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CHRYSLER GROUP LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 05, 2014]

CHRYSLER GROUP LLC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion of our financial condition and results of operations should be read together with our accompanying condensed consolidated financial statements and related notes thereto, as well as our 2013 Annual Report on Form 10-K, or 2013 Form 10-K, filed with the U.S. Securities and Exchange Commission, or SEC.

Selected Financial and Other Data The following sets forth selected financial and other data for the periods presented: Three Months Ended September 30, Nine Months Ended September 30, Percentage of Percentage of Percentage of Percentage of 2014 Revenues 2013 Revenues 2014 Revenues 2013 Revenues (in millions of dollars) Condensed Consolidated Statements of Income Data: Revenues, net $ 20,660 100.0 % $ 17,564 100.0 % $ 60,104 100.0 % $ 50,943 100.0 % Gross margin 2,857 13.8 % 2,683 15.3 % 8,221 13.7 % 7,598 14.9 % Selling, administrative and other expenses 1,326 6.4 % 1,254 7.1 % 4,636 7.7 % 3,761 7.4 % Research and development expenses, net 565 2.7 % 573 3.3 % 1,726 2.9 % 1,719 3.4 % Interest expense 209 1.0 % 256 1.5 % 643 1.1 % 784 1.5 % Loss on extinguishment of debt - NM - NM 504 0.8 % 23 - Net income 611 3.0 % 464 2.6 % 540 0.9 % 1,137 2.2 % September 30, 2014 December 31, 2013 (in millions of dollars) Condensed Consolidated Balance Sheets Data: Cash and cash equivalents $ 13,577 $ 13,344 Restricted cash 314 333 Total assets 48,338 45,870 Current maturities of financial liabilities 330 491 Long-term financial liabilities 12,567 11,810 Members' deficit (2,763 ) (1,242 ) Nine Months Ended September 30, 2014 2013 (in millions of dollars) Condensed Consolidated Statements of Cash Flows Data: Cash flows provided by (used in): Operating activities $ 4,842 $ 2,610 Investing activities (2,542 ) (2,413 ) Financing activities (1,814 ) (223 ) Other Financial Information: Depreciation and amortization expense $ 2,347 $ 2,147 Capital expenditures (1) 2,576 2,436 56-------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 Other Statistical Information: Worldwide factory shipments (in thousands) (2) (5) 700 593 2,095 1,827 Net worldwide factory shipments (in thousands) (3) (5) 698 598 2,053 1,806 Worldwide vehicle sales (in thousands) (4) (5) 711 603 2,055 1,809 U.S. dealer inventory at period end (in thousands) 500 387 Number of employees at period end 77,290 72,569 -------------------------------------------------------------------------------- (1) Capital expenditures represent the purchase of property, plant and equipment and intangible assets.

(2) Represents our vehicle sales to dealers, distributors and contract manufacturing customers. For additional information refer to -Results of Operations -Worldwide Factory Shipments.

(3) Represents our vehicle sales to dealers, distributors and contract manufacturing customers adjusted for Guaranteed Depreciation Program vehicle shipments and auctions. For additional information refer to -Results of Operations -Worldwide Factory Shipments.

(4) Represents sales of our vehicles, which include vehicles manufactured by Fiat for us, from dealers and distributors to retail customers and fleet customers. Fleet customers include rental car companies, commercial fleet consumers, leasing companies and government entities. Certain fleet sales that are accounted for as operating leases are included in vehicle sales.

(5) Vehicles manufactured by us for other companies, including Fiat, are included in our worldwide factory shipments and net worldwide factory shipments, however, they are excluded from our worldwide vehicle sales.

Overview of our Operations Unless otherwise specified, the terms "we," "us," "our," "Chrysler Group" and the "Company" refer to Chrysler Group 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 Chrysler Group) 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.

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. 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), minivans, trucks and commercial vans. We also manufacture certain Fiat-brand 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, principally in the U.S. Approximately 10 percent of our vehicle sales during both 2013 and the nine months ended September 30, 2014 were outside North America, mostly 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 general distributor of our vehicles and service parts in Europe. FCA is also distributing certain of our vehicles through its networks in other select markets. We are the exclusive distributor of Fiat-brand and Alfa Romeo vehicles and service parts throughout North America. We are the general distributor for FCA vehicles in select markets outside of Europe. In addition, FCA manufactures certain Fiat-brand vehicles for us, which we sell in select markets. Refer to Note 16, Other Transactions with Related Parties, for additional information regarding other transactions with FCA.

We also generate revenues, income 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.

57 -------------------------------------------------------------------------------- On April 19, 2014, we announced our agreement to join in a joint venture partnership with Fiat and Guangzhou Automobile Group Co., Ltd. According to the agreement, the joint venture, GAC Fiat Automobiles Co., Ltd., will begin localized production of three new Jeep vehicles for the Chinese market, expanding the portfolio of Jeep SUVs currently available to Chinese consumers as imports. The amounts, structure, investments and funding are expected to be finalized in 2014. Production is expected to begin by late 2015.

Fiat Ownership Interest On January 21, 2014, Fiat completed a transaction, or the Equity Purchase Agreement, in which its 100 percent owned subsidiary, Fiat North America LLC, or FNA, indirectly acquired from the VEBA Trust all of the membership interests in the Company not previously held by FNA. In consideration for the sale of its membership interests in the Company, the VEBA Trust received $3,650 million consisting of: • a special distribution paid from available cash on hand by the Company to its members, in an aggregate amount of $1,900 million (FNA directed its portion of the special distribution to the VEBA Trust as part of the purchase consideration), which served to fund a portion of the transaction; and • $1,750 million paid by FNA.

As part of the Equity Purchase Agreement, FNA and the VEBA Trust dismissed with prejudice all proceedings before the Delaware Court of Chancery with respect to the interpretation of a call option agreement which granted FNA the right to acquire certain of the membership interests in the Company held by the VEBA Trust. Options for approximately 10 percent of our membership interests that had been previously exercised by FNA were fulfilled and the underlying equity was acquired by FNA in connection with the Equity Purchase Agreement.

Concurrent with the closing of the Equity Purchase Agreement, we paid a distribution of $60 million to our members in connection with such members' tax obligations. This payment was made pursuant to a specific requirement in our Limited Liability Company Agreement (as amended from time to time, the "LLC Agreement").

Also concurrent with the closing of the Equity Purchase Agreement, we entered into a contractually binding and legally enforceable memorandum of understanding, or MOU, with the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, or UAW, to supplement our existing collective bargaining agreement. In exchange for the UAW's legally enforceable specific commitment to continue to support the implementation of World Class Manufacturing, or WCM, programs throughout our manufacturing facilities, to facilitate benchmarking across all of our manufacturing plants and to actively assist in the achievement of our long-term business plan, we agreed to make payments totaling $700 million to be paid in four equal annual installments. At the direction of the UAW, the payments are to be made to the VEBA Trust. The first installment of $175 million was paid on January 21, 2014 and is reflected in the operating section of the accompanying Condensed Consolidated Statements of Cash Flows.

As the MOU was negotiated and executed concurrently with the Equity Purchase Agreement and as Fiat was a related party and the UAW and the VEBA Trust were related parties, the two agreements were accounted for by Fiat as a single commercial transaction with multiple elements. As a result, the fair value of the total consideration paid under the Equity Purchase Agreement and the MOU was allocated to the various elements acquired by Fiat. Due to the unique nature and inherent judgment involved in determining the fair value of the UAW's commitments under the MOU, a residual value methodology was used to determine the portion of the consideration paid attributable to the UAW's commitments. We have reflected in the accompanying condensed consolidated financial statements only the impacts of these transactions that are related to us. Refer to Note 16, Other Transactions with Related Parties, for a discussion of the accounting for these transactions.

On October 12, 2014, the Merger became effective, and FCA became the new parent of the Company. FCA's sole ownership of the Company provides the opportunity to combine various global businesses and legal entities for business efficiencies, cost synergies and brand expansion. FCA and the Company are currently evaluating alternative plans to transfer certain subsidiary entities and business units and also determining whether each of their subsidiaries' tax status should be flow-through or taxable, which may result in changes to existing tax status. Such transfers and changes may impact our current cash taxes or deferred taxes. Evaluating and implementing any such combinations may take several years and involves a detailed analysis within each of the various tax jurisdictions. Such combinations may consist of a change in an entity's taxable status or of transfers of shares or business units among these various tax jurisdictions. Any impact to cash taxes and deferred taxes will be reflected in the financial period in which the transfer or change occurs or is disclosed. If material, these impacts could be reflected in an earlier period when it becomes apparent that such transfer or change will occur in the foreseeable future.

