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Chrysler Corporation
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4510636
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Chrysler Corporation
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Arthur F. Burns Papers
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1974
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The original documents are located in Box B13, folder "Chrysler Corporation" of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library. Copyright Notice The copyright law of the United States (Title 17, United States Code) governs the making of photocopies or other reproductions of copyrighted material. Arthur Burns donated to the United States of America his copyrights in all of his unpublished writings in National Archives collections. Works prepared by U.S. Government employees as part of their official duties are in the public domain. The copyrights to materials written by other individuals or organizations are presumed to remain with them. If you think any of the information displayed in the PDF is subject to a valid copyright claim, please contact the Gerald R. Ford Presidential Library. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYS 1 BOARD Office Correspondence Date November 22, 1974 To Chairman Burns Subject: Economic Position 22 of CHEYSLEY YSTEM From Capital Markets Section (Mr. Puckett) OFFICE PM 5:30 RECEIVED CHAIRMAN This memorandum examines the present condition of Chrysler Corporation, its vulnerability to failure, and possible implications should failure occur. Over-all, it would appear that Chrysler today is in a financial condition somewhat analogous to that in late 1969 and 1970. The substantive difference between the situation then and now seems to be that industry automobile sales in the first half of 1975 may be lower than in any period in 12 years, if the staff's projections of domestic auto sales materialize. Therefore, Chrysler's financial difficulties are likely to deepen. Whether or not the Company fails, severe effects on stockholders, employees, and suppliers will continue to be felt by the plunge in Chrysler stock prices, lay offs, and cutbacks in production. If the firm should fail, the "shock" effect would at least be cushioned by the previous widespread recognition of its financial troubles. Sales and Inventory Position Chrysler is working in an unfavorable environment--one in which automobile sales have plunged in recent months and dealer stocks have soared. (Charts 1 and 2) Third quarter auto sales FORD & LIBRARY GERALD -2- were at a seasonally adjusted annual rate of 8.5 million units, and sales in the fourth quarter as projected in the most recent Greenbook are expected to be 6.8 million units (SAAR) the lowest since the fourth quarter of 1970, when there was a long strike at General Motors. But there are indications even that low rate may be revised downward in the light of the weakening over-all economic picture and indications of a continued decline in auto sales. Data for October show sales of 6.4 million units, while data for the first 10 days of November indicate sales of only 5.5 million units (SAAR). In this environment, Chrysler's relative position also has deteriorated as its share of the passenger car market has fallen by about four percentage points since the first of the year. In part, this may be viewed as a return to a somewhat more normal situation since Chrysler's position around the beginning of the year was unusually strong. Nonetheless, the erosion of its market share plus a general deterioration in over-all industry sales has resulted in significant difficulties for Chrysler, which have been exacerbated by its reluctance to cut output sufficiently to match the reduced level of consumer demand. As of the end of October, Chrysler was holding a 108 day supply of cars in inventory (not seasonally adjusted), given its rate of sales for October, versus a 62 day supply for the rest of the industry, excluding Chrysler. Chrysler's FORD & LIBRARY GERALD -3- inventories, moreover, contained inordinately large amounts of 1974 models. Recently, Chrysler has responded to this large build-up in stocks by shutting down all but one of its six domestic assembly plants and announcing plans for laying off nearly 44,000 workers, which will bring the total layoffs to 70,500 in December--a significant portion of the nearly 154,000 workers it employed on average during 1973. Reports, in addition, have been published of plans for even more layoffs, but as yet without official confirmation from the Company. Chrysler's Financial Position All of these difficulties are compounded by the fact that Chrysler, as is well known, is one of the weakest firms in the industry. This is amply borne out