Mercedes 2006 Annual Report Download - page 180

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Due to refinements of estimates for workforce reduction measures
and for the stop of the smart roadster, DaimlerChrysler recorded
income of €8 million during 2006, which is recognized in “cost of
sales” and in “selling, administrative and other expenses.”
As a consequence of the ongoing negative sales development
of the smart forfour, DaimlerChrysler decided in the first quarter
of 2006 to cease the production of the smart forfour in 2006,
to focus its smart brand solely on the smart fortwo and to integrate
the activities of smart into the Mercedes-Benz organization.
The smart forfour was assembled by Mitsubishi Motors Corporation
(MMC) under the terms of a contract manufacturing agreement.
In March 2006, DaimlerChrysler and MMC signed a letter of intent
which sets forth the general conditions of a termination of that
agreement. In June 2006, the exit agreement was signed and pro-
duction ceased. Based on these conditions, DaimlerChrysler
recorded charges of €592 million for 2006, primarily relating to
termination payments to MMC and suppliers. These charges
are recognized in “cost of sales.”
Additional charges totaling €334 million were recorded in 2006 for
inventory write-downs, higher incentives, the recognition of
lower estimated residual values of smart vehicles, and estimated
payments for the reorganization of the distribution network.
The charges were recognized in “cost of sales” (€97 million),
“selling, administrative and other expenses” (€210 million) and
as a reduction of “revenues” (€27 million).
Also in the first quarter of 2006, DaimlerChrysler approved
plans to reduce the workforce located in Böblingen (Germany).
According to the terms of the workforce reduction initiative,
severance benefits consist of continued pay for a period after the
end of service, job placement assistance and cash severance
payments. Therefore, charges of €28 million were recognized in
“selling, administrative and other expenses” in 2006.
Associated with the discontinuation of the smart forfour production,
DaimlerChrysler terminated its involvement with a variable
interest entity (“VIE”) and prematurely repaid the Group’s portion
of that VIE’s external debt. The early extinguishment of debt
of the VIE resulted in a financial expense of €9 million which is
included in “financial income (expense), net” for 2006.
All charges related to the realignment of smart and to the cancel-
lation of the production of the smart forfour, with the exception
of the expenses relating to the early extinguishment of debt, were
allocated to the Mercedes Car Group segment. The development
of balances that lead to payments in subsequent periods is sum-
marized as follows:
The Mercedes Car Group expects the remaining balance of €119
million to be paid in 2007.
Personnel expenses and number of employees. Personnel
expenses included in the statement of income are comprised of:
On January 1, 2006, upon the adoption of FASB Emerging Issues
Task Force (“EITF”) 05-5, “Accounting for Early Retirement or
Postemployment Programs with Specific Features (Such As Terms
Specified in Altersteilzeit Early Retirement Arrangements)”,
DaimlerChrysler changed its estimates of the effects of employee
bonuses and other benefits provided under the German Alters-
teilzeit early retirement program and other benefit arrangements
with the same or similar terms. DaimlerChrysler also adjusted
its accounting for related reimbursement subsidies received from
the German government when certain conditions are met.
The adoption of EITF 05-5 resulted in a gain from the reduction
of the related provision of €166 million (€102 million, net of
taxes, or €0.10 per share) which was primarily recognized in
“cost of sales” for 2006.
Total
Other costs
Workforce
reduction
(in millions of €)
Year ended December 31,
2004
20052006
18,625
3,395
1,329
1,342
109
24,800
19,750
3,371
1,131
1,331
148
25,731
18,750
3,294
948
1,173
51
24,216
Wages and salaries
Social security and payroll costs
Net pension cost (see Note 24a)
Net postretirement benefit cost
(see Note 24a)
Other expenses for pensions and
retirements
(in millions of €)
Balance at January 1, 2005
Charges
Payments
Balance at December 31, 2005
Additional charges
Adjustments
Payments
Balance at December 31, 2006
–
24
(16)
8
21
(2)
(18)
9
–
552
(443)
109
815
(6)
(808)
110
–
576
(459)
117
836
(8)
(826)
119