By Jeff Bennett and Joseph B. White
A $2.5 billion pre-tax bill for safety recalls and the
establishment of an ignition switch victims compensation fund
slashed General Motors Co.'s second quarter net income by 80%, and
highlighted the work Chief Executive Mary Barra must do to close
the profitability gap with rival Ford Motor Co., which reported
stronger results for the quarter ahead of a critical product
launch.
GM said Thursday that net profit fell to $278 million during the
quarter as special items offset North American operating-margin
expansion and continued growth in China. The company recently
launched a new family of pickup trucks and sport-utility vehicles
in the U.S., but costs related to quality problems--resulting in
nearly 30 million recalls this year--blunted the positive impact of
new models designed to compete in the sweet spot of the American
market.
Ford Motor Co., meanwhile, said second-quarter net income rose
6% to $1.3 billion, propelled by record earnings in North America
and momentum in Asia. Ford, like GM, was hit by weakness in Latin
America and Russia, but posted its first quarterly profit in Europe
in three years even as GM's losses in the region continue to
mount.
The results highlighted the heightened role North American
margins play as a barometer for the health of domestic auto makers
that were once far more fixated on market share as a yard stick.
After decades of citing high production costs as a competitive
disadvantage in their home market, GM and Ford are capitalizing on
more favorable labor deals to cash in on a resurgence in demand for
their biggest vehicles.
Both companies boosted margins in North America, but Ford's
11.6% operating profit in the region solidly outpaced GM's 9.2%,
overshadowing Ford losing 1.2 points of U.S. market share.
Ford is readying a new aluminium version of its best-selling
F-150 pickup truck for launch later this year. Ford warned again
that costs for that launch will likely depress profits during the
second half.
GM Chief Financial Officer Chuck Stevens said Thursday the
company's profitability levels "have room to run" and is confident
GM can reach 10% margins in its core market by "mid-decade" as new
products, cost cuts and improvements in financing and service
product offerings fuel results.
Shares in GM fell 3.4% to $36.15 in trading Thursday. Ford's
stock edged up slightly to $17.86.
RBC Capital Markets analyst Joseph Spak, in a note to investors,
said GM's margin performance was "below general expectations." Mr.
Spak said GM has been able to command higher prices in recent
months and that may have led to higher forecasts ahead of
Thursday's earnings.
Mr. Stevens, speaking to reporters in Detroit, said GM's
automotive business proved "resilient" in the face of the intense
public scrutiny stemming from problems with ignition switches
installed in vehicles dating back more than a decade. North
American market share was virtually unchanged, and dealers used the
crisis to demonstrate the improvements GM has made to its vehicles
in recent years, Mr. Stevens said.
Still, past quality problems are proving to be painful. The
company set aside nearly a half-billion dollars to compensate
victims of accidents taking place in certain small GM vehicles,
including the Chevrolet Cobalt, built in the last decade with
problematic ignition switches. Mr. Stevens said the $400 billion
fund, to be independently administered by compensation expert
Kenneth Feinberg starting Aug 1., is based on a best-guess estimate
and could grow by as much as 50%.
Mr. Spak said the $400 million charge should be viewed
positively as it fell well short of expectations. RBC, for
instance, set a $1.5 billion "placeholder in our valuation" for the
victim-fund reserve.
GM also took a $900 million noncash pretax charge during the
quarter for estimated recall costs that could be accumulated over
the next decade on the 30 million vehicles already sold and still
on U.S. roads.
The auto maker recalled 22 million vehicles in the three-month
period ending June 30, setting a pace of a quarter million vehicles
per day being called back for quality problems. GM Chief Executive
Mary Barra, speaking during a conference call, said recall work is
"substantially complete."
GM still faces a U.S. Justice Department probe that analysts
think could end with a multibillion-dollar fine for delays in
telling customers and the U.S. auto-safety regulator about safety
flaws.
The company disclosed Thursday it is now also being investigated
by Transport Canada and 45 state attorneys general in connection
with its recalls.
"We are cooperating fully with all requests," the auto maker
said in a federal filing. "Such investigations could in the future
result in the imposition of material damages, fines or civil and
criminal penalties."
GM's earnings during the period equaled $278 million, which
reflect preferred dividends, compared with $1.41 billion a year
earlier. Excluding certain one-time costs, GM earned 58 cents a
share, matching the 58 cents a share analysts expected, according
to FactSet.
Revenue equaled $39.6 billion during the quarter, up slightly
from the same period in 2013.
The company's loss in Europe grew to $305 million as the company
recorded ongoing restructuring charges. In South America, GM posted
a loss of $81 million as the economy remains soft in that
region.
Ford's pretax operating profits edged up to $2.59 billion, with
cost cutting playing a significant role in helping to offset a 1%
decline in revenue for the quarter to $37.4 billion. Ford
reaffirmed its forecast for full-year pretax profits of $7 billion
to $8 billion, down from $8.6 billion for 2013.
Ford's net was reduced by a $329 million write-down of an
investment in a Russian joint venture. Still, the company squeezed
out a narrow pretax profit in Europe on favorable exchange and
lower costs, and Chief Financial Officer Bob Shanks said "we're
clearly on the way to a profit in 2015."
Write to Jeff Bennett at jeff.bennett@wsj.com and Joseph B.
White at Joseph.White@wsj.com