Business Context and Reporting Period
This summary covers the Form 10-Q for Berkshire Hathaway Inc. for the quarterly period ended March 31, 2014. The company operates through diverse segments including Insurance, Railroad (BNSF), Utilities and Energy (Berkshire Hathaway Energy), Manufacturing, Service, Retailing, and Finance and Financial Products. The filing notes that interim results are not necessarily indicative of full-year results due to the timing of catastrophe losses and investment gains.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total Revenues | $45,453 million | $43,867 million |
| Net Earnings (Consolidated) | $4,773 million | $5,017 million |
| Net Earnings Attributable to Berkshire | $4,705 million | $4,892 million |
| Net Earnings Per Share (Class A equiv.) | $2,862 | $2,977 |
| Operating Cash Flows | $4,928 million | $6,055 million |
| Cash and Cash Equivalents (Ending) | $48,948 million | $49,089 million |
| Total Shareholders' Equity | $230,289 million | $224,485 million |
| Total Liabilities | $264,655 million | $260,446 million |
Material Changes vs. Prior Period
- Net Earnings: Net earnings attributable to Berkshire decreased by approximately 3.8% ($187 million) compared to Q1 2013. This decline was primarily driven by lower underwriting gains in the reinsurance segment and reduced derivative gains, partially offset by higher investment gains.
- Insurance Underwriting: Pre-tax underwriting gain fell to $715 million from $1,389 million in Q1 2013. The Berkshire Hathaway Reinsurance Group (BHRG) saw a significant drop in underwriting gains ($183 million vs. $974 million) due to lower premiums from the Swiss Re quota-share contract and foreign currency losses.
- Investment Gains: Pre-tax investment gains increased to $1,150 million from $590 million. This included a non-cash holding gain of $949 million from the exchange of Phillips 66 stock for the acquisition of Phillips Specialty Products Inc.
- Derivative Gains: Pre-tax derivative gains decreased significantly to $236 million from $1,206 million. Equity index put option contracts resulted in a loss of $132 million in 2014 compared to a gain of $1,246 million in 2013.
- Segment Performance:
- BNSF: Earnings declined to $724 million from $798 million due to adverse weather and service challenges.
- Utilities and Energy: Earnings increased to $452 million from $394 million, aided by the inclusion of NV Energy (acquired Dec 2013) and favorable weather impacts on natural gas pipelines.
- Manufacturing: Earnings rose 12.7% to $1,068 million, driven by industrial products and apparel.
Guidance, Outlook, and Risks
- Capital Allocation: Management maintains a policy of holding significant cash (approx. $42.2 billion in Insurance/Other) to ensure liquidity and safety over yield. No share repurchases were made in Q1 2014, though the program remains active if the market price is below intrinsic value and cash holdings remain above $20 billion.
- Acquisitions: Berkshire Hathaway Energy announced an agreement to acquire AltaLink, L.P. for approximately $2.9 billion, expected to close by the end of 2014. Recent acquisitions included IMI plc beverage operations and Phillips Specialty Products Inc.
- Derivative Risks: The company holds significant liabilities related to equity index put options ($4.8 billion) and credit default contracts ($275 million). While no collateral is currently required, a downgrade in Berkshire's credit rating could trigger collateral posting requirements of up to $1.1 billion.
- Forward-Looking Statements: Management cautions that periodic earnings are volatile due to investment gains/losses and derivative valuations, which may not reflect long-term economic performance.
Key Facts for Investor Verification
- Non-Cash Gains: Verify the impact of the $949 million non-cash holding gain from the Phillips 66 stock exchange on reported earnings.
- Reinsurance Volatility: Monitor the BHRG segment for continued volatility due to foreign currency fluctuations and the run-off of the Swiss Re quota-share contract.
- Derivative Exposure: Review the valuation assumptions for equity index put options, as changes in interest rates and volatility significantly impact quarterly earnings.
- Cash Position: Confirm the total cash and cash equivalents balance ($48.9 billion) remains sufficient to meet the $20 billion threshold for potential share repurchases.
- Debt Maturities: Note upcoming debt maturities for Berkshire Hathaway parent ($750 million in Aug 2014) and BHFC ($400 million in July 2014), and management's intent to refinance.