Business Context and Reporting Period
This summary covers the Form 10-Q filed by Berkshire Hathaway Inc. for the quarterly period ended September 30, 2014. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The filing includes unaudited consolidated financial statements and management's discussion and analysis of financial condition and results of operations.
Key Financial Metrics
| Metric | Third Quarter 2014 | First Nine Months 2014 | First Nine Months 2013 |
|---|---|---|---|
| Total Revenues | $51,199 million | $146,414 million | $135,101 million |
| Net Earnings (Total) | $4,721 million | $15,952 million | $14,782 million |
| Net Earnings Attributable to Berkshire | $4,617 million | $15,717 million | $14,486 million |
| Net Earnings Per Share (Class A equiv.) | $2,811 | $9,562 | $8,814 |
| Cash and Cash Equivalents | $62,380 million (Sep 30, 2014) | $62,380 million (Sep 30, 2014) | $42,079 million (Sep 30, 2013) |
| Total Shareholders' Equity | $240,302 million | $240,302 million | $211,431 million |
| Operating Cash Flows (9 months) | N/A | $24,157 million | $20,737 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues for the first nine months of 2014 increased by $11.3 billion (8.4%) compared to the same period in 2013. This was driven by growth in the Insurance group, Railroad, and Utilities and Energy segments.
- Earnings Increase: Net earnings attributable to Berkshire shareholders rose by $1.2 billion (8.5%) year-over-year for the first nine months.
- Investment Gains/Losses: Investment gains for the first nine months of 2014 were $3.0 billion, compared to $2.5 billion in 2013. This included non-cash holding gains of approximately $2.1 billion from the exchange of Phillips 66 and Graham Holdings Company stock for subsidiaries. These gains were partially offset by an other-than-temporary impairment (OTTI) charge of $678 million related to Tesco PLC in the third quarter.
- Derivative Gains: Derivative contracts produced pre-tax gains of $649 million for the first nine months of 2014, a decrease from $2.1 billion in the same period of 2013.
- Insurance Underwriting: The insurance group generated a pre-tax underwriting gain of $2.3 billion for the first nine months of 2014, compared to $2.5 billion in 2013. No significant catastrophe events occurred in the first nine months of 2014, whereas 2013 included approximately $425 million in pre-tax catastrophe losses.
- Utilities and Energy: Earnings increased significantly due to the full-year impact of the NV Energy acquisition (completed December 2013) and higher earnings from other energy businesses.
Guidance, Outlook, and Risks
- Capital Allocation: Management reiterated that maintaining ample liquidity is paramount. The company holds approximately $55.8 billion in cash and cash equivalents within its Insurance and Other segment. The Board has authorized a stock repurchase program at prices no higher than a 20% premium over book value, provided consolidated cash holdings do not fall below $20 billion. No repurchases were made in the first nine months of 2014.
- Acquisitions:
- Van Tuyl Group: Agreed to acquire a controlling interest in the Van Tuyl Group (auto dealerships) for an undisclosed amount, expected to close in Q1 2015.
- AltaLink: Agreed to acquire 100% of AltaLink, L.P. (regulated transmission business) for approximately $2.9 billion, expected to close in Q4 2014.
- Burger King/Tim Hortons: Entered an agreement to acquire $3 billion of perpetual preferred shares and warrants in the merged entity, contingent on the merger closing in Q4 2014 or early 2015.
- Railroad Operations: BNSF reported that service levels remain below internal standards due to severe winter weather and other service-related challenges, leading to operating inefficiencies and potential market share loss. Management is investing in capacity and hiring to address these issues.
- Risks:
- Investment Volatility: Realized investment gains/losses and derivative gains/losses cause significant volatility in periodic earnings and are not considered predictive of economic performance.
- Insurance Reserves: A small percentage change in the estimated liabilities for unpaid losses ($71.2 billion) could materially affect periodic earnings.
- Goodwill Impairment: Goodwill of $58.7 billion is subject to impairment testing; changes in facts and circumstances could lead to material charges.
- Derivative Contracts: Significant exposure to equity index put options and credit default contracts, valued using models with unobservable inputs, creates valuation uncertainty.
Key Facts for Investor Verification
- Cash Position: Verify the total cash and cash equivalents of $62.4 billion, noting the significant increase from $42.1 billion in the prior year period.
- Investment Portfolio: Review the composition of equity securities ($116.4 billion) and fixed maturity securities ($28.7 billion), noting the concentration in four major holdings (American Express, Wells Fargo, IBM, Coca-Cola) representing 58% of the equity portfolio's fair value.
- OTTI Charge: Confirm the $678 million other-than-temporary impairment charge related to Tesco PLC and its impact on third-quarter earnings.
- Non-Cash Gains: Understand that a significant portion of investment gains ($2.1 billion) resulted from non-cash exchanges of stock for subsidiaries, which are tax-free reorganizations.
- Debt Maturities: Note that $1.7 billion of parent company senior notes mature in February 2015, and management intends to issue new debt to replace maturing obligations.
- Service Issues at BNSF: Monitor future reports on BNSF's ability to resolve service disruptions and improve efficiency, as this impacts railroad earnings.