July 24 (Bloomberg) -- General Motors Co., posting a second-quarter profit that missed analyst estimates, said it will spend at least $400 million to pay victims of the 2.59 million compact cars with a potentially faulty ignition switch linked to at least 13 deaths.
Profit excluding one-time items was 58 cents a share, helped by redesigned pickups and large sport-utility vehicles in the U.S. and improved sales in China, GM said today in a statement. That compared with an average estimate of 59 cents from 14 analysts, according to data compiled by Bloomberg. The biggest U.S. automaker reported earning 84 cents on that basis a year earlier. GM slid 4.5 percent to $35.74 at the close in New York, marking its biggest one-day drop since March 11 and leaving the shares down 13 percent for the year.
While GM took a one-time charge of $400 million for the victim compensation program, the automaker said it may rise to $600 million. Chief Financial Officer Chuck Stevens reiterated that Kenneth Feinberg, an outside lawyer who’s managed similar funds for victims of the Sept. 11 terrorist attacks and the BP Plc oil spill, will ultimately decide the cost of the program. GM won’t limit how much money the program pays, Feinberg has said.
“There is no cap on the program,” Stevens told reporters today at the company’s Detroit headquarters. “The objective of our compensation program, independently administered by Ken Feinberg, is to get all of the people that were impacted by the ignition switch issues through the compensation program.”
GM turned to Feinberg to create the victim compensation program as it grapples with the largest crisis since emerging from government-backed bankruptcy reorganization in 2009. Congress and the U.S. Justice Department are both investigating why it took the automaker more than a decade to recall cars with switches that allowed the key to slip out of the “on” position, shutting off the engine and disabling air bags.
Feinberg will begin taking claims Aug. 1.
“This is an absurdly low amount,” Bob Hilliard, a plaintiffs lawyer suing GM over deaths and injuries allegedly due to ignition-switch failures, said today in an e-mail. “GM knows the final number is certain to exceed $1 billion.”
He asked if GM is “reining in Feinberg’s independence so as to control costs?”
Jere Beasley, a plaintiffs’ attorney who represents multiple injury victims in lawsuits over the ignition switches, also said the amount wasn’t enough to cover all victims. The amount discussed today wouldn’t be sufficient to provide for younger people with catastrophic injuries, such as brain damage or quadriplegia, who need substantial lifelong care, he said.
“This is totally inconsistent with setting up an uncapped fund,” Beasley said in an interview. “This is not enough.”
The amount set aside is lower than some investors had expected, Brian Johnson, an analyst with Barclays Plc, said today in a note to investors. Joseph Spak, an analyst with RBC Capital Markets, said in a note that the $400 million was less than the $1.5 billion he had been estimating.
GM has already agreed to a settlement with the U.S. Department of Transportation that included paying a maximum fine of $35 million and agreeing to unprecedented oversight aimed at changing the company’s culture when it comes to safety.
The automaker has stepped up its pace of recalls since beginning the ignition switch fix in February, calling back almost 29 million in North America this year.
GM spent $1.3 billion in the first quarter on recalls and $1.2 billion in the second for the cost of additional actions announced. It also took a $1.3 billion charge for the period ended June 30 that includes the cost of covering the victims’ claims and a non-cash expense of $874 million for changing how GM accounts for possible future recalls. It now treats them more like warranty expenses, assuming costs across the 30 million GM vehicles on the road, the company said.
The cost of the victims’ program could rise, Erik Gordon, a professor at the Ross School of Business at the University of Michigan in Ann Arbor, said today in an e-mail.
“I expect the number to go up as more people learn about the program,” he said.
Without those special items and the $1.2 billion spent on recall related repairs, Stevens, the CFO, said GM’s earnings per share would’ve been $1.02.
“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,” Chief Executive Officer Mary Barra said in the statement.
GM’s revenue rose to $39.6 billion from $39.1 billion a year earlier, missing the $40.6 billion average estimate of six analysts. Net income fell to $278 million from $1.4 billion during the same quarter a year earlier. GM’s second half should be better than its first half, excluding recalls, Stevens told analysts during a conference call today.