58 -------------------------------------------------------------------------------- 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 the Fiat 500L, which Fiat began contract manufacturing for us in May 2013 for sale in North America. Vehicles manufactured by us for other companies, including Fiat, are excluded from our new vehicle sales. The following summarizes our new vehicle sales by geographic market for the periods presented.

Three Months Ended September 30, Nine Months Ended September 30, 2014 (1)(2) 2013 (1)(2) 2014 (1)(2) 2013 (1)(2) Percentage Percentage Percentage Percentage Chrysler of Chrysler of Chrysler of Chrysler of Group Industry Industry (3) Group Industry Industry (3) Group Industry Industry (3) Group Industry Industry (3) (vehicles in thousands) U. S. 536 4,350 12.3 % 449 4,024 11.2 % 1,556 12,655 12.3 % 1,357 11,980 11.3 % Canada 78 526 14.9 % 68 476 14.3 % 225 1,451 15.5 % 207 1,377 15.1 % Mexico 18 298 5.8 % 19 263 7.3 % 54 813 6.6 % 62 782 7.9 % Total North America 632 5,174 12.2 % 536 4,763 11.3 % 1,835 14,919 12.3 % 1,626 14,139 11.5 % Rest of World 79 67 220 183 Total Worldwide 711 603 2,055 1,809 -------------------------------------------------------------------------------- (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 the Company for other companies, including Fiat, are excluded from our new vehicle sales.

Three Months Ended September 30, Nine Months Ended September 30, 2014 (1)(2) 2013 (1)(2) 2014 (1)(2) 2013 (1)(2) Percentage Percentage Percentage Percentage Chrysler of Chrysler of Chrysler of Chrysler of Group Industry Industry (3) Group Industry Industry (3) Group Industry Industry (3) Group Industry Industry (3) (vehicles in thousands) Cars Small 31 796 3.9 % 27 764 3.6 % 87 2,352 3.7 % 90 2,262 4.0 % Mid-size 39 754 5.1 % 44 704 6.2 % 122 2,212 5.5 % 177 2,176 8.1 % Full-size 36 205 17.5 % 37 229 15.8 % 112 644 17.3 % 118 684 17.2 % Sport 13 159 8.2 % 16 172 9.1 % 42 476 8.8 % 52 520 10.0 % Total Cars 119 1,914 6.2 % 124 1,869 6.6 % 363 5,684 6.4 % 437 5,642 7.7 % Minivans 70 139 50.6 % 63 146 43.4 % 212 418 50.8 % 182 432 42.2 % Utility Vehicles 225 1,520 14.8 % 168 1,315 12.8 % 644 4,358 14.8 % 469 3,850 12.2 % Pick-up Trucks 110 581 19.0 % 87 535 16.3 % 306 1,634 18.7 % 251 1,569 16.0 % Van & Medium Duty Trucks 12 196 6.3 % 7 159 4.3 % 31 561 5.6 % 18 487 3.7 % Total Vehicles 536 4,350 12.3 % 449 4,024 11.2 % 1,556 12,655 12.3 % 1,357 11,980 11.3 % -------------------------------------------------------------------------------- (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.

59-------------------------------------------------------------------------------- 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 -Liquidity and Capital Resources -Working Capital Cycle, for additional information.

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.

Three Months Ended September 30, Increase Nine Months Ended September 30, Increase 2014 2013 (Decrease) 2014 2013 (Decrease) (vehicles in thousands) Retail 582 490 92 1,667 1,417 250 Fleet 107 84 23 390 361 29 Contract manufacturing 11 19 (8 ) 38 49 (11 ) Worldwide Factory Shipments 700 593 107 2,095 1,827 268 Adjust for GDP activity during the period: Less: Vehicles shipped (15 ) (4 ) (11 ) (89 ) (57 ) (32 ) Plus: Vehicles auctioned 13 9 4 47 36 11 Net Worldwide Factory Shipments 698 598 100 2,053 1,806 247 60-------------------------------------------------------------------------------- Consolidated Results The following is a discussion of the results of operations for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013 and the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. 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 of the three months ended September 30, 2014 compared to the same period in 2013, and the nine months ended September 30, 2014 compared to the same period in 2013.

Three Months Ended September 30, 2014 Compared to the Three Months Ended September 30, 2013 Revenues, Net Three Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Revenues, net $ 20,660 $ 17,564 $ 3,096 17.6 % Revenues for the three months ended September 30, 2014 increased $3,096 million as compared to the three months ended September 30, 2013. Approximately $2,800 million of the increase was attributable to an increase in volume, which was due to an increase in our net worldwide factory shipments from 598 thousand vehicles for the three months ended September 30, 2013 to 698 thousand vehicles for the three months ended September 30, 2014. The 17 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 Cherokee, the Jeep Grand Cherokee and the all-new 2015 Chrysler 200. These increases were partially offset by a reduction in the prior model year Chrysler 200 and Dodge Avenger shipments. Production of these vehicles was discontinued in the first quarter of 2014 in preparation for the launch and changeover 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 19 percent period over period increase in our U.S. vehicle sales, which was primarily driven by a 20 percent increase in our U.S. retail sales for the three months ended September 30, 2014 as compared to the same period in 2013. Our U.S. market share increased 110 basis points to 12.3 percent for the three months ended September 30, 2014.

Approximately $150 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 third quarter 2014, we recorded a $4 million remeasurement charge 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, which was partially offset by a net foreign currency transaction gain of $1 million due to the impact of changes in Venezuelan Bolivar, or VEF, per USD on certain other transactions. Refer to Note 18, Venezuelan Currency Regulations and Devaluation, for further detail.

Cost of Sales Three Months Ended September 30, Percentage Percentage Increase 2014 of Revenues 2013 of Revenues (Decrease) (in millions of dollars) Cost of sales $ 17,803 86.2 % $ 14,881 84.7 % $ 2,922 19.6 % Gross margin 2,857 13.8 % 2,683 15.3 % 174 6.5 % 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 three months ended September 30, 2014 and 75 percent for the three months ended September 30, 2013. 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 61 -------------------------------------------------------------------------------- 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.

Cost of sales for the three months ended September 30, 2014 increased $2,922 million compared to the same period in 2013, approximately $2,200 million of which was attributable to an increase in our net worldwide factory shipments.

During the three months ended September 30, 2014, higher base material costs associated with vehicle components and content enhancements on our new models also contributed to an approximately $300 million increase in our cost of sales over the same period last year. In addition, our pre-existing warranty costs increased approximately $300 million over the same period last year, which included the effects of recently approved recall campaigns.

Gross margin for the three months ended September 30, 2014 increased $174 million, or 6.5 percent, as compared to the same period in 2013. Gross margin increased by approximately $600 million related to increases in our net worldwide factory shipments. Approximately $150 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.

Also, partially offsetting these increases, gross margin was reduced by $300 million over the same period last year resulting from an increase to our pre-existing warranty expense, which included the effects of recently approved recall campaigns. In addition, we incurred approximately $300 million of higher base material costs associated with vehicle components and content enhancements.

Selling, Administrative and Other Expenses Three Months Ended September 30, Percentage Percentage Increase 2014 of Revenues 2013 of Revenues (Decrease) (in millions of dollars) Selling, administrative and other expenses $ 1,326 6.4 % $ 1,254 7.1 % $ 72 5.7 % Selling, administrative and other expenses include advertising, personnel, warehousing and other costs. Advertising expenses accounted for approximately 54 percent of these costs during the three months ended September 30, 2014 and 50 percent of the costs during the three months ended September 30, 2013.

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 refreshed vehicles are available to customers in the dealerships. During the three months ended September 30, 2014, advertising expenses increased to support vehicle launches, including the all-new 2014 Jeep Cherokee and the all-new 2015 Chrysler 200.