by Table 1, showing data as of mid-year, when detailed information was last available. Perhaps the most surprising thing about the data, however, is the degree of Chrysler's weakness relative to other firms in the industry, including American Motors. Chrysler's leverage, as measured by its debt-equity ratio is substantially higher than any other firm, as is its ratio of short-term to long-term debt. Not surprisingly, its coverage of interest and fixed charges is also very thin. Indicative of Chrysler's slow sales, large inventories, and high fixed charges is its performance for the first nine months of the year, showing an after-tax profit of only $21 million--the GERALD FORD LIBRARY -4- smallest since 1970. (Table 2) Further evidence of Chrysler's weakening position is its after-tax loss of $8 million in the third quarter, versus small profits in the first two quarters of the year. (Tables 3 and 4) Though this 1974 third quarter performance was better than that for the third quarter of 1973, in the sense that losses were smaller, 1973 results were plagued by parts shortages and strikes. As for the balance sheet, information as of September 30, indicates the current ratio (current assets/current liabilities) is the lowest for any third quarter since 1969, despite the swollen inventories of the Corporation. (Table 5) The quick ratio (current assets excluding inventories/current liabilities) is essentially the same as in 1973 and is only a modest amount above that for 1970. But the liquidity position of the firm has been weakened by payment of dividends that were not earned--$57 million paid versus only $21 million earned after taxes in the nine months ending September 30, and in the third quarter, $19 million paid versus a loss of $8 million after taxes. This payment of dividends in excess of earnings was one of the reasons cited by Moody's in its recent downgrading (from P-1 to P-2) of the commercial paper of Chrysler's financing subsidiary, FORD is LIBRARY GERALD -5- Chrysler Financial Other reasons cited were Chrysler Corporation's poor performance, primarily with respect to profits, and also the erosion of Chrysler's working capital position throughout the year. The downgrading of Chrysler Financial's commercial paper and the information circulating about the condition of Chrysler has made it difficult for the financing subsidiary to sell its paper, except in very short maturities. (Table 6) Since October 31 the outstanding commercial paper of Chrysler Financial has fallen by $220 million, which is being replaced by bank loans. Adequate bank credit probably is available to Chrysler Financial since at the end of October, back-up lines of credit approximately matched outstanding commercial paper. Thus, the main effects of the shift from commercial paper to bank credit, besides foreclosing an alternative source of finance, seem to be a significant increase in the cost of funds. Sources at Chrysler Financial estimate that at recent rates the Company would have to replace commercial paper at 9-3/4 per cent with bank loans at 10-1/2 to 11-1/2 per cent, plus 10 per cent compensating balances As a result, a signifi- cant conversion of commercial paper to bank credit could appreciably 1/ Standard and Poor's, for quite some time, has rated the commercial paper as of medium quality (A-2). 2/ Apparently, no balances have been required to support unused lines of credit. FORD is LIBRARY 938470 -6- lower Chrysler Financial's net income and hence further weaken the position of the parent corporation. Over-all the position of Chrysler seems then to be some cause for concern. In some ways, its situation today is analogous to that in late 1969 and on into early 1970 when it had a narrow margin of liquidity and poor profits. Gradually, after the first quarter of 1970 the company recovered until it, along with the rest of the industry, was adversely affected by the Arab oil embargo last year. However, there are important differences between the situation today and that in late 1969 and early 1970. Industry auto sales subsequent to and during Chrysler's earlier financial weakness never dipped below 7.5 million units (SAAR), except during the interval covered by the General Motors strike. Yet if the Greenbook projections concerning domestic auto sales materialize, industry sales will be at a rate of 7.0 million units during the first half of 1975-the lowest rate in twelve years. Some recovery is expected in the second half of the year to around 7.5 million units. But, in the light of recent events, these projections, both for the first and second half, may be revised downward. Therefore, Chrysler may be facing a significantly more austere marketing picture than in the periods when it was previously in financial FORDO & LIBRARY 939470 -7- difficulties, while probably being burdened with a higher break-even point. Some Implications of a Chrysler Failure If Chrysler were to fail the resulting "shock" effects would be cushioned by the fact that its financial problems have been well-publicized. News of its plant closings, sluggish sales, large inventories, weak profits, and inadequate liquidity are widely known. Partly as a result of such adverse information, Chrysler stock on November 20 closed at $8.75, down from a high for the year of $20.12. The Company's bond ratings are already relatively low (Standard and Poor's and Moody's A), and the recent Moody's down- grading of Chrysler Financial's commercial paper only ratified adverse news about the parent company. Purchasers of commercial paper, already sensitive to the position of Chrysler Financial, have, as noted previously, been reluctant to continue to lend except on a very short-term basis. Bank loans to Chrysler Financial secured by the Company's receivables have increased as a replacement for commercial paper run-offs. Such loans totaled $638 million as of November 12. The total amount of bank debt owęd by Chrysler and its subsidiaries, however, is not known. FORD & LIBRARY GERALD thart 1 Domestic New Car Sales (monthly, seasonally adjusted) millions of autos 11.0 11.0 10.0 10.0 9.0 9.0 8.0 8.0 7.0 7.0 FORD VIBRARA 6.0 6.0 5.0 5.0 1968 1969 1970 1971 1972 1973 1974 Chart 2 Dealers' Inventories Domestic New Car Stocks (monthly, seasonally adjusted) millions of autos 2.0 2.0 1.8 1.8 1.6 1.6 1.4 1.4 1.2 1.2 1.0 1.0 1968 1969 1970 1971 1972 1973 1974 & LIBRARY Table 1 Selected Balance Sheet Ratios for Major Motor Manufacturers ($ millions) General American Chrysler Motors Ford Motors Total debt ($ millions) 6/30/74 1,426 1,192 1,915 80 Debt as per cent of equity 6/30/74 52 10 30 20 Avg. debt as per cent of equity 1964-73 38 7 18 28 Short-term as per cent total debt 6/30/74 42.4 36.5 36.7 0 Avg. short-term as per cent total debt 1964-73 29.9 40.2 49.5 54.0 Coverage ratios: Interest cover. ratio pretax 6/30/74 3.1 44.0 10.3²/ 10.4 Total fixed charge cover. ratio 6/30/74 3.0 35.7 10.1 10.4 1/ Interest expense reported net of interest income by company in some periods. 2/ As of December 31, 1973. Definitions: Total debt Long-term plus short-term debt. Debt as per cent of equity Total long- and short-term debt as a per cent of common equity, which includes common stock, capital surplus, retained earnings. Interest coverage ratio Pretax income plus total interest expense divided by total interest expense. Total fixed charge Net income plus total interest expense (adjusted coverage ratio by tax rate) divided by fixed charges (adjusted by tax rate) plus preferred dividends paid. Source: Business Week: October 12, 1974. FORD & LIBRARY GERALD Table 2 Chrysler Corporation and Consolidated Subsidiaries Income Statement for Nine Months Ending September 30 ($ millions) 1968 1969 1970 1971 1972 1973 1974 Income: Net sales 5,298 5,240 5,147 5,855 7,054 8,364 8,506 Equity earnings 10 5 -7 2 10 9 8 Other income 26 19 -9 5 8 11 -1 Total income 5,334 5,264 5,131 5,862 7,073 8,384 8,514 Expenses: Costs 4,579 4,692 4,786 5,330 6,346 7,592 7,961 Depreciation 122 129 135 132 132 137 145 Amortization 129 147 128 130 145 139 107 Pension plans 100 85 88 124 137 152 199 Incentive comp. 14 1 -- -- 9 12 -- Interest expense net 19 23 34 54 45 19 68 Total expenses 4,963 5,077 5,171 5,770 6,814 8,051 8,480 Profits before taxes 371 187 -40 92 259 333 34 Income taxes 196 94 -21 41 122 150 11 Minority interest -2 -1 -5 3 2 2 1 Net income 179 93 -15 48 136 181 21 Note: Details may not add to totals due to rounding. Data for 1968-1970 may not be strictly comparable to current classifications. GERALD FORD LIBRARY Table 3 Chrysler Corporation and Consolidated Subsidiaries Income Statement for Quarter Ending September 30 ($ millions) 1968 1969 1970 1971 1972 1973 1974 Income: Net sales 1,561 1,560 1,687 1,893 2,314 2,309 2,801 Equity earnings 4 1 3 3 7 5 8 Other income 8 6 -4 2 0 3 -10 Total income 1,573 1,567 1,686 1,898 2,321 2,317 2,799 Expenses: Costs 1,401 1,447 1,564 1,743 2,107 2,219 2,643 Depreciation 42 41 44 45 44 45 48 Amortization 37 42 35 38 47 36 27 Pension plans 27 24 27 42 45 52 64 Incentive comp. -- -3 -- -- 2 -3 -- Interest expense net 7 8 12 17 13 7 28 Total expenses 1,513 1,560 1,682 1,885 2,258 2,356 2,810 Profits before taxes 60 7 4 13 63 -39 -11 Income taxes 33 2 1 5 30 -21 -3 Minority interest -2 0 0 1 1 0 0 Net income 30 4 2 6 32 -17 -8 Note: Details may not add to totals due to rounding. Data for 1968-1970 may not be strictly comparable to current classifications. FORD i LIBRARY 938870 Table 4 Chrysler Corp. and Consolidated Subsidiaries Net Income After Taxes ($ millions) 1968 1969 1970 1971 1972 1973 1974 QI 64 48 -27 11 