Recall costs a big blow to GM bottom linePublished: 7/25/14 @ 12:05
General Motors Co. has spent $1.2 billion in recall- related costs, which led to a net income of $200 million for the company in the second quarter.
The ignition-switch recall and difficult market conditions in some parts of the world put tremendous pressure on the automaker’s bottom line, said Mary Barra, GM CEO.
In talking about the recall, she said the company has changed to make safety decisions at the top of the company. The company has reorganized the vehicle engineering division.
“We also removed 15 employees from the company – some for misconduct or incompetence; others because they simply don’t take responsibility or act with a sense of urgency,” Barra said.
The company has taken an aggressive stance on the recalls, she said.
GM has estimated it will need $400 million to fund the victim compensation fund, which is being independently run by compensation expert Kenneth Feinberg. The fund is designed to compensate people who were involved in crashes where the ignition switch turned off the vehicle, leading to an accident.
Net revenue in the second quarter of 2014 was $39.6 billion, compared with $39.1 billion in the second quarter of 2013. In the first six months of 2014, revenue rose to $77 billion, up from $76 billion in the same period a year ago, according to the GM report.
The company also announced for the quarter it has spent $200 million in efforts to restructure the company. The stock price of GM started the day at $37.41 on the New York Stock Exchange, but fell throughout the day to $35.74 as investors reacted to the quarterly report.
The stock market is reacting to what it thinks is going to happen, meaning softer future sales are expected, said Jesse Toprak, chief analyst for Cars.com.
The market has become more global than ever, and this was pretty much a flat quarter for GM, he said.
“The good thing for GM is sales really haven’t suffered [after the recall],” Toprak said.
In fact, the forecast for GM is that sales will be up again in July, he said.
Alec Guiterrez, senior analyst for Kelley Blue Book, was a little surprised the company was able to have a small gain.
“[GM has] very solid results given everything they have been going through,” Guiterrez said. “I think that the consumers are still viewing the brand as positive.”
One highlight Guiterrez mentioned are the high sales numbers for GM on larger vehicles such as the Chevrolet Yukon.
June sales numbers showed the Yukon up 53.7 percent from 2013 to date.
“Consumers recognize that those vehicles being produced today are competitive with what the best in the industry has to offer, and that is why they [GM] haven’t lost any momentum,” Guiterrez said.
Michelle Krebs, analyst for Autotrader.com, said GM’s earnings showed strong fundamentals in sales and a cutdown on incentives, and the company is getting good prices for their vehicles.
“It would have been an outstanding quarter if GM did not have all the expense related to the recalls,” Krebs said. “There is an underlying strength that is truly there.”
There were positive elements within the second quarter. GM had its second-highest volume quarter since 2005 mostly due to sales in North America and China, which increased by 6 percent and 8 percent respectively, Barra said. The company had a record sales quarter in China.
“The gains that GM has made in China will help them for some time to come,” Toprak said. “They’ve done quite well there with brand recognition.”
Those gains were offset “to a large degree” by declines in Russia and Venezuela, along with GM’s decision to wind down Chevrolet Europe.
The issue is that the $2 billion the company spent on the recall just has a big impact on earnings, Toprak said.
The sales figures for GM are expected to be released Aug. 1.
Contributor: Kalea Hall, staff writer