Business Context and Reporting Period
This Form 10-Q covers Berkshire Hathaway Inc. for the quarterly period ended September 30, 2003. The company operates a diversified portfolio including insurance (GEICO, General Re, BHRG), manufacturing, retail, and finance businesses. The filing highlights significant liquidity growth and major acquisitions, including McLane Company and Clayton Homes.
Key Financial Metrics
| Metric | Q3 2003 | Q3 2002 | 9 Months 2003 | 9 Months 2002 |
|---|---|---|---|---|
| Total Revenues | $18,232 million | $10,603 million | $44,004 million | $30,139 million |
| Net Earnings | $1,806 million | $1,141 million | $5,765 million | $3,102 million |
| EPS (Class A equiv.) | $1,176 | $744 | $3,755 | $2,024 |
| Operating Cash Flow (9mo) | $6,020 million (vs. $9,310 million in 2002) | |||
| Cash & Equivalents (Total) | $30,745 million (Sep 30, 2003) vs. $12,748 million (Dec 31, 2002) | |||
| Shareholders' Equity | $71,968 million (Sep 30, 2003) vs. $64,037 million (Dec 31, 2002) | |||
| Total Debt (Excl. Finance Biz) | $4,148 million (Sep 30, 2003) vs. $4,807 million (Dec 31, 2002) |
Material Changes vs. Prior Period
- Revenue Surge: Revenues increased significantly due to the inclusion of McLane Company (acquired May 2003) and Clayton Homes (acquired August 2003), as well as strong growth in GEICO premiums.
- Profitability: Net earnings for the first nine months nearly doubled compared to 2002, driven by a $1.884 billion increase in realized investment gains and improved underwriting results.
- Liquidity: Cash and cash equivalents more than doubled to over $30 billion, reflecting strong operating cash flows and a strategic shift toward holding cash due to lower interest rates.
- Underwriting: The insurance group reported a pre-tax underwriting gain of $1.087 billion for the first nine months of 2003, a significant improvement from a $78 million loss in the same period in 2002.
Guidance, Outlook, and Risks
- Outlook: Management expects GEICO policies-in-force to continue growing. However, float growth is not expected to be significant for the remainder of 2003. The cost of float is expected to remain negative (beneficial) absent major catastrophes.
- Investment Strategy: The company is holding large cash balances ($25+ billion in low-yielding short-term instruments) due to the lack of attractive investment opportunities at current market prices.
- Risks:
- Catastrophe Exposure: BHRG's maximum probable gross loss from a single event is estimated at $5.3 billion. Periodic results remain subject to extreme volatility.
- Reserve Uncertainty: A 5% increase in net loss reserve estimates would result in a $2.1 billion charge to pre-tax earnings.
- Accounting Changes: Berkshire will adopt FASB Interpretation No. 46 (FIN 46) by December 31, 2003, which will likely require the consolidation of Value Capital L.P., increasing consolidated assets and liabilities by approximately $23 billion with no effect on net earnings.
Investor Verification Checklist
- Acquisition Integration: Verify the full-year contribution of McLane Company and Clayton Homes to revenue and earnings.
- Investment Portfolio: Monitor the deployment of the $30 billion cash pile and the impact of low interest rates on investment income.
- Insurance Reserves: Track changes in loss reserve estimates, particularly for General Re's prior-year casualty claims and BHRG's retroactive reinsurance amortization.
- FIN 46 Impact: Confirm the final impact of consolidating Value Capital L.P. on the balance sheet in the upcoming 10-K.
- Realized Gains: Assess the sustainability of earnings given the heavy reliance on realized investment gains ($1.884 billion in 9 months) versus operating earnings.