Berkshire Hathaway Inc. 10-Q Summary: Q2 2020
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2020. Berkshire Hathaway operates a diverse portfolio of businesses including insurance, railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), manufacturing, service, and retailing. The reporting period was significantly impacted by the global COVID-19 pandemic, which caused widespread economic disruption, facility closures, and reduced demand across nearly all operating segments.
Key Financial Metrics
| Metric | Q2 2020 | Q2 2019 | YTD 2020 | YTD 2019 |
|---|---|---|---|---|
| Total Revenues | $56.8 billion | $63.6 billion | $118.1 billion | $124.3 billion |
| Net Earnings (Loss) Attributable to Shareholders | $26.3 billion | $14.1 billion | $(23.5) billion | $35.7 billion |
| Investment & Derivative Gains (Losses) | $40.1 billion | $10.0 billion | $(30.2) billion | $30.4 billion |
| Cash, Cash Equivalents & U.S. Treasury Bills | $142.8 billion | $64.9 billion | $142.8 billion | $64.9 billion |
| Total Shareholders' Equity | $393.5 billion | $386.4 billion | $393.5 billion | $386.4 billion |
Note: Q2 2020 net earnings were driven by a $39.4 billion unrealized gain on equity securities. YTD 2020 net loss was driven by a $18.4 billion unrealized loss on equity securities and $10.6 billion in goodwill impairments.
Material Changes vs. Prior Period
- Operating Revenues: Total operating revenues declined due to the pandemic. Manufacturing revenues fell 19.6% Q2-over-Q2, while Service and Retailing revenues dropped 19.2%. BNSF revenues decreased 21.9% due to lower shipping volumes.
- Goodwill Impairments: The company recorded pre-tax goodwill and indefinite-lived intangible asset impairment charges of approximately $10.6 billion in Q2 2020. Approximately $10 billion of this charge related to Precision Castparts Corp. (PCC) due to the severe impact of the pandemic on the aerospace industry.
- Insurance Underwriting: GEICO generated record pre-tax underwriting earnings of $2.1 billion in Q2 2020 due to significantly lower claims frequencies from reduced driving. However, the "GEICO Giveback" program (15% premium reduction) is expected to negatively impact future earnings.
- Liquidity: Cash and U.S. Treasury Bill holdings increased significantly to $142.8 billion (from $64.9 billion at year-end 2019) as the company sold equity securities and reinvested proceeds into short-term Treasuries to maintain liquidity.
Guidance, Outlook, and Risks
- Outlook: Management states that the duration and extent of the pandemic's effects cannot be reasonably estimated. While some businesses are reopening, the company expects continued volatility. GEICO's underwriting results are expected to decline in the second half of 2020 as the full impact of premium reductions is earned.
- Capital Allocation: The company continues its share repurchase program, spending $6.7 billion in the first six months of 2020. Repurchases will not occur if consolidated cash and Treasury holdings fall below $20 billion.
- Acquisitions: Berkshire Hathaway Energy (BHE) agreed to acquire Dominion Energy's natural gas transmission and storage business for approximately $4.0 billion, subject to closing conditions.
- Risks: Key risks include the severity and duration of the COVID-19 pandemic, potential for additional goodwill impairments if economic conditions worsen, and volatility in equity markets affecting reported earnings.
Investor Verification Checklist
- Investment Volatility: Verify the distinction between operating earnings and investment gains/losses, as the latter caused a massive swing from a YTD loss to a Q2 profit.
- PCC Impairment: Review the $10 billion impairment charge related to Precision Castparts Corp. and the assumptions regarding the recovery of the aerospace industry.
- GEICO Sustainability: Assess the sustainability of GEICO's Q2 underwriting profits given the temporary nature of reduced driving and the delayed impact of the "Giveback" premium credits.
- Liquidity Position: Confirm the $142.8 billion cash and Treasury position, which provides a substantial buffer against economic downturns.
- Debt Maturities: Note that $1.6 billion of senior notes mature in Q1 2021 and monitor refinancing activities.