Research and Development Expenses, Net Three Months Ended September 30, Percentage Percentage Increase 2014 of Revenues 2013 of Revenues (Decrease) (in millions of dollars) Research and development expenses, net $ 565 2.7 % $ 573 3.3 % $ (8 ) (1.4 )% 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 three months ended September 30, 2014 and 2013 are net of reimbursements of $10 million and $12 million, respectively.

Research and development expenses remained relatively consistent period over period, and are in line with our continued investments in mid-cycle and new program actions along with continued spending for our joint development programs with FCA, primarily related to future B-segment vehicles.

62 --------------------------------------------------------------------------------Restructuring Expense (Income), Net Three Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Restructuring expense (income), net $ 1 $ (1 ) $ 2 NM In February 2014, we undertook a voluntary severance program in Venezuela to facilitate workforce reductions. During the three months ended September 30, 2014, we incurred approximately $1 million of restructuring expense associated with this program.

In connection with our transaction with Old Carco LLC, or Old Carco, in June 2009, 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 three months ended September 30, 2014, there were no refinements to restructuring reserve estimates. During the three months ended September 30, 2013, we made refinements to restructuring reserve estimates resulting in restructuring income of approximately $1 million. Refer to Note 17, Restructuring Actions, for additional information.

Interest Expense Three Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Interest expense $ 209 $ 256 $ (47 ) (18.4 )% Interest expense included the following: Three Months Ended September 30, 2014 2013 (in millions of dollars) Financial interest expense: VEBA Trust Note $ - $ 107 2019 and 2021 Notes 121 65 Tranche B Term Loan due 2017 28 32 Tranche B Term Loan due 2018 14 - Canadian Health Care Trust Notes 19 23 Mexican development banks credit facilities 11 13 Other 19 14 Interest accretion (1) 10 29 Capitalized interest related to capital expenditures (13 ) (27 ) Total $ 209 $ 256 -------------------------------------------------------------------------------- (1) Interest accretion is primarily related to debt discounts/premiums, debt issuance costs and fair value adjustments.

The decrease in interest expense resulted primarily from the prepayment of the senior unsecured note issued June 10, 2009 to the VEBA Trust, or VEBA Trust Note, that was funded with new debt issuances which have lower effective interest rates than the VEBA Trust Note. Refer to -New Debt Issuances and Prepayment of the VEBA Trust Note, for additional information regarding the VEBA Trust Note prepayment and new debt issuances. The decrease in capitalized interest was consistent with the reduction in the effective interest rate, and a lower average construction in progress balance during the three months ended September 30, 2014 compared to the same period in 2013.

63 -------------------------------------------------------------------------------- Nine Months Ended September 30, 2014 Compared to the Nine Months Ended September 30, 2013 Revenues, Net Nine Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Revenues, net $ 60,104 $ 50,943 $ 9,161 18.0 % Revenues for the nine months ended September 30, 2014 increased $9,161 million as compared to the nine months ended September 30, 2013. Approximately $6,500 million of the increase was attributable to an increase in volume, which was due to an increase in our net worldwide factory shipments from 1,806 thousand vehicles for the nine months ended September 30, 2013 to 2,053 thousand vehicles for the nine months ended September 30, 2014. The 14 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 Cherokee, Ram pickups and the Jeep Grand Cherokee.

Overall, demand for our vehicles has increased, as evidenced by a 15 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 nine months ended September 30, 2014 as compared to the same period in 2013. Our U.S. market share increased 100 basis points to 12.3 percent for the nine months ended September 30, 2014.

Approximately $1,800 million of the increase in revenues was attributable to a favorable shift in vehicle mix as there was a higher percentage growth in certain 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 due 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. 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, $100 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 nine months ended September 30, 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 SICAD I rate. Additionally, during the nine months ended September 30, 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, in September 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 nine months ended September 30, 2013, we recognized a $78 million foreign currency remeasurement loss as a reduction to revenues. Additionally, certain monetary liabilities, which had been submitted to the CADIVI for payment approval, were approved to be paid at a favorable exchange rate. As a result, during the nine months ended September 30, 2013, we recognized $21 million of foreign currency transaction gains in Revenues, net. Refer to Note 18, Venezuelan Currency Regulations and Devaluation, for further detail.

Cost of Sales Nine Months Ended September 30, Percentage Percentage Increase 2014 of Revenues 2013 of Revenues (Decrease) (in millions of dollars) Cost of sales $ 51,883 86.3 % $ 43,345 85.1 % $ 8,538 19.7 % Gross margin 8,221 13.7 % 7,598 14.9 % 623 8.2 % 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 64 -------------------------------------------------------------------------------- and components makes up the majority of our cost of sales, which was approximately 76 percent for the nine months ended September 30, 2014 and 75 percent for the nine months ended September 30, 2013. 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.

Cost of sales for the nine months ended September 30, 2014 increased $8,538 million compared to the same period in 2013, approximately $5,100 million of which was attributable to an increase in our net worldwide shipments. In addition, approximately $2,100 million of the increase was due to changes in our 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 period ending September 30, 2014, higher base material costs associated with vehicle components and content enhancements also contributed to an increase in our cost of sales of approximately $1,000 million over the same period last year. In addition, we incurred approximately $100 million of higher depreciation and amortization expense primarily related to capital investments associated with our recent product launches. During the nine months ended September 30, 2014, we incurred an increase to our pre-existing warranty expense of approximately $300 million over the same period last year, which included the effects of recently approved recall campaigns. During the nine months ended September 30, 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 nine months ended September 30, 2014 increased $623 million, or 8.2 percent, as compared to the same period in 2013. Gross margin increased by approximately $1,400 million related to increases in our net worldwide factory shipments and by approximately $400 million related to a shift in mix which included vehicle and market mix. Also, $100 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 $1,000 million due to higher base material costs associated with vehicle components and content enhancements, and approximately $100 million of higher depreciation and amortization. In addition, our gross margin was reduced by an increase of $300 million over the same period last year to our pre-existing warranty costs, which included the effects of recently approved recall campaigns.

Selling, Administrative and Other Expenses Nine Months Ended September 30, Percentage Percentage Increase 2014 of Revenues 2013 of Revenues (Decrease) (in millions of dollars) Selling, administrative and other expenses $ 4,636 7.7 % $ 3,761 7.4 % $ 875 23.3 % Selling, administrative and other expenses include advertising, personnel, warehousing and other costs. Selling, administrative and other expenses for the nine months ended September 30, 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.

Excluding the infrequent MOU charge, advertising expenses accounted for approximately 56 percent and 50 percent of selling, administrative and other expenses for the nine months ended September 30, 2014 and 2013, respectively.

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. During the nine months ended September 30, 2014, advertising expenses increased to support vehicle launches, including the all-new 2014 Jeep Cherokee and the all-new 2015 Chrysler 200, along with continued marketing support in international markets.

During the nine months ended September 30, 2014, the increases in advertising expense were partially offset by a $21 million reduction of expense related to share-based compensation. Refer to Note 19, Share-Based Compensation, for additional information.

65 --------------------------------------------------------------------------------Research and Development Expenses, Net Nine Months Ended September 30, Percentage Percentage Increase 2014 of Revenues 2013 of Revenues (Decrease) (in millions of dollars) Research and development expenses, net $ 1,726 2.9 % $ 1,719 3.4 % $ 7 0.4 % 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 nine months ended September 30, 2014 and 2013 are net of reimbursements of $24 million and $26 million, respectively.

Research and development expenses remained relatively consistent period over period, and were in line with our continued investments in mid-cycle and new program actions along with continued spending for our joint development programs with FCA, primarily related to future B-segment vehicles.

Restructuring Expense (Income), Net Nine Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Restructuring expense (income), net $ 5 $ (12 ) $ 17 NM In February 2014, we undertook a voluntary severance program in Venezuela to facilitate workforce reductions. During the nine months ended September 30, 2014, we incurred approximately $10 million of restructuring expense associated with the program in Venezuela.

In connection with our transaction with Old Carco in June 2009, 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 nine months ended September 30, 2014 and 2013, we made refinements to restructuring reserve estimates resulting in restructuring income of approximately $5 million and $12 million, respectively. Refer to Note 17, Restructuring Actions, for additional information.

