Berkshire Hathaway Inc. 10-Q Summary: Q3 2012
Business Context and Reporting Period
This filing covers the quarterly period ended September 30, 2012, and the first nine months of 2012. Berkshire Hathaway operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The company reported strong liquidity with consolidated cash and cash equivalents totaling $47.8 billion.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9 Months 2012 | 9 Months 2011 |
|---|---|---|---|---|
| Total Revenues | $41,050 million | $33,739 million | $117,743 million | $105,733 million |
| Net Earnings (Attributable to Shareholders) | $3,920 million | $2,278 million | $10,273 million | $7,206 million |
| Net Earnings Per Share (Class A equiv.) | $2,373 | $1,380 | $6,220 | $4,368 |
| Operating Cash Flow (9 Months) | $16,160 million | |||
| Shareholders' Equity | $184,602 million | $159,957 million | N/A | |
| Total Debt (Notes Payable) | $62,509 million | $60,384 million | N/A |
Note: Debt figures represent the sum of notes payable across all segments as of September 30, 2012.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 21.7% in Q3 2012 compared to Q3 2011, driven by higher premiums, sales, and investment gains.
- Profitability Surge: Net earnings attributable to shareholders rose 72% in Q3 2012 ($3.92B vs. $2.28B). This was significantly aided by a reduction in derivative losses and higher investment gains.
- Derivative Performance: Derivative losses improved dramatically. Q3 2012 losses were $118 million compared to $2.44 billion in Q3 2011. This improvement was due to narrower credit spreads and increased equity index values.
- Investment Gains: Realized investment gains were $917 million in Q3 2012, compared to $100 million in Q3 2011.
- Insurance Underwriting: Pre-tax underwriting gains were $608 million in Q3 2012, down from $1.695 billion in Q3 2011. The prior year included a significant $875 million reduction in retroactive reinsurance liabilities.
- Acquisitions: The company completed several "bolt-on" acquisitions totaling approximately $1.8 billion in the first nine months of 2012. The Lubrizol acquisition (completed Sept 2011) contributed significantly to manufacturing earnings in 2012.
Guidance, Outlook, and Risks
- Capital Allocation: Management maintains a stock repurchase program authorized in September 2011, allowing purchases up to a 10% premium over book value. However, repurchases will not occur if consolidated cash equivalents fall below $20 billion. No repurchases were made in the first nine months of 2012.
- Liquidity Strategy: Management emphasizes safety over yield for cash equivalents, maintaining a substantial cash balance to capitalize on investment opportunities and withstand economic downturns.
- Derivative Risks: The company holds significant equity index put option and credit default contracts. While losses decreased in 2012, these contracts remain a source of earnings volatility. The aggregate intrinsic value of equity index put options was approximately $5.4 billion as of September 30, 2012.
- Regulatory Environment: The company is monitoring the Dodd-Frank Wall Street Reform and Consumer Protection Act. Management does not currently expect the act to have a material impact on its derivative contracts entered into prior to the legislation.
- Legal Proceedings: BNSF is involved in consolidated class-action litigation regarding fuel surcharges. Management believes the claims are without merit and does not expect a material financial impact.
Investor Verification Checklist
- Derivative Liability Valuation: Verify the assumptions used to value the $10 billion in derivative liabilities, specifically regarding volatility and credit default spreads.
- Insurance Reserve Adequacy: Review the $63.4 billion in unpaid loss reserves for property and casualty insurance, noting the inherent uncertainty in long-tail liability estimates.
- Goodwill Impairment: Assess the $54.1 billion in goodwill, particularly for acquired businesses like Lubrizol, against future cash flow projections.
- Float Cost: Monitor the cost of insurance float, which remains negative (profitable) due to underwriting gains, but is sensitive to catastrophe losses.
- Debt Maturities: Track upcoming debt maturities for BNSF and MidAmerican, which have significant capital expenditure requirements funded by debt.