Business Context and Reporting Period
This summary covers the Form 10-Q filed by Berkshire Hathaway Inc. for the quarterly period ended June 30, 2013. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The reporting period reflects significant capital allocation activities, including a major investment in H.J. Heinz Holding Corporation and the acquisition of remaining noncontrolling interests in several subsidiaries.
Key Financial Metrics
| Metric | Q2 2013 | YTD 2013 | YTD 2012 |
|---|---|---|---|
| Total Revenues | $44,693 million | $88,560 million | $76,693 million |
| Net Earnings (Attributable to Berkshire) | $4,541 million | $9,433 million | $6,353 million |
| Net Earnings Per Share (Class A equiv.) | $2,763 | $5,740 | $3,847 |
| Operating Cash Flows (YTD) | $12,911 million | ||
| Investing Cash Flows (YTD) | $(22,463) million | ||
| Cash and Cash Equivalents (Total) | $35,695 million (as of June 30, 2013) | ||
| Total Shareholders' Equity | $204,988 million (as of June 30, 2013) | ||
| Total Debt (Notes Payable & Borrowings) | $63,953 million (as of June 30, 2013) |
Material Changes vs. Prior Period
- Profitability Surge: Net earnings attributable to Berkshire increased 46% year-over-year for the first six months ($9.4 billion vs. $6.4 billion), driven primarily by investment and derivative gains.
- Derivative Gains: The company recorded pre-tax derivative gains of $1.7 billion for the first six months of 2013, a significant reversal from the $66 million loss in the same period in 2012. This was largely due to favorable changes in the fair value of equity index put option contracts.
- Investment Portfolio: Equity securities increased to $101.9 billion from $86.5 billion at year-end 2012. Unrealized gains on equity securities were substantial, contributing to a $11.1 billion increase in accumulated other comprehensive income.
- Insurance Underwriting: The insurance group generated a pre-tax underwriting gain of $2.2 billion for the first six months of 2013, compared to $1.0 billion in 2012. GEICO and the Berkshire Hathaway Reinsurance Group (BHRG) were key contributors.
- Capital Deployment: Cash and cash equivalents decreased by approximately $11.3 billion during the first six months, primarily due to a $12.25 billion investment in H.J. Heinz Holding Corporation and $2.3 billion used to acquire noncontrolling interests in subsidiaries (Marmon and Iscar).
Guidance, Outlook, and Risks
- Management Commentary: Management emphasized that periodic investment gains/losses and derivative fluctuations often have little predictive value for future economic performance. The focus remains on maintaining extraordinary capital strength and liquidity.
- Share Repurchases: The Board authorized repurchases of Class A and Class B shares at prices no higher than a 20% premium over book value, provided consolidated cash holdings remain above $20 billion. No repurchases were made in the first six months of 2013.
- Future Acquisitions: MidAmerican Energy announced an agreement to acquire NV Energy for approximately $5.6 billion, expected to close in Q1 2014. Berkshire is contractually obligated to acquire the remaining noncontrolling interests in Marmon by March 31, 2014.
- Risks and Contingencies:
- Derivative Exposure: Significant liabilities exist for equity index put options and credit default contracts. While no new contracts have been written since 2008/2009, fair value changes can cause significant earnings volatility.
- Insurance Reserves: Estimated liabilities for unpaid losses are $64.4 billion; small percentage changes in these estimates could materially impact earnings.
- Regulatory Environment: The Dodd-Frank Act and ongoing rulemaking could impact financial operations, though no material impact is currently expected.
Key Facts for Investor Verification
- Heinz Investment Structure: Verify the terms of the $12.25 billion investment in Heinz Holding, specifically the 9% cumulative preferred stock and the 50% common stock ownership shared with 3G Capital.
- Derivative Liability Valuation: Review the Level 3 fair value measurements for equity index put options ($5.9 billion liability) and credit default contracts, noting the reliance on unobservable inputs and valuation models.
- Float Cost: Confirm the cost of float remains negative (a gain) due to strong underwriting performance, which is a key driver of insurance profitability.
- Noncontrolling Interest Acquisitions: Verify the accounting treatment of the $1.2 billion reduction in shareholders' equity resulting from the acquisition of noncontrolling interests in Marmon and Iscar.
- Capital Expenditures: Monitor the forecasted $5.4 billion in capital expenditures for BNSF and MidAmerican for the remainder of 2013 and their funding sources (operating cash flow vs. debt).