On Saturday, February 26, 2011, Warren Buffett’s Berkshire Hathaway (BRK.A / BRK.B) reported 2011 4th quarter and year end results:
• Net earnings increased to $12.97B ($7,982 per Class A share), from last year’s profit of $8.06B ($5,193 per Class A).
• Insurance underwriting profit increased to $2.02B, from $1.46B.
• Income from investments & derivatives increased to $1.88B from $486M.
• Income from manufacturing & retail businesses increased $2.46B from $1.11B.
• Income from energy & utilities increased to $1.13B from $1.07B.
• Operating earnings (excluding investment and derivative results) increased to $11.1B from $7.6B (results of operations M&A Discussion).
• Per share book value increased 20.2%.
Berkshire’s earnings from operations increased to $11.1B in 2010, from $7.6B in 2009. This is largely due to increases in insurance underwriting profit, earnings from Burlington Northern Santa Fe (BNSF), and improved earnings from manufacturing, service, and retailing operations, as economic conditions stabilized.
Investment & derivative gains of $1.87B included a one time holding gain of $979M related to the BNSF acquisition, realized gains from disposition of investments, and net gains from derivative contracts. “Changes in the equity and credit markets from period to period can and have caused significant volatility in periodic earnings.” That is why it is important to focus on numbers from operating earnings as opposed to net earnings. “Important though that number may be at most companies, it is almost always meaningless at Berkshire. Regardless of how our businesses might be doing, Charlie and I could – quite legally – cause net income in any given period to be almost any number we would like.”
Insurance Group :
Berkshire’s insurance operations had a net underwriting gain of $1.3B, a 37% improvement from $949M during the prior year. Much of the increase came from GEICO which experienced a pre-tax increase of 72% to $1.1B from $649M. The other significant improvement came from Berkshire Hathaway Primary Group, which saw a pre-tax increase of 219% to $268M from $84M. Berkshire’s total year end float from insurance operations increased 3.7% to $65.8B from $63.4B.
Buffett expects investment income in 2011 from Goldman Sachs as well as General Electric preferred stocks, to be redeemed in 2011. Approximately 85% of the securities were acquired by the insurance group, with the remainder held in finance and financial products businesses.
Railroad – Burlington Northern Santa Fe :
The acquisition of Burlington Northern Santa Fe (BNSF) [BNI] was completed on 2/12/2010, and contributed $3.86B. Both Buffett and Munger “are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor.” BNSF experienced a 20% revenue increase to $16.9B.
Utilities, Energy, Manufacturing, Service, Retailing, Other Businesses :
Berkshire’s utilities & energy businesses again delivered stable results but decreased slightly as a whole. The only increase was from MidAmerican Energy.
Manufacturing, Service, and Retailing businesses at Berkshire increased across the board due to an improved economic climate. Revenues in 2010 at Marmon increased in all sectors, except Transportation Services & Engineered Products and Water Treatment sectors. The earnings increase at McLane was due to the favorable impact from the acquisitions of Empire Distributors and Horizon Wine and Spirits Inc, as well as an increase in food service earnings.
Revenues from Other Manufacturing activities increased 11% to $17.7B, mainly due to increases in volume. Revenue at Forest River increased 57%, ISCAR Metalworking Companies (IMC) increased 41%, and CTB International increased 20%.
However, the other manufacturers, primarily in the building products group continued to be negatively affected by the weak real estate climate (Acme Building Brands, Benjamin Moore, Shaw, and MiTek), with the exception of Johns Manville which saw revenues increase 12%.
In the Other Service group, revenues increased 12% to $7.4B, driven by significant improvements from NetJets and TTI. NetJets saw revenues increase 7% to $207M due to higher worldwide flight revenue hours and increased pass through costs. “NetJets’ operating cost structure has been reduced to better match customer demand and we believe that NetJets will continue to operate profitably in the future.” Revenues at TTI increased substantially by 45% to roughly $9.5B due to an increase in consumer demand for electronic products, as well as manufacturers replenishing depleted raw material inventories. Buffett anticipates that market conditions will slow to more normalized levels in 2011.
Revenues in retailing operations increased 2% to $2.9B, while pre-tax earnings increased 22% to $197M. The increase in earnings was due to increases in sales and cost containment efforts.
In the Finance and Financial Products group, revenues and earnings remained relatively flat and unchanged. Revenues from the Clayton Homes (manufactured housing and finance business) declined slightly and continued to be impacted by the economic recession and credit crisis. Revenues increased slightly from furniture and transportation equipment leasing, primarily due to cost containment and improved transportation equipment.
Financial Condition & Buffett’s Outlook :
Once again, Berkshire Hathaway’s financial condition continues to remain very strong with a balance sheet that reflects significant liquidity and a strong capital base. Consolidated shareholders’ equity increased to $157.3B, up from $149.7B in 2009. Berkshire also continues to keep a significant amount of cash on hand (customarily at least $20B), to cover any insurance losses and to invest in opportunities. In his 2010 shareholder letter, Buffett dedicated a significant portion explaining the benefits of holding cash.
Buffett’s outlook remains optimistic, with more major acquisitions on the horizon. “Charlie and I hope that the per-share earnings of our non-insurance businesses continue to increase at a decent rate. But the job gets tougher as the numbers get larger. We will need both good performance from our current businesses and more major acquisitions. We’re prepared. Our elephant gun has been reloaded, and my trigger finger is itchy.”
The Berkshire Hathaway’s 2010 annual report and shareholder letter, can be found at the following links. I encourage everyone to actually read them:
Thanks and Happy Investing! – The Investment Blogger © 2011