts to meet emissions and fuel economy standards, since the latter are often facilitated by reducing vehicle weight. The need to meet regulatory or other generally accepted rating standards can substantially increase costs for product development, testing and manufacturing, particularly if new requirements or testing standards are implemented in the middle of a product cycle, and the vehicle does not already meet the new requirements or standards.

To the extent that the ratings of independent parties are negative, or are below our competitors’ ratings, our vehicle sales may be negatively impacted.

 

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We are exposed to ongoing litigation and other legal and regulatory actions and risks in the ordinary course of our business, and we could incur significant liabilities and substantial legal fees.

In the ordinary course of business, we face a significant volume of litigation as well as other legal claims and proceedings and regulatory enforcement actions. The results of these legal proceedings cannot be predicted with certainty, and adverse results in current or future legal proceedings may materially harm our business, financial condition and results of operations, whether because of significant damage awards or injunctions or because of harm to our reputation and market perception of our vehicles and brands. We may incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings or that exceed any applicable insurance coverage.

Although we design and develop vehicles to comply with all applicable safety standards, compliance with governmental standards does not necessarily prevent individual or class action lawsuits, which can entail significant costs and risks. For example, whether FMVSS preempt state common law claims is often a contested issue in litigation, and some courts have found us in breach of legal duties and liable in tort, even though our vehicles comply with all applicable federal and state regulations. Furthermore, simply responding to actual or threatened litigation or government investigations regarding our compliance with regulatory standards, even in cases in which no liability is found, often requires significant expenditures of funds, time and other resources, and may cause reputational harm. Any insurance we hold currently may not be available when costs arise in the future and, in the case of harm caused by a component sourced from a supplier, the supplier may no longer be available to provide indemnification or contribution.

In addition, our vehicles may have “long-tail” exposures, including as a result of potential product recalls and product liability claims, giving rise to liabilities many years after their sale. For instance, NHTSA has indicated that it will request a safety recall where it sees an unreasonable disparity in vehicle performance or later adoption of evolving technology or design standards as compared to other vehicles in the market even though the subject vehicles met applicable standards when sold.

Taxing authorities could challenge our historical and future tax positions as well as our allocation of taxable income among our subsidiaries.

The amount of income tax we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken, and will continue to take, appropriate tax positions based on our interpretation of such tax laws. While we believe that we have complied with all applicable income tax laws, there can be no assurance that a taxing authority will not have a different interpretation of the law and assess additional taxes. Should additional taxes be assessed, this may have a material adverse effect on our results of operations and financial condition.

We conduct sales, contract manufacturing, marketing, distribution and research and development operations with affiliated companies located in various tax jurisdictions around the world. While our transfer pricing methodologies are based on economic studies that we believe are reasonable, the transfer prices for these products and services could be challenged by the various tax authorities resulting in additional tax liabilities, interest and/or penalties, and the possibility of double taxation. To reduce the risk of transfer pricing adjustments, the Company entered into an advanced pricing agreement, or APA, with Canada that is applicable through 2014. We intend to seek an extension to the Canadian APA but there can be no assurance that we will obtain such an extension.

We depend on the services of our key executives, the loss of whose skills could materially harm our business. Also, we are in the process of hiring additional employees, and we may encounter difficulties with hiring sufficient employees with critical skills, particularly in competitive specialties such as vehicle design and engineering.

Several of our senior executives, including our Chief Executive Officer, Sergio Marchionne, are important to our success because they have been instrumental in establishing our new strategic direction and implementing the 2010-2014 Business Plan. If we were to lose the services of any of these individuals this could have a material

 

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adverse effect on our business, financial condition and results of operations. We believe that these executives, in particular Mr. Marchionne, could not easily be replaced with executives of equivalent experience and capabilities.

In addition, we are currently seeking to hire employees in a number of critical areas, including vehicle design and engineering. We have experienced some difficulties in hiring and retaining highly skilled employees, particularly in competitive specialties, and we may experience such difficulties going forward. Due to the potential lack of critical skills in our employee population, we may not be able to achieve the 2010-2014 Business Plan targets in as cost-effective or efficient a manner as we have projected.

Our collective bargaining agreements limit our ability to modify our operations and reduce costs in response to market conditions.

Substantially all of our hourly employees in the U.S. and Canada are represented by unions and covered by collective bargaining agreements. We recently negotiated a new collective bargaining agreement with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, or the UAW, in 2011 and with the National Automobile, Aerospace, Transportation and General Workers Union of Canada, or the CAW (now part of Unifor), in 2012. As a practical matter, both these agreements restrict our ability to modify our operations and reduce costs quickly in response to changes in market conditions during the terms of the agreements. These and other provisions in our collective bargaining agreements may impede our ability to restructure our business successfully to compete more effectively, especially with those automakers whose employees are not represented by unions.

Work stoppages at our facilities and work stoppages at our suppliers’ facilities which result in interruptions of production may harm our business.

A work stoppage or other interruption of production could occur at our facilities or those of our suppliers as a result of disputes under existing collective bargaining agreements with labor unions, or in connection with negotiations of new collective bargaining agreements, or as a result of supplier financial distress. A work stoppage or interruption of production at our facilities or those of our suppliers due to labor disputes could negatively impact our ability to achieve vehicles sales objectives and profitability. Long-term interruptions in production which cannot be countered by productivity gains may result in a material impact on vehicle sales projections, liquidity and profitability.

We depend on our information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems, or a security breach that compromises the confidential and sensitive information stored in those systems, could disrupt our business and adversely impact our ability to compete.

Our ability to keep our business operating effectively depends on the functional and efficient operation of our enterprise resource planning and telecommunications systems, including our vehicle design, manufacturing, inventory tracking and billing and collection systems. We rely on these systems to make a variety of day-to-day business decisions as well as to track transactions, billings, payments and inventory. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages, and a range of other hardware, software and network problems. Those systems are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency. For any of these reasons, we may experience systems malfunctions or interruptions. Although our systems are diversified, including multiple server locations and a range of software applications for different regions and functions, and we are currently undergoing an effort to assess and ameliorate risks to our systems, a significant or large-scale malfunction or interruption of our computer or data processing systems could adversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions and deliver products to our dealers and customers. A malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, financial condition and results of operations.

 

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We are currently in the process of transitioning, retiring or replacing a significant number of our software applications at an accelerated rate, an effort that will continue in future years. These applications include, among others, our engineering, finance, procurement and communication systems. During the transition periods, and until we fully migrate to our new systems, we may experience material disruptions in communications, in our ability to conduct our ordinary business processes and in our ability to report out on the results of our operations. Though we are taking commercially reasonable steps to transition our data properly and to assess and minimize risk during this process, we may lose significant data in the transition, or we may be unable to access data for periods of time without forensic intervention. Loss of data may affect our ability to continue ongoing business processes according to the dates in the 2010-2014 Business Plan, or could affect our ability to file timely reports required by a wide variety of regulators, including the U.S. Securities and Exchange Commission, or SEC. Our ability to comply with the requirements of the Sarbanes-Oxley Act, to the extent required of us, may also be compromised.

In addition to supporting our operations, we use our systems to collect and store confidential and sensitive data, including information about our business, our customers and our employees. As our technology continues to evolve, we anticipate that we will collect and store even more data in the future, and that our systems will increasingly use remote communication features that are sensitive to both willful and unintentional security breaches. Much of our value is derived from our confidential business information, including vehicle design, proprietary technology and trade secrets, and to the extent the confidentiality of such information is compromised, we may lose our competitive advantage and our vehicle sales may suffer. We also collect, retain and use personal information, including data we gather from customers for product development and marketing purposes, and data we obtain from employees. In the event of a breach in security that allows third parties access to this personal information, we are subject to a variety of ever-changing laws on a global basis that require us to provide notification to the data owners, and that subject us to lawsuits, fines and other means of regulatory enforcement. Our reputation could suffer in the event of such a data breach, which could cause consumers to purchase their vehicles from our competitors. Ultimately, any compromise in the integrity of our data security could have a material adverse effect on our business.

We may not be able to adequately protect our intellectual property rights, which may harm our business.

Our success depends, in part, on our ability to protect our intellectual property rights. If we fail to protect our intellectual property rights, others may be able to compete against us using intellectual property that is the same as or similar to our own. In addition, we cannot assure you that our intellectual property rights are sufficient to provide us with a competitive advantage against others who offer products similar to ours.

We rely upon a combination of patent, trademark, copyright and trade secret law to protect our intellectual property rights, all of which provide limited protection. However, we cannot assure you that any patents will be issued from any pending or future applications or that any issued patents will provide us with any competitive advantage or will not be challenged, invalidated or circumvented. We also cannot assure you that we will obtain any copyright or trademark registrations from any pending or future applications or that any of our copyrights or trademarks will be enforceable. We rely in some circumstances on trade secrets to protect our technology. However, trade secrets may lose their value if not properly protected. Adequate remedies may not be available in the event of the disclosure of our trade secrets and the unauthorized use of our technology.

Despite our efforts, we may be unable to prevent third parties from infringing our intellectual property and using our technology for their competitive advantage. Any such infringement and use could adversely affect our business, financial condition or results of operations. Monitoring our intellectual property rights to detect infringement can be difficult and costly, and enforcement of our intellectual property rights may require us to bring legal action. Any such litigation could be costly and time-consuming, and the result of any litigation is uncertain.

Our intellectual property is also used in a large number of foreign countries, and, in connection with the Fiat-Chrysler Alliance, we are seeking to expand our operations overseas. The laws of some countries do not offer the

 

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same protection of our intellectual property rights as do the laws of the U.S. In addition, effective intellectual property enforcement may be unavailable or limited in certain countries, making it difficult for us to protect our intellectual property from misuse or infringement there. We expect differences in intellectual property laws and enforcement to become a greater problem for us as our licensees increase their manufacturing and sales outside of the U.S. Our inability to protect our intellectual property rights in some countries may harm our business, financial condition or results of operations.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business and cause a decline in our stock price.

Reporting obligations as a public company and our anticipated growth are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. We continuously monitor and evaluate changes in our internal control over financial reporting. In connection with the Fiat-Chrysler Alliance, and in support of our drive toward common global systems, we are replacing our current finance, procurement, and capital project and investment management systems with an SAP system that was developed leveraging the SAP system Fiat currently utilizes. Our new system is being implemented in two phases. The first phase was implemented as of January 1, 2013 and we began utilizing this system to record and report our 2013 financial results. As appropriate, we continue to modify the design and documentation of internal control processes and procedures relating to the new systems to simplify and automate many of our previous processes. Our management believes that the implementation of this system will continue to improve and enhance our internal controls over financial reporting. The second phase of the implementation is expected to occur on January 1, 2014.

In addition, as a public company, in the future we will be required to document and test our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 so that our management can certify the effectiveness of our internal controls and our independent registered public accounting firm can render an opinion on the effectiveness of our internal control over financial reporting. As a result, we may be required to incur substantial expenses to test our systems, to make any necessary improvements, and to hire additional personnel. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could harm our business and cause a decline in our stock price. In addition, if we do not maintain adequate financial and management personnel, processes and controls, we may not be able to accurately report our financial performance on a timely basis, which could cause a decline in our stock price and harm our ability to raise capital. Failure to accurately report our financial performance on a timely basis could also jeopardize our listing on             or any other stock exchange on which our common stock may be listed. Delisting of our common stock on any exchange could reduce the liquidity of the market for our common stock, which could reduce the price of our stock and increase the volatility of our stock price.

Risks Related to this Offering and Ownership of Our Common Stock

There is no existing market for our common stock, and we do not know if one will develop, which may cause our common stock to trade at a discount from its initial offering price and make it difficult to sell the shares you purchase.

Prior to this offering, there has not been a public market for our common stock and we cannot predict the extent to which investor interest in us will lead to the development of an active trading market on the             , or otherwise, or how liquid that market might become. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock will be determined by negotiations among us, the selling stockholder and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See Underwriting. Consequently, you may not be able to sell shares of our common stock at prices equal to or greater than the price you paid in this offering and you may suffer a loss on your investment.

 

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Following the completion of this offering, there will be a limited public float of our common stock, which may cause the price of our common stock to be volatile.

The limited number of shares of our common stock being sold by the selling stockholder will be the only shares in the public market following the completion of this offering. As such, there will be a limited “public float” of our common stock in the hands of a relatively small number of holders. Due to our relatively small public float and the limited trading volume of our common stock, purchases and sales of relatively small amounts of our common stock can have a disproportionate effect on the market price of our common stock. This volatility could prevent a stockholder seeking to sell our common stock from being able to sell it at or above the price at which the stock was bought.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume of our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to sell your shares of common stock at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our common stock, or result in fluctuations in the price or trading volume of our common stock, include:

 

    variations in our quarterly operating results, which, among other things, may have a more pronounced effect on us due to our substantial indebtedness relative to many of our principal competitors;

 

    failure to meet the market’s earnings expectations;

 

    publication of research reports about us, Fiat or the automotive industry, or the failure of securities analysts to cover our common stock after this offering;

 

    departures of any members of our management team or additions or departures of other key personnel;

 

    adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

    actions by stockholders;

 

    changes in market valuations of similar companies;

 

    adverse changes to Fiat’s business and financial condition, or to the price or trading volume of Fiat’s securities;

 

    real or perceived change in the commitment of Fiat to the success of the Fiat-Chrysler Alliance or divergence in the goals of the two partners;

 

    changes or proposed changes in laws or regulations, or differing interpretations thereof, affecting our business, or enforcement of these laws and regulations, or announcements relating to these matters;

 

    adverse publicity about the automotive industry generally, or particular scandals, specifically;

 

    litigation and governmental investigations; and

 

    general market and economic conditions.

 

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Future sales of our common stock in the public market or perception of future sales could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.

The market price of our common stock could decline as a result of sales of a large number of shares of our common stock available for sale after completion of this offering, or the perception that such sales could occur. We may, in the future, issue stock options or other stock grants to retain and motivate our employees. These issuances of our securities could dilute the voting and economic interests of our existing stockholders. These sales, or the possibility that these sales may occur, also may make it more difficult for us to raise additional capital by selling equity securities in the future, at a time and price that we deem appropriate.

We will agree with the underwriters not to issue, sell, or otherwise dispose of or hedge any shares of our common stock, subject to certain exceptions, for the             -day period following the date of this prospectus, without the prior consent of J.P. Morgan Securities LLC and             . Our officers, directors and certain of our other stockholders (other than public stockholders) will enter into similar lock-up agreements with the underwriters. J.P. Morgan Securities LLC and             may, at any time, release us and/or any of our officers, directors and/or stockholders from this lock-up agreement and allow us to sell shares of our common stock within this             -day period. See Underwriting.

We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock, including any additional sales by the VEBA Trust, may have on the market price of our common stock. Sales or distributions of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline. See Shares Eligible for Future Sale.

The value of our shares may be influenced by the share price of our controlling stockholder, Fiat, which is also a public company, which may be beyond our control and may not reflect the underlying value of our business or our common stock.

Fiat, which is the indirect owner of the majority of our equity interests and, following the consummation of this offering, will be the indirect owner of a majority of our common stock, is a public company whose shares are traded on the Borsa Italiana in Italy. Fiat is subject to reporting and disclosure requirements that are independent from our own. Further, Fiat consolidates our financial results under International Financial Reporting Standards, or IFRS, in its financial reporting. As the indirect subsidiary of another public company, the value of our shares may be influenced by actions and events related to Fiat, including fluctuation in the trading volume or price of Fiat’s securities, which may be entirely unrelated to us but may affect the price of our common stock. Such actions or events may be beyond our control and may not reflect the underlying value of our business or of our common stock.

Anti-takeover provisions in our certificate of incorporation, bylaws and Stockholders’ Agreement and in the Delaware General Corporation Law could discourage a change of control that our stockholders may favor, which could negatively affect the market price of our common stock.

Following the consummation of the Company Conversion and this offering, the provisions in our certificate of incorporation, bylaws and Stockholders’ Agreement and in the Delaware General Corporation Law, or the DGCL, may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our stockholders. For example, our certificate of incorporation, which will be in effect at the time this offering is consummated, will authorize the issuance of preferred stock that could be issued by the Board to thwart a takeover attempt. The market price of our common stock could be adversely affected to the extent that the provisions of our certificate of incorporation and bylaws discourage potential takeover attempts that our stockholders may favor. See Description of Capital Stock —Anti-Takeover Effects of Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws for additional information on the anti-takeover measures applicable to us.

 

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Additionally, following the consummation of the Company Conversion and this offering, Fiat will own a majority of our common stock. If Fiat were to sell a sufficiently large portion of its interest in us, such a transaction could result in a change in control of us. The ability of Fiat to privately sell such shares of our common stock, with no requirement for a concurrent offer to be made to acquire all of the shares of our common stock that will be publicly traded hereafter, could prevent you from realizing any change-of-control premium on your shares of our common stock that may otherwise accrue to Fiat upon its private sale of our common stock.

