Recalls offset strong truck prices, rising China sales; 45 states, Canada join safety probes

GM's quarterly profit plunges on recall costs

Recalls offset strong truck prices, rising China sales; 45 states, Canada join safety probes

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DETROIT -- The heavy cost of General Motors’ unprecedented slew of safety recalls during the second quarter wiped out most of its profits, erasing the fruits of strong truck pricing in North America and sales growth in China.

General Motors today posted an 85 percent drop in net income for the April-June period to $190 million from $1.2 billion a year earlier. Recall-related costs and one-time expenses -- including $400 million that GM has set aside to pay victims of its faulty ignition switch -- reduced net profit by about $1.5 billion net of taxes.

The cost of 41 safety campaigns covering more than 20 million cars during the quarter was about $1.2 billion, GM said in a statement. Special items included the $400 million charge for the victims compensation fund as well as $874 million for anticipated recall costs over the next decade in North America, an accounting change that GM said is consistent with the practice of other automakers.

Revenue rose 1 percent to $39.7 billion.

GM shares fell 4.5 percent to $35.74. Some analysts said though North America provided the bulk of GM’s profit, the earnings there were lighter than they had expected.

“I think we’ve demonstrated resiliency as we’ve gone through this” recall blitz, CEO Mary Barra said during a conference call. “We understand that we have a lot more work to do.”

Barra said GM’s top-to-bottom review of pending safety issues dating to the 1990s is “substantially complete.”

Strong pricing

In North America, pretax profit excluding special items was $1.39 billion, down 30 percent from a year earlier. The bottom line was hurt by about $1 billion in recall expenses.

Strong pricing in North America aided GM’s pretax bottom line by about $800 million compared with a year earlier, thanks mostly to heady pricing on its redesigned pickups and SUVs. CFO Chuck Stevens said that average transaction prices on pickups in the quarter rose roughly $5,000 compared with a year earlier. SUV transaction prices increased $6,000-$7,000, he said.

“We continue to have very strong pricing on recently launched products,” Stevens told reporters at GM headquarters. He said incentive spending industrywide has “generally been in line with the past three or four years.”

Stevens said that GM sold about 6,600 vehicles in the quarter to customers who came in to have their faulty ignition switches replaced. The defect is linked to at least 13 deaths and is the subject of several federal investigations, including a Department of Justice probe.

In Europe, GM lost $305 million, up from a $114 million loss a year earlier. Stevens said most of the losses came on restructuring charges related to the closure of an assembly plant in Bochum, Germany. Meanwhile, Ford posted its first profitable quarter in Europe in three years.

Stevens now expects GM’s Opel division to be profitable by “mid-decade” -- an improved outlook from his previous forecast of break-even by then -- as Opel gains market share in key countries, including Germany.

China gains

GM’s international division posted a $315 million pretax profit, up 36 percent from a year earlier. The company recorded about $500 million in pretax income from China but lost money in the other markets that make up its international operation, which includes India, Australia, southeast Asia and other markets.

In South America, GM lost $81 million, vs. a $54 million pretax profit a year earlier.

GM Financial posted $258 million in pretax income for the quarter, up 2 percent.

The $874 million charge for future recall expenses stems from a change GM is making in how it estimates future recall costs. The money was set aside to cover potential liabilities over the next decade from the roughly 30 million GM cars on the road in North America.

Going forward, GM will set aside anticipated recall costs when each vehicle is sold. Stevens said “improved analytics” allow GM to more precisely peg its exposure to future recall costs. He said the practice is similar to how it books future expenses for warranty claims.

Stevens expects recall costs in the second half of the year to be “closer to” GM’s historical average.

GM said the $400 million charge for the victim-compensation process, overseen by attorney Kenneth Feinberg, is its “best estimate” for its ultimate cost. It said the number could rise to $600 million.

RBC Capital Markets analyst Joseph Spak said he had expected GM to allocate around $1.5 billion for the compensation fund.

In addition to congressional and federal probes, GM disclosed Thursday it is also being investigated by 45 state attorneys general and Transport Canada following the recalls.

"We are cooperating fully with all requests," GM said in a filing with U.S securities regulators. "Such investigations could in the future result in the imposition of material damages, fines or civil and criminal penalties."

You can reach Mike Colias at mcolias@crain.com.


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