Improved net income and earnings per share were overshadowed by warnings of a tough third quarter and cost-cutting measures for DaimlerChrysler AG.

Financial results for the second quarter exceeded forecasts: net income is up 18% to $1.67 billion, revenue is up 17% to $41.75 billion, earnings per share rose to $1.66 from $1.41 a year ago, and operating profit is up 3% at $2.5 billion.

But analysts and media zeroed in on the cautionary notes: operating profits won't reach 1999 levels of $10.4 billion. The Chrysler division, which accounts for more than half the profits, is to blame with year-to-date operating profit down 9% to $2.4 billion. Mercedes-Benz and Smart enjoyed a 22% hike in combined earnings and 18% rise in revenue.

DaimlerChrysler Second Quarter Financial Results
2000 1999 % Chg.
Sales $41,748 $35,628 17.2
Net Income $1,668 $1,416 17.8
E/S $1.66 $1.41 17.7
Unit Sales* 1,306 1,267 3.1
Note: Dollar sales and net income stated in millions; unit sales in thousands.
E/S is earnings per share. Dollar amounts based at 1 euro = $0.9545
*Unit sales are worldwide wholesale deliveries.

Chairman Juergen Schrempp says DC must play the same incentives game as the competition, especially for products near the end of the life cycle. The upside is fresh product (minivan, sedans, coupes, sport/utility vehicles) bode well for the future.

“It will be tough, but it will be handled because we have the financial muscle to do so,” says Mr. Schrempp.

DaimlerChrysler Corp. Chief Executive James P. Holden says marketing costs peaked at 13.6% of revenue in the first quarter but dropped to 12.2% in the second, continue to fall and are within a point of the competition.

The backdrop is stock that has lost half its value since the 1998 merger and the number of American shareholders is down to 20% and falling. To boost the price, Mr. Schrempp confirmed the company will cut $5.67 billion over three years from every division, including administration. The dual headquarters must cut 25% which translates into about 1,500 of 6,000 jobs, many by attrition and reassignment. He concedes the cuts are needed “to a lesser extent in Auburn Hills.”

Mr. Holden says the need to address the competitive U.S. market prompted an executive retreat last year from which came a reworked business plan to cut more than $1 billion from the operating budget. It includes plans to cut $3 billion in launch costs over four years.

Mr. Schrempp expects e-commerce to reduce cost.

Profits also fell within the financial arm, DaimlerChrysler Services, due to weak used car prices and higher financing and leasing costs.