Coronavirus punishes Warren Buffett as Berkshire Hathaway takes big writedown

(Reuters) – Berkshire Hathaway Inc (BRKa.N) on Saturday announced a $ 9.8 billion write-off and a loss of 10,000 jobs at Precision Castparts aircraft parts unit as the coronavirus pandemic caused widespread pain in the Warren Buffett Conglomerate.

FILE PHOTO: Warren Buffett, Chairman and CEO of Berkshire Hathaway, takes his place to address the Fortune & # 39; s Most Powerful Women & # 39; s Summit on October 13, 2015 in Washington. REUTERS / Kevin Lamarque / File Photo

Despite the write-off, Berkshire said second-quarter net income rose 87% as stock investments like Apple Inc (AAPL.O) as the markets recovered.

Operating income was down 10%, cushioned by a temporary drag on Geico auto insurer as the pandemic caused "relatively minor to severe" damage to most of Berkshire's 90+ operating companies.

"The write-off was prudent," said Cathy Seifert, an equity analyst with CFRA Research. "It's an appreciation of what the market has long believed, that the purchase price was rich and the integration wasn't as smooth as many would have hoped."

Berkshire, which paid $ 32.1 billion for Precision in its largest acquisition in 2016 and which Buffett called a high price at the time, said COVID-19 caused airlines to cut aircraft orders, increasing demand for Precision- Products significantly.

Buffett himself harassed airlines during the quarter, selling $ 6 billion of their shares, and telling shareholders on May 2 that the future of the industry had become "a lot less clear to me."

Berkshire said Precision, which also makes industrial parts, has seen sales decline by a third and is planning an "aggressive reorganization" to downsize operations. Precision finished 2019 with 33,417 employees and cut 30% of its workforce.

During the quarter, Buffett, who turned 90 on Aug. 30, also took advantage of the underperforming stocks of Berkshire by buying back $ 5.1 billion worth of shares, though the pandemic limited the ability of other companies to buy back their own stocks .

Berkshire stock has lagged significantly behind broader markets since late 2018, and Seifert said investors should welcome the buybacks.

"Berkshire tends to go against the grain, and when so many companies stopped buying back, Berkshire did the opposite," she said. "The market should respond positively as it shows that Berkshire is confident of its prospects."

Those buybacks confirmed Berkshire’s notice in a July 8 filing that it had become more aggressive with buybacks after easing its buyback policy in 2018.

PANDEMIC DAMAGE

Berkshire companies hit by the pandemic also include the BNSF Railroad, which has had lower shipping volumes, and retailers, including See & # 39; s Bonbons, that have temporarily closed stores.

Companies that Berkshire has recently made large investments in also have problems.

Berkshire posted a $ 513 million loss on its 26.6% stake in Kraft Heinz Co (KHC.O) after the food company took multiple write-offs, including for Maxwell House and Oscar Mayer.

Meanwhile Occidental Petroleum Corp (OXY.N), where Berkshire invested $ 10 billion last August, has also been brought to its knees by falling oil prices.

Berkshire's quarterly net income rose from $ 14.07 billion, or $ 8,608 per share last year, to $ 26.3 billion, or $ 16,314 per Class A share. It was followed by a loss of $ 49.75 billion in the first quarter.

An accounting rule requires Berkshire to report unrealized stock gains and losses with net results, creating huge swings that Buffett believes are meaningless.

Operating income for the second quarter fell to $ 5.53 billion, or approximately $ 3,463 per Class A share, from $ 6.14 billion, or $ 3,757 per share last year.

Sales were down 11% to $ 56.8 billion, although some companies, including Duracell Batteries, grew 16%.

Geico's pre-tax underwriting profit increased five-fold to $ 2.06 billion as a result of fewer people driving, resulting in significantly less accidental damage.

However, Berkshire said Geico could suffer underwriting losses for the remainder of the year as riders received $ 2.5 billion in loans to renew auto and motorcycle policies.

Berkshire ended June with a record $ 146.6 billion in cash, and bought just $ 797 million in shares during the quarter.

Buffett has since put in some money and agreed to buy Dominion Energy (D.N.) $ 4 billion gas assets and adding more than $ 2 billion to Bank of America Corp (BAC.N) Camp.

Reporting by Jonathan Stempel in New York; Editing by Megan Davies, Hugh Lawson, Christina Fincher, and Franklin Paul

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