Berkshire's 3Q net income falls on derivatives

[November 06, 2010]  OMAHA, Neb. (AP) -- Warren Buffett's company posted an 8 percent drop in third-quarter net income Friday due to paper losses on its derivatives portfolio, but BNSF railroad and several of Berkshire Hathaway's other operating companies performed well.

Burlington Northern Santa Fe railroad added $706 million to Berkshire's bottom line in its second full quarter under Buffett's umbrella, as it again saw increases in industrial, agricultural and consumer product shipping. Earnings from Berkshire's manufacturing, service and retail unit, which includes such companies as Fruit of the Loom clothing and Benjamin Moore paint, nearly doubled to $645 million. Berkshire's insurance businesses, which include auto insurer Geico and reinsurance giant General Re, reported a decline in both underwriting and investment income, however.

The Omaha, Neb.-based company said it earned nearly $3 billion, or $1,814 per Class A share, during the quarter ending Sept. 30. That's down from $3.24 billion, or $2,087 per share, last year. Revenue grew 21 percent in the third quarter to $36.3 billion from last year's $29.9 billion.

The biggest factor in the profit decline was a largely unrealized $95 million loss on Berkshire's derivatives, some of which are tied to equity markets and credit default swaps. Last year's third-quarter profit was boosted by a mostly unrealized $1.1 billion gain as the value of derivative contracts tied to equity indexes soared.

The true value of the derivatives won't be clear for at least several years because they don't mature until an average of 11 years from now, but Berkshire is required to estimate their value every time the company reports earnings. Buffett has told investors he believes the contracts will ultimately be profitable because the premiums are being invested.

Buffett has said Berkshire's operating earnings are a better measure of how the company is performing in any given period because those figures exclude the value of derivatives and investment gains or losses. Berkshire said its operating earnings jumped 36 percent to $2.8 billion in the quarter over last year's $2.06 billion.

On that basis, Berkshire earned $1,692 per share in the latest period. That exceeded the $1,676 per share estimated by the three analysts surveyed by Thomson Reuters.

Andy Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett," said Berkshire's results looked good, but he had been expecting better numbers, especially in the insurance division.

"It's a good, solid report, but I thought it was going to fire on all cylinders this quarter," Kilpatrick said.

Berkshire executives typically do not comment on quarterly earnings reports, and they did not immediately respond to an interview request on Friday.

Revenue at Burlington Northern Santa Fe railroad grew 22 percent to $4.4 billion in the quarter. Berkshire also said it saw significant improvement at Fruit of the Loom clothing, Iscar tool makers and its Forest River RVs business. Its building products companies, such as Acme Brick, Shaw Carpet and Benjamin Moore paint, improved slightly over last year's dismal results but demand remains weak for those products.

Another positive factor was that fractional private jet leasing firm NetJets rebounded from a $182.5 million pretax loss a year ago to a $43.5 million pretax profit in the third quarter. NetJets announced this week that it bought Marquis Jet, which sells small fractions of flight time on NetJets planes, but that deal didn't affect the third quarter.

On the underwriting side, the insurance businesses generated net income of $199 million, down from $346 million in last year's third quarter. Insurance investments added $873 million, down from $1.02 billion a year ago.

Berkshire said its insurance companies didn't cover any catastrophic losses during the quarter, but they did book $181 million in foreign currency transaction losses in the quarter. A year ago, those foreign currency transactions added $60 million to Berkshire's insurance results.

The company's utility division, led by MidAmerican Energy, also generated slightly less profit this year. Berkshire's utilities recorded net income of $331 million, down from $346 million in the 2009 period.

Through the first nine months of the year, Berkshire has generated net income of $8.6 billion, or $5,265 per Class A share. That's 72 percent higher than the $5 billion, or $3,223 per share, Berkshire reported for the first nine months of 2009 thanks largely to the addition of BNSF railroad.

"We are hopeful that recent economic improvements will continue over the remainder of 2010 and beyond," Berkshire officials said in the report.

Berkshire owns clothing, insurance, furniture, utility, jewelry and corporate jet companies. Berkshire also has big investments in companies including Coca-Cola Co. and Wells Fargo & Co.

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Online:

Berkshire Hathaway Inc.: http://www.berkshirehathaway.com/

[Associated Press; By JOSH FUNK]

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