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General Motors 2Q profit falls 85 pct., drained by massive recall costs

DETROIT - Recall expenses chopped $1.5 billion from General Motors' bottom line in the second quarter, as it added up the costs of repairs for nearly 30 million cars and set aside funds to compensate victims of small-car crashes.

The nation's biggest automaker posted a net profit of $190 million, or 11 cents per share. A year ago GM made $1.26 billion, or 75 cents per share. Without one-time items GM would have made 58 cents per share, equaling Wall Street's expectations, according to data provider FactSet.

So far this year GM has recalled almost 30 million vehicles, surpassing the company's annual record of 11.8 million in 2004.

GM's safety problems began earlier this year with the recall of 2.6 million small cars with faulty ignition switches. The company knew about the problem for more than 10 years before finally recalling the cars this year. GM says at least 13 people have died in crashes caused by the switches, although lawmakers say the total is closer to 100.

GM set aside $400 million to fund a compensation plan for families of those killed and people injured in crashes caused by the switches. It's being administered by compensation expert Kenneth Feinberg.

Chief Financial Officer Chuck Stevens said the figure could go as high as $600 million. He said there is no cap on the size of the fund.

"At the end of the day, the ultimate cost of this will be determined by Ken Feinberg," Stevens said.

Lawyers suing the company called the $400 million figure arbitrary and too small. Montgomery, Ala., lawyer Jere Beasley said the number is "not consistent with a no-cap compensation fund."

GM has announced a total of 60 recalls so far this year. CEO Mary Barra told analysts on a conference call Thursday that a companywide review of safety issues is "substantially complete."

So far, company sales have been "resilient" in the face of the recalls, and GM has even benefited in one way. Stevens said GM has sold about 6,600 cars by offering employee pricing to owners of recalled small cars such as the Chevrolet Cobalt and Saturn Ion. The company also is working with dealers to show new cars and trucks to owners of recalled vehicles.

"We see this as an opportunity to demonstrate the strength of the products that we have today," Barra said.

For the quarter, GM's revenue was up 1.3 per cent for the quarter to $39.6 billion, about $300 million below analysts' estimates.

GM reported a $1.4 billion pretax profit in North America, led by higher prices for pickup trucks and new large SUVs. Still, that was down almost 30 per cent from a year ago. But excluding recall costs, GM would have made $2.4 billion in North America, the highest number since January of 2010, Stevens said.

Pretax profits rose 36 per cent at GM's International Operations including China, to $315 million. But South America reported an $81 million loss, and GM's European loss widened by almost $200 million to $305 million on uncertainty in Russia.

Stevens said the situation with Ukraine has forced GM to cut production by 20 to 25 per cent at its plant in St. Petersburg. He expects more of the same in the second half.

Despite the challenges, GM now says it expects to be profitable in Europe by mid-decade, anticipating improvement in core markets such as Germany and the United Kingdom.

The Canadian Press


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