News Column

Recall hits the brakes on income

July 24, 2014

By James R. Healey, USA TODAY



General Motors reported net income of $200 million in the second quarter after a $1.2 billion charge for the cost of recalls.

That's well off from a net of $1.2 billion a year earlier, when it had just $100 million in recall expenses.

Revenue in the quarter was $39.6 billion, up slightly from $39.1 billion a year earlier.

GM has issued 60 recalls this year through July 23, involving 26.41 million U.S. vehicles.

GM also said it expects to spend $400 million to compensate victims of its defective ignition switches -- the first time GM has forecast what that will cost. The automaker warned its investors that the victim-compensation fund has no cap and could rise to $600 million.

Lance Cooper, lawyer for some victims, said the numbers seem too small, and could signal Kenneth Feinberg, who is administering the compensation fund, effectively capping what's supposed to be an uncapped fund.

GM and Feinberg both have said vigorously and often that Feinberg has sole authority to make awards from the fund to anyone he believes is deserving, in any amount. He is using a formula derived from the Bureau of Labor Statistics for valuing a life in the event of a mishap, effectively capping most individual awards. The fund is for people who were hurt or lost loved ones in crashes of the 2.6 million 2003-2011 GM small cars the automaker recalled worldwide in February and March. Defective ignition switches can disable air bags. GM links 13 deaths to cars in that recall. That began the recalls, as GM cleaned house to avoid additional fines by the federal government.

Feinberg says people riding in other vehicles hit by the GM models and pedestrians also are eligible to ask for compensation.

Investors didn't like the overall picture painted by the numbers, and GM stock closed at $35.74 Thursday, down $1.67 or 4.5%.

GM tried to focus on its business Thursday, not the costs. "Our underlying business performance in the first half of the year was strong, as we grew our revenue on improved pricing and solid new vehicle launches," said GM CEO Mary Barra.

The automaker said core North American operations earned $1.4 billion before taxes and interest payments, even after subtracting $1 billion for the recalls, most of which involve U.S. models.

That was down from $2 billion from North American operations a year earlier, when recall costs were just $100 million.

Brian Johnson of Barclays, who had forecast "Suburban-size" profits in North America, said numbers were "below high expectations." Joe Spak of RBC Capital Markets called results "shy of expectations."

GM says it expects recall costs the rest of the year to "normalize" slightly higher than it previously forecast, but didn't give a figure. It also said it is changing how it accounts for those costs.

As it sells each vehicle, it will accrue an amount that "represents management's best estimate of future recall costs in North America." As a start, GM said, it will take a $900 million non-cash pretax special charge in the second quarter for what it forecasts as "costs of future possible recalls for up to the next 10 years on 30 million GM vehicles on the road today."

If nothing else, that will keep the automaker from announcing each quarter how much in recall costs it's expecting to write off against earnings.

Akshay Anand, analyst for Kelley Blue Book, said, "GM is going to take a hit because of the recalls that have been happening over the last several months. The question is, how much? Sales haven't slowed as much as many people expected, thanks in part to a clear recall strategy from GM as it relates to public perception, as well as the introduction of solid, new product."




Barra by Darr Beiser, USA TODAY; Ignition by Molly Riley, AP


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Source: USA Today


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