Chrysler's costs 'horrific'

The Baltimore Sun

DETROIT -- As DaimlerChrysler AG shops the Chrysler Group, potential bidders are looking long and hard at billions of dollars in looming retiree pension and health care costs often buried beneath financial results the company highlights publicly.

When DaimlerChrysler reports financial results, it stresses operating profits or losses for each group, which do not fully take into account future retiree pension and benefit expenses.

But a note in the annual report provides a breakdown of the expenses, giving a glimpse of how difficult it will be for anyone to turn a profit with the automaker.

If future pension and retiree benefit expenses are included, the Chrysler Group's reported loss for 2006 would have been $3 billion, double what was reported in the operating results at a news conference Feb. 14 at the Auburn Hills, Mich., headquarters.

During the past five years, the Chrysler Group would have swung from a combined $2.27 billion operating profit to a $1.75 billion loss, according to figures in the annual report.

These pension and retiree benefit costs, set in United Auto Workers contracts over the decades, would be a challenge for any new owner, analysts say. They also make the chances of a deal more likely with a private equity firm than with an automaker, because those firms specialize in taking drastic actions to restructure financially troubled companies.

"The legacy costs are horrific," said Joe Phillippi, a longtime auto analyst and principal with AutoTrends Consulting in Short Hills, N.J. "To put a deal together, the buyers are going to have to make some heroic assumptions as to what they can do to fix all of this, which will include a substantial number of concessions."

The Chrysler Group is a division of DaimlerChrysler. Like most companies, DaimlerChrysler does not report as much detail on divisions as it does for the overall corporation. But notes to the annual report, analyst estimates and a closer look at General Motors Corp. and Ford Motor Co., which have similar deals with the UAW, offer a good idea of the legacy costs.

The problem has been compounded as Detroit automakers lose market share to Asian competitors.

GM, Ford and DaimlerChrysler all have designated funds to pay for these benefits. They estimate each year their obligations to retirees and report whether they have enough money in the funds to meet these future expenses.

Counting pension and other retiree benefit obligations, GM reported last year that its plans were underfunded by $45 billion. Ford's plans were underfunded by $34 billion, according to its annual report.

DaimlerChrysler's plans as a whole are underfunded by $21.6 billion, the company said. DaimlerChrysler does not provide a break-out for the Chrysler Group, but the Auburn Hills unit likely accounts for the bulk of this obligation because it is locked into plans with the UAW similar to GM's and Ford's, analysts say.

In a report this month, Goldman Sachs estimates any company that buys the Chrysler Group would inherit $16.5 billion in pension and health care liabilities.

In a note to its annual report, DaimlerChrysler also provides by group an income or expense taken each year for future pension and retiree benefits. It is a way to reconcile the operating profit or loss and give a figure closer to what is reported as the bottom-line net income for the overall company.

During the past five years, the Chrysler Group has been the source of the biggest expense of any DaimlerChrysler group, at $4 billion. In 2005, the Chrysler Group had an operating profit of $1.8 billion, but it also had $1.2 billion in future retiree expenses, resulting in an adjusted net income of $597 million.

These benefit obligations are one reason analysts have pegged the price of the Chrysler Group as low as $5 billion, even though Daimler-Benz bought Chrysler for $40 billion in 1998.

"My feeling is a buyer should pay very little for the company," said Peter Morici, a University of Maryland business professor. "The reality is that unless there are structural changes in the labor agreement, Chrysler Corp. is worth less than zero."

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