Berkshire Hathaway Inc. Q1 2011 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2011. Berkshire Hathaway operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The company reported a significant decline in net earnings compared to the prior year, primarily driven by insurance underwriting losses from global catastrophes and accounting adjustments related to investment impairments.
Key Financial Metrics
- Net Earnings Attributable to Berkshire: $1.511 billion (Q1 2011) vs. $3.633 billion (Q1 2010).
- Net Earnings Per Share (Class A equivalent): $917 (Q1 2011) vs. $2,272 (Q1 2010).
- Total Revenues: $33.720 billion (Q1 2011) vs. $32.037 billion (Q1 2010).
- Operating Cash Flows: $3.502 billion (Q1 2011) vs. $3.313 billion (Q1 2010).
- Cash and Cash Equivalents: $41.178 billion (March 31, 2011) vs. $38.227 billion (Dec 31, 2010).
- Total Shareholders' Equity: $164.265 billion (March 31, 2011).
- Total Debt (Notes Payable and Borrowings): $56.546 billion (March 31, 2011).
Material Changes vs. Prior Period
- Insurance Underwriting Loss: The insurance group recorded a pre-tax underwriting loss of $1.276 billion in Q1 2011, compared to a gain of $345 million in Q1 2010. This was driven by approximately $1.7 billion in provisions for catastrophe losses (earthquakes in Japan and New Zealand, cyclones/floods in Australia).
- Investment Impairments: The company recorded $506 million in other-than-temporary impairment (OTTI) losses, primarily related to Wells Fargo ($337 million) and Kraft Foods ($169 million). This contrasts with Q1 2010, which included a one-time $979 million holding gain from the BNSF acquisition.
- Railroad Performance: Burlington Northern Santa Fe (BNSF) revenues increased 17% to $4.53 billion, and pre-tax earnings rose to $965 million, driven by higher unit volumes and fuel surcharges.
- Derivative Gains: Derivative contracts generated a gain of $271 million in Q1 2011, down from $411 million in Q1 2010.
Guidance, Outlook, and Risks
- Underwriting Outlook: Management stated it is unlikely that combined insurance operations will achieve an underwriting profit for the full year 2011 due to Q1 catastrophe losses and potential hurricane activity.
- Investment Income: Investment income is expected to decline in Q2 2011 and beyond following the redemption of the Goldman Sachs 10% Preferred Stock ($5.5 billion) in April 2011, as reinvestment yields are currently low.
- Acquisitions: Berkshire entered into an agreement to acquire The Lubrizol Corporation for approximately $9.0 billion, expected to close in Q3 2011. The company also increased its stake in Marmon Holdings to 80.2%.
- Capital Expenditures: Forecasted capital expenditures for the remainder of 2011 are approximately $3.1 billion for MidAmerican and $2.8 billion for BNSF.
- Risks: Key risks include the volatility of insurance loss estimates, potential for further catastrophic events, changes in fair value of derivative contracts, and regulatory changes under the Dodd-Frank Act.
Investor Verification Checklist
- Verify the ultimate development of the $1.7 billion catastrophe loss reserves recorded in Q1 2011.
- Monitor the impact of the Goldman Sachs preferred stock redemption on Q2 2011 investment income.
- Review the status and regulatory approval timeline for the $9.0 billion Lubrizol acquisition.
- Assess the long-term impact of the Wells Fargo OTTI charge on future earnings, noting that the company intends to hold the remaining shares.
- Track BNSF's ability to maintain revenue growth amidst rising fuel and labor costs.