Berkshire reports 77 percent drop in 3Q earnings

OMAHA, Neb. — Warren Buffett's Berkshire Hathaway Inc. on Friday reported a 77 percent drop in third-quarter earnings, hurt by declining insurance profits and a $1.01 billion investment loss.

Net income fell to $1.06 billion, or $682 per Class A share, in the quarter ending Sept. 30. That's down sharply from year-ago profit of $4.55 billion, or $2,942 per share, which included a $2 billion gain aided by the sale of PetroChina stock.

Berkshire generated $27.9 billion in revenue during the quarter, down from $29.9 billion a year ago.

Operating profit in Berkshire's insurance underwriting business, which includes Geico and General Reinsurance, plunged to $81 million from $486 million a year ago. The company said results were hurt by greater price competition and losses of $1.05 billion on Gulf Coast Hurricanes Gustav and Ike. By comparison, relatively few hurricane losses were reported in the third quarter of 2007.

Berkshire began the year with an unrealized $1.67 billion loss on its derivative contracts. The value of those derivatives, which are tied to the value of the overall markets and the credit health of certain companies, improved in the second quarter by $654 million. But in the third quarter amid unprecedented market turmoil, their pretax value fell by $1.26 billion, leaving a pretax loss of $2.21 billion through the first nine months of the year.

But Berkshire has no plans to sell the long-term derivative contracts before they mature, and Buffett has predicted they will ultimately be profitable.

Berkshire's derivatives fit into two major categories. Berkshire will have to pay on some of the contracts if certain U.S. entities default on their credit. Most of the other contracts will only be paid if certain stock indices are lower in 15 or 20 years than they were when the contract was written.

Andy Kilpatrick, stockbroker and author who wrote "Of Permanent Value: The Story of Warren Buffett," said he was impressed with the results Buffett delivered, given the difficult current environment.

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"Very few people are making money," Kilpatrick said. "He's still making money with some extraordinary paper losses."

Berkshire officials do not typically comment on earnings reports, and a spokeswoman did not immediately respond to a message left Friday afternoon.

Berkshire finished the third quarter with $33.4 billion cash on hand. That is up from the end of the second quarter when the company had $31.2 billion cash on hand.

Berkshire and Buffett have made several deals over the past two months that will make use of some of that cash, but most of the big investments, including a $5 billion infusion in Goldman Sachs and a $3 billion stake in General Electric, weren't completed until October. Therefore, those deals aren't reflected in this quarter's results.

Berkshire said it also invested $6.5 billion on Oct. 6 in equities related to Mars Inc.'s acquisition of chewing-gum giant Wm. Wrigley Jr. Co. Berkshire helped finance the deal and received a $2.1 billion minority equity interest in the Wrigley subsidiary and took on $4.4 billion of subordinated debt.

Year to date, Berkshire's net worth slipped to $120.15 billion from $120.73 billion, but during October, price declines in investments and increased liability for equity index put option contracts accounted for a $9 billion decline in net worth.

Berkshire's manufactured housing unit, Clayton Homes, and its financing arm reported a sharp drop in pretax net income to $7 million from $129 million a year ago. Those results were hurt by a $64 million increase in the provision for bad loans and a $22 million loss related to Hurricanes Gustav and Ike.

Some of Berkshire's operating business tied to the housing industry, like carpet maker Shaw Industries, again reported lower profits. Shaw's pretax profit fell from $125 million in 2007 to $49 million this year.

Earnings also fell in Berkshire's manufacturing and apparel unit, which includes Acme Brick, Benjamin Moore Paint and Fruit of the Loom. That division reported net income of $478 million in the most-recent quarter, down from $567 million a year ago.

But this is the second quarter that includes results from Marmon Holdings Inc., which Berkshire acquired in March. The industrial conglomerate added $247 million in pretax earnings in the third quarter. Marmon includes more than 125 manufacturing and service businesses across the transportation, energy and construction markets, making products ranging from railroad tank cars to metal fasteners.

Berkshire owns more than 60 subsidiaries including insurance, clothing, furniture, candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.

Through the first three quarters, Berkshire generated net income of $4.88 billion, or about $3,149 per share. That's down from the $10.27 billion, or about $6,644 per share, that Berkshire reported a year ago.

Berkshire's Class A shares gained $800 to close at $113,000 Friday before the earnings report was released.

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On the Net:

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

Comments

[themodernleader]

Under the Truman Administration foreign aid, such as the Marshall Plan required that the bulk of the loaned money be returned to the United States in the form of purchase orders for plant, equipment and survival materials. We carried huge trade surpluses at that period, Roosevelt-Truman-Eisenhower-Kennedy in American governance. It was not free trade but managed free trade. Of course, the system today is managed mercantelistic trade with us as the loser. Obviously, we are not the managers but the servants in our trade relations.

[DuganS1]

Increased trade has benefited ordinary Americans through cheaper goods and thus more money left over to buy even more goods and services then before. The US has also increased exports at an incredible rate for three years now. Our trade deficit ex-petro is the lowest it has been since 1997.