36 90 2 QII 85 41 10 31 68 109 28 QIII 30 4 2 6 32 -17 -8 QIV 111 -4 7 36 84 73 -- Year 290 89 -8 84 220 255 -- Note: Data for 1968-70 may not be strictly comparable to current classifications. FORD & LIBRARY GERALD Table 5 Chrysler Corp. Consolidated Balance Sheet Amounts Outstanding September 30 ($ millions) 1968 1969 1970 1971 1972 1973 1974 Assets: Cash & marketable securities 471 376 220 345 639 327 366 Inventories 936 1,122 *1,298 1,339 1,365 1,753 2,058 Other current assets 684 811 607 610 675 822 1,110 Total current assets 2,091 2,310 *2,125 2,294 2,680 2,901 3,534 Other assets 2,185 2,403 2,626 2,603 2,521 2,739 2,954 Total assets 4,277 4,713 *4,751 4,897 5,200 5,640 6,488 Liabilities: Current liabilities 1,413 1,671 1,509 1,605 1,757 *1,973 2,553 Stockholders' equity & long-term debt 2,864 3,041 3,242 3,292 3,443 3,667 3,935 Total liabilities 4,277 4,713 4,751 4,897 5,200 5,640 6,488 Net working capital 679 638 *616 689 923 *928 981 Current ratio 1.481 1.382 1.408 1.430 1.525 1.471 1.384 Quick ratio .817 .710 .548 .595 .748 .582 .578 Sales/Inventory 5.658 4.669 3.964 4.380 5.168 4.772 4.133 Memo: Sales (9 months ending 5,298 5,240 5,147 5,855 7,054 8,364 8,506 September 30) * Restated figures Note: Detail may not add to total due to rounding. GERALD FORD LIBRARY Table 6 Chrysler Financial Corporation - End of Month ($ millions) Commercial Paper Bank Loans Outst. Change Outst. Change 1973-Sept. 937 -21 -- -- Oct. 1,025 88 -- -- Nov. 1,072 47 -- -- Dec. 1,184 112 -- -- 1974-Jan. 1,155 -29 -- -- Feb. 1,177 22 -- -- Mar. 1,277 100 -- -- April 1,183 -94 100 100 May 1,250 67 102 2 June 1,218 -32 151 49 July 1,341 123 63 -88 Aug. 1,375 34 6 -57 Sept. 1,312 -63 206 200 Oct. 1,255 -57 381 175 Nov. 21 1,035 -220 638 257 Commercial Paper Maturity Schedule ($ millions) Paper Paper Maturing Sold 1974-Nov. 18 155 95 19 90 90 20 123 90 21 103 67 22 104 -- 25 64 -- 26 13 -- 27 36 -- 29 60 -- Dec. 2 35 -- Amount through Dec. 2 783 : FORD & LIBRARY GERALLY BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Office Correspondence Date September 19, 1973 Chairman Burns To Subject: Proposed Chrysler Settlement From Murray Wernick MW The proposed Chrysler contract, covering 117,000 production workers is expected to serve as a pattern contract with some possible minor modifications for about 550,000 other workers at GM and Ford. Both management and labor have indicated it is a liberal settlement and it appears to be above the Cost of Living Council guidelines. Chrysler estimates that it will increase labor costs about 7 per cent each year during the three year contract period. Since it has a cost of living clause this estimate would seemingly require relatively moderate price increase over the next three years to be achieved. Data made available on fringes are still rather limited and impossible to cost out. But they appear to be fairly extensive and close to unions original demands. Wage rates will be increased by 3 per cent per year (productivity increase) with an extra first year supplement of 12 cents. Part of the first year supplement is an offset for normal cost of living adjustments that would have been made for the April 1973 to September 1973 period. Cost-of-living adjustments continue with no ceiling and the basic formula was liberalized somewhat--1 cent adjustments will now be given for each 0.35 per cent increase in the CPI each quarter. Under the old contract workers received 1 cent for each 0.4 per cent increase in the CPI. During the term of this contract the union has agreed that 1 cent of each quarterly adjustment (a potential total of 10 cents) is to be used to finance other fringe benefits. GERALD FORD LIBRARY -2- Voluntary overtime was agreed to by the company after nine hours work per day, for Sundays and for Saturdays if the worker had worked the two previous Saturdays. This could lead to some increased costs in periods of high auto output. Pensions will be increased significantly. Any worker with thirty years of service can retire, receiving $500 a month the first year with the total rising $50 in each of the next two years. Other details of the pension plan revisions have not been spelled out yet. Health programs are to be expanded to include dental care in the second year of the program and the company has agreed to pay both employer and employee taxes provided in any national health insurance program that may become law during the contract period. Money now used by the company to pay health benefits would be distributed to the workers in a manner to be decided if the health insurance program is passed. Paid holidays will be increased under the new contract with the day after Thanksgiving included as a paid holiday. Holiday schedules may be revised somewhat but these details were not available. FORD & LIBRARY