General Motors estimated that it would pay victims of an ignition-switch defect about $400 million in settlements through a compensation fund administered by an outside official — although it said the cost could increase by $200 million depending on the number of people who file claims, reported Detroit Free Press.
The company eked out a net income of $190 million in the second quarter after factoring in the cost of current recalls and incorporating a new $900 million expense for the cost of future recalls to cover the entire portfolio of 30 million GM cars currently on the road.
GM’s pre-tax profit fell 85% for the quarter as a slew of recalls temporarily dented the company’s bottom line.
In North America — where most of the recall expenses have occurred — GM nonetheless turned a $1.4 billion operating profit for the quarter, reflecting a surge in sales of redesigned full-size sport-utility vehicles and pickup trucks.
GM Chief Financial Officer Chuck Stevens said the company has largely finished its rapid-fire succession of vehicle recalls after completing an exhaustive review of internal data and customer complaints.
But the cost of the ignition switch defect — which festered for more than a decade before it was fixed and is blamed for more than 13 deaths — will continue to rise.
Stevens said the company’s estimate for victim settlements does not include an estimate for payments to victims who choose to sue GM instead of accepting offers from compensation fund chief Kenneth Feinberg.
Feinberg confirmed in an email to the Free Press on Wednesday that he had not provided an estimate to GM on the cost of his compensation fund, which is not capped. He will accept claim applications from Aug. 1 through Dec. 31.
Stevens told reporters this morning that GM’s actuarial advisers calculated the $400 million estimate.
It’s “our best assessment based on the data that is available to us,” Stevens said. “At the end of the day, the ultimate cost of this will be determined by Ken Feinberg.”
For second-quarter recalls, GM posted a one-time charge of $1.2 billion
But in a shift directly connected to GM’s recall crisis — which has triggered an industry record number of recalls for a single year — the company will now incorporate an estimated cost for future recalls into its earnings calculations when the vehicles are actually sold.
That lead to a $874 million one-time loss for all GM vehicles currently on the road in what the company described as a “catchup” charge.
Despite the flurry of recall costs and a currency crisis in Venezuela, GM nonetheless posted its 18th consecutive quarterly profit — thanks in part to the fourth consecutive quarter of profit margin improvement in North America.
Total revenue rose 1% to $39.6 billion, although global market share slipped from 11.6% a year ago to 11.3%.
“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,” GM CEO Mary Barra said in a statement. “We remain focused on keeping our customers at the center of all we do, and executing our plan to operate profitably in every region of the world.”
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