66 -------------------------------------------------------------------------------- Interest Expense Nine Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Interest expense $ 643 $ 784 $ (141 ) (18.0 )% Interest expense included the following: Nine Months Ended September 30, 2014 2013 (in millions of dollars) Financial interest expense: VEBA Trust Note $ 44 $ 326 2019 and 2021 Notes 341 195 Tranche B Term Loan due 2017 83 120 Tranche B Term Loan due 2018 37 - Canadian Health Care Trust Notes 55 67 Mexican development banks credit facilities 34 41 Other 48 42 Interest accretion (1) 39 88 Capitalized interest related to capital expenditures (38 ) (95 ) Total $ 643 $ 784 -------------------------------------------------------------------------------- (1) Interest accretion is primarily related to debt discounts/premiums, debt issuance costs and fair value adjustments.

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 tranche B term loan maturing May 24, 2017. Refer to -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 Item 7 Management Discussion and Analysis -Liquidity and Capital Resources in our 2013 Form 10-K for further information regarding the June 2013 amendment and restatement and the December 2013 re-pricing of the tranche B term loan maturing May 24, 2017. The decrease in capitalized interest was consistent with the reduction in the effective interest rate, and a lower average construction in progress balance for the first nine months of 2014 compared to the same period in 2013.

Loss on Extinguishment of Debt Nine Months Ended September 30, Increase 2014 2013 (Decrease) (in millions of dollars) Loss on extinguishment of debt $ 504 $ 23 $ 481 NM During the nine months ended September 30, 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. During the nine months ended September 30, 2013, in connection with the June 2013 amendment and re-pricing of our tranche B term loan maturing May 24, 2017 and $1.3 billion revolving credit facility, we recognized a $23 million loss on extinguishment of debt. The loss included the write off of $12 million of unamortized debt discounts and $3 million of unamortized debt issuance costs associated with the original facilities, as well as $8 million of call premium and other fees associated with the amendment and re-pricing.

67 -------------------------------------------------------------------------------- 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 other postretirement benefits, or OPEB, payments. Our capital expenditures are estimated to be approximately $1 billion for the remainder of 2014, which we plan to fund with cash generated primarily from our operating activities.

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 and to achieve and maintain a liquidity and capital position consistent with that of our principal competitors. Our calculation of Net Industrial Cash, as well as a detailed discussion of this measure, is included below 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 in our 2013 Form 10-K.

Total Available Liquidity At September 30, 2014, our total available liquidity was $14.9 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 our Senior Credit Facilities, which include the Tranche B Term Loan due 2017 and 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 Facilities and term loan credit facility that matures on December 31, 2018, 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.

The following summarizes our total available liquidity (in millions of dollars): September 30, 2014 December 31, 2013 Cash and cash equivalents (1) $ 13,577 $ 13,344 Revolving Facility availability (2) 1,300 1,300 Total Available Liquidity $ 14,877 $ 14,644 -------------------------------------------------------------------------------- (1) The foreign subsidiaries for which we have elected to indefinitely reinvest earnings outside of the U.S. held $1.7 billion and $1.0 billion of Cash and cash equivalents as of September 30, 2014 and December 31, 2013, respectively. Our current plans do not demonstrate a need to, nor do we have plans to, repatriate the retained earnings from these subsidiaries, as the earnings are indefinitely reinvested. However, if we determine in the future that it is necessary to repatriate these funds or we sell or liquidate any of these subsidiaries, we may be required either to pay taxes or make distributions to our members to pay taxes associated with the repatriation or the sale or liquidation of these subsidiaries. We may also be required to accrue and pay withholding taxes, depending on the foreign jurisdiction from which the funds are repatriated.

(2) Subsequent to the February 7, 2014 debt issuances and subject to the limitations in the amended and restated credit agreement governing the Senior Credit Facilities, the term loan credit agreement governing the $1,750 million tranche B term loan that matures on December 31, 2018, and the indenture governing our secured senior notes, we have the option 68-------------------------------------------------------------------------------- to increase the amount of the Revolving Facility, in an aggregate principal amount not to exceed $700 million, subject to certain conditions. Refer to -New Debt Issuances and Prepayment of the VEBA Trust Note for additional information regarding the February 2014 debt issuances and our 2013 Form 10-K for additional information regarding the terms of those agreements.

Refer to -Cash Flows, Nine Months Ended September 30, 2014 compared to Nine Months Ended September 30, 2013, for additional information regarding the increase of $233 million in cash and cash equivalents from December 31, 2013 to September 30, 2014.

New Debt Issuances and Prepayment of the VEBA Trust Note On February 7, 2014, we and certain of our U.S. subsidiaries as guarantors entered into the following transactions to facilitate the prepayment of the VEBA Trust Note with an original face amount of $4,587 million: • New Senior Credit Facilities - a $250 million additional term loan under the existing tranche B term loan facility, which matures on May 24, 2017 (we collectively refer to the $250 million additional tranche B term loan and the $3.0 billion tranche B term loan, which was fully drawn on May 24, 2011, as the Tranche B Term Loan due 2017, and along with the Revolving Facility, the Senior Credit Facilities), and a new $1,750 million tranche B term loan, or Tranche B Term Loan due 2018, issued under the term loan credit facility, or Term Loan Credit Facility, that matures on December 31, 2018; • Secured Senior Notes due 2019 - issuance of an additional $1,375 million aggregate principal amount of 8 percent secured senior notes, or Offered 2019 Notes, due June 15, 2019, at an issue price of 108.25 percent of the aggregate principal amount; and • Secured Senior Notes due 2021 - issuance of an additional $1,380 million aggregate principal amount of 81/4 percent secured senior notes, or Offered 2021 Notes, due June 15, 2021, at an issue price of 110.50 percent of the aggregate principal amount (together with the Offered 2019 Notes, the Offered Notes).

The proceeds of these transactions were used to prepay all amounts outstanding of approximately $5.0 billion under the VEBA Trust Note, which included a principal payment of $4,715 million and interest accrued through February 7, 2014. The $4,715 million principal payment consisted of $128 million of interest that was previously capitalized as additional debt with the remaining $4,587 million representing the original face value of the note. The payment of capitalized interest is included as a component of Net Cash Provided by Operating Activities in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014.

In connection with the prepayment of the VEBA Trust Note, we recorded a non-cash charge of $504 million in the first quarter of 2014, consisting primarily of the remaining unamortized debt discount. The charge is included in Loss on extinguishment of debt in the accompanying Condensed Consolidated Statements of Income.

The payment terms for the outstanding principal and accrued interest and the interest rates on the $250 million additional term loan are consistent with the terms of the $3.0 billion tranche B term loan, which was fully drawn on May 24, 2011, with principal payments on the Tranche B Term Loan due 2017 of $8.1 million due quarterly, commencing March 31, 2014, with the remaining balance due at maturity.

The outstanding principal amount of the Tranche B Term Loan due 2018 is payable in equal quarterly installments of $4.4 million, commencing June 30, 2014, with the remaining balance due at maturity. The Tranche B Term Loan due 2018 bears interest, at our option, either at a base rate plus 1.50 percent per annum or at LIBOR plus 2.50 percent per annum, subject to a base rate floor of 1.75 percent per annum or a LIBOR floor of 0.75 percent per annum, respectively.

As of September 30, 2014, we may refinance or re-price the Tranche B Term Loan due 2017 and the Tranche B Term Loan due 2018 without premium or penalty.

Subsequent to these new debt issuances, and subject to the limitations in the amended and restated credit agreement governing the Senior Credit Facilities, the term loan credit agreement governing the Term Loan Credit Facility, and the indenture governing our secured senior notes, we have the option to increase the amount of the Revolving Facility, in an aggregate principal amount not to exceed $700 million, subject to certain conditions.

69 -------------------------------------------------------------------------------- The remaining terms of the Term Loan Credit Facility and the Offered Notes are generally consistent with the terms of the Senior Credit Facilities and the previously issued secured senior notes, respectively. Refer to our 2013 Form 10-K for additional information regarding the terms of those agreements.

