Berkshire Letter to Shareholders

[gret]

Letter Comments-

The major problem for Berkshire last year was NetJets, an aviation operation that offers fractional ownership of jets. Over the years, it has been enormously successful in establishing itself as the premier company in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our dominance in the field remains unchallenged.

NetJets’ business operation, however, has been another story. In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company’s debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of this debt, NetJets would have been out of business. It’s clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out.

Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of NetJets in August. His leadership has been transforming: Debt has already been reduced to $1.4 billion, and, after suffering a staggering loss of $711 million in 2009, the company is now solidly profitable.

​

Financial Statement Notes-

NetJets produced a pre-tax loss in 2009 of $711 million compared to pre-tax earnings of $213 million in 2008. The pre-tax loss at NetJets in 2009 included asset writedowns and other downsizing costs of $676 million compared to $54 million of such charges in 2008. NetJets owns more planes than is required for its present level of operations and plans to dispose of selected aircraft over time provided that prices are reasonable. We do not believe at this point that further downsizing will be required. We also believe, as a result of actions taken to date, that NetJets is likely to operate at a profit in 2010, assuming there is no further deterioration in the U.S. economy or negative actions directed at the ownership of private aircraft.
​

 

[CRJFlyer]

While better news for 2010..Seems like the same quarterly report we've seen over the last few reports??

 

[HazMat]

I never realized that Netjets wouldn't have been able to stand alone without berkshires backing. Pretty scary. Man you guys are lucky Sokol wasn't there when the TA was negotiated.

 

[ArtVandalay]

I don't understand how in less than 6 months you can be "solidly profitable" after all that mess.

 

[gret]

"solidly profitable" in the letter and then "likely to operate at a profit in 2010" in the footnote.

We'll see after the 1st qtr. Flight activity overall is still anemic, the used a/c aren't selling, and we're about ready to take another dive in the economy. 2010 will be repeat of 2009 and any meaningful recovery will probably take place in the 2nd half of 2011.

 

[gunfyter]

I don't understand how in less than 6 months you can be "solidly profitable" after all that mess.

Its very simple... Before the mess we made $211 Million in 2008.

We have an aggregate loss of $157M since BRK bought us... $711M in 2009 alone... This means before 2009 we had made an aggregate profit of 711-157 = $554M.

Elsewhere previously it has been said he expects 2010 profit to be about $250M. If so the aggregate will be Back in the Black.

The mess is over.

"...asset writedowns and other downsizing costs of $676 million...."

Those are over... and accounted for $676M of the $711M loss. Leaving only $35M in operational losses ... more than offset by the manpower and other reductions made in costs over the last 6 months. We will not likely encounter similar write downs again... barring another devastating collapse of the US and global economy.

Its like your $211M profitable business got hit with a Tsunami and an Earthquake one day. You take the financial hit and press on.

 

[gret]

"Its very simple... Before the mess we made $211 Million in 2008.

The mess is over."


What about the almost 80% decline in new share sales in 2009 versus 2008? Are any new shares being sold in 2010?

Actually the 2008 figures are overstated as a good portion of the 2009 writedowns should have been booked in 2008.

No way for anybody to know for sure until the books are closed for the qtr ending 3/31/2010.

 

[gunfyter]

I wouldn't go by 2010... Obviously the economy has not recovered yet... It still SUCKS! Only the economic Tsunami has receded... with hopefully no more aftershocks.

But Berkshire says we are "solidly" profitable. Are they telling a lie in their Annual report. That could probably represent difficulties with the SEC....

So I believe the situation is as they state ... we are making a profit.

 

[netjetwife]

Part of the mess was caused by executives who made foolish and/or extravagant decisions. They were replaced when NJ got a new CEO.

 

[johnsonrod]

Will Netjets likely continue to operate 10+ aircraft types (with the associated complexity)? What's the word on fleet type consolidation?

 

[gret]

"Part of the mess was caused by executives who made foolish and/or extravagant decisions."

Could you provide some specific examples?

 

[CALRepublic]

The mess is over.

Its like your $211M profitable business got hit with a Tsunami and an Earthquake one day. You take the financial hit and press on.

