Berkshire Hathaway Inc. 10-Q Summary: Q3 2016
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2016. Berkshire Hathaway operates a diversified portfolio including insurance (GEICO, General Re, BHRG), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), manufacturing (including recent acquisitions Precision Castparts Corp. and Duracell), service and retailing, and finance/financial products.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total Revenues | $59,068M | $58,989M | $165,931M | $159,001M |
| Net Earnings (Attributable to BH) | $7,198M | $9,428M | $17,788M | $18,605M |
| EPS (Class A Equivalent) | $4,379 | $5,737 | $10,822 | $11,323 |
| Operating Cash Flow (9M) | $25,171M (vs $24,155M in 2015) | |||
| Cash & Equivalents (Total) | $84,835M (vs $71,730M at Dec 31, 2015) | |||
| Total Debt (Notes Payable) | $101,798M (vs $84,289M at Dec 31, 2015) | |||
| Shareholders' Equity | $269,264M (vs $255,550M at Dec 31, 2015) |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings attributable to shareholders decreased 23.6% in Q3 and 4.4% in the first nine months compared to 2015. The primary driver was a significant reduction in investment and derivative gains/losses.
- Investment Gains: Pre-tax investment gains dropped from $8.3B in Q3 2015 to $3.2B in Q3 2016. The 2015 figure included a $6.8B non-cash holding gain from the Kraft Heinz merger. 2016 gains included $2.4B from the sale of Wrigley preferred stock and $1.1B from the P&G/Duracell exchange.
- Acquisitions: The inclusion of Precision Castparts Corp. (PCC) and Duracell significantly boosted manufacturing revenues and earnings, offsetting declines in other segments.
- Railroad Performance: BNSF revenues and earnings declined due to a 6.6% drop in unit volume year-to-date, driven by lower coal and petroleum product shipments.
- Insurance Underwriting: Pre-tax underwriting gains decreased to $409M in Q3 2016 from $643M in Q3 2015, largely due to lower gains from prior year loss development in the reinsurance group.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that investment and derivative gains/losses are often meaningless for evaluating economic performance due to volatility. They emphasize maintaining ample liquidity (cash above $20B) and safety over yield.
- Capital Allocation: The company has an open-ended share repurchase program but made no repurchases in the first nine months of 2016. Capital was deployed for the PCC acquisition ($32.7B) and Duracell acquisition ($4.2B).
- Derivative Risks: Berkshire holds long-duration equity index put option contracts with a fair value liability of $3.97B. While no collateral is currently required, a downgrade in credit ratings could trigger collateral posting requirements of up to $1.1B.
- Accounting Changes: The company is evaluating the impact of new FASB standards (ASU 2016-01) regarding equity investments, which may significantly impact periodic net earnings upon adoption in 2018 by moving unrealized gains/losses from equity to earnings.
- Contingencies: The company is pursuing the acquisition of Medical Liability Mutual Insurance Company (MLMIC), expected to close in late 2017.
Key Facts for Investor Verification
- IBM Investment: Berkshire holds a significant unrealized loss ($941M) on its IBM common stock investment, which management deems temporary despite the loss position lasting over 12 months.
- Debt Maturities: Over the next 12 months, $1.1B of parent company senior notes and $2.8B of Berkshire Hathaway Finance Corporation (BHFC) notes will mature.
- Float Cost: The cost of insurance float remained negative (profitable) as underwriting gains were generated across the period.
- Goodwill: Total goodwill increased to $79.4B, largely due to PCC and Duracell acquisitions; management asserts no impairment but notes the risk of future charges.
- Wrigley Sale: The $4.56B sale of Wrigley preferred stock to Mars Inc. was completed in September 2016, generating a significant realized gain.