Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2013
Overview: Berkshire Hathaway is a holding company with diverse operations including insurance (GEICO, General Re, BHRG, Primary Group), railroad (BNSF), utilities and energy (MidAmerican), and a wide array of manufacturing, service, and retailing businesses. The company operates on a decentralized basis with minimal corporate involvement in day-to-day operations.
Key Financial Metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total Revenues | $182,150 million | $162,463 million |
| Net Earnings (Attributable to Berkshire) | $19,476 million | $14,824 million |
| Net Earnings Per Share (Class A equiv.) | $11,850 | $8,977 |
| Total Assets | $484,931 million | $427,452 million |
| Shareholders' Equity | $221,890 million | $187,647 million |
| Cash and Cash Equivalents | $48,186 million | $46,992 million |
| Notes Payable and Borrowings | $72,224 million | $62,736 million |
| Operating Cash Flow | $27,704 million | $20,950 million |
Material Changes vs. Prior Period
- Earnings Growth: Net earnings attributable to Berkshire shareholders increased 31% to $19.5 billion, driven by a $4.3 billion after-tax gain from investments and derivatives (compared to $2.2 billion in 2012) and improved operating earnings across most segments.
- Insurance Underwriting: Pre-tax underwriting gains rose to $3.1 billion from $1.6 billion in 2012. GEICO reported a pre-tax gain of $1.1 billion, and BHRG reported $1.3 billion. Catastrophe losses were lower in 2013 ($436 million pre-tax) compared to 2012 ($1.1 billion pre-tax, largely Hurricane Sandy).
- Investment Activity: Significant gains included $2.1 billion from GE and Goldman Sachs warrants and a $680 million gain from the repurchase of Wrigley subordinated notes. Equity securities fair value increased to $115.5 billion from $87.1 billion.
- Acquisitions: Major acquisitions included NV Energy (MidAmerican subsidiary) for $5.6 billion and H.J. Heinz Holding Corporation (joint venture with 3G Capital) for $12.25 billion. Berkshire also acquired remaining noncontrolling interests in Marmon and Iscar.
- Segment Performance:
- BNSF: Revenues increased 5.7% to $22.0 billion; net earnings rose to $3.8 billion.
- MidAmerican: Revenues increased to $12.7 billion; net earnings attributable to Berkshire rose to $1.5 billion.
- Manufacturing/Service/Retailing: Earnings increased 14.4% to $4.2 billion, aided by the Lubrizol acquisition and bolt-on acquisitions.
Guidance, Outlook, and Risks
- Capital Allocation: Management maintains a stock repurchase program (up to 20% premium over book value) but made no repurchases in 2013. The program is indefinite and contingent on cash levels remaining above $20 billion.
- Investment Outlook: Management expects investment income to decline in 2014 compared to 2013 due to the redemption of high-yielding fixed maturity investments and lower yields on available opportunities. The company prioritizes liquidity and safety over yield.
- Key Risks:
- Insurance: Significant underwriting losses from single catastrophic events (e.g., earthquakes, hurricanes) or terrorism. Estimation errors in loss reserves could materially impact future earnings.
- Investments: Concentration risk in equity securities (55% in four companies) and potential losses from derivative contracts (equity index put options and credit default swaps).
- Regulatory: Changes in laws affecting insurance, railroad, and utility operations, including environmental regulations and climate change policies impacting MidAmerican.
- Key Personnel: Dependence on Warren Buffett (CEO) and Charlie Munger (Vice Chairman) for major capital allocation decisions.
Investor Verification Checklist
- Insurance Reserves: Verify the adequacy of the $64.9 billion in gross unpaid losses and loss adjustment expenses, noting the inherent uncertainty in long-tail casualty claims.
- Derivative Liabilities: Review the $5.3 billion in derivative contract liabilities (primarily equity index put options) and the potential for future cash settlement obligations.
- Investment Concentration: Assess the impact of the top four equity holdings (American Express, Wells Fargo, IBM, Coca-Cola) which represent 55% of the equity portfolio.
- Debt Maturities: Confirm the company's ability to service $72.2 billion in total debt, with $8.8 billion due in 2014, particularly for BNSF and MidAmerican.
- Float Cost: Monitor the cost of insurance float, which remains negative (profitable) but is subject to volatility from catastrophe events.