Weird as it may sound for an automaker that has recalled 34 million vehicles in nine months, General Motors is celebrating its third-quarter earnings report that notes bigger profits and a healthy wad of available cash. But hundreds of pending lawsuits and investigations against GM may pose a greater risk to the company's bottom line than its latest report actually shows.
First, the good news. GM ended the quarter with $1.4 billion in net income, a sevenfold increase from the second quarter where it recorded $200 million. (The first quarter came in at $125 million.) The North American division posted a 9.5-percent profit margin adjusted before interest and tax, already nipping at the heels of its 10-percent goal for 2016. Global sales through September, at 7.37-million cars, are up 1.7 percent year over year, although higher overall industry sales put a small dent in GM's world market share from 11.5 to 11.3 percent (the automaker claims 17.4 percent of the American market, the most of any automaker). Cash flow, the amount a company has readily available to spend, was $36.6 billion through September, including $10.5 billion the automaker has not drawn from open credit lines.
This is all good, considering GM's European division took a 63-percent greater revenue hit in the third quarter than it did last year. It's even better when including GM's recall-related costs. GM accountants have apparently anticipated the company's staggering recall pace so well (76 and counting) that it recorded the bulk of its current recall costs in the previous quarter, while adding only $163 million more for the third quarter. So far, GM has written off $2.7 billion for recall repairs, $400 million for the ignition-switch settlement fund that has found the company responsible for 30 deaths as of last Friday, and roughly $1.8 billion in other expected litigation costs, much of which involve non-recall related lawsuits.
Beneath the Balance Sheets, A Boogeyman
Herein lies GM's great boogeyman, listed under what should be called Liabilities That Go Bump in the Night: Those recall write-offs may, in fact, be off by a lot. Automakers get sued all the time, but these lawsuits are unprecedented, even for GM. Let's review from what we know and from GM's own recollection in its 10-Q filing (PDF downloadable here).
GM's settlement fund is accepting claims until December 31 for all deaths and injuries related to the original 2.6-million cars equipped with faulty ignition switches. This is very low risk. The company thinks these settlements will cost it only $600 million, or $200 million more than it had originally estimated. Once the victims or their families receive the money, which will be paid out starting this quarter, they can't sue GM for similar damages, ask for more money, or join another lawsuit. Even if the approved claims surge within the next 10 weeks, this settlement is a one-time expense that will be finished by the middle of next year.
Sooner or Later, They'll Have to Pay
Now, for the bad news. GM is under investigation by the Department of Justice, likely for criminal charges relating to its ignition switches, and will very likely be required to settle as Toyota did with the feds earlier this year. With Toyota, that process took four years and cost them $1.2 billion, not counting legal fees. With GM's multiple Congressional testimonies admitting to fault and having delayed the ignition-switch recalls by 13 years—not to mention the clear proof, through its establishment of the settlement fund and prior settled cases, that the automaker's negligence led to more than two dozen people dying—we can bet the DOJ is going to ask for more than it received from Toyota. A lot more.
Outside of the settlement fund, as of October 20, GM is facing 107 class-action cases alleging economic harm from the recalls and 63 more cases for related deaths and injuries. Another 130 cases have been consolidated before a New York district court, which were filed last week in two separate complaints. The lead law firm on the cases, which successfully prosecuted Toyota for its unintended-acceleration recalls in 2012, estimates potential damages at more than $10 billion. And that's just for one of the cases. Factor in 17 class-action suits in Canada, investigations by 48 state attorneys general that most certainly will lead to more settlements, as well as potential future recalls that GM itself can't foresee, and the company's financial outlook is altogether darker. If any of several Congressional bills pass that would raise per-recall fines to the nine-figure level, you can imagine where this will head.
- Inside NHTSA: What Happened with GM Recalls Could Easily Happen Again
- General Motors Q1 Profits Down Big on the Heels of Ignition-Switch Recall
- GM Ignition-Switch Deaths Up to 29, Automaker May Face $10-Billion Lawsuit
Given the gravity of pending litigation against GM at all levels—individual, class-action, state, federal—the automaker could dive into its cash reserves or post narrower profits even if only some of the lawsuits are successful. But we won't see this possibility reflected in the company's quarterly filings. Instead, GM is banking on federal protection, specifically the bankruptcy clause that frees the "new GM" from any liability on its actions prior to June 2009. A bankruptcy judge is currently deciding whether GM's protective clause should stand; if the protection is upheld, this would disintegrate the high-dollar lawsuits. Even if it falls, GM will drag out these lawsuits to no end, and it may be difficult for prosecutors to prove, for example, that someone driving an older Chevy Impala deserves a piece of that $10 billion purely for economic damages. For now, GM feels insulated, and time is its ultimate ally.
from Car and Driver Blog http://ift.tt/nSHy27
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