Massive recall expenses slash General Motors’ first-quarter profit

Heavy spending to repair more than 6 million vehicles in the first quarter triggered an 88% plunge in General Motors Co. earnings for the period, compared to a year earlier.

The nation’s largest automaker said it earned just $108 million, or 8 cents a share, in the quarter, down from the $873 million in profits, or 63 cents a share, it collected in the same period in 2013.

Revenue edged up a little more than 1% to $37.4 billion.

“It is an understatement to say that the first quarter was challenging for General Motors,” said Mary Barra, the automaker’s chief executive.

However, she said, that GM could still produce a profit was a testament to the strength of the company.

The earnings reflected a $1.3-billion charge to fix millions of vehicles recalled globally so far this year, including 2.6 million of GM’s Chevrolet Cobalt and other older vehicles equipped with a faulty ignition switch linked to 13 deaths. GM’s first-quarter earnings were also hurt by a $400-million adjustment for the devaluation of currency in Venezuela.

The switch issue has prompted congressional hearings and probes by the National Highway Traffic Safety Administration and the Department of Justice into why GM didn’t recall the cars until this year even though it knew about the problem for a decade.

“The ignition switch recall and the factors that lead up to it are unacceptable,” Barra said. “This leadership team is responsible for making things right and will.”

GM’s goal is to “repair the cars as quickly as we can and win back the full faith and confidence of our customers and regulators,” Barra said.

She noted that GM has overhauled the way it evaluates customer complaints and reports of car defects to more quickly identify and correct problems.

Barra said the recalls do not appear to have hurt GM’s U.S. sales so far this year.

GM no longer makes any of the cars recalled for the faulty switch.

The results were better than expected, said Brian Johnson, an analyst at Barclays Capital.

“There are still uncertainties in the road ahead for GM. We continue to expect a gradual recovery in Europe, South America continues to exhibit macro risk, and the U.S. large-pickup segment remains volatile,” Johnson said. “However, this morning’s result offered some relief across the board, reinforcing our view that the stock is at a bottom and may be in position to rebound.”

GM’s shares rose 2% in early trading to $35.15.

The recalls have overshadowed the generally higher quality of vehicles the automaker is making now compared to its lineup before its 2009 bankruptcy restructuring and federal bailout, said Karl Brauer, an analyst at auto information company Kelley Blue Book.

“The automaker has made exceptional progress since the restructuring five years ago, but today’s ultra-competitive global car market leaves little room for error, and the cost of the recall will have a substantial impact on near-term financials,” he said.

But the automaker’s business was off in many of its markets.

GM’s operating profits in North America sagged to $557 million from more than $1.4 billion a year earlier. GM’s vehicle sales in North America dipped by 22,000 units to 807,000. GM has added 1,000 jobs in North America since this time last year.

Vehicle sales also fell in most international markets, rising only in Europe, which is recovering from a recession. Still, losses in Europe widened to $284 million from $152 million in the same period a year ago, primarilly because of heavy spending by the automaker to restructure its operations in the region. The company expects to break even in Europe by “mid-decade.”

Profits in its international division – which includes China – declined to $252 million from $472 million.
Losses in South America grew to $156 million from a deficit of $38 million.

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