OMAHA, Neb. (AP) — Warren Buffett’s company said Friday its third-quarter profit soared 72 percent because the value of its investments and derivative contracts improved significantly.
But Buffett has said he believes Berkshire’s operating earnings, which exclude the value of its derivatives and investments, are a better measure of the company’s performance. Berkshire’s operating earnings declined 11 percent in the quarter, weighed by a drop in insurance underwriting profits.
Berkshire Hathaway Inc. reported net income of $3.92 billion, or $1.58 per Class B share. That’s up from $2.28 billion, or 92 cents per share, last year.
Its revenue grew to $41.05 billion from last year’s $33.74 billion.
The three analysts surveyed by FactSet expected Berkshire to report earnings of $1.38 per Class B share on $39.04 billion revenue.
The biggest difference in the quarter was a major swing in the paper value of Berkshire’s derivatives tied to equity markets. Berkshire’s investment gains and derivative losses combined to add $521 million to net income this year. In 2011, those things drained $1.53 billion from its third-quarter profit.
Buffett says Berkshire’s investment and derivative gains or losses can be misleading because the company rarely sells its investments, and the derivatives don’t mature until about eight years from now.
Berkshire executives do not typically comment on quarterly earnings reports, and they did not immediately respond to an interview request late Friday.
Besides the big swing in the paper value of Berkshire’s investment and derivatives, several of the Omaha-based company’s other subsidiaries performed well.
Berkshire’s BNSF Railway contributed $937 million to the company’s third-quarter profit as it increased prices about 2 percent and hauled 5 percent more carloads of freight. That’s up from $766 million last year as BNSF limited expense growth to less than 3 percent.
Another boost was the addition of specialty chemical maker Lubrizol, which Berkshire acquired last September. That acquisition, combined with a modest improvement in the U.S. housing construction, helped Berkshire’s manufacturing, service and retail unit generate $991 million in net income. That’s up from $836 million last year.
Berkshire’s utilities, which include Iowa-based MidAmerican Energy, added $438 million to the company’s quarterly profit. That’s up from $372 million last year.
But Berkshire’s insurance unit, which includes Geico and several large reinsurance companies, were a drag on third quarter profit because last-year’s results were helped by a one-time $855 million adjustment in the liabilities of several reinsurance contracts.
Because of that, Berkshire reported an insurance underwriting profit of $392 million this year, down from $1.09 billion last year.
Jeff Matthews, an investor who wrote “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett,” said there were few surprises in the quarterly results, which generally showed Berkshire’s businesses moving ahead steadily.
But Matthews said he was surprised not to see any mention of Berkshire insurance liabilities related to Superstorm Sandy that struck the East Coast.
“The thing that jumped out at me was that there was no commentary on the hurricane. That means they have no significant exposure,” Matthews said.
Berkshire’s operating earnings declined to $3.4 billion from last year’s $3.8 billion because the drop in insurance underwriting profits offset the improvement in Berkshire’s non-insurance businesses.
Berkshire owns roughly 80 subsidiaries, including railroad, clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company’s net income. The Omaha, Neb., company also has major investments in such companies as Coca-Cola Co., IBM and Wells Fargo & Co.
On Friday, Berkshire announced plans to acquire Omaha-based Oriental Trading Co., which offered more than 40,000 party supplies, arts, crafts, toys and other trinkets through its website and catalog.
Oriental Trading generates about $500 million in sales annually and has as many as 2,000 employees, but financial terms for that deal weren’t disclosed.
Follow Josh Funk online at www.twitter.com/funkwrite
Berkshire Hathaway Inc.: www.berkshirehathaway.com
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