Photo credit: FCA
UPDATED: 10/30/2018 4:21 pm ET – adds details
Fiat Chrysler Automobiles outearned Ford Motor Co. in the third quarter, and it fulfilled a prediction from two years ago by then-CEO Sergio Marchionne by posting a record double-digit profit margin in North America.
FCA’s global adjusted earnings before interest and taxes rose 13 percent to $2.27 billion, the company said Tuesday. Global revenue rose 9 percent to $32.7 billion, and the company confirmed its operating guidance for the full year. However, the company reduced its forecast for net cash to a range of $1.7 billion to $2.27 billion, from an earlier projection of about $3.4 billion.
The company’s global regions generated mixed results. FCA’s North American profit margin surged to 10.2 percent, the highest level since Fiat S.p.A. took control of bankrupt Chrysler in 2009. That’s also more than double the 4.1 percent North American margin in the third quarter of 2014, when FCA began its five-year business plan that will end with the new year.
Ford earned $1.7 billion before interest and taxes last quarter, down 27 percent, with a North American profit margin of 8.8 percent. General Motors reports its earnings Wednesday; its second-quarter North American margin was 9.4 percent.
FCA’s profit margins also surged in Latin America to 4.2 percent, up from 2.8 percent a year earlier. Like other automakers, FCA’s operations in the region had previously been hampered by political instability in Brazil and other South American countries. However, the company suffered losses in the Eastern Hemisphere, posting a 93 million euro loss ($106 million) in Asia Pacific because of a dramatic slowdown in China, and a $28 million loss in its Europe/Middle East/Africa region, because of slow Fiat sales and costs related to a new emissions testing regimen.
The automaker promised to pay $2.27 billion in extraordinary dividends using proceeds from the sale of its Magneti Marelli parts unit. FCA last week agreed to sell Magneti Marelli to Japan’s Calsonic Kansei for $7.1 billion. FCA also said it plans to issue regular dividends to its investors of 20 percent of its profits starting next spring.
FCA said it booked $810.9 million as a charge to pay for “U.S. diesel emission matters.” The company has been locked in litigation with federal regulators over emissions software used in about 101,000 2014-16 Ram 1500 and Jeep Grand Cherokee vehicles equipped with EcoDiesel engines.
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Settlement talks between the automaker and regulators are ongoing, and the matter remains unresolved, but FCA said the charge-off “represents an estimate of the provisions under applicable accounting guidelines based on progress of settlement discussions with counterparties.” The charge is intended to reflect an estimate of all known costs tied to the issue, a spokesman said.
FCA slipped back into a net-debt position in the quarter, just three months after being able to boast that it finally had more cash on hand than debt on its books for the first time since the Chrysler takeover. FCA said it ended the quarter with $215 million more debt than cash on hand, compared with a $519 million net-cash position at the end of June. The backslide resulted from an accelerated discretionary U.S. pension payment of $682 million.
Prescient prediction
FCA achieved its record North American margin in large part because of strong sales from Jeep and Ram, including the redesigned Jeep Wrangler and Ram 1500 and the freshened Jeep Cherokee. Marchionne told analysts in October 2016 that FCA would “be able to achieve double-digit margins” in North America once those products came online. And in the late CEO’s last quarterly conference call in April of this year prior to his July 25 death, the ailing Marchionne predicted FCA’s profit margins in North America would soon best rivals Ford and GM.
“If it doesn’t happen on my watch in ’18, I don’t have a single doubt that my successor will be able to whack the crap out of both of them. The machine is ready to do it. Just let them engage,” Marchionne said then.
In comments to analysts, CEO Mike Manley said FCA’s multi-billion and multi-year effort to resurrect the Alfa Romeo brand has not yet turned a profit at current volume levels.
“Alfa Romeo does not make a contribution in our performance this year. We are seeing an improvement year-over-year,” Manley said. “I still need that volume to grow.”
The former Jeep brand boss also said current levels of Jeep Wrangler production are sustainable over the long term, even as a Wrangler-based pickup — scheduled to debut next month at the Los Angeles auto show and be in U.S. showrooms in April 2019 — lures away some traditional Wrangler buyers. The Wrangler is one of FCA’s most profitable vehicles.
“There are many Wrangler buyers that have indicated they would look at the pickup instead of Wrangler. But we’ve got the flexibility we need… to adjust to that. We’ve deliberately allowed the United States, Canada, and to a lesser extent Mexico, be first,” to receive the redesigned Wrangler that went on sale earlier this year, Manley said. “Now we’re just opening up to other markets.”
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