If equity research analysts do not publish research or if they publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us or our business. We do not currently have and may never obtain research coverage by equity research analysts. If no equity research analysts commence coverage of our Company, the trading price for our common stock would be negatively impacted. If we obtain equity research analyst coverage and if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Equity research analysts may be less likely to publish research reports regarding investment in our common stock in light of Fiat’s ownership position. Fiat’s controlling position may encourage equity research analysts to focus their efforts and attention on Fiat itself, because of the potentially greater liquidity in trading of Fiat shares and investors’ ability to gain exposure to our operations through an investment in Fiat, as well as that we are unlikely to qualify for inclusion in most stock indices in light of Fiat’s controlling position.

Fiat may seek to focus investor relations activities and market communication on the Fiat Group and limit communications regarding Chrysler to those necessary for compliance purposes which may impact our stock price and trading volumes.

Fiat, as our controlling shareholder, may seek to enhance Fiat’s visibility and stock market performance as a whole and seek to limit the impact on its shares price and trading volumes that may result from having two listed securities in different markets with exposure to Chrysler’s performance. There can be no assurance that Fiat will not seek to focus investor relations efforts and resources at the Fiat level and limit communication with investors specifically regarding Chrysler to the minimum required by the          stock exchange, the SEC and Chrysler’s debt instruments, which may have an adverse effect on trading prices and volumes in our shares.

Our controlling stockholder may have interests in our business that may be different than yours.

Fiat indirectly owns more than 50 percent of the voting power of our equity ownership, and will continue to own more than 50 percent of the voting power of our common stock following the consummation of the Company Conversion and this offering. Accordingly, unless Fiat disposes of a substantial portion of its shares, Fiat will continue to be able to control our business policies and affairs, including through its right to nominate a majority of the Board, and to control the outcome of any matter requiring the approval of our stockholders. The concentration of ownership will also make some transactions, including mergers or other changes in control and issuances of additional equity securities, impossible without Fiat’s support. Moreover, in the event Fiat acquires 90 percent of the outstanding shares of common stock, Fiat would be able to effect a merger of the Company with Fiat without a stockholder vote, subject to certain appraisal rights provided under Delaware law. There can be no guarantee that Fiat will not pursue such a plan to achieve its objectives. It is possible that Fiat’s interests may, in some circumstances, conflict with your interests as a stockholder. For additional information about our relationships with Fiat, see Certain Relationships and Related Party Transactions —Transactions with Fiat under the Fiat-Chrysler Alliance.

Conflicts of interest between Fiat and us could arise. Some of our directors may own more stock in Fiat than our Company following this offering. Ownership interests of officers and directors of Fiat in our common stock, or a

 

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person’s service as either an officer or director of both companies, could create or appear to create potential conflicts of interest whenever those officers and directors are faced with decisions that could have different implications for Fiat and us. Potential conflicts of interest could also arise if we were to enter into or modify commercial arrangements with Fiat. Our certificate of incorporation and bylaws provide that Fiat and directors nominated by it will have no duty to refrain from engaging in the same or similar business activities or lines of business, doing business with any of our customers or employing or otherwise engaging any of our officers or employees.

For additional information regarding the share ownership of, and our relationship with, Fiat, refer to the information under the headings Principal Stockholders and Selling Stockholder and Certain Relationships and Related Party Transactions.

Although the VEBA Trust has determined to sell shares in this offering and has exercised its registration rights to cause this offering to occur, Fiat has indicated that it does not intend to sell shares in the offering, and, in any case we believe it is unlikely that Fiat would jeopardize its position as majority stockholder in the Company. Therefore, it is likely that Fiat’s ability to exert control over our business policies and officers will continue for the foreseeable future.

We are a “controlled company” within the meaning of the                 rules, and, as a result, will qualify for, and intend to rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

Following the consummation of this offering, we will be a “controlled company” within the meaning of the corporate governance rules as a result of the ownership position and voting rights of Fiat following this offering. A “controlled company” is a company of which more than 50 percent of the voting power is held by an individual, group or another company. As a controlled company we may elect not to comply with certain                 corporate governance rules that would otherwise require the Board to have a majority of independent directors and our compensation and governance committees to be comprised entirely of independent directors. Accordingly, our stockholders will not have the same protection afforded to stockholders of companies that are subject to all of the                 corporate governance requirements and the ability of our independent directors to influence our business policies and affairs may be reduced. See Management —Corporate Governance —Management of the Company —Board of Directors and Nominees.

Future offerings of debt securities, which would be senior to our common shares upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common shares for the purposes of distributions, may adversely affect the market price of our common shares.

In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper, medium-term notes, senior or subordinated notes, secured notes and classes of preferred stock. Upon liquidation, holders of our debt securities and preferred shares and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of our future offerings reducing the market price of our common stock and diluting their proportionate ownership.

Because we do not currently intend to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you are able to sell your common stock for a price greater than that which you paid for it.

We currently intend to retain future earnings and do not intend to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of the Board and

 

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will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions, restrictions imposed by applicable law or the SEC and other factors that the Board may deem relevant. Accordingly, investors must be prepared to rely on sales of their common stock after price appreciation to earn an investment return, which may never occur. Investors seeking cash dividends should not purchase our common stock. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it. See Dividend Policy and Dividends.

The Internal Revenue Service may not treat the reorganization transactions consummated in connection with the Company Conversion in a manner consistent with the intended tax treatment, which could result in adverse tax consequences.

Immediately prior to the effectiveness of the registration statement of which this prospectus is a part, we will complete a series of transactions pursuant to which we will convert Chrysler Group LLC from a Delaware limited liability company into a Delaware corporation. See Our Structure and Company Conversion for further description of the Company Conversion, including such reorganization transactions. We can provide no assurance that we will pursue or actually obtain rulings from the IRS regarding all of the tax consequences of consummating the Company Conversion, and accordingly, there can be no assurance that the IRS will treat the reorganization transactions consummated in connection with the Company Conversion in a manner that is consistent with the intended tax treatment. If the IRS challenged the intended treatment of such reorganization transactions, and if it succeeded in its challenge, adverse tax consequences to the Company may result and the returns to stockholders’ investment in the Company may be adversely affected.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that reflect our current views about future events. We use the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “will,” “intend,” “may,” “plan,” “project,” “should,” “could,” “seek,” “designed,” “potential,” “forecast,” “target,” “objective,” “goal,” or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under Risk Factors and elsewhere in this prospectus. These factors include, but are not limited to:

 

    our ability to realize benefits from, and our dependence on, the Fiat-Chrysler Alliance;

 

    potential conflicts of interest resulting from Fiat’s control over our management, operations and corporate decisions;

 

    our profitability depends on reaching certain minimum vehicle sales volumes that may not continue to increase;

 

    continued elevated unemployment levels that do not recover at the same pace as economic indicators, sustained economic weakness and low consumer confidence, especially in North America, where we sell most of our vehicles;

 

    our ability to increase vehicle sales outside of North America;

 

    our ability to regularly introduce new or significantly refreshed vehicles that appeal to a wide base of consumers and to respond to changing consumer preferences, quality demands, economic conditions, and government regulations;

 

    lengthy product development cycles and our inability to adequately forecast demand for our vehicles which may lead to inefficient use of or production capacity;

 

    competitive pressures that may limit our ability to reduce sales incentives, achieve better pricing and grow our profitability;

 

    the potential inability of consumers and our dealers to obtain affordably priced financing on a timely basis due to our lack of a captive finance company, and our ongoing transition to a new private-label financing provider;

 

    the impact of vehicle defects and/or product recalls (including product liability claims);

 

    disruption of production or delivery of new vehicles due to shortages of materials, including supply disruptions resulting from natural disasters, labor strikes or supplier insolvencies;

 

    our ability to control costs and implement cost reduction and productivity improvement initiatives;

 

    changes and fluctuations in the prices of raw materials, parts and components;

 

    changes in foreign currency exchange rates, commodity prices and interest rates;

 

    our substantial indebtedness and limitations on our liquidity that may limit our ability to execute the 2010-2014 Business Plan and could prevent us from fulfilling our obligations under the terms of our indebtedness;

 

    changes in laws, regulations and government policies, particularly those relating to vehicle emissions, fuel economy and safety;

 

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    interruptions to our business operations caused by information technology systems failures arising from our transition to new, enterprise-wide software systems or from potential cyber security incidents;

 

    the lack of an existing market for our common stock; and

 

    fluctuation in the value of our shares caused by the share price of Fiat, which may not reflect the underlying value of our business or our common stock.

If any of these risks and uncertainties materialize, or if the assumptions underlying any of our forward-looking statements prove incorrect, then our actual results, level of activity, performance or achievements may be materially different from those we express or imply by such statements. The risks described in Risk Factors of this prospectus are not exhaustive. Other sections of this prospectus describe additional factors that could adversely affect our business, financial condition or results of operations. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risks on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements. We do not intend, or assume any obligation, to update these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and included elsewhere in this prospectus.

 

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OUR STRUCTURE AND COMPANY CONVERSION

Structure Prior to the Reorganization Transactions

The diagram below depicts our organizational structure before giving effect to the reorganization transactions described herein and this offering.

 

LOGO

Prior to the reorganization transactions described below, which we refer to as the Company Conversion, the equity interests in Chrysler Group LLC consisted of Class A Membership Interests held indirectly by Fiat through its subsidiaries and by the VEBA Trust through thirteen holding companies.

As of the date of this prospectus, Fiat held a 58.5 percent ownership interest in Chrysler Group and the VEBA Trust held the remaining 41.5 percent. See Management’s Discussion and Analysis of Financial Condition and Results of Operations —Ownership Interest in Chrysler Group.

Reorganization Transactions and Post-IPO Structure

The diagram below depicts our organizational structure immediately after the consummation of the reorganization transactions in the Company Conversion and this offering.

 

LOGO

Immediately prior to the effectiveness of the registration statement of which this prospectus is a part, we will complete a series of transactions pursuant to which we will convert Chrysler Group LLC from a Delaware limited liability company into a Delaware corporation. First, the thirteen VEBA holding companies will be acquired by and then merged with and into FNA LLC in exchange for membership interests in FNA LLC, resulting in the VEBA Trust holding              percent of the membership interests in FNA LLC and Fiat and its subsidiaries holding              percent of the membership interests in FNA LLC. Next, Chrysler Group LLC, a

 

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Delaware limited liability company, will convert into Chrysler Group Corporation, a Delaware corporation, and FNA LLC, the sole member of Chrysler Group LLC at such time, will receive                  shares of our common stock in exchange for its membership interests in Chrysler Group LLC. Immediately following such conversion, FNA LLC will merge with and into Chrysler Group Corporation, with Chrysler Group Corporation surviving the merger, and Fiat and the VEBA Trust will receive shares of our common stock in exchange for their respective equity interests in FNA LLC.

Upon consummation of the Company Conversion and this offering, Fiat, the VEBA Trust and our public stockholders will each own approximately      percent,      percent and      percent of our common stock, respectively (assuming that the underwriters do not exercise their option to purchase additional shares).

 

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USE OF PROCEEDS

The selling stockholder will receive all of the net proceeds from this offering, after deducting underwriting discounts and commissions. We will not receive any proceeds from the sale of shares in this offering, including any proceeds from the sale of shares by the selling stockholder pursuant to an exercise by the underwriters of their option to purchase additional shares. See Principal Stockholders and Selling Stockholder for additional info regarding the selling stockholder.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2013:

 

    on an actual basis for Fiat North America LLC and its consolidated subsidiaries; and

 

    on an as-adjusted basis for Chrysler Group Corporation and its consolidated subsidiaries after giving effect to the consummation of this offering and the Company Conversion as described under Our Structure and Company Conversion.

You should read the following table in conjunction with the consolidated financial statements and related notes, Use of Proceeds, Summary Selected Historical Consolidated Financial and Other Data, Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this prospectus.

 

     June 30, 2013         
     Actual      As Adjusted         
     (in millions of dollars)         

Cash and cash equivalents

   $ 12,201           $                     
  

 

 

    

 

 

      

Financial Liabilities:

          

VEBA Trust Note

   $ 4,874           $                     

Tranche B Term Loan

     2,916               

Secured Senior Notes due 2019

     1,500               

Secured Senior Notes due 2021

     1,700               

Canadian Health Care Trust Notes

     934               

Mexican development banks credit facilities

     587               

Fiat Finance North America term loan facilities

     400               

Liabilities from capital leases

     360               

Other financial obligations

     307               
  

 

 

    

 

 

      

Total Financial Liabilities

   $ 13,578           $                     

Total members’ interest

     5,386               
  

 

 

    

 

 

      

Total Capitalization

   $ 18,964           $                     
  

 

 

    

 

 

      

 

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DIVIDEND POLICY AND DIVIDENDS

We do not intend to pay any dividends in the foreseeable future, but the Board retains the discretion to declare and pay all future dividends, if any. In determining the amount of any future dividends, the Board will take into account any legal or contractual limitations, our actual and anticipated future earnings, cash flow, debt service and capital requirements. See Risk Factors —Because we do not currently intend to pay cash dividends on our common stock for the foreseeable future, you may not receive any return on investment unless you are able to sell your common stock for a price greater than that which you paid for it.

Following the consummation of this offering, Fiat will have the right to nominate a majority of the directors on the Board. See Management —Corporate Governance —Management of the Company. Therefore, Fiat may effectively control our decision whether to pay dividends.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following sets forth selected financial data of FNA (Successor), Chrysler Group (Predecessor A) and Old Carco (Predecessor B). The selected financial data has been derived from:

 

    FNA’s accompanying condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 (Successor);

 

    FNA’s accompanying audited consolidated financial statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012 and the period from May 25, 2011 to December 31, 2011 (Successor); and for the period from January 1, 2011 to May 24, 2011 and the year ended December 31, 2010 (Predecessor A);

 

    Chrysler Group’s audited consolidated financial statements as of December 31, 2009 and for the period from June 10, 2009 to December 31, 2009 (Predecessor A), which are not included in this prospectus; and

 

    Old Carco’s audited consolidated financial statements as of June 9, 2009 and December 31, 2008 and for the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008 (Predecessor B), which are not included in this prospectus.

The accompanying condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 (Successor) have been prepared on the same basis as FNA’s accompanying audited consolidated financial statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.

Fiat North America LLC was formed on May 14, 2009 and through a series of transactions and events, became the primary beneficiary of Chrysler Group LLC, which is a variable interest entity, or VIE, on May 25, 2011. As a result, a new basis of accounting was created. As FNA LLC succeeded to substantially all of the business of Chrysler Group, and FNA LLC’s own operations before the succession were insignificant relative to Chrysler Group’s operations, Chrysler Group represents Predecessor A to FNA for accounting and financial reporting purposes.

Chrysler Group LLC was formed on April 28, 2009. On June 10, 2009, Chrysler Group purchased the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to acquiring the equity of Old Carco’s principal foreign subsidiaries, in the 363 Transaction approved by the bankruptcy court. Old Carco represents Predecessor B to FNA for accounting and financial reporting purposes.

For financial reporting purposes, FNA is referred to as the Successor prior to the consummation of the Company Conversion summarized above and discussed in Our Structure and Company Conversion. Subsequent to the Company Conversion, Chrysler Group Corporation will assume FNA’s accounting basis for financial reporting purposes and will be the ultimate successor to Chrysler Group LLC. Chrysler Group is referred to as Predecessor A and Old Carco is referred to as Predecessor B.

You should read the following selected historical consolidated financial data together with Our Structure and Company Conversion, Risk Factors, Prospectus Summary —Summary Selected Historical Consolidated Financial and Other Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the historical consolidated financial statements and the related notes included elsewhere in this prospectus.

 

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Comparability of Financial Information

Comparability of FNA and Chrysler Group Financial Information

On May 25, 2011, FNA LLC became the primary beneficiary of Chrysler Group LLC, which is a VIE. The consolidation of Chrysler Group was accounted for as a business combination, achieved in stages, using the acquisition method of accounting. In accordance with the acquisition method, FNA LLC recognized the acquired assets and assumed liabilities at their acquisition date fair values, with certain exceptions as provided in the applicable accounting guidance. These adjustments did not have a material effect on FNA’s consolidated results of operations or cash flows subsequent to May 24, 2011. In addition, FNA does not have significant operations, other than those of Chrysler Group and its consolidated subsidiaries, and its accounting policies are the same as Chrysler Group’s. Therefore, in addition to separately presenting FNA’s financial information for the period from May 25, 2011 to December 31, 2011 and Chrysler Group’s financial information for the period from January 1, 2011 to May 24, 2011, we have combined the respective results for 2011 for purposes of presenting the historical financial data for full year 2011.

