May 2, 2014

Berkshire profit declines as income from BNSF, derivatives dips

First-quarter net income declined 3.8 percent at Warren Buffett’s conglomerate as bad weather and service problems caused a 9.3 percent drop in net earnings at Fort Worth-based BNSF Railway.

Berkshire Hathaway’s first-quarter profit fell 3.8 percent on reduced earnings from BNSF Railway, derivatives wagers and underwriting at insurance businesses, the company said Friday in advance of its shareholders meeting.

Net income slipped to $4.71 billion, or $2,862 a share, from $4.89 billion, or $2,977, a year earlier, the Omaha, Neb.-based company said Friday. Operating earnings, which exclude some investment results, were $2,149 a share, missing the $2,171 average estimate of three analysts surveyed by Bloomberg.

Berkshire, run by legendary investor Warren Buffett, entered into derivatives contracts to bet on long-term gains in stocks. Fluctuations in the contracts’ value are reflected in Berkshire profit even though they don’t expire for years. Excluding those swings, the company has benefited from a rebounding U.S. economy that propelled gains in the equity portfolio and dozens of operating businesses.

The derivative book “adds volatility to earnings, although the economic risk appears manageable,” Barclays analysts, led by Jay Gelb, said in a report this week.

Continued stimulus from the Federal Reserve, a pickup in consumer spending and a recovering housing market have bolstered the U.S. economy. Berkshire stands to gain from those trends because its more than 80 subsidiaries. In addition to BNSF, Berkshire owns Justin Brands, Acme Brick and TTI in Fort Worth.

Berkshire blamed bad weather and service problems in the northern states for the 9.3 percent drop in net earnings at Fort Worth-based BNSF to $724 million, compared to $798 million for the same period a year ago.

“Nevertheless, we expect that revenues and earnings over the remainder of 2014 will exceed 2013,” Berkshire said regarding BNSF. “Our planned capital investments and new employee hiring in 2014 will expand capacity and allow us to maintain high service levels in the future.”’

BNSF previously announced plans to hire 5,000 workers as it works to reduce delays in its network.

Buffett, 83, has touted business prospects in the U.S., where most of Berkshire’s operations are based. He said in his annual letter to shareholders that his company has plenty of opportunity to invest in plants and equipment. Capital spending climbed to a record $11.1 billion last year.

“Though we invest abroad as well, the mother lode of opportunity resides in America,” Buffett wrote in the letter posted March 1.

Today’s annual meeting is expected to draw tens of thousands of spectators, who come to hear Buffett and Vice Chairman Charles Munger, 90, answer questions from shareholders, journalists and analysts.

Topics at past meetings have ranged from the operating businesses to taxes and politics. Shareholders may ask this year about why Buffett abstained from voting on Coca-Cola’s executive-pay plan, which he called “excessive.” Berkshire is the soft-drink maker’s largest shareholder.

Staff writer Barry Shlachter contributed to this report.

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