Business Context and Reporting Period
This summary covers the Form 10-K Annual Report for Berkshire Hathaway Inc. for the fiscal year ended December 31, 2015. Berkshire is a holding company with a decentralized management structure, operating diverse businesses including insurance (GEICO, General Re, BHRG), freight rail (BNSF), utilities and energy (Berkshire Hathaway Energy), manufacturing, service, retailing, and finance. The company employed approximately 331,000 people worldwide at year-end.
Key Financial Metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Total Revenues | $210.8 billion | $194.7 billion |
| Net Earnings (Attributable to Berkshire) | $24.1 billion | $19.9 billion |
| Net Earnings Per Share (Class A equiv.) | $14,656 | $12,092 |
| Total Assets | $552.3 billion | $525.9 billion |
| Shareholders' Equity | $255.6 billion | $240.2 billion |
| Cash and Cash Equivalents | $71.7 billion | $63.3 billion |
| Notes Payable and Borrowings | $84.3 billion | $79.9 billion |
Note: Net earnings include significant investment and derivative gains/losses. Operating earnings (excluding investment/derivative gains) were approximately $17.4 billion in 2015.
Material Changes vs. Prior Period
- Investment Gains: Net earnings were significantly boosted by a non-cash holding gain of approximately $6.8 billion related to the merger of Kraft Foods and H.J. Heinz Company, which reduced Berkshire's ownership percentage in the combined entity.
- Insurance Underwriting: Pre-tax underwriting gains declined to $1.8 billion in 2015 from $2.7 billion in 2014. GEICO reported a decline in underwriting gains due to increased claim frequencies and severities, while the Berkshire Hathaway Reinsurance Group saw lower gains due to the run-off of prior years' business.
- Railroad (BNSF): Revenues decreased 5% to $22.0 billion, primarily due to a 55% decline in fuel surcharges resulting from lower fuel prices. However, pre-tax earnings increased 10% to $6.8 billion due to improved service levels and lower fuel costs.
- Utilities and Energy: Earnings increased 13.3% to $2.1 billion, driven by the inclusion of newly acquired businesses (AltaLink and NV Energy) and higher earnings from other energy operations.
- Acquisitions: Berkshire acquired the Van Tuyl Group (renamed Berkshire Hathaway Automotive) in Q1 2015 for $4.1 billion. On January 29, 2016 (post-year-end), Berkshire completed the acquisition of Precision Castparts Corp. (PCC) for approximately $32.7 billion.
Guidance, Outlook, and Risks
- Outlook: Management anticipates that BNSF volumes for coal and certain industrial products may decline in 2016 due to low oil prices and high utility coal inventories. Manufacturing businesses expect soft market conditions in 2016.
- Capital Allocation: Berkshire maintains a stock repurchase program allowing purchases up to a 20% premium over book value, provided cash holdings remain above $20 billion. No repurchases were made in 2015.
- Key Risks:
- Succession: Heavy reliance on Warren Buffett (85) and Charlie Munger (92) for major investment and capital allocation decisions.
- Insurance Reserves: Significant estimation error in property and casualty loss reserves could materially impact future earnings. Gross unpaid losses were $73.1 billion.
- Derivatives: Exposure to equity index put options and credit default contracts could result in significant future cash settlement payments if market conditions deteriorate.
- Regulatory: Changes in environmental regulations (e.g., Clean Power Plan) and railroad safety mandates could increase costs for utilities and BNSF.
Investor Verification Checklist
- Verify the impact of the non-cash $6.8 billion Kraft Heinz holding gain on reported net earnings versus operating cash flow.
- Review the development of GEICO's loss ratios and the adequacy of the $13.7 billion in gross unpaid loss reserves.
- Assess the sustainability of BNSF's earnings given the anticipated decline in coal and industrial freight volumes in 2016.
- Examine the fair value and potential settlement obligations of the $3.6 billion in equity index put option liabilities.
- Confirm the integration and financial performance of the newly acquired Berkshire Hathaway Automotive group.