GM recall cost wipes out profits; affected cars reach 7 million
GM recall costs sank the automaker's first-quarter profit, but CEO Mary Barra said the much-publicized recalls have yet to cut into sales. The biggest contributor to the GM recall costs was a $1.3 billion charge to cover a series of problems announced since early February.
Detroit — The cost of recalling nearly 7 million cars and trucks sank General Motors' first-quarter profit, but the company's CEO said the much-publicized recalls have yet to cut into sales.
GM on Thursday reported its worst financial results in more than four years, with profit falling 86 percent to $125 million. The biggest contributor was a $1.3 billion charge to cover a series of recalls announced since early February, most notably 2.6 million small cars with defective ignition switches.
The Detroit automaker is facing government investigations and lawsuits over the small-car recall. On a conference call, CEO Mary Barra called the company's handling of the recall unacceptable but said that, so far, bad publicity has not had a "meaningful impact" on sales. She also said GM is offering employee discounts to owners of cars with the faulty ignition switches.
After opening with a 2 percent gain, GM shares were down 37 cents, or 1 percent, to $34.02 in afternoon trading.
Christian Mayes, an industrials analyst with Edward Jones, said the stock decline could be due to investor concerns about GM U.S. market share.
GM's first-quarter share fell 0.6 points to 17.4 percent compared with a year ago. In a 16 million-vehicle market, the drop equals nearly 10,000 vehicles. Mayes said GM has $27 billion in cash and can handle the recall costs, "but I think the market share is a big deal. There's very strong competition out there from all the other automakers."
GM made 6 cents per share in the first quarter, down from 58 cents a year ago. The recall charge alone cut 48 cents off its earnings. But excluding one-time items, GM made 29 cents per share, far above Wall Street estimates of 3 cents per share. Revenue rose more than 1 percent.
Still, it was a rough start to what many expected would be a strong year for the Detroit automaker.
The U.S. government its remaining stake in GM at the end of last year, freeing the company of the "Government Motors" nickname. In January, GM announced its first quarterly dividend in six years. And it has rolled out multiple new models in recent months including high-profit pickup trucks and full-size SUVs.
But the recalls have overshadowed Barra's first months as CEO. GM has linked the ignition switch problem to 13 deaths and has acknowledged knowing about it for at least a decade. Barra was grilled earlier this month by two congressional panels seeking an explanation on why GM dragged its feet. She said answers would come from an internal investigation.
GM also announced other recalls that pushed the total to near 7 million cars and trucks.
Barra said the company has formed a leadership team to focus on recall issues. But, as before, she made no excuses for GM's behavior. "It doesn't matter that the roots of the issue are more than a decade old," she said.
She told analysts that dealers are taking advantage of increased showroom traffic due to the recalls. But spokesman Jim Cain said GMhas asked dealers to use employee pricing not as a marketing tool, but to help owners of cars with bad ignition switches to trade for a new car. Employees generally pay 4 percent below dealer invoice.
Without the recalls, GM would have had a strong quarter. Revenue grew 1.3 percent from a year ago to $37.4 billion, in line with analysts' estimates.
"Clearly the headline results are overshadowed by the recall charges," Chief Financial Officer Chuck Stevens said.
GM's global sales for the quarter rose 2.3 percent to 2.42 million vehicles. China sales grew 13 percent, and sales in Europe rose less than 1 percent. But sales fell 2 percent in North America, GM's most profitable region, and dropped 10 percent in South America.
The company's North America division earned $600 million. Without the recall charge, it would have earned $1.9 billion. Stevens said GMis getting $2,000 more for its vehicles on average in the U.S. than it did a year ago.
The $1.3 billion charge, he said, covers the entire parts and installation cost for the recalls, as well as loaner vehicles for owners of cars with bad ignition switches. So far GM has issued 36,000 loaners. Stevens said it's too early to tell if GM will take more recall-related charges. GM faces multiple lawsuits from families of people killed in crashes.
The company has hired Kenneth Feinberg — who handled funds for victims of the Sept. 11, 2001 terrorist attacks and the BP oil spill — to explore ways to compensate victims. Stevens said no decision has been made on establishing a fund.
GM said ignition parts supplier Delphi is producing parts on one assembly line, running multiple shifts seven days per week. Second and third lines should be up in the summer, so GM should finish repairs by October.