On Friday November 5 2010, Warren Buffett’s Berkshire Hathaway (BRK.A / BRK.B) reported 2010 3rd quarter earnings:
– Net earnings deceivingly decreased to $2.99B ($1,814 per Class A share), from last year’s Q3 profit of $3.24B ($2,087 per Class A).
– Insurance underwriting profit decreased to $199M, from $346M.
– Income from investments & derivatives decreased to $202M from a $1.18B.
– Income from manufacturing & retail businesses increased 92% to $645M.
– Income from energy & utilities decreased slightly to $331M from $346M.
– Operating earnings (excluding investment and derivative results) increased 35.6% to $2.79B, from last year’s $2.06B.
BERKSHIRE HATHAWAY QUARTERLY REPORT NOTES:
Investors who have recently started to follow Warren Buffett and Berkshire Hathaway, should really focus on operating earnings, and year end results. For this reason I stopped writing summaries of results for each quarter. However, I will still continue to write summaries from time to time in order to highlight some specific results that would be useful to any investor, as Berkshire is usually a good economic indicator.
For the manufacturing, retail, and energy businesses of the company, the six and nine month earnings in the quarterly reports are of significance rather than individual quarterly earnings. And for the company as a whole the full year are even more significant. The different business divisions really need to be looked at separately. For followers of Berkshire Hathaway, we know not to be overly critical of the numbers in the quarterly reports, due to the timing of many business operations which result in non-uniform and misleading results across quarters (especially in the insurance industry). However, in some industries & businesses specific numbers are meaningful such as sales, inventory, etc. during each quarter. Examples are in industries such as retail, manufacturing, etc.
In addition investors need to be familiar with and aware of reporting under GAAP, which for Berkshire, does not adequately reflect the overall financial condition and health of the businesses. Other impacts that do not give an accurate account of the financial condition, are investments that are marked-to-market, and the timing of realized gains/losses. The Berkshire quarterly report explains and summarizes as to why the reported quarterly results are not necessarily that meaningful for Berkshire and insurance companies in particular, as well as the impact that GAAP reporting has. Investors should commit this knowledge to memory:
“For a number of reasons, our results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be relatively more significant to results of interim periods than to results for a full year. Variations in the amounts and timing of investment gains/losses and other-than-temporary impairment losses on investments can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are sold or in instances when investments are required to be marked-to-market. In addition, changes in the fair value of derivative assets/liabilities associated with derivative contracts that do not qualify for hedge accounting treatment can cause significant variations in periodic net earnings.”
Investors also need to be aware of the newer accounting rules adopted in 2010. Issued by the FASB are ASU 2009-16, ASU 2009-17, and ASU 2010-06.
BERKSHIRE HATHAWAY THIRD QUARTER RESULTS SUMMARY:
In the third quarter, Berkshire’s earnings were $2.99B, which is a decrease over last year’s 3Q of $3.24B. This is largely due to the unrealized paper loss of -$700M on its equity index put options contracts in its derivatives portfolio, versus 2009’s gain of $220M. The loss is unrealized as Berkshire does not need to compensate for the loss, because Buffett structured the contracts to have no collateral posting requirements with respect to changes in the fair value or intrinsic value of the contracts, or downgrade in Berkshire’s credit ratings. The unrealized derivative losses offset the real story which is the increased profits from the other business units and Burlington Northern Santa Fe railroad.
Berkshire’s operating profit increased 35.6% to $2.79B. This was due to strong profits from both Burlington Northern Santa Fe, the manufacturing, and service operations. The railroad added $706M in profit to Berkshire’s results. The manufacturing, service, and retail segments added $645M in the 3rd quarter, nearly double the profit (91%) from a year ago. Increases in “other manufacturing” businesses were mainly driven by volume increases which saw increases in business activity. The “other manufacturing” businesses group include Forest River, ISCAR Metalworking Companies, and CTB International. However, business related to the building products (manufacturing) group continued to be negatively affected by relatively weak residential and commercial construction activity. The buildings products group include Acme Building Brands, Benjamin Moore, Johns Manville, Shaw, and MiTek. The largest increase was in Berkshire’s “other service” businesses coming from NetJets and TTI. Revenues in the other service businesses increased from a loss of -$5M in 3Q 2009 to a profit of $244M. Results from NetJets include 17% revenue increase over the same period in 2009, and lower management fees. Also, in 3Q 2009 NetJets had a pre-tax loss due to asset writedowns and downsizing costs, which it does not have in 3Q 2010. Revenues of TTI increased approximately 50% over 2009 due to recovering worldwide demand in consumer electronics and manufacturers replenishing raw material inventories. The “other service businesses” include NetJets, TTI, Business Wire, Pampered Chef, Dairy Queen, and The Buffalo News.
The results of the railroad and the manufacturing, services, and retail segments as a whole are significant. They are a good representation of the broader economy in general. The third quarter results illustrate that the economy has stabilized, and is recovering, but still at a slow pace.
Berkshire’s utilities & energy businesses again delivered stable results as a whole, and was led by increases from MidAmerican Energy.
Insurance underwriting profits and premiums decreased 42% as a whole to $199M from $346M, due to a $237M underwriting loss at Berkshire Hathaway Reinsurance Group. The group which is run by Ajit Jain, experienced an underwriting loss from other multi-line businesses in 2010 included foreign currency transaction losses of $181 million in the third quarter. These non-cash gains/losses arise from the conversion of certain reinsurance loss reserves and other liabilities denominated in foreign currencies (U.K. Pound Sterling, Euro, Australian Dollar) into U.S. Dollars as of the balance sheet dates
GEICO experienced an increase in premiums earned of $158M (4.6%). Voluntary auto policies-in-force by the end of the 3rd quarter were 398,000 greater than at the beginning of the year. Berkshire also noted that during October 2010, an additional 75,000 customers were added as compared to about 30,000 in October 2009.
Berkshire Hathaway’s financial condition remains very strong with a balance sheet that reflects significant liquidity and a strong capital base. Consolidated shareholders’ equity increased to $149.7B, up $131.1B from the previous year (3Q 2009).
The complete Form 13-F is not available for Berkshire’s 3Q 2010 stock holding changes, but should be made available to the public by November 15, 2010. That being said the third quarter report shows the cost basis on shares of Proctor & Gamble (PG) as well as for Wells Fargo (WFC) have changed. We’ll have to wait until the 13-F report is filed to find out the exact details of the change in holdings.
The Berkshire Hathaway’s quarterly report can be found at the following link. I encourage everyone to actually read it: