As filed with the Securities and Exchange Commission on May 19, 2015 Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________
FORM F-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_______________________________
FIAT CHRYSLER AUTOMOBILES N.V.
(Exact name of registrant as specified in its charter)
The Netherlands (State or other jurisdiction of incorporation or organization) | 3711 (Primary Standard Industrial Classification Code Number) | Not Applicable (I.R.S. Employer Identification Number) |
25 St. James’s Street London SW1A 1HA United Kingdom Tel. No. +44 (0)20 7766 0311 | ||
(Address, including zip code, and telephone number, including area code, or Registrant’s principal executive offices)
_______________________________
Richard K. Palmer |
25 St. James’s Street |
London SW1A 1HA |
United Kingdom |
Tel. No.: +44 (0)20 7766 0311 |
(Name, address, including zip code and telephone number including area code, of agent for service)
_______________________________
Copies to:
Scott Miller, Esq. | Giorgio Fossati |
Sullivan & Cromwell LLP | c/o Fiat Chrysler Automobiles N.V. |
125 Broad Street | 25 St. James’s Street |
New York, NY 10004 | London SW1A 1HA |
Tel. No.: (212) 558-4000 | Tel. No.: +44 (0)20 7766 0311 |
_______________________________
Approximate date of commencement of proposed sale to the public: As promptly as practicable after the date this Registration Statement becomes effective.
_______________________________
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(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. ¨
If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) ¨
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) ¨
_______________________________
CALCULATION OF REGISTRATION FEE
Title of each class of Securities to be registered | Amount to be registered | Proposed maximum offering price per note (1) | Proposed maximum aggregate offering price (1) | Amount of registration Fee |
4.500% Senior Notes due 2020 | $1,500,000,000 | 100% | $1,500,000,000 | 174,300 |
5.250% Senior Notes due 2023 | $1,500,000,000 | 100% | $1,500,000,000 | 174,300 |
Total | $3,000,000,000 | 348,600 | ||
(1) Pursuant to Rule 457(f), the fee is calculated based upon the book value of the 4.500% Senior Notes due 2020 and the 5.250% Senior Notes due 2023, as applicable.
_______________________________
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 this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
Subject to Completion. Dated May 19, 2015
PROSPECTUS
 |  | $3,000,000,000 FIAT CHRYSLER AUTOMOBILES N.V. Offers to Exchange up to $1,500,000,000 aggregate principal amount of new 4.500% Senior Notes due 2020 registered under the Securities Act of 1933, for any and all of our outstanding 4.500% Senior Notes due 2020 issued on April 14, 2015, and up to $1,500,000,000 aggregate principal amount of new 5.250% Senior Notes due 2023 registered under the Securities Act of 1933, for any and all of our outstanding 5.250% Senior Notes due 2023 issued on April 14, 2015 |
___________________________________________________________________________________________ We are offering to exchange, upon the terms and subject to the conditions set forth in this Prospectus and the accompanying letter of transmittal, (i) our new 4.500% Senior Notes due 2020 (the “2020 Notes”) for all of our outstanding 4.500% Senior Notes due 2020 issued on April 14, 2015 (the “Initial 2020 Notes”) in an aggregate principal amount of $1,500,000,000, and (ii) our new 5.250% Senior Notes due 2023 (the “2023 Notes” and, together with the “2020 Notes,” the “Notes”) for all of our outstanding 5.250% Senior Notes due 2023 issued on April 14, 2015 (the “Initial 2023 Notes” and, together with the “Initial 2020 Notes,” the “Initial Notes”) in an aggregate principal amount of $1,500,000,000. We refer to each of these offers as an “Exchange Offer” and together as the “Exchange Offers.” | ||
Material Terms of the Exchange Offers: • The exchange offers will expire at 5:00 p.m. New York City time, on , 2015, unless extended.• You will receive an equal principal amount of 2020 Notes for all Initial 2020 Notes and an equal principal amount of 2023 Notes for all Initial 2023 Notes, in each case that you validly tender and do not validly withdraw.• The form and terms of each series of Notes will be identical in all material respects to the form and terms of the corresponding Initial Notes, except that the Notes will not contain restrictions on transfer, will bear different CUSIP numbers and will not entitle their holders to certain registration rights relating to the Initial Notes. | ||
• If you do not tender your Initial Notes in the Exchange Offers, all non-exchanged Initial Notes will continue to be subject to the restriction on transfer set forth in the Initial Notes. If we exchange Initial Notes in the Exchange Offers, the trading market, if any, for any remaining Initial Notes could be much less liquid.• We expect to obtain and maintain a listing for the Notes on the Official List of the Irish Stock Exchange and to admit the Notes for trading on the Main Market thereof. If we are unable to obtain or maintain such listing on the Official List of the Irish Stock Exchange, we may obtain and maintain listing for the Notes on another exchange in our sole discretion. No public market currently exists for the Initial Notes. | ||
Each broker-dealer that receives Notes for its own account pursuant to the Exchange Offers must acknowledge that it will deliver a prospectus in connection with any resale of such Notes. The letter of transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act of 1933. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Notes received in exchange for Initial Notes where such Initial Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of up to 180 days of the effectiveness of the exchange offer registration statement, we will make this Prospectus available to any broker-dealer for use in connection with any such resale. _______________________________ Investing in the Notes involves risks. See “Risk Factors” beginning on page 10. _______________________________ Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this Prospectus. Any representation to the contrary is a criminal offense. _______________________________ The date of this Prospectus is , 2015 | ||
We are responsible for the information contained in this Prospectus. We have not authorized anyone to give you any other information, and take no responsibility for any other information that others may give you. We are offering to sell the Notes only in places where offers and sales are permitted. You should not assume that the information contained in this Prospectus is accurate as of any date other than the date on the front cover of this Prospectus.
TABLE OF CONTENTS
Page | |
As permitted by the rules and regulations of the SEC, this Prospectus does not contain all the information included in the registration statement. You should refer to the registration statement on Form F-4 (File No. 333- ), for information omitted from this Prospectus. See "Where You Can Find More Information." This information is available without charge upon written or oral request to: Fiat Chrysler Automobiles N.V., Attn: Investor Relations, 25 St. James’s Street, London SW1A 1HA, United Kingdom, Tel. No. +44 (0)20 7766 0311.
In order to obtain timely delivery of such materials, you must request information from us no later than five business days prior to , 2015, the date you must make your investment decision.
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CERTAIN DEFINED TERMS
In this Prospectus, unless otherwise specified or the context otherwise requires, the terms “we,” “our,” “us,” the “Group,” the “Company” and “FCA” refer to Fiat Chrysler Automobiles N.V., together with its subsidiaries, following completion of the merger of Fiat S.p.A. with and into us on October 12, 2014, which we refer to as the “Merger,” or to Fiat S.p.A. together with its subsidiaries, prior to the Merger. References to “Fiat” refer solely to Fiat S.p.A., the predecessor of FCA. “FCA US” refers to FCA US LLC, formerly known as Chrysler Group LLC (together with its direct and indirect subsidiaries).
See “Note on Presentation” below for additional information regarding the financial presentation.
NOTE ON PRESENTATION
This Prospectus includes the consolidated financial statements of the Group for the years ended December 31, 2014, 2013, and 2012 prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB. We refer to these consolidated financial statements collectively as the “Consolidated Financial Statements.”
This Prospectus also includes the unaudited interim consolidated financial statements of the the Group for the three months ended March 31, 2015 prepared in accordance with IAS 34 - Interim Financial Reporting. We refer to those unaudited interim consolidated financial statements as the “Interim Consolidated Financial Statements.”
The Group’s financial information is presented in Euro except that, in some instances, information in U.S. dollars is provided in the Consolidated Financial Statements and information included elsewhere in this Prospectus. All references in the Prospectus to “Euro” and “€” refer to the currency introduced at the start of the third stage of European Economic and Monetary Union pursuant to the Treaty on the Functioning of the European Union, as amended, and all references to “U.S. dollars,” “U.S.$” and “$” refer to the currency of the United States of America.
The language of this Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.
Certain totals in the tables included in this Prospectus may not add due to rounding.
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MARKET AND INDUSTRY INFORMATION
In this Prospectus, we include and refer to industry and market data, including market share, ranking and other data, derived from or based upon a variety of official, non-official and internal sources, such as internal surveys and management estimates, market research, publicly available information and industry publications. Market share, ranking and other data contained in this Prospectus may also be based on our good faith estimates, our own knowledge and experience and such other sources as may be available. Market share data may change and cannot always be verified with complete certainty due to limits on the availability and reliability of raw data, the voluntary nature of the data-gathering process, different methods used by different sources to collect, assemble, analyze or compute market data, including different definitions of vehicle segments and descriptions and other limitations and uncertainties inherent in any statistical survey of market shares or size. 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. In addition we normally estimate our market share for automobiles and commercial vehicles based on registration data. In a limited number of markets where registration data are not available, we calculate our market share based on estimates relating to sales to final customers. Such data may differ from data relating to shipments to our dealers and distributors. While we believe our internal estimates with respect to our industry are reliable, our internal company surveys and management estimates have not been verified by an independent expert, and we cannot guarantee that a third party using different methods to assemble, analyze or compute market data would obtain or generate the same result. The market share data presented in this Prospectus represents the best estimates available from the sources indicated as of the date hereof but, 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.”
For an overview of the automotive industry, see “Business—Industry Overview—Our Industry.”
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CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Statements contained in this Prospectus, particularly those regarding possible or assumed future performance, competitive strengths, costs, dividends, reserves and growth of FCA, industry growth and other trends and projections and estimated company earnings are “forward-looking statements” that contain risks and uncertainties. In some cases, words such as “may,” “will,” “expect,” “could,” “should,” “intend,” “estimate,” “anticipate,” “believe,” “outlook,” “continue,” “remain,” “on track,” “target,” “objective,” “goal,” “plan” and similar expressions are used to identify forward-looking statements. These forward-looking statements reflect the respective current views of the Group with respect to future events and involve significant risks and uncertainties that could cause actual results to differ materially. These factors include, without limitation:
• | our ability to reach certain minimum vehicle sales volumes; |
• | changes in the general economic environment and changes in demand for automotive products, which is subject to cyclicality, in particular; |
• | our ability to enrich our product portfolio and offer innovative products; |
• | the high level of competition in the automotive industry; |
• | our ability to expand certain of our brands internationally; |
• | changes in our credit ratings; |
• | our ability to realize anticipated benefits from any acquisitions, joint venture arrangements and other strategic alliances; |
• | our ability to integrate the Group’s operations; |
• | exposure to shortfalls in the Group’s defined benefit pension plans, particularly those of FCA US; |
• | our ability to provide or arrange for adequate access to financing for our dealers and retail customers, and associated risks associated with financial services companies; |
• | our ability to access funding to execute our business plan and improve our business, financial condition and results of operations; |
• | various types of claims, lawsuits and other contingent obligations against us, including product liability, warranty and environmental claims and lawsuits; |
• | disruptions arising from political, social and economic instability; |
• | material operating expenditures in relation to compliance with environmental, health and safety regulations; |
• | our timely development of hybrid propulsion and alternative fuel vehicles and other new technologies to enable compliance with increasingly stringent fuel economy and emission standards in each area in which we operate; |
• | developments in our labor and industrial relations and developments in applicable labor laws; |
• | risks associated with our relationships with employees and suppliers; |
• | increases in costs, disruptions of supply or shortages of raw materials; |
• | exchange rate fluctuations, interest rate changes, credit risk and other market risks; |
• | our ability to achieve some or all of the financial and other benefits we expect will result from the separation of Ferrari; and |
• | other factors discussed elsewhere in this Prospectus. |
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Furthermore, in light of ongoing difficult macroeconomic conditions, both globally and in the industries in which we operate, it is particularly difficult to forecast results, and any estimates or forecasts of particular periods that are provided in this Prospectus are uncertain. We expressly disclaim and do not assume any liability in connection with any inaccuracies in any of the forward-looking statements in this document or in connection with any use by any third party of such forward-looking statements. Actual results could differ materially from those anticipated in such forward-looking statements. We do not undertake an obligation to update or revise publicly any forward-looking statements.
Additional factors which could cause actual results and developments to differ from those expressed or implied by the forward-looking statements are included in the section “Risk Factors” of this Prospectus.
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SUMMARY
In this Prospectus, unless otherwise specified or the context otherwise requires, the terms “we,” “our,” “us,” the “Group,” the “Company” and “FCA” refer to Fiat Chrysler Automobiles N.V. and its consolidated subsidiaries. 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 investing in any series of Notes. You should carefully read the entire Prospectus, including the sections under the headings “Risk Factors” and “Cautionary Statements Concerning Forward-Looking Statements.”
FIAT CHRYSLER AUTOMOBILES N.V.
Our Business
We are an international automotive group engaged in designing, engineering, manufacturing, distributing and selling vehicles, components and production systems. We are the seventh largest automaker in the world based on total vehicle sales in 2014. We have operations in approximately 40 countries and sell our vehicles directly or through distributors and dealers in more than 150 countries. We design, engineer, manufacture, distribute and sell vehicles for the mass market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram brands and the SRT performance vehicle designation. We support our vehicle sales with after-sales services and parts worldwide using the Mopar brand for mass market vehicles. We make available retail and dealer financing, leasing and rental services through our subsidiaries, joint ventures and commercial arrangements. In addition, we design, engineer, manufacture, distribute and sell luxury vehicles under the Ferrari and Maserati brands, which we support with financial services provided to our dealers and retail customers. We also operate in the components and production systems sectors under the Magneti Marelli, Teksid and Comau brands.
For the three months ended March 31, 2015, we shipped 1.1 million vehicles, reported net revenues of €26.4 billion and net profit of €0.1 billion. In 2014, we shipped 4.6 million vehicles, a 6 percent increase over 2013. For the year ended December 31, 2014, we reported net revenues of €96.1 billion, EBIT (earnings before interest and taxes) of €3.2 billion and net profit of €0.6 billion. At March 31, 2015, we had available liquidity of €25.2 billion (including €3.3 billion available under undrawn committed credit lines) and net industrial debt of €8.6 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Net Industrial Debt.” Our activities are carried out through seven reportable segments: four regional mass-market vehicle segments, NAFTA (U.S., Canada, Mexico and the Caribbean islands), LATAM (South and Central America), APAC (Asia and Pacific countries) and EMEA (Europe, Middle East and Africa), Ferrari and Maserati our two global luxury brand segments and a global Components segment (see “Business—Overview of Our Business”).
Additional Information
We were incorporated as a public limited liability company (naamloze vennootschap) under the laws of the Netherlands on April 1, 2014 under the name Fiat Investments N.V. for the purposes of carrying out the reorganization of the Group, including the merger of Fiat with and into FCA (the “Merger”), following its January 2014 acquisition of the approximately 41.5 percent interest it did not already own in FCA US. The Group’s redomiciliation to the Netherlands was intended to facilitate the combined Group’s listing on the New York Stock Exchange, or NYSE. Upon the effectiveness of the Merger, FCA was renamed Fiat Chrysler Automobiles N.V., as the successor entity to Fiat and the holding company of the combined Group. Our principal executive offices are located at 25 St. James’s Street, London SW1A 1HA, United Kingdom. Our telephone number is +44 (0)20 7766 0311. We do not incorporate information available on, or accessible through, our corporate website into this Prospectus, and you should not consider it part of this Prospectus.
Risk Factors
Investing in the Notes 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 the Notes, you should carefully consider all of the information in this Prospectus, including matters set forth in the section entitled “Risk Factors” beginning on page 10.
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The Exchange Offers
The summary below describes the principal terms of the exchange offers. Some of the terms and conditions described below are subject to important limitations and exceptions. You should carefully review the “The Exchange Offers” section of this Prospectus and the letter of transmittal accompanying this Prospectus for a more detailed description. For purposes of the summary of the Exchange Offers below, the terms “we,” “our,” “us,” and “FCA” refer only to Fiat Chrysler Automobiles N.V. and not to any of its subsidiaries.
The Exchange Offers | Our exchange offers relate to the exchange of: Ÿ up to $1,500,000,000 aggregate principal amount of new 4.500% Senior Notes due 2020 (the “2020 Notes”) registered under the Securities Act of 1933, for any and all of our outstanding 4.500% Senior Notes due 2020 issued on April 14, 2015 (the “Initial 2020 Notes”); and Ÿ up to $1,500,000,000 aggregate principal amount of new 5.250% Senior Notes due 2023 (the “2023 Notes” and, together with the 2020 Notes, the “Notes”) registered under the Securities Act of 1933, for any and all of our outstanding 5.250% Senior Notes due 2023 issued on April 14, 2015 (the “Initial 2023 Notes” and, together with the Initial 2020 Notes, the “Initial Notes”). We refer to each of these offers as an “Exchange Offer” and together as the “Exchange Offers.” We will exchange a like principal amount of 2020 Notes for our outstanding Initial 2020 Notes and a like principal amount of 2023 Notes for our outstanding Initial 2023 Notes, provided that, in each case, the Initial Notes are validly tendered and not validly withdrawn. The Initial Notes may only be tendered in minimum denominations of $200,000 and integral multiples of $1,000 in excess thereof. The form and terms of each series of Notes will be identical in all material respects to the form and terms of the corresponding Initial Notes, except that the Notes will not contain restrictions on transfer, will bear different CUSIP numbers and will not entitle their holders to certain registration rights relating to the Initial Notes. |
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Resale of the Notes | Based on interpretations by the staff of the SEC set forth in no-action letters issued to other parties, we believe that you may offer for resale, resell and otherwise transfer your Notes without compliance with the registration and Prospectus delivery provisions of the Securities Act if you are not our affiliate and you acquire the Notes issued in the Exchange Offers in the ordinary course. You must also represent to us that you are not participating, do not intend to participate, and have no arrangement or understanding with any person to participate, in the distribution of the Notes we issue to you in the Exchange Offers. Each broker-dealer that receives Notes in the Exchange Offers for its own account in exchange for Initial Notes that it acquired as a result of market-making or other trading activities must acknowledge that it will deliver a Prospectus meeting the requirements of the Securities Act in connection with any resale of the Notes issued in the Exchange Offers. You may not participate in any Exchange Offer if you are a broker-dealer who purchased such outstanding Initial Notes directly from us for resale pursuant to Rule 144A or any other available exemption under the Securities Act. |
Expiration Date | The Exchange Offers will expire at, and no further tenders of Initial Notes will be accepted after, 5:00 p.m., New York City time, on , 2015 (the “Expiration Date”), unless we, in our sole discretion, extend the period during which an Exchange Offer is open, and we will extend the Expiration Date to the extent required by Rule 13e-4 under the Exchange Act of 1934, as amended (the “Exchange Act”). If we extend the Expiration Date for an Exchange Offer, the term “Expiration Date” means the latest time and date on which such Exchange Offer, as so extended, expires. We may extend the expiration date of either Exchange Offer for any reason, and we may extend the Expiration Date of one Exchange Offer without extending the Expiration Date of the other Exchange Offer. The Exchange Offers are not conditioned upon each other, and we may withdraw, extend or modify the terms of one exchange offer without withdrawing, extending or modifying the terms of the other Exchange Offer in our sole discretion. See “The Exchange Offers—Information about the Expiration Date of the Exchange Offers and Changes to It.” |
Special Procedures For Beneficial Owners | If you are the beneficial owner of Initial Notes and you registered your Initial Notes in the name of a broker or other institution, and you wish to participate in the Exchange Offers, you should promptly contact the person in whose name you registered your Initial Notes and instruct that person to tender the Initial Notes on your behalf. If you wish to tender on your own behalf, you must, prior to completing and executing the letter of transmittal and delivering your outstanding Initial Notes, either make appropriate arrangements to register ownership of the outstanding Initial Notes in your name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. |
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Guaranteed Delivery Procedures | If you wish to tender your Initial Notes and time will not permit your required documents to reach the Exchange Agent by the Expiration Date, or you cannot complete the procedure for book-entry transfer on time or you cannot deliver your certificates for registered Initial Notes on time, you may tender your Initial Notes pursuant to the procedures described in this Prospectus under “The Exchange Offers—How to Use the Guaranteed Delivery Procedures if You Will Not Have Enough Time to Send All Documents to Us.” |
Termination and Modification of the Exchange Offers | Each of the Exchange Offers is subject to customary conditions described in “The Exchange Offers—We May Modify or Terminate the Exchange Offers Under Some Circumstances,” including, among other things, the condition that the registration statement of which this Prospectus forms a part shall have become effective and that there shall not have occurred any material adverse change to our business, condition (financial or otherwise), operations or prospects. Neither of the Exchange Offers is conditioned upon the other Exchange Offer, and we may terminate one Exchange Offer without terminating the other Exchange Offer. In addition, we expressly reserve the right to terminate one or both of the Exchange Offers and not accept for exchange any Initial Notes for any reason. |
Withdrawal Rights | You may withdraw the tender of your Initial Notes at any time prior to the Expiration Date. See “The Exchange Offers.” |
Material U.S. Federal Income Tax Consequences | The exchange of Initial Notes for Notes will not be a taxable exchange for United States federal income tax purposes. See “Material Tax Considerations—Material U.S. Federal Income Tax Consequences.” |
Use of Proceeds | We will not receive any proceeds from the issuance of Notes pursuant to the Exchange Offers. Initial Notes that are validly tendered and exchanged will be retired and canceled. We will pay all expenses incidental to the Exchange Offers. |
Exchange Agent | We have appointed The Bank of New York Mellon as the Exchange Agent for the Exchange Offers. |
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The Notes
The summary below describes the principal terms of the Notes. Some of the terms and conditions described below are subject to important limitations and exceptions. You should carefully review the “Description of the Notes” section of this Prospectus, which contains a more detailed description of the terms and conditions of each series of Notes. For purposes of the summary below, the terms “we,” “our,” “us,” and “FCA” refer only to Fiat Chrysler Automobiles N.V. and not to any of its subsidiaries.
