Coronavirus punishes Warren Buffett as Berkshire Hathaway takes big writedown

(Reuters) – Berkshire Hathaway Inc on Saturday announced a $9.8 billion writedown and 10,000 job losses at its Precision Castparts aircraft and industrial parts unit, as the coronavirus pandemic caused widespread pain at Warren Buffett’s conglomerate.

Despite the writedown, Berkshire said second-quarter net income surged 87% because of gains in common stock investments such as Apple Inc as markets rebounded. Operating profit, which the writedown does not affect, fell 10%.

“The writedown was prudent” at Precision, said Cathy Seifert, an equity analyst at CFRA Research. “It’s a recognition of what the market has long believed, that the purchase price was rich, and the integration not as smooth as many would have hoped.”

Berkshire, which acquired Precision for $32.1 billion in 2016 in its largest acquisition, and which Buffett at the time called a steep price, said COVID-19 caused airlines to slash aircraft orders, resulting in significantly less demand for Precision’s products.

At Precision, revenue fell by one-third, and Berkshire said results may suffer more as the unit undertakes an “aggressive restructuring” to shrink operations. Precision ended 2019 with 33,417 employees, meaning it has shed 30% of its workforce.

During the quarter, Buffett, who turns 90 on Aug. 30, also took advantage of Berkshire’s underperforming shares by repurchasing $5.1 billion of stock, even as the pandemic reduced other companies’ ability to buy back their own shares.

Seifert said investors should welcome the buybacks.

“Berkshire tends to go against the grain, and when so many companies suspended buybacks, Berkshire did the opposite,” she said. “The market should react positively, because it shows Berkshire is confident in its prospects.”

The repurchases confirmed Berkshire’s hint in a July 8 regulatory filing it had become more aggressive with buybacks after loosening its buyback policy in 2018.

Precision was not the only drag on Berkshire, which said the pandemic caused “relatively minor to severe” damage to most of its more than 90 operating businesses, including lower shipping volume at the BNSF railroad and store closures at See’s candies.

Berkshire said it also took a $513 million charge on its 26.6% stake in Kraft Heinz Co, which on July 30 took writedowns on several of its businesses, including its Maxwell House and Oscar Mayer brands.


Quarterly net income rose to $26.3 billion, or $16,314 per Class A share, from $14.07 billion, or $8,608 per share, a year earlier.

An accounting rule requires Berkshire to report unrealized stock gains and losses with net results, causing huge swings that Buffett considers meaningless. Berkshire’s net loss was $49.75 billion in the first quarter.

Second-quarter operating profit fell to $5.53 billion, or about $3,463 per Class A share, from $6.14 billion, or $3,757 per share, a year earlier.

Revenue fell 11% to $56.8 billion, with larger declines at BNSF and Berkshire’s own aircraft units, including NetJets.

In contrast, Geico said pretax underwriting profit increased fivefold to $2.06 billion because people drove less, resulting in significantly fewer accident claims.

That bump is likely temporary. Berkshire said Geico could suffer underwriting losses for the rest of the year because it is giving $2.5 billion of credits on auto and motorcycle policy renewals.

Berkshire ended June with a record $146.6 billion of cash and equivalents, in part because Buffett exited his bet on the airline industry by selling $6 billion of stock.

Buffett has deployed some cash since June, agreeing to buy some Dominion Energy gas assets for $4 billion and buying more than $2 billion of Bank of America Corp stock, already one of its largest investments.

Berkshire’s stock has underperformed broader markets since the end of 2018. Through Friday, the stock had risen 3% over that time, while the Standard & Poor’s 500 was up 34%.

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