10-K 1 fcausllc-2014123110k.htm FCA US 12.31.14 10-K FCA US LLC - 2014.12.31 10K

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
 
(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to            
 Commission file number 000-54282
 
FCA US LLC
(Exact name of Registrant as Specified in its Charter)
DELAWARE
 
27-0187394
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
1000 Chrysler Drive
Auburn Hills, Michigan
 
48326
(Address of Principal Executive Offices)
 
(Zip Code)
(248) 512-2950
(Registrant’s Telephone Number, Including Area Code)
Chrysler Group LLC
(Former name or former address, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K.    þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
þ  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  þ
There is no public market for our equity securities. As of March 4, 2015, there were 1,632,654 Membership Interests issued and outstanding.
The registrant meets the conditions set forth in General Instruction I(2)(a) and (c) of Form 10-K and is therefore filing this form with certain reduced disclosures as permitted by those instructions.
DOCUMENTS INCORPORATED BY REFERENCE
None.
 
 
 
 
 



FCA US LLC AND CONSOLIDATED SUBSIDIARIES
2014 ANNUAL REPORT ON FORM 10-K
INDEX
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
 
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
 
 
 
 
 
Item 15.
SIGNATURES
 
 
 




Unless otherwise specified, the terms "we," "us," "our," "FCA US," "Chrysler Group" and the "Company" refer to FCA US LLC, formerly known as Chrysler Group LLC, and its consolidated subsidiaries, or any one or more of them, as the context may require. “Old Carco” refers to Old Carco LLC, formerly known as Chrysler LLC, and its consolidated subsidiaries, or any one or more of them, as the context may require. "FCA" refers to Fiat Chrysler Automobiles N.V., a public limited liability company (naamloze vennootschap) organized under the laws of the Netherlands, its consolidated subsidiaries (excluding FCA US) and entities it jointly controls, or any one or more of them, as the context may require. References to "Fiat" refer solely to Fiat S.p.A., the predecessor of FCA.
INDUSTRY DATA
In this report, we include and refer to industry and market data obtained or derived from internal surveys, market research, publicly available information and industry publications. Industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information.
Although we believe that this information is reliable, we have not independently verified the data from third-party sources. Similarly, while we believe our internal estimates with respect to our industry are reliable, our estimates have not been verified by any independent sources. While we believe the industry data presented in this report is reliable, our estimates, in particular as they relate to market share and our future expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under Item 1A. Risk Factors.
In this report, we refer to various different vehicle segments, including the A (mini), B (small), C (compact), D (mid-size) and E (full-size) segments. We derive these segments from industry practice and custom, although there is no official codification of these vehicle segments in North America.
Forward-Looking Statements
This report contains forward-looking statements that reflect our current views about future events. We use the words "anticipate," "assume," "believe," "estimate," "expect," "will," "intend," "may," "plan," "project," "should," "could," "seek," "designed," "potential," "forecast," "target," "objective," "goal," or the negatives of such terms or other similar expressions. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. For additional discussion of these risks, refer to Item 1A. Risk Factors. These factors include, but are not limited to:
our continued ability to reach certain minimum vehicle sales volumes to maintain profitability and appropriate levels of cash flow;
our ability to regularly introduce new or significantly refreshed vehicles that appeal to a wide base of consumers and to respond to changing consumer preferences, quality demands, economic conditions and government regulations;
an increase in unemployment levels, erosion in current economic conditions or decrease in consumer confidence, especially in North America, where we sell most of our vehicles;
the impact of product recalls and/or vehicle defects (including product liability claims);
our dependence on FCA;
our ability to control costs and implement cost reduction and productivity improvement initiatives;
lengthy product development cycles and our inability to adequately forecast demand for our vehicles which may lead to inefficient use of our production capacity;
our ability to increase vehicle sales outside of North America;
changes in foreign currency exchange rates;



competitive pressures that may limit our ability to reduce sales incentives, achieve better pricing and grow our profitability;
the potential inability of consumers and our dealers to obtain affordably priced financing on a timely basis due to our lack of a captive finance company;
disruption of production or delivery of new vehicles due to shortages of materials, including supply disruptions resulting from natural disasters, labor strikes or supplier insolvencies;
changes and fluctuations in the prices of raw materials, parts and components;
our substantial indebtedness and limitations on our liquidity that may limit our ability to execute our business plan;
changes in laws, regulations and government policies, particularly those relating to vehicle emissions, fuel economy and safety; and
interruptions to our business operations caused by information technology systems failures arising from our transition to new, enterprise-wide software systems or from potential cyber security incidents.
If any of these risks and uncertainties materialize, or if the assumptions underlying any of our forward-looking statements prove incorrect, then our actual results, level of activity, performance or achievements may be materially different from those we express or imply by such statements. The risks described in Item 1A. Risk Factors are not exhaustive. Other sections of this report describe additional factors that could adversely affect our business, financial condition or results of operations. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and we cannot predict all such risk factors, nor can we assess the impact of all such risks on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those implied by any forward-looking statements. We do not intend, or assume any obligation, to update these forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are expressly qualified in their entirety by the cautionary statements referred to above and included elsewhere in this report.

ii


PART I
Item 1. Business.
Company Overview
We design, engineer, manufacture, distribute and sell vehicles under the brand names Chrysler, Jeep, Dodge and Ram and the SRT performance vehicle designation. Our product lineup includes passenger cars, utility vehicles (including sport utility vehicles, or SUVs, and crossover vehicles, or CUVs), minivans, trucks and commercial vans. We also sell automotive service parts and accessories under the Mopar brand name. In addition, we sell separately-priced service contracts to customers and provide contract manufacturing services to other vehicle manufacturers, primarily other affiliates of our parent company, FCA. As part of the FCA family of companies, or the Group, we also manufacture certain vehicles in Mexico, which are distributed by us throughout North America and select markets and sold to FCA for distribution in other select markets. In addition, FCA manufactures certain vehicles for us, which we sell in the U.S. and internationally. Our products are available in more than 150 countries around the world.
The majority of our operations, employees, independent dealers and sales are in North America, primarily in the U.S. Approximately 10 percent of our vehicle sales in 2014 were outside North America, principally in Asia Pacific, South America and Europe.
FCA is the beneficial owner of 100 percent of our membership interests. Our governance documents include provisions that effectively grant FCA full control over our governance structure, including the election of our entire Board of Directors, or the Board. In addition, our Chief Executive Officer and Chief Financial Officer serve in those same roles for FCA.
Group membership has provided us with a number of benefits, including access to new vehicles, platforms and powertrain technologies, particularly with respect to smaller, more fuel-efficient vehicles, as well as commercial vehicles. This relationship has also allowed us to streamline global distribution, and to realize procurement benefits in light of our combined purchasing volume. In addition, we have implemented FCA’s World Class Manufacturing, or WCM, principles in our manufacturing operations with the objective of enhancing worker efficiency, productivity, safety and vehicle quality. See Item 1A. Risk Factors We depend on our relationship with FCA to collaborate in the development of new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success for a discussion of risks relating to these relationships.
Products
We believe that we can continue to increase our vehicle sales by building the value of our brands, in particular by ensuring that each brand has a clear identity and market focus. We are reinforcing our effort to build brand value by ensuring that we introduce new vehicles with individualized characteristics that remain closely aligned with the unique identity of each brand.
Chrysler. Chrysler, named after the company founded by Walter P. Chrysler in 1925, aims to create vehicles with distinctive design, craftsmanship, intuitive innovation and technology standing as a leader in design, engineering and value, with a range of vehicles from mid-size sedans (Chrysler 200) to full size sedans (Chrysler 300) and minivans (Town & Country).
Dodge. With a traditional focus on “muscle car” performance vehicles, the Dodge brand, which began production in 1914, offers a full line of cars, CUVs and minivans, mainly in the mid-size and large size vehicle market, that are sporty, functional and innovative, intended to offer an excellent value for families looking for high performance, dependability and functionality in everyday driving situations.
Jeep. Jeep, founded in 1941, is a globally recognized brand focused exclusively on the SUV and off-road vehicle market. The Jeep Grand Cherokee is the most awarded SUV ever. The brand’s appeal builds on its heritage associated with the outdoors and adventurous lifestyles, combined with the safety and versatility features of the brand’s modern vehicles. Jeep recently introduced the Jeep Renegade, a small segment SUV that began production in the second half of 2014. Jeep set an all-time brand sales record in 2014 with over 1 million vehicles sold.
Ram. Ram, established as a standalone brand separate from Dodge in 2009, offers a line of full-size trucks, including light- and heavy-duty pick-up trucks such as the Ram 1500 pick-up truck, which recently became the first truck to be named Motor Trend’s “Truck of the Year” for two consecutive years, and cargo vans. By investing substantially in new

1


products, infusing them with great looks, refined interiors, durable engines and features that further enhance their capabilities, we believe Ram has emerged as a market leader in full size pick-up trucks.
In addition, by agreement with FCA, we are the distributor of Fiat and Alfa Romeo brand vehicles and service parts in North America. Fiat reentered the U.S. market in 2011 and aims to make cars that are flexible, easy to drive, affordable and energy efficient. Alfa Romeo reentered the U.S. market in 2014 with a lightweight sports car, the 4C, and is known for a long, sporting tradition and Italian design.
We also leverage the more than 75-year history of the Mopar brand to provide a full line of service parts and accessories for our mass-market vehicles worldwide. As of December 31, 2014, we had 50 parts distribution centers throughout the world to support our customer care efforts in each of our regions. Our Mopar brand accessories allow our customers to customize their vehicles by including after-market sales of products from side steps and lift-kits, to graphics packages, such as racing stripes, and custom leather interiors. Further, through the Mopar brand, we offer vehicle service contracts to our retail customers worldwide under the “Mopar Vehicle Protection” brand, with the majority of our service contract sales in 2014 in the U.S. and Europe. Finally, our Mopar customer care initiatives support our vehicle distribution and sales efforts through 27 call centers located around the world.
Vehicle Sales
Our new vehicle sales represent sales of our vehicles from dealers and distributors to retail customers and fleet customers. Our vehicle sales also include vehicles that FCA contract manufactures for us for sale in the U.S. and internationally. Vehicles manufactured by us for other companies, including FCA, are excluded from our new vehicle sales. The following summarizes our new vehicle sales by geographic market for the periods presented.
 
 
Years Ended December 31,
 
 
2014 (1)(2)
 
2013 (1)(2)
 
2012 (1)(2)
 
2011 (1)(2)
 
2010 (1)(2)
 
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
 
(vehicles in thousands)
U. S.
 
2,091

 
16,828

 
12.4
%
 
1,800

 
15,862

 
11.4
%
 
1,652

 
14,786

 
11.2
%
 
1,369

 
13,041

 
10.5
%
 
1,085

 
11,770

 
9.2
%
Canada
 
290

 
1,886

 
15.4
%
 
260

 
1,777

 
14.6
%
 
244

 
1,714

 
14.2
%
 
231

 
1,618

 
14.3
%
 
205

 
1,581

 
13.0
%
Mexico
 
77

 
1,168

 
6.6
%
 
87

 
1,101

 
7.9
%
 
88

 
1,024

 
8.6
%
 
82

 
937

 
8.8
%
 
79

 
846

 
9.3
%
Total North America
 
2,458

 
19,882

 
12.4
%
 
2,147

 
18,740

 
11.5
%
 
1,984

 
17,524

 
11.3
%
 
1,682

 
15,596

 
10.8
%
 
1,369

 
14,197

 
9.6
%
Rest of World
 
308

 
64,800

 
<1.0
%
 
254

 
63,621

 
<1.0
%
 
210

 
62,449

 
<1.0
%
 
173

 
60,018

 
<1.0
%
 
147

 
57,697

 
<1.0
%
Total Worldwide
 
2,766

 
84,682

 
3.2
%
 
2,401

 
82,361

 
2.9
%
 
2,194

 
79,973

 
2.7
%
 
1,855

 
75,614

 
2.5
%
 
1,516

 
71,894

 
2.1
%
 

(1)
Certain fleet sales that are accounted for as operating leases are included in vehicle sales.
(2)
The Company’s estimated industry and market share data presented are based on management’s estimates of industry sales data, which use certain data provided by third-party sources, including IHS Global Insight and Ward’s Automotive.
(3)
Percentages are calculated based on the unrounded vehicle sales volumes for the Company and the industry.
The following summarizes the total U.S. industry sales of new vehicles of domestic and foreign models and our relative competitive position for the periods presented. Vehicles manufactured by us for other companies, including FCA, are excluded from our new vehicle sales.
 
 
Years Ended December 31,
 
 
2014 (1)(2)
 
2013 (1)(2)
 
2012 (1)(2)
 
2011 (1)(2)
 
2010 (1)(2)
 
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
FCA US
 
Industry
 
Percentage
of
Industry (3)
 
 
(vehicles in thousands)
Cars
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Small
 
118

 
3,056

 
3.8
%
 
119

 
2,962

 
4.0
%
 
80

 
2,809

 
2.8
%
 
55

 
2,278

 
2.4
%
 
45

 
2,011

 
2.2
%
Mid-size
 
166

 
2,912

 
5.7
%
 
211

 
2,846

 
7.4
%
 
210

 
2,725

 
7.7
%
 
143

 
2,272

 
6.3
%
 
82

 
2,082

 
4.0
%
Full-size
 
147

 
847

 
17.4
%
 
156

 
922

 
16.9
%
 
153

 
878

 
17.5
%
 
106

 
850

 
12.5
%
 
113

 
893

 
12.6
%
Sport
 
56

 
623

 
8.9
%
 
58

 
618

 
9.3
%
 
55

 
627

 
8.8
%
 
50

 
539

 
9.3
%
 
44

 
532

 
8.3
%
Total Cars
 
487

 
7,438

 
6.5
%
 
544

 
7,348

 
7.4
%
 
498

 
7,039

 
7.1
%
 
354

 
5,939

 
6.0
%
 
284

 
5,518

 
5.2
%
Minivans
 
272

 
545

 
49.9
%
 
246

 
518

 
47.5
%
 
253

 
540

 
46.9
%
 
206

 
472

 
43.4
%
 
216

 
460

 
46.9
%
Utility Vehicles
 
863

 
5,837

 
14.8
%
 
642

 
5,221

 
12.3
%
 
600

 
4,671

 
12.8
%
 
552

 
4,280

 
12.9
%
 
372

 
3,753

 
9.9
%
Pick-up Trucks
 
425

 
2,253

 
18.9
%
 
338

 
2,109

 
16.0
%
 
278

 
1,888

 
14.7
%
 
244

 
1,774

 
13.8
%
 
207

 
1,602

 
12.9
%
Van & Medium Duty Trucks
 
44

 
755

 
5.8
%
 
30

 
666

 
4.4
%
 
23

 
648

 
3.6
%
 
13

 
576

 
2.3
%
 
6

 
437

 
1.3
%
Total Vehicles
 
2,091

 
16,828

 
12.4
%
 
1,800

 
15,862

 
11.4
%
 
1,652

 
14,786

 
11.2
%
 
1,369

 
13,041

 
10.5
%
 
1,085

 
11,770

 
9.2
%

2



(1)
Certain fleet sales that are accounted for as operating leases are included in vehicle sales.
(2)
The Company’s estimated industry and market share data presented are based on management’s estimates of industry sales data, which use certain data provided by third-party sources, including IHS Global Insight and Ward’s Automotive.
(3)
Percentages are calculated based on the unrounded vehicle sales volumes for the Company and the industry.
Fleet Sales and Deliveries
Our new vehicle sales and market share data presented above includes fleet sales, as well as sales by our dealers to retail customers. Fleet sales consist of sales to rental car companies, commercial fleet customers and government entities.
The following summarizes our U.S. fleet sales and the number of those sales as a percentage of our total annual U.S. vehicle sales:
 
 
Years Ended December 31,
 
 
2014 (1) 
 
2013 (1) 
 
2012 (1) 
 
2011 (1) 
 
2010 (1)
 
 
(vehicles in thousands)
Rental Car Companies
 
325

 
305

 
324

 
295

 
317

Other Fleet Customers
 
116

 
99

 
105

 
83

 
75

Total U.S. Fleet
 
441

 
404

 
429

 
378

 
392

Percentage of Total U.S. Vehicle Sales (2) 
 
21.1
%
 
22.4
%
 
26.0
%
 
27.6
%
 
36.1
%

 
(1)
Certain fleet sales that are accounted for as operating leases are included in vehicle sales.
(2)
Percentages are calculated based on the unrounded vehicle sales volume for the Company.
Competitive Position
The automotive industry is highly competitive, especially in the U.S., our primary market, with more than 10 large manufacturers with significant market share.
The following provides new vehicle U.S. market share information for the Company and its principal competitors:
 
Years Ended December 31, (1)
 
2014
 
2013
 
2012
 
2011
 
2010
FCA US
12.4
%
 
11.4
%
 
11.2
%
 
10.5
%
 
9.2
%
GM
17.4
%
 
17.6
%
 
17.6
%
 
19.2
%
 
18.8
%
Ford
14.7
%
 
15.7
%
 
15.2
%
 
16.5
%
 
16.4
%
Toyota
14.1
%
 
14.1
%
 
14.1
%
 
12.6
%
 
15.0
%
Honda
9.2
%
 
9.6
%
 
9.6
%
 
8.8
%
 
10.5
%
Nissan
8.2
%
 
7.9
%
 
7.7
%
 
8.0
%
 
7.7
%
Hyundai/Kia
7.8
%
 
7.9
%
 
8.6
%
 
8.7
%
 
7.6
%
Other
16.2
%
 
15.8
%
 
16.0
%
 
15.7
%
 
14.8
%
Total
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
 
(1)
The Company’s estimated market share data is presented based on management’s estimates of industry sales data, which use certain data provided by third-party sources, including IHS Global Insight and Ward’s Automotive.

3


Distribution
Our products are available in more than 150 countries around the world. We sell our products to dealers and distributors for sale to retail customers and fleet customers. Sales of vehicles, service parts and accessories outside North America are primarily to 100 percent owned, or affiliated, national sales companies or independent distributors and dealers.
FCA is the distributor of our vehicles and service parts in Europe and Brazil, selling our products through a network of independent dealers.
The following summarizes the number of independent dealer entities in our dealer network:
 
As of December 31,
 
2014
 
2013
 
2012
 
2011
 
2010
U.S. (1)
2,630

 
2,604

 
2,570

 
2,474

 
2,311

Canada (2)
441

 
437

 
437

 
434

 
433

Mexico (3)
162

 
163

 
149

 
136

 
132

Rest of World (4)
848

 
891

 
883

 
773

 
1,411

Total Worldwide
4,081

 
4,095

 
4,039

 
3,817

 
4,287

 
(1)
The number of Fiat dealers in the U.S. as of December 31, 2014, 2013 and 2012 is 217, 214 and 200, respectively, of which 173, 179 and 175, were also Chrysler, Jeep, Dodge and Ram brand dealers. In the total presented for year ended December 31, 2014, there are 88 Alfa Romeo dealers, 83 of which were also Fiat brand dealers.
(2)
The number of dealers in Canada as of December 31, 2014, 2013 and 2012 includes 86, 82 and 77, respectively, Fiat brand dealers, of which 83, 81 and 76, respectively, were also Chrysler, Jeep, Dodge and Ram brand dealers.
(3)
The number of dealers in Mexico as of December 31, 2014, 2013, 2012 and 2011 includes 46, 44, 31 and 22 Fiat brand dealers, respectively, and 10, 9, 8 and 3 Alfa Romeo brand dealers, respectively.
(4)
The increase in the number of Rest of World dealers in 2012 as compared to 2011 is primarily attributable to our continuing efforts to engage in emerging market opportunities, particularly in Asia Pacific and South America. The decrease in the number of Rest of World dealers in 2011 as compared to 2010 is primarily attributable to our appointment in June 2011 of FCA as our distributor for select countries in Europe. The decrease in the number of Rest of World dealers in 2014 as compared to 2013 is primarily attributable to our appointment in October 2014 of FCA as our distributor in Brazil.
We are the distributor of Fiat brand vehicles and service parts in North America. As of December 31, 2014, there were 217 dealerships in the U.S. where the Fiat brand was sold, including 134 that were Fiat only dealerships. We are also the distributor of Alfa Romeo brand vehicles and service parts in North America and as of December 31, 2014, there were 88 locations that include five stand-alone Alfa Romeo dealerships in the U.S.
As part of the Group, we are also developing opportunities for the production, distribution and sales of vehicles and service parts in emerging markets, such as China and Brazil.
Dealer and Customer Financing
Because our dealers and retail customers finance the purchase of a significant percentage of the vehicles we sell, the availability and cost of financing is one of the most significant factors affecting our vehicle sales volumes. Dealers use wholesale financing arrangements to purchase vehicles from us to maintain vehicle inventory levels adequate to drive retail vehicle sales. Retail customers use a variety of financing and lease programs, including programs in which we offer financial subsidy incentives, capitalized cost reductions or special terms through a financial services company, to acquire new vehicles from our dealers.
We do not have a captive finance company and instead rely upon strategic relationships developed with independent financial service providers, primarily Santander Consumer USA, Inc., or SCUSA, to provide critical financing and support for our dealers and retail customers. Prior to the agreement with SCUSA, we principally relied on Ally Financial Inc., or Ally, for dealer and retail financing and support. Additionally, we have agreements with a number of financial institutions to provide a variety of dealer and retail customer financing programs in Canada. There are no formal retail financing arrangements in Mexico at this time, although CF Credit Services, S.A. de C.V. SOFOM E.R., or CF Credit, provides nearly all dealer financing and about half of all retail financing of our products in Mexico. We also have agreements with FCA financial services affiliates

