Berkshire Hathaway Moat Breached By Virus Shutdown

By Glenn Dyer | More Articles by Glenn Dyer

Warren Buffett’s Berkshire Hathaway says its quarterly operating profit fell 10% because of the impact of the COVID-19 pandemic on its wide range of industrial businesses which saw it take a big write-down on the value of its Precision Castparts Corp business.

Berkshire said its second-quarter operating profit fell to $US5.51 billion from $US6.14 billion a year earlier. That took operating earnings for the half-year to $US11.697 billion.

Revenue fell 11% to $US56.8 billion, with larger declines at BNSF and Berkshire’s own aircraft units, including NetJets while it’s retail and distribution businesses also suffered from the impact of the pandemic. See’s Candies closed a number of stores.

The company had a cash ‘float’ of nearly $US147 billion and bought back $US5.1 billion of shares in the quarter – an all-time high.

Taking into account gains and losses on its share portfolio (especially Apple), Berkshire also said quarterly net income rose to $US26.3 billion, from $US14.07 billion in the June quarter of 2019.

That profit was half the massive $US54.5 billion loss reported for the March quarter as the value of the company’s holdings in banks like Bank of America, Apple, and a host of other companies slumped in the COVID-19 sell-off.

The loss for the first six months of the year was more than $US23 billion, including the share gains and losses.

For the first six months of 2020, the company is still facing sharemarket losses of more than $US19.5 billion, although that has considerably reduced since especially with the surge in Apple’s share price and value which is now more than $US1.95 trillion.

There was a total of $10.9 billion of write-downs, including $US9.8 billion for Precision, which Berkshire bought in 2016 for $US37.2 billion including debt and remains its largest acquisition.

The write-down was around a third of Precision’s intangibles.

Berkshire said it cut the value of its Precision Castparts unit because of the pandemic has hurt air travel and businesses that support the airline industry.

Precision Castparts cut about 10,000 jobs, or about 30% of its workforce, during the first half of the year as it responded to the reduced demand.

And there could be more cuts to come in this and other businesses with Berkshire warning in the report that future results may suffer more as the unit undertakes an “aggressive restructuring” to shrink operations.

Berkshire said it also took a $US513 million charge on its 26.6% stake in Kraft Heinz Co, which on July 30 took a second lot of write-downs in 18 months on several of its businesses, including its Maxwell House and Oscar Mayer brands.

Outside of Precision, the pandemic’s impact on Berkshire’s businesses was significant, with all businesses reporting lower income except some of insurance operations which did OK such as car insurer, Geico.

Like all car insurers, Geico benefited from lower claims because there were fewer accidents as people drove less with many people working from home.

It reported a $US2.1 billion underwriting profit in the quarter, up from $US393 million a year ago.

Also, a $US2.5 billion in premium reductions Geico is offering customers because of the lower claims will be spread over the coming year as people renew policies instead of taking effect all in the second quarter when most other insurers sent refunds.

Railroad, BNSF’s profit fell 15% to $US1.1 billion during the quarter as the number of shipments – especially coal – fell 18%.

The rail giant though saw big cuts to costs – especially diesel as oil prices slumped in the quarter. That helped cut costs by 26% which helped offset the lower freight volumes.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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