German prosecutors have fined automaker Daimler AG (OTC:DMLRY), the corporate parent of Mercedes-Benz, nearly a billion dollars to settle a probe into whether Daimler sold diesel-powered vehicles that cheated on emissions testing.
What happened
Prosecutors in Stuttgart, where Daimler is headquartered, found that the company sold about 684,000 vehicles, starting in 2008, that didn’t fully comply with European Union regulations around emissions of oxides of nitrogen. (Oxides of nitrogen are among the pollutants that cause smog.)
Without admitting guilt, Daimler agreed to pay a fine of 4 million euros for “negligent violation of supervisory duties” and to give up an additional 866 million euros in profit, for a total payment of 870 million euros (about $960 million).
In a statement, Daimler said that the fines were below the statutory maximum because of its decision to cooperate fully with the authorities in Stuttgart and changes it has made to its internal regulatory-compliance systems.
The Stuttgart prosecutors’ case against Daimler is one of several that arose following investigations into Volkswagen AG‘s (OTC:VWAGY) diesel-emissions cheating scandal. Volkswagen subsidiary Porsche and parts supplier Robert Bosch GmbH both paid substantial fines earlier this year to settle similar cases with the Stuttgart authorities.
What it means for Daimler
The good news for Daimler investors, such as it is, is that Daimler took a one-time charge of 2.55 billion euros in the second quarter for diesel-related legal costs that appears to cover this fine. The company said that the fine will not result in a “relevant additional negative effect” on its third-quarter earnings.
Daimler cut its full-year profit guidance in July, mostly because of concerns about the potential costs of diesel-related litigation and enforcement actions. While it said at the time that it still expects sales to be roughly equal to its 2018 total (3.4 million vehicles) and revenue to rise slightly from the 167.4 billion euros it generated last year, the company currently believes that its full-year earnings before interest and taxes will fall “significantly below” the 11.13 billion euros it earned on the same basis in 2018.
Daimler CEO Ola Kallenius has said he will spend the remainder of 2019 focused on improving operating performance and cash flow generation, while looking at ways to trim costs that could include eliminating models from the company’s global product portfolio.
For Daimler investors who have been concerned about the potential costs of diesel-related litigation, this settlement is a significant step forward. But Daimler isn’t out of the woods yet: The company still faces huge costs related to the development of battery-electric vehicles at a moment when the world’s auto markets appear to be stalling.