Issuer | Fiat Chrysler Automobiles N.V., a public limited liability company incorporated under the laws of the Netherlands. |
Notes Offered | $1,500,000,000 aggregate principal amount of 4.500% Senior Notes due 2020 (the “2020 Notes”) and $1,500,000,000 aggregate principal amount of 5.250% Senior Notes due 2023 (the “2023 Notes,” and together with the 2020 Notes, the “Notes”). |
Interest Rate | 4.500% per annum for the 2020 Notes and 5.250% per annum for the 2023 Notes. Interest will accrue from April 14, 2015. |
Maturity Date | April 15, 2020 for the 2020 Notes and April 15, 2023 for the 2023 Notes. |
Interest Payment Dates | April 15 and October 15 of each year, commencing on October 15, 2015. |
Ranking | The Notes will be our unsecured senior obligations and will: Ÿ be senior in right of payment to any future subordinated indebtedness and to any of our existing indebtedness which is by its terms subordinated in right of payment to the Notes; Ÿ rank pari passu in right of payment with respect to all of our existing and future unsubordinated indebtedness. We are a holding company and most of our operations are conducted through our subsidiaries. Therefore, payments of interest and principal on the Notes may depend on the ability of our operating subsidiaries to distribute cash or other property to us. The Notes are not guaranteed by our subsidiaries, and therefore effectively rank junior to the liabilities of our current and future subsidiaries to the extent of the assets of such subsidiaries. See “Risk Factors—Risks Relating to the Notes and the Exchange Offers” and “Description of the Notes—Ranking.” The Indenture does not limit the amount of debt securities we or our subsidiaries may issue and does not restrict our ability, or the ability of our subsidiaries, to incur additional indebtedness (including, in certain cases, secured debt). Such additional debt will effectively rank senior to the Notes to the extent of the value of the assets of such subsidiaries or the assets securing such debt. At March 31, 2015, Ÿ we had approximately €14.0 billion of unsecured indebtedness outstanding, principally consisting of indebtedness incurred by our treasury subsidiaries and guaranteed by us, including our global medium term notes; and Ÿ our subsidiaries had approximately €19.4 billion of external indebtedness outstanding, including €11.8 billion of indebtedness at FCA US LLC and approximately €1.6 billion of indebtedness at our financial services subsidiaries. |
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Optional Redemption | We may redeem each series of Notes, in whole or in part, at our option, at any time and from time to time, at a redemption price equal to the greater of (i) 101% of the principal amount of the series of Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments of principal, premium and interest (excluding accrued but unpaid interest to the redemption date) on the series of Notes to be redeemed to the maturity date thereof, discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months), at the Treasury Rate plus 50 basis points, plus in each case unpaid interest, if any, accrued to, but not including, such redemption date. See “Description of the Notes—Optional Redemption.” |
Change of Control | If we experience specific kinds of change of control events, we must make an offer to repurchase all of the Notes at a price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, to the purchase date. See “Description of the Notes—Repurchase at the Option of Holders.” |
Certain Covenants | The Indenture restricts our ability to consolidate or merge with or into any other person, and sell, transfer, or lease or convey all or substantially all of our properties and assets to another person. See “Description of the Notes—Consolidation, Merger and Sale of Assets.” In addition, so long as any of the Notes remains outstanding we will not create any mortgage, charge, pledge, lien, encumbrance or other security interest (“Lien”) (other than a Permitted Lien) upon our assets to secure any Quoted Indebtedness or any Qualifying Guarantee of such Quoted Indebtedness, unless, in any such case, we grant, for the benefit of holders of the Notes, a security interest in such assets that is equal and ratable to the security interests in favor of the holders of the Quoted Indebtedness. See “Description of the Notes—Negative Pledge.” |
CUSIP Numbers | 2020 Notes: 31562Q AC1 2023 Notes: 31562Q AF4 |
ISINs | 2020 Notes: US31562QAC15 2023 Notes: US31562QAF46 |
Indenture | The Notes will be issued under the indenture, dated as of April 14, 2015, with The Bank of New York Mellon, as trustee (the “Indenture”). The rights of holders of the Notes, including rights with respect to default, waivers and amendments, are governed by the Indenture. |
Listing | We expect to obtain and maintain a listing for the Notes on the Official List of the Irish Stock Exchange and to admit the Notes for trading on the Main Market thereof. If we are unable to obtain or maintain such listing on the Official List of the Irish Stock Exchange, we may obtain and maintain listing for the Notes on another exchange in our sole discretion. |
Governing Law | The Indenture and the Notes are governed by the laws of the State of New York. |
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SUMMARY SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary historical consolidated financial and other data of the Group. The historical financial data has been derived from:
• | the Interim Consolidated Financial Statements for the three months ended March 31, 2015 and 2014, included elsewhere in this Prospectus; and |
• | the Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012, included elsewhere in this Prospectus. |
The accompanying Interim Consolidated Financial Statements have been prepared on the same basis as the Consolidated Financial Statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Interim Consolidated Financial Statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.
The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Selected Historical Consolidated Financial and Other Data”, “Unaudited Pro Forma Condensed Consolidated Financial Statements”, “Business”, the Interim Consolidated Financial Statements and the Consolidated Financial Statements included elsewhere in this Prospectus. Historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Consolidated Income Statement Data
For the Three Months Ended March 31, | |||||
2015 | 2014 | ||||
(€ million) | |||||
Net revenues | 26,396 | 22,125 | |||
EBIT | 792 | 270 | |||
Profit/(loss) before taxes | 186 | (223 | ) | ||
Profit/(loss) from continuing operations | 92 | (173 | ) | ||
Net profit/(loss) | 92 | (173 | ) | ||
Attributable to: | |||||
Owners of the parent | 78 | (189 | ) | ||
Non-controlling interest | 14 | 16 | |||
Earnings/(loss) per share (in Euro) | |||||
Basic per ordinary share | 0.052 | (0.155 | ) | ||
Diluted per ordinary share | 0.052 | (0.155 | ) | ||
EBITDA(1) | 2,189 | 1,438 | |||
Adjusted EBIT(2) | 800 | 655 | |||
__________________________
(1) We believe EBITDA provides useful information about our operating results as it provides us with a measure of our financial performance that is frequently used by securities analysts, investors and other interested parties to compare results or estimate valuations across companies in our industry. We compute EBITDA starting with EBIT, and then adding back depreciation and amortization expense. Set forth below is a reconciliation of EBITDA for the periods presented:
7
For the Three Months Ended March 31, | |||||
2015 | 2014 | ||||
(€ million) | |||||
EBIT | 792 | 270 | |||
Plus: | |||||
Amortization and Depreciation | 1,397 | 1,168 | |||
EBITDA | 2,189 | 1,438 | |||
(2) Beginning on January 1, 2015, “Adjusted EBIT” is a non-GAAP measure being used by the Group to assess its performance; Adjusted EBIT is
calculated as EBIT excluding gains/(losses) on the disposal of investments, restructuring, impairments, asset write-offs and other unusual income/
(expenses) which are considered rare or discrete events that are infrequent in nature. Refer to Note 26 in the Interim Consolidated Financial Statements included elsewhere in this Prospectus for a reconciliation of Adjusted EBIT to EBIT.
Consolidated Statement of Financial Position Data
At March 31, 2015 | At December 31, 2014 | ||||
(€ million) | |||||
Cash and cash equivalents | 21,669 | 22,840 | |||
Total assets | 106,978 | 100,510 | |||
Debt | 33,366 | 33,724 | |||
Total equity | 15,235 | 13,738 | |||
Equity attributable to owners of the parent | 14,893 | 13,425 | |||
Non-controlling interests | 342 | 313 | |||
Consolidated Income Statement Data
For the Years Ended December 31, | ||||||||||||||
2014 | 2013 | 2012 | 2011(1) | 2010(2) | ||||||||||
(€ million) | ||||||||||||||
Net revenues | 96,090 | 86,624 | 83,765 | 59,559 | 35,880 | |||||||||
EBIT | 3,223 | 3,002 | 3,434 | 3,291 | 1,106 | |||||||||
Profit before taxes | 1,176 | 1,015 | 1,524 | 1,932 | 706 | |||||||||
Profit from continuing operations | 632 | 1,951 | 896 | 1,398 | 222 | |||||||||
Profit from discontinued operations | — | — | — | — | 378 | |||||||||
Net profit | 632 | 1,951 | 896 | 1,398 | 600 | |||||||||
Attributable to: | ||||||||||||||
Owners of the parent | 568 | 904 | 44 | 1,199 | 520 | |||||||||
Non-controlling interest | 64 | 1,047 | 852 | 199 | 80 | |||||||||
Earnings/(loss) per share (in Euro) | ||||||||||||||
Basic per ordinary share | 0.465 | 0.744 | 0.036 | 0.962 | 0.410 | |||||||||
Diluted per ordinary share | 0.460 | 0.736 | 0.036 | 0.955 | 0.409 | |||||||||
EBITDA(3) | 8,120 | 7,637 | 7,635 | 6,649 | 3,292 | |||||||||
__________________________
(1) The amounts reported include seven months of operations for FCA US.
(2) CNH Industrial was reported as discontinued operations in 2010 as a result of the Demerger.
(3) We believe EBITDA provides useful information about our operating results as it provides us with a measure of our financial performance that is frequently used by securities analysts, investors and other interested parties to compare results or estimate valuations across companies in our industry. We compute EBITDA starting with EBIT, and then adding back depreciation and amortization expense. Set forth below is a reconciliation of EBITDA for the periods presented:
8
For the Years Ended December 31, | ||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
(€ million) | ||||||||||||||
EBIT | 3,223 | 3,002 | 3,434 | 3,291 | 1,106 | |||||||||
Plus: | ||||||||||||||
Amortization and Depreciation | 4,897 | 4,635 | 4,201 | 3,358 | 2,186 | |||||||||
EBITDA | 8,120 | 7,637 | 7,635 | 6,649 | 3,292 | |||||||||
Consolidated Statement of Financial Position Data
At December 31, | ||||||||||||||
2014 | 2013 | 2012 | 2011(1)(2) | 2010 | ||||||||||
(€ million) | ||||||||||||||
Cash and cash equivalents | 22,840 | 19,455 | 17,666 | 17,526 | 11,967 | |||||||||
Total assets | 100,510 | 87,214 | 82,633 | 80,379 | 73,442(2) | |||||||||
Debt | 33,724 | 30,283 | 28,303 | 27,093 | 20,804 | |||||||||
Total equity | 13,738 | 12,584 | 8,369 | 9,711 | 12,461(2) | |||||||||
Equity attributable to owners of the parent | 13,425 | 8,326 | 6,187 | 7,358 | 11,544(2) | |||||||||
Non-controlling interests | 313 | 4,258 | 2,182 | 2,353 | 917(2) | |||||||||
__________________________
(1) The amounts as at December 31, 2011 are equivalent to those as at January 1, 2012 derived from the Consolidated Financial Statements.
(2) The amounts as at December 31, 2011 include the consolidation of FCA US.
9
RISK FACTORS
Investing in the Notes involves a high degree of risk. You should carefully consider the following risk factors and all other information contained in this Prospectus before deciding whether to invest in the Notes. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of or that we currently believe to be immaterial, may also become important factors that affect us.
If any of the following events occur, our business, financial condition and results of operations could be materially and adversely affected.
Risks Relating to Our Business
Our profitability depends on reaching certain minimum vehicle sales volumes. If our vehicle sales deteriorate, particularly sales of our minivans, larger utility vehicles and pick-up trucks, 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 automotive manufacturer, we have significant fixed costs and, therefore, changes in vehicle sales volume can have a disproportionately large effect on our profitability. For example, assuming constant pricing, mix and cost of sales per vehicle, that all results of operations were attributable to vehicle shipments and that all other variables remain constant, a ten percent decrease in our 2014 vehicle shipments would reduce our Earnings Before Interest and Taxes, or EBIT, by approximately 40 percent for 2014, without accounting for actions and cost containment measures we may take in response to decreased vehicle sales.
Further, a shift in demand away from our minivans, larger utility vehicles and pick-up trucks in the U.S., Canada, Mexico and Caribbean islands, or NAFTA, region towards passenger cars, whether in response to higher fuel prices or other factors, could adversely affect our profitability in the NAFTA region. Our minivans, larger utility vehicles and pick-up trucks accounted for approximately 44 percent of our total U.S. retail vehicle sales in 2014 (not including vans and medium duty trucks) and the profitability of this portion of our portfolio is approximately 33 percent higher than that of our overall U.S. retail portfolio on a weighted average basis. A shift in demand such that U.S. industry market share for minivans, larger utility vehicles and pick-up trucks deteriorated by 10 percentage points and U.S. industry market share for cars and smaller utility vehicles increased by 10 percentage points, whether in response to higher fuel prices or other factors, holding other variables constant, including our market share of each vehicle segment, would have reduced the Group’s EBIT by approximately 4 percent for 2014. This estimate does not take into account any other changes in market conditions or actions that the Group may take in response to shifting consumer preferences, including production and pricing changes. For additional information on factors affecting vehicle profitability, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trends, Uncertainties and Opportunities.”
Moreover, we tend to operate with negative working capital as we generally receive payments from vehicle sales to dealers within a few days of shipment, whereas there is a lag between the time when parts and materials are received from suppliers and when we pay for such parts and materials; therefore, if vehicle sales decline we will suffer a significant negative impact on cash flow and liquidity as we continue to pay suppliers during a period in which we receive reduced proceeds from vehicle sales. If vehicle sales do not increase, or if they were to fall short of 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.
Our businesses are affected by global financial markets and general economic and other conditions over which we have little or no control.
Our results of operations and financial position may be influenced by various macroeconomic factors—including changes in gross domestic product, the level of consumer and business confidence, changes in interest rates for or availability of consumer and business credit, energy prices, the cost of commodities or other raw materials, the rate of unemployment and foreign currency exchange rates—within the various countries in which we operate.
10
Beginning in 2008, global financial markets have experienced severe disruptions, resulting in a material deterioration of the global economy. The global economic recession in 2008 and 2009, which affected most regions and business sectors, resulted in a sharp decline in demand for automobiles. Although more recently we have seen signs of recovery in certain regions, the overall global economic outlook remains uncertain.
In Europe, in particular, despite measures taken by several governments and monetary authorities to provide financial assistance to certain Eurozone countries and to avoid default on sovereign debt obligations, concerns persist regarding the debt burden of several countries. These concerns, along with the significant fiscal adjustments carried out in several countries, intended to manage actual or perceived sovereign credit risk, led to further pressure on economic growth and to new periods of recession. Prior to a slight improvement in 2014, European automotive industry sales declined over several years following a period in which sales were supported by government incentive schemes, particularly those designed to promote sales of more fuel efficient and low emission vehicles. Prior to the global financial crisis, industry-wide sales of passenger cars in Europe were 16 million units in 2007. In 2014, following six years of sales declines, sales in that region rose 5 percent over 2013 to 13 million passenger cars. From 2011 to 2014, our market share of the European passenger car market decreased from 7.0 percent to 5.8 percent, and we have reported losses and negative EBIT in each of the past four years in the Europe, Middle East and Africa, or EMEA, segment. See “Business—Overview of Our Business” for a description of our reportable segments. These ongoing concerns could have a detrimental impact on the global economic recovery, as well as on the financial condition of European financial institutions, which could result in greater volatility, reduced liquidity, widening of credit spreads and lack of price transparency in credit markets. Widespread austerity measures in many countries in which we operate could continue to adversely affect consumer confidence, purchasing power and spending, which could adversely affect our financial condition and results of operations.
A majority of our revenues have been generated in the NAFTA segment, as vehicle sales in North America have experienced significant growth from the low vehicle sales volumes in 2009-2010. However, this recovery may not be sustained or may be limited to certain classes of vehicles. Since the recovery may be partially attributable to the pent-up demand and average age of vehicles in North America following the extended economic downturn, there can be no assurances that continued improvements in general economic conditions or employment levels will lead to additional increases in vehicle sales. As a result, North America may experience limited growth or decline in vehicle sales in the future.
In addition, slower expansion or recessionary conditions are being experienced in major emerging countries, such as China, Brazil and India. In addition to weaker export business, lower domestic demand has also led to a slowing economy in these countries. These factors could adversely affect our financial condition and results of operations.
In general, the automotive sector has historically been subject to highly cyclical demand and tends to reflect the overall performance of the economy, often amplifying the effects of economic trends. Given the difficulty in predicting the magnitude and duration of economic cycles, there can be no assurances as to future trends in the demand for products sold by us in any of the markets in which we operate.
In addition to slow economic growth or recession, other economic circumstances—such as increases in energy prices and fluctuations in prices of raw materials or contractions in infrastructure spending—could have negative consequences for the industry in which we operate and, together with the other factors referred to previously, could have a material adverse effect on our financial condition and results of operations.
We may be unsuccessful in efforts to expand the international reach of some of our brands that we believe have global appeal and reach.
The growth strategies reflected in our 2014-2018 Strategic Business Plan, or Business Plan, will require us to make significant investments, including to expand several brands that we believe to have global appeal into new markets. Such strategies include expanding sales of the Jeep brand globally, most notably through localized production in Asia and Latin America and reintroduction of the Alfa Romeo brand in North America and other markets throughout the world. Our plans also include a significant expansion of our Maserati brand vehicles to cover all segments of the luxury vehicle market. This will require significant investments in our production facilities and in distribution networks in these markets. If we are unable to introduce vehicles that appeal to consumers in these markets and achieve our brand expansion strategies, we may be unable to earn a sufficient return on these investments and this could have a material adverse effect on our financial condition and results of operations.
11
Product recalls and warranty obligations may result in direct costs, and loss of vehicle sales could have material adverse effects on our business.
We, and the U.S. automotive industry in general, have recently experienced a significant increase in recall activity to address performance, compliance or safety-related issues. The costs we incur to recall vehicles typically include the cost of replacement parts and labor to remove and replace parts, substantially depend on the nature of the remedy and the number of vehicles affected, and may arise many years after a vehicle’s sale. Product recalls may also harm our reputation and may cause consumers to question the safety or reliability of our products.
Any costs incurred, or lost vehicle sales, resulting from product recalls could materially adversely affect our financial condition and results of operations. 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.
We are also obligated under the terms of our warranty agreements 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 assumptions may result in unanticipated losses.
Our future performance depends on our ability to expand into new markets as well as enrich our product portfolio and offer innovative products in existing markets.
Our success depends, among other things, on our ability to maintain or increase our share in existing markets and/or to expand into new markets through the development of innovative, high-quality products that are attractive to customers and provide adequate profitability. Following our January 2014 acquisition of the approximately 41.5 percent interest in FCA US that we did not already own, we announced our Business Plan in May 2014. Our Business Plan includes a number of product initiatives designed to improve the quality of our product offerings and grow sales in existing markets and expand in new markets.
It generally takes two years or more to design and develop a new vehicle, and a number of factors may 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 and changes in styling preferences, an initial product concept or design that we believe will be attractive may not result in a vehicle that will generate sales in sufficient quantities and at high enough prices to be profitable. A failure to develop and offer innovative products that compare favorably to those of our principal competitors, in terms of price, quality, functionality and features, with particular regard to the upper-end of the product range, or delays in bringing strategic new models to the market, could impair our strategy, which would have a material adverse effect on our financial condition and results of operations. 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 to adjust personnel costs to changes in demand for our products, may further exacerbate the risks associated with incorrectly assessing demand for our vehicles.
Further, if we determine that a safety or emissions defect, a mechanical defect or a non-compliance with regulation exists with respect to a vehicle model prior to the retail launch, 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 noncompliance in vehicles that have been sold, could be substantial.
The automotive industry is highly competitive and cyclical and we may suffer from those factors more than some of our competitors.
