Berkshire Hathaway’s 2nd Quarter Report Shows A 9% Decline Due To Derivatives Losses

Berkshire Hathaway’s second-quarter profits fell a total of 9% due to larger paper losses on derivatives that were sold by the company, although many of the subsidiaries of Berkshire Hathaway did perform very well.

It is reported that Berkshire Hathaway’s insurance units were up in profits. Also, the business improved at Berkshire’s manufacturing, retail, railroad and utility businesses.

David Rolfe, a Berkshire investor and CEO at Wedgewood Partners, stated that “it was obviously a solid rebound in insurance, but what was really terrific was the non-insurance subsidiaries.”

The railroad Burlington Northern Santa Fe added a total of $802 million to the net income of Berkshire Hathaway this year, and this is up from the $690 million that it added last during the same timeframe. The railroad’s revenue grew about 6% because of fuel surcharges, and it also increased around 2% of the shipping volume total. Even though there is a weak coal demand right now, they have gained more shipments in consumer goods as well as industrial products.

Lubrizol, the specialty chemical maker owned by Berkshire Hathaway which they acquired last September, also helped the gain in profits. The company added a total of $322 million to the pretax profits of Berkshire Hathaway during this quarter. If you add that up with the rest of Berkshire’s retail, service and manufacturing units, they have all combined to gain over $1 billion worth of net income. This is up from $789 million which they earned last year at this time.

The housing related businesses of Berkshire Hathaway, which include Shaw carpet, Acme Brick, Nebraska Future Mart and other real estate brokerages have all improved quite a bit over the second quarter.

According to Jeff Matthews, the investor who wrote “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett,” he mentioned that Berkshire Hathaway had a good quarter and there weren’t any real surprises.

Matthews also mentions that the housing businesses of Berkshire Hathaway have improved, as well as the retail units and manufacturing units reporting a weaker demand. This actually should have people concerned about the demand of the overall strength of the economy.

Officials at Berkshire Hathaway don’t comment on the quarterly earnings reports typically, and they didn’t respond to a message left to them on Friday afternoon.

Since there were no major catastrophes or natural disasters in the world this year, the insurance companies of Berkshire Hathaway were able to improve. Geico is one of their insurance companies, and they have several reinsurance firms as well that improved significantly. The insurance companies at Berkshire Hathaway incurred $1.2 billion worth of losses last year that were catastrophe related. This happened because of the major earthquakes in New Zealand and Japan, plus some weather-related losses in Australia and the US.

The insurance companies at Berkshire Hathaway added $619 million in profits from underwriting this year, as opposed to the $7 million dollar loss that they took in underwriting last year.

Berkshire told us that it generated $3.1 billion dollars worth of net income, or a total of $1.25 per Class B share. This is actually a lot less than last year’s second quarter results which were a net gain of $3.4 billion, which works out to be $1.38 per Class B share. They were helped last year by a onetime gain of $1.25 billion.

Berkshire Hathaway’s results beat the expected earnings of Wall Street, which were estimated to be $1.19 per share. They also grew their revenue slightly from $38.3 billion to $38.5 billion.

Buffett mentions that the right way you need to look at the Berkshire earnings report is without the losses and derivatives, as well as big gains in investments. He tells people that the investment gains and derivative losses are misleading to people since the company does not often sell its investments.

Berkshire Hathaway also reported an increase in their operating profit by 37%. The operating earnings of Berkshire Hathaway was $3.7 billion, or $1.50 per Class B share. This is higher than the $2.7 billion or $1.09 per Class B share that they had last year.

The loss in derivative contracts by Berkshire Hathaway was $693 million during the second quarter. That’s a much higher loss than the $120 million loss at the same time last year.

It’s actually very difficult to figure out the true value of the derivatives until several more years have passed since they will not mature for another decade. But the company is required to try and estimate the value of the derivatives each time they report their earnings.

Buffett still tells his investors that he believes in the derivatives contracts – even the ones that are tied to the equity markets and to credit defaults – and feels that they are going to be profitable over the long term since they are investing the premiums.

Andy Kilpatrick, the gentleman who wrote the wrote book “Of Permanent Value: The Story of Warren Buffett,” mentions that the second-quarter results are actually quite impressive due to the debt woes in Europe and the overall economy slowing down.

“I thought it was a good decent quarter in a bad world,” Kilpatrick said.

Berkshire Hathaway roughly owns 80 subsidiaries, and some of the companies are jewelry firms, furniture and clothing businesses. The utility and insurance companies bring in about half of Berkshire Hathaway’s net income. The company also has very large investments in Wells Fargo and Coca-Cola Co.

The quarterly results of Berkshire Hathaway were issued on August 3, 2012, after the stock market closed last Friday. The Class B shares of Berkshire Hathaway rose about 1% during the after hours Friday trading, but then gave up some of that ground and only rose $.57 to come to a total of $86.15 per share.

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