GM Overcomes Huge Recall Costs to Post Healthy 3Q Profit

By The Associated Press
The Associated Press
The Associated Press
October 21, 2015 Updated: October 21, 2015

DETROIT—General Motors’ third-quarter profit fell slightly, but the company rode strong North American sales to overcome $1.5 billion in costs from its deadly ignition switch recall. Its shares rose almost 7 percent in afternoon trading Wednesday.

The Detroit automaker’s net income slipped 1.4 percent from a year ago, but still was $1.36 billion, or 84 cents per share. That compares with $1.38 billion, or 81 cents per share, a year ago.

Without the recall costs, GM would have made a $1.50 per share, soundly beating Wall Street expectations. Analysts polled by FactSet expected $1.18 per share.

The company posted a record $3.3 billion pretax profit in North America largely on high-profit truck and SUV sales, more than offsetting a small decline in China and a loss in South America.

The news pushed GM shares up $2.29, or 6.8 percent, to $35.77 in afternoon trading Wednesday.

Chief Financial Officer Chuck Stevens said the GM’s North American profit margin, the percent of revenue it gets to keep, hit a record 11.8 percent for the quarter. The company had set a goal of 10 percent North American margins by next year, but Stevens said GM will achieve the target in 2015, a year early.

Revenue from July through September fell 1 percent to $38.8 billion, but still beat analysts’ forecasts. Almost three quarters of GM’s revenue came from North America.

In China, GM reported pretax income of $463 million, down 4 percent from a year ago, but profit margins rose from 9.6 percent to 9.8 percent because the company sold more expensive Cadillacs and SUVs. “China has not fallen off the cliff as everyone had expected,” Stevens said.

South America, though, is still the big trouble spot for GM and other companies. The company lost $217 million in the region, almost seven times the loss from a year ago, and Stevens said there isn’t an end in sight to economic troubles there.

In Europe, GM’s loss narrowed to $231 million and Stevens said GM is still on track to be profitable there next year. GM Financial, the company’s auto loan arm, posted a 13 percent profit gain to $231 million.

The recall costs included $900 million to fend off criminal prosecution over the ignition-switch scandal and about $600 million to settle multiple wrongful death and shareholder lawsuits stemming from the problem.

The switches in older model small cars such as the Chevy Cobalt can slip out of the “run” position and cut off the engine. They have been linked to at least 169 deaths.

GM said in September that ignition-switch scandal cost it over $5.3 billion. Even with the settlements, GM cannot close the books on last year’s recall mess. Its quarterly report filed with U.S. regulators says it still faces 217 wrongful death and injury lawsuits in the U.S. and Canada, as well as 122 lawsuits alleging that the recalls reduced values of owners’ cars. GM also disclosed that its compensation program run by attorney Kenneth Feinberg has paid out $453 million to settle 300 of 399 eligible claims.