Substantially all of our revenues are generated in the automotive industry, which is highly competitive, encompassing the production and distribution of passenger cars, light commercial vehicles and components and production systems. We face competition from other international passenger car and light commercial vehicle manufacturers and distributors and components suppliers in Europe, North America, Latin America and the Asia Pacific region. These markets are all highly competitive in terms of product quality, innovation, pricing, fuel economy, reliability, safety, customer service and financial services offered, and many of our competitors are better capitalized with larger market shares.
12
Competition, particularly in pricing, has increased significantly in the automotive industry in recent years. Global vehicle production capacity significantly exceeds current demand, partly as a result of lower growth in demand for vehicles. This overcapacity, combined with high levels of competition and weakness of major economies, has intensified and may further intensify pricing pressures.
Our competitors may respond to these conditions by attempting to make their vehicles more attractive or less expensive to customers by adding vehicle enhancements, providing subsidized financing or leasing programs, or by reducing vehicle prices whether directly or by offering option package discounts, price rebates or other sales incentives in certain markets. In addition,manufacturers in countries that have lower production costs have announced that they intend to export lower-cost automobiles to established markets. These actions have had, and could continue to have, a negative impact on our vehicle pricing, market share, and results of operations.
In the automotive business, sales to end-customers are cyclical and subject to changes in the general condition of the economy, the readiness of end-customers to buy and their ability to obtain financing, as well as the possible introduction of measures by governments to stimulate demand. The automotive industry is also subject to the constant renewal of product offerings through frequent launches of new models. A negative trend in the automotive industry or our inability to adapt effectively to external market conditions coupled with more limited capital than many of our principal competitors could have a material adverse impact on our financial condition and results of operations.
Our current credit rating is below investment grade and any further deterioration may significantly affect our funding and prospects.
The ability to access the capital markets or other forms of financing and the related costs depend, among other things, on our credit ratings. Following downgrades by the major rating agencies, we are currently rated below investment grade. The rating agencies review these ratings regularly and, accordingly, new ratings may be assigned to us in the future. It is not currently possible to predict the timing or outcome of any ratings review. Any downgrade may increase our cost of capital and potentially limit our access to sources of financing, which may cause a material adverse effect on our business prospects, earnings and financial position. Since the ratings agencies may separately review and rate FCA US on a standalone basis, it is possible that our credit ratings may not benefit from any improvements in FCA US’s credit ratings or that a deterioration in FCA US’s credit ratings could result in a negative rating review of us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for more information on our financing arrangements.
We may not be able to realize anticipated benefits from any acquisitions and challenges associated with strategic alliances may have an adverse impact on our results of operations.
We may engage in acquisitions or enter into, expand or exit from strategic alliances which could involve risks that may prevent us from realizing the expected benefits of the transactions or achieving our strategic objectives. Such risks could include:
• | technological and product synergies, economies of scale and cost reductions not occurring as expected; |
• | unexpected liabilities; |
• | incompatibility in processes or systems; |
• | unexpected changes in laws or regulations; |
• | inability to retain key employees; |
• | inability to source certain products; |
• | increased financing costs and inability to fund such costs; |
• | significant costs associated with terminating or modifying alliances; and |
• | problems in retaining customers and integrating operations, services, personnel, and customer bases. |
13
If problems or issues were to arise among the parties to one or more strategic alliances for managerial, financial or other reasons, or if such strategic alliances or other relationships were terminated, our product lines, businesses, financial position and results of operations could be adversely affected.
We may not achieve the expected benefits from our integration of the Group’s operations.
The January 2014 acquisition of the approximately 41.5 percent interest in FCA US we did not already own and the related integration of the two businesses is intended to provide us with a number of long-term benefits, including allowing new vehicle platforms and powertrain technologies to be shared across a larger volume, as well as procurement benefits and global distribution opportunities, particularly the extension of brands into new markets. The integration is also intended to facilitate penetration of key brands in several international markets where we believe products would be attractive to consumers, but where we currently do not have significant market penetration.
The ability to realize the benefits of the integration is critical for us to compete with other automakers. If we are unable to convert the opportunities presented by the integration into long-term commercial benefits, either by improving sales of vehicles and service parts, reducing costs or both, our financial condition and results of operations may be materially adversely affected.
We may be exposed to shortfalls in our pension plans.
Our defined benefit pension plans are currently underfunded. As of December 31, 2014, our defined benefit pension plans were underfunded by approximately €5.1 billion (€4.8 billion of which relates to FCA US’s defined benefit pension plans). Our pension funding obligations may increase significantly if the investment performance of plan assets does not keep pace with benefit payment obligations. Mandatory funding obligations may increase because of 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, or any changes in applicable law related to funding requirements. Our defined benefit 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 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 the ability to quickly rebalance illiquid and long-term investments.
To determine the appropriate level of funding and contributions to our defined benefit 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 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Pension plans.”
Any reduction in the discount rate 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, could constrain liquidity and materially adversely affect our financial condition and results of operations. If we fail to make required minimum funding contributions, we could be subject to reportable event disclosure to the U.S. Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount of any funding deficiency. With our ownership in FCA US now equal to 100 percent, we may become subject to certain U.S. legal requirements making us secondarily responsible for a funding shortfall in certain of FCA US’s pension plans in the event these pension plans were terminated and FCA US were to become insolvent.
We may not be able to provide adequate access to financing for our dealers and retail customers.
Our dealers enter into wholesale financing arrangements to purchase vehicles from us to hold in inventory and facilitate retail sales, and retail customers use a variety of finance and lease programs to acquire vehicles.
14
Unlike many of our competitors, we do not own and operate a controlled finance company dedicated solely to our mass-market operations in the U.S. and certain key markets in Europe. Instead we have elected to partner with specialized financial services providers through joint ventures and commercial agreements. Our lack of a controlled finance company in these key markets may increase the risk that our dealers and retail customers will not have access to sufficient financing on acceptable terms which may adversely affect our vehicle sales in the future. Furthermore, many of our competitors are better able to implement financing programs designed to maximize vehicle sales in a manner that optimizes profitability for them and their finance companies on an aggregate basis. Since our ability to compete depends on access to appropriate sources of financing for dealers and retail customers, our lack of a controlled finance company in those markets could adversely affect our results of operations.
In other markets, we rely on controlled finance companies, joint ventures and commercial relationships with third parties, including third party financial institutions, to provide financing to our dealers and retail customers. Finance companies are subject to various risks that could negatively affect their ability to provide financing services at competitive rates, including:
• | the performance of loans and leases in their portfolio, which could be materially affected by delinquencies, defaults or prepayments; |
• | wholesale auction values of used vehicles; |
• | higher than expected vehicle return rates and the residual value performance of vehicles they lease; and |
• | fluctuations in interest rates and currency exchange rates. |
Any financial services provider, including our joint ventures and controlled finance companies, 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, they may be subject to regulatory changes that may increase their costs, which may impair their ability to provide competitive financing products to our dealers and retail customers.
To the extent that a financial services provider is unable or unwilling to provide sufficient financing at competitive rates to our dealers and retail customers, such dealers and retail customers may not have sufficient access to financing to purchase or lease our vehicles. 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 affordable interest rates for vehicle financing.
In certain regions, financing for new vehicle sales has been available at relatively low interest rates for several years due to, among other things, expansive government monetary policies. To the extent that interest rates rise generally, market rates for new vehicle financing are expected to rise as well, which may make our vehicles less affordable to retail customers or steer consumers to less expensive vehicles that tend to be less profitable for us, adversely affecting our financial condition and results of operations. Additionally, if consumer interest rates increase substantially or if financial service providers tighten lending standards or restrict their lending to certain classes of credit, our retail customers may not desire to or be able to obtain financing to purchase or lease our vehicles. Furthermore, because our customers may be relatively more sensitive to changes in the availability and adequacy of financing and macroeconomic conditions, our vehicle sales may be disproportionately affected by changes in financing conditions relative to the vehicle sales of our competitors.
15
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 future performance will depend on, among other things, our ability to finance debt repayment obligations and planned investments from operating cash flow, available liquidity, the renewal or refinancing of existing bank loans and/or facilities and possible access to capital markets or other sources of financing. Although we have measures in place that are designed to ensure that adequate levels of working capital and liquidity are maintained, declines in sales volumes could have a negative impact on the cash-generating capacity of our operating activities. For a discussion of these factors, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” We could, therefore, find ourselves in the position of having to seek additional financing and/or having to refinance existing debt, including in unfavorable market conditions, with limited availability of funding and a general increase in funding costs. 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 our Business Plan and impair our 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, customers, suppliers and financial service providers, to do business with us, which may adversely affect our financial condition and results of operations.
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 operations, for example, by increasing the number of vehicles that are based on common platforms, reducing dependence on sales incentives offered to dealers and consumers, leveraging purchasing capacity and volumes and implementing World Class Manufacturing, or WCM, principles. WCM principles are intended to eliminate waste of all types, and improve worker efficiency, productivity, safety and vehicle quality as well as worker flexibility and focus on removing capacity bottlenecks to maximize output when market demand requires without having to resort to significant capital investments. As part of our Business Plan, we plan to continue our efforts to extend our WCM programs into all of our production facilities and benchmark across all of our facilities around the world. See “Business—Mass-Market Vehicles—Mass-Market Vehicle Design and Manufacturing” for a discussion of these efforts. Our future success depends upon our ability to implement these initiatives successfully throughout our operations. While some 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 make it more difficult to reduce 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 the need to introduce new and improved products in order to meet consumer expectations.
Our business operations may be impacted by various types of claims, lawsuits, and other contingent obligations.
We are involved in various product liability, warranty, product performance, asbestos, personal injury, environmental claims and lawsuits, governmental investigations, antitrust, intellectual property, tax and other legal proceedings including those that arise in the ordinary course of our business. We estimate such potential claims and contingent liabilities and, where appropriate, record provisions to address these contingent liabilities. The ultimate outcome of the legal matters pending against us is uncertain, and although such claims, lawsuits and other legal matters are not expected individually to have a material adverse effect on our financial condition or results of operations, such matters could have, in the aggregate, a material adverse effect on our financial condition or results of operations. Furthermore, we could, in the future, be subject to judgments or enter into settlements of lawsuits and claims that could have a material adverse effect on our results of operations in any particular period. While we maintain insurance coverage with respect to certain claims, we may not be able to obtain such insurance on acceptable terms in the future, if at all, and any such insurance may not provide adequate coverage against any such claims. See “Business—Legal Proceedings” and also Notes 26 and 33 of our Consolidated Financial Statements included elsewhere in this Prospectus for additional information regarding legal proceedings to which we are subject.
16
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business reputation and cause a default under certain covenants in our credit agreements and other debt.
We continuously monitor and evaluate changes in our internal controls over financial reporting. In support of our drive toward common global systems, we are extending the current finance, procurement, and capital project and investment management systems to new areas of operations. 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 these systems will continue to improve and enhance internal controls over financial reporting. Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business reputation.
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 default under certain covenants in the indentures governing certain of our public indebtedness, and other credit agreements.
A disruption in our information technology could compromise confidential and sensitive information.
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 information, data processing and telecommunications systems, including our vehicle design, manufacturing, inventory tracking and billing and payment 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 any one 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.
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 significant compromise in the integrity of our data security could have a material adverse effect on our business.
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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, there can be no guarantee that our intellectual property rights are sufficient to provide us with a competitive advantage against others who offer products similar to ours. 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.
The laws of some countries in which we operate do not offer the same protection of our intellectual property rights as do the laws of the U.S. or Europe. 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. Our inability to protect our intellectual property rights in some countries may harm our business, financial condition or results of operations.
We are subject to risks relating to international markets and exposure to changes in local conditions.
We are subject to risks inherent to operating globally, including those related to:
• | exposure to local economic and political conditions; |
• | import and/or export restrictions; |
• | multiple tax regimes, including regulations relating to transfer pricing and withholding and other taxes on remittances and other payments to or from subsidiaries; |
• | foreign investment and/or trade restrictions or requirements, foreign exchange controls and restrictions on the repatriation of funds. In particular, current regulations 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments” for more information regarding our Venezuela operations; and |
• | the introduction of more stringent laws and regulations. |
Unfavorable developments in any one or a combination of these areas (which may vary from country to country) could have a material adverse effect on our financial condition and results of operations.
Our success largely depends on the ability of our current management team to operate and manage effectively.
Our success largely depends on the ability of our senior executives and other members of management to effectively manage the Group and individual areas of the business. In particular, our Chief Executive Officer, Sergio Marchionne, is critical to the execution of our new strategic direction and implementation of the Business Plan. Although Mr. Marchionne has indicated his intention to remain as our Chief Executive Officer through the period of our Business Plan, if we were to lose his services or those of any of our other senior executives or key employees it could have a material adverse effect on our business prospects, earnings and financial position. We have developed succession plans that we believe are appropriate in the circumstances, although it is difficult to predict with any certainty that we will replace these individuals with persons of equivalent experience and capabilities. If we are unable to find adequate replacements or to attract, retain and incentivize senior executives, other key employees or new qualified personnel our business, financial condition and results of operations may suffer.
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Developments in emerging market countries may adversely affect our business.
We operate in a number of emerging markets, both directly (e.g., Brazil and Argentina) and through joint ventures and other cooperation agreements (e.g., Turkey, India, China and Russia). Our Business Plan provides for expansion of our existing sales and manufacturing presence in our South and Central America, or LATAM and Asia and Pacific countries, or APAC, regions. In recent years we have been the market leader in Brazil, which has provided a key contribution to our financial performance. Our exposure to other emerging countries has increased in recent years, as have the number and importance of such joint ventures and cooperation agreements. Economic and political developments in Brazil and other emerging markets, including economic crises or political instability, have had and could have in the future material adverse effects on our financial condition and results of operations. Further, in certain markets in which we or our joint ventures operate, government approval may be required for certain activities, which may limit our ability to act quickly in making decisions on our operations in those markets.
Maintaining and strengthening our position in these emerging markets is a key component of our global growth strategy in our Business Plan. However, with competition from many of the largest global manufacturers as well as numerous smaller domestic manufacturers, the automotive market in these emerging markets is highly competitive. As these markets continue to grow, we anticipate that additional competitors, both international and domestic, will seek to enter these markets and that existing market participants will try to aggressively protect or increase their market share. Increased competition may result in price reductions, reduced margins and our inability to gain or hold market share, which could have a material adverse effect on our financial condition and results of operations.
Our reliance on joint ventures in certain emerging markets may adversely affect the development of our business in those regions.
We intend to expand our presence in emerging markets, including China and India, through partnerships and joint ventures. For instance, we have entered into a joint venture with Guangzhou Automobile Group Co., Ltd, or GAC Group, which will localize production of three new Jeep vehicles for the Chinese market and expand the portfolio of Jeep sport utility vehicles, or SUVs, currently available to Chinese consumers as imports. We have also entered into a joint venture with TATA Motors Limited for the production of certain of our vehicles, engines and transmissions in India.
Our reliance on joint ventures to enter or expand our presence in these markets may expose us to risk of conflict with our joint venture partners and the need to divert management resources to overseeing these shareholder arrangements. Further, as these arrangements require cooperation with third party partners, these joint ventures may not be able to make decisions as quickly as we would if we were operating on our own or may take actions that are different from what we would do on a standalone basis in light of the need to consider our partners’ interests. As a result, we may be less able to respond timely to changes in market dynamics, which could have an adverse effect on our financial condition and results of operations.
Laws, regulations and governmental policies, including those regarding increased fuel economy requirements and reduced greenhouse gas 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 and these costs could be difficult to pass through to customers. As a result, we may face limitations on the types of vehicles we produce and sell and where we can sell them, which could have a material adverse impact on our financial condition and results of operations. For a discussion of these regulations, see “Business—Environmental and Other Regulatory Matters.”
Government initiatives to stimulate consumer demand for products sold by us, such as changes in tax treatment or purchase incentives for new vehicles, can substantially influence the timing and level of our revenues. The size and duration of such government measures are unpredictable and outside of our control. Any adverse change in government policy relating to those measures could have material adverse effects on our business prospects, financial condition and results of operations.
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The financial resources required to develop and commercialize vehicles incorporating sustainable technologies for the future are significant, as are the barriers that limit the mass-market potential of such vehicles.
Our product strategy is driven by the objective of achieving sustainable mobility by reducing the environmental impact of vehicles over their entire life cycle. We therefore intend to continue investing capital resources to develop new sustainable technology. We aim to increase the use of alternative fuels, such as natural gas, by continuing to offer a range of dual-fuel passenger cars and commercial vehicles. Additionally, we plan to continue developing alternative propulsion systems, particularly for vehicles driven in urban areas (such as the zero-emission Fiat 500e).
In many cases, technological and cost barriers limit the mass-market potential of sustainable natural gas and electric vehicles. In certain other cases the technologies that we plan to employ are not yet commercially practical and depend on significant future technological advances by us and by suppliers. There can be no assurance that these advances will occur in a timely or feasible manner, that the funds we have budgeted or expended for these purposes will be adequate, or that we will be able to obtain rights to use these technologies. Further, our competitors and others are pursuing similar technologies and other competing technologies and there can be no assurance that they will not acquire similar or superior technologies sooner than we will or on an exclusive basis or at a significant price advantage.
Labor laws and collective bargaining agreements with our labor unions could impact our ability to increase the efficiency of our operations.
Substantially all of our production employees are represented by trade unions, are covered by collective bargaining agreements and/or are protected by applicable labor relations regulations that may restrict our ability to modify operations and reduce costs quickly in response to changes in market conditions. See “Business—Overview of Our Business” for a description of these arrangements. 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 trade unions or are subject to less stringent regulations, which could have a material adverse effect on our financial condition and results of operations.
We depend on our relationships with suppliers.
We purchase raw materials and components from a large number of suppliers and depend on services and products provided by companies outside the Group. Close collaboration between an original equipment manufacturer, or OEM, and its suppliers is common in the automotive industry, and although this offers economic benefits in terms of cost reduction, it also means that we depend on our suppliers and are exposed to the possibility that difficulties, including those of a financial nature, experienced by those suppliers (whether caused by internal or external factors) could have a material adverse effect on our financial condition and results of operations.
We face risks associated with increases in costs, disruptions of supply or shortages of raw materials.
We use a variety of raw materials in our business including steel, aluminum, lead, resin and copper, and precious metals such as platinum, palladium and rhodium, as well as energy. The prices for these raw materials fluctuate, and market conditions can affect our ability to manage our cost of sales over the short term. We seek to manage this exposure, but we may not be successful in managing our exposure to these risks. Substantial increases in the prices for raw materials would increase our operating costs and could reduce profitability if the increased costs cannot be offset by changes in vehicle prices or countered by productivity gains. In particular, certain 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 that assure 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, natural or man-made disasters or civil unrest may have severe and unpredictable effects on the price of certain raw materials in the future.
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 suppliers to monitor potential disruptions and 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.
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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 our financial condition and/or results of operations.
We are subject to risks associated with exchange rate fluctuations, interest rate changes, credit risk and other market risks.
We operate in numerous markets worldwide and are exposed to market risks stemming from fluctuations in currency and interest rates. The exposure to currency risk is mainly linked to the differences in geographic distribution of our manufacturing activities and commercial activities, resulting in cash flows from sales being denominated in currencies different from those connected to purchases or production activities.
We use various forms of financing to cover funding requirements for our industrial activities and for providing financing to our dealers and customers. Moreover, liquidity for industrial activities is also principally invested in variable-rate or short-term financial instruments. Our financial services businesses normally operate a matching policy to offset the impact of differences in rates of interest on the financed portfolio and related liabilities. Nevertheless, changes in interest rates can affect net revenues, finance costs and margins.
We seek to manage risks associated with fluctuations in currency and interest rates through financial hedging instruments. Despite such hedges being in place, fluctuations in currency or interest rates could have a material adverse effect on our financial condition and results of operations. For example, the weakening of the Brazilian Real against the Euro in 2014 impacted the results of operations of our LATAM segment. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments.”
Our financial services activities are also subject to the risk of insolvency of dealers and retail customers, as well as unfavorable economic conditions in markets where these activities are carried out. Despite our efforts to mitigate such risks through the credit approval policies applied to dealers and retail customers, there can be no assurances that we will be able to successfully mitigate such risks, particularly with respect to a general change in economic conditions.
It may be difficult to enforce U.S. judgments against us.
We are incorporated under the laws of the Netherlands, and a substantial portion of our assets are outside of the U.S. Most of our directors and senior management and our independent auditors are resident outside the U.S., and all or a substantial portion of their respective assets may be located outside the U.S. As a result, it may be difficult for U.S. investors to effect service of process within the U.S. upon these persons. It may also be difficult for U.S. investors to enforce within the U.S. judgments predicated upon the civil liability provisions of the securities laws of the U.S. or any state thereof. In addition, there is uncertainty as to whether the courts outside the U.S. would recognize or enforce judgments of U.S. courts obtained against us or our directors and officers predicated upon the civil liability provisions of the securities laws of the U.S. or any state thereof. Therefore, it may be difficult to enforce U.S. judgments against us, our directors and officers and our independent auditors.
