, On Friday November 4, 2011, 7:20 pm EDT
LOS ANGELES (AP) -- Warren Buffett's Berkshire Hathaway Inc. said Friday that its third-quarter profit fell 24 percent from a year ago due to a sharp decline in the value its equity derivative contracts following the wild swings in the stock market this summer.
Paper losses aside, most of the mammoth company's business segments, including its railroad, insurance underwriting and manufacturing operations, reported improved earnings for the quarter.
Berkshire said net income was $2.28 billion, or $1,380 per Class A share, for the three months ended Sept. 30. That's down from net income of nearly $3 billion, or $1,814 per Class A share, a year earlier.
On a Class B share basis, the company's earnings amounted to 92 cents a share, down from $1.21 a share.
Berkshire's results fell short of the $1.20 per Class B share three analysts surveyed by FactSet had expected on average.
Revenue slid to $33.7 billion from $36.3 billion last year.
The Omaha, Neb.-based company recorded a loss from its derivative contracts of about $1.59 billion, much wider than the loss of $95 million booked the year before.
"A lot of that will be reversed this quarter because the market's come back," said Jeff Matthews, a shareholder who wrote "Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett."
All told, Berkshire's investment gains and derivative losses combined to sap $1.53 billion from its profit in the third quarter. A year earlier, the company's derivatives and investments added $202 million to quarterly net income.
The true value of the derivatives won't be clear for at least several years because they don't mature until an average of about 10 years from now. But Berkshire is required to estimate their value every time the company reports earnings. Buffett has said he believes the contracts will ultimately be profitable because the premiums are being invested.
Berkshire executives say the company's operating earnings are a better measure of how the company is performing in any given period because those figures exclude its derivatives and investment gains or losses.
The company said its operating income climbed 37 percent to $3.81 billion in the quarter from $2.79 billion a year earlier.
Besides investments, Berkshire owns roughly 80 subsidiaries, including clothing, furniture and jewelry firms, but its insurance and utility businesses typically account for more than half of the company's net income.
In the latest quarter, most of the company's business segments turned in annual gains in earnings, led by insurance underwriting.
The segment generated net earnings of $1.09 billion, up from $199 million a year earlier.
That included an after-tax gain of about $855 million as the company reduced its estimate of reinsurance contract liabilities and changes in currency exchange rates.
The company's insurance investment income segment posted a 10 percent drop in earnings to $783 million from $873 million in the prior-year quarter -- a result of the drop in the value of the company's derivatives.
Net earnings for Berkshire's railroad business, the Burlington Northern Santa Fe railroad, climbed 8.5 percent to $766 million from $706 million.
The company's utilities and energy, manufacturing, service and retailing, and finance and financial products segments also reported annual gains in net income.
At the end of the quarter, the company's book value was up 1.5 percent from the end of last year to $96,876 per Class A equivalent share, Berkshire said.
The company said in September that it planned to buy back its Class A and B shares should they trade at less than 110 percent of book value. That threshold would be less than $106,563 a Class A share, going by the company's book value at the end of the quarter.
Berkshire's Class A shares were down $4 to $115,802 in aftermarket trading on Friday. They ended the regular session down $2,494, or 2.1 percent, at $115,806.
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