BERKSHIRE HATHAWAY INC quarterly report, Q1 FY2020

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Berkshire Hathaway Inc. 10-Q Summary: Q1 2020

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2020. Berkshire Hathaway Inc. operates a diverse portfolio of businesses including insurance, railroad, utilities, energy, manufacturing, service, and retailing. The quarter was significantly impacted by the global spread of the COVID-19 pandemic, which began affecting operations in March 2020. Management noted that while essential businesses (railroad, utilities, insurance) continued to operate, many retail and service businesses faced closures or reduced demand.

Key Financial Metrics

  • Net Earnings (Loss): Reported a net loss attributable to Berkshire Hathaway shareholders of $49.7 billion (Q1 2019: Net earnings of $21.7 billion).
  • Total Revenues: $61.3 billion, a slight increase from $60.7 billion in Q1 2019.
  • Investment and Derivative Gains (Losses): A pre-tax loss of $70.3 billion, driven primarily by a $68.5 billion unrealized loss on equity securities due to market declines. This contrasts with a $20.3 billion gain in Q1 2019.
  • Operating Earnings: Excluding investment gains/losses, operating businesses generated positive earnings. Insurance underwriting earnings were $363 million (after-tax).
  • Liquidity: Cash, cash equivalents, and U.S. Treasury Bills held by insurance and other businesses totaled $124.7 billion (net of payables), including $105.5 billion in Treasury Bills.
  • Debt: Total notes payable and other borrowings were $104.2 billion ($37.5 billion for Insurance/Other; $66.7 billion for Railroad/Utilities/Energy).
  • Shareholders' Equity: Decreased to $371.6 billion from $424.8 billion at year-end 2019, primarily due to the unrealized investment losses.

Material Changes vs. Prior Period

  • Investment Portfolio: The fair value of equity securities dropped from $248.0 billion (Dec 31, 2019) to $180.8 billion (March 31, 2020), a decline of approximately $67.2 billion.
  • Insurance Underwriting: GEICO reported pre-tax underwriting earnings of $984 million (up from $770 million), aided by lower claim frequencies due to reduced driving during the pandemic. However, the Reinsurance Group reported a pre-tax loss of $489 million, including estimated COVID-19 related claims of $230 million.
  • Railroad (BNSF): Revenues decreased 6.0% to $5.4 billion due to lower shipping volumes (down 5.2%) caused by the pandemic. Pre-tax earnings declined 4.9% to $1.6 billion.
  • Utilities and Energy (BHE): After-tax earnings attributable to Berkshire shareholders decreased 7.3% to $561 million. Real estate brokerage earnings improved significantly due to favorable interest rates.
  • Manufacturing and Retail: Earnings decreased 7.4% year-over-year. Retailing businesses faced temporary closures, while manufacturing saw declines in aerospace (PCC) and industrial products due to the pandemic and the Boeing 737 MAX suspension.
  • Accounting Changes: Adopted ASC 326 (Credit Losses) on Jan 1, 2020, resulting in a $388 million charge to retained earnings, primarily related to manufactured housing loans.

Guidance, Outlook, and Risks

  • Outlook: Management stated that the duration and extent of the pandemic's effects cannot be reasonably estimated. They anticipate adverse effects on nearly all operations in the second quarter of 2020. Revenues for essential businesses slowed considerably in April.
  • Liquidity Strategy: Berkshire maintains a policy of safety over yield for short-term investments. The company holds ample liquidity to withstand economic volatility. They do not expect to repurchase stock if it reduces consolidated cash and Treasury holdings below $20 billion.
  • Capital Allocation: In April 2020, Berkshire issued approximately $1.8 billion in senior notes (Yen-denominated) and BNSF issued $575 million in debentures. BHE issued $1.0 billion in term debt.
  • Risks: Key risks include the severity and duration of the COVID-19 pandemic, potential goodwill impairment due to economic uncertainty, credit losses from customers failing to meet obligations, and volatility in equity markets affecting reported earnings.
  • Unusual Items: The massive unrealized investment loss is a non-cash accounting item driven by GAAP requirements to mark equity securities to market. Management considers these fluctuations "meaningless" for evaluating long-term economic performance.

Investor Verification Checklist

  • Verify the distinction between operating earnings (positive) and reported net loss (negative) driven by unrealized investment mark-to-market adjustments.
  • Confirm the cash and Treasury Bill balance of $124.7 billion to assess liquidity resilience against potential future credit losses or operational downturns.
  • Review the GEICO "Giveback" program details ($2.5 billion in estimated premium credits) and its impact on future underwriting margins.
  • Monitor the goodwill impairment assessment for reporting units where fair value is close to carrying value, given the economic uncertainty.
  • Track the credit loss provisions for manufactured housing loans and receivables, which increased due to the adoption of ASC 326 and pandemic-related economic stress.
  • Check the derivative contract liabilities (equity index put options), which increased to $2.4 billion, reflecting market declines.