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for the provision of financing to consumers and our dealers in China and Argentina. See Item 1A. Risk Factors Availability of adequate financing on competitive terms for our dealers and consumers is critical to our success. Our lack of a captive finance company could place us at a competitive disadvantage to other automakers that may be able to offer consumers and dealers financing and leasing on better terms than our customers and dealers are able to obtain. In lieu of a captive finance company, we will depend on our relationship with SCUSA to supply a significant percentage of this financing, and we continue to depend on our former partner, Ally.
In February 2013, we entered into a private-label financing agreement with SCUSA, or the SCUSA Agreement. Under the SCUSA Agreement, SCUSA provides a wide range of wholesale and retail financing services to our dealers and retail customers in accordance with its usual and customary lending standards, under the Chrysler Capital brand name. The financing services include credit lines to finance our dealers’ acquisition of vehicles and other products that we sell or distribute, retail loans and leases to finance retail customer acquisitions of new and used vehicles at our dealerships, financing for commercial and fleet customers, and ancillary services. In addition, SCUSA offers dealers construction loans, real estate loans, working capital loans and revolving lines of credit.
The SCUSA Agreement has a ten year term from February 2013, subject to early termination in certain circumstances, including the failure by a party to comply with certain of its ongoing obligations under the SCUSA Agreement. In accordance with the terms of the agreement, SCUSA provided us an upfront, nonrefundable payment in May 2013 which is being amortized over ten years.
Under the SCUSA Agreement, SCUSA has certain rights, including limited exclusivity to participate in specified minimum percentages of certain of our retail financing rate subvention programs. SCUSA’s exclusivity rights are subject to SCUSA maintaining price competitiveness based on market benchmark rates to be determined through a steering committee process as well as minimum approval rates.
The SCUSA Agreement replaced an auto finance relationship with Ally, which was terminated in 2013. As of December 31, 2014, Ally was providing wholesale lines of credit to approximately 39 percent of our dealers in the U.S. For the year ended December 31, 2014, we estimate that approximately 82 percent of the vehicles purchased by our U.S. retail customers were financed or leased through our dealer network, of which approximately 48 percent were financed or leased through Ally and SCUSA.
Research, Development and Intellectual Property
We engage in research and development for new vehicles and technology to improve the performance, safety, fuel efficiency, reliability and consumer perception of our vehicles and to develop new features and content to meet customer expectations. As of December 31, 2014, we employed over 6,000 engineers. Our engineers support our product development efforts and have expertise in a number of disciplines, including mechanical, electrical, materials, computer science and chemical engineering. We also provide several internal programs through which a portion of our engineers receive cross-training in various technical and business functions.
Our research and development spending is used for a number of activities that support development of new and existing vehicles and powertrain technologies, including the building of three-dimensional models, virtual simulations, prototype building and testing (including with respect to the integration of safety and powertrain technologies) and assembly of pre-production pilot models
The following summarizes our research and development expenses (in millions of dollars):
 
Years Ended December 31,
2014
 
2013
 
2012
Research and development expenses, net
$
2,290

 
$
2,320

 
$
2,324

We hold numerous licenses and patents for use in our business. We also jointly own or hold licenses to intellectual property in certain technologies with FCA and other third parties pursuant to various commercial agreements. No single patent is material to our business as a whole. We also own a number of trademarks and service marks that are critical to the recognition of our products by consumers.

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Raw Materials, Services and Supplies
We procure a variety of raw materials, parts, supplies, utilities, transportation and other services from numerous suppliers to manufacture our vehicles, parts and accessories, primarily on a purchase order basis. Raw materials we use typically consist of steel, aluminum, lead, resin, copper, rubber, and precious metals including platinum, palladium and rhodium. We are subject to fluctuations in the prices of these raw materials based on variations in global supply and demand.
Although we have not experienced any major loss of production as a result of material or parts shortages, we, like our competitors, regularly source systems, components, parts, equipment and tooling from a sole supplier or limited number of providers. Therefore, we are at risk of production delays and losses should any supplier fail to deliver goods and services on time. See Item 1A. Risk Factors If our suppliers fail to provide us with the raw materials, systems, components and parts that we need to manufacture our automotive products, our operations may be disrupted which would have a material adverse effect on our business and —Most of the components, parts and systems we use are sourced exclusively from a single supplier.
Environmental and Regulatory Matters
The automotive industry is subject to extensive government regulation. Chief among these are vehicle and engine requirements governing safety, emissions and fuel economy, and the environmental impacts of our manufacturing operations. As described below, regulations in the U.S. and other countries impose substantial testing, certification and verification requirements with respect to vehicle emissions, fuel economy, noise and safety, and with respect to the environmental aspect of the operations of our manufacturing plants and other facilities. We are also subject to substantial rules and regulations designed to protect the health and safety of our workforce. The costs of complying with these requirements can be significant, and violations with respect to these requirements can result in fines, penalties, sales limitations, vehicle recalls, cleanup costs, reconfiguration of our facilities and claims for personal injury or property damage.
Vehicle Emissions
U.S. Standards. Under the Clean Air Act, the U.S. Environmental Protection Agency, or EPA, and the California Air Resources Board, or CARB, (by EPA waiver) require emission compliance certification before a vehicle can be sold in the U.S. or in California (and other states that have adopted the California emissions requirements). Both agencies impose limits on tailpipe and evaporative emissions of certain smog-forming pollutants from new motor vehicles and engines. Pre-production testing data must demonstrate compliance with such standards to obtain emissions certification. For vehicles sold in the U.S., EPA’s Clean Air Act Tier 2 tailpipe emissions standards, or Tier 2 standards, currently apply to passenger cars and light-duty trucks (which for this purpose includes our minivans, SUVs and pick-up trucks other than the Ram 2500/3500 models), and heavy-duty emissions of regulated compounds standards apply to heavy-duty vehicles (our Ram 2500/3500 model and chassis cab trucks).
EPA recently issued new tailpipe and evaporative emission standards, as well as fuel requirements under its Tier 3 Vehicle Emission and Fuel Standards Program, or Tier 3 standards. These Tier 3 standards are generally more stringent than prior standards. The Tier 3 standards are also generally aligned with California’s Low Emission Vehicle III, or LEV III, tailpipe and evaporative standard, discussed below. These standards further require us to conduct post-production vehicle testing to demonstrate compliance with these emissions limits for the estimated useful life of a vehicle, for up to 15 years and 150,000 miles, depending on the compliance category, and are scheduled to become effective in model year 2017 for light-duty vehicles and 2018 for heavy-duty vehicles. One feature of the Tier 3 rule mitigates the effect of the new standards by extending the "life" of emissions credits earned early in the program.
California Standards. California sets its own, generally more stringent, emissions standards pursuant to a waiver from the EPA under the Clean Air Act. CARB has adopted requirements relating to vehicle certification, onboard diagnostic, or OBD, and tailpipe, evaporative and greenhouse gas emissions limitations, known as the LEV III standards, which apply to 2015 model year vehicles. CARB regulations also require that a specified percentage of cars and certain light-duty trucks sold in California must be zero-emission vehicles, or ZEVs, such as electric vehicles or hydrogen fuel cell vehicles. A manufacturer can earn credits toward the ZEV requirement through the sale of advanced-technology vehicles such as hybrid electric vehicles or natural gas vehicles with extremely low tailpipe emissions, as set forth in the LEV III standards, by over-complying with the federal model year 2017 through 2025 Greenhouse Gas, or GHG, standards, retiring such credits, and applying them to its ZEV obligation. Through the 2017 model year, ZEV rules also provide certain ZEV credits for partial zero-emission vehicles, or PZEVs, which can include internal combustion engine vehicles certified to very low tailpipe emissions and zero evaporative emissions. The ZEV regulations, which CARB revised most recently for the 2018 and subsequent model years, require increasing volumes of battery electric and other advanced technology vehicles with each model year. We currently comply with the ZEV requirements using a variety of vehicles, including battery electric vehicles (full ZEVs), PZEVs and hybrid vehicles.

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The Clean Air Act permits other states to adopt California’s stricter emission standards. Twelve other states (New York, Massachusetts, Maine, Vermont, Connecticut, Delaware, Pennsylvania, Rhode Island, New Jersey, Oregon, Washington and Maryland), as well as the Province of Quebec, currently use California’s LEV III standards in lieu of the federal EPA standards, and 10 of those states also have adopted California’s ZEV requirements. California also has GHG emissions limitations, which are discussed below under the caption —Vehicle Fuel Economy and GHG Regulation.
Regulatory Fleet Aggregation. Under U.S. and California GHG regulations, as well as Corporate Average Fuel Economy, or CAFE, standards and California's ZEV requirements, sales of our, and certain other Group members', fleets must be combined.
European Standards. The European Union, or EU, regulates tailpipe smog-forming pollutant and evaporative emissions for vehicles sold in its member states. Other non-EU countries have adopted similar regulations from the United Nations Economic Commission for Europe. European regulations, like those in the U.S., require certification by regulatory authorities of the emissions performance of our new vehicles before the vehicles can be sold. The Euro-5 EU emission standard was adopted in 2009 and applies to vehicles through the 2013 model year. The more stringent Euro-6 EU standard applies to 2014 and later model year vehicles. The new standards will require the development of additional diesel engine technology, which is likely to increase the cost of diesel engines and compromise overall fuel economy. The EU also requires such programs as OBD, and pre- and post-production testing. We expect the combined Group vehicle fleet to meet the requirements of both the Euro-5 and Euro-6 standards, as applicable.
Other Regions. Vehicles sold in Asia, South America and other parts of the world also are subject to local emissions and evaporative standards and OBD requirements. We expect to comply with such requirements, which generally are based on the EU standards, California standards, or a hybrid standard based on those established programs.
Vehicle Fuel Economy and GHG Regulation
U.S. Requirements. Since enactment of the 1975 Energy Policy and Conservation Act, or EPCA, the National Highway Transportation Safety Administration, or NHTSA, has established minimum CAFE requirements for fleets of new passenger cars and light-duty trucks sold in the U.S. A manufacturer is subject to civil penalties if it fails to meet the CAFE standards in any model year, after taking into account all available credits for performance in the last three model years or expected performance in the next five model years. Passenger cars imported into the U.S. are averaged separately from those manufactured in the U.S., but all light-duty trucks are averaged together.
The 2007 Energy Independence and Security Act, or EISA, revised EPCA and required NHTSA to establish more stringent CAFE standards beginning with the 2011 model year. Among other things, although there will continue to be separate standards for cars and light-duty trucks, standards must be set such that they increase year over year to achieve an industry-wide standard by 2016. These CAFE standards applicable to all manufacturers’ 2011-2016 model year domestic and imported passenger car and light-duty truck fleets are “footprint-based,” meaning that each manufacturer’s fuel economy requirement is dependent on the size of the vehicle, and mathematically averaged per the sales volumes and the mix of models in the manufacturer’s fleet for that model year. Meeting these CAFE standards is causing us to make costly adjustments to our product plans through the 2016 model year.
In May 2009, President Obama announced an agreement in principle among EPA and other federal agencies, the State of California and the automotive industry to establish a coordinated national program to reduce GHGs under the Clean Air Act and improve fuel economy under CAFE. EPA (under its GHG standards) and NHTSA (under its CAFE standards) subsequently issued a joint final rule to implement a coordinated national GHG and fuel economy program for light-duty vehicles (passenger cars, light-duty trucks, and medium-duty passenger vehicles), establishing standards for model years 2012 through 2016, calling for year-over-year increases in fuel economy until the average fleet-wide standards reach 35.5 miles per gallon by 2016. Although California adopted a more stringent GHG rule under California law, compliance with the federal rule constitutes compliance with CARB’s rule. Additionally, EPA and NHTSA issued a joint final rule on September 15, 2011 that establishes a similar GHG/fuel economy national program for medium and heavy-duty vehicles, beginning with model year 2014 for GHG standards, and model year 2016 for fuel economy standards.
In August 2012, EPA and NHTSA issued a joint final rule to extend the joint GHG/fuel economy national program for light-duty vehicles to model years 2017 through 2025, again requiring year-over-year increases in fuel economy until the average fleet-wide standards reach 54.5 miles per gallon by 2025. The rule calls for a “mid-term review” to be completed by 2021 that compels EPA and NHTSA to evaluate the market acceptance of advanced vehicle technology, as well as other assumptions that formed the basis for the stringency of this rule to determine whether the standards are appropriate. Again, under California law, compliance with the federal GHG rule constitutes compliance with CARB’s GHG rule. The model year federal 2017-2025 GHG rule contains a variety of compliance flexibilities, including incentives for sales of electric vehicles and hybrids, as well

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as alternative fuels like compressed natural gas or hydrogen fuel cell vehicles, and the use of the new ultra-low global warming potential refrigerant HFO1234yf. NHTSA’s corresponding proposed CAFE rule imposes new vehicle safety standards in conjunction with the fuel economy standards.
While we believe that our current product plan will meet the applicable federal and California GHG/fuel economy standards established through model year 2016, our compliance is dependent on our ability to implement design features that would generate GHG credits pursuant to the federal GHG rule for model years 2012-2016, and 2017-2025, on a credit carry-forward and carry-back basis. Moreover, based on projected sales volumes and fleet mix, compliance with the standards as proposed for the 2017 through 2025 model years will require us to take further costly actions or to limit the sale of certain of our vehicles in certain states. If the vehicles we develop to comply with these requirements are not appealing to consumers or cannot be sold at a competitive price, we may not be able to achieve the vehicle fleet mix, depending on the type and volume of our customers’ purchases, which would enable us to meet the stringent fuel economy/GHG requirements, even though our long-range projection plans out a compliant path. Additionally, if pending litigation challenging EPA’s ability to regulate GHG vehicle emissions as a pollutant is successful (such that the model years 2012 through 2016 rule is voided) and, as a result, CARB enforces its GHG rule separately, we would need to adjust our product plan and would incur additional cost.
European Requirements. The EU promulgated passenger car carbon dioxide, or CO2, emissions regulations, beginning in 2012 and phasing in compliance through 2015. These regulations target vehicle weight, calculated as an average across the manufacturer’s fleet. The law also provides certain flexibility, such as credits for “eco-innovations,” alternative fuel use, and vehicles with very low CO2 emissions. We are developing a compliance plan based on our predicted fleets and vehicle CO2 emissions averages of Group vehicles sold in Europe as a combined fleet. The EU also adopted CO2 emissions standards for light commercial vehicles, a program similar to the passenger car program.
Another set of regulations, called the “complementary measures” laws, could potentially require low-rolling resistance tires, tire-pressure monitors, gear shift indicators, fuel economy indicators and more efficient air conditioners. Some EU members have adopted or are considering CO2-based tax incentives.
Canadian Requirements. Canadian federal emissions regulations are substantially similar to the U.S. regulations described above, including compliance certification requirements.
Mexican Requirements. On June 21, 2013, the Mexican Ministry of Environment and Natural Resources issued a new final GHG regulation applicable to manufacturers and importers of light duty vehicles in Mexico. This rule is based on the model years 2012 through 2016 U.S. GHG rule described below under —Requirements in Other Regions.
Requirements in Other Regions. Other countries, such as China, South Korea, India and South American countries have proposed or are considering establishing fuel economy/GHG emissions requirements that would pose additional compliance obligations and may increase our costs to manufacture vehicles.
Vehicle Safety Regulations
U.S. Requirements. Under federal law, all vehicles sold in the U.S. must comply with all applicable Federal Motor Vehicle Safety Standards, or FMVSS, promulgated by NHTSA, and must be certified by their manufacturer as being in compliance with all such standards. In addition, if a vehicle contains a defect that is related to motor vehicle safety or does not comply with applicable FMVSS, the manufacturer must notify vehicle owners and provide a remedy. Moreover, the Transportation Recall Enhancement, Accountability, and Documentation Act, or TREAD Act, authorized NHTSA to establish Early Warning Reporting, or EWR, requirements for manufacturers to report all claims which involve one or more fatalities or injuries; all incidents of which the manufacturer receives actual notice which involve fatalities or injuries which are alleged or proven to have been caused by a possible defect in such manufacturer’s motor vehicle or motor vehicle equipment in the U.S.; and all claims involving one or more fatality or in a foreign country when the possible defect is in a motor vehicle or motor vehicle equipment that is identical or substantially similar to a motor vehicle or motor vehicle equipment offered for sale in the U.S., as well as aggregate data on property damage claims from alleged defects in a motor vehicle or in motor vehicle equipment; warranty claims (including good will); consumer complaints and field reports about alleged or possible defects. The rules also require reporting of customer satisfaction campaigns, consumer advisories, recalls, or other activity involving the repair or replacement of motor vehicles or items of motor vehicle equipment, even if not safety related.
The compliance of TREAD Act EWR submissions has received heightened scrutiny recently, and resulted in two manufacturers agreeing to pay substantial civil penalties for deficient TREAD Act EWR submissions. Furthermore, in 2014 both the U.S. Senate and the U.S. House of Representatives had legislation introduced to enhance the EWR reporting requirements for

8


manufacturers. These bills were not enacted in 2014, but will likely be reconsidered in 2015. Compliance with such additional requirements if enacted into law is likely to be difficult and/or costly.
Several new or amended FMVSS will take effect during the next few years (sometimes under phase-in schedules that require only a portion of a manufacturer’s fleet to comply in the early years of the phase-in). These include an amendment to the side impact protection requirements that added several new tests and performance requirements (FMVSS No. 214), an amendment to roof crush resistance requirements (FMVSS No. 216), and a new rule for ejection mitigation requirements (FMVSS No. 226). In addition, NHTSA has adopted a new FMVSS that will require all light vehicles to be equipped with a rear-mounted video camera and an in-vehicle visual display, and has proposed to mandate the installation of event data recorders. Compliance with these new requirements, as well as other possible prospective NHTSA requirements, is likely to be difficult and/or costly.
NHTSA recently published guidelines for driver distraction and, although not rising to the level of FMVSS, there may be substantial costs associated with conformance.
At times, organizations like NHTSA or the Insurance Institute for Highway Safety, or IIHS, will issue or reissue safety ratings applicable to vehicles. Changes to these ratings are subject to the agencies’ discretion. IIHS recently introduced new tests and modified its “Top Safety Pick” protocol. Pursuant to the new protocol, many of our vehicles’ existing Top Safety Pick ratings may not be maintained, and we could incur significant expense to maintain those ratings, or could suffer negative public relations if we do not maintain them.
Finally, NHTSA has announced its intention to issue regulations regarding its Connected Vehicles strategy. These regulations could subject us to substantial costs for vehicle integration components and software and may require auto manufacturers to provide significant funding for a national technology operating system. The regulations may also implicate cybersecurity issues that place additional legal and financial responsibilities on us.
Requirements in Other Regions. We are subject to certain safety standards and recall regulations in the markets outside the U.S. in which we operate. Foreign safety standards often have the same purpose as the U.S. standards, but they may differ in their requirements and test procedures. From time to time, other countries adopt safety requirements that are unique and usually require revised or additional vehicle design. Additionally, the EU and many other countries require “type approval” by a government agency before a vehicle can be sold, while the U.S. and Canada require “self-certification” by the manufacturer.
Environmental Regulation of Manufacturing Operations
We operate manufacturing facilities and other facilities, primarily in the U.S., Canada and Mexico, that are subject to a multitude of federal, state/provincial and local environmental protection laws, including those that govern air emissions, water discharges, hazardous substance handling, storage and use, waste generation, management and disposal, remediation of site contamination, odor and noise. These requirements impose various operating permit, data collection and reporting requirements. We have incurred, and expect to continue to incur, significant costs and will make investments to comply with these laws and regulations. In addition, we could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions and third-party claims for property damage or personal injury, as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits required at our facilities.
We expect facility-related environmental requirements applicable to our industry to become more stringent over time, and significant expenditures could be required to comply with environmental requirements that may be adopted, amended or imposed in the future or as a result of changes in interpretation or results of litigation relating to existing or pending requirements.
Occupational Safety
The federal Occupational Safety and Health Administration, or OSHA, enforces and promulgates regulations under the Occupational Safety and Health Act of 1970, as amended, or the OSH Act. These laws establish certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to affect the health and safety of our employees, including that which could cause death or serious injury. In particular, we must comply with safety and toxicological standards promulgated by OSHA, as well as various labeling, record keeping, disclosure and procedural requirements that apply to our operations. We have incurred, and will continue to incur, capital and operating expenditures and other costs in the ordinary course of our business to comply with the OSH Act and other state and local laws and regulations. Any failure to comply with these regulations could result in fines by government authorities and payment of damages to private litigants and affect our ability to service our customers and adversely affect our consolidated results of operations.

