earnings

GM posts huge profit drop driven by ignition switch crisis

April 24, 2014: 12:18 PM ET

No. 1 U.S. automaker reports its worst quarterly results since emerging from bankruptcy.

By Doron Levin

GM's earnings were dented by the massive cost of an ignition-switch recall crisis.

GM's earnings were dented by the massive cost of an ignition-switch recall crisis.

FORTUNE -- General Motors (GM) posted a scant $125 million first-quarter profit Thursday, an 86% drop from its profit in the same quarter one year ago, as its earnings were dented by the massive cost of an ignition-switch recall crisis, as well as losses overseas.

It was GM's worst quarterly result since emerging from bankruptcy.

The No. 1 U.S. automaker in terms of sales also said its "core earnings" were strong for the period, more than offsetting a loss of $400 million due to a currency devaluation in Venezuela and a $1.3 billion charge for recall-related costs.

The results, which beat analysts' estimates, sparked a sharp run-up in GM's share price when trading opened following the company's earnings announcement. But the rally had faded by mid-morning.

The share price spike couldn't entirely offset a larger sense of uncertainty about GM's prospects among investors, Wall Street analysts and the public. The company emerged from bankruptcy protection nearly five years ago with the help of $50 billion of aid from the U.S. government.

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A year ago, GM posted an $865 million first-quarter profit and might have matched or exceeded that sum had it not been for a government safety investigation resulting in the recall of 2.6 million small cars. The National Highway Traffic Safety Administration, the U.S. Justice Department, and outside lawyers hired by GM are probing the reasons behind a defective ignition linked to 31 accidents and 13 deaths.

Revenue in the quarter rose 1% to $37.4 billion.

GM's core financial performance was a positive surprise for the forecasts of financial analysts, who were braced for an even worse report. A factor in GM's favor was the strong performance of its line of full-size pickup trucks. Transaction prices for Chevrolet Silverado and GMC Sierra pickups increased to $35,652 in the quarter, almost $3,000 more than a year ago. Silverado on its own averaged $36,431, or about $6,000 more per unit. Full-size pickups, from a financial standpoint, are GM's most important vehicle.

GM's results in China were a plus, where deliveries to retail customers grew 13% in the quarter. Globally, GM's sales increase was 2.3%.

Europe continued to be a trouble spot. GM's adjusted loss before interest and taxes on the continent grew to $284 million from a loss of $152 million a year earlier. Analysts had expected a loss of $436 million. Sales in Europe, meanwhile, showed a pickup during the period. Currency troubles caused a $400 million one-time charge in Venezuela.

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On April 10, the automaker announced that costs related to its recall had expanded to $1.3 billion from $750 million previously.

Eleven analysts that follow GM and surveyed by Bloomberg have been tempering their earlier optimism for 2014, based on the company's performance. Two years ago, the average of their estimates was an annual profit of more than $10 billion. Now, analysts estimate that GM will earn a bit more than $5.5 billion this year.

The safety investigation is likely to hang over GM for some time, a source of worry and distraction for newly minted chief executive officer, Mary Barra. Fortunately, demand for vehicles in the U.S., GM's most important market, continues to improve.

The spotlight on GM's performance seems never to dim.

Editor's note: An earlier version of this story incorrectly stated that GM posted an $865 billion first-quarter profit a year ago. The correct figure is $865 million.

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