Berkshire Profit Declines 30% as Gains Narrow on Derivatives

Berkshire Hathaway Inc. (BRK/A) said fourth- quarter profit fell 30 percent on smaller gains from Warren Buffett’s portfolio of derivatives.

Net income declined to $3.05 billion, or $1,846 a share, from $4.38 billion, or $2,656, a year earlier, Omaha, Nebraska- based Berkshire said today in its annual report.

Buffett, Berkshire’s chairman and chief executive officer, is investing in stocks and acquisitions as Berkshire generates earnings. The derivatives bets, made in prior years on long-term gains in stocks and the solvency of borrowers, produced more than $2 billion of profit in the fourth quarter of 2010.

“These are contracts that don’t expire for another 10 or 15 years and might fluctuate a lot every quarter,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business. Buffett is “not really bothered by the volatility short term,” said Kass, in an interview before results were released.

Berkshire has slumped 4 percent in New York in the last 12 months, compared with a gain of 4.6 percent for the Standard & Poor’s 500 Index.

The gain from equity index puts slipped to $350 million in the last three months of 2011 from $2.49 billion a year earlier. The contracts are tied to four stock indexes including the S&P 500, which rose 11 percent in the period, and the Nikkei 225 Stock Average, which fell 2.8 percent. Liabilities narrow when equity benchmarks rise, and the fluctuations are recorded each quarter in Berkshire’s income statement.

Credit-Default Contracts

Losses from credit-default contracts, in which Buffett bets on the ability of borrowers to repay debt, widened to $216 million from $157 million a year earlier. Some fourth-quarter results were calculated by subtracting figures for the first nine months from the full-year data provided today.

Berkshire’s cash hoard increased to $37.3 billion on Dec. 31 from $34.8 billion three months earlier. Buffett, 81, drew down funds in the third quarter to purchase engine-additives maker Lubrizol Corp. for about $9 billion and accumulate an equity stake in International Business Machines Corp. Berkshire had $38.2 billion in cash at the end of 2010.

Book value, a measure of assets minus liabilities, rose in the last three months of 2011 to $164.9 billion from $160 billion on Sept. 30, and $157.3 billion at the end of 2010. Full-year net income slipped to $10.3 billion from $13 billion in 2010.

Burlington Northern

Acquisitions have given Berkshire more than 70 operating units that produce energy and chocolate, operate planes and trains, and insure against car wrecks and earthquakes. Berkshire’s investment portfolio generates income by collecting dividends and bond coupons. The firm is the biggest stock investor in Coca-Cola Co. and Wells Fargo & Co.

Buffett’s biggest takeover, railroad Burlington Northern Santa Fe, was completed in 2010 in a $26.5 billion transaction. The business contributed $909 million to quarterly earnings, compared with $644 million a year earlier. Auto, mineral and chemical shipments have fueled gains in Burlington Northern’s traffic.

“Our major businesses did well last year,” Buffett said in a letter in Berkshire’s annual report today. “each of our five largest non-insurance companies -- BNSF, Iscar, Lubrizol, Marmon Group and MidAmerican Energy -- delivered record operating earnings.”

Buffett, who doesn’t pay Berkshire investors a dividend, started his first share buyback last year as the stock slid. He is also seeking to use Berkshire’s cash to fund takeovers and new equity investments.

‘Dangerous’ Bonds

Bonds and other bets tied to currencies are “among the most dangerous of assets” because of the risk of inflation and low interest rates, Buffett said in the letter. His comments are read by investors around the world for insights into his views on the economy and markets.

Buffett, who built Berkshire over four decades, is preparing the company for his eventual departure. He hired former hedge-fund manager Ted Weschler last year to join Todd Combs in overseeing portions of the company’s investments.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net; Noah Buhayar in New York at nbuhayar@bloomberg.net.

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net.

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