Comparability of Chrysler Group and Old Carco Financial Information

In connection with the 363 Transaction, we did not acquire all of the assets or assume all of the liabilities of Old Carco. The assets we acquired and liabilities we assumed from Old Carco were generally recorded at fair value in accordance with business combination accounting guidance, resulting in a change from Old Carco’s accounting basis. In addition, certain of our accounting policies differ from those of Old Carco. For these reasons, we do not present any financial information for the period from June 10, 2009 to December 31, 2009 with Old Carco’s financial information or for the period from January 1, 2009 to June 9, 2009 on a combined basis. The comparability of revenues was not significantly affected by these items.

This presentation is in accordance with the practice of Chrysler Group management. We do not review the results of operations for the Predecessor B period when assessing the performance of our operations. Our business during the Successor and Predecessor A periods compared to the Predecessor B periods has been impacted by the significant changes in capital structure, management, business strategies and product development programs that were implemented subsequent to the 363 Transaction in an effort to realize the benefits of the Fiat-Chrysler Alliance. For further details on our business, refer to Business.

 

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     Successor  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in millions of dollars)  

Consolidated Statements of Operations Data:

           

Revenues, net

    $     17,995         $ 16,803         $ 33,379         $     33,177    

Gross margin

     2,683          2,555          4,945          5,140    

Selling, administrative and other expenses

     1,256          1,224          2,474          2,439    

Research and development expenses, net

     543          541          1,114          1,126    

Restructuring income, net

     (7)         (34)         (11)         (48)   

Interest expense

     250          262          499          525    

Loss on extinguishment of debt (3)

             —                  —    

Net income

     576          485          764          966    

Net income attributable to noncontrolling interest

     252          194          340          407    

Net income attributable to controlling interest

     324          291          424          559    
                   Successor  
        

 

 

 
                   Six Months Ended
June 30,
 
                   2013      2012  
                   (in millions of dollars)  

Consolidated Statements of Cash Flows Data:

           

Cash flows provided by (used in):

           

Operating activities

          $ 2,176         $ 4,312    

Investing activities

           (1,647)         (1,734)   

Financing activities

           (43)         201    

Other Financial Information:

           

Depreciation and amortization expense

          $ 1,372         $ 1,388    

Capital expenditures (8)

           1,660          1,854    
                   Successor  
        

 

 

 
                   June 30, 2013      June 30, 2012  
                   (in millions of dollars)  

Consolidated Balance Sheets Data at Period End:

           

Cash and cash equivalents

          $ 12,201         $ 12,375    

Restricted cash

           349          407    

Total assets

           56,611          53,495    

Current maturities of financial liabilities

           504          586    

Long-term financial liabilities

           13,074          13,011    

Members’ interest

           5,386          5,687    
     Successor  
     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2013              2012              2013              2012      

Other Statistical Information (unaudited):

           

Worldwide factory shipments (in thousands) (9)(12)

     660          630          1,234          1,237    

Net worldwide factory shipments (in thousands) (10)(12)

     636          625          1,208          1,244    

Worldwide vehicle sales (in thousands) (11)(12)

     643          582          1,206          1,105    

U.S. dealer inventory at period end (in thousands)

           408          358    

Number of employees at period end

           70,386          62,223    

 

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    Successor     Combined     Successor          Predecessor A          Predecessor B  
    Year
Ended
December 31,
2012
    Total 2011     Period
from May 25,
2011 to
December 31,
2011
         Period from
January 1,
2011 to
May 24,
2011
    Year
Ended
December 31,
2010
    Period
from June 10,
2009 to
December 31,
2009
         Period
from
January 1,
2009 to
June 9,
2009
    Year
Ended
December 31,
2008
 
          (in millions of dollars)                      (in millions of dollars)                (in millions     of dollars)  

Consolidated Statements of Operations Data:

                       

Revenues, net

   $ 65,809          $ 55,054          $ 32,936              $ 22,118          $ 41,946          $ 17,710              $ 11,082          $ 48,477      

Gross margin

    10,489           8,308           4,787               3,521           6,060           1,599               (1,934)          1,928      

Selling, administrative and other expenses

    5,156           4,754           2,761               1,993           3,797           4,336               1,599           3,991      

Research and development expenses, net

    2,302           1,664           1,058               606           1,500           626               452           1,525      

Restructuring (income) expenses, net (1)

    (61)          3           (5)              8           48           34               (230)          1,306      

Interest expense (2)

    1,040           1,210           628               582           1,276           470               615           1,080      

Loss on extinguishment of debt (4)

    —           551           —               551           —           —               —           —      

Impairment of brand name intangible assets (5)

    —           —           —               —           —           —               844           2,857      

Impairment of goodwill (6)

    —           —           —               —           —           —               —           7,507      

Reorganization expenses, net (7)

    —           —           —               —           —           —               843           —      

Net income (loss)

    1,805           (37)          264               (301)          (652)          (3,785)              (4,425)          (16,844)     

Net income attributable to noncontrolling interest

    759           101           101                        

Net income (loss) attributable to controlling interest

    1,046           (138)          163                        

Consolidated Statements of Cash Flows Data:

                       

Cash flows provided by (used in):

                       

Operating activities

   $ 5,784          $ 4,603          $ 1,984              $ 2,619          $ 4,320          $ 2,335              $ (7,130)         $ (5,303)     

Investing activities

    (3,557)          6,120           6,372               (252)          (1,167)          250               (404)          (3,632)     

Financing activities

    6           (405)          1,270               (1,675)          (1,526)          3,268               7,517           1,058      

Other Financial Information:

                       

Depreciation and amortization expense

   $ 2,718          $ 2,885          $ 1,625              $ 1,260          $ 3,051          $ 1,587              $ 1,537          $ 4,808      

Capital expenditures (8)

    3,633           3,009           2,072               937           2,385           1,088               239           2,765      

Consolidated Balance Sheets Data at Period End:

                       

Cash and cash equivalents

   $ 11,834          $ 9,601          $ 9,601              $ 8,090          $ 7,347          $ 5,862              $ 1,829          $ 1,898      

Restricted cash

    371           461           461               467           671           730               1,133           1,355      

Total assets

    53,508           49,858           49,858               36,015           35,449           35,423               33,577           39,336      

Current maturities of financial liabilities

    614           281           281               207           2,758           1,092               2,694           11,308      

Long-term financial liabilities

    12,969           13,087           13,087               12,217           10,973           8,459               1,900           2,599      

Members’ interest (deficit)

    3,574           4,816           4,816               (4,807)          (4,489)          (4,230)              (16,562)          (15,897)     

Other Information (unaudited):

                       

Worldwide factory shipments (in thousands) (9)(12)

    2,409           2,011           1,191               820           1,602           670               381           1,987      

Net worldwide factory shipment (in thousands) (10)(12)

    2,432           1,993           1,198               795           1,581           672               459           2,065      

Worldwide vehicle sales (in thousands) (11)(12)

    2,194           1,855           1,140               715           1,516           725               593           2,007      

U.S. dealer inventory at period end (in thousands)

    427           326           326               311           236           179               246           398      

Number of employees at period end (13)

    65,535           55,687           55,687               53,310           51,623           47,326               48,237           52,191      

 

(1) Old Carco initiated multi-year recovery and transformation plans aimed at restructuring its business in 2007, which were refined in 2008 and 2009 due to depressed economic conditions and decreased demand for its vehicles. We have continued to execute the remaining actions initiated by Old Carco. For additional information see Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations.
(2) Interest expense for the period from January 1, 2009 to June 9, 2009 excludes $57 million of contractual interest expense on debt subject to compromise.
(3) In connection with the June 2013 amendment and re-pricing of Chrysler Group’s Original Credit Agreement dated May 24, 2011, we recognized a $9 million loss on extinguishment of debt. The charges consisted of the write off of $1 million of unamortized debt issuance costs associated with the original facilities, and $8 million of call premium and other fees associated with the amendment and re-pricing.
(4) In connection with the May 2011 repayment of Chrysler Group’s outstanding obligations under the U.S. Treasury first lien credit facilities, or U.S. Treasury credit facilities, and the Export Development Canada Credit Facilities, or EDC credit facilities, we recognized a $551 million loss on extinguishment of debt. The charges consisted of the write off of $136 million of unamortized debt discounts and $34 million of unamortized debt issuance costs associated with the U.S. Treasury credit facilities and $367 million of unamortized debt discounts and $14 million of unamortized debt issuance costs associated with the EDC credit facilities.
(5) Old Carco recorded indefinite-lived intangible asset impairment charges of $844 million and $2,857 million during the period from January 1, 2009 to June 9, 2009 and the year ended December 31, 2008, respectively, related to its brand names. The impairments were primarily a result of the significant deterioration in Old Carco’s revenues, the ongoing volatility in the U.S. economy, in general, and in the automotive industry in particular, and a significant decline in its projected production volumes and revenues considering the market conditions at that time.
(6) In 2008, Old Carco recorded a goodwill impairment charge of $7,507 million, primarily as a result of significant declines in its projected financial results considering the deteriorating economic conditions and the weakening U.S. automotive market at that time.

 

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(7) In connection with Old Carco’s bankruptcy filings, Old Carco recognized $843 million of net losses during the period from January 1, 2009 to June 9, 2009, from the settlement of pre-petition liabilities, provisions for losses resulting from the reorganization and restructuring of the business, as well as professional fees directly related to the process of reorganizing Old Carco and its principal domestic subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. These losses were partially offset by a gain on extinguishment of certain financial liabilities and accrued interest.
(8) Capital expenditures represent the purchase of property, plant and equipment and intangible assets.
(9) Represents our vehicle sales to dealers, distributors and contract manufacturing customers. For additional information refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations —Worldwide Factory Shipments.
(10) Represents our vehicle sales to dealers, distributors and contract manufacturing customers adjusted for Guaranteed Depreciation Program vehicle shipments and auctions. For additional information refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations —Results of Operations —Worldwide Factory Shipments.
(11) Represents sales of our vehicles, which include vehicles manufactured by Fiat for us, from dealers and distributors to consumers. Fleet customers include rental car companies, commercial fleet customers, leasing companies and government entities. Certain fleet sales that are accounted for as operating leases are included in vehicle sales. Beginning January 1, 2013, Chrysler Group vehicle sales in Mexico include Fiat-manufactured Fiat and Alfa Romeo vehicles. Prior to January 1, 2013, these vehicle sales were reported by Fiat.
(12) Vehicles manufactured by Chrysler Group for other companies, including for Fiat, are included in our worldwide factory shipments and net worldwide factory shipments, however, they are excluded from our worldwide vehicles sales.
(13) The number of employees provided for May 24, 2011 and June 9, 2009 are as of May 31, 2011 and June 30, 2009, respectively.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with the information included under Business, Selected Historical Consolidated Financial and Other Data and the Fiat North America LLC and consolidated subsidiaries audited consolidated financial statements as of December 31, 2012 and 2011 and for the year ended December 31, 2012, the period from May 25, 2011 to December 31, 2011 (Successor as defined below under —Successor and Predecessor Presentation), the period from January 1, 2011 to May 24, 2011 and the year ended December 31, 2010 (Predecessor as defined below under —Successor and Predecessor Presentation) and the Fiat North America LLC and consolidated subsidiaries condensed consolidated financial statements as of June 30, 2013 and for the three and six months ended June 30, 2013 and 2012 included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under Cautionary Note Regarding Forward-Looking Statements and Risk Factors. Actual results may differ materially from those contained in any forward-looking statements.

Overview of Our Formation

This prospectus relates to an offering of common stock of Chrysler Group Corporation, a Delaware corporation that will be the result of the Company Conversion described herein that will occur immediately prior to the effectiveness of the registration statement of which this prospectus is a part. Refer to Our Structure and Company Conversion for additional information regarding the Company Conversion.

Chrysler Group LLC was formed on April 28, 2009 as a Delaware limited liability company to complete the transactions contemplated by the Master Transaction Agreement dated April 30, 2009, among Chrysler Group, Fiat and Old Carco and certain of its subsidiaries, which was approved under section 363 of the U.S. Bankruptcy Code, or the 363 Transaction. On April 30, 2009, Old Carco and its principal domestic subsidiaries filed for bankruptcy protection. On June 10, 2009, Chrysler Group LLC completed the 363 Transaction and purchased the principal operating assets and assumed certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to acquiring the equity of Old Carco’s principal foreign subsidiaries. As a result of the 363 Transaction, a new basis of accounting was created. As Chrysler Group LLC succeeded to substantially all of the business of Old Carco and as Chrysler Group LLC’s own operations before the succession were insignificant relative to Old Carco’s operations, Old Carco represents the Predecessor to Chrysler Group LLC for accounting and financial reporting purposes for periods prior to June 10, 2009.

Fiat North America LLC was formed on May 14, 2009 as a Delaware limited liability company and 100 percent owned indirect subsidiary of Fiat to hold Fiat’s ownership interest in Chrysler Group, a VIE. In connection with the closing of the 363 Transaction, Fiat contributed intellectual property rights, or Fiat IP, to FNA LLC that were contributed and licensed to Chrysler Group for its use in exchange for a 20.0 percent ownership interest in Chrysler Group.

Through a series of transactions and events, FNA LLC became the primary beneficiary of Chrysler Group on May 25, 2011. As a result, a new basis of accounting was created. As FNA LLC succeeded to substantially all of the business of Chrysler Group, and as FNA LLC’s own operations before the succession were insignificant relative to Chrysler Group’s operations, Chrysler Group represents the Predecessor to FNA LLC for accounting and financial reporting purposes. As a result of the Company Conversion that will occur immediately prior to the effectiveness of the registration statement of which this prospectus is a part, which includes the merger of FNA LLC with and into Chrysler Group Corporation, with Chrysler Group Corporation surviving the merger, Chrysler Group Corporation will assume FNA LLC’s accounting basis for financial reporting purposes and will be the ultimate successor to Chrysler Group LLC.

As a part of the Company Conversion, the members of Chrysler Group will become holders of shares of common stock of Chrysler Group Corporation.

 

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In this prospectus, unless otherwise specified, the terms “we,” “our,” “us,” “Chrysler Group” and the “Company”:

 

  (i) following the date of the Company Conversion discussed in Our Structure and Company Conversion, refer to Chrysler Group Corporation and its consolidated subsidiaries, or any one or more of them as the context may require;

 

  (ii) for the period from June 10, 2009 to the date of the Company Conversion, refer to Chrysler Group LLC and its consolidated subsidiaries, or any one or more of them as the context may require, which from May 25, 2011 was a consolidated subsidiary of FNA LLC, which holds a 58.5 percent ownership interest in Chrysler Group as of the date of this prospectus; and

 

  (iii) for the period from August 4, 2007 through June 9, 2009, refer to Old Carco LLC (f/k/a Chrysler LLC) and its consolidated subsidiaries, or Old Carco, or any one or more of them as the context may require.

Solely with respect to information relating to financial results and related disclosures for the period from May 25, 2011 to the date of the Company Conversion , the terms “we,” “our,” “us,” “FNA” and the “Company” refer to FNA LLC and its consolidated subsidiaries (which, as described in (ii) above, are Chrysler Group LLC and its consolidated subsidiaries), or any one or more of them as the context may require. “Fiat” refers to Fiat S.p.A., a corporation organized under the laws of Italy, its consolidated subsidiaries (excluding FNA LLC and its consolidated subsidiaries) and entities it jointly controls, or any one or more of them as the context may require.

Successor and Predecessor Presentation

For accounting and financial reporting purposes, for the period from May 25, 2011 to the date of the Company Conversion discussed in Our Structure and Company Conversion, FNA is referred to as the “Successor.” For the period from June 10, 2009 to May 24, 2011, Chrysler Group is referred to as “Predecessor A.” For the period from January 1, 2008 to June 9, 2009, Old Carco is referred to as “Predecessor B.” As a result of the Company Conversion, Chrysler Group Corporation will assume FNA’s accounting basis for financial reporting purposes and will be the ultimate successor to Chrysler Group LLC.

Overview of our Operations

We generate revenues, income and cash primarily from our sales of Chrysler, Jeep, Dodge and Ram vehicles and Mopar service parts and accessories to dealers and distributors for sale to retail and fleet customers. Our product lineup includes passenger cars, utility vehicles (which include SUVs and crossover vehicles), minivans, trucks and commercial vans. As part of the Fiat-Chrysler Alliance, we also manufacture certain Fiat vehicles in Mexico, which are distributed throughout North America and sold to Fiat for distribution elsewhere in the world. In addition, Fiat manufactures certain Fiat brand vehicles for us, which we sell in certain markets. The majority of our operations, employees, independent dealers and vehicle sales are in North America, principally in the U.S. Approximately 10 percent of our vehicle sales during both 2012 and the first half of 2013 were outside North America, mostly in Asia Pacific, South America and Europe. We also generate revenues, income and cash from the sale of separately-priced service contracts to consumers and from providing contract manufacturing services to other vehicle manufacturers. Our dealers enter into wholesale financing arrangements to purchase vehicles to hold in inventory for sale to retail customers. Our retail customers use a variety of finance and lease programs to acquire vehicles from our dealers.

