Business Context and Reporting Period
This summary covers the Form 10-Q for Berkshire Hathaway Inc. for the quarterly period ended March 31, 2019. The company operates a diverse portfolio of businesses including insurance (GEICO, Reinsurance Group, Primary Group), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), and various manufacturing, service, and retailing operations. The financial statements are unaudited and reflect all normal recurring adjustments.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Total Revenues | $60,678 million | $58,473 million |
| Net Earnings (Attributable to Shareholders) | $21,661 million | $(1,138 million) |
| Investment & Derivative Gains | $20,322 million | $(8,015 million) |
| Operating Cash Flows | $7,577 million | $7,556 million |
| Cash & Equivalents (Insurance & Other) | $22,487 million | $27,749 million |
| Short-term U.S. Treasury Bills | $88,029 million | $81,506 million |
| Total Shareholders' Equity | $372,591 million | $352,500 million |
| Notes Payable & Borrowings | $97,193 million | $97,490 million |
Material Changes vs. Prior Period
- Net Earnings Surge: Net earnings attributable to shareholders swung from a loss of $1.1 billion in Q1 2018 to a profit of $21.7 billion in Q1 2019. This is primarily driven by a $28.3 billion swing in investment and derivative gains/losses.
- Investment Volatility: Investment gains totaled $19.6 billion in Q1 2019 compared to losses of $7.8 billion in Q1 2018. This reflects the adoption of ASU 2016-01, which requires unrealized gains/losses on equity securities to be recorded in earnings rather than other comprehensive income.
- Insurance Underwriting: Pre-tax underwriting gains were $487 million in Q1 2019, slightly down from $518 million in Q1 2018. GEICO reported a pre-tax gain of $770 million, while the Reinsurance Group reported a loss of $253 million.
- Operating Segments:
- BNSF: Pre-tax earnings increased 10% to $1.7 billion, despite a 5.4% decrease in freight volumes due to severe weather.
- Berkshire Hathaway Energy: Pre-tax earnings increased to $540 million from $487 million.
- Manufacturing: Pre-tax earnings were relatively flat at $2.2 billion.
- Share Repurchases: The company repurchased approximately $1.7 billion of its own Class A and Class B common stock in Q1 2019.
Guidance, Outlook, and Risks
- Capital Allocation: Management reiterated that share repurchases will continue as long as the price is below intrinsic value and consolidated cash, cash equivalents, and U.S. Treasury Bills remain above $20 billion. As of March 31, 2019, these holdings totaled approximately $110.5 billion.
- Capital Expenditures: BNSF and Berkshire Hathaway Energy forecast additional capital expenditures of approximately $9.0 billion for the remainder of 2019.
- Investment Volatility: Management explicitly states that investment gains/losses (both realized and unrealized) are often meaningless for evaluating periodic economic performance due to the size of the portfolio and market volatility.
- Contingencies:
- Occidental Petroleum: On April 30, 2019, Berkshire committed to invest $10 billion in Occidental Petroleum, contingent on its acquisition of Anadarko Petroleum.
- Tax Equity Funds: Berkshire recorded a $377 million income tax expense adjustment related to investments in tax equity funds where the company now believes previously recognized tax benefits are invalid due to alleged fraud by the fund sponsor.
- Kraft Heinz: Berkshire could not record its share of Kraft Heinz's Q1 2019 earnings as Kraft Heinz had not filed its 2018 10-K or provided Q1 2019 financials by the filing date.
- Accounting Changes: The company adopted ASC 842 (Leases) on January 1, 2019, recognizing operating lease assets of $6.2 billion and liabilities of $5.9 billion.
Investor Verification Checklist
- Investment Portfolio Concentration: Verify the current fair value of the top five equity holdings (Apple, Bank of America, Coca-Cola, American Express, Wells Fargo), which comprised approximately 68% of the equity portfolio's fair value.
- Insurance Float: Confirm the stability of the $124 billion insurance float and the cost of float, which was negative in Q1 2019 due to underwriting profits.
- Derivative Liabilities: Review the $1.7 billion liability for equity index put options written prior to 2008 and the potential for collateral posting if credit ratings are downgraded.
- Occidental Deal Status: Monitor the progress of the proposed $10 billion investment in Occidental Petroleum and the completion of the Anadarko acquisition.
- Tax Equity Fund Resolution: Track the outcome of the investigation into the tax equity fund sponsor and potential further adjustments to tax liabilities.