We operate so as to be treated as exclusively resident in the United Kingdom for tax purposes, but the relevant tax authorities may treat us as also being tax resident elsewhere.
We are not a company incorporated in the United Kingdom, or U.K. Therefore, whether we are resident in the U.K. for tax purposes will depend on whether our “central management and control” is located (in whole or in part) in the U.K. The test of “central management and control” is largely a question of fact and degree based on all the circumstances, rather than a question of law. Nevertheless, the decisions of the U.K. courts and the published practice of Her Majesty’s Revenue & Customs, or HMRC, suggest that we, a group holding company, are likely to be regarded as having become U.K.-resident on this basis from incorporation and remaining so if, as we intend, (i) at least half of the meetings of our Board of Directors are held in the U.K. with a majority of directors present in the U.K. for those meetings; (ii) at those meetings there are full discussions of, and decisions are made regarding, the key strategic issues affecting us and our subsidiaries; (iii) those meetings are properly minuted; (iv) at least some of our directors, together with supporting staff, are based in the U.K.; and (v) we have permanent staffed office premises in the U.K.
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Even if we are resident in the U.K. for tax purposes on this basis, as expected, we would nevertheless not be treated as U.K.-resident if (a) we were concurrently resident in another jurisdiction (applying the tax residence rules of that jurisdiction) that has a double tax treaty with the U.K. and (b) there is a tie-breaker provision in that tax treaty which allocates exclusive residence to that other jurisdiction.
Our residence for Italian tax purposes is largely a question of fact based on all circumstances. A rebuttable presumption of residence in Italy may apply under Article 73(5-bis) of the Italian Consolidated Tax Act, or CTA. However, we have set up and thus far maintained, and intend to continue to maintain, our management and organizational structure in such a manner that we should be deemed resident in the U.K. from our incorporation for the purposes of the Italy-U.K. tax treaty. The result of this is that we should not be regarded as an Italian tax resident either for the purposes of the Italy-U.K. tax treaty or for Italian domestic law purposes. Because this analysis is highly factual and may depend on future changes in our management and organizational structure, there can be no assurance regarding the final determination of our tax residence. Should we be treated as an Italian tax resident, we would be subject to taxation in Italy on our worldwide income and may be required to comply with withholding tax and/or reporting obligations provided under Italian tax law, which could result in additional costs and expenses.
Even if our “central management and control” is in the U.K. as expected, we will be resident in the Netherlands for Dutch corporate income tax and Dutch dividend withholding tax purposes on the basis that we are incorporated there. Nonetheless, we will be regarded as solely resident in either the U.K. or the Netherlands under the Netherlands-U.K. tax treaty if the U.K. and Dutch competent authorities agree that this is the case. We have applied for a ruling from the U.K. and Dutch competent authorities that we should be treated as resident solely in the U.K. for the purposes of the treaty. The outcome of that application cannot be guaranteed and it is possible that the U.K. and Dutch competent authorities may fail to reach an agreement. We anticipate, however, that, so long as the factors listed in the third preceding paragraph are present at all material times, the possibility that the U.K. and Dutch competent authorities will rule that we should be treated as solely resident in the Netherlands is remote. If there is a change over time to the facts upon which a ruling issued by the competent authorities is based, the ruling may be withdrawn or cease to apply.
We therefore expect to continue to be treated as resident in the U.K. and subject to U.K. corporation tax.
Unless and until the U.K. and the Dutch competent authorities rule that we should be treated as solely resident in the U.K. for the purposes of the Netherlands-U.K. double tax treaty, the Netherlands will be allowed to levy tax on us as a Dutch-tax-resident taxpayer.
The U.K.’s controlled foreign company taxation rules may reduce net returns to shareholders.
On the assumption that we are resident for tax purposes in the U.K., we will be subject to the U.K. controlled foreign company, or CFC, rules. The CFC rules can subject U.K.-tax-resident companies (in this case, us) to U.K. tax on the profits of certain companies not resident for tax purposes in the U.K. in which they have at least a 25 percent direct or indirect interest. Interests of connected or associated persons may be aggregated with those of the U.K.-tax-resident company when applying this 25 percent threshold. For a company to be a CFC, it must be treated as directly or indirectly controlled by persons resident for tax purposes in the U.K. The definition of control is broad (it includes economic rights) and captures some joint ventures.
Various exemptions are available. One of these is that a CFC must be subject to tax in its territory of residence at an effective rate not less than 75 percent of the rate to which it would be subject in the U.K., after making specified adjustments. Another of the exemptions (the “excluded territories exemption”) is that the CFC is resident in a jurisdiction specified by HMRC in regulations (several jurisdictions in which our group has significant operations, including Brazil, Italy and the U.S., are so specified). For this exemption to be available, the CFC must not be involved in an arrangement with a main purpose of avoiding U.K. tax and the CFC’s income falling within certain categories (often referred to as the CFC’s “bad income”) must not exceed a set limit. In the case of the U.S. and certain other countries, the “bad income” test need not be met if the CFC does not have a permanent establishment in any other territory and the CFC or persons with an interest in it are subject to tax in its home jurisdiction on all its income (other than non-deductible distributions). We expect that our principal operating activities should fall within one or more of the exemptions from the CFC rules, in particular the excluded territories exemption.
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Where the entity exemptions are not available, profits from activities other than finance or insurance will only be subject to apportionment under the CFC rules where:
• | some of the CFC’s assets or risks are acquired, managed or controlled to any significant extent in the U.K. (a) other than by a U.K. permanent establishment of the CFC and (b) other than under arm’s length arrangements; |
• | the CFC could not manage the assets or risks itself; and |
• | the CFC is party to arrangements which increase its profits while reducing tax payable in the U.K. and the arrangements would not have been made if they were not expected to reduce tax in some jurisdiction. |
Profits from finance activities (whether considered trading or non-trading profits for U.K. tax purposes) or from insurance may be subject to apportionment under the CFC rules if they meet the tests set out above or specific tests for those activities. A full or 75 percent exemption may also be available for some non-trading finance profits.
Although we do not expect the U.K.’s CFC rules to have a material adverse impact on our financial position, the effect of the new CFC rules on us is not yet certain. We will continue to monitor developments in this regard and seek to mitigate any adverse U.K. tax implications which may arise. However, the possibility cannot be excluded that the CFC rules may have a material adverse impact on our financial position, reducing net returns to our shareholders.
The existence of a permanent establishment in Italy for us after the Merger is a question of fact based on all the circumstances.
Whether we have maintained a permanent establishment in Italy after the Merger, or an Italian P.E., is largely a question of fact based on all the circumstances. We believe that, on the understanding that we should be a U.K.-resident company under the Italy-U.K. tax treaty, we are likely to be treated as maintaining an Italian P.E. because we have maintained and intend to continue to maintain sufficient employees, facilities and activities in Italy to qualify as maintaining an Italian P.E. Should this be the case (i) the embedded gains on our assets connected with the Italian P.E. cannot be taxed as a result of the Merger; (ii) our tax-deferred reserves cannot be taxed, inasmuch as they have been recorded in the Italian P.E.’s financial accounts; and (iii) the Italian fiscal unit that was headed by Fiat before the Merger or the Fiscal Unit, continues with respect to our Italian subsidiaries whose shareholdings are part of the Italian P.E.’s net worth.
According to Article 124(5) of the CTA, a mandatory ruling request should be submitted to the Italian tax authorities, in order to ensure the continuity, via the Italian P.E., of the Fiscal Unit that was previously in place between Fiat and its Italian subsidiaries. We filed a ruling request with the Italian tax authorities in respect of the continuation of the Fiscal Unit via the Italian P.E. on April 16, 2014. The Italian tax authorities issued the ruling on December 10, 2014 or the Ruling, confirming that the Fiscal Unit may continue via the Italian P.E. However, the Ruling is an interpretative ruling. It is not an assessment of a certain set of facts and circumstances. Therefore, even though the Ruling confirms that the Fiscal Unit may continue via the Italian P.E., this does not rule out that the Italian tax authorities may in the future verify whether we actually have a P.E. in Italy and potentially challenge the existence of such P.E. Because the analysis is highly factual, there can be no assurance regarding our maintenance of an Italian P.E. after the Merger.
Risks Relating to Our Substantial Existing Indebtedness
We have significant outstanding indebtedness, which may limit our ability to obtain additional funding on competitive terms and limit our financial and operating flexibility.
The extent of our indebtedness could have important consequences on our operations and financial results, including:
• | we may not be able to secure additional funds for working capital, capital expenditures, debt service requirements or general corporate purposes; |
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• | we may need to use a portion of our projected future cash flow from operations to pay principal and interest on our indebtedness, which may reduce the amount of funds available to us for other purposes; |
• | we may be more financially leveraged than some of our competitors, which may put us at a competitive disadvantage; and |
• | we may not be able to adjust rapidly to changing market conditions, which may make us more vulnerable to a downturn in general economic conditions or our business. |
These risks may be exacerbated by volatility in the financial markets, particularly those resulting from perceived strains on the finances and creditworthiness of several governments and financial institutions, particularly in the Eurozone.
Even after the January 2014 acquisition of the approximately 41.5 percent interest in FCA US that we did not already own, FCA US continues to manage financial matters, including funding and cash management, separately. Additionally, we have not provided guarantees or security or undertaken any other similar commitment in relation to any financial obligation of FCA US, nor do we have any commitment to provide funding to FCA US in the future.
Furthermore, certain of our bonds include covenants that may be affected by FCA US’s circumstances . In particular, these bonds include cross-default clauses which may accelerate the relevant issuer’s obligation to repay its bonds in the event that FCA US fails to pay certain debt obligations on maturity or is otherwise subject to an acceleration in the maturity of any of those obligations. Therefore, these cross-default provisions could require early repayment of those bonds in the event FCA US’s debt obligations are accelerated or are not repaid at maturity. There can be no assurance that the obligation to accelerate the repayment by FCA US of its debts will not arise or that it will be able to pay its debt obligations when due at maturity.
In addition, one of our existing revolving credit facilities, expiring in July 2016, provides some limits on our ability to provide financial support to FCA US.
Restrictive covenants in our debt agreements could limit our financial and operating flexibility.
The indentures governing certain of our outstanding public indebtedness, and other credit agreements to which companies in the Group are a party, contain covenants that restrict the ability of certain companies in the Group to, among other things:
• | incur additional debt; |
• | make certain investments; |
• | enter into certain types of transactions with affiliates; |
• | sell certain assets or merge with or into other companies; |
• | use assets as security in other transactions; and |
• | enter into sale and leaseback transactions. |
For more information regarding our credit facilities and debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
Restrictions arising out of FCA US’s debt instruments may hinder our ability to manage our operations on a consolidated, global basis.
FCA US is party to credit agreements for certain senior credit facilities and an indenture for two series of secured senior notes. These debt instruments include covenants that restrict FCA US’s ability to pay dividends or enter into sale and leaseback transactions, make certain distributions or purchase or redeem capital stock, prepay other debt, encumber assets, incur or guarantee additional indebtedness, incur liens, transfer and sell assets or engage in certain business combinations, enter into certain transactions with affiliates or undertake various other business activities.
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In particular, in January 2014 and February 2015, FCA US paid distributions of U.S.$1.9 billion and U.S.$1.3 billion, respectively, to its members. Further distributions will be limited to 50 percent of FCA US’s cumulative consolidated net income (as defined in the agreements) from the period from January 1, 2012 until the end of the most recent fiscal quarter, less the amounts of the January 2014 and February 2015 distributions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
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 particular, the senior credit facilities contain, and future indebtedness may contain, other and more restrictive covenants. These agreements also limit FCA US’s ability to prepay certain of its indebtedness or impose limitations that make prepayment impractical. The senior credit facilities require FCA US to maintain borrowing base collateral coverage and a minimum liquidity threshold. A breach of any of these covenants or restrictions could result in an event of default on the indebtedness and the other indebtedness of FCA US or result in cross-default under certain of its or our indebtedness.
If FCA US is unable to comply with these covenants, its outstanding indebtedness may become due and payable and creditors may foreclose on pledged properties. In this case, FCA US may not be able to repay its debt and it is unlikely that it would be able to borrow sufficient additional funds. Even if new financing is made available to FCA US in such circumstances, it may not be available on acceptable terms.
Compliance with certain of these covenants could also restrict FCA US’s ability to take certain actions that its management believes are in FCA US’s and our best long-term interests.
Should FCA US be unable to undertake strategic initiatives due to the covenants provided for by the above-referenced instruments, our business prospects, financial condition and results of operations could be impacted.
No assurance can be given that restrictions arising out of FCA US’s debt instruments will be eliminated.
In connection with our capital planning to support the Business Plan, we have announced our intention to eliminate existing contractual terms limiting the free flow of capital among Group companies, including through the redemption of each series of FCA US’s outstanding secured senior notes no later than their optional redemption dates in June 2015 and 2016, as well as the refinancing of outstanding FCA US term loans and its revolving credit facility at or before this time. No assurance can be given regarding the timing of such transactions or that such transactions will be completed.
Substantially all of the assets of FCA US and its U.S. subsidiary guarantors are unconditionally pledged as security under its senior credit facilities and secured senior notes and could become subject to lenders’ contractual rights if an event of default were to occur.
FCA US and several of its U.S. subsidiaries are obligors or guarantors under FCA US’s senior credit facilities and secured senior notes. The obligations under the senior credit facilities and secured senior notes are secured by senior and junior priority, respectively, security interests in substantially all of the assets of FCA US and its U.S. subsidiary guarantors. The collateral includes 100 percent of the equity interests in FCA US’s U.S. subsidiaries, 65 percent of the equity interests in its non-U.S. subsidiaries held directly by FCA US and its U.S. subsidiary guarantors, all personal property and substantially all of FCA US’s U.S. real property other than its Auburn Hills, Michigan headquarters. An event of default under FCA US’s senior credit facilities and/or secured senior notes could trigger its lenders’ or noteholders’ contractual rights to enforce their security interest in these assets.
The Notes are not guaranteed by our subsidiaries, and therefore effectively rank junior to any indebtedness or other liabilities of our subsidiaries to the extent of the assets of such subsidiaries, as well as to any secured indebtedness we may incur, to the extent of the assets securing such indebtedness.
We are a holding company and most of our operations are conducted through our subsidiaries. Therefore, payments of interest and principal on the Notes depend on the ability of our operating subsidiaries to distribute cash or other property to us. The Notes are not guaranteed by our subsidiaries, and therefore effectively rank junior to any indebtedness or other liabilities of our subsidiaries to the extent of the assets of such subsidiaries. The Indenture does not limit the amount of debt securities we or our subsidiaries may issue and does not restrict our ability, or the ability of our subsidiaries, to incur additional indebtedness (including, in certain cases, secured debt). Such additional debt will effectively rank senior to the Notes to the extent of the value of the assets of such subsidiaries or the assets securing such debt.
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Risks Relating to the Proposed Separation of Ferrari
No assurance can be given that the Ferrari separation will occur.
No assurance can be given as to whether and when the separation of Ferrari will occur. We may determine to delay or abandon the separation at any time for any reason or for no reason.
The terms of the proposed separation of Ferrari and Ferrari’s stand-alone capital structure have not been determined.
The terms of the proposed separation of Ferrari and Ferrari’s stand-alone capital structure have not yet been determined. Our preliminary plans are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments.” However, the final structure and terms of the separation may not coincide with the terms set forth in this Prospectus. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” for additional information. No assurance can be given as to the terms of the prospective interest in Ferrari or the terms of how it will be distributed.
We may be unable to achieve some or all of the benefits that we expect to achieve from our separation from Ferrari.
We may not be able to achieve the financial and other benefits that we expect will result from the separation of Ferrari. The anticipated benefits of the separation are based on a number of assumptions, some of which may prove incorrect. For example, there can be no assurance that the separation of Ferrari will enable us to strengthen our capital base sufficiently to offset the loss of the earnings and potential earnings of Ferrari.
Following the Ferrari separation, the price of our common shares may fluctuate significantly.
We cannot predict the prices at which our common shares may trade after the separation, the effect of the separation on the trading prices of our common shares or whether the market value of our common shares and the common shares of Ferrari held by a shareholder after the separation will be less than, equal to or greater than the market value of our common shares held by such shareholder prior to the separation.
Risks Relating to the Notes and the Exchange Offers
If an active trading market does not develop for the Notes, you may be unable to sell your Notes or to sell your Notes at a price that you deem sufficient.
Although we expect to obtain and maintain a listing for the Notes on the Official List of the Irish Stock Exchange and to admit the Notes for trading on the Main Market thereof, we cannot assure you that our application will be approved or that any series of Notes will be listed and, if listed, that such Notes will remain listed for the entire term of such Notes. Trading on such market is not an indication of the merits of the Company or the Notes. The Notes of each series will be newly issued in exchange for the Initial Notes of the applicable series pursuant to the Exchange Offers, and there is currently no established trading market for the Notes. We were advised by the initial purchasers of the Initial Notes that they intend to make a market in the Notes and the Initial Notes. However, they are under no obligation to do so and may discontinue any market-making activities with respect to the Notes at any time without any notice. We cannot assure the liquidity of the trading market for the Notes. If an active trading market for any series of Notes does not develop, the market price and liquidity of such Notes may be adversely affected. If any series of Notes is traded, it may trade at a discount from its initial offering price, depending on prevailing interest rates, the market for similar securities, our operating performance and financial condition, general economic conditions and other factors.
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The Notes are not guaranteed by our subsidiaries, and therefore are structurally subordinated to all liabilities of our current and future subsidiaries, and our ability to service our debt is dependent on the performance of our subsidiaries.
We are a holding company and most of our operations are conducted through our subsidiaries. We expect that payments of interest and principal that we make on the Notes will be made only to the extent that our operating subsidiaries can distribute cash or other property to us. Our subsidiaries are separate legal entities that have no obligation to pay any amounts due under the Notes or to make any funds available to us for that purpose, whether by dividends, loans or other payments.
The Notes are our obligations exclusively and are not guaranteed by any of our subsidiaries. Accordingly, the Notes are structurally subordinated to the liabilities, including trade payables, lease commitments and moneys borrowed, of our subsidiaries, including the indebtedness of FCA US. In addition, the Indenture governing the Notes will not contain any limitation on the amount of liabilities, such as trade payables, that may be incurred by our subsidiaries. In the event that any of our subsidiaries becomes insolvent, liquidate, reorganize, dissolve or otherwise wind up, the assets and earnings of those subsidiaries will be used first to satisfy the claims of their creditors, trade creditors, banks and other lenders and judgment creditors, and the ability of holders of the Notes to benefit indirectly from those assets and earnings, will therefore be effectively subordinated to the claims of creditors, including trade creditors, of those subsidiaries.
The Indenture does not restrict the amount of additional debt that we may incur.
The Notes and the Indenture under which the Notes will be issued do not place any limitation on the amount of debt that may be incurred by us. Our incurrence of additional debt may have important consequences for you as a holder of the Notes, including making it more difficult for us to satisfy our obligations with respect to the Notes, a loss in the trading value of your Notes, if any, and a risk that the credit ratings of the Notes are lowered or withdrawn.
We may not be able to repurchase the Notes upon a change of control, which would result in a default under the Notes.
Upon the occurrence of specific kinds of change of control events and unless we have previously exercised our right to redeem the Notes, each holder of Notes will have the right to require us to repurchase all or any part of such holder’s Notes at a price equal to 101.0% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase. If we experience a Change of Control Event (as defined in “Description of the Notes—Definitions—Change of Control Event”), there can be no assurance that we would have sufficient financial resources available to satisfy our obligations to repurchase the Notes. The terms of our other existing credit facilities and other financing arrangements may require repayment of amounts outstanding in the event of a change of control and limit our ability to fund the repurchase of Notes in certain circumstances.
The source of funds for any purchase of the Notes will be our available cash or cash generated from our and our subsidiaries’ operations or other sources, including borrowings, sales of assets or sales of equity. We may not be able to repurchase the Notes upon a Change of Control Event because we may not have sufficient financial resources to purchase all of the Notes that are tendered upon a Change of Control Event and to repay our other indebtedness that will become due. We may require additional financing from third parties to fund any such purchases, and we cannot assure you that we would be able to obtain financing on satisfactory terms or at all. In order to avoid the obligations to repurchase the Notes, we may have to avoid certain change in control transactions that would otherwise be beneficial to us. Our failure to purchase the Notes as required by their terms would result in a default under the Indenture and the Notes, which could have material adverse consequences for us and the holders of the Notes and could lead to a cross-default under the terms of our existing and future indebtedness. See “Description of the Notes—Repurchase at the Option of Holders—Change of Control Event” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
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The provisions in the Indenture and the Notes relating to change of control transactions will not necessarily afford you protection in the event of a change of control transaction, even if the transaction is highly leveraged.