Chrysler Group began operations on June 10, 2009, following our purchase of the principal operating assets and assumption of certain liabilities of Old Carco and its principal domestic subsidiaries, in addition to the acquisition of the equity of Old Carco’s principal foreign subsidiaries, in connection with the 363 Transaction. As a key part of that transaction, we entered into the Fiat-Chrysler Alliance that provides for collaboration in a number of areas, including product, platform and powertrain sharing and development, global distribution, procurement, information technology infrastructure and process improvement. See Business —Chrysler Overview —Formation of Chrysler Group and Chrysler Group Corporation for a description of the circumstances surrounding our formation and the Fiat-Chrysler Alliance for additional information.

 

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See Risk Factors —Risks Related to our Business —We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success and —Meeting our objective of increasing our vehicle sales outside North America is largely dependent upon access to Fiat’s network of distribution arrangements, manufacturing capacity and local alliance partners for a discussion of critical risks related to the Fiat-Chrysler Alliance.

Progress on our Strategic Business Plan

In November 2009, we announced the 2010-2014 Business Plan. The 2010-2014 Business Plan focuses on a number of initiatives designed to bring significant improvements to our business by leveraging the Fiat-Chrysler Alliance. These targets included: upgrading our product styling, innovation, quality, safety and fuel economy; rejuvenating and refining our brands; improving processes in procurement, supply chain management and manufacturing; enhancing our information technology infrastructure; optimizing our dealer network and global distribution strategy; and building a workforce culture of high performance.

We have made significant progress against the objectives in the 2010-2014 Business Plan as they related to:

 

    Product Development. We have made meaningful strides in rationalizing our product mix to produce a range of desirable vehicles with improved fuel economy. Where feasible, we have leveraged the use of common vehicle platforms, powertrains and technologies with Fiat. Following these principles, we have completed an extensive renewal of our product lineup with the launch of over 25 new or significantly refreshed vehicles since we began operations in mid-2009. Among those vehicles was the widely-acclaimed new Jeep Grand Cherokee, which we leveraged to develop and launch the three-row Dodge Durango to better accommodate families, and we worked in cooperation with Fiat to launch our first vehicle in the mini-segment, the eco-friendly Fiat 500, as well as our first vehicle in the B-segment, the all-new Fiat 500L.

Our success to date and ability to make such meaningful strides as a relatively small manufacturer as compared to our competitors was based largely on the Fiat-Chrysler Alliance, as the Fiat-Chrysler Alliance gave us a significant advantage over starting such a revitalization of our product lineup on our own. See Risk Factors —Risks Related to our Business —We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success.

In 2012, we launched the new, fuel-efficient Dodge Dart, the first vehicle built on the compact U.S.-wide, or CUSW, platform that we co-developed with Fiat. We are also using the CUSW platform for the all-new 2014 Jeep Cherokee, which started production in June 2013 and we expect to be available in dealerships in September 2013. The CUSW platform will also be used for our future compact to mid-size vehicles (C- and D-segment), except the body-on-frame Jeep Wrangler. In 2013, we launched the all-new Fiat 500L, our first vehicle to use the jointly-developed platform for the B-segment, or the Small Wide platform. We expect that widespread use of the CUSW and Small Wide platforms will reduce the total number of our passenger car and SUV platforms from 11 in 2010 to nine by the end of 2014, three of which will be shared with Fiat. We plan to continue to use other platforms for our pick-up and chassis cab trucks, as well as for the all-new 2013 SRT Viper, which became available to customers in early 2013. We expect to garner savings from common sourcing for shared platform technology, and expect that benefit will continue to grow with the wider deployment of such common architectures.

For the third consecutive year, Ward’s Auto recognized our Pentastar V-6 engine as one of the “10 Best Engines” in 2013. Because of this engine’s flexible architecture, we are able to deploy it across our product portfolio, which affords us significant efficiencies in manufacturing and logistics. The engine contributes to greater fuel efficiency in our Jeep Grand Cherokee, Chrysler 300, Town and Country, and 14 other models. By January 2012, we had produced one million of these engines to meet growing demand, and we have taken several steps to increase our manufacturing capacity. We also manufacture the 1.4L 4-cylinder Fiat Fully Integrated Robotised Engine, or FIRE engine, for use in the Fiat 500 that we began selling in 2011. Finally, we continue our efforts to broaden the offerings for our Tigershark

 

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engine, and to combine it with Fiat technology. Additional progress on our efforts to develop and implement technologies in tandem with Fiat are detailed in Business —Chrysler Overview —Research, Development and Intellectual Property.

The introduction of transmission technology is also a key element in our strategy to enhance fuel efficiency. In 2011, we introduced a new 8-speed automatic transmission in our E-segment 4-door sedans (Chrysler 300 and Dodge Charger) along with our light duty Ram 1500 when equipped with the Pentastar V-6 engine. In 2013, we expanded utilization of the 8-speed transmission to the Jeep Grand Cherokee, Dodge Durango, and the V-8 applications for the Chrysler 300 and Dodge Charger. Finally, we launched an all-new 9-speed automatic transmission in the all-new 2014 Jeep Cherokee, which we expect to be available in dealerships in September 2013.

 

    Product Quality. We believe we are making significant progress in our efforts to enhance product quality and reliability. We have improved the quality of our interiors, implemented a number of improvements in our manufacturing processes and quality control through WCM, and have doubled the number of test miles for all our vehicles. Our warranty claim rate, as measured by conditions per 1,000 vehicles, has fallen by over 21 percent since we began operations in mid-2009 to May 2013. Additionally, our customer surveys indicate that these improvements, coupled with enhanced customer service, have increased Chrysler Group vehicle owners’ satisfaction with our products and their willingness to recommend our brands to their friends and families.

These changes have also continued to translate into improved third-party ratings and a number of awards recognizing the desirability and strong residual values of our vehicles. In 2012, our 2013 Ram 1500 received both the Motor Trend “Truck of the Year” and the North American International Auto Show “Truck/Utility of the Year”. Our Jeep Grand Cherokee is the most awarded SUV ever. Finally, 11 of our 2012 model year vehicles were designated as Top Safety Picks by the IIHS, as compared to five of our 2010 models.

 

    Enhancing Our Brands. We are continuing to focus heavily on building the value of our brands as a means to increase sales of our vehicles and service parts to minimize our reliance on sales incentives. This effort has included our multi-year campaigns to strengthen our Chrysler, Jeep, Dodge and Mopar brands, to develop Ram as a separate brand, to add the SRT designation for select performance vehicles, and to reintroduce the Fiat brand in the U.S. and Canadian markets.

Our marketing efforts, including our “Imported from Detroit” campaign, garnered significant attention and accolades for us throughout 2011, 2012 and 2013. Though the “Imported from Detroit” campaign centered on the Chrysler brand, the momentum of the advertisements elevated all our brands and enhanced our company image. In 2012, we launched additional campaigns to support the launch of the Dodge Dart, increase global awareness of the Jeep brand and better target potential Ram buyers. During 2012, we had record worldwide Jeep brand sales of approximately 702,000 vehicles, a 19 percent increase over the prior year. In addition, the Ram brand’s market share increased 1.5 percentage points in the highly competitive U.S. large pick-up truck market. These increases included significant sales to new customers who typically purchase vehicles from our competitors, known as conquest buyers. We believe our substantial investment in marketing contributed to the 21 percent increase in our U.S. vehicle sales in 2012 over 2011 and nine percent increase in our U.S. vehicle sales for the six months ended June 30, 2013 over the same period in 2012.

Throughout 2013, we have continued to invest in our brands and certain of our recently launched campaigns emphasize the historical ties of the Jeep brand to the U.S. military and the long-standing relationship of the Ram brand and the Future Farmers of America Organization.

We continue to have each brand headed by an individual with responsibility for the brand’s identity and product portfolio. The head of each brand is responsible for ensuring that each vehicle within that brand’s product lineup reflects brand attributes such as distinct appearance, capability, performance, content, ride and handling. In addition, we have separated advertising and marketing efforts for each brand to further underscore brand differentiation.

 

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As with our own brands, our management of the Fiat brand for the North American market is headed by a single individual. We and Fiat are jointly responsible for determining strategies, policies and plans relating to this brand and Chrysler Group is responsible for management and implementation of such plans and policies throughout North America.

 

    Optimizing our U.S. Dealer Network. We have largely completed the optimization of our dealer network. As of June 30, 2013, 91 percent of our U.S. Chrysler, Jeep, Dodge and Ram dealers were selling all four brands of our vehicles in a single location. We are currently working to strengthen the network by closing gaps in geographical coverage, solidifying dealer financials and profitability, modernizing sales and service facilities, and increasing diversity, all of which we believe will increase per-dealer sales. As of June 30, 2013 and December 31, 2012, we had 2,592 and 2,570 U.S. dealers in our network, respectively, of which 2,385 and 2,370 were Chrysler, Jeep, Dodge and Ram dealers, respectively. As of June 30, 2013 we had 207 independent Fiat dealerships in the U.S., of which 180 are owned by our Chrysler, Jeep, Dodge and Ram dealers. As of June 30, 2013 approximately 88 percent of the U.S. dealers in our dealer network reported to us that they were profitable. This compares to approximately 87 percent in 2012, 86 percent in 2011, 82 percent in 2010 and 70 percent in 2009.

Now with access to available capital on reasonable terms, our dealers are increasingly willing to make the significant investments necessary to attract customers. These investments have involved construction, renovation, and maintenance of modern sales and service facilities that are equipped with state-of-the-art diagnostic equipment, tools and information management systems, and are staffed by well-trained sales and service personnel. Since we began operations in mid-2009, our U.S. Chrysler, Jeep, Dodge and Ram dealers have invested or committed to invest over $650 million as of the June 30, 2013 in new and renovated facilities to revitalize their image and improve the customer experience. In addition, our Fiat dealers have invested or committed to invest over $164 million as of June 30, 2013 in new, state-of-the-art facilities.

We continue to focus heavily on increasing diversity among the owners of our dealerships to better reflect and serve the communities in which they are situated. We are a leader in this effort, with more than six percent of our dealerships minority owned and operated. We have achieved this level of diversity through our 18-month education program that prepares high-potential minority candidates to own and successfully operate a dealership.

 

    Maximizing Efficiency through World Class Manufacturing. In 2012, we invested approximately $205 million in our manufacturing plants to improve the infrastructure, efficiency and quality of our production systems. This investment, which was incremental to the investments we made for our new model launches, was part of our continued effort to apply WCM principles to our manufacturing operations. WCM principles were developed by the WCM Association, a non-profit organization dedicated to developing superior manufacturing standards. Fiat is the only automobile manufacturer that belongs to the WCM Association and Fiat’s membership provides us access to WCM processes. WCM fosters a manufacturing culture that targets improved performance, safety and efficiency, as well as the elimination of all types of waste. Unlike some other advanced manufacturing programs, WCM is designed to prioritize issues to focus on those believed likely to yield the most significant savings, and then directs resources at those limited issues.

Our progress toward achieving WCM goals is verified by WCM experts, who measure our plants’ performance against 20 categories of pre-determined WCM metrics. In 2012, four Chrysler manufacturing facilities achieved WCM Bronze Award status (Dundee Engine, Windsor Assembly, Toledo Assembly Complex, and Saltillo Assembly). We conducted 46 WCM reviews in 2012, and we are planning for 59 in 2013. Beginning in 2012 and throughout 2013, we have engaged key suppliers in the pilot phase of WCM Lite, a program through which suppliers can learn and incorporate WCM principles in their own operations.

Our integration of WCM facilitated the launch of several new vehicles in 2012 and 2013, while also increasing our manufacturing pace to grow our shipments from 2.0 million in 2011 to 2.4 million in

 

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2012, in line with the 2010-2014 Business Plan. We also utilized WCM principles to guide the production launch of the new 8-speed transmission at the Kokomo Transmission Plant (Indiana), and to introduce the 3-crew operating pattern at the Jefferson North Assembly Plant (Michigan), which helps us generate more volume without significantly increasing labor costs. Despite these demands on our operations, we have continued to drive process improvement in our plants. In 2012, we reduced the frequency of injuries by 26 percent. In addition, we made significant strides in manufacturing quality, advancing the dimensional control of our processes to achieve better consistency in fit and finish during assembly and stamping processes.

In January 2012, we opened our WCM Academy, a training facility designed to transfer WCM know-how to participants using automated learning modules and a variety of hands-on simulation techniques. The WCM Academy delivered training to more than 3,400 employees across more than 30 courses in 2012. Participants who attend the full program commit to leading a follow-up WCM project in their home plant, and then return to the WCM Academy to verify and share their results. In addition to WCM Academy-based training, 51 in-plant workshops were conducted to further advance WCM methodology and tool usage.

 

    Procurement. We have established joint purchasing programs with Fiat that are designed to yield preferred pricing and supplier responsiveness, particularly with respect to shared parts and common suppliers. This joint sourcing has yielded benefits that span both direct and indirect procurement, from powertrain components and robots, to computer equipment and corporate expenses. Working with Fiat’s automotive and industrial affiliates, the Fiat-Chrysler Alliance provides the opportunity to develop global commodity and supplier strategies, which allow us to leverage our combined annual purchasing power of approximately $96 billion in 2012. For example, in utilizing the shared CUSW platform for the Dodge Dart, we were able to negotiate tiered reductions in part costs. As volume grows with sales of the Dodge Dart and launches of subsequent vehicles based on the same platform, we expect to realize savings on these common parts. We are currently working on a global component standardization initiative with Fiat. As we deploy these standardized components across our vehicle lines, we expect to realize additional savings in development, investment and variable cost.

 

    Supply Chain Management. In 2012, we continued to maintain the discipline in our supply chain function that began with the implementation of the 2010-2014 Business Plan in 2010. Our supply chain management function coordinates efforts to accurately forecast demand, manage the materials and vehicle ordering processes, track plant capacity, schedule production, allocate product inventory and arrange transportation logistics. Supply chain management is important in preventing potentially costly oversupply or undersupply conditions. Our continued rigor and process improvement in this area has enabled us to rapidly grow our shipments from 1.6 million vehicles in 2010 to 2.4 million vehicles in 2012, consistent with our planning assumptions in 2009. At the same time, our improved efficiency in logistics has helped us to improve our 2012 fuel economy for our internal fleet of trucks by eight percent over our 2010 figures, substantially reducing our CO2 emissions on a per vehicle produced basis, in line with our commitment to sustainability.

Our supply chain management also monitors our dealers’ vehicle inventory levels to maintain availability of vehicles to facilitate sales, while at the same time preventing excess dealer stock to avoid the need for increased dealer and retail incentives. Since we began operations in 2009, we have experienced significant growth in volumes. We have also faced many challenges in forecasting sales patterns given the launch of over 25 new or significantly refreshed vehicles, including most recently, the Dodge Dart and the 2013 Ram 1500. We have nevertheless continued to manage U.S. dealer vehicle inventory levels to be more in line with market demand. Our days’ supply of inventory (number of vehicles in dealer inventory divided by the daily selling rate for the period) was 68 days, 73 days and 64 days, as of June 30, 2013, December 31, 2012 and December 31, 2011, respectively. Our days’ supply as of December 31, 2012 was up from 64 days as of December 31, 2011 due to the Dodge Dart and Ram 1500 launches in 2012.

 

   

Global Distribution. We have made significant progress on our plan to increase our sales of vehicles and service parts outside of North America by leveraging the Fiat-Chrysler Alliance to provide better access

 

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to key markets in Europe and South America. Our success to date and ability to make such significant progress in global distribution in such a short period of time was based largely on the Fiat-Chrysler Alliance, as the Fiat-Chrysler Alliance gave us a significant advantage in expanding such distribution activities. See Risk Factors —Risks Related to our Business —Meeting our objective of increasing our vehicle sales outside North America is largely dependent upon access to Fiat’s network of distribution arrangements, manufacturing capacity and local alliance partners. In June 2011, Fiat became the general distributor of our vehicles and service parts in Europe, where it sells our products through a network of dealers. As contemplated by that plan, we are producing and selling several of our vehicle models and related service parts to Fiat for significantly expanded distribution in Europe, including a range of Jeep models and several Chrysler brand vehicle models sold under Fiat’s Lancia brand.

As part of the Fiat-Chrysler Alliance, we manufacture certain Fiat vehicles in Mexico, which are distributed throughout North America and sold to Fiat for distribution elsewhere in the world. In July 2011, we began producing the Fiat Freemont, a utility vehicle based on the Dodge Journey, which Fiat distributes in Europe. We have also implemented strategies by which we are benefitting from Fiat’s longstanding presence in Brazil, the largest automotive market in South America. In that regard, Fiat is also distributing the Chrysler Group manufactured Fiat Freemont in Brazil, and is selling a portion of the Fiat 500 vehicles that we manufacture in Mexico through its dealer network in Brazil and Argentina. Fiat is also selling a portion of the Fiat 500 vehicles we manufacture in Mexico through its dealer network in China. Fiat added the Fiat Freemont to its portfolio in China in 2012 and to Australia, South Korea and Russia in 2013. In addition, beginning with the all-new Fiat 500L, we purchase certain vehicles that are contract manufactured by Fiat in Europe for our sale in North America.

