Berkshire Hathaway Inc. 2014 Annual Report (10-K) Summary
Business Context and Reporting Period
This summary covers the fiscal year ended December 31, 2014. Berkshire Hathaway Inc. is a holding company with diverse operations including insurance (GEICO, General Re, BHRG, Primary Group), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), manufacturing, service, retailing, and finance. The company operates on a decentralized basis with minimal corporate involvement in day-to-day operations.
Key Financial Metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Total Revenues | $194.7 billion | $182.2 billion |
| Net Earnings (Attributable to Berkshire) | $19.9 billion | $19.5 billion |
| Net Earnings Per Share (Class A equiv.) | $12,092 | $11,850 |
| Total Assets | $526.2 billion | $484.9 billion |
| Shareholders' Equity | $240.2 billion | $221.9 billion |
| Cash and Cash Equivalents | $63.3 billion | $48.2 billion |
| Insurance Float | ~$84 billion | ~$77 billion |
| Notes Payable & Borrowings | $80.2 billion | $72.2 billion |
Note: Investment and derivative gains/losses totaled $4.1 billion pre-tax in 2014, including $2.1 billion in non-cash gains from tax-free exchanges of Phillips 66 and Graham Holdings stock.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 6.9% to $194.7 billion, driven by growth in railroad, utilities, and manufacturing segments.
- Insurance Underwriting: Pre-tax underwriting gain was $2.7 billion in 2014, down from $3.1 billion in 2013. The 2014 results benefited from no significant catastrophe losses, whereas 2013 included losses from European storms and floods.
- Utilities & Energy: Earnings increased 28% to $1.9 billion, primarily due to the full-year impact of the NV Energy acquisition (completed Dec 2013) and the AltaLink acquisition (completed Dec 2014).
- Railroad (BNSF): Earnings rose 2% to $3.9 billion despite service challenges and severe winter weather in Q1 2014. Revenues increased 5.6%.
- Manufacturing: Earnings increased 14% to $4.8 billion, aided by bolt-on acquisitions and volume growth in industrial products.
- Investments: Equity securities portfolio remained relatively flat in value ($115.5 billion), while cash and cash equivalents increased significantly by $15.5 billion.
Guidance, Outlook, and Risks
Management Commentary: Management emphasizes that investment and derivative gains/losses are often meaningless for evaluating economic performance due to volatility. The company maintains a strategy of holding significant cash reserves (over $60 billion) to ensure liquidity and safety over yield. No specific financial guidance was provided for 2015.
Key Risks and Contingencies:
- Key Personnel: Heavy reliance on Warren Buffett (84) and Charlie Munger (91) for capital allocation decisions.
- Insurance Reserves: Significant uncertainty exists regarding the adequacy of $71.5 billion in unpaid loss reserves. Small percentage changes in estimates can materially impact earnings.
- Derivatives: Exposure to equity index put options (liability ~$4.6 billion) and credit default contracts. Future payments depend on market conditions at expiration (starting 2018).
- Regulatory: Utilities and railroads face significant regulatory risks regarding rates, environmental compliance (e.g., EPA carbon emissions rules), and safety mandates.
- Concentration: Equity investments are concentrated in a few issuers (e.g., Wells Fargo, American Express, Coca-Cola, IBM), representing ~59% of the portfolio.
Investor Verification Checklist
- Insurance Reserve Development: Verify the trend of "prior accident year" loss adjustments. In 2014, prior year estimates were reduced by $1.4 billion, boosting earnings.
- Investment Gains Composition: Distinguish between operating earnings and non-recurring investment gains (e.g., the $2.1 billion tax-free exchange gains in 2014).
- Float Cost: Monitor the cost of float (underwriting loss/gain). Berkshire maintained a negative cost of float (underwriting profit) in 2014.
- Capital Expenditures: Review the $11.8 billion in capital expenditures for BNSF and BHE, which are critical for maintaining infrastructure and future growth.
- Derivative Liability Valuation: Assess the sensitivity of the $4.6 billion equity index put option liability to changes in volatility and interest rates.