I hate to be the bearer of bad news.

Daimler-Chrysler, which manufactures the very chic SMART cars, posted some dodgy 1q earnings today. The bad news is that the SMART division (smart GmbH) appears to be struggling.

The press release doesn’t say much:

Stuttgart/Auburn Hills, 04/28/2005 – First-quarter unit sales decreased by 7% to 247,000 vehicles, while revenues were 11% lower at 10.4 billion euros. The operating loss of 954 million euros (Q1 2004: 639 million euros) was affected by expenses of 800 million euros relating to the realignment of the smart business unit. At smart there was an operating loss from ongoing business activities.

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…nor does this (subscriber-only) WSJ story:

Mercedes’s results are also burdened by Smart, a unit of the division that has been losing money since it started churning out its colorful, two-passenger cars in 1998. DaimlerChrysler earlier this month announced a restructuring of Smart that includes a reduction of the unit’s model line and the canceled development of a diminutive sport-utility vehicle. The restructuring is expected to cost DaimlerChrysler as much as €1.2 billion this year, the company has said.

More below the jump.Digging in to the summary a bit:

At smart there was an operating loss from ongoing business activities. In addition to this loss, there were expenses for the realignment of the business model. These expenses mainly comprised impairments on property, plant and equipment, additions to accruals relating to risks arising from contractual obligations, and the valuation of vehicle inventories. In the course of the year 2005, further estimated expenses of up to €0.4 billion may be incurred.

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Further in the report itself (pdf, 28 pp) we get to the numbers:

Worldwide unit sales of smart increased by 32% to 26,400 vehicles. This growth was primarily due to first-quarter sales of 8,200 units of the smart forfour, which was launched in 2004. Sales of the smart fortwo, which is now in its seventh year of production, were slightly above the prior-year level.

As a result of the new smart business model, the key elements of which were announced on April 1, 2005, fixed costs are to be reduced by 30% within the next two years and productivity will be boosted. The successor to the smart fortwo planned for the year 2007 will also be specified to meet the requirements of the US market. Production of the smart roadster will be discontinued by the end of 2005. The smart SUV project will not be pursued any further. smart’s goal is to achieve break even by 2007.

Bummer about the roadster. I thought it looked pretty cool.

The nitty gritty of the shakeup:

Based on the unit sales development of the smart roadster and the smart forfour, two products of the business unit smart, and the downward revisions to forecasted sales targets, DaimlerChrysler reduced its production and notified suppliers about declining shipments. These developments resulted in increasing operating and cash flow losses and an expectation that losses would continue in future periods. Therefore, during the first quarter of 2005, DaimlerChrysler evaluated the recoverability of the carrying amount of the long-lived assets that generate cash flows largely independent of other assets and liabilities of the Group. The smart roadster is assembled in a plant in France, whereas the asset group related to the smart forfour consists of owned real estate and equipment of a German plant as well as leased equipment located with suppliers, but carried on DaimlerChrysler’s balance sheet. As a result of the impairment test, DaimlerChrysler recognized charges of €440 million in “Cost of Sales” of the Mercedes Car Group segment representing the excess of the carrying amount of these long-lived assets over their fair value. After the impairment charge, the remaining carrying amount of the long-lived assets represents the estimated fair value of land and buildings.

As a result of the deterioration of operations in the first quarter of 2005, DaimlerChrysler decided to cease production of the smart roadster by the end of 2005, reduce prices of certain products and provide incentives to dealers related to those vehicles. Thus, also included as a reduction of revenue or in “Cost of Sales” in the first quarter are €97 million to recognize the effects of inventory write-downs, higher incentives and lower residual values of vehicles. Further costs related to the realignment of smart amounting to €48 million arise primarily from supplier claims. In connection with the activities related to the smart business unit, DaimlerChrysler also decided not to proceed with the launch of the smart SUV that was scheduled to be introduced in 2006. As a result of the decision to abandon the smart SUV, tooling and equipment located in our designated assembly plant in Brazil and equipment still under construction with suppliers for which firm purchase orders were in place, €61 million was written off by a charge to “Other Operating Expenses” to the extent those assets could not be redeployed for other purposes. In addition, charges of €154 million related to the liabilities arising from the cancellation of supply contracts were recognized as “Other Operating Expenses.”

Here’s hoping that the strong advance sales of the American version of the SMART car (which is to be distributed by ZAP) will help to turn things around. When you take risks in business, sometimes you have to be willing to bleed a little before you hit the jackpot.

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