In 2011, we began distributing Alfa Romeo vehicles in Mexico, and have exclusive distribution rights for Alfa Romeo in the U.S. and Canada. We are the exclusive distributor of Fiat brand vehicles and service parts throughout North America. In January 2012, we began selling Fiat, Fiat Professional, and Alfa Romeo vehicles and/or service parts for Fiat in certain markets outside of North America. As a result of this increased global activity, our sales outside of North America grew from 196,000 in 2011 to 277,000 in 2012, including sales of Fiat- and Lancia-branded vehicles manufactured by us and sold by Fiat.

Finally, we are exploring additional opportunities for the local production and expansion of the sale of Chrysler Group vehicles and service parts in growing and emerging markets, such as China, Brazil and India, in connection with Fiat’s efforts to establish or expand manufacturing and distribution activities in those markets. To that end, we licensed certain technology to Fiat for a vehicle that a Fiat joint venture began to produce in China in 2012, and we are now selling related parts to that joint venture. In 2014, we expect to participate in an arrangement with Fiat to build a Jeep vehicle in China to be sold only in China.

 

    Management Structure. At the time of our formation, we implemented a flatter management structure so that each functional area of our business reports directly to the Chief Executive Officer. To facilitate collaboration and enhance speed of decision-making, three management committees chaired by our Chief Executive Officer meet regularly to consider significant operational matters. Our Product Committee oversees capital investment, engineering and product development, and our Commercial Committee oversees matters related to sales and marketing. Both committees include the managers of each of our brands, each of whom also has a separate functional responsibility across all the brands. Our Industrial Committee, which consists of our industrial heads, has the responsibility to coordinate and expedite the mitigation of operational risks associated with the production and distribution of our vehicles. We believe this matrix system has fostered cooperation and information sharing and further speeds decision-making. For example, the head of the Jeep brand is also the head of international operations for all our brands, and the head of our Ram brand is also responsible for sales in the U.S. and Canada for all of our brands.

In September 2011, Fiat formed the GEC to oversee and enhance the operational integration of all Fiat interests, including Chrysler Group. Drawing leaders from both Chrysler Group and Fiat, the GEC has

 

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helped both parties to maximize the benefits of the Fiat-Chrysler Alliance, but has allowed us to continue to independently govern our business decisions to enhance value for our members. See Certain Relationships and Related Party Transactions —Polices and Processes for Transactions Involving Related Parties for more information regarding the governance processes related to our operational integration with Fiat.

The 2010-2014 Business Plan also includes targets related to increased liquidity. On May 24, 2011, we completed a debt refinancing transaction whereby we entered into the Original Credit Agreement and issued the Secured Senior Notes. The net proceeds received from the refinancing transaction, along with cash generated from our operations, were used to repay all amounts outstanding under the first lien credit facilities with the U.S. Treasury, or the U.S. Treasury credit facilities, and the Export Development Canada, or EDC, Credit Facilities, or EDC credit facilities. In connection with our repayment of the U.S. Treasury and EDC credit facilities, Fiat exercised its incremental equity call option for FNA LLC to acquire an additional 16 percent fully-diluted ownership interest in Chrysler Group pursuant to the terms of Chrysler Group LLC’s governance documents. FNA LLC, using funds contributed by Fiat, paid $1,268 million to us in connection with the exercise. In June 2013, we amended our Original Credit Agreement to reduce interest rates and amend certain negative covenants, including limitations on incurrence of indebtedness and certain limitations on restricted payments, among other things. Refer to —Liquidity and Capital Resources —Liquidity Overview and specifically to —Repayment of U.S. Treasury and Export Development Canada Credit Facilities and —Senior Credit Facilities and Secured Senior Notes, below, for additional information regarding our current sources of liquidity and capital resources and refinancing transaction.

See Business —Chrysler Overview and Certain Relationships and Related Party Transactions —Transactions with Fiat under the Fiat-Chrysler Alliance for additional information regarding our progress in implementing the 2010-2014 Business Plan.

Trends, Uncertainties and Opportunities

Rate of U.S. Economic Recovery

The U.S. economy has not yet fully recovered from the recession that developed in late 2007 and culminated in the severe global credit crisis in 2008 and 2009. The high unemployment rates that developed during that period have improved slowly over the past several years, while the U.S. economy has grown only moderately. Coupled with concern over events such as the “fiscal cliff” at the end of 2012, sequestration in early 2013, and sustained economic weakness in several parts of the world, consumer confidence levels in the U.S. remain relatively low compared to the beginning of 2008. Even if economic conditions improve, a corresponding increase in vehicle sales may not occur due to factors such as rising interest rates and changes in consumer spending habits. Further, the initial recovery of the demand for vehicles in North America since 2010 may be partially attributable to the pent-up demand and age of the fleet following the extended economic downturn. Vehicle sales in 2012, at a U.S. seasonally adjusted annualized sales rate, or SAAR, level including medium- and heavy-duty vehicles of 14.8 million, still remain well below the 16.5 million in 2007. For the past several years, we have conservatively estimated U.S. SAAR levels including medium- and heavy-duty vehicles, but our estimate of 15.6 million vehicles for 2013 is aligned with other industry estimates. Our ability to meet our performance targets in 2013 and future years will depend significantly on whether our estimates of growth are accurate, and whether we continue to capture greater market share as that growth unfolds.

Product Development and Launches

Since we began operations in mid-2009, we have launched more than 25 new or significantly refreshed vehicles. An integral part of the 2010-2014 Business Plan is the continued refresh and growth of our vehicle portfolio and we have committed significant capital and resources toward an aggressive launch program of completely new vehicles—on all new platforms, with additions of new powertrain and transmission technology. Despite this strong cadence, we are still suffering from the effects of the long interruption in Old Carco’s launch of new or

 

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significantly refreshed products, particularly during 2008 and 2009. Until our lineup consists of more competitive vehicles desired by consumers, particularly with respect to passenger cars, and in order to realize a return on the significant investments we have made, to sustain market share, and to achieve competitive operating margins, we will have to continue this accelerated pace of new vehicle launches. This challenging product development and launch schedule depends heavily on continued successful collaboration with Fiat, particularly in terms of sharing vehicle platforms and powertrains. During the development of these new offerings, despite the pace, we must also maintain our commitment to quality improvements. Moreover, our ability to continue to make the necessary investments in product development to achieve these plans depends in large part on the market acceptance and success of the new or significantly refreshed vehicles we introduce, as well as our ability to timely complete the aggressive launch schedule we have planned without sacrificing quality.

Pricing

Our profitability depends in part on our ability to maintain or increase margins on the sale of vehicles, while operating in an automotive industry that has intense price competition resulting from the wide variety of available competitive vehicles and manufacturing overcapacity. Historically, manufacturers have competed for vehicle sales by offering dealer, retail and fleet incentives, including cash rebates, option package discounts, guaranteed depreciation programs, and subsidized financing or leasing programs, all of which constrain margins on vehicle sales. Although we will continue to use such incentives to generate sales for particular models in particular geographic regions during specific time periods, we are focusing on achieving higher sales volumes by building brand value, balancing our product portfolio by offering smaller vehicle models, and improving the content, quality, fuel economy and performance of our vehicles. Throughout 2010, our U.S. retail average net transaction price increased and our average incentive per unit decreased, as adjusted for changes in model mix over the period, due to favorable content mix and net price discipline. We continued this positive trend into 2011 and 2012, and through June 30, 2013 we have moderately increased our average net transaction price and kept our incentive per unit largely stable as well, as adjusted for changes in model mix. We may encounter challenges given that our smaller, less expensive cars are not currently as competitive as our larger, more profitable vehicles, and we may not be able to price our vehicles or minimize our incentives as planned.

Vehicle Profitability

Our results of operations depend on the profitability of the vehicles we sell, which tends to vary by vehicle segment. Vehicle profitability depends on a number of factors, including sales prices, net of sales incentives, costs of materials and components, as well as transportation and warranty costs. Typically, larger vehicles, which tend to have higher unit selling prices, have been more profitable on a per unit basis. Therefore, our minivans, larger utility vehicles and pick-up trucks have generally been more profitable than our passenger cars. Our minivans, larger utility vehicles and pick-up trucks accounted for approximately 55 percent of our total U.S. vehicle sales in 2012 and approximately 50 percent in the first half of 2013. While more profitable on a per unit basis, these larger vehicles have relatively low fuel economy and over the past several years, consumer preferences have shifted away from these vehicles, particularly in periods of relatively high fuel prices. As part of the Fiat-Chrysler Alliance, we continue to work toward a more balanced product portfolio that we believe will mitigate the impact of future shifts in consumer demand. In order to ensure that our portfolio of vehicles appropriately addresses the range of vehicles that may appeal to consumers over time, we have renewed our focus on the design, manufacturing, marketing and sale of our passenger cars, including mini, small and compact cars, notwithstanding the lower per unit profitability. Our success in selling these smaller vehicles will provide us not only with some protection from the effects of changing consumer preferences, but will also be an important part of our efforts to comply with tightening environmental and fuel economy standards and to achieve corporate sustainability goals. Until we develop a full line of competitive passenger car offerings, we must continue to make substantial investments in product development and engineering, and our ability to increase our margins on these offerings is therefore more limited than our competitors. In addition, our vehicle sales through dealers to customers are normally more profitable than our fleet sales. Our fleet customers increasingly tend to purchase a higher proportion of our smaller, more fuel-efficient vehicles, which have historically had a lower profitability per unit. Nevertheless, our fleet sales have been an important source of stable revenue and can also be an

 

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effective means for marketing our vehicles. Our fleet sales also help to normalize our plant production because they typically involve the delivery of a large, pre-determined quantity of vehicles over several months. In line with our plan to decrease fleet sales as a percentage of our total business, our U.S. fleet sales accounted for approximately 22 percent of our total U.S. vehicle sales for the second quarter of 2013, versus 26 percent in 2012, 28 percent in 2011 and 36 percent in 2010.

Cost of Sales

Our cost of sales is composed of a number of elements. The most significant element of our cost of sales is the cost of materials and components, which makes up the majority of our cost of sales, typically around 75 percent of the total. A large portion of our materials and component costs are affected directly or indirectly by raw materials prices, particularly prices for steel, aluminum, lead, resin and copper, as well as precious metals. The prices for these raw materials fluctuate and can be difficult to predict. These market conditions affect, to a significant extent, our ability to manage our cost of sales over the long term. To the extent raw material price fluctuations may affect our cost of sales, we typically seek to manage these costs and minimize the impact on cost of sales through the use of fixed price purchase contracts and the use of commercial negotiations and technical efficiencies. As a result, for the periods reported, changes in raw material costs generally have not had a material effect on the period to period comparisons of our cost of sales. Nevertheless, our cost of sales related to materials and components has increased, as we have significantly enhanced the quality and content of our vehicles in an effort to remain competitive. Our ability to price our vehicles so as to recover those increased costs does, and will continue to, impact our profitability.

The remaining costs primarily include labor costs, consisting of direct and indirect wages and fringe benefits, as well as depreciation, amortization and transportation costs. Cost of sales also includes warranty and product-related costs, as well as depreciation expense related to our Guaranteed Depreciation Program, or GDP, vehicles. To grow our production from 2.0 million vehicles in 2011 to 2.4 million vehicles in 2012, these elements of our cost of sales increased. The uptick in our volumes required us to take numerous actions to increase production capacity at our own plants, and we also had to demand that our suppliers quickly increase their production levels as well. This growth occurred in a production environment that was already capacity constrained, due to the greater volumes in 2011 over the 1.6 million vehicles we produced in 2010. As a result of this growth, we could not maximize our efficiency, and we incurred non-standard costs for overtime, expedited freight and component banking. As with our suppliers, the industry’s just-in-time inventory systems further exacerbate our costs in times of sudden capacity constraints. In some cases, we outsourced our operations. However, moving our production to suppliers or to locations overseas, where there is available capacity, creates additional risk with respect to quality control, component pricing, logistics and currency exchange rates. We attempted to manage our labor costs where possible, but overtime payments were unavoidable in some of our operations. For example, in our Dundee Engine Plant (Michigan), our 17 percent increase in demand meant that production continued during 32 Sundays and holidays in 2012, as compared to seven such days in 2011. For the six months ended June 30, 2013, we increased worldwide sales by over 100,000 vehicles period over period and project additional growth for the remainder of 2013. We anticipate that we will encounter even more challenges as we work to contain our costs while we still maintain our production quality. To improve, or even maintain, our margins, we must contain the associated increases in our cost of sales.

Engineering, Design and Development Costs

In the past, suppliers often incurred the initial cost of engineering, designing and developing automotive component parts, and recovered their investments over time by including a cost recovery component in the price of each part based on expected volumes. Due in part to liquidity constraints faced by key suppliers, many of them have negotiated for cost recovery payments independent of volumes. This trend places increased demands on our liquidity and increases our economic risk, if new vehicles incorporating these components are not successful in the market.

 

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Impact of Labor Cost Modifications

Our collective bargaining agreements with the UAW and Unifor have introduced lower wage and benefit structures for entry-level new hires, eliminated the employment security system (commonly known as the “Jobs Bank,” which is a UAW provision only), and reduced other compensation programs for terminated or laid-off represented employees, other than traditional severance pay. Over time, these and other modifications are intended to help us achieve hourly labor costs that are comparable to those of the transplant automotive manufacturers with which we compete, while continuing to offer competitive compensation packages. We expect to realize the benefit of the new hire wage and benefit structure as our production increases and as a result of natural attrition. We successfully renegotiated our collective bargaining agreements with the UAW in 2011 and with the CAW, now part of Unifor, in 2012. These settlement provisions enable labor cost competitiveness within the U.S. and Canada automobile manufacturing industry through the terms of the respective agreements.

Ownership Interest in Chrysler Group

On June 10, 2009, FNA LLC obtained a 20 percent ownership interest in Chrysler Group in connection with the 363 Transaction in exchange for the Fiat IP that were contributed and licensed to Chrysler Group. FNA LLC’s ownership interest increased five percent on a fully-diluted basis in January 2011 upon Chrysler Group’s achievement of a certain technology event explained below, or Technology Event, which was one of three Class B Events outlined in Chrysler Group LLC’s governance documents. The Technology Event was achieved as a result of Chrysler Group delivering an irrevocable commitment letter to the U.S. Treasury stating that the appropriate governmental approvals had been received to begin commercial production of our FIRE engine in our Dundee facility (Michigan). In April 2011, FNA LLC’s ownership interest in Chrysler Group increased an additional five percent on a fully-diluted basis when Chrysler Group delivered notice to the U.S. Treasury confirming that it had achieved the second Class B Event, the Non-NAFTA Distribution Event, under which Chrysler Group attained certain metrics relating to revenue and expansion of sales outside of North America.

On May 24, 2011, and in connection with Chrysler Group’s repayment of the U.S. Treasury and EDC credit facilities, Fiat exercised its incremental equity call option for FNA LLC to acquire an additional 16 percent fully-diluted ownership interest in Chrysler Group pursuant to the terms of Chrysler Group LLC’s governance documents. Fiat contributed $1,268 million of cash to FNA LLC, which was then paid to Chrysler Group in connection with the exercise. As a result of these transactions, FNA LLC’s ownership interest in Chrysler Group increased to 46 percent on a fully-diluted basis. In connection with these transactions, FNA LLC became the primary beneficiary of Chrysler Group, resulting in FNA LLC’s consolidation of Chrysler Group as discussed in —Critical Accounting Estimates —Business Combination Accounting, below.

On July 21, 2011, FNA LLC received a $700 million cash contribution from Fiat to complete the following transactions:

 

    Acquire all of the Chrysler Group Class A Membership Interests held by the U.S. Treasury for $500 million, which represented approximately six percent of the fully-diluted ownership interest in Chrysler Group;

 

    Acquire all of the Chrysler Group Class A Membership Interests held by the Canadian Government for $125 million, which represented approximately 1.5 percent of the fully-diluted ownership interest in Chrysler Group; and

 

    Acquire the U.S. Treasury’s rights under the equity recapture agreement between the U.S. Treasury and the VEBA Trust for $75 million, of which $15 million was paid to the Canadian Government pursuant to a separate arrangement between the U.S. Treasury and the Canadian Government.