The provisions in the Indenture and the Notes relating to change of control transactions will not necessarily afford you protection in the event of a highly leveraged change of control transaction that may adversely affect you, including a reorganization, restructuring, merger or other similar transaction involving us. These transactions may not involve a change in voting power or beneficial ownership or, even if they do, may not involve a change of the magnitude or on the terms required under the definition of Change of Control Event. A Change of Control Event will occur only if there is a decline in the credit ratings assigned to the Notes, in connection with a change of control. Therefore, even if such events constitute a change of control, they may not constitute a Change of Control Event.
Changes in our credit ratings or the debt markets could adversely affect the price of the Notes.
The price at which the Notes may be sold depends on many factors, including:
• | our credit ratings with major credit rating agencies; |
• | the prevailing interest rates being paid by, or the market price for the Notes issued by, other comparable companies or companies in similar industries to us; |
• | our financial condition, financial performance and future prospects; the overall condition of the financial markets; and the market, if any, for the Notes. |
Financial market conditions and prevailing interest rates have fluctuated in the past and are likely to fluctuate in the future. Such fluctuations could have an adverse effect on the price of the Notes. In addition, credit rating agencies periodically review their ratings and ratings outlook for various companies, including us. The credit rating agencies evaluate our industry as a whole, our competitors and various markets in which we compete, and may change their credit rating for us based on their view of these factors. A negative change in our rating or outlook is likely to have an adverse effect on the price of the Notes.
The Notes will mature later than a substantial portion of our other indebtedness.
The Notes will mature in 2020 and 2023, respectively. A substantial portion of our existing indebtedness will mature prior to the maturity of either series of the Notes. For example, we may issue a maximum of €20 billion of bonds under our global medium term notes program, or GMTN Program, of which approximately €10.8 billion have been issued and were outstanding at March 31, 2015. The bonds currently outstanding under our GMTN Program will mature from time to time through 2022, and we may issue additional bonds under this program that may mature prior to the maturity of any series of Notes. In addition, FCA US’s secured senior notes will mature in 2019 and 2021, respectively, unless previously redeemed pursuant to their terms. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Market.” FCA US’s tranche B term loan due 2017 will mature three years before the 2020 Notes and six years before the 2023 Notes, and FCA US’s tranche B term loan due 2018 will mature two years before the 2020 Notes and five years before the 2023 Notes. We have financing facilities outstanding with the European Investment Bank, or EIB, which will mature in 2015, 2018 and 2021, respectively. In addition, we, excluding FCA US, and FCA US may incur additional indebtedness under our and FCA US’s respective revolving credit facilities, which were undrawn at March 31, 2015. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Therefore, we will be required to repay a substantial portion of our other indebtedness, including FCA US’s secured senior notes and bonds currently outstanding under our GMTN Program, before the Notes, which may significantly deplete the amount of our cash available to repay the Notes at maturity. There can be no assurance that we will have the ability to borrow or otherwise raise the amounts necessary to repay such amounts if our cash flow is insufficient, and the prior maturity of such other indebtedness may make it difficult to refinance the Notes.
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There may be adverse consequences if you do not exchange your Initial Notes.
If you do not exchange your Initial Notes for Notes in the Exchange Offers, you will continue to be subject to restrictions on transfer of your Initial Notes as set forth in the Offering Memorandum distributed in connection with the private offering of the Initial Notes. In general, the Initial Notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except as required by the registration rights agreement, dated as of April 14, 2015, with the initial purchasers of the Initial Notes, or the Registration Rights Agreement, we do not intend to register resales of the Initial Notes under the Securities Act. You should refer to "Summary—The Exchange Offers" and "The Exchange Offers" for information about how to tender your Initial Notes.
The tender of Initial Notes under the Exchange Offers will reduce the outstanding amount of the Initial Notes to the extent any are not tendered in the Exchange Offers. This may have an adverse effect upon, and increase the volatility of, the market prices of the Initial Notes.
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THE EXCHANGE OFFERS
The terms and conditions of the Exchange Offers are set forth in the following description and the letter of transmittal accompanying this Prospectus. Unless otherwise indicated, references to “we,” “our” and “us” in this section “The Exchange Offers” refer solely to FCA and not to the Group or any of our subsidiaries.
Purpose of the Exchange Offers
The sole purpose of the Exchange Offers is to fulfill our obligations with respect to the registration of the Initial Notes. We originally offered and sold the Initial Notes on April 14, 2015. We did not register those offers and sales under the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption provided in Section 4(a)(2) of the Securities Act and Rule 144A and Regulation S promulgated under the Securities Act. In connection with the sale of the Initial Notes we agreed to file with the Securities and Exchange Commission (the “SEC”) an exchange registration statement related to the Exchange Offers. Under the exchange registration statement, we will offer the Notes in exchange for the Initial Notes. See under the heading “Registration Rights” in this Prospectus for additional information regarding the Registration Rights Agreement, dated April 14, 2015 (the “Registration Rights Agreement”), between us and the initial purchasers named therein. The Notes will be entitled to the benefits of the indenture, dated as of April 14, 2015 (the “Indenture”), with The Bank of New York Mellon, as Trustee, governing the Initial Notes.
How to Determine if You Are Eligible to Participate in the Exchange Offers
Upon the terms and subject to the conditions set forth in this Prospectus and in the letter of transmittal accompanying it, we will accept all Initial Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date (as defined below). The Company will issue $1,000 in principal amount of Notes for each $1,000 in principal amount of the Initial Notes accepted in the Exchange Offers. Holders may tender some or all of their Initial Notes pursuant to the Exchange Offers in minimum denominations of $200,000 and integral multiples of $1,000 in excess thereof. The form and terms of each series of Notes will be identical in all material respects to the form and terms of the corresponding Initial Notes, except that the Notes will not be subject to restrictions on transfer, will bear different CUSIP numbers and will not be entitled to certain registration rights and certain other provisions which are applicable to the Initial Notes under the Registration Rights Agreement. See “Description of the Notes.”
We are not making the Exchange Offers to, nor will we accept surrenders for exchange from, holders of outstanding Initial Notes in any jurisdiction in which the Exchange Offers or the acceptance thereof would not be in compliance with the securities laws of such jurisdiction.
We are not making the Exchange Offers conditional upon the holders tendering, or us accepting, any minimum aggregate principal amount of Initial Notes.
Under existing SEC interpretations, the Notes would generally be freely transferable after the Exchange Offers without further registration under the Securities Act, except that broker-dealers receiving the Notes in the Exchange Offers will be subject to a Prospectus delivery requirement with respect to their resale. This view is based on interpretations by the staff of the SEC in no-action letters issued to other issuers in exchange offers like these. We have not, however, asked the SEC to consider these particular Exchange Offers in the context of a no action letter. Therefore, the SEC might not treat them in the same way it has treated other Exchange Offers in the past. You will be relying on the no-action letters that the SEC has issued to third parties in circumstances that we believe are similar to ours. Based on these no-action letters, the following conditions must be met:
• | you must not be a broker-dealer that acquired the Initial Notes from us or in market-making transactions or other trading activities; |
• | you must acquire the Notes in the ordinary course of your business; |
• | you must have no arrangements or understandings with any person to participate in the distribution of the Notes within the meaning of the Securities Act; and |
• | you must not be an affiliate of ours, as defined in Rule 405 under the Securities Act. |
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If you wish to exchange Initial Notes for Notes in the Exchange Offers you must represent to us that you satisfy all of the above listed conditions. If you do not satisfy all of the above listed conditions:
• | you cannot rely on the position of the SEC set forth in the no-action letters referred to above; and |
• | you must comply with the registration and Prospectus delivery requirements of the Securities Act in connection with a resale of the Notes. |
The SEC considers broker-dealers that acquired Initial Notes directly from us, but not as a result of market-making activities or other trading activities, to be making a distribution of the Notes if they participate in the Exchange Offers. Consequently, these broker-dealers must comply with the registration and Prospectus delivery requirements of the Securities Act in connection with a resale of the Notes.
A broker-dealer that has bought Initial Notes for market-making or other trading activities must deliver a Prospectus in order to resell any Notes it receives for its own account in the Exchange Offers. The SEC has taken the position that broker-dealers may fulfill their Prospectus delivery requirements with respect to the Notes by delivering the Prospectus contained in the registration statement for the Exchange Offers. Each broker-dealer that receives Notes for its own account pursuant to the Exchange Offers must acknowledge that it will deliver a Prospectus in connection with any resale of such Notes. The letter of transmittal states that by so acknowledging and by delivering a Prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Notes received in exchange for Initial Notes where such Initial Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. We have agreed that, for a period of up to 180 days of the effectiveness of the Exchange Offer registration statement, we will make this Prospectus available to any broker-dealer for use in connection with any such resale. See “Plan of Distribution.”
By tendering Initial Notes for exchange, you will exchange, assign and transfer the Initial Notes to us and irrevocably appoint the Exchange Agent (as such term is defined below) as your agent and attorney-in-fact to assign, transfer and exchange the Initial Notes. You will also represent and warrant that you have full power and authority to tender, exchange, assign and transfer the Initial Notes and to acquire Notes issuable upon the exchange of such tendered Initial Notes. The letter of transmittal requires you to agree that, when we accept your Initial Notes for exchange, we will acquire good, marketable and unencumbered title to them, free and clear of all security interests, liens, restrictions, charges and encumbrances and that they are not subject to any adverse claim.
You will also warrant that you will, upon our request, execute and deliver any additional documents that we believe are necessary or desirable to complete the exchange, assignment and transfer of your tendered Initial Notes. You must further agree that our acceptance of any tendered Initial Notes and the issuance of Notes in exchange for them will constitute performance in full by us of our obligations under the Registration Rights Agreement and that we will have no further obligations or liabilities under that agreement, except in certain limited circumstances. All authority conferred by you will survive your death, incapacity, liquidation, dissolution, winding up or any other event relating to you, and every obligation of you shall be binding upon your heirs, personal representatives, successors, assigns, executors and administrators.
If you are tendering Initial Notes, we will not require you to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of the Initial Notes pursuant to the Exchange Offers. Each of the Notes will bear interest from the most recent date through which interest has been paid on the Initial Notes for which they were exchanged. If we accept your Initial Notes for exchange, you will waive the right to have interest accrue, or to receive any payment in respect to interest, on the Initial Notes from the most recent interest payment date to the date of the issuance of the Notes. Interest on the Notes is payable semi-annually in arrears on April 15 and October 15, starting on October 15, 2015. See “Description of the Notes—Principal, Maturity and Interest.”
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Information about the Expiration Date of the Exchange Offers and Changes to It
The Exchange Offers will expire at, and no further tenders of Initial Notes will be accepted after, 5:00 p.m., New York City time, on , 2015 (the “Expiration Date”), unless we, in our sole discretion, extend the period during which an Exchange Offer is open, and we will extend the Expiration Date to the extent required by Rule 13e-4 under the Exchange Act of 1934, as amended (the “Exchange Act”). If we extend the Expiration Date for an Exchange Offer, the term “Expiration Date” means the latest time and date on which such Exchange Offer, as so extended, expires. We reserve the right to extend the Exchange Offers at any time and from time to time prior to the Expiration Date by giving written notice to The Bank of New York Mellon, as the Exchange Agent, and by timely public announcement communicated by no later than 5:00 p.m., New York City time, on the next business day following the Expiration Date, unless applicable law or regulation requires otherwise, by making a release to the Dow Jones News Service. We may extend the Expiration Date of either Exchange Offer for any reason, and we may extend the Expiration Date of one Exchange Offer without extending the Expiration Date of the other Exchange Offer. The Exchange Offers are not conditioned upon each other, and we may withdraw, extend or modify the terms of one Exchange Offer without withdrawing, extending or modifying the terms of the other Exchange Offer in our sole discretion. During any extension of an Exchange Offer, all Initial Notes previously tendered pursuant to such Exchange Offer will remain subject to such Exchange Offer.
The initial exchange date will be the third business day following the Expiration Date. We expressly reserve the right to terminate one or both of the Exchange Offers and not accept for exchange any Initial Notes for any reason, including if any of the events set forth below under “-We may modify or terminate the Exchange Offers under some circumstances” have occurred and we have not waived them. We also reserve the right to amend the terms of one or both of the Exchange Offers in any manner, whether before or after any tender of the Initial Notes. If we terminate or amend an Exchange Offer, we will notify the Exchange Agent in writing and will either issue a press release or give written notice to you as a holder of the Initial Notes as promptly as practicable. Unless we terminate the Exchange Offers prior to 5:00 p.m., New York City time, on the Expiration Date (as such date may be extended as described above), we will exchange the Notes for Initial Notes on the exchange date.
We will mail this Prospectus and the related letter of transmittal and other relevant materials to you as a record holder of Initial Notes and we will furnish these items to brokers, banks and similar persons whose names, or the names of whose nominees, appear on the lists of holders for subsequent transmittal to beneficial owners of Initial Notes.
How to Tender Your Initial Notes
If you tender to us any of your Initial Notes pursuant to one of the procedures set forth below, that tender will constitute an agreement between you and us in accordance with the terms and subject to the conditions that we describe below and in the letter of transmittal for the Exchange Offers.
You may tender Initial Notes by properly completing and signing the letter of transmittal or a facsimile thereof. All references in this Prospectus to the “letter of transmittal” include a facsimile of the letter. You must deliver the letter of transmittal, together with the certificate or certificates representing the Initial Notes that you are tendering and any required signature guarantees, or a timely confirmation of a book-entry transfer pursuant to the procedure that we describe below, to the Exchange Agent at its address set forth below under “—Where to Send Your Documents for the Exchange Offers” and on the back cover page of this Prospectus on or prior to the Expiration Date. You may also tender Initial Notes by complying with the guaranteed delivery procedures that we describe under “—How to Use the Guaranteed Delivery Procedures if You Will Not Have Enough Time to Send All Documents to Us” below.
Your signature does not need to be guaranteed if you registered your Initial Notes in your name, you will register the Notes in your name and you sign the letter of transmittal. In any other case, the registered holder of your Notes must endorse them or send them with duly executed written instruments of transfer in the form satisfactory to us. Also, an “eligible institution,” such as a bank, broker, dealer, credit union, savings association, clearing agency or other institution that is a member of a recognized signature guarantee medallion program within the meaning of Rule 17Ad-15 under the Exchange Act must guarantee the signature on the endorsement or instrument of transfer. If you want us to deliver the Notes or non-exchanged Initial Notes to an address other than that of the registered holder appearing on the note register for the Initial Notes, an eligible institution must guarantee the signature on the letter of transmittal.
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If your Initial Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender Initial Notes, you should contact the registered holder promptly and instruct the holder to tender Initial Notes on your behalf. If you wish to tender your Initial Notes yourself, you must, prior to completing and executing the letter of transmittal and delivering your Initial Notes, either make appropriate arrangements to register ownership of the Initial Notes in your name or follow the procedures described in the immediately preceding paragraph. Transferring record ownership from someone else’s name to your name may take considerable time.
How to Tender if You Hold Your Initial Notes Through a Broker or Other Institution and You Do Not Have the Actual Initial Notes
Any financial institution that is a participant in the systems of The Depository Trust Company’s, or DTC, may make book-entry delivery of your Initial Notes by causing DTC to transfer your Initial Notes into the Exchange Agent’s account at DTC in accordance with DTC’s electronic Automated Tender Offer Program for transfer. Although you may deliver your Initial Notes through book-entry transfer at DTC, you still must send either an executed and properly completed letter of transmittal, with any required signature guarantees, or an agent’s message and any other required documents, to the Exchange Agent at the address set forth below under “—Where to Send Your Documents for the Exchange Offers” and on the back cover page of this Prospectus on or prior to the Expiration Date and the Exchange Agent must receive these documents on time. Delivery of documents to DTC in accordance with its procedures does not constitute delivery to the Exchange Agent. If you will not be able to send all the documents on time, you can still tender your Initial Notes by using the guaranteed delivery procedures described below.
You assume the risk of choosing the method of delivery of Initial Notes and all other documents. If you send your Initial Notes and your other documents by mail, we recommend that you use registered mail, return receipt requested, you obtain proper insurance, and you mail these items sufficiently in advance of the Expiration Date to permit delivery to the Exchange Agent on or before the Expiration Date.
If you do not provide your taxpayer identification number, which is your social security number or employer identification number, as applicable, and certify that such number is correct, the Exchange Agent will withhold 28% of the gross proceeds otherwise payable to you pursuant to the Exchange Offers, unless an exemption applies under the applicable law and regulations concerning “backup withholding” of federal income tax. You should complete and sign the main signature form and the Substitute Form W-9 included as part of the letter of transmittal, so as to provide the information and certification necessary to avoid backup withholding, unless an applicable exemption exists and you prove it in a manner satisfactory to us and the Exchange Agent.
The term “agent’s message” means a message, transmitted by DTC and received by the Exchange Agent and forming part of the confirmation of a book-entry transfer, which states that DTC has received an express acknowledgment from a participant in DTC tendering Initial Notes stating:
• | the aggregate principal amount of Initial Notes which have been tendered by the participant; |
• | that such participant has received an appropriate letter of transmittal and agrees to be bound by the terms of the letter of transmittal and the terms of the Exchange Offer; and |
• | that we may enforce such agreement against the participant. |
Delivery of an agent’s message will also constitute an acknowledgment from the tendering DTC participant that the representations contained in the letter of transmittal and described above under “—How to determine if you are eligible to participate in the Exchange Offers” are true and correct.
How to Use the Guaranteed Delivery Procedures if You Will Not Have Enough Time to Send All Documents to Us
If you desire to accept an Exchange Offer, and time will not permit a letter of transmittal (or agent’s message) or the Initial Notes to reach the Exchange Agent before the Expiration Date, you may tender your Initial Notes if the Exchange Agent has received at its office listed on the letter of transmittal on or prior to the Expiration Date a letter or facsimile transmission (or an agent’s message) from an eligible institution setting forth your name and address, the principal amount of the Initial Notes that you are tendering, the names in which you registered the Initial Notes and, if possible, the certificate numbers of the Initial Notes that you are tendering.
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The eligible institution’s correspondence to the Exchange Agent must state that the correspondence constitutes the tender and guarantee that within three New York Stock Exchange trading days after the date that the eligible institution executes such correspondence, the eligible institution will deliver the Initial Notes, in proper form for transfer, together with a properly completed and duly executed letter of transmittal, or agent’s message with a confirmation of book-entry transfer of the Initial Notes into the Exchange Agent’s account at DTC, and any other required documents. We may, at our option, reject the tender if you do not tender your Initial Notes and accompanying documents by either the above-described method or by a timely book-entry confirmation, and if you do not deposit your Initial Notes and tender documents with the Exchange Agent within the time period set forth above. Copies of a notice of guaranteed delivery that eligible institutions may use for the purposes described in this paragraph are available from the Exchange Agent.
Valid receipt of your tender will occur as of the date when the Exchange Agent receives your properly completed letter of transmittal, accompanied by either the Initial Notes, or a timely book-entry confirmation accompanied by an agent’s message. We will issue Notes in exchange for Initial Notes that you tendered pursuant to a notice of guaranteed delivery or correspondence to similar effect as described above by an eligible institution only against deposit of the letter of transmittal or an agent’s message, any other required documents and either the tendered Initial Notes or a timely book-entry confirmation.
We Reserve the Right to Determine Validity of All Tenders
We will be the sole judge of all questions as to the validity, form, eligibility, including time of receipt, and acceptance for exchange of your tender of Initial Notes and our judgment will be final and binding. We reserve the absolute right to reject any or all of your tenders that are not in proper form or the acceptances for exchange of which may, in our opinion or in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any of the conditions of the Exchange Offers or any defect or irregularities as to particular Initial Notes, whether or not waived in the case of other Initial Notes. Such waiver with respect to particular Initial Notes does not constitute a waiver with respect to any other Initial Notes. Neither we, the Exchange Agent nor any other person will be under any duty to give you notification of any defects or irregularities in tenders nor shall any of us incur any liability for failure to give you any such notification. Our interpretation of the terms and conditions of the Exchange Offers, including the letter of transmittal and its instructions, will be final and binding. The Exchange Offers are not conditioned upon each other, and we may withdraw, extend or modify the terms of one Exchange Offer without withdrawing, extending or modifying the terms of the other Exchange Offer in our sole discretion.
