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Chrysler Posts a Profit, of Sorts

Chrysler announces a surprise $1.1 billion in EBITDA for the first half of 2008, but the automaker is still bleeding red ink

Here's some unexpected good news from Detroit. Chrysler's automotive business says it's in the black, on an operating basis, that is.

When announcing sales on Aug. 1, Chrysler Vice-Chairman and Co-President James Press said the privately held company made $1.1 billion in earnings before interest, taxation, depreciation, and amortization (EBITDA) in the first six months of this year.

But add in some of the costs that help an accountant arrive at net income and Chrysler, a private company that is not required to release financial results, is still losing money. Using the financial reports of former parent Daimler (DAI), which owns 19.9% of Chrysler, the smallest of the Big Three U.S. automakers lost about $400 million in the first quarter. The German company has not yet reported Chrysler's numbers for the second quarter, but Chrysler Executive Vice-President and Chief Financial Officer Ron Kolka told BusinessWeek in an interview that, "We're not in the black on a net basis." But he added, "We're beating the plan that Cerberus laid out for us."

Ahead of Ford and GM in Restructuring

Cerberus Capital Management bought a controlling 80.1% ownership stake in Chrysler from Daimler in August 2007.

When it comes to today's profit picture, Chrysler's auto business has a few advantages that rivals Ford Motor (F) and General Motors (GM) lack.

First, Chrysler announced two massive restructuring moves in 2007 that took out 26,000 workers and cut 1.1 million vehicles worth of production, Kolka said. The restructuring charges for those worker buyouts and factory cuts were booked last year. So Chrysler has a head start on moving past its restructuring costs.

Not Too Troubled by Off-Lease SUVs

GM, for example, chalked up $4.4 billion of its massive $15.5 billion loss (, 8/1/08) to worker buyouts and restructuring charges that stem from closing truck plants this year. Chrysler dealt with most of its charges last year. "They have done a tremendous amount of work to skinny down the cost structure," says Joseph Phillippi, principal of AutoTrends, a New Jersey auto consultancy. "If it's a clean number, it's impressive."

Chrysler is separate from Chrysler Financial, the lending arm within Chrysler Holdings, which is 80%-owned by private equity giant Cerberus. That being the case, Chrysler isn't on the hook for losses from many sport-utility vehicles coming back from being leased.

In the face of higher gas prices, those off-lease SUVs are worth far less than most carmakers expected they would be when they leased the vehicles to consumers two or three years ago. GM and Ford each took charges of around $2 billion for the second quarter due to losses in leasing.

Restructuring Appears to be Working

Chrysler only has lease exposure on one year's worth of leases because Chrysler Financial holds the leases up that were originated until Aug. 3 of last year.

However murky Chrysler's profit reporting may be, there are signs that the restructuring is moving the company within the realm of profitability.

When Chrysler started restructuring back in 2007, its plants could build close to 3 million vehicles, according to the Harbour Report, a study published by consulting firm Oliver Wyman. But Kolka says since then the company has taken out of production the equivalent of 1.1 million vehicles. That puts its production just north of 2 million vehicles.

Cash on Hand: $11.7 Billion

Since Chrysler's sales are down 30% this year, that means it still has excess production, but it has cut away a lot of fat.

Press said Chrysler has $11.7 billion in cash on hand, "down just a little bit from the end of 2007." For a company of Chrysler's size, that's not a bad cash hoard.

But looking ahead, it will be tough for any carmaker to keep profits aloft. The industry saw sales in July at an annualized pace of 12.6 million vehicles, down about 3 million from the same time last year. Says AutoTrends' Phillippi: "The real question becomes sustainability. My suspicion is that the second half will be rocky."

Click here to read about GM's staggering $15.5 billion second-quarter loss.

Welch is BusinessWeek's Detroit bureau chief.

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