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Employees
The following summarizes the number of our salaried and hourly employees as of December 31 of the respective years:
 
 
2014
 
2013
 
2012
 
2011
 
2010
Salaried
 
21,628

 
20,389

 
18,558

 
16,116

 
13,706

Hourly
 
56,189

 
53,323

 
46,977

 
39,571

 
37,917

Total
 
77,817

 
73,712

 
65,535

 
55,687

 
51,623

In the U.S. and Canada combined, substantially all of our hourly employees and approximately 19 percent of our salaried employees are represented by unions under collective bargaining agreements that expire in September 2015 and September 2016, respectively. These represented employees are approximately 66 percent of our worldwide workforce as of December 31, 2014. The International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, or the UAW, and Unifor represent substantially all of these represented employees in the U.S. and Canada, respectively.
Cyclical Nature of Business
As is typical in the automotive industry, our vehicle sales are highly sensitive to general economic conditions, availability of low interest rate new vehicle financing for dealers and retail customers and other external factors, including fuel prices, and as a result, may vary substantially from quarter to quarter and year to year. Retail consumers tend to delay the purchase of a new vehicle when disposable income and consumer confidence are low. In addition, our vehicle production volumes and related revenues may vary from month to month, sometimes due to plant shutdowns, which may occur for several reasons, including production changes from one model year to the next. Model year changeovers can occur throughout the year. Plant shutdowns, whether associated with model year changeovers or other factors, such as temporary supplier interruptions, can have a negative impact on our revenues and a negative impact on our working capital as we continue to pay suppliers under standard contract terms while we do not receive proceeds from vehicle sales. Refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources Working Capital Cycle, for additional information.

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Item 1A. Risk Factors
We face a variety of risks in our business. 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.
Our profitability depends on reaching certain minimum vehicle sales volumes. If 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 continued profitability requires us to maintain certain minimum vehicle sales volumes. As is typical for an automobile manufacturer, we have significant fixed costs and, therefore, changes in our vehicle sales volume can have a disproportionately large effect on profitability. 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 vehicle shipments in 2014 would have reduced our Earnings Before Interest and Taxes, or EBIT, in 2014 by approximately 38 percent, without accounting for actions and cost containment measures we may take in response to decreased vehicles sales.
A shift in demand away from our minivans, larger utility vehicles and pick-up trucks toward passenger cars, whether in response to higher fuel prices or other factors, could also adversely affect our profitability. 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 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 our EBIT by approximately five percent for 2014. This estimate does not take into account any other changes in market conditions or actions that we may take in response to shifting consumer preferences, including production and pricing changes.
In addition, we generally receive payments from vehicle sales to dealers in North America within a few days of shipment from our assembly plants, whereas there is a lag between the time we receive parts and materials from our suppliers and the time we are required to pay for them. In this negative working capital environment, if vehicle sales decline significantly we will suffer a negative impact on our cash flow and liquidity. If our vehicle sales were to decline to levels significantly below our assumptions, due to financial crisis, renewed recessionary conditions, changes in consumer confidence, geopolitical events, or 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 future success depends on our continued ability to introduce new or significantly refreshed vehicles that appeal to a wide base of consumers and to respond to changing consumer preferences, quality demands, economic conditions, and government regulations. In addition, we must continue to substantially refresh and expand our vehicle portfolio, to realize a return on the significant investments we have made, to sustain market share and to achieve competitive operating margins.
Since we began operations in mid-2009, we have significantly upgraded, updated and broadened our product offerings to meet consumers’ changing demands and expectations. In order to meet these goals, we invested heavily in vehicle, engine and powertrain design, engineering and manufacturing. These investments accelerated in 2012, reducing our Free Cash Flow significantly. Our ability to realize acceptable returns on these investments depends in large part on consumers’ acceptance of our new or significantly refreshed vehicles, see —Product recalls and warranty obligations may result in direct costs and loss of vehicle sales that could have material adverse effects on our business below.
We undertake significant market research and testing prior to developing and launching new or significantly refreshed vehicles. Nevertheless, market acceptance of our products depends on a number of factors, many of which are outside of our control and require us to anticipate consumer preferences and competitive products several years in advance. These factors include the market perception of styling, quality, safety, reliability, capability and cost of ownership of our vehicles as compared to those of our competitors, as well as other factors that affect demand, including price competition and financing or lease programs. If we fail to continue to introduce new or significantly refreshed vehicles that can compete successfully in the market, our financial condition and results of operations could deteriorate.
If our new or significantly refreshed vehicles are not received favorably by consumers, our vehicle sales, market share and profitability will suffer. If we are required to cut capital expenditures due to insufficient vehicle sales and profitability or if we decide to reduce costs and conserve cash, our ability to continue our program of improving and updating our vehicle portfolio

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and keeping pace with product and technological innovations introduced by our competitors will be diminished, which may further reduce demand for our vehicles.
Economic weakness, including elevated unemployment levels, has at times adversely affected our business, particularly in our principal market, North America. If economic conditions weaken, our results of operations could be negatively affected. Additionally, North American demand for vehicles has steadily increased from 2010; however, that increase may be partially attributable to the average age of vehicles on the road following the sustained downturn from 2007 to 2010 and historically low industry sales in 2011. To the extent the increase in vehicle demand is attributable to pent-up demand rather than overall economic growth, future vehicle sales may lag behind improvements in general economic conditions or employment levels.
Our business, financial condition and results of operations have been, and may continue to be, adversely affected by worldwide economic conditions. Overall demand for our vehicles, as well as our profit margins, could decline as a result of many factors outside our control, including economic recessions, changes in consumer preferences, increases in commodity prices, changes in laws and regulations affecting the automotive industry and the manner in which they are enforced, inflation, fluctuations in interest and currency exchange rates and changes in the fiscal or monetary policies of governments in the areas in which we operate, the effect of which may be exacerbated during periods of general economic weakness. Depressed demand for vehicles affects our suppliers as well. Any decline in vehicle sales we experience may, in turn, adversely affect our suppliers’ ability to fulfill their obligations to us, which could result in production delays, defaults and inventory management challenges. These supplier events could further impair our ability to build and sell vehicles.
An erosion in current financial conditions, an increase in unemployment levels or a decline in consumer confidence could place significant economic pressures on consumers and our dealer network and may impair the demand for our products, and our financial condition and results of operations could be materially and adversely affected. Further, rising interest rates (see —Vehicle sales depend heavily on adequacy of vehicle financing options, which have been at historically low interest rates. To the extent that interest rates for vehicle financing rise, consumers may be unable to afford vehicles as a result of higher interest payments, or we may need to increase our use of subvention programs to maintain or increase our vehicle sales, either of which would adversely affect our financial condition and results of operations, below), changes in consumer spending habits and other factors may constrain demand for our products and adversely affect our financial condition and results of operations.
In recent periods, approximately 90 percent of our vehicle sales were to customers in the U.S., Canada and Mexico. In the U.S., where we sell most of the vehicles we manufacture, industry-wide vehicle sales declined from 16.5 million vehicles in 2007 to 10.6 million vehicles in 2009. After several years of gradual economic recovery, U.S. vehicle sales reached 16.8 million in 2014. This recovery in vehicle sales may not be sustained. For instance, renewed weakness in the U.S. new home construction market would likely depress sales of pick-up trucks, one of our strongest selling products, representing approximately 30 percent of our U.S. vehicle sales in 2014. In addition, such recovery may be partially attributable to the pent-up demand and average age of vehicles on the road following the extended economic downturn so there can be no assurances that continuing improvements in general economic conditions or employment levels will lead to additional increases in industry-wide vehicles sales. As a result, we may experience declines in vehicle sales in the future, and we may not realize a sufficient return on the investments we have made or that we plan to make in the future. Accordingly, our financial condition and results of operations would be materially affected.
Although we are increasing our vehicle sales outside of North America, we anticipate that our results of operations will continue to depend substantially on vehicle sales in the North American markets. Our vehicle sales in North America will therefore continue to be critical to our plans to maintain and improve current levels of profitability. Our principal competitors, including General Motors Company, Ford Motor Company and Toyota Motor Corporation, however, are more geographically diversified and are less dependent on sales in North America. As a result, any decline in demand in the North American market would have a disproportionately larger negative effect on our vehicle sales and profitability relative to our principal competitors, whose vehicle sales are not similarly concentrated.
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.

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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.
We depend on our relationship with FCA to collaborate in the development of new vehicle platforms and powertrain technologies, additional scale, global distribution and management resources that are critical to our viability and success.
Group membership has provided us with a number of benefits, including access to new vehicle platforms and powertrain technologies, particularly in smaller, more fuel-efficient segments where we historically did not have a significant presence, as well as procurement benefits, management services and global distribution opportunities. Our relationship with FCA is also intended to facilitate our penetration into several international markets where we believe our products would be attractive to consumers, but where we historically have not had significant penetration or existing dealer and distribution networks.
We believe that our ability to realize these benefits is critical for us to compete with our larger and better-funded competitors. If we are unable to continue to convert opportunities presented by Group membership into long-term commercial benefits, either by improving sales of our vehicles and service parts, reducing costs or both, and reducing our reliance on North American vehicle sales, our financial condition and results of operations may be materially adversely affected.
Because of our dependence on FCA, any adverse developments at FCA could have a material adverse effect on our business, financial condition and results of operations. Although FCA has executed its own significant industrial restructuring and financial turnaround, it, like us, remains smaller and less well-capitalized than many of its principal competitors, and FCA has historically operated with more limited capital than many other global automakers. Moreover, FCA’s sales and revenues have been negatively affected by the continuing economic weakness in several European countries. Like other manufacturers and suppliers in Europe, FCA has considerable excess manufacturing capacity. If FCA’s ability to fulfill its obligations under our agreements is impaired or FCA management or operational attention is otherwise diverted away from us, we may not realize all of the potential benefits of our membership in the Group, which would adversely affect our financial condition and results of operations.
Product development cycles can be lengthy, and there is no assurance that new designs will lead to revenues from vehicle sales, or that we will be able to accurately forecast demand for our vehicles, potentially leading to inefficient use of our production capacity, which could harm our business.
It generally takes two years or more to design and develop a new product, and there may be a number of factors that could lengthen that schedule. Because of this product development cycle and the various elements that may contribute to consumers’ acceptance of new vehicle designs, including competitors’ product introductions, fuel prices, general economic conditions, changes in perceptions about our brands’ images and changes in styling preferences, we cannot be certain that an initial product concept or design that appears to be attractive will result in a production model that will generate sales in sufficient quantities and at high enough prices to be profitable. If our designs do not result in the development of products that are accepted in the market, our financial condition and results of operations may be adversely affected. Additionally, our high proportion of fixed costs, both due to our significant investment in property, plant and equipment as well as the requirements of our collective bargaining agreements, which limit our flexibility in quickly calibrating personnel costs to changes in demand for our products, further exacerbate the risks associated with incorrectly assessing demand for our vehicles.
If demand does not develop as we forecast, we could have excess inventory, and we may need to increase sales incentives to sell off inventory, and/or take impairments or other charges. Furthermore, increases in manufacturing volumes to meet forecasted demand may require increases in fixed and other costs, and without a corresponding increase in vehicle sales, our profitability and cash flow could decline. Lower than forecasted demand could also result in excess manufacturing capacity and reduced manufacturing efficiencies, which could reduce margins and profitability.
Constraints on our ability to increase production capacity may limit our vehicle sales and growth opportunities.
Our ability to increase vehicle sales depends on our manufacturing facilities’ capacity to meet demand for our vehicles. If we are not able to adjust our manufacturing capacity to meet rising demand for our products, our prospects for growth and our operating results will be adversely affected. In 2014, our North American assembly manufacturing facilities were operating, on

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average, at 120 percent of Harbour capacity (the capacity of two eight-hour shifts a day for 235 workdays per year, a common manufacturing metric of productivity) and some of our manufacturing facilities have reached their maximum production capacity (three shifts or crews and maximum overtime). In the future, we may only be able to increase our vehicle output for certain vehicles by making significant capital investments in new or expanded manufacturing facilities, or by relying on available manufacturing capacity of other parties, including FCA, however our ability to use such manufacturing capacity of other parties is dependent on such other parties having open capacity that they do not have plans to utilize, and is also dependent on our ability to reach agreement with such parties on commercial terms and conditions, including economics, for the use of such manufacturing capacity.
In addition, while the automotive industry’s successful reduction in capacity has lowered break-even production rates, many companies are still adjusting to these changes and have limited access to capital. Accordingly, there is currently little available capacity for certain materials, parts and components to respond in the short term to a rapid increase in demand. For the past five years, we have encountered challenges in our operations with:
Our ability to rapidly increase production levels inhibited by our suppliers’ inability to provide greater than forecasted volumes of raw materials and components, and those suppliers’ inability to increase their own production rapidly enough to meet our demand, particularly in light of our industry’s focus on just-in-time inventory systems;
Launch delays for certain of our vehicles due to technical challenges when introducing new vehicle models or technology, and daily part supply issues due to our plants and suppliers operating at or in excess of full capacity, have resulted in lost shipments compared to our original planning assumptions; and
Increased costs due to employee overtime, expedited procurement and transportation of raw materials and parts, component banking costs, and other expenditures, all of which have driven up costs for manufacturing and logistics and, which, if not addressed, may further impact our profitability over the long-term.
Rapid increases in manufacturing volumes may also adversely affect our manufacturing quality, partly due to the challenge of hiring, training and overseeing a growing workforce. Such downturns in quality could delay production and deliveries, or could generate product recalls and warranty claims. These results could reduce our margins and adversely impact consumer satisfaction. In addition, we may not be able to properly repair or maintain our equipment in these conditions, which could cause us to lose valuable manufacturing capability in the long run.
Our ability to achieve cost reductions and to realize production efficiencies is critical to maintaining our competitiveness and long-term profitability.
We have implemented a number of cost reduction and productivity improvement initiatives in our automotive operations, including, increasing the number of our vehicles that are based on common platforms, leveraging our purchasing capacity and volumes with FCA’s and implementing World Class Manufacturing, or WCM, principles. Our future success depends upon our ability to implement these initiatives throughout our operations. In addition, while some productivity improvements are within our control, others depend on external factors, such as commodity prices, supply capacity limitations, or trade regulation. These external factors may impair our ability to continue to reduce our costs as planned, and we may incur larger than expected production expenses, materially affecting our business and results of operations.
The automotive industry is highly competitive. Our competitors’ efforts to increase their share of vehicle sales could have a significant negative impact on our vehicle pricing, market share and operating results.
The automotive industry is highly competitive, particularly in the U.S., our primary market. We face increasing competition, both from domestic and foreign competitors, many of whom are better capitalized, with larger market shares and with captive finance companies, and including some who have lower labor costs, excess capacity and/or favorable exchange rates and seek to increase exports to North America, our primary market. These competitors may respond to negative market conditions by not only adding vehicle enhancements and offering option package discounts to make their vehicles more attractive but also providing subsidized financing or leasing programs, offering price rebates or other sales incentives or by reducing vehicle prices in certain markets. We may not be able to take similar actions or be able to sustain such actions without significantly eroding our margins and financial performance even if we are able to maintain market share. These actions have had, and are expected to continue to have, a significant negative impact on our vehicle pricing, market share, and operating results, and present a significant risk to our ability to improve or even maintain our average selling price per vehicle.

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Offering desirable vehicles that appeal to consumers can mitigate the risks of increased price competition, but vehicles that are perceived to be less desirable, whether in terms of price, quality, styling, safety, fuel efficiency or other attributes, can exacerbate these risks.
Certain arrangements with FCA may adversely affect our business, financial condition and results of operations.
Under agreements we have entered into with FCA, we have each agreed to provide the other with goods, services and other resources. We expect to enter into additional agreements from time to time. Although the terms of any such transactions are established in order to comply with our obligations under the senior credit agreements governing our $3.25 billion tranche B term loan, our revolving credit facility and our $1.75 billion tranche B term loan, or Senior Credit Agreements, and the indenture governing our secured senior notes, including the additional notes issued on February 7, 2014, or Secured Senior Notes Indenture, the terms of any such transactions may not be as favorable to us as we would otherwise have obtained in a transaction with a party other than FCA, particularly as our operations become further integrated. In addition, while our Senior Credit Agreements and the Secured Senior Notes Indenture include affiliate transaction covenants designed to promote fairness to us of transactions between us and FCA, compliance with these covenants may not prevent us from entering into transactions that are or become, particularly with the benefit of future hindsight, unfavorable to us.
Finally, not only may such arrangements result in actual or perceived conflicts of interest, but as both parties pursue cost savings through joint procurement, contract manufacturing and engineering and technological development, we each become more reliant on the other and may become exposed to any risks to each other’s business and financial condition, or may disagree as to the best method to share any benefits, which may in turn exacerbate the potential for conflicts of interest.
As the sole beneficial owner of our outstanding equity interests, FCA controls our management, operations and corporate decisions and FCA’s interests as an equity holder may conflict with the interests of the holders of our debt.
FCA, as the sole beneficial owner of our outstanding equity interests, has the power to appoint all of our directors and the ability to control our management and operations, including decisions regarding the focus of our operations and with respect to significant corporate transactions such as mergers and acquisitions, asset sales, borrowings, issuances of securities and our dissolution, as well as amendments to our organizational documents, subject to compliance with our contractual obligations. To the extent permitted under our financing arrangements, FCA may also cause us to pay distributions or make loans for its benefit. The interests of FCA may not in all cases be aligned with those of the holders of our debt.
Our ability to limit the use of dealer and retail incentives to sell vehicles is uncertain.
The intense competition and limited ability to reduce fixed costs that characterize the automotive industry has in many cases resulted in significant over-production of vehicles. These factors, together with significant excess manufacturing capacity, have historically driven manufacturers, including us, to rely heavily on sales incentives to drive vehicle sales. These incentives have included both dealer incentives, typically in the form of dealer rebates or volume-based awards, as well as retail incentives in a variety of forms, including subsidized financing, price rebates and other incentives. If, despite our efforts, we are unable to limit our reliance on short-term sales incentives, and maintain price discipline, our financial condition and results of operations may be adversely affected.

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We may not be successful in increasing our vehicle sales outside of North America, and if we do increase our vehicle sales outside of North America we will be exposed to additional risks of operating in different regions and countries.
We generate a small, but growing, proportion of our vehicle sales outside of North America, with approximately 10 percent of our vehicle sales occurring outside North America in 2014. Currently we have very limited manufacturing operations outside of North America and substantially rely on exporting vehicles made in North America to generate vehicles sales outside of North America. This makes us particularly vulnerable to increases in import restrictions and other trade barriers as well as foreign currency exchange rate changes. In light of the inherent risks of growing in international markets, we may not be able to profitably capitalize on opportunities to establish a production base and distribution network and expand internationally.
Expanding our operations and vehicle sales internationally may subject us to additional regulatory requirements and cultural, political and economic challenges, including the following:
securing relationships to help establish our presence in local markets, including distribution and vehicle finance relationships;
hiring and training personnel capable of marketing our vehicles, supporting dealers and retail customers, and managing operations in local jurisdictions;
identifying and training qualified service technicians to maintain our vehicles, and ensuring that they have timely access to diagnostic tools and parts;
localizing our vehicles to target the specific needs and preferences of local consumers, including with respect to vehicle safety, fuel economy and emissions, which may differ from our traditional retail customer base in North America;
implementing new systems, procedures and controls to monitor our operations in new markets;
multiple, changing and often inconsistent enforcement of laws and regulations;
satisfying local regulatory requirements, including those for vehicle safety, content, fuel economy or emissions;
competition from existing market participants that have a longer history in, and greater familiarity with, the local markets we enter;
differing labor regulations and union relationships;
consequences from changes in tax laws;
tariffs and trade barriers;
laws and business practices that favor local competitors;
anti-corruption and anti-bribery laws;
fluctuations in currency exchange rates;
extended payment terms and the ability to collect accounts receivable;
imposition of limitations on conversion of foreign currencies into U.S. dollars, or USD, or remittance of dividends and other payments by foreign subsidiaries; and
changes in a specific country’s or region’s political or economic conditions.
Moreover, for the past several years, sustained economic weakness in several European countries has slowed our plans to sell more vehicles through the FCA dealer network in that region.
The failure to address these challenges and other risks associated with international expansion could impede our growth or harm our operating results.

