General Motors estimated that it would pay victims of an ignition-switch defect about $400 million in settlements through a compensation fund administered by an outside official – although the cost could increase by $200 million depending on the number of people who file claims.
The company eked out net income of $190 million in the second quarter after factoring in the cost of current recalls and incorporating an additional $874 million charge to cover the cost of any future recalls for the entire portfolio of 30 million GM cars currently on the road.
Even when GM backed out the recall-related costs, its $1.4 billion operating profit for the quarter was 41 percent below the comparable figure from a year earlier. But GM executives said they expect a strong second half of the year.
Despite encouraging sales figures for the company’s most profitable vehicles – its recently redesigned sport-utility vehicles and pickup trucks – investors were disappointed at the automaker’s 9.2 percent operating profit margin in North America. The stock fell 3 percent to $36.15 at 12:20 p.m.
In North America – where most of the recall expenses have occurred – GM enjoyed the benefits of the recently introduced 2015 Chevrolet Suburban, Chevy Tahoe and GMC Yukon, bolstering the profit margin to what would historically be considered a high mark.
But GM Chief Financial Officer Chuck Stevens said the company is facing a “bottleneck” in production of the SUVs at its plant in Arlington, Texas – which is undercutting profits.
In an encouraging sign for the company’s bottom line, the unprecedented string of recalls – blanketing some 29 million vehicles in North America – may be coming to an end.
Stevens said the company has largely finished its wave of recalls after completing an exhaustive review of internal data and customer complaints.
“I think we’ve demonstrated resiliency as we’ve gone through this,” GM CEO Mary Barra said in a conference call. “We understand that we have a lot more work to do and we’re focusing on it.”
Still, the ultimate cost of the ignition switch defect – which festered for more than a decade before it was fixed and is blamed for more than 13 deaths – remains unclear. Stevens said the company’s estimate for victim settlements does not include an estimate for payments to victims who choose to sue GM instead of accepting offers from compensation fund chief Kenneth Feinberg.
It also does not include the potential cost of criminal or civil penalties, which could reach into the billions.
Feinberg confirmed in an email to the Free Press on Wednesday that he had not provided an estimate to GM on the cost of his compensation fund, which is not capped. He will accept claim applications from Aug. 1 through Dec. 31.
Stevens told reporters this morning that GM’s actuarial advisers calculated the $400 million estimate.
For second-quarter recalls, GM posted a one-time charge of $1.2 billion.
But in a shift directly connected to GM’s recall crisis – which has triggered an industry record number of recalls for a single year – the company will now incorporate an estimated cost for future recalls into its earnings calculations when the vehicles are actually sold. Ford and Toyota already account for recall costs this way.
The change triggered a $874 million one-time loss for all GM vehicles currently on the road in North America in what the company described as a “catchup” charge. It amounts to about $30 per vehicle.
Despite the flurry of recall costs and a currency crisis in Venezuela, GM nonetheless posted its 18th consecutive quarterly profit – thanks in part to the fourth consecutive quarter of profit margin improvement in North America.
Total revenue rose 1 percent to $39.6 billion, although global market share slipped from 11.6 percent a year ago to 11.3 percent.