"the mess is over"

don't start counting your chickens yet... remember the majors were hiring two years ago, now look at'em

In my six years at NJ I've seen the good the bad and the ugly. I wonder what's next??


by the way, good job so far Mr. Sokol

 

[imacdog]

"Part of the mess was caused by executives who made foolish and/or extravagant decisions."

Could you provide some specific examples?

Spending like drunken sailors on projects that were entirely unnecessary, or unnecessarily expensive for starters.

 

[gunfyter]

"the mess is over"

don't start counting your chickens yet... remember the majors were hiring two years ago, now look at'em

The mess I am talking about is the fallout from the financial crisis.

The economy still sucks but Berkshire says we are solidly profitable.... I don't think they are allowed to lie in SEC reports....

So we'll see what the numbers are, in the next few reports.... But if we are really making a profit in the crap economy we are in now ... that ain't a bad thing....

 

[shroomwell]

The 676 million loss on asset write downs is a non cash charge. This actual cash effect may be more or may be less. It all depends on the prices they get for the aircraft that were bought back. Time will tell.

 

[netjetwife]

Spending like drunken sailors on projects that were entirely unnecessary, or unnecessarily expensive for starters.

Imacdog, that is what I was referring to in my post. I'd also note that while the value of some purchases/projects may have been debatable, foolishly jumping into them without first doing the required research incurred additional expenses that could have easily been avoided.

Gret, those responsible were immediately removed from the company when Mr. Sokol took over so there's no need to scrutinize, in detail, an issue that has already been corrected. NJ employees that frowned over past practices are relieved to see them come to an end. The point of my post was simply to show that there are valid reasons to be optimistic for the future.

 

[HazMat]

Njw what happened to the kudos you gave netjet management when the voluntary measures were agreed to. Something about Netjets having the best management how quickly things can change

 

[gunfyter]

Oh we fixed that!

The former President of the Union is now the President of the company... and look we already turned a $711M loss into a "solidly profitable" company.

Where is B19?:laugh: Bet he can't do that!

 

[ArtVandalay]

Its very simple... Before the mess we made $211 Million in 2008.

We have an aggregate loss of $157M since BRK bought us... $711M in 2009 alone... This means before 2009 we had made an aggregate profit of 711-157 = $554M.

Elsewhere previously it has been said he expects 2010 profit to be about $250M. If so the aggregate will be Back in the Black.

The mess is over.

"...asset writedowns and other downsizing costs of $676 million...."

Those are over... and accounted for $676M of the $711M loss. Leaving only $35M in operational losses ... more than offset by the manpower and other reductions made in costs over the last 6 months. We will not likely encounter similar write downs again... barring another devastating collapse of the US and global economy.

Its like your $211M profitable business got hit with a Tsunami and an Earthquake one day. You take the financial hit and press on.

Obviously you did not get a degree in business. This makes absolutely no sense whatsoever.

 

[netjetwife]

Haz, I still applaud them for being willing to try other alternatives first. My support for a cooperative labor-management relationship wasn't intended to imply that I thought RTS (the past CEO) was perfect and hadn't made mistakes. I was just giving credit where it was due. The new management team is now ready to focus on their relationship with NJASAP and I give them kudos for that, as well.

 

[gret]

"Part of the mess was caused by executives who made foolish and/or extravagant decisions."

"Spending like drunken sailors on projects that were entirely unnecessary, or unnecessarily expensive for starters".


Interesting that nobody can point out a specific example of mgmt wrongs. NJW, were they "foolish" when they hired a member of your family? Were the "foolish and/or extravagant" when they signed the union contract?

 

[gret]

"The 676 million loss on asset write downs is a non cash charge. This actual cash effect may be more or may be less. It all depends on the prices they get for the aircraft that were bought back. Time will tell."

The term "non cash charge" is a relatively new term that executives use to try and make a disaster look better. It is real money that has gone out the door or has been borrowed.

Included in the $676 million is the downsizing costs. The charge is real and is cash (it is the $1.4 billion in debt which has to be paid even though the a/c haven't been sold). They have already computed what they're going to realize upon the sale of the a/c, if they can even sell them. So far, things haven't gone too well.

