General Motors has just released its second-quarter earnings report, and while revenue was strong due to new vehicle sales, the cost of recalls reduced a healthy quarterly profit of $1.4 billion to only $200 million. Most of the $1.2 billion bite came from recall campaigns.
Revenue stood at $39.6 billion for the quarter, up from $39.1 billion in second quarter 2013.
The GM report included a special charge of $400 million as an estimate of anticipated payouts within a victim compensation program, made necessary by the deaths of 13 people in accidents attributed to faulty ignition switches. Injuries and related expenses are also covered by this fund.
The report mentioned that "there is no cap on this program, but this charge is the company's best estimate of the amounts that may be paid to claimants. Due to the unique nature of the program, this estimate contains significant uncertainty and it is possible the total cost could increase by approximately $0.2 billion."
GM is planning ahead for future recalls by changing the way it estimates potential recall expenses by accruing an amount at time of vehicle sale that represents its best estimate of future recall costs. The company expects recall expenses in general to "normalize" to a slightly higher rate.
For now, GM is accommodating this change by taking a $900 million special pretax non-cash charge in the second quarter. That charge will apply to possible future recalls for the next 10 years and covers 30 million GM vehicles now on the road.
Special charges were needed for a special record-breaking year in recalls, made even more special by GM's recall yesterday of another 717,949 vehicles in the U.S. Included in this list are 414,333 of the 2011-2012 Chevrolet Camaro; 2010-2012 model year Chevrolet Equinox and GMC Terrain; 2011-2012 Buick Regal and LaCrosse; and 2010-2012 Cadillac SRX models. The problem with all of these vehicles is a loose bolt on power height-adjustable seats that could lead to a seat that could move up and down freely.
Also in this recall are 124,007 vehicles that may suffer from a poor weld on a seat hook bracket assembly; 120,426 2011-2013 Buick Regals and 2013 Chevrolet Malibus which did not properly notify drivers that front turn signal bulbs were burned out; and 57,242 2014 Chevrolet Impalas with belt-drive electric power steering that may fail, causing the vehicle to switch to manual steering mode and significantly increasing steering effort.
As a result of this new set of recalls, GM has now issued 60 recalls totaling 29.7 million vehicles this year. That number already exceeds the 22 million vehicles recalled by all manufacturers last year.