The equity recapture agreement provides FNA LLC with certain rights to the economic benefit associated with the membership interests in Chrysler Group held by the VEBA Trust if the VEBA Trust receives proceeds, including certain distributions, in excess of a threshold amount of $4.25 billion plus nine percent per annum from

 

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January 1, 2010, less any proceeds, including certain distributions, previously received by the VEBA Trust, or the Threshold Amount. If the VEBA Trust receives the Threshold Amount, any additional proceeds payable to the VEBA Trust for the Chrysler Group membership interests and any membership interests retained by the VEBA Trust are to be transferred to FNA LLC for no further consideration. Fiat may also acquire all of the membership interests held by the VEBA Trust by paying an amount equal to the then-current specified Threshold Amount. In addition, the equity recapture agreement provides for interim settlements of membership interests having one-third, one-half and 100 percent of the value of FNA LLC’s contingent value right on December 31, 2014, 2016 and 2018, respectively, if the VEBA Trust still holds membership interests on those dates.

In January 2012, FNA LLC’s ownership interest increased an additional five percent on a fully-diluted basis when Chrysler Group notified the U.S. Treasury that it achieved the third and final Class B Event, the Fuel Economy Event. Chrysler Group irrevocably committed to begin assembly of a vehicle based on a Fiat platform or vehicle technology that has a verified unadjusted combined fuel economy of at least 40 miles per gallon in commercial quantities in a production facility in the U.S. This was achieved with a pre-production version of the Dodge Dart, which is produced at the Belvidere Assembly Plant (Illinois).

In January 2013, the 200,000 of Chrysler Group’s Class B Membership Interests held by FNA LLC automatically converted to 571,429 Chrysler Group Class A Membership Interests in accordance with Chrysler Group LLC’s governance documents. There were no dilutive effects of the conversion.

As of June 30, 2013, FNA LLC held a 58.5 percent ownership interest in Chrysler Group and the VEBA Trust held the remaining 41.5 percent. Since July 2012, Fiat exercised, through FNA LLC, the call option right to acquire three tranches of the VEBA Trust’s membership interests in Chrysler Group, each of which represents approximately 3.3 percent of Chrysler Group’s outstanding equity. Interpretation of the call option agreement is currently the subject of a proceeding in the Delaware Court of Chancery, or Chancery Court, in respect of the first exercise of the option in July 2012. Refer to Note 25, Subsequent Events, of the accompanying audited consolidated financial statements for additional information regarding ownership interests in Chrysler Group.

Critical Accounting Estimates

The audited consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, or U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.

The critical accounting estimates that affect the audited consolidated financial statements and that use judgments and assumptions are listed below. In addition, the likelihood that materially different amounts could be reported under varied conditions and assumptions is discussed.

Business Combination Accounting

Chrysler Group was considered a VIE on June 10, 2009 because the total equity investment at risk was not sufficient to finance its activities. This conclusion was based on the fact that Chrysler Group’s only available source of financing at June 10, 2009 was from two of its members, the U.S. Treasury and the Canadian Government, under the terms of the related U.S. Treasury and EDC loan and credit facilities. The assessment of whether Chrysler Group continued to be a VIE was reconsidered on May 24, 2011 in connection with Chrysler Group’s repayment of the U.S. Treasury and EDC loans and termination of the related credit facilities, as well as FNA LLC’s contribution of additional equity through the exercise of its incremental equity call option. We concluded that Chrysler Group continued to be a VIE because the total equity investment at risk was not sufficient to finance Chrysler Group’s activities without additional subordinated financial support as evidenced by FNA LLC’s contribution of additional equity and the fact that the Tranche B Term Loan and Secured Senior

 

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Notes issued by Chrysler Group had ratings that were below investment grade. Refer to Note 13, Financial Liabilities, of the accompanying consolidated financial statements for additional information related to the nature, terms and amounts of the Tranche B Term Loan and Secured Senior Notes.

The primary beneficiary of a VIE is required to consolidate the VIE. The primary beneficiary is the entity that has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. While all of Chrysler Group’s members had the obligation to absorb losses and had the rights to receive benefits from their ownership interests in Chrysler Group that could potentially be significant to Chrysler Group, no individual member was determined to be the primary beneficiary, as no individual member had the power to direct the activities that most significantly impacted Chrysler Group’s economic performance. This was due to the fact that no one member had a majority representation on Chrysler Group’s Board of Directors or the contractual ability to direct Chrysler Group’s key activities prior to FNA LLC’s acquisition of the U.S. Treasury and Canadian Government ownership interests in Chrysler Group on July 21, 2011. Refer to Note 20, Other Transactions with Related Parties, of the accompanying audited consolidated financial statements for additional information regarding these transactions.

However, due to the various restrictions on the members’ ability to sell, transfer or encumber their interests as set forth in Chrysler Group’s governance documents, the members collectively constituted a related party group in accordance with U.S. GAAP consolidation guidance. As a result, the member most closely associated with Chrysler Group was required to consolidate Chrysler Group.

Prior to May 25, 2011, FNA LLC was not the member deemed to be most closely associated with Chrysler Group under U.S. GAAP consolidation guidance, and therefore was not the primary beneficiary. As noted above, prior to Chrysler Group’s issuance of the Tranche B Term Loan and Secured Senior Notes, the U.S. Treasury and Canadian Government were the only sources of financing for Chrysler Group. Further, the U.S. Treasury and Canadian Government were the only members required to provide additional financing under the terms of the U.S. Treasury and EDC loan and credit facilities. As a result of these risks and obligations, Chrysler Group’s equity structure and governance documents were designed to benefit the U.S. Treasury and Canadian Government by providing fewer restrictions on their ability to sell or transfer their interests in Chrysler Group as compared to the interests held by FNA LLC and the VEBA Trust. Conversely, FNA LLC was generally precluded from increasing its ownership interest in Chrysler Group, except through the Class B Events, until the U.S. Treasury and EDC loans were repaid and the credit facilities were terminated. Refer to Note 20, Other Transactions with Related Parties, of the accompanying audited consolidated financial statements for additional information regarding these Class B Events.

Upon repayment of the U.S. Treasury and EDC loans and termination of the related credit facilities on May 24, 2011, the U.S. Treasury and Canadian Government were no longer obligated to provide additional financing to Chrysler Group. Further, as noted above, in connection with this repayment, FNA LLC increased its equity at risk in Chrysler Group through the exercise of the incremental equity call option. As a result of these events, FNA LLC became the member most closely associated with Chrysler Group. Therefore, FNA LLC was determined to be the primary beneficiary, requiring consolidation and application of the acquisition method of accounting on May 25, 2011, or the Acquisition Date.

The consolidation of Chrysler Group was accounted for as a business combination achieved in stages using the acquisition method of accounting. In accordance with the acquisition method, FNA LLC remeasured its previously held equity interest in Chrysler Group at fair value. The noncontrolling interest in Chrysler Group was also recognized at its acquisition date fair value. Additionally, FNA LLC recognized the acquired assets and assumed liabilities at their acquisition date fair values, except for certain pre-acquisition contingent liabilities for which fair value was not determinable, deferred income taxes and certain liabilities associated with employee benefits, which were recorded according to other accounting guidance.

 

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Goodwill represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill was measured as the excess of the sum of the exercise price of the incremental equity call option, the acquisition date fair value of the previously held equity interest and the acquisition date fair value of the noncontrolling interest less the aggregate acquisition date values of the identifiable assets acquired and liabilities assumed.

Goodwill arising from the consolidation of Chrysler Group is expected to be non-deductible for tax purposes. Refer to Note 14, Income Taxes, of the accompanying audited consolidated financial statements for additional information on the accounting for deferred income taxes related to the consolidation of Chrysler Group.

The following summarizes the fair values assigned to the net assets acquired as of the Acquisition Date (in millions of dollars):

 

Fair value of the previously held equity interest

      $ 2,960   

Incremental equity call option exercise price

        1,268   

Fair value of the noncontrolling interest

        4,062   

Assets acquired

     

Cash and cash equivalents (1)

   $ 9,358      

Restricted cash

     467      

Trade receivables

     1,188      

Inventories

     4,387      

Property, plant and equipment

     13,578      

Equipment and other assets on operating leases

     1,879      

Prepaid expenses and other assets

     1,851      

Advances to related parties and other financial assets

     55      

Deferred taxes

     65      

Intangible assets

     5,059      
  

 

 

    

Total assets acquired

     37,887      

Liabilities assumed

     

Trade liabilities

     7,950      

Accrued expenses and other liabilities

     18,072      

Financial liabilities

     13,205      

Deferred revenue

     2,081      

Deferred taxes

     338      
  

 

 

    

Liabilities assumed

     41,646      
  

 

 

    

Less: Value of net liabilities assumed

        (3,759
     

 

 

 

Goodwill

      $ 12,049   
     

 

 

 

 

(1) Cash and cash equivalents includes $1,268 million of proceeds received by Chrysler Group in connection with Fiat’s exercise of its incremental equity call option for FNA LLC to acquire an additional 16 percent fully-diluted ownership interest in Chrysler Group pursuant to the terms of Chrysler Group LLC’s governance documents.

Previously Held Equity Interest and Noncontrolling Interest

The acquisition of Chrysler Group was achieved in stages. FNA LLC accounted for this as a step acquisition, which requires remeasurement of FNA LLC’s previously held equity interest in Chrysler Group to its fair value. The Acquisition Date fair value of FNA LLC’s previously held equity interest in Chrysler Group was $2,960 million. Immediately prior to the business combination, the carrying amount of FNA LLC’s previously held equity interest in Chrysler Group was zero. As the resulting gain of $2,960 million relates to FNA LLC’s previously held equity interest, the gain was recognized by FNA LLC immediately prior to the commencement of the Successor period and

 

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is therefore included in FNA LLC’s retained earnings as of May 24, 2011 in the accompanying Consolidated Statements of Members’ Interest (Deficit). The gain on the previously held equity interest resulted in the recognition of a deferred tax liability of $475 million. The related income tax expense was recognized by FNA LLC immediately prior to the commencement of the Successor period, consistent with the gain on the previously held equity interest, and is therefore included in FNA LLC’s retained earnings as of May 24, 2011.

The noncontrolling interest in Chrysler Group was recorded at its Acquisition Date fair value of $4,062 million.

The fair values of the previously held equity interest and the noncontrolling interest were determined based on the fair value of Chrysler Group’s total membership interest as of the Acquisition Date. The fair value was determined based on the purchase price Fiat negotiated with the U.S. Treasury to acquire its membership interest in Chrysler Group, the terms of which were agreed to on June 2, 2011. This value was corroborated using a discounted cash flow model which yielded an internal rate of return of 14.4 percent. The calculated internal rate of return was consistent with management’s estimated weighted average cost of capital, or WACC, at the Acquisition Date of 14.0 percent.

The key inputs used in the discounted cash flow model included:

 

    Annual projections through 2014 prepared by management that reflect the estimated cash flows a market participant would expect to generate from operating the business;

 

    A terminal value which was determined using a growth model that applied a 2.0 percent long-term growth rate to our projected cash flows beyond 2014. The long-term growth rate was based on management’s internal projections as well as industry growth prospects; and

 

    Projected worldwide factory shipments ranging from 1.6 million vehicles in 2010 to 2.8 million vehicles in 2014.

The significant assumptions related to the valuation of our assets and liabilities recorded in connection with the consolidation of Chrysler Group are discussed below.

Trade Receivables

We recorded trade receivables at a fair value of $1,188 million, which takes into account the risk that not all contractual amounts owed us will be collected. Contractual amounts due to us for acquired trade receivables amounted to $1,273 million. Due to the short-term nature of the acquired trade receivables, management did not expect cash collections for trade receivables to differ materially from the fair value recognized.

Inventories

We recorded inventories at a fair value of $4,387 million, which was determined as follows:

 

    Finished products were determined based on the estimated selling price of finished products on hand less costs to sell, including disposal and holding period costs, as well as a reasonable profit margin on the selling and disposal effort for each specific category of finished products being evaluated;

 

    Work in process was determined based on the estimated selling price once completed less total costs to complete the manufacturing process, costs to sell including disposal and holding period costs, as well as a reasonable profit margin on the remaining manufacturing, selling and disposal effort; and

 

    Raw materials were determined based on current replacement cost.

Property, Plant and Equipment

We recorded property, plant and equipment, which includes land, buildings, leasehold improvements, machinery, equipment, construction in progress and special tooling, at a fair value of $13,578 million. The fair value was based on the premise of highest and best use.

 

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The cost approach was applied in determining fair value for certain assets related to buildings, leasehold improvements and the majority of our machinery, equipment and special tooling. This method considers the amount required to construct or purchase a new asset of equal utility at current prices, with adjustments in value for physical deterioration, as well as functional and economic obsolescence. Economic obsolescence represents a loss in value due to unfavorable external conditions, such as the economics of the automotive industry as of May 25, 2011. Economic obsolescence was estimated based on expectations of the highest and best use of the property, plant and equipment, which generally contemplated an in-use valuation premise. Land was valued using the comparable sales method, which is a market approach that uses recent transactions for similar types of real property as a basis for estimating the fair value of the land acquired.

Equipment and Other Assets on Operating Leases

We recorded equipment and other assets on operating leases, for which we are the lessor, at a fair value of $1,879 million, which was based on the market value of comparable assets.

Intangible Assets

We recorded intangible assets at a fair value of $5,059 million. The following is a summary of the methods used to determine the fair value of our significant intangible assets:

 

    The relief from royalty method was used to calculate the fair value of brand names of $3,580 million. The significant assumptions used in this method included:

 

    Forecasted revenue for each brand name (Chrysler, Jeep, Dodge, Ram and Mopar);

 

    Royalty rates based on licensing arrangements for the use of brands and trademarks in the automotive industry and related industries;

 

    Estimated tax expense a market participant would incur on the net royalties;

 

    After-tax discount rates ranging from 14 percent to 25 percent based on an estimated WACC and adjusted for perceived business risks related to these intangible assets; and

 

    Indefinite economic lives for the acquired brands.

 

    The cost approach was used to calculate the fair value of the acquired dealer networks of $378 million. The fair value of the acquired dealer networks was determined based on our estimated costs to re-create the dealer networks, which took into consideration an estimate of an optimal number of dealers.

 

    The relief from royalty method was used to calculate the fair value of patented and unpatented technology of $293 million. The significant assumptions used included:

 

    Forecasted revenue for each technology category;

 

    Royalty rates based on licensing arrangements for similar technologies and obsolescence factors by technology category;

 

    Estimated tax expense a market participant would incur on the net royalties;

 

    After-tax discount rates ranging from 16 percent to 20 percent based on an estimated WACC and adjusted for perceived business risks related to these developed technologies; and

 

    Estimated economic lives, which ranged from 3 to 8 years.

 

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    The relief from royalty method was used to calculate the fair value of the Fiat IP previously contributed by FNA LLC in connection with the initial capitalization of Chrysler Group. This reacquired right has a fair value of $370 million, based on the following significant assumptions:

 

    Forecasts of revenues for vehicles expected to be manufactured in the future utilizing this intellectual property;

 

    A royalty rate of 3 percent based on licensing arrangements for the use of technology in the automotive industry and related industries;

 

    Estimated costs expected to be incurred to allow the Fiat IP to be used on vehicles sold in North America;

 

    A discount rate of 15 percent commensurate with the perceived business risks related to the cash flows attributable to the Fiat IP; and

 

    An estimated economic life of 10 years.

 

    We recorded other intangible assets of $438 million, which included the fair value of software, other intellectual property and favorable operating leases.

Accrued Expenses and Other Liabilities

We recorded accrued expenses and other liabilities of $18,072 million, which included the following:

 

    Pension and other postretirement employee benefits, or OPEB, liabilities of $3,858 million and $2,632 million, respectively, measured in accordance with the accounting guidance for employee benefits discussed in Note 19, Employee Retirement and Other Benefits, of the accompanying audited consolidated financial statements;

 

    Other employee benefit and nonretirement post-employment benefits, including workers’ compensation and supplemental unemployment benefit obligations totaling $807 million, measured in accordance with the accounting guidance for employee benefits;

 

    Certain warranty obligations of $1,990 million measured at fair value. Fair value was determined based on the expected future cash flows to satisfy the obligations, adjusted for a profit margin that would be required by a market participant to assume the obligations and discounted to a single present value using a discount rate that considers the timing of the expected cash flows and the non-performance risk of the obligations of 7.7 percent based on the timing of the claims and their relationship to other secured and unsecured obligations of the Company. We used Chrysler Group’s historical data regarding profit margins on its service contract business as a basis for estimating the profit margin a market participant would expect to earn on the assumed warranty obligations;

 

    Various accrued expenses, including accrued sales incentives of $2,388 million; accrued income, property, excise, state, local and other taxes payable of $424 million and other items totaling $4,085 million measured at fair value; and

 

    Various pre-acquisition contingencies totaling $1,888 million for which fair value was not determinable, which were measured in accordance with the accounting guidance related to contingencies as discussed below.

