Berkshire Hathaway Inc. 10-Q Summary: Q2 2009
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2009. Berkshire Hathaway operates as a diversified holding company with major segments in Insurance, Utilities and Energy (MidAmerican), Manufacturing/Service/Retailing, and Finance/Financial Products. The reporting period reflects continued impacts from the global economic recession, which significantly reduced earnings in manufacturing and service sectors, while insurance and utility operations remained relatively resilient.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Total Revenues | $29,607 million | $30,093 million | $52,391 million | $55,268 million |
| Net Earnings (Attributable to Berkshire) | $3,295 million | $2,880 million | $1,761 million | $3,820 million |
| EPS (Class A Equivalent) | $2,123 | $1,859 | $1,136 | $2,467 |
| Cash and Cash Equivalents | $24,511 million | $31,159 million (YTD 2008) | $24,511 million | $31,159 million |
| Shareholders' Equity | $114,527 million | $109,267 million (Dec 31, 2008) | $114,527 million | $109,267 million |
| Operating Cash Flow (YTD) | $7,497 million | $4,991 million | $7,497 million | $4,991 million |
Material Changes vs. Prior Period
- Investment and Derivative Volatility: Q2 2009 net earnings were boosted by $1.5 billion in investment and derivative gains, primarily driven by a $1.96 billion gain on equity index put option contracts due to rising equity markets. Conversely, YTD 2009 included a $1.7 billion loss in this category, heavily influenced by a $3.1 billion other-than-temporary impairment (OTTI) charge on ConocoPhillips stock in Q1 and credit default contract losses.
- Operating Earnings Decline: Manufacturing, service, and retailing pre-tax earnings dropped significantly (down 65% YTD) due to the recession. NetJets reported pre-tax losses of $349 million YTD due to asset writedowns and reduced aircraft sales.
- Insurance Underwriting: GEICO reported a pre-tax underwriting gain of $259 million YTD 2009, down from $484 million in 2008, as loss ratios increased to 77.6% from 73.9%. Berkshire Hathaway Reinsurance Group reported a pre-tax underwriting loss of $88 million YTD 2009, compared to a gain of $108 million in 2008, largely due to $365 million in foreign currency transaction losses.
- Capital Allocation: Berkshire deployed significant cash in H1 2009, acquiring a 12% convertible instrument in Swiss Re ($2.7 billion) and 8.5% preferred stock in Dow Chemical ($3.0 billion).
Guidance, Outlook, and Risks
- Economic Outlook: Management expects current economic conditions to persist through 2009 before meaningful improvements occur. Operating companies are implementing cost reductions to manage through the downturn.
- Derivative Risks: Berkshire holds significant long-duration equity index put options and credit default contracts. While these generated gains in Q2 2009, management notes that fair value changes are volatile and not indicative of ultimate cash outcomes, which will not be known until contract expirations (2018–2028).
- Legal Contingencies: Ongoing investigations by the SEC and DOJ regarding non-traditional reinsurance products (specifically the AIG transaction) remain unresolved. Berkshire cannot estimate the potential loss or material impact at this time.
- Goodwill Impairment: While no impairment was recorded, management warns that the depth of the recession could adversely impact the long-term economic value of subsidiaries, potentially leading to future goodwill impairment charges.
Key Investor Verification Points
- Derivative Valuation: Verify the sensitivity of earnings to equity market movements given the $12.3 billion liability in derivative contracts (Level 3 inputs).
- ConocoPhillips Position: Monitor the remaining position in ConocoPhillips and potential for further sales or impairment charges, as the company sold 20.4 million shares in H1 2009 to realize losses for tax purposes.
- Insurance Loss Ratios: Track GEICO's loss ratio trends, which rose to 77.6% in H1 2009, and the impact of foreign currency fluctuations on the Reinsurance Group's results.
- NetJets Restructuring: Assess the sufficiency of cost-cutting measures and asset writedowns at NetJets, which reported significant losses due to the collapse in fractional ownership demand.
- Liquidity Deployment: Confirm the yield and terms of new investments (Swiss Re, Dow Chemical) relative to the low interest rate environment on Berkshire's massive cash pile.