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We may be adversely affected by fluctuations in foreign currency exchange rates.
Our manufacturing and sales operations are exposed to the effects of changes in foreign currency exchange rates. We are most vulnerable to fluctuations in the Canadian dollar, or CAD, Euro, Australian dollar and Mexican peso against the USD. We monitor and manage these exposures as an integral part of our overall risk management program, which is designed to reduce the potentially adverse effects of these fluctuations. Nevertheless, changes in foreign currency exchange rates cannot always be predicted or hedged. In addition, because of intense price competition, our significant fixed costs and our financial and liquidity restrictions, we may not be able to minimize the impact of such changes, even if they are foreseeable. As a result, substantial unfavorable changes in foreign currency exchange rates could have a material adverse effect on our revenues, financial condition and results of operations.
Dealer sourcing and inventory management decisions could adversely affect sales of our vehicles and service parts.
We sell most of our vehicles and service parts through our dealer network. Our vehicle and service part sales depend on the willingness and ability of our dealer network to purchase vehicles and service parts for resale to consumers. Our dealers’ willingness and ability to make these purchases depends, in turn, on the rate of their retail vehicle sales, as well as the availability and cost of capital and financing necessary for dealers to acquire and hold inventories for resale. The dealers carry inventories of vehicles and service parts in their ongoing operations and they adjust those inventories based on their assessment of future sales prospects, their ability to obtain wholesale financing and other factors. Certain of our dealers may also carry products or operate separate dealerships that carry products of our competitors and may focus their inventory purchases and sales efforts on products of our competitors due to industry and product demand or profitability. These inventory and sourcing decisions can adversely impact our sales, financial condition and results of operations.
Availability of adequate financing on competitive terms for our dealers and consumers is critical to our success. Our lack of a captive finance company could place us at a competitive disadvantage to other automakers that may be able to offer consumers and dealers financing and leasing on better terms than our customers and dealers are able to obtain. In lieu of a captive finance company, we depend on our relationship with Santander Consumer USA Inc., or SCUSA, to supply a significant percentage of this financing, and we continue to depend on our former partner, Ally Financial Inc., or Ally.
Our dealers enter into wholesale financing arrangements to purchase vehicles from us to hold in inventory to facilitate vehicle sales, and retail customers use a variety of finance and lease programs to acquire vehicles. Leasing volumes for our vehicles are significantly below market levels. Our inability to offer competitive leases may negatively impact our vehicle sales volumes and market share. Our results of operations therefore depend on establishing and maintaining appropriate sources of financing for our dealers and retail customers.
Unlike most of our competitors who operate and control affiliated finance companies, we do not have a finance company dedicated solely to our operations. Our competitors with dedicated or 100 percent owned finance companies may be better able to implement financing programs designed principally to maximize vehicle sales in a manner that optimizes profitability for them and their finance companies on an aggregate basis, including with respect to the amount and terms of the financing provided. If such competitors offer retail customers and dealers financing and leasing on better terms than our dealers are able to obtain, consumers may be more inclined to purchase or lease our competitors’ vehicles and our competitors’ dealers may be better able to stock our competitors’ products, each of which could adversely affect our results of operations. In addition, unless financing arrangements other than for retail purchase continue to be developed and offered by banks to retail customers in Canada, our lack of a captive finance company could present a competitive disadvantage in Canada, as banks are restricted by law from providing retail lease financing in Canada.
SCUSA is our private-label financing provider under the Chrysler Capital brand name and manages retail and wholesale financing needs for our dealers and retail customers following the termination of our relationship with Ally in April 2013. If SCUSA is unable to continue providing an acceptable level of service including response time, approval rates and a full range of competitive financing products at competitive rates, our vehicle sales may suffer. As of December 31, 2014, SCUSA and Ally were providing wholesale lines of credit to approximately 6 percent and 39 percent of our dealers in the U.S., respectively. Ally has continued to provide dealer financing since the termination of our relationship with them, though they are no longer obligated to provide such financing.
Any financing services provider, including SCUSA, faces other demands on its capital, including the need or desire to satisfy funding requirements for dealers or customers of our competitors as well as liquidity issues relating to other investments. Furthermore, SCUSA is highly dependent on its relationship with Banco Santander, S.A. for funding. Also, because SCUSA is not a depository institution, SCUSA does not have access to low cost insured deposit funding, and is subject to certain state licensing regimes and various operational compliance requirements that lenders who are depository institutions do not face.

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SCUSA is sensitive to regulatory changes that may increase its costs through stricter regulations or increased fees pursuant to such regulations. If SCUSA fails to adequately comply with regulations, or faces a significant increase in compliance costs or fees, SCUSA’s ability to provide competitive financing products to our dealers and retail customers may suffer. Therefore, SCUSA may not have the capital and liquidity necessary to support our vehicle sales, and even with sufficient capital and liquidity, they may apply lending criteria in a manner that will adversely affect our vehicle sales.
Additionally, a relatively high percentage of the customers who seek financing may not qualify for conventional automotive finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. If interest rates increase substantially or if financing service providers, including SCUSA, tighten their lending standards or restrict their lending to certain classes of credit, consumers may not be able to obtain financing to purchase or lease our vehicles.
To the extent that either SCUSA is unable or unwilling to provide sufficient financing at competitive rates to our dealers and consumers, our dealers and consumers may not have sufficient access to such financing. As a result, our vehicle sales and market share may suffer, which would adversely affect our financial condition and results of operations.
Ally has ongoing litigation against SCUSA alleging infringement of intellectual property by SCUSA in connection with its financing arrangement with us. To the extent that the outcome of this litigation is adverse to SCUSA, SCUSA may have difficulty fulfilling its obligations to us, which could have a material adverse effect on our business, results of operations and financial condition.
In September 2013, Ally sued SCUSA alleging breaches of copyright and misappropriation of trade secrets in connection with SCUSA’s provision of financing solutions to our dealers and retail customers. This litigation is pending in U.S. federal court. An outcome that is adverse to SCUSA may impair SCUSA’s ability to provide the services contemplated by our agreement. In particular, the allegations relate to intellectual property which SCUSA currently uses in the provision of financing under the Chrysler Capital brand name. If SCUSA is prevented from utilizing this intellectual property, its ability to provide services may be impaired unless and until it produces new materials outside the scope of the litigation. In addition, if the litigation results in a judgment which is materially adverse to SCUSA, it may impair SCUSA’s ability to support our vehicle sales.
Vehicle sales depend heavily on adequacy of vehicle financing options, which have been at historically low interest rates. To the extent that interest rates for vehicle financing rise, consumers may be unable to afford vehicles as a result of higher interest payments, or we may need to increase our use of subvention programs to maintain or increase our vehicle sales, either of which would adversely affect our financial condition and results of operations.
Financing for new vehicle sales has been available at relatively low rates for several years and rates are generally predicted to rise over the next several years. The low interest rates and extended payment terms available to consumers to finance vehicles have resulted in lower monthly payments for such vehicles. Our agreement with SCUSA provides that SCUSA will use best efforts to charge consumers interest rates that are competitive in the marketplace. To the extent that interest rates rise generally in the U.S., market rates for new vehicle financing are expected to rise as well. This would result in consumers paying a higher monthly payment for the same amount financed, which may decrease the number of vehicles that consumers are able to afford or steer consumers to less expensive vehicles, adversely affecting our financial condition and results of operations. Furthermore, because many of our customers have relatively low credit scores and may therefore be more sensitive to changes in the availability and adequacy of financing and macroeconomic conditions than more affluent consumers, our vehicle sales may be disproportionately affected by changes in financing conditions relative to the vehicle sales of our competitors.
Alternatively, in order to maintain our vehicle sales, we may be required to enter into additional subvention programs under our private-label financing agreement with SCUSA, or the SCUSA Agreement, or increase the amount of interest rates we subsidize in our subvention programs. See Item 1. Business —Distribution —Dealer and Customer Financing for a description of the practice of subvention. In the case of subvention programs, we subsidize interest rates or cash payments at the inception of a financing arrangement. In the event we add additional subvention programs or increase the amount of the subsidy on any subvention program in order to keep the rates paid by our customers in line with current rates following a rise in market interest rates, our payments to SCUSA would increase under the terms of the SCUSA Agreement, which would adversely affect our financial condition and results of operations.

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If our suppliers fail to provide us with the raw materials, systems, components and parts that we need to manufacture our automotive products, our operations may be disrupted which would have a material adverse effect on our business.
Our business depends on a significant number of suppliers, which provide the raw materials, components, parts and systems we require to manufacture vehicles and parts and to operate our business. We use a variety of raw materials in our business including steel, aluminum, lead, resin and copper, rubber, and precious metals such as platinum, palladium and rhodium. The prices for these raw materials often fluctuate. We seek to manage this exposure, but we may not always be successful in hedging these risks.
As with raw materials, we are also at risk for supply disruption and shortages in parts and components for use in our vehicles for many reasons including, but not limited to, tight credit markets or other financial distress, natural or man-made disasters, or production difficulties. We will continue to work with our suppliers to monitor potential shortages and to mitigate the effects of any emerging shortages on our production volumes and revenues; however, there can be no assurance that these events will not have an adverse effect on our production in the future, and any such effect may be material.
Any interruption in the supply or any increase in the cost of raw materials, parts, components and systems could negatively impact our ability to achieve our vehicle sales objectives and profitability. Long-term interruptions in supply of raw materials, parts, components and systems may result in a material impact on vehicle production, vehicle sales objectives, and profitability. Cost increases which cannot be recouped through increases in vehicle prices, or countered by productivity gains, may result in a material impact on profitability.
Most of the components, parts and systems we use are sourced exclusively from a single supplier.
We rely on specific suppliers to provide certain components, parts and systems that are required to manufacture each of our vehicles, and in most circumstances we rely exclusively on one such supplier. Over the past several years, we have worked to reduce or eliminate our dependence on certain suppliers that we believed were financially at risk; however, this has increased our dependence, and the concentration of our risk, on our remaining suppliers. As volumes increase throughout the industry, some of our suppliers must make capital investments to keep pace with demand. Due to the long lead times for such investment, if our suppliers delay in making such investments or do not have sufficient access to capital, that could limit the ability of such suppliers to meet our full demands. Further, if our suppliers seek to increase prices to offset these capital investments, and we are unable to capture those additional costs through pricing on our vehicles, or counter with productivity gains, this may result in an impact on our profitability.
Safety standards set by regulatory authorities, as well as design, safety and quality ratings by widely accepted independent parties may have a significant negative effect on our costs and our vehicle sales.
Our vehicles must satisfy safety requirements that are developed and overseen by a variety of governmental bodies within the U.S. and in foreign countries. Our vehicles are also tested by independent vehicle rating programs such as the Insurance Institute for Highway Safety, or IIHS. In addition, independent ratings services such as Consumers Reports and J.D. Power perform reviews on safety, design and quality, which often influence consumers’ purchase decisions.
Meeting or exceeding government-mandated safety standards and improving independent safety, design and quality ratings can be difficult and costly. Often, safety requirements or desired quality and design attributes hinder our efforts to meet emissions and fuel economy standards, since the latter are often facilitated by reducing vehicle weight. The need to meet regulatory or other generally accepted rating standards can substantially increase costs for product development, testing and manufacturing, particularly if new requirements or testing standards are implemented in the middle of a product cycle, and the vehicle does not already meet the new requirements or standards.
To the extent that the ratings of independent parties are negative, or are below our competitors’ ratings, our vehicle sales may be negatively impacted and our financial condition and results of operations would be materially adversely affected. See Our profitability depends on reaching certain minimum vehicle sales volumes. If vehicle sales deteriorate, particularly sales of our minivans, larger utility vehicles and pick-up trucks, our results of operations and financial condition will suffer.

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Our collective bargaining agreements limit our ability to modify our operations and reduce costs in response to market conditions.
Substantially all of our hourly employees in the U.S. and Canada are represented by unions and covered by collective bargaining agreements that expire in September 2015 and September 2016, respectively. As a practical matter, both of our existing collective bargaining agreements restrict our ability to modify our operations and reduce costs quickly in response to changes in market conditions during the terms of the agreements. These and other provisions in our collective bargaining agreements may impede our ability to restructure our business successfully to compete more effectively, especially with those automakers whose employees are not represented by unions.
Work stoppages at our facilities and work stoppages at our suppliers’ facilities which result in interruptions of production may harm our business.
A work stoppage or other interruption of production could occur at our facilities or those of our suppliers as a result of disputes under existing collective bargaining agreements with labor unions, or in connection with negotiations of new collective bargaining agreements, or as a result of supplier financial distress. A work stoppage or interruption of production at our facilities or those of our suppliers due to labor disputes could negatively impact our ability to achieve vehicles sales objectives and profitability. Long-term interruptions in production which cannot be countered by productivity gains may result in a material impact on vehicle sales, liquidity and profitability.
From time to time, we enter into supply arrangements that commit us to purchase minimum or fixed quantities of certain parts or materials, or to pay a minimum amount to a supplier, or “take-or-pay” contracts, through which we may incur costs that cannot be recouped by vehicles sales, increases in prices for vehicles, or countered by productivity gains.
From time to time, we enter into supply contracts that require us to purchase a minimum or fixed quantity of parts, components, or raw materials to be used in the production of our vehicles. If our need for any of these parts, components, or raw materials were to lessen, we would still be required to purchase a specified quantity of the part, component, or raw materials or pay a penalty for failure to meet the minimum purchase obligation. Additionally, we pay certain key suppliers separately and as work is completed for engineering, design and development costs, rather than embedding these costs in production component or materials pricing. As a result, we bear certain of the costs of new product development years before we will realize any revenue on that new product, which reduces our liquidity. In the event that part or component production volumes are lower than forecast, or a supplier does not meet its supply obligations, we may experience financial losses that we would not otherwise have incurred under the prior payment system.
Limitations on our liquidity and access to funding may limit our ability to improve our financial condition and results of operations.
Our business is capital intensive and we require significant liquidity to meet our funding requirements. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources for a more detailed discussion of our liquidity and capital requirements. In addition, during periods of vehicle sales decreases, our cash flow and liquidity may be significantly negatively impacted because we typically receive revenues from vehicle sales before we are required to pay our suppliers. Any limitations on our liquidity, due to decreases in vehicle sales, the amount of or restrictions in our existing indebtedness, conditions in the credit markets, general economic conditions or otherwise, may adversely impact our business, financial condition and results of operations. In addition, any actual or perceived limitations on our liquidity, or the liquidity of FCA, may limit the ability or willingness of counterparties, including dealers, consumers, suppliers, lenders and financial service providers, to do business with us, which may adversely affect our business, financial condition and results of operations.
Further, our operations have become significantly integrated with those of FCA and the level of integration is expected to increase. We rely heavily upon FCA directly and indirectly for an array of services and products. Limitations on FCA’s liquidity, which may be due to reduced sales of their vehicles, the amount of or restrictions in their existing indebtedness, conditions in the credit markets, general economic conditions or otherwise, could reduce FCA’s ability to provide these services and products to us or purchase goods or services as part of a joint procurement arrangement, which have a material adverse effect on our business, financial condition and results of operations.
Our ability to access funding in the event we need to increase our liquidity may be limited. For example, following our issuance of additional secured senior notes totaling approximately $2.8 billion of aggregate principal amount, or Additional Notes, and $2.0 billion of additional borrowings under our senior credit facilities in February 2014, any new secured financings may be constrained by market capacity and limitations in our debt agreements. Subsequent to the February 2014 transactions described

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above, we are not permitted to increase the amount of our revolving credit facility that matures on May 24, 2016, or Revolving Facility, in an aggregate principal amount in excess of $700 million. We may also elect to terminate our Revolving Facility prior to its maturity. In addition, we are not permitted to issue additional first lien term loans or bonds in the U.S. Moreover, due to the significant amount of our secured debt, our access to unsecured bond financing on acceptable terms, if at all, may be limited.
Our defined benefit pension plans are currently underfunded and our pension funding obligation could increase significantly due to a reduction in funded status as a result of a variety of factors, including weak performance of financial markets, investment risks inherent in our investment portfolio, and unanticipated changes in interest rates resulting in a decrease in the value of certain plan assets or increase in the present value of plan obligations, which could have a material adverse effect on our business, financial condition and results of operations.
Our defined benefit pension plans are currently underfunded. As of December 31, 2014, our defined benefit pension plans were underfunded by approximately $5.8 billion. Our pension funding obligations may increase significantly if investment performance of plan assets does not keep pace with our benefit payment obligations and we do not make additional contributions to offset these impacts. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources —Defined Benefit Pension Plans and OPEB Plans —Contributions and Funded Status —Defined Benefit Pension Plans —Funded Status, and —Critical Accounting Estimates —Pension.
Mandatory funding obligations may increase based upon lower than anticipated returns on plan assets whether as a result of overall weak market performance or particular investment decisions, changes in the level of interest rates used to determine required funding levels, changes in the level of benefits provided for by the plans, and any changes in applicable law related to funding requirements.
Our defined benefit pension plans currently hold significant investments in equity and fixed income securities, as well as investments in less liquid instruments such as private equity, real estate and certain hedge funds. Due to the complexity and magnitude of certain of our investments, additional risks may exist, including significant changes in investment policy, insufficient market capacity to complete a particular investment strategy and an inherent divergence in objectives between the ability to manage risk in the short term and our ability to quickly rebalance illiquid and long-term investments.
To determine the appropriate level of funding and contributions to our defined benefit pension plans, as well as the investment strategy for the plans, we are required to make various assumptions, including an expected rate of return on plan assets and a discount rate used to measure the obligations under our defined benefit pension plans.
Interest rate increases generally will result in a decline in the value of investments in fixed income securities and the present value of the obligations. Conversely, interest rate decreases will generally increase the value of investments in fixed income securities and the present value of the obligations. We are required to remeasure our discount rate annually and did so at December 31, 2014. As a result of the discount rate change from December 31, 2013 to December 31, 2014, our pension obligations increased by approximately $2.5 billion. During the second quarter of 2013, we made changes to our U.S. and Canadian salaried defined benefit pension plans that reduced our pension obligations by $218 million. These changes were made primarily to comply with Internal Revenue Service, or IRS, regulations for the U.S. salaried defined benefit plans. Any reduction in investment returns or the value of plan assets or any increase in the present value of obligations may increase our pension expenses and required contributions, and as a result constrain our liquidity and materially adversely affect our financial condition and results of operations. If we fail to make required minimum funding contributions, we could be subjected to reportable event disclosure to the Pension Benefit Guaranty Corporation, as well as interest and excise taxes calculated based upon the amount of any funding deficiency.
Laws, regulations or governmental policies in foreign countries may limit our ability to access our own funds.
When we sell vehicles in countries other than the U.S., we are subject to various laws, regulations and policies regarding the exchange and transfer of funds back to the U.S., and we may be limited in our ability to transfer some or all of our funds for unpredictable periods of time. In addition, the local currency of a country may be devalued as a result of adjustments to the official exchange rate made by the government with little or no notice. For instance, we are subject to the rules and regulations of the Venezuelan government concerning our ability to exchange cash or marketable securities denominated in Venezuelan bolivar, or VEF, into USD. Under these regulations, our purchases and sales of foreign currency are primarily made through Venezuela's Supplementary Foreign Currency Administrative System, or SICAD I, at official rates of exchange and subject to volume restrictions. These 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. In 2014 and 2013, we recorded devaluation charges due to changes in foreign currency exchange rates in Venezuela.

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Our substantial indebtedness could adversely affect our financial condition, our cash flow, our ability to operate our business and could prevent us from fulfilling our obligations under the terms of our indebtedness.
We have a substantial amount of indebtedness. As of December 31, 2014, our total debt, including the debt of our subsidiaries, was $12.7 billion (based on the outstanding principal balance of such indebtedness), excluding undrawn commitments of $1.3 billion under our Revolving Facility. Although our Senior Credit Agreements, the Secured Senior Notes Indenture (which restricts only secured debt) and our other financing arrangements restrict the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions, which permit us to incur additional debt. The more indebted we become, the more we are exposed to the further risks associated with substantial leverage described below.
Our debt levels and compliance with our financing agreements could have significant negative consequences, including, but not limited to:
making it more difficult to satisfy our obligations, including our obligations with respect to the senior credit facilities and our 8 percent secured senior notes due 2019 and our 8 ¼ percent secured senior notes due 2021, collectively referred to as our Secured Senior Notes;
diminishing our future earnings;
limiting our ability to obtain additional financing as and when needed;
requiring us to issue debt or raise equity or to sell some of our principal assets, possibly on unfavorable terms, to meet debt payment obligations;
exposing us to risks that are inherent in interest rate and currency fluctuations because certain of our indebtedness bears variable rates of interest and is in various currencies;
subjecting us to financial and other restrictive covenants, and if we fail to comply with these covenants and that failure is not waived or cured, could result in an event of default under our indebtedness;
requiring us to devote a substantial portion of our available cash and cash flow to make interest and principal payments on our debt, thereby reducing the amount of cash available for other purposes, including for vehicle design and engineering, manufacturing improvements, other capital expenditures and other general corporate uses;
limiting our financial and operating flexibility in responding to changing economic and competitive conditions or exploiting strategic business opportunities and increasing our vulnerability to general adverse economic and industry conditions; and
placing us at a disadvantage compared to our competitors that have relatively less debt and may therefore be better positioned to invest their funds in design, engineering and manufacturing improvements, among other expenditures.
If our debt obligations materially hinder our ability to operate our business and adapt to changing industry conditions, we may lose market share, our revenues may decline and our operating results and financial condition may suffer. If we do not have sufficient earnings to service our indebtedness, we may be required to refinance all or part of our indebtedness, sell assets, borrow more money or sell securities, which we may not be able to do on acceptable terms if at all.