 

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Financial Liabilities

We recorded financial liabilities, including debt and capital leases, at a fair value of $13,205 million. The Tranche B Term Loan and Secured Senior Notes were issued immediately prior to the business combination. This provided market observable information to establish the fair values of these instruments at the Acquisition Date. The fair values of all other financial liabilities were calculated using a discounted cash flow methodology utilizing a synthetic credit rating to estimate the non-performance risk associated with our debt instruments, adjusted where appropriate for any security interests. Appropriate discount rates were estimated by extrapolating market observable debt yields at the measurement dates. Financial liabilities included the following:

 

    VEBA Trust Note with an Acquisition Date fair value of $4,710 million. Refer to Note 13, Financial Liabilities, of the accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of the VEBA Trust Note;

 

    Canadian Health Care Trust Notes with an Acquisition Date fair value of $1,072 million. Refer to Note 13, Financial Liabilities, of the accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of the Canadian Health Care Trust Notes;

 

    Mexican development banks credit facility due 2025 with an Acquisition Date fair value of $442 million. Refer to Note 13, Financial Liabilities, of the accompanying audited consolidated financial statements for additional information related to the nature, terms, and amounts of this facility; and

 

    Other various financial liabilities and capital lease obligations with fair values totaling $781 million.

Deferred Revenue

We recorded deferred revenue with a fair value of $2,081 million, which includes obligations assumed to fulfill service contracts. Fair value was determined based on the expected future cash flows to satisfy the obligations, adjusted for a profit margin that would be required by a market participant to assume the obligations and discounted to a present value using a discount rate that considers the timing of the expected cash flows and the non-performance risk of the obligations ranging from 6.9 percent to 9.0 percent based on the timing of the claims and their relationship to other secured and unsecured obligations of the Company. We used Chrysler Group’s historical data regarding profit margins on its service contract business as a basis for estimating the profit margin a market participant would expect to earn on the obligations assumed to fulfill service contracts.

Pre-acquisition Contingencies for which Fair Value was not Determinable

We recorded $1,888 million relating to certain pre-acquisition contingent liabilities assumed from Chrysler Group in the transaction for which fair value was not determinable due to uncertainty in the timing and amount of the liability and the number of variables and assumptions in assessing the possible outcomes. Pre-acquisition contingencies for which fair value was not determinable included $1,244 million for certain warranty obligations and $633 million relating to product liabilities, including various pending legal actions and proceedings arising in connection with Chrysler Group’s activities as an automotive manufacturer.

Warranty obligations for which fair value was not determinable related to voluntary service actions and recall actions to address various customer satisfaction, safety and emissions issues on past vehicle sales. Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by a service or recall action and the nature of the corrective actions. The estimated future costs of these actions are based primarily on historical claims experience for our vehicles.

Fair value was also not determinable for product liabilities and various pending legal actions and proceedings arising from Chrysler Group’s activities as an automotive manufacturer. These contingencies included various legal proceedings, claims and governmental investigations which were pending on a wide range of topics,

 

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including: vehicle safety; emissions and fuel economy; dealer, supplier and other contractual relationships; intellectual property rights; product warranties; and environmental matters. Some of these proceedings allege defects in specific component parts or systems (including airbags, seats, seat belts, brakes, ball joints, transmissions, engines and fuel systems) in various vehicle models or allege general design defects relating to vehicle handling and stability, sudden unintended movement or crashworthiness. These proceedings seek recovery for damage to property, personal injuries or wrongful death and in some cases, include a claim for exemplary or punitive damages. Adverse decisions in one or more of these proceedings could require us to pay substantial damages, or undertake service actions, recall campaigns or other costly actions.

As the fair value of these liabilities was not determinable, they have been measured in accordance with the accounting guidance related to contingencies.

We also assessed pre-acquisition contingencies for which we did not record an accrual to determine whether it was reasonably possible that the exposure relating to an individual matter could be material to our consolidated financial statements, thus requiring disclosure. On May 25, 2011, there were no such individual matters where we believed it was reasonably possible that our exposure to loss would be material to our consolidated financial statements.

Refer to Note 15, Commitments, Contingencies and Concentrations, of the accompanying audited consolidated financial statements for additional information related to these contingencies.

Pension

We sponsor both noncontributory and contributory defined benefit pension plans. The majority of the plans are funded plans. The noncontributory pension plans cover certain of our hourly and salaried employees. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to certain of our salaried employees under the salaried employees’ retirement plans. These plans provide benefits based on the employee’s cumulative contributions, years of service during which the employee contributions were made and the employee’s average salary during the five consecutive years in which the employee’s salary was highest in the 15 years preceding retirement.

Our defined benefit pension plans are accounted for on an actuarial basis, which requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as demographic experience. These assumptions may have an effect on the amount and timing of future contributions.

The assumptions used in developing the required estimates include the following key factors:

 

    Discount rates. Our discount rates are based on yields of high-quality (AA-rated or better) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension payments.

 

    Expected return on plan assets. Our expected long-term rate of return on plan assets assumption is developed using a consistent approach across all plans. This approach primarily considers various inputs from a range of advisors for long-term capital market returns, inflation, bond yields and other variables, adjusted for specific aspects of our investment strategy.

 

    Salary growth. Our salary growth assumption reflects our long-term actual experience, outlook and assumed inflation.

 

    Inflation. Our inflation assumption is based on an evaluation of external market indicators.

 

    Expected contributions. Our expected amount and timing of contributions is based on an assessment of minimum funding requirements. From time to time contributions are made beyond those that are legally required.

 

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    Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

 

    Mortality rates. Mortality rates are developed to reflect actual and projected plan experience. In 2011, plan specific mortality tables, which also assume generational improvements, were actuarially developed using mortality experience from U.S. plans in 2005 through 2009. Generational improvements represent decreases in mortality rates over time based upon historical improvements in mortality and expected health care improvements. In August 2011, we received approval from the IRS for use of the plan specific mortality tables for funding for our U.S. plans effective January 1, 2012. We adopted the plan specific mortality tables with generational improvements for accounting purposes as of December 31, 2011. Mortality assumptions used in our Canadian benefit plans were also updated to reflect current and future mortality improvements.

Plan Assets Measured at Net Asset Value

Plan assets are recognized and measured at fair value in accordance with the accounting guidance related to fair value measurements, which specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). Level 3 pricing inputs include significant inputs that are generally less observable from objective sources. At December 31, 2012, substantially all of our investments classified as Level 3 in the fair value hierarchy are valued at the net asset value, or NAV. The plan assets are classified as Level 3 as there are no active markets for these assets and they are valued using unobservable inputs.

Our investments classified as Level 3 include private equity, real estate and hedge fund investments. Private equity investments include those in limited partnerships that invest primarily in operating companies that are not publicly traded on a stock exchange. Our private equity investment strategies include leveraged buyouts, venture capital, mezzanine and distressed investments. Real estate investments include those in limited partnerships that invest in various commercial and residential real estate projects both domestically and internationally. Hedge fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Investments in limited partnerships are valued at the NAV, which is based on audited financial statements of the funds when available, with adjustments to account for partnership activity and other applicable valuation adjustments.

Refer to Note 2, Basis of Presentation and Significant Accounting Policies, and Note 19, Employee Retirement and Other Benefits, of the accompanying audited consolidated financial statements for a discussion of the fair value hierarchy measurement.

Plan obligations and costs are based on existing retirement plan provisions. No assumption is made regarding any potential future changes to benefit provisions beyond those to which we are presently committed, such as in existing labor contracts.

Significant differences in actual experience or significant changes in assumptions may affect the pension obligations and pension expense. The effect of actual results differing from assumptions and of changing assumptions are included in accumulated other comprehensive income as unrecognized actuarial gains and losses. These gains and losses are subject to amortization to expense over the average future service period of plan participants expected to receive benefits under the plans to the extent they exceed 10 percent of the higher of the market related value of plan assets or the projected benefit obligation of the respective plan. For inactive pension plans, we amortize actuarial gains or losses to expense over the remaining life of plan participants. During 2012, the actual return on plan assets was $2,378 million, which was higher than the expected return of $1,811 million, resulting in an unrecognized actuarial gain of $567 million. The weighted average discount rate used to determine the benefit obligation for defined benefit pension plans was 3.98 percent at December 31, 2012 versus 4.84 percent at December 31, 2011, resulting in an unrecognized actuarial loss of $3,174 million. In 2013, $191 million of net unrecognized actuarial losses are expected to be recognized into expense.

 

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The funded status of our pension plans as of December 31, 2012 and the expenses recognized during 2013 are affected by year end 2012 assumptions. These sensitivities may be asymmetric and are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The effect of the indicated increase (decrease) in selected factors, holding all other assumptions constant, is shown below (in millions of dollars):

 

    Pension Plans  
    Effect on 2013
Pension Expense
    Effect on
December 31, 2012
Projected Benefit
Obligation
 

10 basis point decrease in discount rate

  $ 25      $ 403   

10 basis point increase in discount rate

    (25     (396

50 basis point decrease in expected return on assets

    124          

50 basis point increase in expected return on assets

    (124       

Plan Amendments to U.S. and Canada Salaried Defined Benefit Pension Plans

During the second quarter of 2013, we amended our U.S. and Canadian salaried defined benefit pension plans. The U.S. plans were amended in order to comply with IRS regulations, cease the accrual of future benefits effective December 31, 2013, and enhance the retirement factors. The Canada amendment ceases the accrual of future benefits effective December 31, 2014, enhances the retirement factors and continues to consider future salary increases for the affected employees. The changes to the plans resulted in an interim re-measurement of the plans, as well as a curtailment gain and plan amendments. As a result, we recognized a $780 million net reduction to our pension obligation, a $9 million reduction to prepaid pensions, a $51 million curtailment gain and a corresponding $720 million increase in accumulated other comprehensive income.

Refer to Note 19, Employee Retirement and Other Benefits, of the accompanying audited consolidated financial statements for a detailed discussion of our pension plans, and to Note 14, Employee Retirement and Other Benefits, of the accompanying condensed consolidated financial statements for information regarding our plan amendments.

Other Postretirement Employee Benefits

We provide health care, legal and life insurance benefits to certain of our hourly and salaried employees. Upon retirement from the Company, these employees may become eligible for continuation of certain benefits. Benefits and eligibility rules may be modified periodically.

OPEB plans are accounted for on an actuarial basis, which requires the selection of various assumptions. The estimation of our obligations, costs and liabilities associated with OPEB, primarily retiree health care and life insurance, requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as health care cost increases and demographic experience, which may have an effect on the amount and timing of future payments.

The assumptions used in developing the required estimates include the following key factors:

 

    Discount rates. Our discount rates are based on yields of high-quality (AA-rated or better) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected benefit payments.

 

    Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends.

 

    Salary growth. Our salary growth assumptions reflect our long-term actual experience, outlook and assumed inflation.

 

    Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.

 

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    Mortality rates. Mortality rates are developed to reflect actual and projected plan experience. In 2011, plan specific mortality tables, which also assume generational improvements, were actuarially developed using mortality experience from U.S. plans in 2005 through 2009. Generational improvements represent decreases in mortality rates over time based upon historical improvements in mortality and expected health care improvements. In August 2011, we received approval from the IRS for use of the plan specific mortality tables for funding for our U.S. plans effective January 1, 2012. We adopted the plan specific mortality tables with generational improvements for accounting purposes as of December 31, 2011. Mortality assumptions used in our Canadian benefit plans were also updated to reflect current and future mortality improvements. Plan obligations and costs are based on existing OPEB plan provisions. No assumptions have been made regarding any potential future changes to benefit provisions beyond those to which we are presently committed, such as in existing labor contracts.

The effect of actual results differing from assumptions and of changing assumptions are included in accumulated other comprehensive income (loss), or AOCI, as unrecognized actuarial gains and losses. These gains and losses are subject to amortization to expense over the average future service period of plan participants expected to receive benefits under the plan to the extent they exceed 10 percent of the higher of the market related value of plan assets or the accumulated benefit obligation of the respective plan. We immediately recognize actuarial gains or losses for OPEB plans that are short-term in nature and under which our obligation is capped. The weighted average discount rate used to determine the benefit obligation for OPEB plans was 4.07 percent at December 31, 2012 versus 4.93 percent at December 31, 2011, resulting in an unrecognized actuarial loss of $299 million. In 2013, $19 million of net unrecognized actuarial losses are expected to be recognized into expenses.

The effect of the indicated increase (decrease) in the assumed discount rate, holding all other assumptions constant, is shown below (in millions of dollars):

 

    OPEB Plans  
    Effect on 2013
OPEB Expense
    Effect on
December 31,
2012 OPEB
Obligation
 

10 basis point decrease in discount rate

  $ 2      $ 37   

10 basis point increase in discount rate

    (2     (37

Refer to Note 19, Employee Retirement and Other Benefits, of the accompanying audited consolidated financial statements for more information regarding costs and assumptions for OPEB plans.

Share-Based Compensation

Chrysler Group has various compensation plans that provide for the granting of share-based compensation to certain employees and directors. We account for share-based compensation plans in accordance with the accounting guidance set forth for share-based payments, which requires share-based compensation expense to be recognized based on fair value. Compensation expense for equity-classified awards is measured at the grant date based on the fair value of the award using a discounted cash flow methodology. For those awards with post-vesting contingencies, an adjustment is applied to account for the probability of meeting the contingencies. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. Compensation expense is recognized over the employee service period with an offsetting increase to contributed capital or accrued expenses and other liabilities depending on the nature of the award. If awards contain certain performance conditions in order to vest, the cost of the award is recognized when achievement of the performance condition is probable. Costs related to plans with graded vesting are generally recognized using the graded vesting method. Share-based compensation expense is recorded in Selling, Administrative and Other Expenses in the accompanying Consolidated Statements of Operations.

 

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The fair value of each unit issued under the plans is based on the fair value of Chrysler Group’s membership interests. Each unit, or Chrysler Group Unit, is equal to 1/600th of the value of a Class A Membership Interest on a fully-diluted basis after conversion of the Class B Membership Interests, which equates to approximately 980 million Chrysler Group Units. Refer to Note 18, Share-Based Compensation, of the accompanying audited consolidated financial statements for additional information.

Since there is no publicly observable trading price for Chrysler Group’s membership interests, during the periods presented fair value was determined using a discounted cash flow methodology. This approach, which is based on projected cash flows, is used to estimate Chrysler Group’s enterprise value. The fair value of Chrysler Group’s outstanding interest bearing debt, as of the measurement date, is deducted from its enterprise value to arrive at the fair value of equity. This amount is then divided by the total number of Chrysler Group Units, as determined above, to estimate the fair value of a single Chrysler Group Unit. The significant assumptions used in the calculation of fair value at each issuance date and for each period included the following, which is based on Chrysler Group’s financial information only:

 

    Four years of annual projections prepared by management that reflect the estimated after-tax cash flows a market participant would expect to generate from operating the business;

 

    A terminal value which was determined using a growth model that applied a 2.0 percent long-term growth rate to our projected after-tax cash flows beyond the four year window. The long-term growth rate was based on our internal projections, as well as industry growth prospects;

 

    An estimated after-tax WACC ranging from 16.0 percent to 16.5 percent in 2012, 14.4 percent to 16.5 percent in 2011, and 15.0 percent to 15.3 percent in 2010; and

 

    Projected worldwide factory shipments ranging from approximately 2.0 million vehicles in 2011 to approximately 3.2 million vehicles in 2016.

The implied fair value of Chrysler Group, resulting from the transactions through which we acquired beneficial ownership of the membership interests previously held by the U.S. Treasury and Canadian Government, was used to corroborate the values determined using the discounted cash flow methodology as of May 24, 2011. There were no such transactions during 2012.

Based on these calculations, the per unit fair value of a Chrysler Group Unit, calculated based on the fully-diluted Chrysler Group Units of 980 million, was $9.00, $7.63, $7.62 and $4.87 at December 31, 2012, December 31, 2011, May 24, 2011 and December 31, 2010, respectively. The increase in the per unit fair value was primarily attributable to continued improvement in Chrysler Group’s performance and achievement of the objectives outlined in the 2010-2014 Business Plan.

Impairment of Long-Lived Assets

Long-lived assets held and used (such as property, plant and equipment, and equipment and other assets on operating leases) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or group of assets exceeds the fair value of the asset or group of assets. No impairment indicators were identified during the year ended December 31, 2012, the period from May 25, 2011 to December 31, 2011, the period from January 1, 2011 to May 24, 2011 or the year ended December 31, 2010. As such, no impairment charges were recognized during the respective periods. When long-lived assets are considered held for sale, they are recorded at the lower of carrying amount or fair value less costs to sell, and depreciation ceases.

 

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Goodwill and Other Intangible Assets

We account for goodwill in accordance with the accounting guidance related to intangibles and goodwill, which requires us to test goodwill for impairment at the reporting unit level at least annually and when significant events occur or there are changes in circumstances that indicate the fair value is less than the carrying value. Such events could include, among others, a significant adverse change in the business climate, an unanticipated change in the competitive environment and a decision to change the operations of the Company. We have one operating segment, which is also our only reporting unit.

