Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2010
Overview: Berkshire Hathaway is a holding company with diverse operations including insurance (GEICO, General Re, BHRG), railroad (BNSF), utilities and energy (MidAmerican), and various manufacturing, service, and retailing businesses. A major event in 2010 was the full acquisition of Burlington Northern Santa Fe (BNSF) on February 12, 2010, for approximately $26.5 billion.
Key Financial Metrics
| Metric | 2010 | 2009 |
|---|---|---|
| Total Revenues | $136.2 billion | $112.5 billion |
| Net Earnings (Attributable to Berkshire) | $13.0 billion | $8.1 billion |
| Net Earnings Per Share (Class A equiv.) | $7,928 | $5,193 |
| Total Assets | $372.2 billion | $297.1 billion |
| Shareholders' Equity | $157.3 billion | $131.1 billion |
| Cash and Cash Equivalents | $38.2 billion | $30.6 billion |
| Total Debt (Notes Payable & Borrowings) | $58.6 billion | $38.0 billion |
| Operating Cash Flow | $17.9 billion | $15.8 billion |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 21% to $136.2 billion, driven primarily by the inclusion of BNSF's full-year results (partial in 2010) and growth in manufacturing and service sectors.
- Earnings Surge: Net earnings rose 61% to $13.0 billion. This was bolstered by a one-time holding gain of approximately $979 million related to the BNSF acquisition and improved operating results across manufacturing and service segments.
- Investment Gains: After-tax investment and derivative gains were $1.9 billion in 2010, compared to $486 million in 2009. This included gains from the redemption of the Swiss Re convertible capital instrument.
- Debt Increase: Total borrowings increased significantly to $58.6 billion from $38.0 billion, largely due to $8.0 billion in new debt issued by the parent company to fund the BNSF acquisition.
- Insurance Underwriting: The insurance group generated a net underwriting gain of $1.3 billion, up from $949 million in 2009. GEICO reported a pre-tax underwriting gain of $1.1 billion.
Guidance, Outlook, and Risks
- Management Commentary: Management noted that while the economic recovery remains uneven, operating results for many manufacturing and service businesses improved in 2010. They anticipate general economic conditions will continue to gradually improve.
- Capital Allocation: Berkshire maintains a strategy of holding significant cash reserves ($38.2 billion) to capitalize on investment opportunities and weather economic downturns. No cash dividends are paid; the company retains earnings to grow book value.
- Key Risks:
- Insurance Reserves: Significant estimation error in property and casualty loss reserves could materially impact earnings. Gross unpaid losses were $60.1 billion.
- Derivatives: Exposure to credit default and equity index put option contracts creates potential for significant future cash settlement payments, though no loss events occurred in 2010.
- Key Personnel: Operations rely heavily on Warren Buffett (CEO) and Charlie Munger (Vice Chairman). Succession planning is in place, but their unavailability could have a material adverse effect.
- Regulatory Changes: The Dodd-Frank Act and potential climate change regulations could impact financial and utility operations.
Investor Verification Checklist
- BNSF Integration: Verify the full-year impact of BNSF on future earnings and capital expenditure requirements (forecasted at $3.5 billion for 2011).
- Insurance Reserve Adequacy: Review the "Loss Development" tables to assess the historical accuracy of reserve estimates and potential for future adjustments.
- Derivative Liabilities: Monitor the fair value of equity index put options and credit default contracts, which totaled approximately $8.0 billion in liabilities at year-end.
- Investment Portfolio Concentration: Note that approximately 58% of equity investments were concentrated in four companies (American Express, Coca-Cola, Procter & Gamble, Wells Fargo).
- Debt Maturities: Review the schedule of debt maturities, particularly the $2.2 billion due in 2011 for railroad and utility subsidiaries.