Berkshire Hathaway Inc. 10-Q Summary: Q3 2011
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2011. Berkshire Hathaway operates as a diversified holding company with major segments in Insurance, Railroad (BNSF), Utilities and Energy (MidAmerican), Manufacturing/Service/Retailing, and Finance. A significant event during the period was the completion of the acquisition of The Lubrizol Corporation on September 16, 2011, for approximately $8.7 billion in cash.
Key Financial Metrics
| Metric | Q3 2011 | Q3 2010 | 9 Months 2011 | 9 Months 2010 |
|---|---|---|---|---|
| Revenues | $33,739 million | $36,274 million | $105,733 million | $100,020 million |
| Net Earnings (Attributable to BH) | $2,278 million | $2,989 million | $7,206 million | $8,590 million |
| EPS (Class A Equivalent) | $1,380 | $1,814 | $4,368 | $5,265 |
| Cash and Cash Equivalents | $34,776 million | $34,461 million | $34,776 million (End of Period) | $34,461 million (End of Period) |
| Total Shareholders' Equity | $163,881 million | $162,934 million | $163,881 million | $162,934 million |
| Operating Cash Flow (9 Months) | $15,982 million | $13,831 million | $15,982 million | $13,831 million |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings attributable to Berkshire Hathaway decreased 24% in Q3 2011 compared to Q3 2010. The nine-month period saw a 16% decline. This was primarily driven by significant after-tax investment and derivative losses of $1,534 million in Q3 and $903 million for the nine months.
- Derivative Losses: Equity index put option contracts generated pre-tax losses of approximately $2.1 billion in Q3 2011 due to declines in equity indexes. Credit default contracts also contributed to losses.
- Insurance Underwriting: Despite catastrophe losses (earthquakes in Japan/New Zealand, weather events), the insurance group reported a pre-tax underwriting gain of $1,695 million in Q3, compared to $305 million in Q3 2010. This improvement included an $875 million reduction in estimated liabilities for retroactive reinsurance contracts.
- Operating Segments:
- BNSF: Revenues increased 13% in Q3 and 16% for the nine months, driven by higher average revenues per car/unit and fuel surcharges. Earnings increased 10% in Q3.
- MidAmerican: Revenues were relatively flat, but earnings increased due to favorable foreign currency translation and lower regulatory provisions in the U.K.
- Manufacturing/Service: Revenues and earnings generally improved, with Lubrizol contributing $246 million in revenue for the 15 days it was owned.
- Investment Portfolio: Equity securities fair value increased to $67.2 billion (from $59.8 billion at year-end 2010), though unrealized losses of approximately $2.5 billion existed as of September 30, 2011, largely concentrated in financial sector holdings.
Guidance, Outlook, and Risks
- Stock Repurchase Program: In late September 2011, the Board authorized an open-ended repurchase program for Class A and Class B shares at prices no higher than a 10% premium over book value. Repurchases will not reduce consolidated cash equivalents below $20 billion.
- Capital Allocation: Management emphasized that investment and derivative gains/losses are often meaningless for evaluating economic performance due to volatility. The focus remains on operating earnings and capital allocation.
- Risks and Contingencies:
- Derivatives: Significant exposure to equity index put options (liability of $8.8 billion) and credit default contracts. Collateral posting requirements were $443 million as of September 30, 2011, with potential for up to $1.1 billion if credit ratings are downgraded below specific thresholds.
- Insurance Reserves: Estimated liabilities for unpaid losses were $63.8 billion. Small percentage changes in these estimates can materially impact earnings.
- Goodwill: Total goodwill was $53.3 billion. Management believes it is not impaired, but future changes in cash flow forecasts could trigger impairment charges.
- Regulatory: The Dodd-Frank Act may impact collateral requirements, though management does not currently expect a material impact on pre-existing contracts.
Investor Verification Checklist
- Derivative Liability Exposure: Verify the current fair value and potential collateral requirements of the equity index put option and credit default contracts, which caused significant earnings volatility.
- Insurance Reserve Development: Monitor the development of the $63.8 billion in unpaid loss reserves, particularly regarding retroactive reinsurance contracts and catastrophe losses.
- Stock Repurchase Activity: Track the execution of the new share repurchase program and its impact on cash levels relative to the $20 billion floor.
- Lubrizol Integration: Assess the financial performance of the newly acquired Lubrizol Corporation in subsequent periods.
- Unrealized Investment Losses: Review the status of the $2.5 billion in unrealized losses on equity securities, specifically in the financial sector, to gauge potential future OTTI charges.