Secured Senior Notes Exchange Offer In connection with our February 7, 2014 offering of the Offered Notes, we entered into a registration rights agreement with the initial purchasers of the Offered Notes. Under the terms of the registration rights agreement, we agreed to register notes having substantially identical terms as the respective Offered Notes with the SEC as part of an offer to exchange freely tradable notes for the Offered Notes. On April 7, 2014 and subject to the terms and conditions set forth in the Offered Notes prospectus, we commenced an offer to exchange the freely tradable 8 percent secured senior notes due 2019, or 2019 Notes, for the outstanding Offered 2019 Notes and the freely tradable 8 1/4 percent secured senior notes due 2021, or 2021 Notes, for the outstanding Offered 2021 Notes.

Each of the 2019 Notes and 2021 Notes are identical in all material respects to our existing notes. The 2019 Notes and 2021 Notes are collectively referred to as the Notes.

On May 5, 2014, our offers to exchange the Offered 2019 Notes and Offered 2021 Notes expired. Substantially all of the Offered Notes were tendered for Notes.

The holders of the Offered Notes who tendered their notes received an equal principal amount of 2019 Notes for the Offered 2019 Notes and an equal principal amount of 2021 Notes for the Offered 2021 Notes. The form and terms of the 2019 Notes and 2021 Notes are identical in all material respects to the Offered Notes, except that the 2019 Notes and 2021 Notes do not contain restrictions on transfer.

Secured Senior Notes During the nine months ended September 30, 2014, net interest payments of $210 million were made on the outstanding Notes. The $210 million of net interest payments were composed of $198 million that is included as a component of Net Cash Provided by Operating Activities in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014, and $12 million related to the repayment of the debt issuance premium on the Offered Notes, which is included in Net Cash Used in Financing Activities in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014.

Canadian Health Care Trust Notes On June 30, 2014, we made a scheduled payment on the Canadian Health Care Trust Tranche B note, or the Canadian HCT Tranche B Note, of $64 million, which was composed of a $23 million principal payment and interest accrued through the payment date of $41 million. The $23 million Canadian HCT Tranche B Note principal payment consisted of $20 million of interest that was previously capitalized as additional debt with the remaining $3 million representing a repayment of the original principal balance.

On January 2, 2014, we made a prepayment on the Canadian Health Care Trust Tranche A note, or the Canadian HCT Tranche A Note, of the scheduled payment due on June 30, 2014. The amount of the prepayment, determined in accordance with the terms of the Canadian HCT Tranche A Note, was $109 million and was composed of a $91 million principal payment and interest accrued through January 2, 2014 of $18 million. The $91 million Canadian HCT Tranche A Note principal payment consisted of $17 million of interest that was previously capitalized as additional debt with the remaining $74 million representing a prepayment of the original principal balance.

In July 2013, we made a scheduled payment on the HCT Tranche B note of $66 million, which was composed of $44 million of interest accrued through the payment date and $22 million of interest that was previously capitalized as additional debt.

On January 3, 2013, we made a prepayment on the Canadian HCT Tranche A Note of the scheduled payment due on July 2, 2013. The amount of the prepayment, determined in accordance with the terms of the Canadian HCT Tranche A Note, was $117 million and was composed of a $92 million principal payment and interest accrued through January 3, 2013 of $25 million. The $92 million Canadian HCT Tranche A Note principal payment consisted of $47 million of interest that was previously capitalized as additional debt with the remaining $45 million representing a prepayment of the original principal balance.

The payments of capitalized interest are included as a component of Net Cash Provided by Operating Activities in the accompanying Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013.

Refer to our 2013 Form 10-K for additional information regarding the Canadian Health Care Trust Notes.

70 -------------------------------------------------------------------------------- Senior Credit Facilities Amendment In June 2013, we amended and restated our credit agreement dated as of May 24, 2011 among us and the lenders party thereto. As a result, lenders party to the original $3.0 billion tranche B term loan maturing May 24, 2017 that held $760 million of the outstanding principal balance either partially or fully reduced their holdings. These reductions were accounted for as a debt extinguishment.

The remaining holdings were analyzed on a lender-by-lender basis and accounted for as a debt modification. The $2.9 billion outstanding principal balance on the tranche B term loan maturing May 24, 2017 did not change, as new and continuing lenders acquired the $760 million.

We paid $35 million related to the call premium and other fees to re-price and amend the original credit agreement governing the Senior Credit Facilities, of which $27 million was deferred and will be amortized over the remaining terms of the Senior Credit Facilities. We recognized a $23 million loss on extinguishment of debt, which included the write off of $12 million of unamortized debt discounts and $3 million of unamortized debt issuance costs associated with the original senior credit facilities, as well as $8 million of the call premium and fees noted above.

Refer to our 2013 Form 10-K for additional information related to the amended and restated credit agreement.

VEBA Trust Note Scheduled VEBA Trust Note payments through 2012 did not fully satisfy the interest accrued at the implied rate of 9.0 percent per annum. In accordance with the agreement, the difference between a scheduled payment and the accrued interest through June 30 of the payment year was capitalized as additional debt on an annual basis. In July 2013, we made a scheduled payment of $600 million, which was composed of $441 million of interest accrued through the payment date and $159 million of interest that was previously capitalized as additional debt.

The payment of capitalized interest is included as a component of Net Cash Provided by Operating Activities in the accompanying Condensed Consolidated Statements of Cash Flows.

Refer to our 2013 Form 10-K for additional information related to the VEBA Trust Note.

Amounts Available for Borrowing under Credit Facilities As of September 30, 2014, our $1.3 billion revolving credit facility remains undrawn and the Tranche B Term Loan due 2017, the Tranche B Term Loan due 2018 and the Mexican development banks credit facilities remain fully drawn. Our $4.5 billion ($5.0 billion Canadian dollar) Gold Key Lease secured revolving credit facility remained undrawn as of September 30, 2014, however, no additional funding will be provided as this facility was terminated effective October 10, 2014.

Refer to our 2013 Form 10-K for additional information regarding the terms of our financing arrangements.

Capital Structure In connection with FCA's capital planning to support its 2014-2018 business plan, FCA has announced its intention to eliminate any contractual terms limiting the free flow of capital among FCA and its consolidated subsidiaries.

As a result, we expect to redeem our 2019 Notes and 2021 Notes no later than at the respective initial optional redemption dates of June 2015 and June 2016. FCA also announced that it expects to refinance the Company's term loans and revolving credit facility at or before this time.

Restricted Cash Restricted cash, which includes cash equivalents, was $314 million as of September 30, 2014. Restricted cash included $228 million held on deposit or otherwise pledged to secure our obligations under various commercial agreements guaranteed by a subsidiary of Daimler AG and $86 million of collateral for other contractual agreements.

Working Capital Cycle Our business and results of operations depend upon our ability to achieve certain minimum vehicle sales volumes. As is typical for an automotive manufacturer, we have significant fixed costs, and therefore, changes in our vehicle sales volume can have a significant effect on profitability and liquidity. We generally receive payment on sales of vehicles 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 71 -------------------------------------------------------------------------------- our suppliers and the time we are required to pay for them. Therefore, during periods of increasing vehicle sales, there is generally a corresponding positive impact on our cash flow and liquidity. Conversely, during periods in which vehicle sales decline, there is generally a corresponding negative impact on our cash flow and liquidity. Similarly, delays in shipments of vehicles, including delays in orders to address quality issues, may negatively affect our cash flow and liquidity. In addition, the timing of our collections of receivables for sales of vehicles outside of North America tends to be longer due to extended payment terms, and may cause fluctuations in our working capital. The timing of our vehicle sales under our GDP can cause seasonal fluctuations in our working capital. Typically, the number of vehicles sold under the program peak during the second quarter and then taper off during the third quarter.

