Warren Buffett’s Berkshire Hathaway first-quarter profit has been overshadowed by an unprecedented split between Berkshire’s 26.7% owned Kraft Heinz Group and its auditors which prevented Kraft Heinz from filing its quarterly profit last week.
That, in turn, stopped Berkshire from including its share of the Kraft Heinz quarterly results and it is not known when the dispute will be resolved or the reasons for the split. But it has seen Berkshire forced to file an incomplete quarterly financial report on Saturday, US time.
Without the Kraft Heinz contribution, Berkshire reported earnings of $US21.6 billion, thanks in part to higher insurance investment income and the now familiar volatile gains in its huge investment portfolio from wall Street’s surging start to the year with the S&P 500 up 17%.
The first quarter result was a big turnaround from the $US1.14 billion loss in the March quarter of 2018.
The dispute between Kraft Heinz and its auditors is so serious it prevented Kraft Heinz (KH) from releasing its March quarter results last week.
Market analysts wonder if there is an argument over asset values in the Kraft Heinz accounts after the company took a $US15 billion write-down (which produced a $US12.6 billion loss) in the 4th quarter of 2018. That saw Berkshire write down the value of its investment by $US3 billion.
In announcing the impairment and 4th quarter loss, Kraft Heinz said the Securities and Exchange Commission (SEC) was investigating the company’s accounting practices. There has been no update on that investigation and it is not known if the dispute with its auditors is in any way linked to that probe. Buffett said earlier this year that he overpaid for Kraft in that deal but didn’t plan to sell.
The Berkshire quarterly results were released ahead of Saturday’s annual meeting. Buffett told media at the meeting a dispute between Kraft Heinz and its auditor prevented Berkshire Hathaway from reflecting the food company’s performance in its first-quarter earnings report. Buffett Kraft Heinz Co.’s auditor, PricewaterhouseCoopers, hadn’t signed off on the company’s 10-K filing.
“They have to explain why they haven’t signed off, but they haven’t signed off…There’s something going on,” Buffett said.
US media reports quoted a Kraft Heinz spokesman as saying the company is “working together with PWC toward filing our 10-K once we complete our internal reviews of our accounting practices and procedures related to the procurement area.”
No timing was given for the filing or the nature of the dispute which is unprecedented for a major US company
In its SEC filing, Berkshire said “As of May 3, 2019, Kraft Heinz has not filed its 2018 Form 10-K with the Securities and Exchange Commission. In addition, Kraft Heinz has not made its financial statements for the first quarter of 2019 available to Berkshire. Accordingly, Berkshire does not have the necessary financial information to determine its share of the earnings and other comprehensive income of Kraft Heinz for the first quarter of 2019. As a result, Berkshire’s first quarter 2019 earnings and other comprehensive income.”
“Berkshire will record its share of Kraft Heinz’s earnings and other comprehensive income for the three months ended March 31, 2019, during the period that such information becomes available.”
That means it will have to reissue its quarterly filing with the Kraft Heinz data included. After-tax equity earnings from Kraft Heinz were $US234 million in the first quarter of 2018.
Berkshire said its operating income, a better measure of Berkshire’s business performance, rose 5% to $US5.56 billion from $US5.29 billion, helped by the Geico car insurer and BNSF railroad.
Buffett said margins at Precision Castparts, which Berkshire bought for $US32.1 billion in 2016, have been lower than he had expected, but the forecast they would improve.
Berkshire also repurchased $US1.7 billion of stock after $US1.3 billion in the 4th quarter of 2018, reflecting Buffett’s difficulty in finding better uses for the company’s $US114.2 billion cash hoard (up from $US112 billion a year ago).
Buffett acknowledged he would be willing to repurchase $US100 billion of stock if it became cheap enough, and Vice-chairman Charlie Munger told the meeting Berkshire would become “more liberal” with buybacks.
“Buffett said that he has “no ambition to spend a dime” on more buybacks unless he thinks Berkshire shareholders will be better off. But as long the stock trades at what he believes to be a discount to the broader market, “we could easily spend very substantial sums” on more repurchases.”
The growing cash pile is one reason why Buffett has been looking for large investments to put the company’s money to work such as investing $US10 billion in the proposed $US38 billion offer for independent energy group, Anadarko by rival Occidental. Anadarko is reported to be ready to approve the Occidental offer as soon as later today.
Berkshire shares have seriously underperformed the wider market, rising 7% while the S&P 500 rose 13%. Underperformance.
