Berkshire Hathaway Inc. 10-Q Summary: Q2 2015
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2015. Berkshire Hathaway Inc. operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The company reported a significant decline in net earnings compared to the prior year, primarily driven by a reduction in investment gains and derivative results, despite solid performance in operating businesses.
Key Financial Metrics
| Metric | Q2 2015 | Q2 2014 | YTD 2015 | YTD 2014 |
|---|---|---|---|---|
| Total Revenues | $51,368 million | $49,762 million | $100,012 million | $95,215 million |
| Net Earnings (Attributable to Shareholders) | $4,013 million | $6,395 million | $9,177 million | $11,100 million |
| Net Earnings Per Share (Class A equiv.) | $2,442 | $3,889 | $5,585 | $6,751 |
| Cash and Cash Equivalents | $66,587 million | $55,455 million | $66,587 million | $55,455 million |
| Shareholders' Equity | $246,043 million | $236,760 million | $246,043 million | $236,760 million |
| Operating Cash Flows (YTD) | $13,943 million | $11,833 million | $13,943 million | $11,833 million |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings attributable to shareholders dropped 37% in Q2 2015 compared to Q2 2014. The year-to-date decline was 17%. This was largely due to a significant decrease in investment and derivative gains/losses.
- Investment Gains: Pre-tax investment gains fell from $2.37 billion in Q2 2014 to $362 million in Q2 2015. The 2014 figure included non-cash holding gains of approximately $1.1 billion from the exchange of Phillips 66 and Graham Holdings Company stock.
- Derivative Results: Derivative contracts produced a pre-tax loss of $174 million in Q2 2015, compared to a gain of $155 million in Q2 2014. However, YTD 2015 showed a pre-tax gain of $1.14 billion.
- Insurance Underwriting: Insurance underwriting results weakened. GEICO and Berkshire Hathaway Reinsurance Group (BHRG) reported significant declines in underwriting gains compared to 2014, driven by higher loss ratios and catastrophe losses (including a $115 million storm loss in Australia).
- Operating Segments:
- Railroad (BNSF): Earnings increased 4% in Q2 and 21% YTD due to improved service levels and lower fuel costs, despite softening demand for energy-related products.
- Utilities and Energy: Earnings increased 34% in Q2 and 12% YTD, benefiting from the inclusion of AltaLink and a lower effective tax rate.
- Service and Retailing: Revenues surged 75% in Q2 and 55% YTD, primarily due to the acquisition of the Van Tuyl Group (Berkshire Hathaway Automotive) and Detlev Louis Motorad.
Guidance, Outlook, and Risks
- Kraft Heinz Merger: Berkshire expects to record a non-cash pre-tax holding gain of approximately $7 billion in Q3 2015. This results from the Kraft Foods merger, which reduced Berkshire's ownership percentage in Kraft Heinz from 52.5% to 26.9%. Under equity method accounting, this dilution is treated as a sale of a portion of the investment.
- Capital Allocation: The company maintains a strong liquidity position with over $66 billion in cash. The Board has authorized share repurchases at prices no higher than a 20% premium over book value, provided cash holdings remain above $20 billion. No repurchases were made in the first six months of 2015.
- Acquisitions: Berkshire acquired the Van Tuyl Group for $4.1 billion in Q1 2015. On July 1, 2015, Berkshire acquired additional Kraft Heinz shares for $5.26 billion.
- Risks: Key risks include volatility in investment and derivative gains/losses, catastrophe losses in insurance, changes in foreign currency exchange rates, and the potential for goodwill impairment. Management notes that investment gains/losses are often meaningless for evaluating economic performance due to their volatility.
Investor Verification Checklist
- Kraft Heinz Accounting: Verify the impact of the expected $7 billion non-cash gain in Q3 2015 on reported earnings and understand that this does not represent cash flow.
- Insurance Loss Ratios: Monitor GEICO's loss ratio (83.6% in Q2 2015 vs. 76.4% in Q2 2014) and the trend in claim frequency and severity.
- Derivative Liabilities: Review the fair value of equity index put option liabilities ($3.4 billion at June 30, 2015) and the potential for future volatility in earnings based on market index performance.
- Capital Expenditures: Track BNSF and Berkshire Hathaway Energy's capital spending, which totaled $5.1 billion YTD 2015, with an additional $6.8 billion forecast for the remainder of the year.
- Float and Cash: Confirm the stability of the insurance float ($85.1 billion) and the deployment of the massive cash pile ($66.6 billion) for future acquisitions or share buybacks.