Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2017
Overview: Berkshire Hathaway operates a diversified portfolio of businesses including insurance, railroad, utilities, energy, manufacturing, service, retailing, and finance. The company reported net earnings attributable to shareholders of $4.26 billion for the second quarter and $8.32 billion for the first six months of 2017.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | 6 Months 2017 | 6 Months 2016 |
|---|---|---|---|---|
| Total Revenues | $57,518 million | $54,254 million | $122,705 million | $106,417 million |
| Net Earnings (Total) | $4,355 million | $5,082 million | $8,494 million | $10,739 million |
| Net Earnings Attributable to Shareholders | $4,262 million | $5,001 million | $8,322 million | $10,590 million |
| Comprehensive Income (Shareholders) | $7,844 million | $4,324 million | $17,676 million | $7,385 million |
| Operating Cash Flows (6 Months) | $26,627 million (vs. $15,264 million in 2016) | |||
| Cash & Equivalents (Total) | $26,418 million (as of June 30, 2017) | |||
| Shareholders' Equity | $300,659 million (as of June 30, 2017) |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings attributable to shareholders decreased 14.8% in Q2 and 21.4% for the first six months compared to 2016. This was primarily driven by lower investment and derivative gains and underwriting losses.
- Insurance Underwriting: The insurance group reported a pre-tax underwriting loss of $24 million in Q2 and $403 million for the first six months, compared to gains of $510 million and $858 million in the prior year periods. Losses were driven by foreign currency exchange rate impacts, higher catastrophe losses, and increased deferred charge amortization from retroactive reinsurance contracts.
- Investment Gains: Pre-tax investment gains were $290 million in Q2 2017 and $605 million for the first six months, significantly lower than the $643 million and $2.49 billion reported in 2016. The 2016 figures included a $1.1 billion non-cash gain from the Duracell acquisition and a $610 million gain from the redemption of Kraft Heinz preferred stock.
- Operating Segments:
- Railroad (BNSF): Earnings increased 24.2% in Q2 and 15.5% for the first six months due to higher unit volumes and revenue per car.
- Utilities & Energy: Earnings increased due to lower effective tax rates.
- Manufacturing: Earnings increased 15% in Q2 and 8% for the first six months, aided by acquisitions (PCC, Duracell) despite some impairment charges.
Guidance, Outlook, and Risks
- Accounting Changes: Berkshire will adopt new accounting standards (ASU 2016-01) on January 1, 2018, requiring equity securities to be measured at fair value with changes recognized in net income. This is expected to significantly increase the volatility of reported periodic earnings, though it will not affect total shareholders' equity.
- Capital Allocation: The Board has authorized a stock repurchase program at prices no higher than a 20% premium over book value, provided consolidated cash and U.S. Treasury Bills remain above $20 billion. No repurchases were made in the first six months of 2017.
- Major Acquisitions:
- Oncor: Berkshire Hathaway Energy agreed to acquire 80.03% of Oncor Electric Delivery Company for $9 billion, expected to close in Q4 2017.
- MLMIC: Expected to complete the acquisition of Medical Liability Mutual Insurance Company in late 2017.
- Risks:
- Insurance Liabilities: Estimated unpaid loss liabilities are approximately $95 billion; small percentage changes in estimates can materially impact earnings.
- Derivatives: Equity index put option liabilities are valued at $2.49 billion. Changes in market volatility and index values cause significant earnings volatility.
- Goodwill: Goodwill of $80.2 billion is subject to impairment testing; impairment charges could materially affect earnings.
Investor Verification Checklist
- Underwriting Losses: Verify the specific impact of the AIG retroactive reinsurance agreement and foreign currency fluctuations on the $403 million underwriting loss for the first six months.
- Investment Portfolio: Review the composition of the $135.4 billion equity securities portfolio, noting the concentration in five major holdings (Apple, Wells Fargo, Coca-Cola, American Express, IBM).
- Float Cost: Confirm the average cost of float was approximately 0.4% for the first six months of 2017.
- Future Volatility: Assess the potential impact of the 2018 accounting standard change on future quarterly earnings volatility.
- Debt Maturities: Review the maturity schedule for Berkshire's Euro-denominated debt and subsidiary borrowings (BNSF, BHE, BHFC) to understand refinancing needs.