Cash Flows Nine Months Ended September 30, 2014 compared to Nine Months Ended September 30, 2013 Operating Activities -Nine Months Ended September 30, 2014 For the nine months ended September 30, 2014, our net cash provided by operating activities was $4,842 million and was primarily the result of: (i) net income of $540 million, adjusted to add back $2,375 million of depreciation and amortization expense (including amortization and accretion of debt discounts, debt issuance costs, fair market value adjustments and favorable and unfavorable lease contracts) and the non-cash $504 million loss on extinguishment of debt associated with the prepayment of the VEBA Trust Note; (ii) a $1,933 million increase in trade liabilities, primarily due to our production in September 2014 exceeding that of December 2013, the month that our annual plant shutdowns occur; (iii) a $568 million increase in accrued warranty costs, primarily due to a $407 million increase in our net adjustments to pre-existing warranties, which included the effects of recently approved recall campaigns; (iv) a $504 million obligation (including $7 million of interest accretion) associated with the MOU which we entered into with the UAW for its continued support of our WCM programs; (v) a $366 million increase in payables due to Fiat as a result of increased purchases of vehicles, parts, services, tooling, machinery and equipment relative to cash disbursements during the third quarter of 2014; (vi) a $231 million increase in accrued vehicle residual value guarantees, primarily due to an increase in the number of GDP in-service vehicles; (vii) a $178 million increase in accrued sales incentives, primarily due to an increase in retail incentives owed to our U.S. dealers; and (viii) $133 million in foreign currency translation losses were recognized as a result of the March and September 2014 remeasurements related to the devaluation of the Venezuelan currency, partially offset by $4 million of net transaction gains to Revenues, net. Refer to Note 18, Venezuelan Currency Regulations and Devaluation, for further detail on both of these items.

These increases in our net cash provided by operating activities were partially offset by: (i) a $642 million increase in inventories, primarily due to seasonal impacts. In comparison, our inventory levels were lower in December 2013 due to our annual plant shutdowns in that month; (ii) $400 million of pension and OPEB contributions; (iii) a $353 million increase in trade receivables, primarily due to our shipments at the end of September 2014 exceeding those at the end of December 2013 as a result of our annual plant shutdowns in December. We generally receive payments on sales of vehicles in North America within a few days of shipment from our assembly plants; (iv) a $271 million increase in prepaid expense related to common capital investment with Fiat; and 72--------------------------------------------------------------------------------(v) a $128 million repayment of capitalized interest on the VEBA Trust Note.

Operating Activities -Nine Months Ended September 30, 2013 For the nine months ended September 30, 2013, our net cash provided by operating activities was $2,610 million and was primarily the result of: (i) net income of $1,137 million, adjusted to add back $2,224 million of depreciation and amortization expense (including amortization and accretion of debt discounts, debt issuance costs, fair market value adjustments and favorable and unfavorable lease contracts), $220 million of non-cash pension and OPEB expense and the $23 million loss on extinguishment of debt associated with the amendment and re-pricing of the Senior Credit Facilities, partially offset by $8 million of the call premium and other fees paid in connection with the transaction;(ii) a $78 million foreign currency translation loss recognized as a result of the February 2013 currency devaluation in Venezuela, partially offset by a $21 million foreign currency transaction gain due to certain monetary liabilities, which had been submitted to CADIVI for payment approval through the ordinary course of business prior to the devaluation date, being approved to be paid at an exchange rate of 4.30 VEF per USD during the third quarter of 2013; (iii) a $1,516 million increase in trade liabilities, primarily because our production in September 2013 exceeded that of December 2012, the month that our annual plant shutdowns occur; and (iv) a $239 million increase in payables due to Fiat as a result of increased purchases of vehicles, components, parts, tooling and equipment during the nine months of 2013 as compared to late 2012.

These increases in our net cash provided by operating activities were partially offset by: (i) $691 million of pension and OPEB contributions; (ii) a $300 million increase in trade receivables, primarily because our shipments at the end of September 2013 exceeded those at the end of December 2012 as a result of our annual plant shutdowns in December. We generally receive payments on sales of vehicles in North America within a few days of shipment from our assembly plants; (iii) a $1,663 million increase in inventories, primarily due to increased finished vehicle and work in process levels at September 30, 2013 compared to December 31, 2012. These increases were primarily driven by higher production levels in September 2013 to meet anticipated consumer demand, as well as the shipment holds on the all-new Jeep Cherokees at the end of September 2013 to address quality concerns prior to shipment.

In comparison, our inventory levels were lower in December 2012 due to our annual plant shutdowns in that month. Our international finished vehicle inventory levels have also increased since December 2012 in order to support consumer demand for both our and FCA's vehicles. The number of FCA vehicles that we are distributing through our international distribution centers continues to increase as we continue to implement our distribution strategy with FCA; (iv) a $180 million increase in receivables due from Fiat as a result of an increase in vehicle shipments, parts sales and services provided to Fiat during the third quarter of 2013 as compared to the fourth quarter of 2012; (v) the payment of $159 million of capitalized interest on the VEBA Trust Note; and (vi) the payment of $47 million and $22 million of capitalized interest on the HCT Tranche A and B notes, respectively. Refer to -Canadian Health Care Trust Notes, for additional information related to this repayment.

Investing Activities -Nine Months Ended September 30, 2014 For the nine months ended September 30, 2014, our net cash used in investing activities was $2,542 million and was primarily the result of: (i) $2,576 million of capital expenditures to support our investments in existing and future products.

73--------------------------------------------------------------------------------These cash outflows were partially offset by: (i) a $19 million decrease in Restricted cash, consistent with the terms of certain commercial agreements; and (ii) $18 million of proceeds from disposals of property, plant and equipment, primarily related to the sale of properties within the U.S.

Investing Activities -Nine Months Ended September 30, 2013 For the nine months ended September 30, 2013, our net cash used in investing activities was $2,413 million and was primarily the result of: (i) $2,436 million of capital expenditures to support our investments in existing and future products.

These cash outflows were partially offset by: (i) a $30 million decrease in restricted cash, which was primarily the result of no collateral required to be posted for our foreign currency exchange and commodity derivative contracts as of September 30, 2013 due to positive mark-to-market adjustments during 2013, as well as minimum posting thresholds included in our agreements.

Financing Activities -Nine Months Ended September 30, 2014 For the nine months ended September 30, 2014, our net cash used in financing activities was $1,814 million and was primarily the result of: (i) $1,970 million of distributions to members, comprised of a $1,900 million special distribution to members and $70 million for state tax withholding obligations and other taxes; and (ii) $165 million of debt repayments, including $77 million related to the Canadian Health Care Trust Notes, $24 million related to the Tranche B Term Loan due 2017, $22 million related to the Mexican development banks credit facility, $9 million related to the Tranche B Term Loan due 2018 and $33 million related to capital leases and other financial obligations.

These cash outflows were partially offset by: (i) net proceeds of $368 million received from our refinancing transaction in February 2014, which consisted of: (a) $2,985 million of net proceeds from the secured senior notes; (b) $1,723 million of net proceeds from the Tranche B Term Loan due 2018; (c) $247 million of net proceeds from the Tranche B Term Loan due 2017; partially offset by (d) $4,587 million prepayment of the VEBA Trust Note.

Financing Activities -Nine Months Ended September 30, 2013 For the nine months ended September 30, 2013, our net cash used in financing activities was $223 million and was primarily the result of: (i) $188 million of debt repayments, including $45 million related to the HCT Tranche A note, $37 million related to the Auburn Hills headquarters loan, $23 million related to the Mexican development banks credit facility, $23 million related to the Tranche B Term Loan due 2017 and $60 million related to capital leases and other financial obligations; and (ii) $27 million of debt issuance costs related to the June 2013 amendment and re-pricing of our Tranche B Term Loan maturing May 24, 2017 and $1.3 billion revolving credit facility. In connection with this transaction, we repaid $760 million of the outstanding principal balance of the Tranche B Term Loan maturing May 24, 2017 to lenders who either partially or fully reduced their holdings with proceeds received from the new and continuing lenders 74-------------------------------------------------------------------------------- who acquired the outstanding principal balance. Refer to -Liquidity and Capital Resources -Total Available Liquidity -Senior Credit Facilities Amendment, for additional information regarding this transaction.

Net Industrial Cash Our calculation of Net Industrial Cash, as well as a detailed discussion of this measure, is included below in -Non-GAAP Financial Measures -Net Industrial Cash.

Our Net Industrial Cash decreased by $363 million from a $1,043 million Net Industrial Cash position at December 31, 2013 to a $680 million Net Industrial Cash position at September 30, 2014, primarily due to a $596 million increase in our financial liabilities, driven by our refinancing transaction in February 2014, as discussed in Cash Flows, above.

Free Cash Flow Our calculation of Free Cash Flow, as well as a detailed discussion of this measure, are included below in -Non-GAAP Financial Measures -Free Cash Flow.

Free Cash Flow for the nine months ended September 30, 2014 and 2013 totaled $2,300 million and $197 million, respectively.

