Berkshire Hathaway Inc. 10-Q Summary: Q3 2009
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2009. Berkshire Hathaway operates as a diversified holding company with three primary segments: Insurance and Other, Utilities and Energy (MidAmerican), and Finance and Financial Products. The company reported strong liquidity and a significant increase in shareholders' equity, driven largely by unrealized investment gains and improved market conditions compared to the prior year.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | YTD 9M 2009 | YTD 9M 2008 |
|---|---|---|---|---|
| Revenues | $29,904 million | $27,926 million | $82,295 million | $83,194 million |
| Net Earnings (Attributable to Berkshire) | $3,238 million | $1,057 million | $4,999 million | $4,877 million |
| EPS (Class A Equivalent) | $2,087 | $682 | $3,223 | $3,149 |
| Operating Cash Flow (YTD) | $12,026 million (2009) vs $8,428 million (2008) | |||
| Cash & Equivalents | $26,919 million (Total Consolidated) | |||
| Total Assets | $292,010 million | |||
| Shareholders' Equity | $126,073 million (Berkshire Shareholders) |
Material Changes vs. Prior Period
- Profitability Surge: Net earnings attributable to Berkshire for Q3 2009 increased 206% compared to Q3 2008, primarily due to a reversal in derivative and investment losses.
- Derivative Gains: The Finance segment recorded derivative gains of $1.732 billion in Q3 2009, compared to losses of $1.261 billion in the same period in 2008. This was driven by narrowing credit default spreads and gains on equity index put options.
- Investment Portfolio: Equity securities fair value increased to $55.084 billion from $49.073 billion year-over-year. Unrealized gains on fixed maturity securities improved significantly as credit spreads tightened.
- Operating Segments:
- Insurance: Underwriting gains were $363 million (Q3 2009) vs $81 million (Q3 2008). GEICO premiums grew 9.5%, though loss ratios increased slightly due to higher claim frequencies.
- Manufacturing/Service: Revenues declined across most sectors (e.g., Marmon, Shaw, NetJets) due to the ongoing global recession, with NetJets reporting significant pre-tax losses due to asset writedowns.
- Utilities: Revenues declined due to lower energy prices and volumes, though earnings remained relatively stable.
Guidance, Outlook, and Risks
- Acquisition Activity: On November 3, 2009 (subsequent to period end), Berkshire announced a definitive agreement to acquire the remaining 77.4% of Burlington Northern Santa Fe (BNSF) for approximately $26.4 billion. The deal is expected to close in Q1 2010.
- Capital Allocation: Management continues to deploy capital into high-yield investments (e.g., Swiss Re, Dow Chemical) to generate income exceeding short-term rates. Berkshire maintains a policy of holding significant cash reserves to capitalize on market dislocations.
- Risks and Contingencies:
- Derivative Volatility: Earnings remain highly sensitive to changes in the fair value of long-duration equity index put options and credit default contracts. Management notes these periodic gains/losses may not reflect ultimate economic outcomes.
- Legal Proceedings: Ongoing investigations by the SEC and DOJ regarding "non-traditional products" (finite reinsurance) involving General Re. While no material loss is currently estimated, the outcome remains uncertain.
- Economic Recession: Continued weakness in consumer spending and industrial activity negatively impacts manufacturing, service, and retailing segments.
Investor Verification Checklist
- BNSF Acquisition Funding: Verify the impact of the $26.4 billion BNSF acquisition on future debt levels and liquidity, noting the plan to fund 50% of the cash portion with borrowings.
- Derivative Liability Exposure: Review the aggregate intrinsic value of equity index put options ($6.3 billion as of Sept 30, 2009) and potential collateral posting requirements if credit ratings are downgraded.
- Insurance Loss Reserves: Monitor the $59.6 billion in unpaid loss reserves; small percentage changes in estimates can materially impact earnings.
- NetJets Restructuring: Assess the timeline for NetJets to return to profitability following significant asset writedowns and downsizing costs in 2009.
- Investment Impairments: Track the status of unrealized losses on equity securities (e.g., Kraft Foods, Wells Fargo) to determine if future other-than-temporary impairment (OTTI) charges are likely.