Thursday, August 14, 2008

Chrysler numbers add to questions


Jim Press, a Chrysler vice chairman

Cash figures may not mean there's a profit


Chrysler's recent efforts to shed more light on its business are leaving some scratching their heads and wondering what's really going on at the privately held automaker.

In the past couple of weeks, Chrysler has issued a couple of statements aimed at clearing what it says are misconceptions about its business. Notably, the company said it has $11.7 billion in cash and marketable securities and that it earned $1.1 billion before interest, taxes, depreciation, amortization -- known as EBITDA -- and before restructuring charges. (Put together, the measure is sometimes called EBITDAR.)

In general, the figures seem to provide evidence of Chrysler executives' oft-repeated statements that the automaking unit is meeting or exceeding all financial targets used by majority owner Cerberus Capital Management, despite economic headwinds. EBITDA and EBITDAR are measures of operating cash flow, but they do not necessarily indicate an actual net profit. In fact, the limited and selective release of such information produces more questions than answers for outsiders trying to figure out how Chrysler is doing.

"We try to figure it out and obviously it's difficult to do, because we don't have a complete picture of what the financials are. We really don't know what is included and what's not included. Where are all of the special items that we know Chrysler has to have been taking?" asked Aaron Bragman, an industry analyst with Global Insight. "It's an interesting number, but without some context it really has caused a lot of people to be just as skeptical as they have been."

The statements were made about a week after Daimler AG, which kept a 19.9% stake in Chrysler, announced it lost $585 million from its share in the company mostly in the first quarter. The indication being that Chrysler as whole -- including Chrysler Financial -- lost $2.9 billion.

Chrysler issued a statement that day to clarify the announcement, indicating the Auburn Hills automaker and affiliated financial services business lost only $509 million, of which the automaking unit lost $431 million. The vast difference was attributed to Daimler's use of European accounting practices.

Then on Aug. 1, Chrysler surprised many when it announced its cash and EBITDAR numbers for the first half of the year. "I'd like to share some data with you so you can see the context and you can see the difference between our performance and some of the other companies," said Jim Press, a Chrysler president and vice chairman.

Gerald Meyers, a business professor at the University of Michigan, said that EBITDA and similar figures provide only a small part of the story when looking at operations of a company, such as a car company, which can have huge onetime costs.

"It begs a second question," Meyers said. "The second question is 'Well, OK, I hear you about EBITDA. But what was your net profit or loss?' If they won't tell you that then you've got suspicions that there was a helluva loss."

"The billion dollars isn't a big sum of money," Meyers added.

Recent filings by General Motors Corp. and Ford Motor Co. illustrate how EBITDA and EBITDAR figures can vary dramatically from net profit or losses.

Because of historic losses in the second quarter, GM and Ford lost $18.7 billion and $8.6 billion, respectively, in the first half of the year.

For the same period, GM's EBITDA was a negative $8.5 billion, while Ford's was a positive $13.6 billion, according to Bloomberg. Backing out restructuring charges, or what Bloomberg identifies as abnormal losses, and one could come up with an EBITDAR for GM of $39 billion -- to the positive -- and $29 billion for Ford.

The point being that EBITDA may be a useful tool, but it has limits.

"It's very difficult to extract too much information out of an EBITDA number given all of the moving parts involved with the restructuring," Mark Oline of Fitch Ratings said. "There are so many things that flow into those numbers, it's hard to make an apples-to-apples comparison," he added.

Chrysler spokeswoman Shawn Morgan said recent asset sales -- such as a California design center and Brazil engine plant, are included in the Chrysler number.

Experts say Chrysler's change in payment schedules to suppliers -- going from 45 days to 60 days for non-production suppliers -- could also positively impact cash flow for the period.

Chrysler also expects to save $100 million over the next 12 months because of the 5% cost-reduction initiative introduced June 1 on indirect suppliers, as the Free Press reported in June.

Ron Kolka, the automaker's chief financial officer, told reporters and analysts that most of the cost savings at Chrysler came through the restructuring plans begun more than 18 months ago.

Since February 2007, the automaker has announced the elimination of more than 28,000 jobs, cut four models and taken out 1.1 million units of capacity.

"They've taken a pretty aggressive whack at their cost structure," said Fred Hubacker, a former Chrysler executive who now is an executive director at Conway, MacKenzie & Dunleavy.

"EBITDA is a nice measure that the private-equity guys like to use ... but in this business there's so much" capital expenditures "required. What do you really have?" Hubacker said. "I don't think it's a good, fair comparison. You really need to get to operating margins."

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