If You Tender Initial Notes Pursuant to the Exchange Offers, You May Withdraw Them at Any Time Prior to the Expiration Date
You may withdraw the tender of your Initial Notes at any time prior to the Expiration Date. For your withdrawal to be effective, the Exchange Agent must timely receive your written or facsimile (for eligible institutions) notice of withdrawal prior to the Expiration Date at the Exchange Agent’s address set forth below under “—Where to Send Your Documents for the Exchange Offers” and on the back cover page of this Prospectus. Your notice of withdrawal must specify the following information:
• | The person named in the letter of transmittal as tendering Initial Notes you are withdrawing; |
• | The certificate numbers of Initial Notes you are withdrawing; |
• | The principal amount of Initial Notes you are withdrawing; |
• | A statement that you are withdrawing your election to have us exchange such Initial Notes; and |
• | The name of the registered holder of such Initial Notes, which may be a person or entity other than you, such as your broker-dealer. |
The person or persons who signed your letter of transmittal, including any eligible institutions that guaranteed signatures on your letter of transmittal, must sign the notice of withdrawal in the same manner as their original signatures on the letter of transmittal including any required signature guarantees. If such persons and eligible institutions cannot sign your notice of withdrawal, you must send it with evidence satisfactory to us that you now hold beneficial ownership of the Initial Notes that you are withdrawing. Alternately, for a withdrawal to be effective for DTC participants, holders must comply with their respective standard operating procedures for electronic tenders and the Exchange Agent must receive an electronic notice of withdrawal from DTC. Any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn Initial Notes and otherwise comply with the procedures of DTC.
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The Exchange Agent will return the properly withdrawn Initial Notes promptly following receipt of notice of withdrawal. We will determine all questions as to the validity of notices of withdrawals, including time of receipt, and our determination will be final and binding on all parties.
How We Will Either Exchange Your Initial Notes for Notes or Return Your Initial Notes to You
On the exchange date, we will determine which Initial Notes the holders validly tendered, and we will issue Notes in exchange for the validly tendered Initial Notes. The Exchange Agent will act as your agent for the purpose of receiving Notes from us and sending the Initial Notes to you in exchange for Notes promptly after acceptance of the tendered Initial Notes. If we do not accept your Initial Notes for exchange, we will return them without expense to you. If you tender your Initial Notes by book-entry transfer into the Exchange Agent’s account at DTC pursuant to the procedures described below and we do not accept your Initial Notes for exchange, DTC will credit your non-exchanged Initial Notes to an account maintained with DTC. In either case, we will return your non-exchanged Initial Notes to you promptly following the expiration of the Exchange Offers.
We May Modify or Terminate the Exchange Offers Under Some Circumstances
We are not required to issue Notes in respect of any properly tendered Initial Notes that we have not previously accepted and we may terminate the Exchange Offers or, at our option, we may modify or otherwise amend the Exchange Offers. If we terminate an Exchange Offer, it will be by oral (promptly confirmed in writing) or written notice to the Exchange Agent and by timely public announcement communicated no later than 5:00 p.m. New York City time on the next business day following the Expiration Date, unless applicable law or regulation requires us to terminate the Exchange Offers in the following circumstances:
• | Any court or governmental agency brings a legal action seeking to prohibit the Exchange Offers or assessing or seeking any damages as a result of the Exchange Offers, or resulting in a material delay in our ability to accept any of the Initial Notes for Exchange Offers; or |
• | Any government or governmental authority, domestic or foreign, brings or threatens any law or legal action that in our sole judgment, might directly or indirectly result in any of the consequences referred to above; or, if in our sole judgment, such activity might result in the holders of Notes having obligations with respect to resales and transfers of Notes that are greater than those we described above in the interpretations of the staff of the SEC or would otherwise make it inadvisable to proceed with the Exchange Offers; or |
• | A material adverse change has occurred in our business, condition (financial or otherwise), operations or prospects. |
The foregoing conditions are for our sole benefit and we may assert them with respect to all or any portion of the Exchange Offers regardless of the circumstances giving rise to such condition. We also reserve the right to waive these conditions in whole or in part at any time or from time to time in our discretion. Our failure at any time to exercise any of the foregoing rights will not be a waiver of any such right, and each right will be an ongoing right that we may assert at any time or from time to time. In addition, we have reserved the right, notwithstanding the satisfaction of each of the foregoing conditions, to terminate or amend the Exchange Offers.
Any determination by us concerning the fulfillment or nonfulfillment of any conditions will be final and binding upon all parties.
In addition, we will not accept for exchange any tendered Initial Notes, and we will not issue Notes in exchange for any such Initial Notes, if at that time there is, or the SEC has threatened, any stop order with respect to the registration statement that this Prospectus is a part of, or if qualification of the Indenture is required under the Trust Indenture Act of 1939.
35
Where to Send Your Documents for the Exchange Offers
We have appointed The Bank of New York Mellon as the Exchange Agent for the Exchange Offers (the “Exchange Agent”). You must send all documents relating to the Exchange Offers to the Exchange Agent at:
By Facsimile Transmission: (For Eligible Institutions Only) (732) 667-9409 Attn: Corporate Trust Operations Reorganization Unit Confirm by Telephone: (315) 414-3360 | By Overnight Delivery or Mail: The Bank of New York Mellon Trust Company, N.A. Corporate Trust Operations Reorganization Unit 111 Sanders Creek Parkway East Syracuse, New York 13057 |
If you send documents to any other address or facsimile number, you will have not validly delivered them and you will not receive Notes in exchange for your Initial Notes. We will return your Initial Notes to you.
We Are Paying Our Costs for the Exchange Offers
We have not retained any dealer-manager or similar agent in connection with the Exchange Offers and will not make any payments to brokers, dealers or others for soliciting acceptances of the Exchange Offers. We will, however, pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for reasonable out-of-pocket expenses. We will also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses that they incur in forwarding tenders for their customers. We will pay the expenses incurred by us in connection with the Exchange Offers, including the fees and expenses of the Exchange Agent and printing, accounting, investment banking and legal fees. We estimate that these fees are approximately $750,000.
No person has been authorized to give you any information or to make any representations to you in connection with the Exchange Offers other than those that this Prospectus contains, and we take no responsibility for any other information that others may give you. If anyone else gives you information or representations about the Exchange Offers, you should not assume that we have authorized it. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in our affairs since the respective dates as of which this Prospectus gives information. We are not making the Exchange Offers to, nor will we accept tenders from or on behalf of, holders of Initial Notes in any jurisdiction in which it is unlawful to make the Exchange Offers or to accept it. However, we may, at our discretion, take such action as we may deem necessary to make the Exchange Offers in any such jurisdiction and extend the Exchange Offers to holders of Initial Notes in such jurisdiction. In any jurisdiction where the securities laws or blue sky laws require a licensed broker or dealer to make the Exchange Offers one or more registered brokers or dealers that are licensed under the laws of that jurisdiction is making the Exchange Offers on our behalf.
There Are No Dissenters’ or Appraisal Rights
Holders of the Initial Notes do not have any dissenters’ rights or appraisal rights in connection with the Exchange Offers.
Federal Income Tax Consequences to You
The exchange of Initial Notes for Notes will not be a taxable exchange for federal income tax purposes, and you will not recognize any taxable gain or loss upon the exchange of Initial Notes for Notes. See “Material Tax Considerations—Material U.S. Federal Income Tax Consequences.”
36
These Are the Only Exchange Offers for the Initial Notes that We Are Required to Make
Your participation in the Exchange Offers is voluntary, and you should carefully consider whether to accept the terms and conditions of it. You are urged to consult your financial and tax advisors in making your own decisions on what action to take with respect to the Exchange Offers. If you do not tender your Initial Notes in the Exchange Offers, you will continue to hold such Initial Notes and you will be entitled to all the rights and limitations applicable to the Initial Notes under the Indenture. All non-exchanged Initial Notes will continue to be subject to the restriction on transfer set forth in the Initial Notes. If we exchange Initial Notes in the Exchange Offers, the trading market, if any, for any remaining Initial Notes could be much less liquid. See “Risk Factors—Risks Relating to the Notes and the Exchange Offers—There may be adverse consequences if you do not exchange your Initial Notes.”
We may in the future seek to acquire non-exchanged Initial Notes in the open market or privately negotiated transactions, through subsequent Exchange Offers or otherwise. However, we have no present plan to acquire any Initial Notes that are not exchanged in the Exchange Offers.
37
USE OF PROCEEDS
We will not receive any proceeds from the issuance of Notes pursuant to the Exchange Offers. Initial Notes that are validly tendered and exchanged will be retired and canceled. We will pay all expenses incidental to the Exchange Offers.
38
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary historical consolidated financial and other data of the Group. The historical financial data has been derived from:
• | the Interim Consolidated Financial Statements for the three months ended March 31, 2015 and 2014, included elsewhere in this Prospectus; and |
• | the Consolidated Financial Statements for the years ended December 31, 2014, 2013 and 2012, included elsewhere in this Prospectus. |
The accompanying Interim Consolidated Financial Statements have been prepared on the same basis as the Consolidated Financial Statements and include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the Interim Consolidated Financial Statements. Interim results are not necessarily indicative of results that may be expected for a full year or any future interim period.
The following data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Risk Factors”, “Summary Selected Historical Consolidated Financial and Other Data”, “Unaudited Pro Forma Condensed Consolidated Financial Statements”, “Business”, the Interim Consolidated Financial Statements and the Consolidated Financial Statements included elsewhere in this Prospectus. Historical results for any prior period are not necessarily indicative of results to be expected in any future period.
Consolidated Income Statement Data
For the three months ended March 31, | |||||
2015 | 2014 | ||||
(€ million) | |||||
Net revenues | 26,396 | 22,125 | |||
EBIT | 792 | 270 | |||
Profit/(loss) before taxes | 186 | (223 | ) | ||
Profit/(loss) from continuing operations | 92 | (173 | ) | ||
Net profit/(loss) | 92 | (173 | ) | ||
Attributable to: | |||||
Owners of the parent | 78 | (189 | ) | ||
Non-controlling interest | 14 | 16 | |||
Other Statistical Information (unaudited): | |||||
Shipments (in thousands of units) | 1,095 | 1,113 | |||
Number of employees at period end | 233,692 | 230,454 | |||
EBITDA(1) | 2,189 | 1,438 | |||
Adjusted EBIT(2) | 800 | 655 | |||
__________________________
(1) We believe EBITDA provides useful information about our operating results as it provides us with a measure of our financial performance that is frequently used by securities analysts, investors and other interested parties to compare results or estimate valuations across companies in our industry. We compute EBITDA starting with EBIT, and then adding back depreciation and amortization expense. Set forth below is a reconciliation of EBITDA for the periods presented:
39
For the three months ended March 31, | |||||
2015 | 2014 | ||||
(€ million) | |||||
EBIT | 792 | 270 | |||
Plus: | |||||
Amortization and Depreciation | 1,397 | 1,168 | |||
EBITDA | 2,189 | 1,438 | |||
(2) Beginning on January 1, 2015, “Adjusted EBIT” is a non-GAAP measure being used by the Group to assess its performance; Adjusted EBIT is
calculated as EBIT excluding gains/(losses) on the disposal of investments, restructuring, impairments, asset write-offs and other unusual income/
(expenses) which are considered rare or discrete events that are infrequent in nature. Refer to Note 26 in the Interim Consolidated Financial Statements included elsewhere in this Prospectus for a reconciliation of Adjusted EBIT to EBIT.
Consolidated Statement of Financial Position Data
At March 31, 2015 | At December 31, 2014 | ||||
(€ million) | |||||
Cash and cash equivalents | 21,669 | 22,840 | |||
Total assets | 106,978 | 100,510 | |||
Debt | 33,366 | 33,724 | |||
Total equity | 15,235 | 13,738 | |||
Equity attributable to owners of the parent | 14,893 | 13,425 | |||
Non-controlling interests | 342 | 313 | |||
Share capital | 17 | 17 | |||
Consolidated Income Statement Data
For the years ended December 31, | ||||||||||||||
2014 | 2013 | 2012 | 2011(1) | 2010(2) | ||||||||||
(€ million) | ||||||||||||||
Net revenues | 96,090 | 86,624 | 83,765 | 59,559 | 35,880 | |||||||||
EBIT | 3,223 | 3,002 | 3,434 | 3,291 | 1,106 | |||||||||
Profit before taxes | 1,176 | 1,015 | 1,524 | 1,932 | 706 | |||||||||
Profit from continuing operations | 632 | 1,951 | 896 | 1,398 | 222 | |||||||||
Net profit | 632 | 1,951 | 896 | 1,398 | 600 | |||||||||
Attributable to: | ||||||||||||||
Owners of the parent | 568 | 904 | 44 | 1,199 | 520 | |||||||||
Non-controlling interest | 64 | 1,047 | 852 | 199 | 80 | |||||||||
Other Statistical Information (unaudited): | ||||||||||||||
Shipments (in thousands of units) | 4,608 | 4,352 | 4,223 | 3,175 | 2,094 | |||||||||
Number of employees at period end | 232,165 | 229,053 | 218,311 | 197,021 | 137,801 | |||||||||
EBITDA(3) | 8,120 | 7,637 | 7,635 | 6,649 | 3,292 | |||||||||
__________________________
(1) The amounts reported include seven months of operations for FCA US.
(2) CNH Industrial was reported as discontinued operations in 2010 as a result of the Demerger.
(3) We believe EBITDA provides useful information about our operating results as it provides us with a measure of our financial performance that is frequently used by securities analysts, investors and other interested parties to compare results or estimate valuations across companies in our industry. We compute EBITDA starting with EBIT, and then adding back depreciation and amortization expense. Set forth below is a reconciliation of EBITDA for the periods presented:
40
For the Years Ended December 31, | ||||||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||
(€ million) | ||||||||||||||
EBIT | 3,223 | 3,002 | 3,434 | 3,291 | 1,106 | |||||||||
Plus: | ||||||||||||||
Amortization and Depreciation | 4,897 | 4,635 | 4,201 | 3,358 | 2,186 | |||||||||
EBITDA | 8,120 | 7,637 | 7,635 | 6,649 | 3,292 | |||||||||
Three months ended March 31, 2015 | For the years ended December 31, | ||||||||||
2014 | 2013 | 2012 | 2011 | 2010 | |||||||
Ratio of Earnings to Fixed Charges | 1.39x | 1.54x | 1.58x | 1.99x | 2.65x | 1.80x | |||||
Consolidated Statement of Financial Position Data
At December 31, | ||||||||||||||
2014 | 2013 | 2012 | 2011(1)(2) | 2010 | ||||||||||
(€ million) | ||||||||||||||
Cash and cash equivalents | 22,840 | 19,455 | 17,666 | 17,526 | 11,967 | |||||||||
Total assets | 100,510 | 87,214 | 82,633 | 80,379 | 73,442(2) | |||||||||
Debt | 33,724 | 30,283 | 28,303 | 27,093 | 20,804 | |||||||||
Total equity | 13,738 | 12,584 | 8,369 | 9,711 | 12,461(2) | |||||||||
Equity attributable to owners of the parent | 13,425 | 8,326 | 6,187 | 7,358 | 11,544(2) | |||||||||
Non-controlling interest | 313 | 4,258 | 2,182 | 2,353 | 917(2) | |||||||||
Share capital | 17 | 4,477 | 4,476 | 4,466 | 6,377 | |||||||||
__________________________
(1) The amounts as at December 31, 2011 are equivalent to those as at January 1, 2012 derived from the Consolidated Financial Statements.
(2) The amounts as at December 31, 2011 include the consolidation of FCA US.
41
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial information (the “Unaudited Pro Forma Condensed Consolidated Financial Information”) at and for the three months ended March 31, 2015 and for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, has been prepared by applying unaudited pro forma adjustments to the (i) Interim Consolidated Statement of Financial Position at March 31, 2015 and the Interim Consolidated Income Statement for the three months ended March 31, 2015, included within the Interim Consolidated Financial Statements, and to the (ii) historical Consolidated Income Statements for the years ended December 31, 2014, 2013 and 2012 included in the Consolidated Financial Statements. The Interim Consolidated Financial Statements and the Consolidated Financial Statements are included elsewhere in this Prospectus. Unless otherwise specified, the term “FCA” refers to FCA, together with its subsidiaries, following completion of the Merger or to Fiat S.p.A. together with its subsidiaries, prior to the Merger, as the context may require.
The Unaudited Pro Forma Condensed Consolidated Financial information has been prepared to reflect the proposed spin-off of Ferrari from FCA. In particular, on October 29, 2014 we announced our intention to separate Ferrari from FCA through a combination of a public offering of a portion of our current shareholding in Ferrari (expected to occur in 2015) and a spin-off of our remaining equity interest in Ferrari to our shareholders (expected to occur in 2016), collectively referred to as the “Separation.” In connection with the Separation we also intend to enter into certain other transactions including transfers of cash from Ferrari to FCA currently estimated at €2.25 billion (the “Transfers of Cash”), which will be funded through a combination of Ferrari’s cash and cash equivalents and Ferrari’s issuance of third party debt around the time of the Separation.
In accordance with the requirements of Regulation S-X Article 11, as Ferrari will be accounted for as a discontinued operation in FCA’s Consolidated Financial Statements in connection with the Separation, the effects of the Separation have been presented for income statement purposes for the three months ended March 31, 2015 and the last three fiscal years.
The adjustments relating to the Separation do not reflect the receipt of any proceeds in connection with any proposed public offering of Ferrari shares, nor does it reflect any potential pre-separation internal reorganization other than as described herein, as the effects from any such transactions are not ascertainable at this time. The pro forma adjustments included in the Unaudited Pro Forma Condensed Consolidated Financial Information are not necessarily indicative of the transaction structure of any separation that may occur. The final approval of the transaction structure from the FCA Board of Directors has not yet been received and there can be no assurances on the form of the transactions constituting the Separation. Further, if the structure of the Separation requires shareholder approval, such approval has not yet been obtained and there can be no guarantee that such approval will be obtained. See “Risk Factors—Risks Relating to the Proposed Separation of Ferrari.”
The Unaudited Pro forma Condensed Consolidated Income Statements have been prepared assuming that the Separation had occurred on January 1, 2012. The Transfers of Cash have no effects on the Unaudited Pro forma Condensed Income Statements. The Unaudited Pro forma Condensed Consolidated Statement of Financial Position has been prepared assuming that the Separation and the Transfers of Cash had taken place at March 31, 2015.
The Unaudited Pro Forma Condensed Consolidated Financial Information does not purport to represent what our actual results of operations would have been if the Separation had actually occurred on January 1, 2012, nor is it necessarily indicative of future consolidated results of operations or financial condition. The Unaudited Pro Forma Condensed Consolidated Financial Information is presented for informational purposes only. The historical Consolidated Income Statements and Consolidated Statement of Financial Position have been adjusted in the Unaudited Pro Forma Condensed Consolidated Financial Information to give effect to pro forma events that are (1) directly attributable to the Separation, (2) factually supportable, and (3) expected to have a continuing impact on the consolidated financial results.
The Unaudited Pro Forma Condensed Consolidated Financial Information should be read in conjunction with the information contained in “Selected Historical Consolidated Financial and Other Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the Interim Consolidated Financial Statements and the Consolidated Financial Statements appearing elsewhere in this Prospectus. All unaudited pro forma adjustments and their underlying assumptions are described more fully in the footnotes to our Unaudited Pro Forma Condensed Consolidated Financial Information.