The increase in Free Cash Flow from 2013 to 2014 was primarily due to: (i) a $2,232 million increase in our cash generated from operations. Refer to -Cash Flows, Nine Months Ended September 30, 2014 compared to Nine Months Ended September 30, 2013, for additional information regarding the change in our cash generated from operations; and These favorable changes were partially offset by: (i) a $140 million increase in our capital expenditures, primarily due to the timing of payments related to our continued investments to enhance our current and future product portfolio.

Defined Benefit Pension Plans and OPEB Plans -Contributions During the nine months ended September 30, 2014, employer contributions to our U.S. and Canadian funded pension plans amounted to $248 million and $4 million, respectively. For the remainder of 2014, employer contributions to our U.S.

funded pension plans are expected to be $2 million to satisfy minimum funding requirements; employer contributions to our Canadian funded pension plans are expected to be $1 million to satisfy minimum funding requirements.

Employer contributions to our unfunded pension and OPEB plans amounted to $17 million and $131 million, respectively, for the nine months ended September 30, 2014. Employer contributions to our unfunded pension and OPEB plans for the remainder of 2014 are expected to be $5 million and $44 million, respectively, which represent the expected benefit payments to participants.

Our funding policy for defined benefit pension plans is to contribute at least the minimum amounts required by applicable laws and regulations. Occasionally, additional discretionary contributions in excess of those legally required are made to achieve certain desired funding levels. In the U.S. and Canada, credit balances were generated by excess historical contributions, which can be used to satisfy minimum funding requirements in future years. While the usage of credit balances to satisfy minimum funding requirements is subject to our plans maintaining certain funding levels, we expect to be able to utilize the credit balances in 2014 such that no significant additional cash contributions are required for our U.S. and Canadian plans in 2014, although we may voluntarily elect to make contributions.

Defined Benefit Pension Plans -Obligation During the second quarter of 2013, we amended our U.S. and Canadian salaried defined benefit pension plans. The U.S. plans were amended in order to comply with Internal Revenue Service regulations, cease the accrual of future benefits effective December 31, 2013, and enhance the retirement factors. The Canada amendment ceases the accrual of future benefits effective December 31, 2014, enhances the retirement factors and continues to consider future salary increases for the affected employees. The changes to the plans resulted in an interim remeasurement of the plans, as well as a curtailment gain and plan amendments. As a result, we recognized a $780 million net reduction to our pension obligation, a $9 million reduction to prepaid pensions and a corresponding $771 million increase in accumulated other comprehensive income.

For the nine months 75 -------------------------------------------------------------------------------- ended September 30, 2014, there were no plan amendments that would have a remeasurement impact or curtailment gain/loss to our defined benefit pension plans. Refer to our 2013 Form 10-K for additional information regarding the amended U.S and Canadian salaried defined pension plans.

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. generally accepted accounting principles, or 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) 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 net income (loss), 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 and (vii) 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.

76 --------------------------------------------------------------------------------The reconciliation of net income to Adjusted Net Income, Modified Operating Profit and Modified EBITDA is set forth below (in millions of dollars): Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 Net income $ 611 $ 464 $ 540 $ 1,137 Plus: Charge for MOU with the UAW (1) - - 672 - Loss on extinguishment of debt (2) - - 504 23 Adjusted Net Income $ 611 $ 464 $ 1,716 $ 1,160 Plus: Income tax expense 162 146 213 215 Net interest expense 192 247 597 755 Net pension, OPEB and other employee benefit costs (gains) other than service costs (20 ) 3 (18 ) (27 ) Restructuring expense (income), net 1 (1 ) 5 (12 ) Other financial expense, net - 3 4 14 Modified Operating Profit $ 946 $ 862 $ 2,517 $ 2,105 Plus: Depreciation and amortization expense 819 785 2,347 2,147 Less: Depreciation and amortization expense for vehicles held for lease (99 ) (74 ) (219 ) (146 ) Modified EBITDA $ 1,666 $ 1,573 $ 4,645 $ 4,106 -------------------------------------------------------------------------------- (1) In the first nine months of 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 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 nine months ended September 30, 2013, a $23 million loss on extinguishment of debt was recognized related to the June 2013 amendment and re-pricing of our tranche B term loan maturing May 24, 2017 and revolving credit facility, consisting primarily of unamortized debt discount.

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): September 30, 2014 December 31, 2013 Cash and cash equivalents $ 13,577 $ 13,344 Less: Financial liabilities (1) (12,897 ) (12,301 ) Net Industrial Cash $ 680 $ 1,043 -------------------------------------------------------------------------------- (1) Refer to Note 10, Financial Liabilities, of our accompanying condensed consolidated financial statements for additional information regarding our financial liabilities.

77-------------------------------------------------------------------------------- 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): Nine Months Ended September 30, 2014 2013 Net Cash Provided by Operating Activities $ 4,842 $ 2,610 Net Cash Used in Investing Activities (2,542 ) (2,413 ) Free Cash Flow $ 2,300 $ 197 SCUSA Private-Label Financing Agreement In February 2013, we entered into a private-label financing agreement, which we refer to as the SCUSA Agreement, with Santander Consumer USA Inc., or SCUSA, an affiliate of Banco Santander. The financing arrangement launched on May 1, 2013.

Under the SCUSA Agreement, SCUSA provides a wide range of wholesale and retail financing services to our dealers and consumers 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 consumer acquisitions of new and used vehicles at our dealerships, financing for commercial and fleet customers, and ancillary services. In addition, SCUSA works with dealers to offer them construction loans, real estate loans, working capital loans and revolving lines of credit.

Under the financing arrangement, SCUSA has agreed to specific transition milestones for the initial year following launch. We have deemed SCUSA's performance toward the milestones satisfactory and agreed that the SCUSA Agreement will have a ten year term commencing 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 of $150 million in May 2013, which was recognized as Deferred revenue and is being amortized over ten years. As of September 30, 2014, $129 million remained in Deferred revenue in the accompanying Condensed Consolidated Balance Sheets.

We have provided SCUSA with limited exclusivity rights to participate in specified minimum percentages of certain of our retail financing rate subvention programs. SCUSA has committed to certain revenue sharing arrangements, as well as to consider future revenue sharing opportunities. SCUSA bears the risk of loss on loans contemplated by the SCUSA Agreement. The parties share in any residual gains and losses in respect of consumer leases, subject to specific provisions in the SCUSA Agreement, including limitations on our participation in gains and losses. Our dealers and retail customers also obtain funding from other financing sources.

Ally Repurchase Obligation In April 2013, the Auto Finance Operating Agreement between the Company and Ally Financial Inc., which we refer to as the Ally Agreement, was terminated. In accordance with the terms of the Ally Agreement, we were obligated for one year subsequent to the termination of the agreement to repurchase Ally-financed U.S.

dealer inventory that was acquired on or before April 30, 2013 upon certain triggering events and with certain exceptions, in the event of an actual or constructive termination of a dealer's franchise agreement, including in certain circumstances when Ally Financial Inc., or Ally, forecloses on all assets of a dealer securing financing provided by Ally. These obligations excluded vehicles that had been damaged or altered, that were missing equipment or that had excessive mileage or an original invoice date that was more than one year prior to the repurchase date. As of May 1, 2014, we were no longer obligated to repurchase dealer inventory that was acquired prior to April 30, 2013 and was financed by Ally.

78 -------------------------------------------------------------------------------- Other Repurchase Obligations In accordance with the terms of other wholesale financing arrangements in Mexico, we are required to repurchase dealer inventory financed under these arrangements, upon certain triggering events and with certain exceptions, including in the event of an actual or constructive termination of a dealer's franchise agreement. These obligations exclude certain vehicles including, but not limited to, vehicles that have been damaged or altered, that are missing equipment or that have excessive mileage or an original invoice date that is more than one year prior to the repurchase date.

As of September 30, 2014, the maximum potential amount of future payments required to be made in accordance with these other wholesale financing arrangements was approximately $372 million and was based on the aggregate repurchase value of eligible vehicles financed through such arrangements in the respective dealer's stock. If vehicles are required to be repurchased through such arrangements, the total exposure would be reduced to the extent the vehicles can be resold to another dealer. The fair value of the guarantee was less than $0.1 million at September 30, 2014, which considers both the likelihood that the triggering events will occur and the estimated payment that would be made net of the estimated value of inventory that would be reacquired upon the occurrence of such events. The estimates are based on historical experience.

