GM's net income fell about 85 percent in the second quarter from earnings a year ago. (MCT)
General Motors Co. executives said Thursday they believe most major recalls are behind them, as the automaker reported a slim second-quarter profit and took a $400 million special charge it estimates will be needed to pay for a victims compensation fund.
GM’s net income of $190 million or 11 cents a share fell about 85 percent from a year ago, but squared with analysts’ estimates when factoring in one-time charges. GM Chief Financial Officer Chuck Stevens told reporters Thursday that second-half earnings should be better than first-half profits — and that recalls will return to a more normal pace.
“This work is now substantially complete and I believe we have now addressed the major outstanding issues,” GM CEO Mary Barra told analysts in a call Thursday, referring to the automaker’s record number of callbacks. “But if we see new data, we will address it.”
Net income was reduced by about $1.5 billion with special items for the compensation plan to pay those whose family members died or were seriously injured because of GM’s ignition switch defect that led it to call back 2.59 million cars this year. The automaker also took $1.2 billion in overall recall charges and a $874 million pre-tax charge to reserve for future recall costs in North America. In the first half of 2014, GM has taken recall-related charges of $2.5 billion.
The company in the second quarter also took an approximately $200 million restructuring charge for Europe and revised its European outlook to be profitable by mid-decade instead of merely breaking even.
Results in North America, however, weren’t as strong as analysts expected. Investors weren’t happy, either: GM stock sank about 4.5 percent Thursday to close at $35.74.
Recall expense to fall
Stevens said recalls may be more frequent than usual going forward, but their number and expense should be lower than what GM experienced in the first half of the year. The carmaker recalled a record 29 million cars and trucks worldwide in the first six months.
He told reporters the company conferred with outside actuaries to determine its potential exposure and best estimate for the independently administered compensation plan. But Stevens warned it is possible the program cost could increase to $600 million and that GM would make adjustments through the end of the year as claims figures become known.
The victims compensation fund is related to GM’s recalled Chevrolet Cobalts, Saturn Ions and other cars linked to at least 13 deaths and 54 crashes. The ignition keys in those cars can inadvertently turn off the engine, disabling power steering, power brakes and air bags. The fund is independently run by compensation expert Kenneth Feinberg. It begins accepting claims next month.
Stevens said GM did not consult with Feinberg on determining an estimate for the program’s cost. “There’s no cap on this program and at the end of the day Ken Feinberg will determine how much this program costs,” Stevens said.
He would not comment more specifically on how it reached the $400 million estimate or how many claims it expects to receive.
The $400 million earmark for the compensation fund was “likely at the low end of investor expectations,” Barclays Capital Inc. analyst Brian A. Johnson said in an investors note Thursday. It was well below Goldman Sachs analyst Patrick Archambault’s estimate of $2 billion.
Alabama lawyer Jere L. Beasley, who is representing people and families who say they were harmed as a result of the defective switches, said in a statement that the $400 million is “totally inadequate.”
It’s not likely GM will have a final tally on how much the compensation fund will cost until mid-2015 based on the schedule Feinberg has established. Feinberg said Wednesday that any estimate is “purely speculative” until he examines claims and determines their eligibility and value.
N. A. results 'disappointing'
GM in the quarter took a catch-up charge for possible recall expenses looking out 10 years and covering 30 million vehicles currently on the road in North America. The charge equates to about $80 million a year or $30 a vehicle, Stevens said.
The company as of July 1 is setting aside a potential estimated recall expense for a car when it is sold in North America, similar to what other auto manufacturers do. Toyota Motor Corp. and Ford Motor Co. set aside money for possible future recalls when a vehicle is sold, GM said.
Revenue during the second quarter was $39.6 billion, compared to 39.1 billion a year ago. Earnings before interest and tax adjustments were $1.4 billion, compared to $2.3 billion a year ago.
GM made $1.39 billion before interest and taxes in North America, down from $2 billion a year ago, but the figure included the impact of $1 billion in recall costs. The company’s pre-tax margin for North America reached 9.2 percent, excluding recalls, up from 8.4 percent in the quarter a year ago. Stevens said the company is on track to achieve 10 percent pre-tax margins in North America.
North American results were “disappointing” to Citi Research analyst Itay Michaeli, and fell short of his expectations for GM to earn 63 cents a share.
The company was aided by higher average selling prices on vehicles such as full-size SUVs. Stevens said an employee pricing program for customers who own own one of the 2.59 million recalled cars has resulted in about 6,660 vehicles being sold. More than 550,000 cars recalled for bad ignition switches have been repaired, GM said.
The automaker posted a $305 million pretax loss in Europe, compared to a loss of $114 million pretax a year ago; when excluding restructuring related to the Bochum, Germany plant closure later this year, it lost about $100 million. So far in 2014, GM has posted a $589 million pre-tax loss in Europe.
GM’s International Operations posted pre-tax earnings of $315 million led by growth in China, up from $232 million a year ago. GM’s South America operations posted a pre-tax loss of $81 million, down from a pretax profit of $54 million a year ago. GM Financial also posted a $258 million pretax profit.