Business Context and Reporting Period
This summary covers the Form 10-Q for Berkshire Hathaway Inc. for the quarterly period ended March 31, 2016. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The quarter was defined by two major acquisitions: Precision Castparts Corp. (PCC) for approximately $32.7 billion and the Duracell business from Procter & Gamble for approximately $4.2 billion.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Total Revenues | $52,403 million | $48,644 million |
| Net Earnings (Attributable to Shareholders) | $5,589 million | $5,164 million |
| Net Earnings Per Share (Class A Equivalent) | $3,401 | $3,143 |
| Operating Cash Flows | $7,481 million | $5,963 million |
| Cash and Cash Equivalents (Ending) | $58,342 million | $63,711 million |
| Total Shareholders' Equity | $261,837 million | $244,839 million |
| Total Debt (Notes Payable & Borrowings) | $101,539 million | $84,289 million |
Material Changes vs. Prior Period
- Acquisitions: The most significant change was the inclusion of PCC and Duracell in the financial results. PCC was acquired on January 29, 2016, and Duracell on February 29, 2016. These acquisitions drove a 19% increase in Manufacturing revenues and a 68% increase in Retailing revenues (due to prior BHA acquisition impact and new additions).
- Investment Gains: Pre-tax investment gains surged to $1.85 billion from $97 million in Q1 2015. This was primarily driven by a $1.1 billion non-cash gain from the exchange of P&G stock for Duracell.
- Derivative Losses: Pre-tax derivative losses were $810 million in Q1 2016, compared to gains of $1.32 billion in Q1 2015. This volatility is attributed to changes in the fair value of long-duration equity index put options due to lower index values and interest rates.
- Railroad Performance: BNSF revenues declined 15% to $4.8 billion, and pre-tax earnings dropped 25% to $1.3 billion. This was caused by a 5.5% decline in unit volume and a 10.4% decline in average revenue per car, largely due to reduced coal demand and lower fuel surcharges.
- Insurance Underwriting: Pre-tax underwriting gains decreased to $348 million from $747 million in the prior year, driven by lower gains from the Berkshire Hathaway Reinsurance Group and foreign currency impacts.
Guidance, Outlook, and Risks
- Capital Allocation: Management emphasized maintaining ample liquidity. While cash balances decreased due to the PCC acquisition, the company issued $5.5 billion in senior unsecured notes and €2.75 billion in Euro notes in March 2016 to repay a temporary credit facility used for the acquisition.
- Outlook: Management noted that investment and derivative gains/losses cause significant volatility in periodic earnings and are often meaningless for evaluating economic performance. They expect coal volumes to remain lower for the remainder of 2016 due to high utility inventories and low natural gas prices.
- Stock Repurchases: The Board has authorized repurchases of Class A and Class B shares at prices no higher than a 20% premium over book value, provided cash holdings remain above $20 billion. No repurchases were made in Q1 2016.
- Risks and Contingencies:
- Derivatives: Significant exposure exists in equity index put options with a recorded liability of $4.35 billion. If Berkshire's credit rating is downgraded below A- (S&P) or A3 (Moody's), up to $1.1 billion in collateral may be required.
- Legal/Compliance: The company disclosed voluntary self-disclosures to the U.S. Treasury (OFAC) and Commerce Department regarding a foreign subsidiary's inadvertent sales to Iran totaling approximately $45,000 in revenue between 2013 and 2015. Shipments have ceased, and an internal investigation is underway.
- Accounting Changes: Adoption of new FASB standards (ASU 2016-01) regarding financial instruments will likely significantly impact periodic net earnings by moving unrealized gains/losses on equity investments from other comprehensive income to net income, though it will not affect shareholders' equity.
Investor Verification Checklist
- Acquisition Integration: Verify the preliminary fair value adjustments for PCC and Duracell, particularly the $26 billion in intangible assets and the impact on future amortization expenses.
- Derivative Liability Sensitivity: Assess the potential cash impact of the $4.35 billion equity index put option liability and the conditions triggering the $1.1 billion collateral posting requirement.
- Coal Demand Trends: Monitor BNSF's coal volume and revenue trends, as management expects continued declines in 2016 due to market shifts toward natural gas.
- Iran Sanctions Investigation: Track the outcome of the internal investigation and any potential fines or penalties from OFAC or the Department of Commerce regarding the disclosed Iran sales.
- Debt Maturities: Review the schedule of debt maturities, noting $1.85 billion of parent company senior notes maturing within the next 12 months.