42
Unaudited Pro Forma Condensed Consolidated Income Statement for the year ended December 31, 2012
Unaudited Pro forma adjustments | ||||||||
(€ million) | FCA Historical | Separation | Unaudited Pro Forma year ended December 31, 2012 | |||||
(A) | (B) | |||||||
Net revenues | 83,765 | (2,100 | ) | 81,665 | ||||
Cost of sales | 71,473 | (1,460 | ) | 70,013 | ||||
Selling, general and administrative costs | 6,775 | (129 | ) | 6,646 | ||||
Research and development costs | 1,858 | (163 | ) | 1,695 | ||||
Other (expenses)/income | (68 | ) | 13 | (55 | ) | |||
Result from investments | 87 | — | 87 | |||||
Gains and (losses) on the disposal of investments | (91 | ) | — | (91 | ) | |||
Restructuring costs | 15 | — | 15 | |||||
Other unusual expenses | (138 | ) | — | (138 | ) | |||
EBIT | 3,434 | (335 | ) | 3,099 | ||||
Net financial (expenses)/income | (1,910 | ) | 1 | (1,909 | ) | |||
Profit before taxes | 1,524 | (334 | ) | 1,190 | ||||
Tax expense | 628 | (101 | ) | 527 | ||||
Profit from continuing operations | 896 | (233 | ) | 663 | ||||
Net profit | 896 | (233 | ) | 663 | ||||
Net profit/(loss) attributable to: | ||||||||
Owners of the parent | 44 | (202 | ) | (158 | ) | |||
Non-controlling interests | 852 | (31 | ) | 821 | ||||
Basic earnings/(losses) per ordinary share (in €) | 0.036 | (0.130 | ) | |||||
Diluted earnings/(losses) per ordinary share (in €) | 0.036 | (0.130 | ) | |||||
Weighted average number of shares outstanding | 1,215,828 | 1,215,828 | ||||||
Weighted average number of shares for diluted earnings per share | 1,225,868 | 1,225,868 | ||||||
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information
43
Unaudited Pro Forma Condensed Consolidated Income Statement for the year ended December 31, 2013
Unaudited Pro Forma adjustments | ||||||||
(€ million) | FCA Historical | Separation | Unaudited Pro Forma year ended December 31, 2013 | |||||
(A) | (B) | |||||||
Net revenues | 86,624 | (2,094 | ) | 84,530 | ||||
Cost of sales | 74,326 | (1,401 | ) | 72,925 | ||||
Selling, general and administrative costs | 6,702 | (140 | ) | 6,562 | ||||
Research and development costs | 2,236 | (187 | ) | 2,049 | ||||
Other income/(expense) | 77 | 2 | 79 | |||||
Result from investments | 84 | — | 84 | |||||
Gains and (losses) on the disposal of investments | 8 | — | 8 | |||||
Restructuring costs | 28 | — | 28 | |||||
Other unusual expenses | (499 | ) | — | (499 | ) | |||
EBIT | 3,002 | (364 | ) | 2,638 | ||||
Net financial expenses | (1,987 | ) | (2 | ) | (1,989 | ) | ||
Profit before taxes | 1,015 | (366 | ) | 649 | ||||
Tax (income)/expense | (936 | ) | (120 | ) | (1,056 | ) | ||
Profit from continuing operations | 1,951 | (246 | ) | 1,705 | ||||
Net profit | 1,951 | (246 | ) | 1,705 | ||||
Net profit attributable to: | ||||||||
Owners of the parent | 904 | (217 | ) | 687 | ||||
Non-controlling interests | 1,047 | (29 | ) | 1,018 | ||||
Basic earnings per ordinary share (in €) | 0.744 | 0.565 | ||||||
Diluted earnings per ordinary share (in €) | 0.736 | 0.559 | ||||||
Weighted average number of shares outstanding | 1,215,921 | 1,215,921 | ||||||
Weighted average number of shares for diluted earnings per share | 1,228,926 | 1,228,926 | ||||||
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information
44
Unaudited Pro Forma Condensed Consolidated Income Statement for the year ended December 31, 2014
Unaudited Pro Forma adjustments | ||||||||
(€ million) | FCA Historical | Separation | Unaudited Pro Forma for the year ended December 31, 2014 | |||||
(A) | (B) | |||||||
Net revenues | 96,090 | (2,449 | ) | 93,641 | ||||
Cost of sales | 83,146 | (1,640 | ) | 81,506 | ||||
Selling, general and administrative costs | 7,084 | (162 | ) | 6,922 | ||||
Research and development costs | 2,537 | (203 | ) | 2,334 | ||||
Other income/(expense) | 197 | 40 | 237 | |||||
Result from investments | 131 | — | 131 | |||||
Gains and (losses) on the disposal of investments | 12 | — | 12 | |||||
Restructuring costs | 50 | — | 50 | |||||
Other unusual expenses | (390 | ) | 15 | (375 | ) | |||
EBIT | 3,223 | (389 | ) | 2,834 | ||||
Net financial expenses | (2,047 | ) | (3 | ) | (2,050 | ) | ||
Profit before taxes | 1,176 | (392 | ) | 784 | ||||
Tax expense | 544 | (119 | ) | 425 | ||||
Profit from continuing operations | 632 | (273 | ) | 359 | ||||
Net profit | 632 | (273 | ) | 359 | ||||
Net profit attributable to: | ||||||||
Owners of the parent | 568 | (241 | ) | 327 | ||||
Non-controlling interests | 64 | (32 | ) | 32 | ||||
Basic earnings per ordinary share (in €) | 0.465 | 0.268 | ||||||
Diluted earnings per ordinary share (in €) | 0.460 | 0.265 | ||||||
Weighted average number of shares outstanding | 1,222,346 | 1,222,346 | ||||||
Weighted average number of shares for diluted earnings per share | 1,234,097 | 1,234,097 | ||||||
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information
45
Unaudited Pro Forma Condensed Consolidated Income Statement for the three months ended March 31, 2015
Unaudited Pro Forma adjustments | ||||||||
(€ million) | FCA Historical | Separation | Unaudited Pro Forma for the three months ended March 31, 2015 | |||||
(C) | (B) | |||||||
Net revenues | 26,396 | (552 | ) | 25,844 | ||||
Cost of sales | 22,979 | (377 | ) | 22,602 | ||||
Selling, general and administrative costs | 1,986 | (37 | ) | 1,949 | ||||
Research and development costs | 727 | (42 | ) | 685 | ||||
Result from investments | 50 | — | 50 | |||||
Restructuring costs | 4 | — | 4 | |||||
Other income/(expenses) | 42 | — | 42 | |||||
EBIT | 792 | (96 | ) | 696 | ||||
Net financial expenses | 606 | (2 | ) | 608 | ||||
Profit before taxes | 186 | (98 | ) | 88 | ||||
Tax expense | 94 | (33 | ) | 61 | ||||
Profit from continuing operations | 92 | (65 | ) | 27 | ||||
Net profit | 92 | (65 | ) | 27 | ||||
Net profit attributable to: | ||||||||
Owners of the parent | 78 | (58 | ) | 20 | ||||
Non-controlling interests | 14 | (7 | ) | 7 | ||||
Basic earnings per ordinary share (in €) | 0.052 | 0.013 | ||||||
Diluted earnings per ordinary share (in €) | 0.052 | 0.013 | ||||||
Weighted average number of shares outstanding | 1,508,310 | 1,508,310 | ||||||
Weighted average number of shares for diluted earnings per share | 1,508,310 | 1,508,310 | ||||||
46
Unaudited Pro Forma Condensed Consolidated Statement of Financial Position at March 31, 2015
Unaudited Pro Forma adjustments | |||||||||||
(€ million) | FCA Historical (Unaudited) | Separation | Transfers of Cash | Unaudited Pro Forma at March 31, 2015 | |||||||
Assets | (A) | (B) | (C) | ||||||||
Intangible assets | 25,321 | (1,052 | ) | — | 24,269 | ||||||
Property, plant and equipment | 28,184 | (629 | ) | — | 27,555 | ||||||
Investments and other financial assets | 2,089 | (12 | ) | — | 2,077 | ||||||
Deferred tax assets | 3,594 | (168 | ) | — | 3,426 | ||||||
Other assets | 130 | — | — | 130 | |||||||
Total Non-current assets | 59,318 | (1,861 | ) | — | 57,457 | ||||||
Inventories | 12,624 | (372 | ) | — | 12,252 | ||||||
Assets sold with a buy-back commitment | 2,250 | — | — | 2,250 | |||||||
Trade receivables | 2,949 | (110 | ) | — | 2,839 | ||||||
Receivables from financing activities | 3,545 | (1,177 | ) | — | 2,368 | ||||||
Current tax receivables | 277 | 130 | — | 407 | |||||||
Other current assets | 2,802 | (33 | ) | — | 2,769 | ||||||
Current financial assets | 1,538 | — | — | 1,538 | |||||||
Cash and cash equivalents | 21,669 | (566 | ) | 2,250 | 23,353 | ||||||
Total Current assets | 47,654 | (2,128 | ) | 2,250 | 47,776 | ||||||
Assets held for sale | 6 | — | — | 6 | |||||||
Total Assets | 106,978 | (3,989 | ) | 2,250 | 105,239 | ||||||
Equity and liabilities | |||||||||||
Equity: | 15,235 | (2,467 | ) | 2,250 | 15,018 | ||||||
Equity attributable to owners of the parent | 14,893 | (2,287 | ) | 2,250 | 14,856 | ||||||
Non-controlling interest | 342 | (180 | ) | — | 162 | ||||||
Provisions | 22,550 | (208 | ) | — | 22,342 | ||||||
Deferred tax liabilities | 104 | (16 | ) | — | 88 | ||||||
Debt | 33,366 | (162 | ) | — | 33,204 | ||||||
Other financial liabilities | 1,300 | — | — | 1,300 | |||||||
Other current liabilities | 11,985 | (636 | ) | — | 11,349 | ||||||
Current tax payables | 250 | (14 | ) | — | 236 | ||||||
Trade payables | 22,188 | (486 | ) | — | 21,702 | ||||||
Total Equity and liabilities | 106,978 | (3,989 | ) | 2,250 | 105,239 | ||||||
See accompanying Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information
47
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Information
Notes to the Unaudited Pro Forma Condensed Consolidated Income Statement
(A) FCA historical consolidated income statements
This column includes FCA's historical Consolidated Income Statements for the years ended December 31, 2014, 2013 and 2012, as derived from the Consolidated Financial Statements.
(B) Separation
This column reflects the elimination of the results of operations of Ferrari as a result of the Separation. This column has been derived from FCA accounting records as adjusted to reflect the intercompany transactions between FCA and Ferrari which will become third party transactions following the Separation. Tax expense is calculated based on the effective tax rate of Ferrari on a standalone basis of approximately 34 percent, approximately 30 percent, approximately 33 percent and approximately 30 percent for the three months ended March 31, 2015 and the years ended December 31, 2014, 2013 and 2012, respectively.
(C) FCA Interim Consolidated Income Statement
This column includes FCA's Interim Consolidated Income Statement for the three months ended March 31, 2015, as derived from the Interim Consolidated Financial Statements.
Notes to the Unaudited Pro Forma Condensed Consolidated Statement of Financial Position
(A) FCA Interim Consolidated Statement of Financial Position at March 31, 2015
This column includes FCA's Consolidated Statement of Position at March 31, 2015, as derived from the Interim Consolidated Financial Statements.
(B) Separation
This column reflects the elimination of the assets and liabilities of Ferrari which will be spun off as a result of the Separation. This column has been derived from FCA accounting records as adjusted to reflect the consolidation adjustments and intercompany transactions between FCA and Ferrari which will become third party transactions following the Separation.
(C) Transfers of Cash
This column represents the Transfers of Cash which we intend to enter into in connection with the Separation, and which will be funded through a combination of Ferrari’s cash and cash equivalents and Ferrari’s issuance of third party debt around the time of the Separation.
Management notes that in connection with the Separation and Transfers of Cash, FCA’s net industrial debt is estimated to improve by approximately €669 million as a result of the Transfers of Cash of €2.25 billion and the elimination of Ferrari’s debt of €162 million in the Separation partially offset by the elimination of Ferrari’s cash and cash equivalents and receivable from its financing activities in connection with the Separation of €566 million and €1,177 million, respectively. The actual impact of FCA’s net industrial debt at the time of the Separation could differ materially due to changes in FCA’s and Ferrari’s net industrial debt from March 31, 2015 to the actual Separation date.
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EXCHANGE RATES
The table below shows the high, low, average and period end noon buying rates in The City of New York for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York for U.S.$ per €1.00. The average is computed using the noon buying rate on the last business day of each month during the period indicated.
Period | Low | High | Average | Period End | ||||
Year ended December 31, 2010 | 1.1959 | 1.4536 | 1.3262 | 1.3269 | ||||
Year ended December 31, 2011 | 1.2926 | 1.4875 | 1.3931 | 1.2973 | ||||
Year ended December 31, 2012 | 1.2062 | 1.3463 | 1.2859 | 1.3186 | ||||
Year ended December 31, 2013 | 1.2774 | 1.3816 | 1.3281 | 1.3779 | ||||
Year ended December 31, 2014 | 1.2101 | 1.3927 | 1.3210 | 1.2101 | ||||
The table below shows the high and low noon buying rates for Euro for each month during the six months prior to the date of this report.
Period | Low | High | ||
November 2014 | 1.2394 | 1.2554 | ||
December 2014 | 1.2101 | 1.2504 | ||
January 2015 | 1.1279 | 1.2015 | ||
February 2015 | 1.1197 | 1.1462 | ||
March 2015 | 1.0524 | 1.1212 | ||
April 2015 | 1.0582 | 1.1174 | ||
May 2015 (through May 15, 2015) | 1.1142 | 1.1428 | ||
On May 15, 2015, the noon buying rate for U.S. dollars was €1.00 = U.S.$1.1428.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read together with the information included under “Business,” “Selected Historical Consolidated Financial and Other Data”, the Interim Consolidated Financial Statements and the Consolidated Financial Statements included elsewhere in this Prospectus. This discussion includes forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under “Cautionary Statements Concerning Forward-Looking Statements” and “Risk Factors.” Actual results may differ materially from those contained in any forward looking statements. Unless otherwise indicated or the context otherwise requires, references to “we”, “our”, “us”, “the Group” and the “Company” in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” refer to FCA, together with its subsidiaries, and its predecessor prior to the completion of the merger of Fiat S.p.A into Fiat Investments N.V. (the “Merger”). Any references to “Fiat” refer solely to Fiat S.p.A., the predecessor of FCA prior to the Merger. Reference to “FCA US” refers to FCA’s now wholly owned subsidiary and which was formerly known as Chrysler Group LLC or Chrysler. In addition, all references in this Prospectus to “Euro” or “€” are to the European Union Euro and all references to”U.S.$” are to the U.S. Dollar.
Overview
We were incorporated as a public limited liability company (naamloze vennootschap) under the laws of the Netherlands on April 1, 2014. Fiat, our predecessor, was founded as Fabbrica Italiana Automobili Torino on July 11, 1899 in Turin, Italy as an automobile manufacturer. We are an international automotive group engaged in designing, engineering, manufacturing, distributing and selling vehicles and components. We are the seventh largest automaker in the world based on total vehicle sales in 2014. We have operations in approximately 40 countries and sell our vehicles directly or through distributors and dealers in more than 150 countries. We design, engineer, manufacture, distribute and sell vehicles for the car mass-market under the Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia and Ram brands and the SRT performance vehicle designation. We support our vehicle sales with after-sales services and parts worldwide using the Mopar brand for mass-market vehicles. We make available retail and dealer financing, leasing and rental services through our subsidiaries, joint ventures and other commercial arrangements. We also design, engineer, manufacture, distribute and sell luxury vehicles under the Ferrari and Maserati brands, which we support with financial services provided to our dealers and retail customers. In addition, we operate in the components and production systems sectors through Magneti Marelli, Teksid and Comau.
Our activities are carried out through seven reportable segments: four regional mass-market vehicle segments (NAFTA, LATAM, APAC and EMEA), Ferrari and Maserati as global luxury brand segments and a global Components segment.
For the three months ended March 31, 2015, we shipped 1.1 million vehicles, reported net revenues of €26.4 billion and net profit of €0.1 billion. In 2014, we shipped 4.6 million vehicles, a 6 percent increase over 2013. For the year ended December 31, 2014, we reported net revenues of €96.1 billion, EBIT of €3.2 billion and net profit of €0.6 billion. At March 31, 2015, we had available liquidity of €25.2 billion (including €3.3 billion available under undrawn committed credit lines) and net industrial debt of €8.6 billion. See “—Non-GAAP Financial Measures—Net Industrial Debt.”
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Our Strategic Business Plan
Following our January 2014 acquisition of the remaining 41.5 percent interest in FCA US we did not already own, in May 2014, we announced our 2014–2018 Business Plan. Our Business Plan sets forth a number of clearly defined strategic initiatives designed to capitalize on our position as a single, integrated company to become a leading global automaker, including:
• | Premium and Luxury Brand Strategy. We intend to continue to execute on our premium and luxury brand strategy by developing the Alfa Romeo and Maserati brands to service global markets. We believe these efforts will help us address the issue of industry overcapacity in the European market, as well as our own excess production capacity in the EMEA region, by leveraging the strong heritage and historical roots of these brands to grow the reach of these brands in all of the regions in which we operate. |
Recently, we have successfully expanded in the luxury end of the market through our introduction of two new Maserati vehicles. We intend to replicate this on a larger scale with Alfa Romeo by introducing several new vehicles being developed as part of an extensive product plan to address the premium market worldwide. In addition, we intend to continue our development of the Maserati brand as a larger scale luxury vehicle brand capitalizing on the recent successful launches of the next generation Quattroporte and the all new Ghibli. We also intend to introduce additional new vehicles, including an all new luxury SUV in 2015, the Levante, that will allow Maserati to cover the full range of the luxury vehicle market and position it to substantially expand volumes.
• | Building Brand Equity. As part of our Business Plan, we intend to further develop our brands to expand sales in markets throughout the world with particular focus on our Jeep and Alfa Romeo brands, which we believe have global appeal and are best positioned to increase volumes and profits substantially in the regions in which we operate. |
In particular, our Business Plan highlights our intention to leverage the global recognition of the Jeep brand and extend the range of Jeep vehicles to meet global demand through localized production, particularly in APAC and LATAM. We are also developing a range of vehicles that are expected to re-establish the Alfa Romeo brand, particularly in NAFTA, APAC and EMEA, as a premier driver-focused automotive brand with distinctive Italian styling and performance.
In addition, we expect to take further steps to strengthen and differentiate our brand identities in order to address differing market and customer preferences in each of the regions in which we operate. We believe that we can increase sales and improve pricing by ensuring that all of our vehicles are more closely aligned with a brand identity established in the relevant regional markets. For example, we announced as part of the Business Plan that Chrysler would be our mainstream North American brand, with a wider range of models, including crossovers and our primary minivan offering. Dodge will be restored to its performance heritage, which is expected to enhance brand identity and minimize overlapping product offerings which tend to cause consumer confusion. We also intend to continue our repositioning strategy of the Fiat brand in the EMEA region, leveraging the image of the Fiat 500 family, while positioning Lancia as an Italy-focused brand. We will also continue to develop our pick-up truck and light commercial vehicle brands leveraging our wide range of product offerings to expand further in EMEA as Fiat Professional, in LATAM as Fiat and in NAFTA as Ram. For a description of our vehicle brands, see “Business—Mass Market Vehicles—Mass-Market Vehicle Brands.”
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• | Global Growth. As part of our Business Plan, we intend to expand vehicle sales in key markets throughout the world. In order to achieve this objective, we intend to continue our efforts to localize production of Fiat brand vehicles through our joint ventures in China and India, while increasing sales of Jeep vehicles in LATAM and APAC by localizing production through our new facility in Brazil and the extension of the joint venture agreement in China. Local production will enable us to expand the product portfolio we can offer in these important markets and importantly position our vehicles to better address the local market demand by offering vehicles that are competitively priced within the largest segments of these markets without the cost of transportation and import duties. We also intend to increase our vehicle sales in NAFTA, continuing to build market share in the U.S. by offering more competitive products under our distinctive brands as well as offering new products in segments we do not currently compete in. Further, we intend to leverage manufacturing capacity in EMEA to support growth in all regions in which we operate by producing vehicles for export from EMEA, including Jeep brand vehicles. |
• | Continue convergence of platforms. We intend to continue to rationalize our vehicle architectures and standardize components, where practicable, to more efficiently deliver the range of products we believe necessary to increase sales volumes and profitability in each of the regions in which we operate. We seek to optimize the number of global vehicle architectures based on the range of flexibility of each architecture while ensuring that the products at each end of the range are not negatively impacted, taking into account unique brand attributes and market requirements. We believe that continued architectural convergence within these guidelines will facilitate speed to market, quality improvement and manufacturing flexibility allowing us to maximize product functionality and differentiation and to meet diversified market and customer needs. Over the course of the period covered by our Business Plan, we intend to reduce the number of architectures in our mass market brands by approximately 25 percent. |
• | Continue focus on cost efficiencies. An important part of our Business Plan is our continued commitment to maintain cost efficiencies necessary to compete as a global automaker in the regions we operate. We intend to continue to leverage our increased combined annual purchasing power to drive savings. Further, our efforts on powertrain and engine research are intended to achieve the greatest cost-to-environmental impact return, with a focus on new global engine families and an increase in use of the 8 and 9-speed transmissions to drive increased efficiency and performance and refinement. We also plan to continue our efforts to extend WCM principles into all of our production facilities and benchmark our efforts across all facilities around the world, which is supported by FCA US’s January 2014 legally binding memorandum of understanding, or MOU, with the UAW. We believe that the continued extension of our WCM principles will lead to further meaningful progress to eliminate waste of all types in the manufacturing process, which will improve worker efficiency, productivity, safety and vehicle quality. Finally, we intend to drive growth in our components and production systems businesses by designing and producing innovative systems and components for the automotive sector and innovative automation products, each of which will help us focus on cost efficiencies in the manufacturing of our vehicles. |
• | Continue to enhance our margins and strengthen our capital structure. Through the product and manufacturing initiatives described above, we also expect to improve our profitability. We believe our product development and repositioning of our vehicle offerings, along with increasing the number of vehicles manufactured on standardized global platforms will provide an opportunity for us to improve our margins. We are also committed to improving our capital position so we are able to continue to invest in our business throughout economic cycles. We believe we are taking material steps toward achieving investment grade metrics and that we have substantial liquidity to undertake our operations and implement our Business Plan. The proposed capital raising actions, along with our anticipated refinancing of certain FCA US debt, which will give us the ability to more fully manage our cash resources globally, will allow us to further improve our liquidity and optimize our capital structure. Furthermore, we intend to reduce our outstanding indebtedness, which will provide us with greater financial flexibility and enhance earnings and cash flow through reducing our interest burden. Our goal is to achieve a positive net industrial cash balance by the completion of our Business Plan. In light of this, and to further strengthen and support the Group’s capital structure, we completed significant capital transactions in December 2014 and we have announced our intent to and have announced our intent to execute certain transactions in connection with our plan to separate Ferrari from FCA. We believe that these improvements in our capital position will enable us to reduce substantially the liquidity we need to maintain to operate our businesses, including through any reasonably likely cyclical downturns. |
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Trends, Uncertainties and Opportunities
Shipments. Vehicle shipments are generally driven by our plans to meet consumer demand. Vehicle shipments occur shortly after production. We generally recognize revenue when the risks and rewards of ownership of a vehicle are transferred to our dealers or distributors. This usually occurs upon the release of the vehicle to the carrier responsible for transporting the vehicle to the dealer or distributor. Our shipments of passenger cars are driven by consumer demand which in turn is affected by economic conditions, availability and cost of dealer and customer financing and incentives offered to retail customers. Shipments, which correlate with net revenues, are not necessarily directly correlated with retail sales from dealers, which may be affected by other factors including dealer inventory levels.
