Berkshire Hathaway Inc. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, and the first six months of 2007. Berkshire Hathaway Inc. operates as a diversified holding company with major segments in Insurance, Utilities and Energy (MidAmerican), Manufacturing, Service and Retailing, and Finance and Financial Products. The company reported strong liquidity with consolidated shareholders' equity of $115.3 billion.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | YTD 2007 | YTD 2006 |
|---|---|---|---|---|
| Total Revenues | $27,347 million | $24,185 million | $60,265 million | $46,948 million |
| Net Earnings | $3,118 million | $2,347 million | $5,713 million | $4,660 million |
| EPS (Class A equiv.) | $2,018 | $1,522 | $3,700 | $3,023 |
| Operating Cash Flow (YTD) | $7,432 million (vs. $3,451 million YTD 2006) | |||
| Cash & Equivalents | $46,950 million (as of June 30, 2007) | |||
| Total Debt (Notes Payable) | $33.6 billion (as of June 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 13% year-over-year for the first six months, driven by higher premiums, sales volumes, and investment gains.
- Equitas Reinsurance Transaction: A significant non-recurring item occurred on March 30, 2007, where Berkshire assumed $9.3 billion in loss reserves from Equitas in exchange for $7.1 billion in assets. This transaction increased float to approximately $58.5 billion and resulted in $7.1 billion of retroactive premiums and losses being recorded, with no net underwriting gain or loss at inception.
- Investment Gains: Investment and derivative gains/losses contributed $990 million to net earnings for the first six months of 2007, compared to $820 million in 2006. Equity securities fair value rose to $73.6 billion.
- Segment Performance:
- Insurance Underwriting: Pre-tax underwriting gains were $1.9 billion for the first six months of 2007, up from $1.1 billion in 2006. GEICO and General Re reported improved results.
- Utilities (MidAmerican): Earnings applicable to Berkshire increased to $524 million (YTD 2007) from $391 million (YTD 2006), aided by the full-year impact of the PacifiCorp acquisition and favorable weather.
- Manufacturing: Shaw Industries saw a 10% revenue decline due to the housing slowdown, while other manufacturing businesses grew 28% due to new acquisitions (e.g., Iscar Metalworking Companies).
Guidance, Outlook, and Risks
- Capital Allocation: Management maintains a decentralized approach. Capital expenditures for utilities are forecasted at approximately $3.8 billion for the full year 2007, funded by operations and debt issuance.
- Outlook: Management notes that interim results are not necessarily indicative of full-year results due to the timing of catastrophe losses and investment gains. GEICO expects higher loss ratios for the remainder of 2007 as rate reductions take effect.
- Risks and Contingencies:
- Legal Proceedings: Ongoing governmental investigations regarding "non-traditional products" and finite reinsurance transactions involving General Re. Several former executives are awaiting trial on conspiracy charges related to the AIG transaction.
- Insurance Reserves: Significant judgment is required for unpaid loss reserves ($56.5 billion). Small percentage changes in estimates can materially impact earnings.
- Market Risk: Volatility in equity and credit markets affects the fair value of derivative contracts and investment portfolios.
Investor Verification Checklist
- Equitas Impact: Verify the long-term amortization schedule of the $2.2 billion deferred charge asset related to the Equitas reinsurance deal.
- GEICO Loss Ratios: Monitor upcoming quarters for the impact of rate reductions on GEICO's loss ratios, which are expected to rise in the second half of 2007.
- Legal Exposure: Track the status of the SEC and DOJ investigations into General Re's finite reinsurance practices and the pending trial of former executives.
- Debt Maturities: Review the $2.9 billion in MidAmerican debt maturing in late 2007 and 2008, noting Berkshire's commitment to provide up to $3.5 billion in capital support (non-guaranteed).
- Investment Portfolio: Assess the concentration and unrealized gains in the $73.6 billion equity portfolio, which drives a significant portion of comprehensive income.