While recall headlines have dominated in the U.S., sales have increased, rising 2.5 percent through June. GM’s results were helped by new SUVs such as the Cadillac Escalade, which rose 18 percent in the first half, and GMC Yukon, which gained 54 percent. The Buick brand, aided by the new Encore small SUV, rose 13 percent. The sales gains come as GM reduces its spending on incentives, according to researcher Autodata Corp. The average spending per vehicle on light-duty trucks fell 10 percent during the first half while Ford Motor Co.’s truck spending rose 2.3 percent.
Ford, the second-largest U.S. automaker, today reported a profit, excluding some costs, of 40 cents a share, topping the average of analysts’ estimates for a 36-cent gain.
GM’s adjusted earnings before interest and taxes in North America fell to $1.39 billion from $1.98 billion, missing the $1.5 billion average estimate of four analysts. Excluding recall costs, the region’s adjusted Ebit rose to $2.4 billion, GM said. Improved pricing increased regional earnings by $800 million along with $200 million from additional sales and $200 million from a richer mix of inventory, GM said.
Even with the improvements in North America, excluding recall costs, the results weren’t as good as some analysts were expecting.
“We had expected GM would beat expectations handily” in North America, Ryan Brinkman, an analyst with JPMorgan Chase & Co., said in a note today. Prior to today, he had said in a note to investors that he expected, “Suburban-sized” North American profit, referring to the company’s large Chevrolet SUV, because of the increase in truck products in the quarter. GM built more Cadillac Escalades in the period than in any quarter since the first three months of 2008.
“Instead, the North America results are merely solid” while 9.2 percent margin ex-recall is “admittedly the best GM has done in years but compares to Ford, which earlier this morning reported 11.6 percent margin in North America despite a comparatively aged vehicle lineup currently,” Brinkman wrote today.
Beyond the glare of the recalls, Barra has also had to guide GM along other rough roads. GM sales in South America fell 18 percent in the second quarter as deliveries in Brazil declined 13 percent. GM’s adjusted Ebit for the region turned to a loss of $81 million from a profit of $54 million a year ago, beating the $155 million average loss estimate of four analysts.
In Europe, where GM has lost money since 1999, the losses widened from a year earlier to $305 million from $144 million, the company said. That missed the $217 million loss estimate of four analysts. The bulk of the increased loss included costs associated with closing an assembly factory in Germany, Stevens said.
Adjusted Ebit in GM’s other region, called International Operations, which includes China and countries outside of Europe and the Americas, rose to $315 million, beating the average of four estimates for earnings of $181 million. The unit was helped by China, which had an equity income of about $500 million, according to Stevens. That’s a $100 million improvement from a year ago. Without China, the division would’ve lost $187 million in the quarter compared with a loss of $168 million, GM said.
While China sales rose 8 percent in the quarter, helping fuel a first-half rise of 11 percent, the pace failed to keep up with Volkswagen AG. VW’s China deliveries, including Hong Kong, rose 18 percent during the first six months of 2014. It was GM’s best second quarter of sales since 2005.
GM, the world’s biggest car company by vehicle sales in 2011, slipped to third place last year behind Toyota Motor Corp. and Volkswagen. Including VW’s MAN SE and Scania AB heavy-truck units, the German automaker edged out GM as the second-largest automaker with 9.73 million deliveries last year. GM sold 9.71 million vehicles.
VW said this month that global sales, excluding trucks, increased 5.9 percent to 4.97 million in the first half, outpacing GM’s 1.4 percent gain to 4.92 million during the same period.
Barra has withstood a lot of turbulence in her first half-year on the job. There’s more she and GM will need to do, said Barclays’ Johnson said.
“A lot of things thrown at her and she’s done a solid job,” he said in a telephone interview. “Now we’re looking for, as she gets this behind it, some vision of how she’s going to drive the next leg of cultural change beyond paying more attention to safety.”
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