Money Matters, Simplified.
Derivative contracts erode Q2 net profit at Berkshire Hathaway
by Sophie Anderson - August 8, 2010 - comments
Warren Buffett's company reported a 40 percent drop in second-quarter profit because largely unrealized derivative loss of $1.4 billion outweighed improvements at Berkshire Hathaway Inc.'s operating companies.
Second-quarter profit at Warren E. Buffett's, Berkshire Hathaway plunged 40 percent primarily because declining stock prices led the value of its derivatives contracts to fall.
Net income plunged from $3.30 billion earned in the comparative period last year to $1.97 billion in the second quarter this year.
Operating profit jumps
The Omaha, Nebraska based behemoth nonetheless managed a 73 percent hike in operating profit, buoyed by superior insurance underwriting results and a turnaround at the NetJets corporate plane unit.
Operating earnings exclude the derivatives portfolio and some other investment results.
Excluding investments, operating profit jumped to $3.07 billion vis-a-vis $1.78 billion in the comparative period last year.
“We do not believe that the provisions of the Reform Act that concern collateral requirements apply to derivatives contracts that were entered into prior to the enactment of the Reform Act, as ours were,” mentioned the company in its quarterly report to regulators.
The company had acquired a 77.5 percent stake in Burlington Northern Santa Fe for $27 billion. The acquisition, the biggest of Buffett's career, augmented net earnings by $885 million.
The NetJets business, which sells ownership shares on airplanes, managed a pre-tax profit of $114.5 million this year, a marked improvement from the pre-tax loss of $348.5 million in the first six months of last year.
Profits at the company's manufacturing, service and retailing operations increased considerably in the latest quarter. The firm attributed the improvement to "some stabilization of economic conditions."
The company incurred a loss of $1.41 billion on derivatives, including long-term contracts tied to equity indexes. The conglomerate had recorded a profit of $1.53 billion in the same line of business a year ago.
No impact of financial regulation bill
Analysts had started tracking Berkshire stocks after the passage of the financial regulation bill last month, fearing that the company would be forced to put up collateral against the losses.
The company claimed that it was spared in the Congressional overhaul of financial regulations and therefore did not have to post more collateral on derivatives contracts.
“We do not believe that the provisions of the Reform Act that concern collateral requirements apply to derivatives contracts that were entered into prior to the enactment of the Reform Act, as ours were,” mentioned the company in its quarterly report to regulators.
“Although the Reform Act may affect some of our business activities, it is not expected to have a material impact on our consolidated financial results or financial condition,” stated the company.