Goodwill is evaluated for impairment annually as of October 1. In September 2011, the Financial Accounting Standards Board, or FASB, issued updated guidance on annual goodwill impairment testing. The amendment allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we elect the qualitative assessment, and we conclude it is more likely than not that the fair value of a reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required.

When quantitative impairment testing is required, goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test is to compare the fair value of our reporting unit to its carrying value. The fair value is determined by estimating the present value of expected future cash flows for the reporting unit. If the fair value of the reporting unit is greater than its carrying amount, no impairment exists and the second step of the test is not performed. If the carrying amount of the reporting unit is greater than the fair value, there is an indication that an impairment may exist and the second step of the test must be completed to measure the amount of the impairment. The second step of the test calculates the implied fair value of goodwill by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The implied fair value of goodwill is then compared to the carrying value. If the implied fair value of goodwill is less than the carrying value, an impairment loss is recognized equal to the difference. No goodwill impairment losses have been recognized for the year ended December 31, 2012, the period from May 25, 2011 to December 31, 2011, the period from January 1, 2011 to May 24, 2011 or the year ended December 31, 2010.

As discussed in —Valuation of Deferred Tax Assets below, if we are able to demonstrate sustained profitability, we will reverse a significant portion of the valuation allowances recorded against our deferred tax assets. If the valuation allowances are released, the carrying value of our reporting unit will increase significantly. Depending on the fair value of our reporting unit at that time, there may be an indication that goodwill is impaired.

Intangible assets that have a finite useful life are amortized over their respective estimated useful lives, which are reviewed by management each reporting period and whenever changes in circumstances indicate that the carrying value of the assets may not be recoverable. Other intangible assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment annually. In July 2012, the FASB issued updated guidance on the annual testing of indefinite-lived intangible assets for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If we elect the qualitative assessment, and we conclude it is more likely than not that the fair value of the indefinite-lived intangible assets is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management estimates fair value through various techniques including discounted cash flow models, which incorporate market based inputs, and third party independent appraisals, as considered appropriate. Management also considers current and estimated economic trends and outlook. No impairment losses on these assets have been recognized for the year ended December 31, 2012, the period from May 25, 2011 to December 31, 2011, the period from January 1, 2011 to May 24, 2011 and the year ended December 31, 2010.

 

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Valuation of Deferred Tax Assets

A valuation allowance on deferred tax assets is required if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon our ability to generate sufficient taxable income during the carryback or carryforward periods applicable in each tax jurisdiction. Our accounting for deferred tax assets represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.

In assessing the realizability of deferred tax assets, we consider both positive and negative evidence. Concluding that a valuation allowance is not required is difficult when there is absence of positive evidence and there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Cumulative losses in recent years are a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets.

The assessment of the nature, timing and recognition of a valuation allowance takes into account various types of evidence, including, but not limited to, the following:

 

    Nature, frequency and severity of current and cumulative financial reporting losses. A pattern of objectively measured recent financial reporting losses is heavily weighted as a source of negative evidence. In certain circumstances, historical information may not be as relevant due to changed circumstances;

 

    Sources of future taxable income. Future reversals of existing temporary differences are heavily-weighted sources of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary differences are a source of positive evidence only when the projections are combined with a history of recent profits and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years, particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has not yet been achieved. In such cases, these projections of future taxable income are given no weight for the purposes of the valuation allowance assessment; and

 

    Tax planning strategies. If necessary and available, tax planning strategies would be implemented to accelerate taxable amounts to utilize expiring carryforwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted.

Our deferred tax assets consist primarily of those related to FNA LLC’s investment in Chrysler Group and of those of our subsidiaries in foreign jurisdictions. As we have previously disclosed, our subsidiaries in foreign jurisdictions are highly dependent on our North American operations, which consists primarily of our U.S. operations. Despite our recent financial results, we have not yet reached a level of sustained profitability for our U.S. operations. While we were profitable in the U.S. for the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, our financial performance history is somewhat limited. We have undergone significant changes in our capital structure, management and business strategies since the 363 Transaction with Old Carco LLC in 2009. We have also implemented several new product development programs. While we continue to improve our product portfolio, we must also continue to decrease our dependency on the pick-up truck, SUV and minivan markets. We are also reliant upon the Fiat-Chrysler Alliance to jointly develop vehicles and vehicle platforms, which is somewhat uncertain given Fiat’s own business and financial condition, as well as its revised business plan for product development and manufacturing operations. We believe that our ability to realize the benefits of the Fiat-Chrysler Alliance is critical for us to compete with our larger, more product-

 

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diversified and better-funded competitors. See Risk Factors —Risks Related to our Business —We depend on the Fiat-Chrysler Alliance to provide new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success, —Notwithstanding our close industrial alliance, Fiat’s significant control over our management, operations and corporate decisions may result in conflicts of interest, and —Fiat is free to sell, in whole or in part, its equity ownership in us, which could reduce Fiat’s incentive to support our industrial alliance and may subject us to the control of a presently unknown third party for a discussion of critical risks related to the Fiat-Chrysler Alliance. We concluded that negative evidence, including the lack of sustained profitability, outweighed our positive evidence as of December 31, 2012; therefore we maintained our valuation allowances on our net deferred tax assets of $4.4 billion.

We believe that sustained profitability may be demonstrated by certain factors, which may include a combination of the following over an extended period of time:

 

    Continued positive progress on the 2010-2014 Business Plan, including achievement of a substantial portion of our 2013 financial and performance objectives;

 

    Continued improvement in our product mix;

 

    Increased sales outside of North America; and/or

 

    Our ability to successfully launch vehicles, particularly those using a Fiat or jointly developed platform.

We have demonstrated progress towards the factors noted above. In the first half of 2013, we launched the 2014 Jeep Grand Cherokee and 2013 Ram Heavy Duty truck. However, in the second half of 2013 our retail launches of the all-new 2014 Jeep Cherokee, Fiat 500L and Ram ProMaster will present an additional indication of our progress towards our 2013 financial and performance objectives, as well as our ability to successfully launch vehicles. As a result, we do not believe that we have reached a level of sustained profitability and have maintained our valuation allowances on our net deferred tax assets as of June 30, 2013.

If we are able to demonstrate sustained profitability, our conclusion regarding the need for valuation allowances on our net deferred tax assets could change, resulting in the reversal of a significant portion of the valuation allowances as early as the fourth quarter of 2013. In the reporting period in which the valuation allowance is released, we will record a significant tax benefit related to the release, which will result in a negative effective tax rate. Until such time, we will reverse a portion of the valuation allowance related to the corresponding realized tax benefit for that period, without changing our conclusions regarding the need for a full valuation allowance against the remaining net deferred tax assets.

Sales Incentives

We record the estimated cost of sales incentive programs offered to dealers and consumers as a reduction to revenue at the time of sale to the dealer. This estimated cost represents the incentive programs offered to dealers and consumers, as well as the expected modifications to these programs in order to facilitate sales of the dealer inventory. Subsequent adjustments to incentive programs related to vehicles previously sold to dealers are recognized as an adjustment to revenue in the period the adjustment is determinable.

We use price discounts to adjust vehicle pricing in response to a number of market and product factors, including: pricing actions and incentives offered by competitors, economic conditions, the amount of excess industry production capacity, the intensity of market competition, consumer demand for the product and the need to support promotional campaigns. We may offer a variety of sales incentive programs at any given point in time, including: cash offers to dealers and consumers and subvention programs offered to customers, or lease subsidies, which reduce the retail customer’s monthly lease payment or cash due at the inception of the financing arrangement, or both. Incentive programs are generally brand, model and region specific for a defined period of time, which may be extended.

 

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Multiple factors are used in estimating the future incentive expense by vehicle line including the current incentive programs in the market, planned promotional programs and the normal incentive escalation incurred as the model year ages. The estimated incentive rates are reviewed monthly and changes to the planned rates are adjusted accordingly, thus impacting revenues. As discussed previously, there are a multitude of inputs affecting the calculation of the estimate for sales incentives, and an increase or decrease of any of these variables could have a significant effect on recorded revenues.

Warranty and Product Recalls

We establish reserves for product warranties at the time the sale is recognized. We issue various types of product warranties under which we generally guarantee the performance of products delivered for a certain period or term. The reserve for product warranties includes the expected costs of warranty obligations imposed by law or contract, as well as the expected costs for policy coverage, recall actions and buyback commitments. The estimated future costs of these actions are principally based on assumptions regarding the lifetime warranty costs of each vehicle line and each model year of that vehicle line, as well as historical claims experience for our vehicles. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could materially affect our results of operations.

We periodically initiate voluntary service and recall actions to address various customer satisfaction, safety and emissions issues related to vehicles we sell. Included in the reserve is the estimated cost of these service and recall actions. The estimated future costs of these actions are based primarily on historical claims experience for our vehicles. Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by a service or recall action and the nature of the corrective action. It is reasonably possible that the ultimate cost of these service and recall actions may require us to make expenditures in excess of established reserves over an extended period of time and in a range of amounts that cannot be reasonably estimated. Our estimate of warranty and additional service and recall action obligations is re-evaluated on a quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies upon long-term historical averages until actual data is available. As actual experience becomes available, it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting accruals are then compared with current spending rates to ensure that the balances are adequate to meet expected future obligations.

Accounting Standards Not Yet Adopted

Accounting standards not yet adopted are discussed in Note 2, Basis of Presentation and Significant Accounting Policies, of the accompanying audited consolidated financial statements and Note 2, Basis of Presentation and Recent Accounting Pronouncements, of the accompanying condensed consolidated financial statements.

In July 2013, the FASB issued updated guidance requiring that certain unrecognized tax benefits be recognized as offsets against the corresponding deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, unless the deferred tax asset is not available or not intended to be used at the reporting date. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to unrecognized tax benefits that exist at the effective date. We will comply with this guidance as of January 1, 2014, and we are evaluating the potential impact on our consolidated financial statements.

In July 2013, the FASB issued updated guidance to allow for the inclusion of the Federal Funds Effective Swap Rate as a benchmark interest rate for hedge accounting purposes. This guidance is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We adopted this guidance as of July 17, 2013, and it did not have a material impact on our consolidated financial statements.

In March 2013, the FASB issued updated guidance to clarify a parent company’s accounting for the release of the cumulative translation adjustment into income upon derecognition of certain subsidiaries or groups of assets

 

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within a foreign entity or of an investment in a foreign entity. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied prospectively to derecognition events occurring after the effective date. We will comply with this guidance as of January 1, 2014, and we are evaluating the potential impact on our consolidated financial statements.

In February 2013, the FASB issued updated guidance in relation to the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This guidance is effective for fiscal periods beginning after December 15, 2013, and is to be applied retrospectively for all periods presented for those obligations resulting from joint and several liability arrangements that exist at the beginning of the fiscal year of adoption. We will comply with this guidance as of January 1, 2014, and we are evaluating the potential impact on our consolidated financial statements.

In February 2013, the FASB issued updated guidance that amends the reporting of amounts reclassified out of AOCI. These amendments do not change the current requirements for reporting net income or other comprehensive income in the financial statements. However, the guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component, either on the face of the financial statement where net income is presented or in the notes to the financial statements. This guidance was effective for fiscal periods beginning after December 15, 2012, and was to be applied prospectively. We adopted this guidance as of January 1, 2013, and it did not have a material impact on our consolidated financial statements.

In October 2012, the FASB issued updated guidance on technical corrections and other revisions to various FASB codification topics. The guidance represents changes to clarify the codification, correct unintended application of the guidance or make minor improvements to the codification. The guidance also amends various codification topics to reflect the measurement and disclosure requirements of Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures. Certain amendments in this guidance were effective for fiscal periods beginning after December 15, 2012, while the remainder of the amendments were effective immediately. We previously adopted the guidance that was effective immediately and adopted the remainder of the guidance as of January 1, 2013, and it did not have a material impact on our consolidated financial statements.

In August 2012, the FASB issued updated guidance on technical corrections to the SEC guidance in the U.S. GAAP hierarchy. The SEC guidance was updated to make it more consistent with U.S. GAAP issued by the FASB. The principal changes to the guidance involve revision or removal of accounting guidance references and other conforming changes to ensure consistent referencing throughout the SEC’s Staff Accounting Bulletins. This guidance was effective immediately and it did not have a material impact on our consolidated financial statements.

In July 2012, the FASB issued updated guidance on the annual testing of indefinite-lived intangible assets for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If, based on its qualitative assessment, an entity concludes it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if an entity concludes otherwise, quantitative impairment testing is not required. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We elected to early adopt the updated guidance as of October 1, 2012, and it did not have a material impact on our consolidated financial statements.

In December 2011, the FASB issued updated guidance which amends the disclosure requirements regarding the nature of an entity’s rights of offset and related arrangements associated with its financial instruments and derivative instruments. Under the guidance, an entity must disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and

 

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transactions subject to an agreement similar to a master netting arrangement. In January 2013, the FASB issued updated guidance which clarified that the 2011 amendment to the balance sheet offsetting standard does not cover transactions that are not considered part of the guidance for derivatives and hedge accounting. This guidance was effective for fiscal periods beginning on or after January 1, 2013. We adopted this guidance as of January 1, 2013, and it did not have a material impact on our consolidated financial statements.

In May 2011, the FASB issued updated guidance to achieve common fair value measurement and disclosure requirements between IFRS and U.S. GAAP. The amendments clarify the FASB’s intent about the application of existing requirements and provide for changes in measuring the fair value of financial instruments that are managed within a portfolio and the application of premiums or discounts. This guidance will require us to, among other things, expand existing disclosures for recurring Level 3 fair value measurements and for those assets and liabilities not measured at fair value on the balance sheet, but for which fair value is disclosed. This guidance was effective for fiscal periods beginning after December 15, 2011, and was to be applied prospectively. We adopted this guidance as of January 1, 2012, and it did not have a material impact on our consolidated financial statements.

Non-GAAP Financial Measures

We monitor our operations through the use of several non-GAAP financial measures: Adjusted Net Income (Loss); Modified Operating Profit (Loss); Modified Earnings Before Interest, Taxes, Depreciation and Amortization, which we refer to as Modified EBITDA; Gross and Net Industrial Debt; as well as Free Cash Flow. We believe that these non-GAAP financial measures provide useful information about our operating results and enhance the overall ability to assess our financial performance. They provide us with comparable measures of our financial performance based on normalized operational factors which then facilitate management’s ability to identify operational trends, as well as make decisions regarding future spending, resource allocations and other operational decisions. These and similar measures are widely used in the industry in which we operate.

These financial measures may not be comparable to other similarly titled measures of other companies and are not an alternative to net income (loss) or income (loss) from operations as calculated and presented in accordance with U.S. GAAP. These measures should not be used as a substitute for any U.S. GAAP financial measures.

Adjusted Net Income (Loss)

Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of infrequent charges, which includes losses on extinguishment of debt. We use Adjusted Net Income (Loss) as a key indicator of the trends in our overall financial performance, excluding the impact of such infrequent charges.

Modified Operating Profit (Loss)

We measure Modified Operating Profit (Loss) to assess the performance of our core operations, establish operational goals and forecasts that are used to allocate resources, and evaluate our performance period over period. Modified Operating Profit (Loss) is computed starting with net income (loss), and then adjusting the amount to (i) add back income tax expense and exclude income tax benefits, (ii) add back net interest expense (excluding interest expense related to financing activities associated with the Gold Key Lease vehicle lease portfolio), (iii) add back (exclude) all pension, OPEB and other employee benefit costs (gains) other than service costs, (iv) add back restructuring expense and exclude restructuring income, (v) add back other financial expense, (vi) add back losses and exclude gains due to cumulative change in accounting principles and (vii) add back certain other costs, charges and expenses, which include the charges factored into the calculation of Adjusted Net Income (Loss). We also use performance targets based on Modified Operating Profit (Loss) as a factor in our incentive compensation calculations for our represented and non-represented employees.

 

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Modified EBITDA

We measure the performance of our business using Modified EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We compute Modified EBITDA starting with net income (loss) adjusted to Modified Operating Profit (Loss) as described above, and then adding back depreciation and amortization expense (excluding depreciation and amortization expense for vehicles held for lease). We believe that Modified EBITDA is useful to determine the operational profitability of our business, which we use as a basis for making decisions regarding future spending, budgeting, resource allocations and other operational decisions.

The reconciliation of net income (loss) to Adjusted Net Income (Loss), Modified Operating Profit and Modified EBITDA is set forth below (in millions of dollars):

 

                                                                                                               
    Successor  
    Three Months Ended June 30,     Six Months Ended June 30,  
    2013     2012     2013     2012  

Net income

  $ 576      $ 485      $ 764      $ 966   

Plus:

       

Loss on extinguishment of debt (a)

    9               9          
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Net Income

  $ 585      $ 485      $ 773      $ 966   
 

 

 

   

 

 

   

 

 

   

 

 

 

Plus:

       

Income tax expense

    65        89        117        154