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Restrictive covenants in the agreements governing our indebtedness could adversely affect our business by limiting our operating and strategic flexibility.
Our Senior Credit Agreements and the Secured Senior Notes Indenture contain restrictive covenants that limit our ability to, among other things:
incur or guarantee additional secured and unsecured indebtedness;
make distributions or purchase or redeem capital stock;
make certain other restricted payments;
incur liens;
sell assets;
enter into sale and lease-back transactions;
enter into transactions with affiliates; and
effect a consolidation, amalgamation or merger.
These restrictive covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, mergers and acquisitions, joint ventures or other corporate opportunities. In addition, the Senior Credit Agreements require us to maintain a minimum ratio of borrowing base to covered debt, as well as a minimum liquidity of $3.0 billion, which includes any undrawn amounts on the Revolving Facility, and also restricts us from prepaying certain of our other indebtedness, including our Secured Senior Notes, prior to the discharge of the senior credit facilities. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation —Liquidity and Capital Resources for a further description of our indebtedness. Any new financing may include additional, and potentially more burdensome, covenants and restrictions on our operations and financial flexibility. Our ability to meet those financial ratios could be affected by a deterioration in our operating results, as well as by events beyond our control, including unfavorable economic conditions, and we cannot assure you that those ratios would be met. It may be necessary to obtain waivers or amendments with respect to covenants under our Secured Senior Notes Indenture, the Senior Credit Agreements or our future indebtedness from time to time, but we cannot assure you that we will be able to obtain such waivers or amendments or the cost of obtaining such waivers. Moreover, if we are unable to comply with the terms applicable to our indebtedness, including all of the covenants under the Secured Senior Notes Indenture, the Senior Credit Agreements or any of our other indebtedness, we may be in default, which could result in cross-defaults under certain of our indebtedness. Upon the occurrence of an event of default under the Secured Senior Notes Indenture, the Senior Credit Agreements or our other indebtedness, the lenders under the senior credit facilities or such other indebtedness could terminate their commitments to lend and declare all amounts outstanding under such indebtedness, together with accrued interest, to be immediately due and payable. If acceleration occurs, we may not be able to repay our debt as it is unlikely that we would be able to borrow sufficient additional funds to refinance our debt. Even if new financing is made available to us in such circumstances, it may not be available on acceptable terms. Non-compliance with our debt covenants would have a material adverse effect on our business, financial condition and results of operations.
Despite our substantial indebtedness, we may be able to incur substantially more debt.
Despite our substantial amount of indebtedness, we may be able to incur substantial additional debt, including secured debt, in the future. Although our Secured Senior Notes Indenture (in the case of secured debt), our Senior Credit Agreements and our other financing arrangements restrict the incurrence of additional debt, these restrictions are subject to a number of qualifications and exceptions. Also, these restrictions do not prevent us from incurring obligations that do not constitute indebtedness. In addition, as of December 31, 2014, we had $1.3 billion available for additional borrowing under our Revolving Facility. The more indebtedness we incur, the further exposed we become to the risks associated with substantial leverage described above.

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We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to generate sufficient cash flow from operations to make scheduled payments on, or to refinance obligations under, our debt depends on our financial and operating performance, which, in turn, is subject to prevailing economic, market and competitive conditions and to financial and business-related factors, many of which may be beyond our control.
As of December 31, 2014, we had $12.7 billion of outstanding indebtedness (based on the outstanding principal balance of such indebtedness), excluding undrawn commitments of $1.3 billion under our Revolving Facility.
If our cash flow and capital resources are insufficient to fund our debt service obligations, we may have less working capital, and we may be forced to reduce or delay capital expenditures, sell assets, seek additional equity capital or restructure all or a portion of our debt. We may not be able to complete any of these on commercially reasonable terms or at all, and even if successful, we still may be unable to meet our scheduled debt service obligations. In particular, our ability to refinance our indebtedness or obtain additional financing may be adversely affected by our high levels of debt, prevailing market conditions and the debt incurrence restrictions imposed by our debt instruments. In the absence of sufficient cash flow and capital resources, we could face substantial liquidity problems and may be required to dispose of material assets or operations to meet our debt service and other obligations. The Secured Senior Notes Indenture, the Senior Credit Agreements and certain other debt agreements restrict our ability to dispose of assets and the use of proceeds from any such disposition. We cannot assure you that we will be able to consummate any asset sales, or if we do, what the timing of the sales will be or whether the proceeds that we realize will be adequate to meet our debt service obligations when due or that we will be contractually permitted to apply such proceeds for that purpose. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction in our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms, if at all. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to implement any of these alternative measures, would have a material adverse effect on our business, 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. In the U.S., for example, governmental regulation is driven by a variety of sometimes conflicting concerns, including vehicle safety, fuel economy and environmental impact. Complying with these regulatory requirements, despite competing policy and regulatory goals, could significantly affect our plans for product development, particularly our plans to further integrate product development with our parent and industrial partner, FCA, and may result in substantial costs, including civil penalties, if we are unable to comply fully. They may also limit the types of vehicles we produce and sell and where we sell them, which can affect our vehicle sales and revenues.
Among the most significant regulatory changes we face over the next several years are the heightened requirements for fuel economy and Greenhouse Gas, or GHG, emissions restrictions. Corporate Average Fuel Economy, or CAFE, provisions under the 2007 Energy Independence and Security Act, or EISA, mandate that, by 2025, car and truck fleet-wide average fuel economy must be materially higher than that required today. In addition, as a result of the recent revelation that certain automakers’ reported fuel economy ratings were higher than the U.S. Environmental Protection Agency, or EPA, verification testing showed, EPA has increased its scrutiny of all automakers’ fuel economy representations. This increased scrutiny could have an effect on the fuel economy ratings of certain of our vehicles, which, in turn, could affect our consumer perception and sales, and our ability to meet our CAFE and GHG emissions obligations in the long-term.
In May 2009, President Obama announced a goal of implementing harmonized federal standards for fuel economy and GHG emissions. In 2010 and 2012, the EPA and National Highway Transportation Safety Administration, or NHTSA, issued joint final rules to implement these new federal programs. These standards apply to passenger cars, light-duty trucks, and medium-duty passenger vehicles built in model years 2012 through 2025, and the California Air Resources Board, or CARB, has agreed that compliance with these federal emissions standards will be deemed compliance with the California emissions standards for the 2012 through 2025 model years. These light-duty standards require a car and truck fleet-wide average fuel economy of 54.5 miles per gallon by 2025. Moreover, in the absence of these harmonization rules, we would be subject to conflicting and in some cases more onerous requirements promulgated by California and adopted by other states. Implementation of these rules will require us to take costly design actions and implement vehicle technologies that may not appeal to consumers. In addition,

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if circumstances arise where CARB and EPA regulations regarding GHG emissions and fuel economy conflict, this too could require costly actions or limit the sale of certain of our vehicles in certain states. We could also be adversely affected if pending litigation by third parties outside of the automotive industry challenging EPA’s regulatory authority with respect to GHG emissions is successful and as a result CARB were free to enforce its own GHG emissions standards.
We are committed to meeting these new regulatory requirements. While we believe that our current product plan will meet the applicable federal and California GHG/fuel economy standards established through model year 2016, our compliance is dependent on our ability to implement design and testing features that would generate GHG credits pursuant to EPA’s GHG rule for model years 2012 through 2016 and 2017 through 2025 on a credit carry-forward and carry-back basis. However, our current vehicle technology cannot yield the improvement in fuel efficiency necessary to achieve compliance with the requirements of the proposed 2017-2025 joint rule, and certain regulatory provisions dictate that our fleet of vehicles must be combined with the fleet of vehicles from FCA for GHG, CAFE and zero-emission vehicle purposes. These requirements may cause additional strain on our ability to comply with the applicable fuel economy and GHG standards. If the vehicles we develop to comply with these requirements are not appealing to consumers or cannot be sold at a competitive price, we may not be able to achieve the vehicle fleet mix, depending on the type and volume of our customers’ purchases, that would enable us to meet the stringent fuel economy/GHG requirements even if our long-range projection plans out a compliant path.
Canadian federal emissions regulations largely mirror the U.S. regulations.
On June 21, 2013, the Mexican Ministry of Environment and Natural Resources issued a new final GHG regulation applicable to manufacturers and importers of light-duty vehicles in Mexico. This rule is based on the model years 2012 through 2016 U.S. GHG rule described above, under the caption Item 1. Business —Environmental and Regulatory Matters —Vehicle Fuel Economy and GHG Regulation.
The European Union, or EU, promulgated new passenger car carbon dioxide, or CO2, emissions regulations beginning in 2012. This directive sets an industry target for 2020 of a fleet average measured in grams per kilometer, with the requirements for each manufacturer calculated based on the average weight of vehicles across its fleet. In addition, some EU member states have adopted or are considering some form of CO2-based vehicle tax, which may affect consumer preferences for certain vehicles in unpredictable ways, and which could result in specific market requirements that are more stringent than the EU emissions standards. EU sales of FCA US and FCA vehicles are “pooled” for purposes of this EU directive. However, because our vehicles are not as CO2 emission compliant as FCA’s vehicles, as sales of our vehicles in the EU increase, the ability of the pooled fleet to comply becomes more difficult, and we may be responsible for the cost of product or other actions to achieve compliance if the non-compliance was our responsibility based on our agreement with FCA.
Other countries are also developing or adopting new policies to address these issues. These policies could significantly affect our product development and international expansion plans, and, if adopted in the form of new laws or regulations, could subject us to significant civil penalties or require that we modify our products or fleet mix to remain in compliance. Any such modifications may reduce the appeal of our vehicles to consumers.
Additionally, any new regulations could result in substantial increased costs, which we may be unable to pass through to consumers, and could limit the vehicles we design, manufacture and sell and limit the markets we can access. These changes could adversely affect our business, financial condition and results of operations.
We are exposed to ongoing litigation and other legal and regulatory actions and risks in the ordinary course of our business, and we could incur significant liabilities and substantial legal fees.
In the ordinary course of business, we face a significant volume of litigation as well as other legal claims and proceedings and regulatory enforcement actions. The results of these legal proceedings cannot be predicted with certainty, and adverse results in current or future legal proceedings may materially harm our business, financial condition and results of operations, whether because of significant damage awards or injunctions or because of harm to our reputation and market perception of our vehicles and brands. We may incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings or that exceed any applicable insurance coverage.
Although we design and develop vehicles to comply with all applicable safety standards, compliance with governmental standards does not necessarily prevent individual or class action lawsuits, including with regard to vehicles many years after their sale, which can entail significant costs and risks. For example, whether FMVSS preempt state common law claims is often a contested issue in litigation, and courts may find us in breach of legal duties and liable in tort, even though our vehicles comply with all applicable federal and state regulations. Furthermore, simply responding to actual or threatened litigation or government investigations regarding our compliance with regulatory standards, even in cases in which no liability is found,

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often requires significant expenditures of funds, time and other resources, and may cause reputational harm. Any insurance we hold currently may not be available when costs arise in the future and, in the case of harm caused by a component sourced from a supplier, the supplier may no longer be available to provide indemnification or contribution.
Taxing authorities could challenge our historical and future tax positions as well as our allocation of taxable income among our subsidiaries and affiliates.
The amount of income tax we pay is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. We have taken, and will continue to take, appropriate tax positions based on our interpretation of such tax laws. While we believe that we have complied with all applicable income tax laws, there can be no assurance that a taxing authority will not have a different interpretation of the law and assess additional taxes. Should additional taxes be assessed, this may have a material adverse effect on our results of operations and financial condition.
We conduct sales, contract manufacturing, marketing, distribution and research and development operations with affiliated companies located in various tax jurisdictions around the world. While our transfer pricing methodologies are based on economic studies that we believe are reasonable, the transfer prices for these products and services could be challenged by the various tax authorities resulting in additional tax liabilities, interest and/or penalties, and the possibility of double taxation.
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 legacy and telecommunications systems, including our vehicle design, manufacturing, inventory tracking and billing and collection systems. We rely on these systems to make a variety of day-to-day business decisions as well as to track transactions, billings, payments and inventory. Such systems are susceptible to malfunctions and interruptions due to equipment damage, power outages, and a range of other hardware, software and network problems. Those systems are also susceptible to cybercrime, or threats of intentional disruption, which are increasing in terms of sophistication and frequency. For any of these reasons, we may experience systems malfunctions or interruptions. Although our systems are diversified, including multiple server locations and a range of software applications for different regions and functions, and we are currently undergoing an effort to assess and ameliorate risks to our systems, a significant or large-scale malfunction or interruption of our computer or data processing systems could adversely affect our ability to manage and keep our operations running efficiently, and damage our reputation if we are unable to track transactions and deliver products to our dealers and customers. A malfunction that results in a wider or sustained disruption to our business could have a material adverse effect on our business, financial condition and results of operations.
We are currently in the process of transitioning, retiring or replacing a significant number of our software applications at an accelerated rate, an effort that will continue in future years. These applications include, among others, our engineering, finance, procurement and communication systems. During the transition periods, and until we fully migrate to our new systems, we may experience material disruptions in communications, in our ability to conduct our ordinary business processes and in our ability to report the results of our operations. Though we are taking commercially reasonable steps to transition our data properly and to assess and minimize risk during this process, we may lose significant data in the transition, or we may be unable to access data for periods of time without forensic intervention. Loss of data could affect our ability to file timely reports required by a wide variety of regulators, including the U.S. Securities and Exchange Commission, or SEC. Our ability to comply with the requirements of the Sarbanes-Oxley Act, to the extent required of us, may also be compromised.
In addition to supporting our operations, we use our systems to collect and store confidential and sensitive data, including information about our business, our customers and our employees. As our technology continues to evolve, we anticipate that we will collect and store even more data in the future, and that our systems will increasingly use remote communication features that are sensitive to both willful and unintentional security breaches. Much of our value is derived from our confidential business information, including vehicle design, proprietary technology and trade secrets, and to the extent the confidentiality of such information is compromised, we may lose our competitive advantage and our vehicle sales may suffer. We also collect, retain and use personal information, including data we gather from customers for product development and marketing purposes, and data we obtain from employees. In the event of a breach in security that allows third parties access to this personal information, we are subject to a variety of ever-changing laws on a global basis that require us to provide notification to the data owners, and that subject us to lawsuits, fines and other means of regulatory enforcement. Our reputation could suffer in the event of such a data breach, which could cause consumers to purchase their vehicles from our competitors. Ultimately, any compromise in the integrity of our data security could have a material adverse effect on our business.

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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 assurance that our intellectual property rights are sufficient to provide us with a competitive advantage against others who offer products similar to ours.
We rely upon a combination of patent, trademark, copyright and trade secret law to protect our intellectual property rights, all of which provide limited protection. However, there can be no assurance that any patents will be issued from pending or future applications or that any issued patents will provide us with a competitive advantage or will not be challenged, invalidated or circumvented. We also cannot assure you that we will obtain any copyright or trademark registrations from pending or future applications or that any of our copyrights or trademarks will be enforceable. We rely in some circumstances on trade secrets to protect our technology. However, trade secrets may lose their value if not properly protected. Adequate remedies may not be available in the event of the disclosure of our trade secrets and the unauthorized use of our technology.
Despite our efforts, we may be unable to prevent third parties from infringing our intellectual property and using our technology for their competitive advantage. Any such infringement and use could adversely affect our business, financial condition or results of operations. Monitoring our intellectual property rights to detect infringement can be difficult and costly, and enforcement of our intellectual property rights may require us to bring legal action. Any such litigation could be costly and time-consuming, and the result of any litigation is uncertain.
Our intellectual property is also used in a large number of foreign countries, and we are seeking to expand our operations overseas. The laws of some countries do not offer the same protection of our intellectual property rights as do the laws of the U.S. In addition, effective intellectual property enforcement may be unavailable or limited in certain countries, making it difficult for us to protect our intellectual property from misuse or infringement there. We expect differences in intellectual property laws and enforcement to become a greater problem for us as our licensees increase their manufacturing and sales outside of the U.S. Our inability to protect our intellectual property rights in some countries may harm our business, financial condition or results of operations.
We depend on the services of our key executives, the loss of whose skills could materially harm our business. Also, we are in the process of hiring additional employees, and we may encounter difficulties with hiring sufficient employees with critical skills, particularly in competitive specialties such as vehicle design and engineering.
Several of our senior executives, including our Chief Executive Officer, Sergio Marchionne, are important to our success because they have been instrumental in establishing and maintaining our strategic direction. If we were to lose the services of any of these individuals this could have a material adverse effect on our business, financial condition and results of operations. We believe that these executives, in particular Mr. Marchionne, could not easily be replaced with executives of equivalent experience and capabilities. We do not have a specified allocation of required time and attention for Mr. Marchionne, and certain other members of management, including our Chief Financial Officer. If any of them allocates more of their time and attention to non-FCA US matters, our business, financial condition and results of operations may suffer.
In addition, we are currently seeking to hire employees in a number of critical areas, including vehicle design and engineering. We have experienced some difficulties in hiring and retaining highly skilled employees, particularly in competitive specialties, and we may experience such difficulties going forward.
Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting, which could harm our business and cause a default under certain covenants in the Senior Credit Agreements and the Secured Senior Notes Indenture.
Our anticipated growth is likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. We continuously monitor and evaluate changes in our internal control over financial reporting. 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 our internal controls over financial reporting.
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 Senior Credit Agreements and the Secured Senior Notes Indenture.

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Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
We own or lease 38 principal manufacturing facilities, of which 23 are located in the U.S., eight in Mexico, six in Canada and one in South America. These manufacturing facilities primarily consist of vehicle assembly plants, powertrain plants, and metal stamping plants. Our manufacturing facilities in the U.S. are primarily located in Michigan, Indiana, Ohio, and Illinois. We also own our principal engineering and research facilities and general offices, which are located in Auburn Hills, Michigan and include approximately 5.4 million square feet on 465 acres, including our 4.8 million square foot technology center.
In addition, we operate numerous parts distribution facilities throughout the world which are primarily located in the U.S., Canada and Mexico. These locations facilitate the distribution of service and accessory parts to our dealer network and include a combination of owned and leased facilities.
Other than our Auburn Hills headquarters, substantially all of our owned facilities and principal properties located in the U.S. are encumbered by mortgages that secure the senior credit facilities and the Secured Senior Notes. Certain of our owned facilities in Mexico have been placed in special purpose trusts to secure the repayment of the Mexican development banks credit facilities. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources for additional information.
Item 3. Legal Proceedings
Various legal proceedings, claims and governmental investigations are pending against us on a wide range of topics, including vehicle safety; emissions and fuel economy; dealer, supplier and other contractual relationships; intellectual property rights; product warranties and environmental matters. Some of these proceedings allege defects in specific component parts or systems (including air bags, seats, seat belts, brakes, ball joints, transmissions, engines and fuel systems) in various vehicle models or allege general design defects relating to vehicle handling and stability, sudden unintended movement or crashworthiness. These proceedings seek recovery for damage to property, personal injuries or wrongful death, and in some cases include a claim for exemplary or punitive damages. Adverse decisions in one or more of these proceedings could require us to pay substantial damages, or undertake service actions, recall campaigns or other costly actions.
Item 4. Mine Safety Disclosures.
Not applicable.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
There is no public market for our common equity. As of March 4, 2015, FCA North America Holdings LLC, formerly known as Fiat North America LLC, or FCA NA, owns 100 percent of our membership interests.
On January 21, 2014, we paid holders of our membership interests a special distribution of $1,900 million. During 2014, we also accrued and made tax distributions of approximately $60 million in connection with the Equity Purchase Agreement transaction and we accrued and paid approximately $10 million of certain taxes withheld on behalf of our members. During 2013, we accrued distributions of approximately $14 million for state tax withholding obligations on behalf of our members. We have issued no other cash dividends or distributions on our membership interests in the two most recent fiscal years.
On February 3, 2015, we made a $1,338 million special distribution payment to our sole member, FCA NA.
Our Senior Credit Agreements and the Secured Senior Notes Indenture contain limitations on our ability to make restricted payments, including a limit on declaring dividends or making distributions to our sole member, FCA NA.
Item 6.    Selected Financial Data.
Omitted under the reduced disclosure format permitted by General Instruction I(2)(a) of Form 10-K.

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Item 7. 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 Item 1. Business and our accompanying audited consolidated financial statements and related notes thereto. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under Disclosure Regarding Forward-Looking Statements and Item 1A. Risk Factors. Actual results may differ materially from those contained in any forward-looking statements.
Overview of our Formation and Operations
The Company was formed on April 28, 2009 as a Delaware limited liability company. Our sole beneficial owner is FCA, which holds a 100 percent ownership interest in us effective as of the October 12, 2014 merger of Fiat with and into FCA, or the Merger. Prior to the Merger, Fiat held a 100 percent ownership interest in us effective as of its January 21, 2014 acquisition of the 41.5 percent of our membership interests held by the UAW Retiree Medical Benefits Trust, or the VEBA Trust.
We design, engineer, manufacture, distribute and sell vehicles under the brand names Chrysler, Jeep, Dodge, Ram and the SRT performance vehicle designation, as well as Mopar service parts and accessories, to dealers and distributors for sale to retail customers and fleet customers. Our product lineup includes passenger cars, utility vehicles (including sport utility vehicles, or SUVs, and crossover vehicles, or CUVs), minivans, trucks and commercial vans. We also manufacture certain vehicles in Mexico, which are distributed by us throughout North America and select markets and sold to FCA for distribution in other select markets. The majority of our operations, employees, independent dealers and vehicle sales are in North America, primarily in the U.S. Approximately 10 percent of our vehicle sales during both 2013 and 2014 were outside North America, principally in Asia Pacific, South America and Europe. Vehicle, service parts and accessories sales outside North America are primarily through our 100 percent owned, affiliated or independent distributors and dealers. FCA is the distributor of our vehicles and service parts in Europe and Brazil, selling our products through a network of independent dealers. We are the distributor of Fiat and Alfa Romeo brand vehicles and service parts throughout North America. We are also the distributor for Fiat brand vehicles in select markets outside of Europe. In addition, FCA manufactures certain vehicles for us, which we sell in the U.S. and internationally.
Refer to Note 19, Other Transactions with Related Parties, for additional information regarding other transactions with FCA.
We also generate revenues and cash from the sale of separately-priced service contracts to consumers and from providing contract manufacturing services to other vehicle manufacturers. Our dealers enter into wholesale financing arrangements to purchase vehicles to be held in inventory for sale to retail customers. In turn, our dealers' retail customers use a variety of finance and lease programs to acquire our vehicles.

