Chrysler 2nd-Quarter Profit Drops 86% : Autos: Company blames production cuts, incentive payments and costs related to its new minivan.
Chrysler Corp. reported Tuesday that its second-quarter profit fell 86% because of production cutbacks, rising sales-incentive payments and high costs related to the introduction of its new minivan.
The sharp earnings slide had been widely anticipated because of a series of negative events that have hit the nation’s No. 3 auto maker in recent months. Last week, Chrysler said it would take a $143-million charge for production changes at a Delaware assembly plant.
“It was sort of a Murphy’s Law quarter: Anything that could go wrong did go wrong,” said David Healy, an analyst for Arizona-based Burnham Investment Research.
Chrysler earned $135 million for the second quarter, compared to $956 million for the year-ago period. Sales were $12.5 billion, down from $13.1 billion last year.
The earnings decline came as auto sales slumped industrywide in the first half of the year and as Chrysler faces intense pressure from billionaire investor Kirk Kerkorian, the company’s largest shareholder. Kerkorian tried unsuccessfully to take over the auto maker earlier this year.
The company attributed the poor earnings to the production of fewer vehicles, high costs related to building and launching new vehicles, higher rebates to buyers, increased material costs and lower sales in Mexico. “Obviously, the second quarter was disappointing,” Chairman Robert Eaton said, “but it was not a surprise to us.”
Chrysler had signaled to Wall Street in recent weeks that the quarterly results would be dismal. Its stock closed Tuesday at $49.50 a share, down 37.5 cents, in trading on the New York Stock Exchange.
Still, Healy and other analysts said Chrysler’s financial performance is poised to improve for the traditionally weak third quarter and should be strong in the last three months of the year.
Chrysler has been the most aggressive of the Big Three auto makers in cutting back production in response to the weak sales market. It produced 28,653 fewer vehicles during the second quarter compared to a year ago. It also increased rebates and other sales incentives on vehicles in an effort to trim bloated dealership inventories. The average incentive was $1,035 per vehicle, up from $590 in the first quarter.
The rebates were most noticeable on the 1995 minivans, which the company wanted to clear out as it began selling the 1996 version--the first major redesign of the vehicle in more than a decade.
Although the incentives helped move more metal, they took a toll on profit. The company’s average profit per vehicle was about $300, down from about $1,300 a year ago. With the drop in income, the company dipped into its cash fund to help pay for some ongoing programs. Chrysler had $6.9 billion of cash on hand at the end of June, down from $7.6 billion at the beginning of the year.
Much of the reduction went to the company’s stock buyback program. This year it has spent $608 million to buy back 14.1 million shares. The company has committed to buy back at least $1 billion in stock this year.
The buyback was urged by Kerkorian, who has criticized the company for amassing such a large cash cushion. Chrysler says it needs $7.5 billion to fund vehicle development in the next downturn.
Kerkorian argues that is too much and wants much of the money used to enhance the stock value.
Kerkorian withdrew his original $55-a-share takeover bid because it lacked financing. Recently he made a tender offer to buy 14 million shares for $50 a share, which would bring his holdings to 13.6% of Chrysler’s stock.
