General Motors had a “very solid quarter,” GM CEO Mary Barra has recently told analysts. GM’s profits from truck sales in the first quarter of 2015 from North America had been impressive; however, its earnings had been limited to an extent due to some problems in Brazil and Russia as well as the persistent impact of the recall last year.
GM reported an operating income (excluding onetime items) of $2.08 billion. The automaker has always claimed that this figure is the best indication of its core performance. This is more than quadruple what it was last year, which is when high expenses were incurred because of the recall. GM posted an operating profit of $2.18 billion in North America, marking its highest-ever result in the first quarter since it entered bankruptcy in 2009.
In the quarterly statement that GM has released, it cited higher sales of pickups and SUVs as gasoline prices have gone down. But because of steep drops in volumes recorded in Russia and Brazil where exchange rates have been unfavorable, its revenue has fallen 4.5% to $35.71 billion.
In addition, GM had to pay claims from those affected by its faulty ignition switch in its older small cars, raising the amount from $400 million to $550 million. So far, GM’s compensation fund has awarded 87 death and 157 injury claims to victims of this recall, according to the automaker’s attorney Ken Feinberg.
This recall, affecting 30.4 million vehicles in North America, indirectly had an impact on GM’s first-quarter earnings. In late 2014, GM made repairs to the vehicles involved in the recall but it had put off fixing the units that came from rental agencies before they were sold at auction.
In the first quarter, GM sold many of those vehicles at very low prices, cutting about $400 million from GM's bottom line, according to CFO Chuck Stevens’ statement in a conference call. Stevens said that some of its past-model units were “carried longer into the cycle."
He pointed out that another thing that affected its bottom line was that auction values fell the longer that the automaker went into a model year. Reuters estimated that the per-share profit of 86 cents didn’t meet analysts' expectations of 97 cents because of higher taxes and unfavorable foreign-exchange rates as the U.S. dollar strengthened.
Investment company Sterne Agee’s analyst, Michael Ward, is downplaying GM’s lower earnings, telling clients that that three most valuable variables for GM, including profitability in North America, China, and cash flow are still headed in “the right direction.” The automaker reported a net income of $945 million, much higher than the $125 million recorded in the first quarter of 2014, which is when GM spent a lot on the recall.
The bottom line for this year has been reduced by $550 million from the net effect of nonrecurring items, which include the rise in victim-compensation costs and expenses because of the decision made last March to wind down Russia’s manufacturing operations.
GM again stated that it will be able to increase its operating profit as well as margin this year with better automotive results in every one of its four main operating regions. Barra has said that GM’s first quarter serves as a “strong foundation” for the remaining months of the year.