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Trends, Uncertainties and Opportunities
Vehicle Profitability. Our results of operations depend on the profitability of the vehicles we sell, which tends to vary by vehicle segment. Vehicle profitability depends on a number of factors, including sales prices, net of sales incentives, costs of materials and components, labor costs, as well as transportation and warranty costs. Typically, larger vehicles, which tend to have higher unit selling prices, have been more profitable on a per unit basis. Therefore, our minivans, larger utility vehicles and pick-up trucks have generally been more profitable than our passenger cars. Our minivans, larger utility vehicles and pick-up trucks accounted for approximately 44 percent of our total U.S. retail vehicle sales in 2014 (not including vans and medium duty trucks). However, until we develop a full line of competitive passenger car offerings, our ability to increase margins on our passenger car offerings is more limited than our competitors.
In addition, we, and the U.S. automotive industry in general, have recently experienced a significant increase in recall activity. The magnitude of this recent activity is likely due, at least in part, to the increasingly complex components found in modern vehicles, as well as the intensified media and governmental attention paid to automotive recalls beginning in 2014. The costs we incur to recall vehicles typically include the cost of the new remedy parts and labor to remove and replace the problem parts. Depending on the nature of the recall campaign and the number of vehicles affected, product recalls may have a materially negative impact on our profitability.
Cost of Sales. The most significant element of our cost of sales is the cost of materials and components, which makes up around 75 percent of the total. A large portion of our materials and component costs are affected directly or indirectly by raw materials prices, particularly prices for steel, aluminum, lead, resin and copper, as well as precious metals. To the extent raw material price fluctuations may affect our cost of sales, we typically seek to manage these costs and minimize the impact on cost of sales through the use of fixed price purchase contracts and the use of commercial negotiations and technical efficiencies. Nevertheless, our cost of sales related to materials and components has increased, as we have significantly enhanced the quality and content of our vehicles in an effort to remain competitive and meet regulatory requirements. Our ability to price our vehicles to recover those increased costs does, and will continue to, impact our profitability.
Our collective bargaining agreements with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, or UAW, and the National Automobile, Aerospace, Transportation and General Workers Union of Canada, or CAW, which is now part of Unifor, have introduced lower wage and benefit structures for new hire employees, eliminated the employment security system, and reduced other compensation programs for terminated or laid-off represented employees, other than traditional severance pay. Over time, these and other modifications are intended to help us achieve hourly labor costs that are comparable to those of the transplant automotive manufacturers with which we compete, while continuing to offer competitive compensation packages. We continue to realize the benefit of the new hire wage and benefit structure as our production increases and as a result of natural attrition. We successfully renegotiated our collective bargaining agreements with the UAW in 2011 and with the CAW in 2012. These settlement provisions enable continued labor cost competitiveness within the U.S. and Canada automobile manufacturing industry through the terms of the respective agreements. Our current collective bargaining agreements with the UAW and Unifor expire in September 2015 and September 2016, respectively.
Effects of Foreign Exchange Rates. We are affected by fluctuations in foreign exchange rates (i) through translation of foreign currency financial statements into U.S. dollars, or USD, for consolidation, which we refer to as the translation impact, and (ii) through transactions by entities in the Company 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 USD, while the financial statements of each of our subsidiaries are prepared in the functional currency of that entity. In preparing consolidated financial statements, we translate assets and liabilities measured in the functional currency of the subsidiaries into USD 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 USD impact our results of operations.

31


Critical Accounting Estimates
The audited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, which require the use of estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses in the periods presented. We believe that the accounting estimates employed are appropriate and resulting balances are reasonable; however, due to inherent uncertainties in making estimates, actual results could differ from the original estimates, requiring adjustments to these balances in future periods.
The critical accounting estimates that affect the audited consolidated financial statements and that use judgments and assumptions are listed below. In addition, the likelihood that materially different amounts could be reported under varied conditions and assumptions is discussed.
Pension
We sponsor both noncontributory and contributory defined benefit pension plans. The majority of the plans are funded plans. The noncontributory pension plans cover certain of our hourly and salaried employees. Benefits are based on a fixed rate for each year of service. Additionally, contributory benefits are provided to certain of our salaried employees under the salaried employees’ retirement plans. These plans provide benefits based on the employee’s cumulative contributions, years of service during which the employee contributions were made and the employee’s average salary during the five consecutive years in which the employee’s salary was highest in the 15 years preceding retirement or the freeze of such plans, as applicable.
Our defined benefit pension plans are accounted for on an actuarial basis, which requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as demographic experience. These assumptions may have an effect on the amount and timing of future contributions.
The assumptions used in developing the required estimates include the following key factors:
Discount rates. Our discount rates are based on yields of high-quality (AA-rated or better) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected pension payments.
Expected return on plan assets. Our expected long-term rate of return on plan assets assumption is developed using a consistent approach across all plans. This approach primarily considers various inputs from a range of advisors for long-term capital market returns, inflation, bond yields and other variables, adjusted for specific aspects of our investment strategy.
Salary growth. Our salary growth assumption reflects our long-term actual experience, outlook and assumed inflation.
Inflation. Our inflation assumption is based on an evaluation of external market indicators.
Expected contributions. Our expected amount and timing of contributions is based on an assessment of minimum funding requirements. From time to time contributions are made beyond those that are legally required.
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, primarily the U.S. Society of Actuaries and the Canadian Institute of Actuaries, 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 change increased the Canadian pension obligations by approximately $50 million.
Additionally, retirement rate assumptions used for our U.S. benefit plan valuations were updated to reflect an ongoing trend towards delayed retirement for all employees. The change decreased the U.S. pension obligations by approximately $317 million.

32


Plan Assets Measured at Net Asset Value. Plan assets are recognized and measured at fair value in accordance with the accounting guidance related to fair value measurements, which specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). Level 3 pricing inputs include significant inputs that are generally less observable from objective sources. At December 31, 2014, substantially all of our investments classified as Level 3 in the fair value hierarchy are valued at the net asset value, or NAV. These plan assets are classified as Level 3 as there are no active markets for these assets and they are valued using unobservable inputs.
Our investments classified as Level 3 include private equity, real estate and hedge fund investments. Private equity investments include those in limited partnerships that invest primarily in operating companies that are not publicly traded on a stock exchange. Our private equity investment strategies include leveraged buyouts, venture capital, mezzanine and distressed investments. Real estate investments include those in limited partnerships that invest in various commercial and residential real estate projects both domestically and internationally. Hedge fund investments include those seeking to maximize absolute returns using a broad range of strategies to enhance returns and provide additional diversification. Investments in limited partnerships are valued at the NAV, which is based on audited financial statements of the funds when available, with adjustments to account for partnership activity and other applicable valuation adjustments.
Refer to Note 2, Basis of Presentation and Significant Accounting Policies, and Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for a discussion of the fair value hierarchy measurement.
Plan obligations and costs are based on existing retirement plan provisions. We do not make assumptions regarding any potential future changes to benefit provisions beyond those to which we are presently committed.
Significant differences in actual experience or significant changes in assumptions may affect the pension obligations and pension expense. The effect of actual results differing from assumptions and of changing assumptions are included in accumulated other comprehensive (loss) income, or AOCI, as unrecognized actuarial gains and losses. These gains and losses are subject to amortization to expense over the average future service period of plan participants expected to receive benefits under the plans to the extent they exceed 10 percent of the higher of the market related value of assets or the projected benefit obligation of the respective plan. For inactive pension plans, we amortize actuarial gains or losses to expense over the remaining life of plan participants. During 2014, the actual return on plan assets was $3,053 million, which was higher than the expected return of $1,682 million, resulting in an unrecognized actuarial gain of $1,371 million. The weighted average discount rate used to determine the benefit obligation for defined benefit pension plans was 4.03 percent at December 31, 2014 versus 4.69 percent at December 31, 2013, resulting in an unrecognized actuarial loss of $2,462 million. Changes in actuarial assumptions resulted in a net gain of $350 million and were primarily driven by changes in the retirement rate assumptions used for our U.S. benefit plan valuations that reflect an ongoing trend towards delayed retirement for all employees. In 2015, $100 million of net unrecognized actuarial losses are expected to be recognized into expense.
The funded status of our pension plans as of December 31, 2014 and the expenses to be recognized during 2015 are affected by year end 2014 assumptions. These sensitivities may be asymmetric and are specific to the time periods noted. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown. The effect of the indicated increase (decrease) in selected factors, holding all other assumptions constant, is shown below (in millions of dollars):
 
 
Pension Plans
 
 
Effect on 2015
Pension Expense
 
Effect on
December 31, 2014
Projected Benefit
Obligation
10 basis point decrease in discount rate
 
$
13

 
$
370

10 basis point increase in discount rate
 
(13
)
 
(364
)
50 basis point decrease in expected return on assets
 
127

 

50 basis point increase in expected return on assets
 
(127
)
 

Refer to Note 18, Employee Retirement and Other Benefits, of the accompanying audited consolidated financial statements for a detailed discussion of our pension plans.

33


Other Postretirement Employee Benefits
We provide health care, legal and life insurance benefits to certain of our hourly and salaried employees. Upon retirement from the Company, these employees may become eligible for continuation of certain benefits. Benefits and eligibility rules may be modified periodically.
Other postretirement employee benefits, or OPEB, plans are accounted for on an actuarial basis, which requires the selection of various assumptions. The estimation of our obligations, costs and liabilities associated with OPEB, primarily retiree health care and life insurance, requires that we make use of estimates of the present value of the projected future payments to all participants, taking into consideration the likelihood of potential future events such as health care cost increases and demographic experience, which may have an effect on the amount and timing of future payments.
The assumptions used in developing the required estimates include the following key factors:
Discount rates. Our discount rates are based on yields of high-quality (AA-rated or better) fixed income investments for which the timing and amounts of payments match the timing and amounts of the projected benefit payments.
Health care cost trends. Our health care cost trend assumptions are developed based on historical cost data, the near-term outlook, and an assessment of likely long-term trends.
Salary growth. Our salary growth assumptions reflect our long-term actual experience, outlook and assumed inflation.
Retirement rates. Retirement rates are developed to reflect actual and projected plan experience.
Mortality rates. Mortality rates are developed using our plan-specific populations, recent mortality information published by recognized experts in this field, primarily the U.S. Society of Actuaries and the Canadian Institute of Actuaries 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 OPEB 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 all employees. The change decreased the U.S. OPEB obligations by approximately $48 million.
Plan obligations and costs are based on existing OPEB plan provisions. We do not make assumptions regarding any potential future changes to benefit provisions beyond those to which we are presently committed.
The effect of actual results differing from assumptions and of changing assumptions are included in AOCI as unrecognized actuarial gains and losses. These gains and losses are subject to amortization to expense over the average future service period of plan participants expected to receive benefits under the plan to the extent they exceed 10 percent of the higher of the market related value of assets or the accumulated benefit obligation of the respective plan. We immediately recognize actuarial gains or losses for OPEB plans that are short-term in nature and under which our obligation is capped. The weighted average discount rate used to determine the benefit obligation for OPEB plans was 4.11 percent at December 31, 2014 versus 4.87 percent at December 31, 2013, resulting in an unrecognized actuarial loss of $254 million. In 2015, $30 million of net unrecognized actuarial losses are expected to be recognized into expenses.
The effect of the indicated increase (decrease) in the assumed discount rate, holding all other assumptions constant, is shown below (in millions of dollars):
 
 
OPEB Plans
 
 
Effect on 2015 OPEB
Expense
 
Effect on December 31, 2014
OPEB Obligation
10 basis point decrease in discount rate
 
$
1

 
$
35

10 basis point increase in discount rate
 
(1
)
 
(34
)

34


Refer to Note 18, Employee Retirement and Other Benefits, of our accompanying audited consolidated financial statements for more information regarding costs and assumptions for our OPEB plans.
Share-Based Compensation
We have various compensation plans that provide for the granting of share-based compensation to certain employees and directors. We account for share-based compensation plans in accordance with the accounting guidance set forth for share-based payments, which requires share-based compensation expense to be recognized based on fair value. Compensation expense for equity-classified awards is measured at the grant date based on the fair value of the award using a discounted cash flow methodology. For those awards with post-vesting contingencies, an adjustment is applied to account for the probability of meeting the contingencies. Liability-classified awards are remeasured to fair value at each balance sheet date until the award is settled. Compensation expense is recognized over the employee service period with an offsetting increase to Contributed capital or Accrued expenses and other liabilities depending on the nature of the award. If awards contain certain performance conditions in order to vest, the cost of the award is recognized when achievement of the performance condition is probable. Costs related to plans with graded vesting are generally recognized using the graded vesting method. Share-based compensation expense is recorded in Selling, administrative and other expenses in the accompanying Consolidated Statements of Income.
The fair value of each unit issued under the plans is based on the fair value of our membership interests. Each "FCA US Unit", or Unit, is equal to 1/600th of the value of a membership interest. Refer to Note 17, Share-Based Compensation, of our accompanying audited consolidated financial statements for additional information.
Since there is no publicly observable trading price for our membership interests, fair value was determined using our discounted cash flow methodology. This approach, which is based on projected cash flows, is used to estimate our enterprise value. The fair value of our outstanding interest bearing debt as of the measurement date is deducted from our enterprise value to arrive at the fair value of equity. This amount is then divided by the total number of Units, as determined above, to estimate the fair value of a single Unit. The significant assumptions used in the contemporaneous calculation of fair value at each issuance date and for each period included the following:
Four years of annual projections prepared by management that reflect the estimated after-tax cash flows a market participant would expect to generate from operating the business;
A terminal value which was determined using a growth model that applied a 2.0 percent long-term growth rate to our projected after-tax cash flows beyond the four year window. The long-term growth rate was based on our internal projections, as well as industry growth prospects;
An estimated after-tax weighted average cost of capital of 16.0 percent in 2014 and ranging from 16.0 percent to 16.5 percent in both 2013 and 2012; and
Projected worldwide factory shipments ranging from approximately 2.6 million vehicles in 2013 to approximately 3.4 million vehicles in 2018.
On January 21, 2014, Fiat completed the Equity Purchase Agreement, or the transaction, in which its 100 percent owned subsidiary, FCA NA, indirectly acquired from the VEBA Trust all of the membership interests in the Company not previously held by FCA NA. The implied fair value of the Company in that transaction was determined by Fiat based upon the range of potential values determined in connection with the initial public offering, or IPO, that we were pursuing at the direction of our members at that time, reduced by approximately 15 percent for the expected discount that would have been realized in order to complete a successful IPO for the minority interest being sold. This value was used to corroborate the fair value, including the discount for lack of marketability, determined at December 31, 2013. Refer to Note 19, Other Transactions with Related Parties, of our accompanying audited consolidated financial statements for additional information. There were no such transactions during 2013.
The assumptions noted above used in the contemporaneous estimation of fair value at each measurement date have not changed significantly with the exception of the weighted average cost of capital, which is directly influenced by external market conditions. As of December 31, 2014, a change of 50 basis points in the weighted average cost of capital would cause the value of a Unit to change by approximately $0.55, which would change our share-based compensation liability by approximately $3 million.

35


Anti-Dilution Adjustment
The documents governing our share-based compensation plans contain anti-dilution provisions which provide for an adjustment to the number of Units granted under the plans in order to preserve, or alternatively prevent the enlargement of, the benefits intended to be made available to the holders of the awards should an event occur that impacts our capital structure.
During 2014, two transactions occurred that diluted the fair value of equity and the per unit fair value of a Unit based on our discounted cash flow methodology. These transactions were:
A special distribution paid from available cash on hand by the Company to its members, in an aggregate amount of $1,900 million on January 21, 2014, which served to fund a portion of the transaction whereby Fiat acquired the VEBA Trust's remaining membership interest in the Company (FCA NA directed its portion of the special distribution to the VEBA Trust as part of the purchase consideration); and
The prepayment of the Company’s senior unsecured note issued June 10, 2009 to the VEBA Trust, or VEBA Trust Note, on February 7, 2014, that accelerated tax deductions that were being passed through to the Company's members. Had the payments been made according to the original terms of the VEBA Trust Note, an expected future tax benefit, net of discounting, of approximately $720 million would have been realized.
Refer to Note 17, Share-Based Compensation Anti-Dilution Adjustment, of our accompanying audited consolidated financial statements for additional information regarding these dilutive transactions and the resulting anti-dilution adjustment.
In light of the May 6, 2014 publication of the 2014-2018 FCA Business Plan and in recognition of the Company's performance for the 2012 and 2013 performance years, the Compensation and Leadership Development Committee, or Compensation Committee, on May 12, 2014, approved an amendment to outstanding performance share unit, or LTIP PSU award agreements, subject to participant consent, to modify outstanding LTIP PSUs by closing the performance period for such awards as of December 31, 2013. Participants were notified of this modification on or about May 30, 2014, and all plan participants subsequently consented to the amendment. The modification provides for a payment of the LTIP PSUs granted under the FCA US LLC 2012 Long Term Incentive Plan, or 2012 LTIP Plan, representing two-thirds of the original LTIP PSU award based on the unadjusted December 31, 2013 per unit fair value of $10.47. To receive the LTIP PSU payment, a participant must remain an employee up to the date the LTIP PSUs are paid, which is expected to occur on or before March 15, 2015. As a result, compensation expense was reduced by approximately $21 million during the year ended December 31, 2014.
Impairment of Long-Lived Assets
Long-lived assets held and used (such as property, plant and equipment, and equipment and other assets on operating leases) are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of an asset or asset group to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated undiscounted future cash flows expected to be generated by the asset or group of assets. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or group of assets exceeds the fair value of the asset or group of assets. No impairment charges were recorded during the years ended December 31, 2014, 2013 and 2012. When long-lived assets are considered held for sale, they are recorded at the lower of carrying amount or fair value less costs to sell, and depreciation ceases.
Goodwill and Other Intangible Assets
Goodwill. We account for goodwill in accordance with the accounting guidance related to intangibles and goodwill, which requires us to test goodwill for impairment at the reporting unit level at least annually and when significant events occur or there are changes in circumstances that indicate the fair value is less than the carrying amount. Such events could include, among others, a significant adverse change in the business climate, an unanticipated change in the competitive environment and a decision to change the operations of the Company. We have one operating segment, which is also our only reporting unit.
Goodwill is evaluated for impairment annually as of October 1. In September 2011, the Financial Accounting Standards Board, or FASB, issued updated guidance on annual goodwill impairment testing. The amendment allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. At our election, we can qualitatively assess whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount or we can perform a quantitative assessment by comparing the fair value of our reporting unit to its carrying amount, including goodwill, which is the first step of the two-step process described below. If we elect to perform

36


the qualitative assessment and we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required.
When quantitative impairment testing is required as a result of the qualitative test or elected as the first assessment, goodwill is reviewed for impairment utilizing a two-step process. The first step of the impairment test is to compare the fair value of our reporting unit to its carrying amount. The fair value is determined by estimating the present value of expected future cash flows for the reporting unit. If the fair value of the reporting unit is greater than its carrying amount, no impairment exists and the second step of the test is not performed. If the carrying amount of the reporting unit is greater than the fair value, there is an indication that an impairment may exist and the second step of the test must be completed to measure the amount of the impairment. The second step of the test calculates the implied fair value of goodwill by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination. The implied fair value of goodwill is then compared to the carrying value. If the implied fair value of goodwill is less than the carrying value, an impairment loss is recognized equal to the difference. No goodwill impairment losses have been recognized for the years ended December 31, 2014, 2013 and 2012.
Other Intangible Assets. Intangible assets that have a finite useful life are generally amortized over their respective estimated useful lives, on a straight-line basis. However, certain other finite-lived intangible assets are amortized in a manner that reflects the pattern in which the economic benefits of the intangible asset will be consumed. The estimated useful lives of intangible assets are reviewed by management each reporting period and whenever changes in circumstances indicate that the carrying value of the assets may not be recoverable. Other intangible assets determined to have an indefinite useful life are not amortized, but are instead tested for impairment annually.
In July 2012, the FASB issued updated guidance on the annual testing of indefinite-lived intangible assets for impairment. The amendments allow an entity to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. At our election, we can qualitatively assess whether it is more likely than not that the fair value of our indefinite-lived intangible asset is less than its carrying value or we can perform a quantitative assessment by comparing the fair value of our indefinite-lived intangible asset to its carrying amount. If we elect to perform the qualitative assessment and we conclude it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, quantitative impairment testing is required. However, if we conclude otherwise, quantitative impairment testing is not required. An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. Management estimates fair value through various techniques including discounted cash flow models, which incorporate market based inputs, and third party independent appraisals, as considered appropriate. Management also considers current and estimated economic trends and outlook. No impairment losses on these assets have been recognized for the years ended December 31, 2014, 2013 and 2012.
Valuation of Deferred Tax Assets
A valuation allowance on deferred tax assets is required if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon our ability to generate sufficient taxable income during the carryback or carryforward periods applicable in each relevant tax jurisdiction. Our accounting for deferred tax assets represents our best estimate of those future events. Changes in our current estimates, due to unanticipated events or otherwise, could have a material impact on our financial condition and results of operations.
In assessing the realizability of deferred tax assets, we consider both positive and negative evidence. Concluding that a valuation allowance is not required is difficult when there is absence of positive evidence and there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses. Cumulative losses in recent years is a significant piece of negative evidence that is difficult to overcome in determining that a valuation allowance is not needed against deferred tax assets.
Accordingly, at December 31, 2014, we have retained $227 million of valuation allowances, primarily in certain foreign countries in which we do not expect to realize net deferred tax assets. As of December 31, 2013, our valuation allowance on net deferred tax assets was $151 million. Refer to Note 13. Income Taxes, of our accompanying audited consolidated financial statements for additional information.

