GM Manages $125 Million Profit Amid Recall Crisis

DETROIT (Detroit Free Press/MCT) —

General Motors Co. eked out a small profit in the first quarter, strongly outperforming investors’ expectations amid a recall crisis that threatened to temporarily plunge the automaker into the red.

The automaker reported net income of $125 million, down 86 percent from a year earlier, avoiding what could have been its first loss in nearly five years and marking the company’s 17th straight profitable quarter.

GM’s global revenue rose 1 percent to $37.4 billion for the quarter.

The quarter included $1.3 billion in expenses associated with GM’s ignition-switch-defect crisis and other recalls that dragged down the company’s financial performance for the period.

Because of one-time recall costs, it was GM’s worst quarterly performance since 2009. Still, the fact that GM added to its cash pile underscores what analysts have emphasized: The recall won’t destroy GM’s balance sheet, and customers are still buying GM vehicles at a similar pace as before reports of the defect surfaced.

GM CEO Mary Barra said the recall has had “no meaningful impact” on sales and, in fact, that the recall presents a “huge opportunity” to sell new vehicles to customers who visit dealerships to get their cars fixed.

“Sure, there have been setbacks,” she said on a conference call. “That’s part of our business. Nevertheless, our overall progress has been sure and steady.”

Most analysts expect the automaker eventually to shell out several billion dollars to settle recall claims and pay government fines, although those expenses are not expected to deliver irreparable damage to the company’s finances.

The automaker has recalled 2.6 million vehicles – small cars mostly from 2003 through 2007 model years – to fix an ignition switch that could flip into accessory mode, cutting off power to air bags. The issue has been blamed for at least 31 accidents and 13 deaths in vehicles that are no longer made, such as the Chevrolet Cobalt and Saturn Ion.

GM spokesman Jim Cain said the automaker is “providing significant assistance” to help automotive supplier Delphi ramp up production of replacement parts. He said Delphi is currently operating one production line on multiple shifts 7 days a week, and the second and third lines are expected to be operational in the summer.

The company expects to have enough parts by October to fix the majority of vehicles, Cain said.

“We are buying the parts from Delphi,” GM Chief Financial Officer Chuck Stevens told reporters. “Our focus right now is to get parts produced and out to dealers as quickly as we can, to repair the vehicles and take care of our customers.”

Stevens declined to discuss whether GM expects to incur additional recall expenses later this year.

He said disaster-compensation expert Kenneth Feinberg, whom GM hired to explore options on potential payouts to recall victims, would deliver proposals within 30 to 45 days.

“It’s too early to predict what that outcome’s going to be,” Stevens said.

Lawyers for GM have asked a U.S. Bankruptcy Court in Manhattan to rule that it is still protected against product liability lawsuits in which owners of the recalled cars are seeking compensation for the lost value of their vehicles.

The company is not asking for immunity from claims for crashes and injuries.

“It was an understatement to say the first quarter was challenging for General Motors,” Barra said. “Nevertheless, the company remained profitable, and I’m very proud with how the team kept the focus on the customer.”

Despite the recall costs, the company posted a pretax profit of $466 million, down from $1.8 billion a year ago. That included a $557 million profit in North America, where the operating margin would have been about 8 percent without recall costs.

The average transaction price of GM vehicles rose $2,000 for the quarter, with pickup truck prices rising $5,000, Stevens said.

In Europe, where GM has not made a profit since 1999, the company’s loss widened from $152 million to $284 million as GM incurred restructuring costs associated with a plant closing in Germany.

In GM’s International Operations division, which includes Asia and Australia, pretax profits fell 47 percent to $252 million. But GM earned $598 million before taxes in China, up 9 percent from a year earlier.

In South America, however, the automaker lost $156 million before taxes, not including a $419 million charge associated with the devaluation of Venezuela’s currency, the bolivar.

Worldwide, GM’s market share fell from 11.3 percent a year earlier to 11.1 percent in the first quarter of 2014. In the U.S., its market share slipped from 17.7 percent to 17 percent.

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