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Mike Colias
Automotive News
July 24, 2014 - 7:36 am ET

DETROIT -- General Motors today posted an 85 percent drop in second-quarter net income, hurt by recall-related expenses including a special charge of $400 million for the cost of a program to compensate victims of GM’s faulty ignition switch.

Costs related to GM’s unprecedented spate of safety recalls, along with special items, sliced GM’s net income for the April-June period by about $1.5 billion net of taxes, down to $190 million, from $1.26 billion in the year-earlier period.

The cost of 41 safety campaigns covering more than 20 million cars during the quarter was about $1.2 billion, GM said in a statement. Special items included the $400 million charge for the victim’s compensation fund as well as $874 million for anticipated recall costs over the next decade in North America, an accounting change that GM said is consistent with the practice of other automakers.

Revenue rose 1 percent to $39.7 billion.

“Our underlying business performance in the first half of the year was strong as we grew our revenue on improved pricing and solid vehicle launches,” CEO Mary Barra said in GM's statement.

In North America, pretax profit excluding special items was $1.39 billion, down 30 percent from a year earlier. The bottom line was hurt by about $1 billion in recall expenses.

Strong pricing

Strong pricing in North America aided GM’s pretax bottom line by about $800 million compared to a year earlier, thanks mostly to heady pricing on its redesigned pickups and SUVs. CFO Chuck Stevens said that average transaction prices on pickups in the quarter rose roughly $5,000 compared to a year earlier. SUV transaction prices increased $6,000-$7,000, he said.

“We continue to have very strong pricing on recently launched products,” Stevens told reporters at GM headquarters. He said incentive spending industrywide has “generally been in line with the past three or four years.”

Stevens said that GM sold about 6,600 vehicles in the quarter to customers who came in to have their faulty ignition switches replaced. The defect is linked to at least 13 deaths and is the subject of several federal investigations, including a Department of Justice probe.

In Europe, GM lost $305 million, up from a $114 million loss a year earlier. Stevens said most of the losses came on restructuring charges related to the closure of an assembly plant in Bochum, Germany. Meanwhile, Ford posted its first profitable quarter in Europe in three years.

China gains

GM’s international division posted a $315 million pretax profit, up 36 percent from a year earlier. The company recorded about $500 million in pretax income from China, but lost money in the other markets that make up its international operation, which includes India, Australia, southeast Asia and other markets.

In South America, GM lost $81 million, vs. a $54 million pretax profit a year earlier.

GM Financial posted $258 million in pretax income for the quarter, up 2 percent.

The $874 million charge for future recall expenses stems from a change GM is making in how it estimates future recall costs. The money was set aside to cover potential liabilities over the next decade from the roughly 30 million GM cars on the road in North America.

Going forward, GM will set aside anticipated recall costs when each vehicle is sold. Stevens said “improved analytics” allow GM to more precisely peg its exposure to future recall costs. He said the practice is similar to how it books future expenses for warranty claims.

Stevens expects recall costs in the second half of the year to be “closer to” GM’s historical average
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