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General Motors 2Q profit falls 85 pct., drained by massive recall costs

FILE - In this May 13, 2014 file photo, an auto worker inspects finished SUVs coming off the assembly line at the General Motors auto plant in Arlington, Texas. General Motors reports quarterly financial results on Thursday, July 24, 2014. (AP Photo/LM Otero, File)

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FILE - In this May 13, 2014 file photo, an auto worker inspects finished SUVs coming off the assembly line at the General Motors auto plant in Arlington, Texas. General Motors reports quarterly financial results on Thursday, July 24, 2014. (AP Photo/LM Otero, File)

DETROIT - Recall expenses chopped $1.5 billion from General Motors' bottom line in the second quarter, as it added up the costs of repairs for nearly 30 million cars and set aside funds to compensate victims of small-car crashes.

The automaker, which is in the midst of the largest spate of recalls in its history, posted a net profit of $190 million, or 11 cents per share. A year ago GM made $1.26 billion, or 75 cents per share. Without one-time items GM would have made 58 cents per share, equaling Wall Street's expectations, according to data provider FactSet.

So far this year GM has recalled almost 30 million vehicles, surpassing the company's annual record.

GM took two pretax charges tied to the recalls: $400 million to compensate victims of ignition-switch related crashes and $874 million to account for recall expenses during the next 10 years. It also booked $1.2 billion in expenses for recalls announced during the quarter. The after-tax impact of those items was $1.5 billion.

GM's safety problems began earlier this year with the recall of 2.6 million small cars with faulty ignition switches. The company has admitted knowing about the problem for more than 10 years, yet it didn't issue any recalls until now. GM says at least 13 people have died in crashes caused by the switches, although lawmakers say the total is closer to 100.

The $400 million will fund a compensation plan for families of those killed and people injured in crashes caused by the switches. It's being administered by compensation expert Kenneth Feinberg.

Chief Financial Officer Chuck Stevens said the figure is an estimated total cost based on outside actuarial calculations, but it could go as high as $600 million. He said there is no cap on the size of the fund.

"At the end of the day, the ultimate cost of this will be determined by Ken Feinberg," Stevens said.

GM has "substantially cleared" a companywide safety review that looked for lingering unaddressed problems, Stevens said. GM has announced 60 recalls totalling just under 30 million vehicles so far this year. Stevens expects that going forward, GM will spend slightly more on recalls than normal. As a comparison, the company spent $100 million on recalls in North America in the second quarter of last year.

So far, company sales haven't been severely hurt by the recalls. In one way, they've benefited. Stevens said GM has sold about 6,600 cars by offering employee pricing to owners of recalled small cars such as the Chevrolet Cobalt and Saturn Ion.

Revenue was up 1.3 per cent for the quarter to $39.6 billion, about $300 million below analysts' estimates.

Stevens said GM's core business, led by North America and China, performed well during the quarter. Without recall expenses, he said, the company would have made $1.02 per share. The company reported a $1.4 billion pretax profit in North America, led by higher prices for pickup trucks and new large SUVs. Still, that was down almost 30 per cent from a year ago. But excluding recall costs, GM would have made $2.4 billion in North America, the highest number since January of 2010, Stevens said.

Pretax profits were up 36 per cent at GM's International Operations including China, to $315 million. But South America reported an $81 million loss, and GM's European loss widened by almost $200 million to $305 million on uncertainty in Russia. The company also had $200 million in restructuring costs associated with the pending closure of a factory in Bochum, Germany.

Stevens said the situation with Ukraine has forced GM to cut production by 20 to 25 per cent at its plant in St. Petersburg. He expects more of the same in the second half. Excluding those costs, GM is on track to break even and become profitable in Europe by mid-decade.

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