Berkshire Hathaway Inc. 2011 10-K Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2011. Berkshire Hathaway Inc. is a holding company with a highly decentralized management structure, operating diverse businesses including insurance (GEICO, General Re, BHRG), railroad (BNSF), utilities and energy (MidAmerican), and various manufacturing, service, and retailing operations. The company employs approximately 271,000 people worldwide.
Key Financial Metrics
| Metric | 2011 | 2010 |
|---|---|---|
| Total Revenues | $143.7 billion | $136.2 billion |
| Net Earnings (Attributable to Berkshire) | $10.3 billion | $13.0 billion |
| Net Earnings Per Share (Class A equiv.) | $6,215 | $7,928 |
| Total Assets | $392.6 billion | $372.2 billion |
| Shareholders' Equity | $164.9 billion | $157.3 billion |
| Cash and Cash Equivalents | $37.3 billion | $38.2 billion |
| Notes Payable and Borrowings | $60.4 billion | $58.6 billion |
Note: Net earnings declined primarily due to a shift from investment gains in 2010 to investment and derivative losses in 2011.
Material Changes vs. Prior Period
- Insurance Underwriting: Pre-tax underwriting gain dropped significantly from $2.0 billion in 2010 to $248 million in 2011. This was driven by approximately $2.6 billion in pre-tax catastrophe losses (earthquakes in Japan/New Zealand, weather events) and increased loss severities at GEICO.
- Investment and Derivative Results: The company reported a net loss of $830 million in 2011 compared to a gain of $2.3 billion in 2010. This included $1.8 billion in pre-tax losses on equity index put option contracts and $590 million in other-than-temporary impairment (OTTI) losses on investments.
- Operating Segments:
- BNSF (Railroad): Revenues increased 16% to $19.5 billion, and earnings rose to $2.97 billion, driven by higher volumes and fuel surcharges.
- MidAmerican (Utilities/Energy): Earnings increased to $1.2 billion, with Northern Powergrid (UK) showing significant growth due to higher distribution revenues and currency effects.
- Manufacturing/Service/Retailing: Earnings increased to $3.0 billion, aided by the acquisition of Lubrizol (Sept 2011) and improved demand in several sectors.
- Acquisitions: Completed the acquisition of The Lubrizol Corporation for approximately $8.7 billion in cash. Increased ownership in Marmon Holdings to 80.2%.
Guidance, Outlook, and Risks
- Stock Repurchases: The Board authorized a repurchase program for Class A and Class B shares at prices no higher than a 10% premium over book value. Repurchases will not reduce consolidated cash equivalents below $20 billion.
- Capital Allocation: Management emphasized maintaining financial strength and redundant liquidity. Future capital expenditures for BNSF and MidAmerican are forecasted at approximately $3.9 billion and $3.8 billion, respectively, for 2012.
- Key Risks:
- Insurance: Significant exposure to catastrophe losses and estimation errors in loss reserves ($64 billion in unpaid losses).
- Derivatives: Potential for significant future cash settlements on equity index put options (liability of $8.5 billion) and credit default contracts.
- Key Personnel: Dependence on Warren Buffett (CEO) and Charlie Munger (Vice Chairman) for major investment and capital allocation decisions.
- Regulatory: Exposure to changing regulations in insurance, rail, and utilities sectors, including environmental and climate change policies.
Investor Verification Checklist
- Verify the adequacy of the $64 billion in property and casualty loss reserves, particularly regarding retroactive reinsurance contracts and catastrophe exposure.
- Review the valuation assumptions for the $8.5 billion liability associated with equity index put option contracts and the potential for future cash outflows.
- Monitor the impact of the new accounting standard (ASU 2010-26) on GEICO's deferred advertising costs, expected to increase underwriting expenses in early 2012.
- Assess the integration and performance of the newly acquired Lubrizol Corporation and the impact of cotton price volatility on the Fruit of the Loom apparel business.
- Confirm the company's ability to maintain cash equivalents above the $20 billion threshold while executing the stock repurchase program.