Business Context and Reporting Period
This summary covers the Form 10-Q for Berkshire Hathaway Inc. for the quarterly period ended June 30, 2010. The reporting period is significantly impacted by the full consolidation of Burlington Northern Santa Fe Corporation (BNSF), which was acquired on February 12, 2010. Prior to this date, BNSF was accounted for under the equity method. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | YTD 2010 | YTD 2009 |
|---|---|---|---|---|
| Total Revenues | $31,709 million | $29,607 million | $63,746 million | $52,391 million |
| Net Earnings (Attributable to Berkshire) | $1,968 million | $3,295 million | $5,601 million | $1,761 million |
| Net Earnings Per Share (Class A equiv.) | $1,195 | $2,123 | $3,451 | $1,136 |
| Cash and Cash Equivalents | $27,953 million | $24,511 million | $27,953 million | $24,511 million |
| Total Shareholders' Equity | $147,514 million | $135,785 million | $147,514 million | $135,785 million |
| Total Debt (Notes Payable & Borrowings) | $57,970 million | $37,909 million | $57,970 million | $37,909 million |
Note: Debt figures include parent company, railroad/utilities, and finance subsidiary borrowings. YTD cash flow from operating activities was $6,860 million for 2010 compared to $7,497 million for 2009.
Material Changes vs. Prior Period
- BNSF Acquisition: The most significant change is the acquisition of BNSF. This added $6.2 billion in revenues and $885 million in net earnings for the first six months of 2010. The acquisition was funded with $15.9 billion in cash (half from existing cash, half from new debt) and $10.6 billion in Berkshire stock.
- Investment and Derivative Volatility: Net earnings were heavily influenced by investment and derivative results. In Q2 2010, the company reported a net loss of $1.1 billion in this category, primarily due to a $1.8 billion unrealized loss on equity index put option contracts. This contrasts with a $1.5 billion gain in Q2 2009.
- Insurance Underwriting: Underwriting results improved significantly. Pre-tax underwriting gain for the first six months of 2010 was $1.06 billion, compared to $411 million in 2009. GEICO reported a pre-tax underwriting gain of $628 million for the first six months of 2010, up from $259 million in 2009.
- Manufacturing and Retailing: Earnings in this segment rebounded strongly from the 2009 recession. Pre-tax earnings for the first six months of 2010 were $2.04 billion, compared to $948 million in 2009, driven by volume increases in Forest River, IMC, and NetJets.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that while the economic recession adversely affected many businesses in 2009, operating results in 2010 have improved due to stabilizing economic conditions. However, they caution that interim results are not necessarily indicative of full-year results due to the timing of catastrophe losses and investment gains/losses.
- Derivative Contracts: The company holds significant equity index put option contracts with a liability of approximately $8.9 billion as of June 30, 2010. Management states that periodic gains or losses on these contracts are not meaningful for evaluating ultimate payment obligations, which will not be determined until expiration (2018–2028).
- Regulatory Risks: The filing discusses the Dodd-Frank Wall Street Reform and Consumer Protection Act signed into law on July 21, 2010. Management does not believe the collateral requirements in the Act will apply to their pre-existing derivative contracts, but notes that regulatory interpretation is ongoing.
- Legal Proceedings: General Re settled investigations with the DOJ and SEC regarding non-traditional products (AIG Transaction) in January 2010, paying $19.5 million to the DOJ and $12.2 million to the SEC. No other material legal developments were reported.
Investor Verification Checklist
- BNSF Integration: Verify the impact of BNSF's full consolidation on future capital expenditure requirements and debt service obligations.
- Derivative Liability Exposure: Review the $8.9 billion liability associated with equity index put options and the potential for further mark-to-market volatility in earnings.
- Insurance Reserve Adequacy: Assess the $58.5 billion in unpaid loss reserves and the sensitivity of earnings to changes in these estimates.
- Debt Structure: Analyze the increase in total debt to $58 billion, specifically the $8 billion in new parent company debt issued to fund the BNSF acquisition.
- Investment Portfolio: Monitor the unrealized losses in the equity portfolio (notably Wells Fargo) and the company's stated intent to hold these securities until recovery.