37


Sales Incentives
We record the estimated cost of sales incentive programs offered to dealers and consumers as a reduction to revenue at the time of sale to the dealer. This estimated cost represents the incentive programs offered to dealers and consumers, as well as the expected modifications to these programs in order to facilitate sales of the dealer inventory. Subsequent adjustments to incentive programs related to vehicles previously sold to dealers are recognized as an adjustment to revenue in the period the adjustment is determinable.
We use price discounts to adjust vehicle pricing in response to a number of market and product factors, including: pricing actions and incentives offered by competitors, economic conditions, the amount of excess industry production capacity, the intensity of market competition, consumer demand for the product and to support promotional campaigns. We may offer a variety of sales incentive programs at any given point in time, including: cash offers to dealers and consumers and subvention programs offered to customers, or lease subsidies, which reduce the retail customer’s monthly lease payment or cash due at the inception of the financing arrangement, or both. Incentive programs are generally brand, model and region specific for a defined period of time, which may be extended.
Multiple factors are used in estimating the future incentive expense by vehicle line including the current incentive programs in the market, planned promotional programs and the normal incentive escalation incurred as the model year ages. The estimated incentive rates are reviewed monthly and changes to the planned rates are adjusted accordingly, thus impacting revenues. As discussed previously, there are a multitude of inputs affecting the calculation of the estimate for sales incentives, and an increase or decrease of any of these variables could have a significant effect on recorded revenues.
Warranty and Product Recalls
We establish accruals for product warranties at the time the sale is recognized. We issue various types of product warranties under which we generally guarantee the performance of products delivered for a certain period or term. The accrual for product warranties includes the expected costs of warranty obligations imposed by law or contract, as well as the expected costs for policy coverage, recall actions and buyback commitments. The estimated future costs of these actions are principally based on assumptions regarding the lifetime warranty costs of each vehicle line and each model year of that vehicle line, as well as historical claims experience for our vehicles. In addition, the number and magnitude of additional service actions expected to be approved, and policies related to additional service actions, are taken into consideration. Due to the uncertainty and potential volatility of these estimated factors, changes in our assumptions could materially affect our results of operations.
We periodically initiate voluntary service and recall actions to address various customer satisfaction, safety and emissions issues related to vehicles we sell. Included in the accrual is the estimated cost of these service and recall actions. The estimated future costs of these actions are based primarily on historical claims experience for our vehicles. Estimates of the future costs of these actions are inevitably imprecise due to numerous uncertainties, including the enactment of new laws and regulations, the number of vehicles affected by a service or recall action and the nature of the corrective action. It is reasonably possible that the ultimate cost of these service and recall actions may require us to make expenditures in excess of established accruals over an extended period of time and in a range of amounts that cannot be reasonably estimated. Our estimate of warranty and additional service and recall action obligations is re-evaluated on a quarterly basis. Experience has shown that initial data for any given model year can be volatile; therefore, our process relies upon long-term historical averages until actual data is available. As actual experience becomes available, it is used to modify the historical averages to ensure that the forecast is within the range of likely outcomes. Resulting accruals are then compared with current spending rates to ensure that the balances are adequate to meet expected future obligations.

38


Accounting Standards Not Yet Adopted
Accounting standards not yet adopted are discussed in Note 2, Basis of Presentation and Significant Accounting Policies, of our accompanying audited consolidated financial statements.
Non-GAAP Financial Measures
We monitor our operations through the use of several non-GAAP financial measures: Adjusted Net Income (Loss), Modified Operating Profit (Loss); Modified Earnings Before Interest, Taxes, Depreciation and Amortization, which we refer to as Modified EBITDA; Net Industrial Cash (Debt) and Free Cash Flow. We believe that these non-GAAP financial measures provide useful information about our operating results and enhance the overall ability to assess our financial performance. They provide us with comparable measures of our financial performance based on normalized operational factors which then facilitate management’s ability to identify operational trends, as well as make decisions regarding future spending, resource allocations and other operational decisions. These and similar measures are widely used in the industry in which we operate.
These financial measures may not be comparable to other similarly titled measures of other companies and are not an alternative to net income (loss) or income (loss) from operations as calculated and presented in accordance with U.S. GAAP. These measures should not be used as a substitute for any U.S. GAAP financial measures.
Adjusted Net Income (Loss)
Adjusted Net Income (Loss) is defined as net income (loss), including income (loss) attributable to non-controlling interests, excluding the impact of items that we consider infrequent. We use Adjusted Net Income (Loss) as a key indicator of the trends in our overall financial performance, excluding the impact of such infrequent items.
Modified Operating Profit (Loss)
We measure Modified Operating Profit (Loss) to assess the performance of our core operations, establish operational goals and forecasts that are used to allocate resources, and evaluate our performance period over period. Modified Operating Profit (Loss) is computed starting with adjusted net income (loss), including income (loss) attributable to non-controlling interests, and then adjusting the amount to (i) add back income tax expense and exclude income tax benefits, (ii) add back net interest expense, (iii) add back (exclude) all pension, OPEB and other employee benefit costs (gains) other than service costs, (iv) add back restructuring expense and exclude restructuring income, (v) add back other financial expense, (vi) add back losses and exclude gains due to cumulative change in accounting principles, (vii) exclude non-controlling interests and (viii) add back certain other costs, charges and expenses, which include the impact of infrequent items factored into the calculation of Adjusted Net Income (Loss). We also use performance targets based on Modified Operating Profit (Loss) as a factor in our incentive compensation calculations for our represented and non-represented employees.
Modified EBITDA
We measure the performance of our business using Modified EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We compute Modified EBITDA starting with net income (loss) adjusted to Modified Operating Profit (Loss) as described above, and then adding back depreciation and amortization expense (excluding depreciation and amortization expense for vehicles held for lease). We believe that Modified EBITDA is useful to determine the operational profitability of our business, which we use as a basis for making decisions regarding future spending, budgeting, resource allocations and other operational decisions.

39


The reconciliation of net income to Adjusted Net Income, Modified Operating Profit and Modified EBITDA is set forth below (in millions of dollars):
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
Net income
 
$
1,209

 
$
2,757

 
$
1,668

Plus:
 
 
 
 
 
 
Charge for Memorandum of Understanding (MOU) with the UAW (1)
 
672

 

 

Deferred tax assets valuation allowance release
 

 
(962
)
 

Loss on extinguishment of debt (2)
 
504

 
24

 

Adjusted Net Income
 
$
2,385

 
$
1,819

 
$
1,668

Plus:
 
 
 
 
 
 
Income tax expense (3)
 
348

 
409

 
274

Net interest expense 
 
779

 
994

 
1,050

Net pension, OPEB and other employee benefit costs (gains) other than service costs
 
(24
)
 
(49
)
 
(34
)
Restructuring expense (income), net
 
11

 
(14
)
 
(61
)
Other financial expense, net
 
3

 
17

 
15

Modified Operating Profit
 
$
3,502

 
$
3,176

 
$
2,912

Plus:
 
 
 
 
 
 
Depreciation and amortization expense
 
3,200

 
2,941

 
2,701

Less:
 
 
 
 
 
 
Depreciation and amortization expense for vehicles held for lease
 
(298
)
 
(198
)
 
(163
)
Modified EBITDA
 
$
6,404

 
$
5,919

 
$
5,450


(1)
During the year ended December 31, 2014, we recorded an infrequent charge of $672 million, which reflected the costs associated with the January 2014 MOU to supplement the existing collective bargaining agreement with the UAW in exchange for the UAW's specific commitment to our continued roll-out of our World Class Manufacturing, or WCM, programs and long-term business plan.
(2)
In connection with the February 2014 prepayment of the VEBA Trust Note, with an original face amount of $4,587 million, we recognized a $504 million loss on extinguishment of debt, consisting primarily of the remaining unamortized debt discount. For the year ended December 31, 2013, a $24 million loss on extinguishment of debt was recognized primarily related to the June 2013 amendment and re-pricing of our $3.0 billion tranche B term loan and $1.3 billion revolving credit facility, consisting primarily of unamortized debt discount.
(3)
Excludes the effects of a $962 million non-cash tax benefit related to the release of valuation allowances on deferred tax assets during the year ended December 31, 2013. Refer to Note 13, Income Taxes, of our accompanying audited consolidated financial statements for additional information.

40


Net Industrial Cash
We compute Net Industrial Cash as cash and cash equivalents less total financial liabilities. We use Net Industrial Cash as a measure of our financial leverage and believe it is useful in evaluating our financial leverage.
The following is a reconciliation of cash and cash equivalents to Net Industrial Cash (in millions of dollars):
 
 
Years Ended December 31,
 
 
2014
 
2013
Cash and cash equivalents
 
$
14,538

 
$
13,344

Less: Financial liabilities (1)
 
(12,779
)
 
(12,301
)
Net Industrial Cash
 
$
1,759

 
$
1,043


(1)
Refer to Note 12, Financial Liabilities, of our accompanying audited consolidated financial statements for additional information regarding our financial liabilities.
Free Cash Flow
Free Cash Flow is defined as cash flows from operating and investing activities, excluding any debt related investing activities. Free Cash Flow is presented because we believe that it is used by analysts and other parties in evaluating the Company. However, Free Cash Flow does not necessarily represent cash available for discretionary activities, as certain debt obligations and capital lease payments must be funded out of Free Cash Flow. We also use performance targets based on Free Cash Flow as a factor in our incentive compensation calculations for our non-represented employees.
Free Cash Flow should not be considered as an alternative to, or substitute for, net change in cash and cash equivalents. We believe it is important to view Free Cash Flow as a complement to our Consolidated Statements of Cash Flows.
The following is a reconciliation of Net Cash Provided by Operating and Investing Activities to Free Cash Flow (in millions of dollars):
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
Net Cash Provided by Operating Activities
 
$
6,355

 
$
5,536

 
$
5,821

Net Cash Used in Investing Activities
 
(3,018
)
 
(3,413
)
 
(3,557
)
Investing activities excluded from Free Cash Flow:
 
 
 
 
 
 
Change in loans and notes receivables
 

 

 
(2
)
Financing activities included in Free Cash Flow:
 
 
 
 
 
 
Repayments of Gold Key Lease financing
 

 

 
(41
)
Free Cash Flow
 
$
3,337

 
$
2,123

 
$
2,221


41


Results of Operations
Worldwide Factory Shipments
The following summarizes our gross and net worldwide factory shipments, which include vehicle sales to our dealers, distributors and contract manufacturing customers. Management believes that this data provides meaningful information regarding our operating results. Shipments of vehicles manufactured by our assembly facilities are generally aligned with current period production, which is driven by consumer demand. Revenue is generally recognized when the risks and rewards of ownership of a vehicle have been transferred to our customer, which usually occurs upon release of the vehicle to the carrier responsible for transporting the vehicle to our customer.
Dealers and distributors sell our vehicles to retail customers and fleet customers. Our fleet customers include rental car companies, commercial fleet customers, leasing companies and government entities. Our fleet shipments include vehicle sales through our Guaranteed Depreciation Program, or GDP, under which we guarantee the residual value or otherwise assume responsibility for the minimum resale value of the vehicle. We account for such sales similar to an operating lease and recognize rental income over the contractual term of the lease on a straight-line basis. At the end of the lease term, we recognize revenue for the portion of the vehicle sales price which had not been previously recognized as rental income. The remainder of the cost of the vehicle which had not been previously recognized as depreciation expense over the lease term is recognized in cost of sales. We include GDP vehicle sales in our net worldwide factory shipments at the time of auction, rather than at the time of sale to the fleet customer, consistent with the timing of revenue recognition. We consider these net worldwide factory shipments to approximate the timing of revenue recognition.
 
 
Years Ended December 31,
 
 
2014
 
2013
 
2012
 
 
(vehicles in thousands)
Retail
 
2,300

 
2,033

 
1,844

Fleet
 
531

 
470

 
484

Contract manufacturing
 
49

 
60

 
81

Worldwide Factory Shipments
 
2,880

 
2,563

 
2,409

Adjust for GDP activity during the period:
 
 
 
 
 
 
Less: Vehicles shipped
 
(121
)
 
(79
)
 
(51
)
Plus: Vehicles auctioned
 
74

 
58

 
74

Net Worldwide Factory Shipments
 
2,833

 
2,542

 
2,432

Consolidated Results
The following is a discussion of the results of operations for the year ended December 31, 2014 as compared to the year ended December 31, 2013, and for the year ended December 31, 2013 as compared to the year ended December 31, 2012. The discussion of certain line items (Cost of sales, Gross margin, Selling, administrative and other expenses, and Research and development expenses) includes a presentation of such line items as a percentage of revenues, for the respective periods presented, to facilitate the discussion for the year over year comparisons.
Revenues, Net
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Revenues, net
 
$
83,057

 
$
72,144

 
$
65,784

 
$
10,913

 
15.1
%
 
$
6,360

 
9.7
%
2014 Compared to 2013. Revenues, net for the year ended December 31, 2014 increased $10,913 million as compared to the year ended December 31, 2013. Approximately $7,800 million of the increase was attributable to an increase in volume, which was due to an increase in our net worldwide factory shipments from 2,542 thousand vehicles for the year ended December 31, 2013 to 2,833 thousand vehicles for the year ended December 31, 2014. The 11 percent period over period increase in our net worldwide factory shipments was driven primarily by increased demand for our vehicles, including the all-new 2014 Jeep

42


Cherokee, Ram pickups and the Jeep Grand Cherokee. These increases were partially offset by a reduction in the 2014 model year Chrysler 200 and Dodge Avenger shipments due to their discontinued production in the first quarter of 2014 in preparation for the changeover and launch of the all-new 2015 Chrysler 200, which began arriving in dealerships in May 2014.
Overall, demand for our vehicles has increased, as evidenced by a 16 percent period over period increase in our U.S. vehicle sales, which was primarily driven by an 18 percent increase in our U.S. retail sales for the year ended December 31, 2014 as compared to the same period in 2013. Our U.S. market share increased approximately 100 basis points to 12.4 percent for the year ended December 31, 2014 compared to 2013.
Approximately $1,900 million of the increase in revenues was attributable to a favorable shift in vehicle mix as there was a higher percentage growth in certain sport utility vehicles, or SUV, shipments as compared to passenger car shipments. In addition, approximately $400 million of the increase in revenues was due to a favorable shift in market mix which included greater international retail shipments as a percentage of total shipments, which is consistent with our continuing strategy to grow our retail market share while maintaining stable fleet shipments. Typically, the average revenue per vehicle for retail shipments is higher than the average revenue per vehicle for fleet shipments, as our retail customers tend to purchase vehicles with more optional features. For additional information regarding retail and fleet shipments, refer to —Worldwide Factory Shipments, above. Also, $400 million of the increase in revenues was attributable to favorable pricing and pricing for enhanced content, partially offset by incentive spending on certain vehicles in our portfolio.
During the year ended December 31, 2014, we recorded remeasurement charges of $133 million as a reduction to Revenues, net as a result of foreign currency devaluation due to changes in the exchange rate determined by an auction process conducted by Venezuela's Supplementary Foreign Currency Administration System, or SICAD, referred to as the SICAD I rate. Additionally, during the second quarter of 2014, we received a total of $65 million in USD through the SICAD I auction process resulting in a net foreign currency transaction gain of $2 million in Revenues, net. Furthermore, during the third quarter of 2014, certain monetary liabilities, which had been submitted to the Commission for the Administration of Foreign Exchange, or CADIVI, for payment approval, were approved and paid at a favorable exchange rate resulting in a foreign currency transaction gain in Revenues, net of $2 million.
During the first quarter of 2013, we recognized a $78 million foreign currency translation loss as a reduction to revenues as a result of the February 2013 devaluation of the official exchange rate of the Venezuelan bolivar, or VEF, relative to the USD from 4.30 VEF per USD to 6.30 VEF per USD. Subsequent to the devaluation, certain monetary liabilities, which had been submitted to the CADIVI for payment approval through the ordinary course of business prior to the devaluation date, were approved to be paid at an exchange rate of 4.30 VEF per USD. As a result, during the year ended December 31, 2013, we recognized $22 million of foreign currency transaction gains in revenues due to these monetary liabilities being previously remeasured at 6.30 VEF per USD at the devaluation date. Refer to Note 22, Venezuelan Currency Regulations and Devaluation, for further detail.
As of December 31, 2014, we continue to control, and therefore consolidate, our Venezuelan operations. However, as the complex environment in Venezuela evolves, we will continuously assess whether factors have changed, suggesting that we have lost control of these operations. Refer to Item 7A. Quantitative and Qualitative Disclosures about Market Risk for additional information.
2013 Compared to 2012. Revenues, net for the year ended December 31, 2013 increased $6,360 million as compared to the year ended December 31, 2012. Approximately $2,800 million of the increase was due to an increase in our net worldwide factory shipments from 2,432 thousand vehicles for the year ended December 31, 2012 to 2,542 thousand vehicles for the year ended December 31, 2013. The increase in our net worldwide factory shipments was driven primarily by increased demand for our vehicles, including the Ram 1500, the launch of the all-new 2014 Jeep Cherokee, which began shipping to dealers in late October 2013, the significantly refreshed 2014 Jeep Grand Cherokee, which launched in the first quarter of 2013, as well as increases in the Jeep Wrangler. These increases were partially offset by a reduction in Jeep Liberty shipments due to its discontinued production at the end of the second quarter of 2012 in preparation of the all-new 2014 Jeep Cherokee. During the second half of 2012 we continued to ship the residual Jeep Liberty inventory to dealers.
Overall, demand for our vehicles increased, as evidenced by a nine percent period over period increase in our U.S. vehicle sales, which was primarily driven by a 14 percent increase in our U.S. retail sales for the year ended December 31, 2013 as compared to the same period in 2012. Our U.S. market share increased by 20 basis points to 11.4 percent for the year ended December 31, 2013 as compared to the same period in 2012.
Approximately $1,400 million of the increase in revenues was attributable to favorable vehicle mix as there was a higher percentage growth in truck and certain SUV shipments as compared to minivan and passenger car shipments. In addition,

43


revenues increased by approximately $1,200 million as a result of favorable net pricing from vehicle content enhancements in our 2014 model year vehicles as compared to prior model years. Further, approximately $900 million of the increase in revenues was due to a favorable shift in market mix to greater retail shipments as a percentage of total shipments, which is consistent with our continuing strategy to grow our U.S. retail market share while maintaining stable fleet shipments. For additional information regarding retail and fleet shipments, refer to —Worldwide Factory Shipments, above.
During the first quarter of 2013, we recognized a $78 million foreign currency translation loss as a reduction to revenues as a result of the February 2013 devaluation of the VEF relative to the USD from 4.30 VEF per USD to 6.30 VEF per USD. Subsequent to the devaluation, certain monetary liabilities, which had been submitted to the CADIVI, for payment approval through the ordinary course of business prior to the devaluation date, were approved to be paid at an exchange rate of 4.30 VEF per USD. As a result, during the year ended December 31, 2013, we recognized $22 million of foreign currency transaction gains in revenues due to these monetary liabilities being previously remeasured at 6.30 VEF per USD at the devaluation date. Refer to Item 7A. —Quantitative and Qualitative Disclosures about Market Risk, for additional information regarding Venezuela currency regulations and devaluation.
Cost of Sales
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
Percentage
of Revenues
 
2013
 
Percentage
of Revenues
 
2012
 
Percentage
of Revenues
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Cost of sales
 
$
71,942

 
86.6
%
 
$
61,398

 
85.1
%
 
$
55,350

 
84.1
%
 
$
10,544

 
17.2
%
 
$
6,048

 
10.9
%
Gross margin
 
11,115

 
13.4
%
 
10,746

 
14.9
%
 
10,434

 
15.9
%
 
369

 
3.4
%
 
312

 
3.0
%
We procure a variety of raw materials, parts, supplies, utilities, transportation and other services from numerous suppliers to manufacture our vehicles, parts and accessories, primarily on a purchase order basis. The raw materials we use typically consist of steel, aluminum, resin, copper, lead and precious metals including platinum, palladium and rhodium. The cost of materials and components makes up the majority of our cost of sales, which was approximately 76 percent for the years ended December 31, 2014, 2013 and 2012. The remaining costs primarily include labor costs, consisting of direct and indirect wages and fringe benefits, as well as depreciation and amortization costs. Cost of sales also includes warranty and product-related costs, as well as depreciation expense related to our GDP vehicles. Fluctuations in costs of sales are primarily driven by the number of vehicles that we produce and sell.
2014 Compared to 2013. Cost of sales for the year ended December 31, 2014 increased $10,544 million compared to the same period in 2013, approximately $6,100 million of which was attributable to an increase in our net worldwide shipments. In addition, approximately $2,200 million of the increase was due to changes in our vehicle and market mix which included a higher percentage growth in certain SUV shipments as compared to passenger car shipments, along with more retail shipments relative to fleet shipments. See —Revenues, Net, above for additional discussion. During the year ended December 31, 2014, higher base material costs associated with vehicle components and content enhancements, and other costs net of purchasing efficiencies, contributed to an increase in our cost of sales of approximately $1,100 million over the same period last year. In addition, we incurred approximately $200 million of higher depreciation and amortization expense which included our capital investments associated with our recent product launches. During the year ended December 31, 2014, we experienced an increase in the number of approved recall campaigns. As a result, we incurred an increase to our pre-existing warranty expense of approximately $500 million over the same period in 2013, which included the effects of recently approved recall campaigns. During the year ended December 31, 2013, we recorded a $151 million charge related to our voluntary safety recall for the 1993-1998 Jeep Grand Cherokee and 2002-2007 Jeep Liberty, as well as our customer satisfaction action for the 1999-2004 Jeep Grand Cherokee.
Gross margin for the year ended December 31, 2014 increased $369 million, or 3.4 percent, on an absolute basis, as compared to the same period in 2013. Gross margin increased by approximately $1,700 million related to increases in our net worldwide factory shipments and by approximately $100 million related to a shift in vehicle and market mix. Also, $400 million of the increase in revenues was attributable to favorable pricing and pricing for enhanced content, partially offset by incentive spending on certain vehicles in our portfolio. Partially offsetting these increases, gross margin was reduced by approximately $1,100 million due to higher base material costs associated with vehicle components and content enhancements, and other costs net of purchasing efficiencies. In addition, our gross margin was reduced by approximately $200 million of higher depreciation and amortization, and by an increase of approximately $500 million over the same period last year to our pre-existing warranty costs, which included the effects of recently approved recall campaigns.

