Tags: General Motors | Earnings | Profit | Recall

GM's Profit Falls on Recall Costs, Victims' Compensation Fund

Thursday, 24 Jul 2014 08:06 AM

General Motors Co. reported a much lower second-quarter profit on Thursday due to numerous recalls and the expected cost of at least $400 million for a compensation fund for those killed or injured by a defective ignition switch linked to at least 13 deaths.

GM also reiterated that it expected a moderately improved operating profit this year and that its future recall costs would be slightly higher than historic rates.

"We're on or ahead of the plan we shared in January," Chief Financial Officer Chuck Stevens told reporters. "Our expectation is that the second half of the year will be better than the first half."

GM earlier this year recalled 2.6 million cars for the faulty ignition switches, which can cause engine stalls and stop air bags from deploying, and power steering and power brakes from operating. The company is under investigation by U.S. safety regulators, Congress and the U.S. Department of Justice over its failure to detect the faulty part for more than a decade.

Net income in the quarter fell to $190 million, or 11 cents a share, from $1.2 billion, or 75 cents a share, a year earlier.

Excluding one-time items, GM earned 58 cents a share, just below the 59 cents analysts polled by Thomson Reuters I/B/E/S had expected.

The company's shares fell 2.2 percent to $36.60 in trading before the market opened.

One-time items included the charge for the establishment of the victims' compensation fund, which GM said could still rise by about $200 million, as well as an $874 million charge for a change in how the company will account for recalls in the future.

GM previously took charges as recalls occurred, but now it will account for potential future liabilities as the cars are sold and adjust those costs up or down on a quarterly basis as it does for warranty expenses.

For the victim's compensation fund, Stevens said the $400 million figure was based on actuarial data and did not say whether the company expected the number of deaths linked to the defective part to rise. He reiterated that the fund had no cap and that attorney Kenneth Feinberg, who is administering the fund for GM, was not consulted in setting the charge and would determine the final payouts.

Safety advocates had previously pushed for GM to put aside $1 billion for the compensation fund.

Not counted as one-time items were previously disclosed costs of $1.2 billion for GM recalls, which have covered almost 29 million vehicles so far this year. GM also has $200 million in restructuring costs.

Revenue rose slightly to $39.6 billion, but that fell short of the $40.59 billion analysts had expected.

On a regional basis, GM's North American operating profit, including about $1 billion in recall costs, fell about 30 percent to $1.39 billion.

However, higher prices and lower incentives in North America added $800 million. For example, the company was able to get up to $7,000 more for the new Chevrolet Tahoe and GMC Yukon full-size SUVs and about $5,000 more for the newer Chevy Silverado and GMC Sierra full-size pickup trucks, Stevens said.

Profit margins in North America reached 9.2 percent, improving year-over-year for the fourth straight quarter. Stevens said they remained on track to reach the company's mid-decade target of 10 percent.

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General Motors says second-quarter profit fell 85 percent as recall costs chopped $1.5 billion from the bottom line.
General Motors, Earnings, Profit, Recall
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2014-06-24
Thursday, 24 Jul 2014 08:06 AM
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