Volkswagen Swings to a Loss as Scandal Costs Mount

Image source: Volkswagen.

Volkswagen said on Oct. 28 that it had a net loss of 1.73 billion euros ($1.9 billion) in the third quarter, as the costs of a massive emissions scandal began to hit the company's bottom line.

Volkswagen results: The key numbers

All results are in euros.

What happened with Volkswagen this quarterAll of VW's results are overshadowed by the emissions scandal. VW took a charge of 6.5 billion euros against third-quarter earnings to cover costs related to the scandal. That was more than enough to wipe out its profit, but the eventual costs are likely to be a lot higher.

On Sept. 18, the U.S. Environmental Protection Agency (EPA) charged Volkswagen with several violations of the Clean Air Act. That news led to a stunning series of admissions: VW sold millions of diesel-powered cars around the world with software that switches on the cars' emission-control systems only when it determines that an emissions test is under way.

In normal driving, much of the system is switched off to improve performance and fuel economy -- and the cars emit exhaust far dirtier than is allowed in the United States.

The software amounts to what is known as a "defeat device." Under the Clean Air Act, the EPA can fine VW up to $37,500 per car. About 482,000 cars with the defeat-device software were sold in the United States.

That's just the beginning of VW's exposure. About 11 million cars with the software were sold worldwide. Roughly half of those were in Europe. VW will have to fix all of the cars, and it has said that some models will require extensive hardware changes that could cost $1,000 or more per car. The company is facing investigations in the U.S., Europe, and elsewhere, and some of those investigations are likely to result in criminal charges against VW or some of its employees.

VW was doing fairly well before the scandal broke. The VW brand earned 0.8 billion euros, up from 0.7 billion a year ago, as favorable exchange-rate swings helped offset difficulties in South America and Russia. As usual, VW's two major luxury brands earned outsized profits: Audi earned 1.1 billion euros (roughly flat versus a year ago), and Porsche added another 0.8 billion, up from 0.5 billion a year ago. Both brands saw good sales growth around the world.

What management had to sayCEO Matthias Mueller is new to the job; longtime chief Martin Winterkorn was forced to resign on Sept. 23 in the wake of the emissions-scandal revelations. Mueller had been CEO of the Porsche brand before his promotion.

His remarks went right to the point. "The [earnings results] show the core strength of the Volkswagen Group on the one hand, while on the other the initial impact of the current situation is becoming clear," Mueller said in a statement. "We will do everything in our power to win back the trust we have lost."

VW CFO Frank Witter noted that VW was able to raise its net liquidity by 6.3 billion euros to 27.8 billion euros during the quarter. A substantial portion of that came from VW's sale of its stake in Suzuki Motor. "The Volkswagen Group has very solid and robust liquidity resources," Witter said in a statement. "This will help us manage the challenging situation caused by the financial impact of the diesel issue."

Looking aheadVW still expects its full-year deliveries to be roughly on par with 2014 results. It said that full-year revenue could increase by up to 4%. But it now expects operating profit to be "down significantly" as a result of the costs of the scandal, though it hasn't yet shared an estimate.

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