44


2013 Compared to 2012. Cost of sales for the year ended December 31, 2013 increased $6,048 million as compared to the same period in 2012, approximately $2,200 million of which was attributable to an increase in our net worldwide factory shipments. In addition, approximately $1,400 million was attributable to a higher percentage of growth in truck and certain SUV shipments as compared to minivan and passenger car shipments. Further, approximately $1,200 million of the increase was due to higher base material costs associated with vehicle components and enhancements. In addition, we incurred approximately $200 million of higher depreciation and amortization expense primarily related to capital investments associated with our product launches. There was also an increase of $200 million in other costs associated with expanding our manufacturing capacity, which includes costs for additional shifts and/or crews at certain facilities in order to meet increased production requirements to support consumer demand. In addition, approximately $500 million of the increase was attributable to a shift in market mix to greater retail shipments as a percentage of total shipments, as our retail customers tend to purchase vehicles with more optional features. See —Revenues, Net, above, for additional discussion.
Cost of sales for the year ended December 31, 2013 also included a $151 million charge recognized during the second quarter of 2013 related to our voluntary safety recall for the 1993-1998 Jeep Grand Cherokee and 2002-2007 Jeep Liberty, as well as our customer satisfaction action for the 1999-2004 Jeep Grand Cherokee. In addition, during the year ended December 31, 2012, we recognized insurance recoveries totaling $76 million related to losses sustained in 2011 due to supply disruptions. The proceeds from these recoveries were fully collected during 2012. There were no similar insurance recoveries during the year ended December 31, 2013.
Gross margin for the year ended December 31, 2013 increased $312 million, or three percent, on an absolute basis, as compared to the same period in 2012. Overall, the increase in gross margin is attributable to favorable net pricing of approximately $1,200 million. In addition, there was an increase in our net worldwide factory shipments which contributed approximately $600 million to our increased gross margin. Further, the favorable shift in market mix contributed to an increase in our gross margin of approximately $400 million. These increases were partially offset by approximately $1,200 million of higher base material costs associated with vehicle components and enhancements. In addition, we incurred approximately $200 million of higher depreciation and amortization expense primarily related to capital investments associated with our product launches. There was also an increase of $200 million in other costs associated with expanding our manufacturing capacity, which includes costs for additional shifts and/or crews at certain facilities in order to meet increased production requirements to support consumer demand. The reduction in gross margin also included the $151 million charge recognized during 2013 for the above-mentioned voluntary safety recall and customer satisfaction action. In addition, gross margin was lower in 2013 due to the $76 million of insurance recoveries recognized in 2012 as discussed above.
Selling, Administrative and Other Expenses
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
Percentage
of Revenues
 
2013
 
Percentage
of Revenues
 
2012
 
Percentage
of Revenues
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Selling, administrative and other expenses
 
$
5,974

 
7.2
%
 
$
5,218

 
7.2
%
 
$
5,179

 
7.9
%
 
$
756

 
14.5
%
 
$
39

 
0.8
%
Selling, administrative and other expenses include advertising, personnel, warehousing and other costs. Selling, administrative and other expenses for the year ended December 31, 2014 included an infrequent charge of $672 million, which reflected the costs associated with the January 2014 MOU, to supplement the existing collective bargaining agreement with the UAW, in exchange for the UAW’s specific commitment to our continued roll-out of our WCM programs and long-term business plan.
For the year ended December 31, 2014, advertising expenses accounted for approximately 60 percent of the selling, administrative and other expenses excluding the infrequent MOU charge. During the years ended December 31, 2013 and 2012, advertising expenses accounted for approximately 53 percent of selling, administrative and other expenses.
Advertising expenses consist primarily of national and regional media campaigns, as well as marketing support in the form of trade and auto shows, events and sponsorships. Typically, we incur greater advertising costs in the initial months that new or significantly refreshed vehicles become available at dealerships.
2014 Compared to 2013. For the year ended December 31, 2014, excluding the infrequent MOU charge, selling, administrative and other expenses remained relatively consistent as compared to the same period in 2013. In 2014, our advertising expenses supported the vehicle launch for the all-new 2015 Chrysler 200, and we continued our advertising spending for the all-new

45


2014 Jeep Cherokee to build upon the success of the vehicle, along with continued marketing support in international markets. In 2013, we launched the significantly refreshed 2014 Jeep Grand Cherokee, the all-new 2014 Jeep Cherokee and the all-new Fiat 500L. During the year ended December 31, 2014, the increases in advertising expense were partially offset by a $21 million reduction of expense related to share-based compensation. Refer to Note 17, Share-Based Compensation, for additional information.
2013 Compared to 2012. For the year ended December 31, 2013, selling, administrative and other expenses remained relatively consistent as compared to the same period in 2012. In 2013, we launched the significantly refreshed 2014 Jeep Grand Cherokee, the all-new 2014 Jeep Cherokee and the all-new Fiat 500L. In 2012, we launched the all-new Dodge Dart and the Ram 1500. In addition, during 2012, we continued to increase our advertising spending for the Fiat 500 to build upon the growing success of the vehicle and to support the launch of the Fiat 500 Abarth.
Research and Development Expenses, Net
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
Percentage
of Revenues
 
2013
 
Percentage
of Revenues
 
2012
 
Percentage
of Revenues
 
2014 vs. 2013
 
2013 vs. 2012
 
 
 (in millions of dollars)
Research and development expenses, net
 
$
2,290

 
2.8
%
 
$
2,320

 
3.2
%
 
$
2,324

 
3.5
%
 
$
(30
)
 
(1.3
)%
 
$
(4
)
 
(0.2
)%
We conduct research and development for new and existing vehicles and technologies to improve performance, safety, fuel efficiency, reliability, comfort and convenience and consumer perception of our vehicles. Research and development expenses consist primarily of material costs and personnel related expenses that support development of new and existing vehicles and powertrain technologies, including the building of three-dimensional models, virtual simulations, prototype building and testing (including with respect to the integration of safety and powertrain technologies) and assembly of pre-production pilot models. Additionally, research and development activities focus on improved fuel efficiency and reduced emissions. We share access to certain platforms, vehicles, products and technologies with FCA. Likewise, costs are shared with FCA related to joint engineering and development activities and we reimburse each other based upon costs agreed to under our cost sharing arrangements. Our research and development expenses for the years ended December 31, 2014, 2013 and 2012 are net of reimbursements of $69 million, $33 million and $51 million respectively.
2014 Compared to 2013. Research and development expenses remained relatively consistent year over year. For the year ended December 31, 2014, spending related primarily to direct and indirect materials focused on our continued investments in mid-cycle and new program actions, principally the 2015 Jeep Renegade. Spending in 2014 related to personnel expenses was consistent with our continued investment to support development of new and existing powertrain technologies. In 2014, spending also continued for our joint development programs with FCA primarily related to front-wheel drive and rear-wheel drive architecture and future B- segment vehicles. For the year ended December 31, 2013, spending related primarily to mid-cycle and new program actions, principally the Ram truck lineup, 2014 Jeep Cherokee, and the all-new 2015 Chrysler 200, as well as joint development programs with FCA primarily related to future small, or B- segment vehicles.
2013 Compared to 2012. Research and development expenses remained relatively consistent year over year. For the year ended December 31, 2013, spending related primarily to direct and indirect materials, and personnel expenses focused on mid-cycle and new program actions, principally the Ram truck lineup, along with the all-new 2014 Jeep Cherokee and the all-new 2015 Chrysler 200. In 2013, spending also continued for our joint development programs with FCA primarily related to future B-segment vehicles. For the year ended December 31, 2012, spending related primarily to mid-cycle actions, principally the Ram truck lineup, Jeep Grand Cherokee, Dodge Durango and the all-new 2014 Jeep Cherokee, as well as joint development programs with FCA primarily related to the compact U.S. wide, or CUSW, platform utilized for the Dodge Dart, which launched in the second quarter 2012.

46


Restructuring Expense (Income), Net
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Restructuring expense (income), net
 
$
11

 
$
(14
)
 
$
(61
)
 
$
25

 
(178.6
)%
 
$
47

 
(77.0
)%
2014. During 2014, we undertook a voluntary severance program in Venezuela to facilitate workforce reductions. As a result for the year ended December 31, 2014, we incurred approximately $17 million of restructuring expense associated with this program.
In connection with the master transaction agreement approved under section 363 of the U.S. Bankruptcy Code, we assumed certain liabilities related to specific restructuring actions commenced by Old Carco. We continue to monitor these previously established reserves for adequacy, taking into consideration the status of the restructuring actions and the estimated costs to complete the actions, and any necessary adjustments are recorded in the period the adjustment is determinable. During the year ended December 31, 2014, we made refinements to restructuring reserve estimates resulting in restructuring income of approximately $7 million. The refinements were due to decreases in the expected workforce reduction costs and legal claim reserves. Refer to Note 21, Restructuring Actions, for additional information.
2013. Restructuring income, net for the year ended December 31, 2013 was $14 million and includes refinements to existing reserve estimates primarily related to decreases in the expected workforce reduction costs and legal claim reserves.
2012. Restructuring income, net for the year ended December 31, 2012 was $61 million and includes refinements to existing reserve estimates of $62 million primarily related to decreases in the expected workforce reduction costs and legal claim reserves, as well as other transition costs related to the integration of the operations of our European distribution and dealer network into FCA's distribution organization. These refinements were partially offset by $1 million of charges primarily related to costs associated with employee relocations for previously announced restructuring initiatives.

47


Interest Expense
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Interest expense
 
$
842

 
$
1,035

 
$
1,094

 
$
(193
)
 
(18.6
)%
 
$
(59
)
 
(5.4
)%
Interest expense included the following:
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Financial interest expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
VEBA Trust Note
 
$
44

 
$
433

 
$
440

 
$
(389
)
 
(89.8
)%
 
$
(7
)
 
(1.6
)%
2019 and 2021 Notes
 
462

 
260

 
260

 
202

 
77.7
 %
 

 
 %
Tranche B Term Loan due 2017
 
111

 
151

 
181

 
(40
)
 
(26.5
)%
 
(30
)
 
(16.6
)%
Tranche B Term Loan due 2018
 
52

 

 

 
52

 
NM

 

 
 %
Canadian Health Care Trust Notes
 
72

 
89

 
99

 
(17
)
 
(19.1
)%
 
(10
)
 
(10.1
)%
Mexican development banks credit facilities
 
45

 
54

 
58

 
(9
)
 
(16.7
)%
 
(4
)
 
(6.9
)%
Financial resources provided by Fiat
 
12

 
8

 

 
4

 
50.0
 %
 
8

 
NM

Other
 
49

 
49

 
53

 

 
 %
 
(4
)
 
(7.5
)%
Interest accretion (1)
 
48

 
117

 
119

 
(69
)
 
(59.0
)%
 
(2
)
 
(1.7
)%
Capitalized interest related to capital expenditures
 
(53
)
 
(126
)
 
(116
)
 
73

 
(57.9
)%
 
(10
)
 
8.6
 %
Total
 
$
842

 
$
1,035

 
$
1,094

 
$
(193
)
 
(18.6
)%
 
$
(59
)
 
(5.4
)%

(1)
Interest accretion is primarily related to debt discounts/premiums, debt issuance costs and fair value adjustments.
2014 Compared to 2013. The decrease in interest expense resulted primarily from the prepayment of the senior unsecured note issued June 10, 2009 to the VEBA Trust, that was funded with new debt issuances which have lower effective interest rates than the VEBA Trust Note, and the June 2013 amendment and restatement and the December 2013 re-pricing which lowered the effective interest rate of the $3.0 billion tranche B term loan. Refer to —Liquidity and Capital Resources —New Debt Issuances and Prepayment of the VEBA Trust Note for additional information regarding the VEBA Trust Note prepayment and new debt issuances, and to Liquidity and Capital Resources for further information regarding the June 21, 2013 amendment and restatement and the December 23, 2013 re-pricing of the $3.0 billion tranche B term loan. The decrease in capitalized interest was consistent with the reduction in the effective interest rate, and a lower average construction in progress balance during 2014 compared to 2013.
2013 Compared to 2012. The decrease in interest expense for the year ended December 31, 2013 as compared to the year ended December 31, 2012 was primarily due to lower effective interest rates resulting from the June 21, 2013 amendment and restatement of our credit agreement governing the $3.0 billion tranche B term loan and $1.3 billion revolving credit facility, or Original Senior Credit Agreement, which reduced the applicable interest rate spreads on the $3.0 billion tranche B term loan by 1.50 percent per annum and reduced the rate floors applicable to the $3.0 billion tranche B term loan by 0.25 percent per annum. Refer to —Liquidity and Capital Resources —Senior Credit Facilities and Secured Senior Notes and —Senior Credit Facilities, for additional information related to these transactions.

48


Loss on Extinguishment of Debt
 
 
Years Ended December 31,
 
Increase (Decrease)
 
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Loss on extinguishment of debt
 
$
504

 
$
24

 
$

 
$
480

 
NM
 
$
24

 
NM
2014. During the year ended December 31, 2014, in connection with the prepayment of the VEBA Trust Note in February 2014, we recorded a non-cash charge of $504 million, consisting primarily of the remaining unamortized debt discount. Refer to —Liquidity and Capital Resources —New Debt Issuances and Prepayment of the VEBA Trust Note, below, for additional information related to our new debt issuances and prepayment of the VEBA Trust Note.
2013. During the year ended December 31, 2013, in connection with the June 21, 2013 amendment and restatement of our Original Senior Credit Agreement and the December 23, 2013 re-pricing of our $3.0 billion tranche B term loan, we recognized a $24 million loss on extinguishment of debt. The loss included the write off of $13 million of unamortized debt discounts and $3 million of unamortized debt issuance costs associated with the $3.0 billion tranche B term loan and $1.3 billion revolving credit facility, as well as $8 million of call premium and other fees associated with the amendments. Refer to —Liquidity and Capital Resources —Senior Credit Facilities and Secured Senior Notes and —Senior Credit Facilities, below, for additional information related to our senior credit facilities.
2012. No loss on extinguishment of debt was recorded during the year ended December 31, 2012.
Income Tax Expense (Benefit)
 
 
Years Ended December 31,
 
Increase (Decrease) 
 
 
2014
 
2013
 
2012
 
2014 vs. 2013
 
2013 vs. 2012
 
 
(in millions of dollars)
Income tax expense (benefit)
 
$
348

 
$
(553
)
 
$
274

 
$
901

 
162.9
%
 
$
(827
)
 
(301.8
)%
Our effective income tax rate differs from the expected federal statutory rate of 35 percent primarily because we are a limited liability company, or LLC, taxed as a partnership, and because of differences between foreign statutory tax rates and the U.S. federal statutory tax rate.
The primary difference in our income tax expense amounts for the periods presented is due to the release of a $962 million valuation allowance on net deferred tax assets resulting in a tax benefit for the 2013 year.
2014. Our effective income tax rate for the year ended December 31, 2014 was 22 percent, which is lower than the statutory rate primarily due to income generated by us and certain of our 100 percent owned U.S. subsidiaries that are not subject to income tax at the FCA US level. Income tax expense for the year ended December 31, 2014 was primarily driven by foreign statutory tax provisions as a result of our subsidiaries in foreign jurisdictions having taxable earnings.
2013. Our effective income tax rate for the year ended December 31, 2013 was (25) percent. While we had pretax income, we recognized a non-cash tax benefit of $962 million related to the release of valuation allowances on certain of our deferred tax assets.
2012. Our effective income tax rate for the year ended December 31, 2012 was 14 percent, which is lower than the statutory rate primarily due to income generated by us and certain of our 100 percent owned U.S. subsidiaries that are not subject to income tax at the Company level. Income tax expense for the year ended December 31, 2012 was primarily driven by foreign statutory tax provisions as a result of our subsidiaries in foreign jurisdictions having taxable earnings.

49


Non-Cash (Gains) Charges
The following summarizes our significant non-cash (gains) charges (in millions of dollars):
 
 
Years Ended December 31,
 
 
    2014    
 
    2013    
 
    2012    
Charge for the MOU with the UAW
 
$
672

 
$

 
$

Loss on extinguishment of debt
 
504

 
24

 

Valuation allowances against deferred tax assets
 
75

 
(962
)
 
(77
)
Total Significant Non-Cash (Gains) Charges
 
$
1,251

 
$
(938
)
 
$
(77
)
Liquidity and Capital Resources
Liquidity Overview
We require significant liquidity in order to meet our obligations and fund our business plan. Short-term liquidity is required to purchase raw materials, parts and components required for vehicle production, and to fund selling, administrative, research and development and other expenses. In addition to our general working capital needs, we expect to use significant amounts of cash for the following purposes: (i) capital expenditures to support our existing and future products; (ii) principal and interest payments under our financial obligations and (iii) pension and OPEB payments.
Liquidity needs are met primarily through cash generated from operations, including the sale of vehicles and service parts to dealers, distributors and other consumers worldwide. We also have access to an undrawn revolving credit facility detailed under the caption —Total Available Liquidity, below. In addition, long-term liquidity needs may involve some level of debt refinancing as outstanding debt becomes due or we are required to make amortization or other principal payments. Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position and increase our Net Industrial Cash over time in order to enhance our financial flexibility. Our calculation of Net Industrial Cash, as well as a detailed discussion of this measure, is included above in —Non-GAAP Financial Measures —Net Industrial Cash.
Any actual or perceived limitations of our liquidity, or the liquidity of FCA, may limit the ability or willingness of counterparties, including dealers, consumers, suppliers, lenders and financial service providers, to do business with us, or require us to restrict additional amounts of cash to provide collateral security for our obligations. Our liquidity levels are subject to a number of risks and uncertainties, including those described in Forward-Looking Statements, above, and in Item 1A. Risk Factors.
Total Available Liquidity
At December 31, 2014, our total available liquidity was $15.8 billion, including $1.3 billion available under our revolving credit facility that matures in May 2016, or the Revolving Facility. We may access these funds subject to the conditions of the senior credit agreement governing the Revolving Facility. The proceeds from the Revolving Facility may be used for general corporate and/or working capital purposes. The terms of our senior credit agreements governing our $3.25 billion tranche B term loan, our revolving credit facility and our $1.75 billion tranche B term loan, or Senior Credit Agreements, require us to maintain a minimum liquidity of $3.0 billion inclusive of any amounts undrawn on our Revolving Facility. Total available liquidity includes cash and cash equivalents, which are subject to intra-month, foreign currency exchange and seasonal fluctuations. Restricted cash is not included in our presentation of total available liquidity.

50


The following summarizes our total available liquidity (in millions of dollars):
 
 
Years Ended December 31,
 
 
2014
 
2013
Cash and cash equivalents (1)
 
$
14,538