Berkshire Hathaway Inc. 10-Q Summary: Q2 2011
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2011. Berkshire Hathaway operates as a diversified holding company with 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 approximately $47.9 billion.
Key Financial Metrics
| Metric | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Total Revenues | $38,274 million | $31,709 million | $71,994 million | $63,746 million |
| Net Earnings (Attributable to BH) | $3,417 million | $1,968 million | $4,928 million | $5,601 million |
| EPS (Class A Equivalent) | $2,072 | $1,195 | $2,989 | $3,451 |
| Operating Cash Flow (YTD) | $9,983 million (vs. $6,860 million YTD 2010) | |||
| Shareholders' Equity | $163.0 billion (as of June 30, 2011) | |||
| Total Debt (Notes Payable) | $56.7 billion (as of June 30, 2011) |
Material Changes vs. Prior Period
- Investment Gains: Q2 2011 net earnings were significantly boosted by a pre-tax gain of $1.25 billion from the redemption of Goldman Sachs 10% Preferred Stock. This contrasts with Q2 2010, which included a $1 billion one-time holding gain from the BNSF acquisition.
- Insurance Underwriting: The insurance group reported a pre-tax underwriting loss of $1.3 billion for the first six months of 2011, compared to a gain of $1.1 billion in the same period in 2010. This deterioration was driven by approximately $1.9 billion in pre-tax catastrophe losses (earthquakes in Japan/New Zealand, weather events) and foreign currency translation losses.
- Railroad (BNSF): Revenues increased 17% year-over-year for the first six months, driven by higher fuel surcharges and increased unit volumes. Pre-tax earnings rose to $2.0 billion (YTD 2011) from $1.5 billion (YTD 2010).
- Derivatives: Derivative losses narrowed significantly to $184 million in Q2 2011 compared to $2.2 billion in Q2 2010, primarily due to improved credit default contract valuations.
Guidance, Outlook, and Risks
- Acquisition Activity: Berkshire entered into an agreement to acquire The Lubrizol Corporation for approximately $9 billion in cash, expected to close within one to three months. The company also acquired remaining noncontrolling interests in Wesco Financial Corporation.
- Insurance Outlook: Management stated it is unlikely that combined insurance operations will achieve an underwriting profit for the full year 2011 due to the magnitude of first-half catastrophe losses and potential hurricane exposure in the second half.
- Investment Income: Future investment income is expected to be negatively impacted by the redemption of the Goldman Sachs preferred stock and the anticipated redemption of General Electric preferred stock in October 2011, as current market yields are lower.
- Capital Expenditures: Forecasted capital expenditures for the remainder of 2011 are approximately $2.5 billion for MidAmerican and $2.2 billion for BNSF.
- Risks: Key risks include the volatility of investment and derivative gains/losses, the uncertainty of insurance loss reserve estimates, and potential regulatory changes under the Dodd-Frank Act regarding derivative collateral requirements.
Investor Verification Checklist
- Catastrophe Loss Reserves: Verify the adequacy of the $1.9 billion in catastrophe provisions and the potential for further development of loss estimates.
- Float Cost: Monitor the cost of float, which turned positive (costly) in 2011 due to underwriting losses, compared to negative (profitable) in 2010.
- Lubrizol Acquisition: Confirm the closing of the $9 billion Lubrizol deal and its impact on cash balances.
- Derivative Liabilities: Review the $7.9 billion in recorded liabilities for equity index put options and credit default contracts, noting the long-term settlement dates.
- OTTI Losses: Understand the $506 million other-than-temporary impairment losses recorded in Q1 2011 (Wells Fargo, Kraft Foods) and their lack of impact on total shareholders' equity.