GM sets aside at least $400 million for ignition recall victims

Bloomberg News
Updated 7/24/2014 8:19 AM

General Motors Co., posting a second-quarter profit that missed analyst estimates, said it will spend at least $400 million to pay victims of the 2.59 million compact cars with potentially faulty ignition switch linked to at least 13 deaths.

Profit excluding one-time items was 58 cents a share, helped by redesigned pickups and large sport-utility vehicles in the U.S. and improved sales in China, Detroit-based GM said today in a statement. That compared with an average estimate of 59 cents from 14 analysts, according to data compiled by Bloomberg. The biggest U.S. automaker reported earning 84 cents on that basis a year earlier.

While GM took a one-time charge of $400 million for the victim compensation program, the automaker said it may rise to $600 million. Chief Financial Officer Chuck Stevens reiterated that Kenneth Feinberg, an outside lawyer who's managed similar funds for victims of the Sept. 11 terrorist attacks and the BP Plc oil spill, will ultimately decide the cost of the program. GM won't cap how much money the program pays, Feinberg has said.

'There is no cap on the program,'' Stevens told reporters today at the company's headquarters. "The objective of our compensation program, independently administrated by Ken Feinberg, is to get all of the people that were impacted by the ignition switch issues through the compensation program."

GM turned to Feinberg to create the victim compensation program as its grapples with the largest crisis since emerging from government-backed bankruptcy reorganization in 2009. Congress and the U.S. Justice Department are both investigating why it took the automaker more than a decade to recall cars with switches that allowed the key to slip out of the "on" position, shutting off the engine and disabling air bags.

Maximum Fine

GM has already agreed to a settlement with the U.S. Department of Transportation that included paying a maximum fine of $35 million and agreeing to unprecedented oversight aimed at changing the company's culture when it comes to safety.

The automaker has stepped up its pace of recalls since beginning the ignition switch fix in February, calling back almost 29 million in North America this year.

GM spent $1.3 billion in the first quarter on recalls and $1.2 billion in the second quarter for the cost of additional recalls announced. As part of a non-cash special charge, GM reconfigured how it would account for future recalls, doing it on an accrual basis rather than when something occurred, Stevens told reporters. The cost of doing that on a non-cash basis was $874 million for the 30 million vehicles already on the road, according to GM. The total $1.3 billion special item includes the $400 million for the victims program.

GM's revenue rose to $39.6 billion from $39.1 billion a year earlier, missing the $40.6 billion average estimate of six analysts. Net income fell to $278 million from $1.4 billion during the same quarter a year earlier.

"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," Chief Executive Officer Mary Barra said in the statement.

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