Off-Balance Sheet Arrangements We have entered into various off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations or liquidity.

Arrangements with Key Suppliers From time to time, in the ordinary course of our business, we enter into various arrangements with third party key suppliers in order to establish strategic and technological advantages. A limited number of these arrangements contain unconditional purchase obligations to purchase a fixed or minimum quantity of goods and/or services with fixed and determinable price provisions. Purchases under our arrangements with third parties were $179 million and $228 million for the nine months ended September 30, 2014 and 2013, respectively. During the nine months ended September 30, 2014, we increased our purchase obligations with certain suppliers. Future minimum purchase obligations under our arrangements as of September 30, 2014 were as follows (in millions of dollars): Remainder of 2014 $ 93 2015 295 2016 268 2017 222 2018 209 2019 and thereafter 218 In addition, certain of the arrangements we have entered into with FCA contain unconditional purchase obligations to purchase a fixed or minimum quantity of goods and/or services with fixed and determinable price provisions. During the nine months ended September 30, 2014, we increased our purchase obligation with FCA. Purchases under our arrangements were $417 million and $321 million for the nine months ended September 30, 2014 and 2013, respectively. Future minimum purchase obligations under our arrangements as of September 30, 2014 were as follows (in millions of dollars): Remainder of 2014 $ 13 2015 82 2016 91 2017 100 2018 100 2019 and thereafter 210 79-------------------------------------------------------------------------------- Other Matters 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.

As previously disclosed, in June 2014, the National Development and Reform Commission of the Government of the People's Republic of China, or NDRC, initiated an investigation of Chrysler Group (China) Sales Limited, or CGCSL, a 100 percent owned subsidiary of the Company, relating to the Company's compliance with the Chinese Anti-Monopoly Law, or AML. In September 2014, the NDRC announced the imposition on CGCSL of a fine in the amount of 31.682 million renminbi (approximately $5.1 million) as a result of past practices or acts that were deemed to violate the AML.

Employees The following summarizes the number of our salaried and hourly employees as of the dates noted below: September 30, 2014 December 31, 2013 Salaried 21,720 20,389 Hourly 55,570 53,323 Total 77,290 73,712 The increase in our total workforce during the nine months ended September 30, 2014 was primarily attributable to the hiring of manufacturing employees to support our current and anticipated production volumes, as well as additional engineering, research and development and other highly skilled employees to support our product development, sales, marketing and other corporate activities.

In the U.S. and Canada combined, substantially all of our hourly employees and approximately 20 percent of our salaried employees were represented by unions under collective bargaining agreements, which represented approximately 65 percent of our worldwide workforce as of September 30, 2014. The UAW and Unifor represent substantially all of these represented employees in the U.S. and Canada, respectively.

On January 21, 2014, we entered into the MOU with the UAW to supplement our existing collective bargaining agreement. In exchange for the UAW's legally enforceable specific commitment to continue to support the implementation of WCM programs throughout our manufacturing facilities, to facilitate benchmarking across all of our manufacturing plants and to actively assist in the achievement of our long-term business plan, we agreed to make payments totaling $700 million to be paid in four equal annual installments. At the direction of the UAW, the payments are to be made to the VEBA Trust. As the MOU was negotiated and executed concurrently with the Equity Purchase Agreement described under Note 16, Other Transactions with Related Parties, and as Fiat was a related party to us and the UAW and the VEBA Trust were related parties, the two agreements were accounted for by Fiat as a single commercial transaction with multiple elements.

As a result, the fair value of the total consideration paid under the Equity Purchase Agreement and the MOU was allocated to the various elements acquired by Fiat and us. Due to the unique nature and inherent judgment involved in determining the fair value of the UAW's commitments under the MOU, a residual value methodology was used to determine the portion of the consideration paid attributable to the UAW's commitments. We have reflected in the accompanying condensed consolidated financial statements only the impacts of these transactions that are related to us. Refer to Note 16, Other Transactions with Related Parties, for a discussion of the accounting for these transactions.

Recent Accounting Pronouncements In August 2014, the Financial Accounting Standards Board, or FASB, issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity's ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity's ability to 80 -------------------------------------------------------------------------------- continue as a going concern. The guidance is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. We will comply with this guidance as of December 31, 2016.

In May 2014, the FASB issued updated guidance that requires a company to recognize revenue upon transfer of control of goods or services to a customer at an amount that reflects the consideration it expects to receive. This new revenue recognition model defines a five step process to achieve this objective.

The updated guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The guidance is effective for periods beginning after December 15, 2016. We will comply with this guidance as of January 1, 2017, and we are currently evaluating the method of implementation and impact of adoption on our consolidated financial statements.

In April 2014, the FASB issued updated guidance that changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. The guidance also requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. This guidance is effective for fiscal periods beginning after December 15, 2014, and is to be applied prospectively. We will comply with this guidance as of January 1, 2015.

In July 2013, the FASB issued updated guidance requiring that certain unrecognized tax benefits be recognized as offsets against the corresponding deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward, unless the deferred tax asset is not available or not intended to be used at the reporting date. This guidance was effective for fiscal periods beginning after December 15, 2013, and was to be applied prospectively to unrecognized tax benefits that exist at the effective date. We adopted this guidance as of January 1, 2014, and it did not have a material impact on our consolidated financial statements as it was consistent with out existing practice.

In March 2013, the FASB issued updated guidance to clarify a parent company's accounting for the release of the cumulative translation adjustment into net income upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. This guidance was effective for fiscal periods beginning after December 15, 2013, and was to be applied prospectively to derecognition events occurring after the effective date. We adopted this guidance as of January 1, 2014, and it did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued updated guidance in relation to the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. This guidance is effective for fiscal periods beginning after December 15, 2013, and was to be applied retrospectively for all periods presented for those obligations resulting from joint and several liability arrangements that existed at the beginning of the fiscal year of adoption. We adopted this guidance as of January 1, 2014, and it did not have a material impact on our consolidated financial statements.

Critical Accounting Estimates The accompanying condensed consolidated financial statements are prepared in accordance with 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. For a discussion of our critical accounting estimates, refer to Item 7 -Management's Discussion and Analysis of Financial Condition and Results of Operations -Critical Accounting Estimates and Item 8 -Financial Statements and Supplementary Data -Note 2, Basis of Presentation and Significant Accounting Policies, included in our 2013 Form 10-K. There have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2014.

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 81 -------------------------------------------------------------------------------- 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 Condensed Consolidated Statements of Operations.

The fair value of each unit issued under the plans is based on the fair value of our membership interests. Each unit, or Chrysler Group Unit, is equal to 1/600th of the value of a Membership Interest. Refer to Note 19, Share-Based Compensation, of our accompanying condensed 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 Chrysler Group Units, as determined above, to estimate the fair value of a single Chrysler Group 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 ranging from 16.0 percent in 2014 and 16.0 percent to 16.5 percent in 2013; and • Projected worldwide factory shipments ranging from approximately 2.8 million vehicles in 2014 to approximately 3.4 million vehicles in 2018.

On January 21, 2014, Fiat completed the Equity Purchase Agreement in which its 100 percent owned subsidiary, FNA, indirectly acquired from the VEBA Trust all of the membership interests in the Company not previously held by FNA. 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 16, Other Transactions with Related Parties, of our accompanying condensed 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 September 30, 2014, a change of 50 basis points in the weighted average cost of capital would cause the value of a Chrysler Group Unit to change by approximately $0.35, which would change our share-based compensation liability by approximately $2 million.

Anti-Dilution Adjustment The documents governing our share-based compensation plans contain anti-dilution provisions which provide for an adjustment to the number of Chrysler Group 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 Chrysler Group 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 (FNA directed its portion of the special distribution to the VEBA Trust as part of the purchase consideration); and 82--------------------------------------------------------------------------------• The prepayment of the Company's 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 19, Share-Based Compensation -Anti-Dilution Adjustment, of our accompanying condensed 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 Chrysler Group 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 between January 1, 2015 and March 15, 2015. As a result, compensation expense was reduced by approximately $21 million during the nine months ended September 30, 2014.

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