Economic Conditions. Demand for new vehicles tends to reflect economic conditions in the various markets in which we operate because retail sales depend on individual purchasing decisions, which in turn are affected by many factors including levels of disposable income. Fleet sales and sales of light commercial vehicles are also influenced by economic conditions, which drives vehicle utilization and investment activity. Therefore, our performance has been impacted by the macroeconomic trends in the markets in which we operate. For example, the severe global credit crisis that peaked in 2008 and 2009 resulted in a significant and sudden reduction in new vehicle sales in the U.S. The marked recovery in U.S. vehicle sales beginning in 2011 may have been partially due to pent-up demand and the age of the vehicles on the road following the extended economic downturn. In Brazil, our largest market in Latin America slowed beginning in mid-2011. Industry-wide vehicle sales increased in 2012, due largely to government tax incentives that have now been phased out (see “—Government Incentives”), but decreased in 2013 and 2014, while continuing weak economic conditions affected car demand in 2013 and 2014. In Asia, the automotive industry has shown strong year-on-year growth, although the pace of growth is slowing. In Europe, the economic crisis of 2008-2009 has been followed by periods of tentative recovery, particularly in some countries, but also continued uncertainty and financial stress. Widespread concerns over sovereign credit risk that prevailed in 2011 and 2012 have been partly addressed by concerted monetary and fiscal consolidation efforts; however, the lingering uncertainty over the region’s financial sector together with various austerity measures have led to further pressure on economic growth and to new periods of recession or stagnation. From 2007, the year before the financial crisis began, to 2013, annual vehicle sales (including sales of passenger cars and light commercial vehicles) in Europe fell by over 4 million vehicles, before improving slightly in 2014. In Italy, our historical home market, both macroeconomic and industry performance were even worse than in Europe as a whole over the same period.
Dealer and Customer Financing. Because dealers and retail customers finance their purchases of a large percentage of the vehicles we sell worldwide, the availability and cost of financing is a significant factor affecting our sales volumes and revenues. Availability of customer financing could affect the vehicle mix, as customers who have access to greater financing are able to purchase higher priced vehicles, whereas when customer financing is constrained, vehicle mix could shift towards less expensive vehicles. The low interest rate environment in recent years has had the effect of reducing the effective cost of vehicle ownership. However, during the global financial crisis, access to financing, particularly for subprime borrowers, in the U.S., was significantly limited, which led directly to a sharp decline in U.S. vehicle sales. Further, the relative unavailability of dealer inventory financing negatively impacted the profitability and financial health of our U.S. dealership network which adversely affected the network’s ability to drive vehicle sales to retail customers. While availability of credit following the 2008-2009 crisis has improved significantly and interest rates in the U.S. and Europe are at historically low levels, the availability and terms of financing will continue to change over time, impacting our results. We operate in many regions without a controlled finance company, as we provide access to financing through joint ventures and third party arrangements in several of our key markets. Therefore, we may be less able to ensure availability of financing for our dealers and retail customers in those markets than our competitors that own and operate affiliated finance companies.
Government incentives. In the short- to medium-term, our results may be affected in certain countries or regions by government incentives for the purchase of vehicles. Government incentives tend to increase the number of vehicles sold during the periods in which the incentives are in place, but also tend to distort the development of demand from period to period because they affect the timing of purchases. For example, decisions to purchase may be accelerated if the incentive is scheduled or expected to terminate, which could dampen vehicle sales in future periods.
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Pricing. Our profitability depends in part on our ability to maintain or improve pricing on the sale of our vehicles, notwithstanding that the automotive industry continues to experience intense price competition resulting from the variety of available competitive vehicles and excess global manufacturing capacity. We have generally been able to maintain or increase prices of current year models in the NAFTA segment, while the competitive trading environment in Europe, China and Australia has reduced pricing or increased incentives and affected our results of operations in these markets. Historically, manufacturers have driven short-term 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 from time to time, we are focusing on achieving higher sales volumes by building brand value, balancing our product portfolio by offering a wider range of vehicle models, and improving the content, quality, fuel economy and performance of our vehicles.
Vehicle Profitability. Our results of operations depend on the profitability of the vehicles we sell, which tends to vary based upon a number of factors, including vehicle size, content of those vehicles, brand positioning and the customer base purchasing our vehicles. Vehicle profitability also depends on sales prices, net of sales incentives, costs of materials and components, as well as transportation and warranty costs. In the NAFTA segment, our larger vehicles such as our minivans, larger utility vehicles and pick-up trucks have historically been more profitable than other vehicles; however, these vehicles have lower fuel economy and consumer preferences tend to shift away from larger vehicles in periods of significant rising fuel prices, which affects their profitability on a per unit and aggregate basis. Our minivans, larger utility vehicles and pickup trucks accounted for approximately 44 percent of our total U.S. retail vehicle sales (not including vans and medium duty trucks) in 2014 and the profitability of this portion of our portfolio is approximately 33 percent higher than that of our overall U.S. retail portfolio on a weighted-average basis. In all mass-market segments throughout the world, vehicles equipped with additional options are generally more profitable for us. As a result, our ability to offer attractive vehicle options and upgrades is critical to our ability to increase our profitability on these vehicles. Our vehicles sold under certain brand and model names, for instance, are generally more profitable given the strong brand recognition of those vehicles tied in many cases to a long history and in other cases to customers identifying these vehicles as being more modern and responsive to customer needs. For instance, in the EMEA region, our vehicles in the Fiat 500 family tend to be more profitable than older model vehicles of similar size. In addition, in the U.S. and Europe, our vehicle sales through dealers to retail customers are normally more profitable than our fleet sales, as the retail customers typically request additional optional features while fleet customers increasingly tend to concentrate purchases on smaller, more fuel-efficient vehicles with fewer optional features, which have historically had a lower profitability per unit.
Effects of Foreign Exchange Rates. We are affected by fluctuations in foreign exchange rates (i) through translation of foreign currency financial statements into Euro for consolidation, which we refer to as the translation impact, and (ii) through transactions by entities in the Group in currencies other than their own functional currencies, which we refer to as the transaction impact.
Translation impacts arise in preparation of the Consolidated Financial Statements; in particular, we prepare our Consolidated Financial Statements in Euro, while the financial statements of each of our subsidiaries are prepared in the functional currency of that entity. In preparing the Consolidated Financial Statements, we translate assets and liabilities measured in the functional currency of the subsidiaries into Euro using the exchange rate prevailing at the balance sheet date, while we translate income and expenses using the average exchange rates for the period covered. Accordingly, fluctuations in the exchange rate of the functional currencies of our entities against the Euro impacts our results of operations.
Transaction impacts arise when our entities conduct transactions in currencies other than their own functional currency. We are therefore exposed to foreign currency risks in connection with scheduled payments and receipts in multiple currencies. For example, foreign currency denominated purchases by LATAM segment companies have been affected by the weakening of the Brazilian Real, which has had the effect of making such purchases more expensive in Brazilian Real terms.
Service Parts, Accessories and Service Contracts Revenues. Revenues from aftermarket service parts and accessories through our Mopar brand are less volatile and generate higher margins than average vehicle sales. In addition, we sell vehicle service contracts. With over 70 million of our branded vehicles on the road, we have an extensive network of potential customers for our service parts and accessories.
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Cost of Sales. Cost of sales includes purchases, certain warranty and product-related costs, labor costs, depreciation, amortization and logistic costs. We purchase a variety of components (including mechanical, steel, electrical and electronic, plastic components as well as castings and tires), raw materials (steel, rubber, aluminum, resin, copper, lead, and precious metals including platinum, palladium and rhodium), supplies, utilities, logistics and other services from numerous suppliers which we use to manufacture our vehicles, parts and accessories. These purchases accounted for approximately 80 percent of total cost of sales for each of the years ended December 31, 2014, 2013 and 2012. Fluctuations in cost of sales are primarily related to the number of vehicles we produce and sell along with shifts in vehicle mix, as newer models of vehicles generally have more technologically advanced components and enhancements and therefore additional costs per unit. The cost of sales could also be affected, to a lesser extent, by fluctuations of certain raw material prices. The cost of raw materials comprised approximately 15 percent of the previously described total purchases for each of the years ended December 31, 2014, 2013 and 2012, while the remaining portion of purchases is made of components, transformation and overhead costs. We typically seek to manage these costs and minimize their volatility through the use of fixed price purchase contracts and the use of commercial negotiations and technical efficiencies. Because of these effects and relatively more stable commodities markets, for the periods reported, changes in component and 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 as we renew and refresh our product offerings. Over time, technological advancements and improved material sourcing can reduce the cost to us of the additional enhancements. In addition, we seek to recover higher costs through pricing actions, but even when competitive conditions permit this, there may be a time lag between the increase in our costs and our ability to realize improved pricing. Accordingly, our results are typically adversely affected, at least in the short term, until price increases are accepted in the market.
Further, in many markets where our vehicles are sold, we are required to pay import duties on those vehicles, which are included in our cost of sales. Although we can typically pass these costs along with our higher priced vehicles, for many of our vehicles, particularly in the mass-market segments, we cannot always pass along increases in those duties to our dealers and distributors and remain competitive. Our ability to price our vehicles to recover those increased costs has impacted, and will continue to impact, our profitability. Alternatively, we can try to eliminate or reduce the impact of these import duties by increasing local manufacturing of vehicles, as we have done in China and we plan to do in Brazil with a new plant that will start production in 2015. However, operating conditions, including labor regulations, in certain markets, have produced industry overcapacity which may make it hard for us to shift to more local production in other markets. As a result, we may experience lower plant utilization rates, which we will be unable to recover, if we are unable to reallocate production easily. These factors as well as the long capital investment cycles associated with building local production infrastructure may necessitate that we continue to produce a large proportion of our vehicles in existing facilities and satisfy most of our demand from emerging markets through exports.
Product Development. An integral part of our Business Plan has been the continued refresh, renewal 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. 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. We believe efforts in developing common vehicle platforms and powertrains as well as parts commonization has accelerated the time-to-market for many of our new vehicle launches and resulted in cost savings.
Our efforts to develop our product offerings and the costs associated with vehicle improvements and launches can impact our EBIT. Refer to “Significant Accounting Policies—Format of the Financial Statements” included in the Consolidated Financial Statements included elsewhere in this Prospectus for a description of EBIT. During the development and launch of these new or refreshed 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.
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Costs we incur in the initial research phase for new projects (which may relate to vehicle models, vehicle platforms or powertrains) are expensed as incurred and reported as research and development costs. Costs we incur for product development are capitalized and recognized as development cost intangible assets if and when the following two conditions are both satisfied: (i) development costs can be measured reliably and (ii) the technical feasibility of the project, and the anticipated volumes and pricing, corroborate that the development expenditures will generate future economic benefits. Capitalized development costs include all direct and indirect costs that may be directly attributed to the development process. Such capitalized development costs are amortized on a straight line basis commencing from production over the expected economic useful life of the product developed, and such amortization is recognized and reported as research and development costs in our Consolidated Income Statement. During a new vehicle launch and introduction to the market, we typically incur increased selling, general and advertising expenses associated with the advertising campaigns and related promotional activity. If vehicle production is terminated prior to the expected end date, any unamortized capitalized development costs are expensed during that period.
Future developments in our product portfolio to support certain of our brands’ growth strategy and their related development expenditures could lead to significant capitalization of development costs. Our time to market is approximately 21 months from the date the design is signed-off for tooling and production, but varies, depending on product, after which, the project goes into production, resulting in an increase in amortization. Therefore our operating results, which are measured through EBIT, are impacted by the cyclicality of our research and development expenditures based on our product portfolio strategies and our product plans.
Ferrari Separation. We have announced our intention to separate Ferrari from FCA through a combination of a public offering of a portion of our shareholding in Ferrari from our current shareholding (expected to occur in 2015) and a spin-off of the remaining equity interest in Ferrari to our shareholders (expected to occur in 2016). While we may not have finally determined the structure and terms of any distribution, this Separation is subject to final approvals and other customary requirements. However, the degree to which the separation of Ferrari will strengthen our capital base, and offset the loss of the earnings and potential earnings of Ferrari, is not yet determined.
Regulation. We face a regulatory environment in markets throughout the world where safety, vehicle emission and fuel economy regulations are increasingly becoming more stringent which will affect our vehicle sales and profitability. We must comply with these regulations in order to continue operations in those markets, including a number of markets where we derive substantial revenue, such as the U.S., Brazil and Europe. Further, developments in regulatory requirements in China, the largest single market in the world in 2014, limit in some respects, the product offerings we can pursue as we seek to expand the scope of our operations in that country. Developing, engineering and manufacturing vehicles that meet these requirements and therefore may be sold in those markets requires a significant expenditure of resources.
Critical Accounting Estimates
The Consolidated Financial Statements require the use of estimates, judgments and assumptions that affect the carrying amount of assets and liabilities, the disclosure of contingent assets and liabilities and the amounts of income and expenses recognized. The estimates and associated assumptions are based on elements that are known when the financial statements are prepared, on historical experience and on any other factors that are considered to be relevant.
The estimates and underlying assumptions are reviewed periodically and continuously by the Group. If the items subject to estimates do not perform as assumed, then the actual results could differ from the estimates, which would require adjustment accordingly. The effects of any changes in estimate are recognized in the Consolidated Income Statement in the period in which the adjustment is made, or in future periods.
The items requiring estimates for which there is a risk that a material difference may arise in respect of the carrying amounts of assets and liabilities in the future are discussed below.
Pension Plans
The Group sponsors both non-contributory and contributory defined benefit pension plans primarily in the U.S. and Canada. The majority of the plans are funded plans. The non-contributory pension plans cover certain hourly and salaried employees. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to certain 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.
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The Group’s defined benefit pension plans are accounted for on an actuarial basis, which requires the use of estimates and assumptions to determine the net liability or net asset. The Group estimates the present value of the projected future payments to all participants taking into consideration parameters of a financial nature such as discount rates, the rates of salary increases and the likelihood of potential future events estimated by using demographic assumptions such as mortality, dismissal and retirement rates. These assumptions may have an effect on the amount and timing of future contributions.
There were no significant plan amendments or curtailments to the Group’s pension plans for the year ended December 31, 2014. In 2013, the Group amended the U.S. and Canadian salaried defined benefit pension plans. The U.S. plans were amended in order to comply with U.S. Internal Revenue Service, or IRS, regulations to cease the accrual of future benefits effective December 31, 2013, and to enhance the retirement factors. The Canada amendment ceased the accrual of future benefits effective December 31, 2014, enhanced the retirement factors and continued to consider future salary increases for the affected employees. The plan amendments resulted in the remeasurement of the plans and a corresponding curtailment gain. As a result, the Group recognized a €509 million net reduction to its pension obligation, a €7 million reduction to defined benefit plan assets, and a corresponding €502 million increase in Other comprehensive income/(loss) for the year ended December 31, 2013.
Plan obligations and costs are based on existing retirement plan provisions. Assumptions regarding any potential future changes to benefit provisions beyond those to which the Group is presently committed are not made.
The assumptions used in developing the required estimates include the following key factors:
• | Discount rates. The Group selects discount rates on the basis of the rate of return on high-quality (AA-rated) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension payments. |
• | Salary growth. The salary growth assumption reflects the Group’s long-term actual experience, outlook and assumed inflation. |
• | Inflation. The inflation assumption is based on an evaluation of external market indicators. |
• | Expected contributions. The 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. |
• | Retirement rates. Retirement rates are developed to reflect actual and projected plan experience. |
• | Mortality rates. Mortality rates are developed using our plan-specific populations, recent mortality information published by recognized experts in this field and other data where appropriate to reflect actual and projected plan experience. |
• | Plan assets measured at net asset value. Plan assets are recognized and measured at fair value in accordance with IFRS 13–Fair Value Measurement. Plan assets for which the fair value is represented by the net asset value , or NAV, since there are no active markets for these assets amounted to €2,750 million and €2,780 million at December 31, 2014 and at 2013, respectively. These investments include private equity, real estate and hedge fund investments. |
Additionally, retirement rate assumptions used for our U.S. benefit plan valuations were updated to reflect an ongoing trend towards delayed retirement for FCA US employees. The change decreased our U.S. pension obligations by approximately €261 million. Significant differences in actual experience or significant changes in assumptions may affect the pension obligations and pension expense. The effects of actual results differing from assumptions and of changing assumptions are included in Other comprehensive income/(loss).
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At December 31, 2014 the effect of the indicated decrease or increase in selected factors, holding all other assumptions constant, is shown below:
Effect on pension defined benefit obligation | ||
( € million) | ||
10 basis point decrease in discount rate | 317 | |
10 basis point increase in discount rate | (312 | ) |
The net liabilities and net assets for pension benefits amounted to €5,166 million and to €104 million, respectively (€4,253 million and €95 million, respectively at December 31, 2013). Refer to Note 25 to the Consolidated Financial Statements included elsewhere in this Prospectus for a detailed discussion of the Group’s pension plans.
Other Post-Employment Benefits
The Group provides health care, legal, severance indemnity and life insurance benefits to certain hourly and salaried employees. Upon retirement, these employees may become eligible for continuation of certain benefits. Benefits and eligibility rules may be modified periodically.
Health care, life insurance plans and other employment benefits are accounted for on an actuarial basis, which requires the selection of various assumptions. The estimation of the Group’s obligations, costs and liabilities associated with these plans requires the use of estimates of the present value of the projected future payments to all participants, taking into consideration parameters of a financial nature such as discount rate, the rates of salary increases and the likelihood of potential future events estimated by using demographic assumptions such as mortality, dismissal and retirement rates.
Plan obligations and costs are based on existing plan provisions. Assumptions regarding any potential future changes to benefit provisions beyond those to which the Group is presently committed are not made.
The assumptions used in developing the required estimates include the following key factors:
• | Discount rates. The Group selects discount rates on the basis of the rate of return on high-quality (AA-rated) 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. The Group’s 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. The salary growth assumptions reflect the Group’s long-term actual experience, outlook and assumed inflation. |
• | Retirement and employee leaving rates. Retirement and employee leaving rates are developed to reflect actual and projected plan experience, as well as the legal requirements for retirement in Italy. |
• | Mortality rates. Mortality rates are developed using our plan-specific populations, recent mortality information published by recognized experts in this field and other data where appropriate to reflect actual and projected plan experience. |
In 2014, following the release of new standards by the Canadian Institute of Actuaries, mortality assumptions used for our Canadian benefit plan valuations were updated to reflect recent trends in the industry and the revised outlook for future generational mortality improvements. The impact of this change on our other post-employment benefit obligations was not significant.
Additionally, retirement rate assumptions used for our U.S. benefit plan valuations were updated to reflect an ongoing trend towards delayed retirement for FCA US employees. The change decreased our U.S. other post-employment benefit obligations by approximately €40 million.
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At December 31, 2014, the effect of the indicated decreases or increases in the key factors affecting the health care, life insurance plans and severance indemnity in Italy (trattamento di fine rapporto, or TFR), holding all other assumptions constant, is shown below:
Effect on health care and life insurance defined benefit obligation | Effect on the TFR obligation | ||||
(€ million) | |||||
10 basis point / (100 basis point for TFR) decrease in discount rate | 28 | 55 | |||
10 basis point / (100 basis point for TFR), increase in discount rate | (28 | ) | (49 | ) | |