GM's profit falls on recall costs, victims' compensation fund

DETROIT Thu Jul 24, 2014 12:21pm EDT

The Chevrolet logo and the U.S. flag are seen in Gaithersburg, Maryland May 1, 2013. REUTERS/Gary Cameron

The Chevrolet logo and the U.S. flag are seen in Gaithersburg, Maryland May 1, 2013.

Credit: Reuters/Gary Cameron

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DETROIT (Reuters) - General Motors Co (GM.N) 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."

Morgan Stanley analyst Adam Jonas said strong vehicle pricing in North America "saves the quarter."

GM earlier this year recalled 2.6 million cars for the faulty ignition switches, which can cause engine stalls and stop power steering and power brakes from operating and air bags from deploying. The company is under investigation by U.S. safety regulators, Congress and the U.S. Department of Justice over its failure to detect the problems 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 3.3 percent to $36.16 at midday.

Also on Thursday, GM's smaller U.S. rival, Ford Motor Co (F.N), posted a higher-than-expected profit on strong results in North America and Europe.

One-time items for GM included the charge for establishing the victims' compensation fund, which the company 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 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, and the company's charge for that was at the low end of Wall Street's expectations.

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.

Retail sales rose 5.7 percent in both North America and the International Operation unit, which includes China, while falling 11 percent in Europe and 18 percent in South America.

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, but some analysts said the margins were weaker than they expected.

In Europe, GM's loss almost tripled to $305 million, largely due to restructuring costs for the planned closure of its plant in Bochum, Germany. Stevens said the company still expected to return to profitability in the region by mid-decade.

Ford surprised analysts by posting a profit in Europe, its first in the region in three years.

The International Operations' profit rose 36 percent to $315 million. Net income profit margins in China hit 10 percent.

South American operations slipped to a loss of $81 million from a year-earlier profit. Stevens said the company expected business there to improve slightly in the second half.

(Reporting by Ben Klayman in Detroit; Editing by Lisa Von Ahn)

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