BERKSHIRE HATHAWAY INC quarterly report, Q1 FY2012

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Berkshire Hathaway Inc. 10-Q Summary: Q1 2012

Business Context and Reporting Period

This filing covers the quarterly period ended March 31, 2012. Berkshire Hathaway operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The company reported a significant improvement in net earnings compared to the prior year, driven by strong operating results across most segments and favorable derivative valuations, offset by investment impairments.

Key Financial Metrics

Metric Q1 2012 Q1 2011
Total Revenues $38,147 million $33,720 million
Net Earnings (Attributable to Berkshire) $3,245 million $1,511 million
Comprehensive Income $11,108 million $2,696 million
Operating Cash Flows $4,650 million $3,502 million
Cash and Cash Equivalents $37,826 million $41,178 million
Total Shareholders' Equity $180,269 million $168,961 million
Total Debt (Notes Payable & Borrowings) $61,835 million $60,384 million

Note: Debt figures represent the sum of "Notes payable and other borrowings" across all three segments.

Material Changes vs. Prior Period

  • Net Earnings Surge: Net earnings attributable to Berkshire increased 115% to $3.245 billion, compared to $1.511 billion in Q1 2011. This was largely due to a shift from a net underwriting loss in 2011 to a gain in 2012, and significant derivative gains.
  • Insurance Underwriting: The insurance group reported a pre-tax underwriting gain of $85 million in Q1 2012, a stark contrast to the $1.276 billion loss in Q1 2011. The 2011 loss was heavily impacted by catastrophe events (Japan/New Zealand earthquakes, Australian floods/cyclone), whereas Q1 2012 had no significant catastrophe losses.
  • Investment Impairments: The company recorded $337 million in other-than-temporary impairment (OTTI) losses on fixed maturity securities (Texas Competitive Electric Holdings) in Q1 2012. In Q1 2011, OTTI losses were $506 million, primarily related to Wells Fargo and Kraft Foods equity securities.
  • Derivative Gains: Derivative gains/losses contributed $1.002 billion to revenue in Q1 2012, compared to $271 million in Q1 2011. This was driven by equity index put option gains ($689 million) and credit default contract gains ($340 million).
  • Segment Performance:
    • BNSF (Railroad): Revenues increased 10% to $5.0 billion; earnings rose to $701 million.
    • MidAmerican (Utilities/Energy): Earnings attributable to Berkshire increased to $338 million.
    • Manufacturing/Service: Earnings increased significantly to $854 million, boosted by the full quarter inclusion of the Lubrizol acquisition (completed Sept 2011).

Guidance, Outlook, and Risks

  • Capital Allocation: Management reiterated an indefinite share repurchase program authorized in September 2011. Repurchases are capped at a 10% premium over book value and will not occur if consolidated cash equivalents fall below $20 billion. No repurchases were made in Q1 2012.
  • Capital Expenditures: BNSF and MidAmerican have significant capital commitments. BNSF forecasted ~$3.1 billion in capital commitments for the remainder of 2012, while MidAmerican forecasted $3.0 billion. These are expected to be funded by operating cash flows and debt issuances.
  • Derivative Risks: The company holds significant equity index put option and credit default contracts. While these generated substantial gains in Q1 2012, management notes that fair value changes can cause significant volatility in periodic earnings. The aggregate intrinsic value of equity index put options was approximately $4.5 billion as of March 31, 2012.
  • Regulatory Environment: Management stated that the Dodd-Frank Act is not currently expected to have a material impact on consolidated financial results, particularly regarding collateral requirements for pre-existing derivative contracts.
  • Accounting Changes: Adoption of new accounting standards (ASU 2010-26) regarding insurance contract acquisition costs resulted in higher reported underwriting expenses for GEICO in Q1 2012, though management notes this does not impact cash basis costs.

Investor Verification Checklist

  • OTTI Loss Details: Verify the specific issuer and remaining exposure related to the $337 million fixed maturity impairment loss.
  • Derivative Valuation: Review the sensitivity of the $8.9 billion net derivative liability to changes in volatility and credit spreads, as these are Level 3 fair value measurements.
  • Insurance Loss Reserves: Monitor the $63.7 billion in unpaid loss reserves for potential adjustments, as small percentage changes can materially impact earnings.
  • Debt Maturities: Track the $2.45 billion of BHFC notes maturing in Q2 and Q3 2012 and the company's refinancing plans.
  • GEICO Expense Ratio: Assess the long-term impact of the new DPAC accounting standard on GEICO's reported expense ratios versus cash costs.