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Chrysler's Earnings More Than Double

Autos: Second-quarter revenue exceeds analysts' forecasts. Strong high-margin sales, cost reductions offset rebates.


DETROIT — Chrysler Corp. said Monday that second-quarter earnings more than doubled as it offset higher incentives with strong sales of high-profit vehicles and a broad cost-reduction program.

The results were better than analysts' expectations and came despite an auto price war that forced Chrysler to increase rebates to nearly $1,500 a vehicle, about 50% higher than a year ago.

The Auburn Hills, Mich.-based auto maker reported net income of $1 billion, or $1.51 a diluted share, compared with $483 million, or 70 cents a share, a year ago when a 29-day strike cut profit by $438 million.

Chrysler, which plans to merge with Daimler-Benz of Germany this fall, posted revenue of $17 billion, up from $14.4 billion a year ago. Worldwide vehicle sales increased 15% to 849,000 vehicles.

"The competitive environment got tougher in the quarter, heightened by an aggressive coupon incentive battle, but breakthrough products helped us considerably," said Chrysler Chairman Robert Eaton.

Chrysler is the first of the nation's Big Three auto makers to report earnings. General Motors Corp., which has been crippled by a six-week labor dispute, is expected to report sharply lower earnings today. Ford Motor Co. should report strong profit Wednesday.

Chrysler's earnings per share were its best since 1984 and about 10 cents better than the average estimate by analysts. Shares closed unchanged, at $56.19, in trading on the New York Stock Exchange.

During the first half of the year, Chrysler earned $2.06 billion, or $3.12 a diluted share, up 36% from $1.51 billion, or $2.17 a share, a year earlier. Revenue rose 11% to $33.8 billion from $30.5 billion.

Analysts commended Chrysler for continuing to introduce attractive products while trimming costs. But they noted that incentives are cutting deeply into profit, a problem faced by all auto makers.

"Incentives carry a high cost too," said David Healy, analyst with Burnham Securities. "It amounts to an effective price cut of $500 a vehicle over a year ago."

Chrysler issued more than $1 billion in rebates in the last three months. Incentives averaged $1,485 per vehicle, up from $980 a year ago. The rebates increased when GM in April launched a loyalty coupon program providing $500 to $1,000 in rebates to previous buyers and to employees. The coupons, matched by Chrysler and Ford, expired earlier this month.

Still, Chrysler's incentives are expected to continue at roughly $1,200 a vehicle through the third quarter.

Chrysler overcame the higher marketing costs with further cost cutting. The company said it trimmed more than $400 million through reduced material costs, manufacturing efficiencies and lower spending on advertising.

"We saw cost reductions across the board," said Gary Valade, Chrysler's chief financial officer.

The No. 3 U.S. auto maker also sold more high-profit vehicles, such as the new Dodge Durango sport-utility vehicle and Chrysler Concorde mid-size sedan. Analysts estimate that Chrysler makes $5,000 on every Durango it sells.

These high-margin sales helped Chrysler increase its earnings per vehicle to $1,040, up from a strike-adjusted $989 a year ago.

The auto maker said it has seen no benefit from the strikes afflicting GM in the second quarter. But Valade said Chrysler could pick up both commercial fleet and retail customers if the walkouts continue through month's end.

Chrysler has increased its production plans for the third and fourth quarters, but the hikes were previously scheduled and are not a response to the GM strikes.

With factories running about 93% of capacity, Chrysler has room to squeeze out additional vehicles in coming months if necessary. With increased production in the next two quarters, Chrysler expects to maintain its current 16.1% U.S.-Canadian market share, up from 15.5% a year ago.

Van Bussmann, a Chrysler economist, estimates that auto sales this month will run at a seasonably adjusted rate of 14.8 million vehicles, down from a torrid 16.3-million pace in June. For the year, he predicts light-vehicle sales of about 15.2 million.

Chrysler's planned $40-billion merger with Daimler-Benz is proceeding smoothly, company officials said. The shareholders of both companies are scheduled to vote on the deal in September.

The merger prompted Chrysler to suspend a stock-buyback program. This has helped increase its cash reserve to $9.2 billion, up from $7 billion a year ago. Valade said the reserve could be used to develop new technologies and products, expand internationally or increase dividends.


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