Berkshire Hathaway Inc. 10-Q Summary: Q3 2020
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2020. Berkshire Hathaway operates a diversified portfolio including insurance, railroad (BNSF), utilities and energy (BHE), manufacturing, service, and retailing businesses. The reporting period was significantly impacted by the COVID-19 pandemic, which adversely affected nearly all operations, particularly in the second quarter, with varying degrees of recovery in the third quarter.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total Revenues | $63.0 billion | $65.0 billion | $181.1 billion | $189.2 billion |
| Net Earnings (Attributable to BH) | $30.1 billion | $16.5 billion | $6.7 billion | $52.3 billion |
| Investment Gains/Losses (Pre-tax) | $31.6 billion | $10.7 billion | $2.0 billion | $40.1 billion |
| Cash & Equivalents (Insurance & Other) | $23.1 billion | $61.2 billion | See Note | See Note |
| Total Cash & T-Bills (Insurance & Other) | $135.2 billion | $129.0 billion | See Note | See Note |
| Shareholders' Equity | $415.2 billion | $424.8 billion | See Note | See Note |
Note: Cash and cash equivalents for Insurance and Other decreased from $61.2 billion at year-end 2019 to $23.1 billion at Q3 2020, largely due to the purchase of $114.1 billion in U.S. Treasury Bills. Total liquidity (Cash + T-Bills) increased to $135.2 billion.
Material Changes vs. Prior Period
- Investment Volatility: Q3 2020 net earnings were driven by a pre-tax investment gain of $31.6 billion, primarily unrealized gains on equity securities. This contrasts sharply with the first nine months of 2020, where net earnings were only $6.7 billion due to a $10.4 billion goodwill impairment charge recorded in Q2.
- Goodwill Impairment: In Q2 2020, the company recorded pre-tax goodwill and intangible asset impairment charges of approximately $10.6 billion, primarily related to Precision Castparts Corp. (PCC) due to the pandemic's impact on the aerospace industry. No such charges were recorded in Q3 2020.
- Operating Performance:
- Insurance: Underwriting produced a pre-tax loss of $291 million in Q3 2020 (vs. $581 million profit in Q3 2019), impacted by the GEICO Giveback program and pandemic-related claims. However, the first nine months showed a pre-tax underwriting profit of $1.2 billion.
- Railroad (BNSF): Operating revenues declined 14.1% in Q3 2020 due to lower shipping volumes from the pandemic, though costs were also reduced.
- Utilities & Energy: Earnings increased 18.4% in Q3 2020, driven by renewable energy tax credits and real estate brokerage growth.
- Manufacturing: Industrial products revenues fell 20.0% in Q3 2020, heavily impacted by PCC's aerospace segment.
- Share Repurchases: Berkshire repurchased $9.0 billion of its own stock in Q3 2020 and $15.7 billion for the first nine months of 2020.
Guidance, Outlook, and Risks
- Management Commentary: Management emphasizes that investment gains/losses are often meaningless for evaluating economic performance due to volatility. They maintain a focus on safety over yield for short-term investments, holding substantial cash and T-Bills.
- Outlook: The duration and extent of the pandemic's effects remain uncertain. GEICO's underwriting results are expected to be negatively affected in Q4 2020 and Q1 2021 due to the "Giveback" program. PCC is undertaking aggressive restructuring to align with reduced aircraft build rates.
- Risks:
- Pandemic Impact: Continued disruption to supply chains, workforce, and demand for products/services.
- Insurance Liabilities: Uncertainty regarding ultimate claim costs, particularly for legacy exposures and pandemic-related claims.
- Goodwill Impairment: Additional impairment charges may be required if the economic recovery is slower than estimated.
- Foreign Currency: Significant non-cash gains/losses on non-U.S. Dollar denominated debt.
Investor Verification Checklist
- Investment Portfolio Composition: Verify the concentration of equity holdings (approx. 70% in Apple, Bank of America, Coca-Cola, and American Express) and the impact of unrealized gains on reported earnings.
- Goodwill Impairment Details: Review the specific assumptions used for the $10 billion PCC impairment and the potential for further charges in Q4 2020.
- GEICO Underwriting Trends: Monitor the loss ratio and the impact of the "Giveback" program on future premium earnings and profitability.
- Liquidity Position: Confirm the total cash and U.S. Treasury Bill holdings ($135.2 billion) to assess the company's ability to fund operations and repurchases while maintaining the $20 billion liquidity floor.
- Debt Maturities: Review the schedule of debt maturities for BNSF and BHE, noting that Berkshire does not guarantee their debt.