Berkshire Hathaway Inc. 10-Q Summary: Q3 2010
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2010. The period was defined by the completion of the acquisition of Burlington Northern Santa Fe Corporation (BNSF) on February 12, 2010, for approximately $26.5 billion. BNSF's results are fully consolidated beginning on that date. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | 9 Months 2010 | 9 Months 2009 |
|---|---|---|---|---|
| Total Revenues | $36,274 million | $29,904 million | $100,020 million | $82,295 million |
| Net Earnings (Attributable to Berkshire) | $2,989 million | $3,238 million | $8,590 million | $4,999 million |
| Net Earnings Per Share (Class A equiv.) | $1,814 | $2,087 | $5,265 | $3,223 |
| Operating Cash Flows (9 Months) | $13,831 million (vs. $12,026 million in 2009) | |||
| Cash and Cash Equivalents | $34,461 million (as of Sept 30, 2010) | |||
| Total Shareholders' Equity | $154,597 million (as of Sept 30, 2010) |
Material Changes vs. Prior Period
- BNSF Acquisition Impact: The acquisition of BNSF contributed $10,558 million in revenues and $2,577 million in pre-tax earnings for the nine months ended September 30, 2010. A one-time holding gain of approximately $979 million was recognized in Q1 2010 related to the re-measurement of previously held BNSF shares.
- Insurance Underwriting: Pre-tax underwriting gains were $305 million in Q3 2010 compared to $534 million in Q3 2009. GEICO reported a pre-tax underwriting gain of $289 million. The Berkshire Hathaway Reinsurance Group (BHRG) reported a loss of $237 million, impacted by catastrophe losses (Chilean earthquake, BP Deepwater Horizon) and foreign currency transaction losses.
- Investment and Derivative Gains/Losses: Net after-tax investment and derivative gains were $202 million in Q3 2010, down from $1,183 million in Q3 2009. This decline was driven by a $700 million increase in the estimated liability of equity index put option contracts, partially offset by gains from credit default contracts and realized investment gains.
- Manufacturing and Retailing: Earnings from manufacturing, service, and retailing businesses improved significantly, rising to $645 million in Q3 2010 from $336 million in Q3 2009, reflecting economic stabilization and improved operating results at companies like NetJets and TTI.
Guidance, Outlook, and Risks
- Outlook: Management expects economic conditions to improve over time but notes that the ultimate impact of new financial regulations (Dodd-Frank Act) remains uncertain. The company anticipates continued capital expenditures for BNSF and MidAmerican Energy, funded by operating cash flows and debt.
- Derivative Risks: As of September 30, 2010, the net liability for equity index put option and credit default contracts was approximately $10.7 billion. While no collateral is currently required for most contracts, a downgrade in Berkshire's credit rating could trigger collateral posting requirements of up to $1.1 billion.
- Legal Proceedings: General Re settled investigations with the DOJ and SEC regarding non-traditional products (AIG Transaction), paying $19.5 million to the DOJ and $12.2 million to the SEC. Management does not believe routine litigation will have a material effect on financial condition.
- Float: Insurance float approximated $66 billion at September 30, 2010. The cost of float remained negative (a benefit) as the insurance business generated underwriting gains.
Investor Verification Checklist
- BNSF Integration: Verify the ongoing capital expenditure requirements and debt service obligations associated with the BNSF acquisition.
- Derivative Liabilities: Monitor the fair value changes of equity index put options and credit default contracts, which caused significant volatility in Q3 earnings.
- Insurance Reserves: Review the adequacy of loss reserves, particularly given the impact of recent catastrophes (Chile, BP) on BHRG results.
- Investment Portfolio: Assess the unrealized losses in the equity portfolio (notably Wells Fargo) and the company's stated intent to hold these securities until recovery.
- Regulatory Impact: Track the implementation of the Dodd-Frank Act and its potential effect on derivative collateral requirements and insurance operations.