 

[gunfyter]

Obviously you did not get a degree in business. This makes absolutely no sense whatsoever.

No business degree Art ...

Yet I understand the report and how we can be solidly profitable from reading the report....

 

[gret]

From the 2007 Berkshire letter to shareholders-

"The NetJets brand – with its promise of safety, service and security – grows stronger every year. Behind this is the passion of one man, Richard Santulli. If you were to pick someone to join you in a foxhole, you couldn’t do better than Rich. No matter what the obstacles, he just doesn’t stop.

Europe is the best example of how Rich’s tenacity leads to success. For the first ten years we made little financial progress there, actually running up cumulative losses of $212 million. After Rich brought Mark Booth on board to run Europe, however, we began to gain traction. Now we have real momentum, and last year earnings tripled.

In November, our directors met at NetJets headquarters in Columbus and got a look at the sophisticated operation there. It is responsible for 1,000 or so flights a day in all kinds of weather, with customers expecting top-notch service. Our directors came away impressed by the facility and its capabilities – but even more impressed by Rich and his associates."

Hey, if Waren says the company is "solidly profitable"...it is "solidly profitable". No reason to debate or question the matter.

 

[gunfyter]

"The 676 million loss on asset write downs is a non cash charge. This actual cash effect may be more or may be less. It all depends on the prices they get for the aircraft that were bought back. Time will tell."

The term "non cash charge" is a relatively new term that executives use to try and make a disaster look better. It is real money that has gone out the door or has been borrowed.

Included in the $676 million is the downsizing costs. The charge is real and is cash (it is the $1.4 billion in debt which has to be paid even though the a/c haven't been sold). They have already computed what they're going to realize upon the sale of the a/c, if they can even sell them. So far, things haven't gone too well.

The money that went out the door is the $billions that were borrowed and owed to buy back the airplanes. Thats CASH... but is NOT included in the losses.

The non-cash losses are the paper losses for write-downs. This IS included in the LOSSES.

Ex:

You buy back $1Billion in airplanes. Cash flow is $1B negative. Losses = ZERO.

You then revalue the airplanes to match market prices ... say $500 Million. You just lost 1/2 Billion dollars without ANY negative cash flow.

You report a $500 M loss in your annual report.

Cash flow and losses ... Two different things.

 

[imacdog]

"Part of the mess was caused by executives who made foolish and/or extravagant decisions."

"Spending like drunken sailors on projects that were entirely unnecessary, or unnecessarily expensive for starters".


Interesting that nobody can point out a specific example of mgmt wrongs. NJW, were they "foolish" when they hired a member of your family? Were the "foolish and/or extravagant" when they signed the union contract?

I can point out specific examples, but I choose not to on a public board.

 

[CRJFlyer]

If rumors hold true, there was that expensive skybox at a certian Bronx field, bought with NJA dollars "for our owners" but who actually was using them??

 

[HazMat]

Gun so when you write a check to buy back the share that is not cash? When you borrow 1.9 billion that is not cash. When buffet says nj would have been out of business if not for Berkshire signing for loans on their behalf that's good. Dude wake up

 

[gunfyter]

Gun so when you write a check to buy back the share that is not cash? When you borrow 1.9 billion that is not cash. When buffet says nj would have been out of business if not for Berkshire signing for loans on their behalf that's good. Dude wake up

Its cash ... but its not a Loss.


When you write a check for $1 million and trade it for GOLD.... Its a $1M negative cash flow ... but its not a loss. Your net worth remains the same... Even though you took out a loan for the $1 Million.

If the Gold then goes down in value to $500,000. There is No Cash involved ... but you just took a $500K loss.

That's the way things get reported.

Now WB says we are solidly profitable. Do you know more than Warren?

 

[netjetwife]

Imacdog, you and I are on the same page. While general statements/observations are acceptable, publicly re-hashing, in detail, an old issue that has been resolved is not appropriate nor productive.

Gret, my husband is a great asset to the Company and NJASAP. The new CEO has stated that he has no problems with the pilots' contract and will not be looking for concessions from them. Leaders from the Company and the Union will be meeting next week to discuss topics of mutual interest; obviously both groups value a good labor-management relationship.