[FDRJFKLBJ]

This economy must be allowed to collapse. That's right, let it collapse. It's the only way to clean the system.

The US economy is phony. It's built on debt we can't afford. US consumers are $14 trillion in debt. We have negative equity. 70% of our economy is consumption. Trying to prop up this credit bubble economy is an exercise in futility.

Obama can't "save" this economy, much like you can't stop the beaches from eroding. The markets are crashing for a reason. We must let them work it out.

[SailFree]

Well, even Warran B. ain't always gonna bet correctly! Hmmm...

[americaforme]

Shut the back door to the Caymans! Bring our industries home! Better slave labor here, than soup lines tomorrow. Get a grip on health care,then GM will have a fighting chance. Stop the usury, consumers could work with 9% on credit card loans. The Banks need to put GREED on hold, for our America to survive.

[curiousasheck]

What do you expect when 99% of American consumers are not spending money as "disposable" income for goodies and toys or things they don't need regardless if they have it or not because they have ZERO Faith and Confidence in the system anymore.

A booming economy?

[1969z28]

"Whats a matter Buff, the world is not enough."

[repugnicansfearme]

Ooops! I guess Buffett is not the quite the guitar god of the financial world as many people paint him to be.

[MetalCanuck]

Well if he keeps "buying American" he will go broke.

[yappnmutt]

hardly a disaster. there will be lots of buying for bershire hathaway in the next year.

[Veritas 1]

I am sure Berkshire isn't pulling in record profits in this economy, but earnings headlines are usually misleading. Net income fell from $4.5 billion to $1 billion, but last year the company had a $2 billion dollar gain from investing and this year they had a $1 billion loss. So, the vast majority of the 77% drop is not from continuing operations but one time items. I don't follow the company and don't know by what measures investors value the company, but i am sure the earnings from one quarter are not that significant. I doubt the stock will decline much tomorrow.

[darthdarcy]

We needed a bottom up solution but those who are running and destroying our nation will never do anything from the bottom up...they only serve themselves as we have seen to date...

Buffet is simply taking a slight reduction in his vast fortune...if he had been fighting for the little guy and averge American more over the last 8 years he would have also in fact been serving his clients and share holders and personal best interests as well...

Those who think electing Obama will be an immediate cure or near that are sadly mistaken we will pay for many generations for allowing our nation to fall so low into the clutches of those such as G.W. Bush and Karl Rove et al....

[Pacojam]

Yes, we need a bottom-up strategy.

Buffett makes it impossible for the little guy to invest in BH because he never splits his stock.

I do commend him for his charity work, however.

[Enid]

Buffet offered a stock set up in the ninety's for the low end investor who could not afford BS stock. Shares were opened at -one thousand dollars. Didn't everyone buy then, he who hesitates.

[DuganS1]

President Bush supported increased trade which is a liberal policy that mostly helps those at the bottom.

[mrcontinental]

If we do not get a handle on this crisis soon our economy will not survive. The entire financial system has to be reformed or thousands of companies will go bellyup. And no industry is immune, not big oil, not big healthcare, not even Walmart. When there are no consumers left what then folks? If we don't get the idea of profits uber alles out of our heads America as we now know it will cease to exist within a decade. Greed is good will be the death of this country, we will look like Mexico before long at our current pace.

[ErnestineBass]

Yessiree, mrc, and (thankfully) that will be the inherent downfall of GD "WalMart Economics".

At some point, even WalMart's "Low Prices, Everyday" will no longer be affordable for the long term unemployed.

When will the clueless folks in Washington figure this out?

[mrcontinental]

They already know it E.B, they just cannot admit it to themselves because they and their cronies have the most to loss.

[themodernleader]

Even the agile, perceptive and wise are caught unprepared to cope with the perils of a precipitiously declining organization which requires unprecedented decision making to act upon unprecedented perils.
Mr. Buffett should think anew towards those policies that made us a golden enterprise under Harry S. Truman. The policies associated with utility monopolies were originated when he was a Senator which set the Roosevelt Administration on a solid track in monopoly regulation. Mr. Buffett propose and encourage the President-Elect to study and emulate the foreign trade, domestic-economic policies of the Truman Administration.
Never in human history had a nation set in motion policies and procedures that provided virtually unlimited equitable opportunity to all Americans.

[DuganS1]

Truman pushed for reducing barriers on foreign trade, much like George W Bush has done. So I guess you want to see a further increase in foreign trade, which is the view supported by virtually every economist in the world but not by many within the Democratic party.

[IllinoisTexan43]

Well, according to you if Bush did so many things right, why are we in this mess now? How about you take your self important a$$ on up to D.C. and expound on your knowledge to the powers that be? Run for office, maybe.

[mamacat]

I'm not sure what the point of this article is. Does anyone expect Berkshire Hathaway to be doing wonderfully when the economy is doing so horribly? BH reflects some of the best stocks to be had, but at the moment the whole economic system is floundering.