Berkshire Hathaway Inc. Q1 2008 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2008. Berkshire Hathaway Inc. operates as a diversified holding company with major segments in Insurance, Utilities and Energy (MidAmerican), Manufacturing/Service/Retailing, and Finance and Financial Products. The company reported a significant decline in net earnings compared to the prior year, primarily driven by unrealized losses on derivative contracts and reduced investment gains.
Key Financial Metrics
| Metric | Q1 2008 | Q1 2007 |
|---|---|---|
| Total Revenues | $25,175 million | $32,918 million |
| Net Earnings | $940 million | $2,595 million |
| Net Earnings Per Share (Class A equiv.) | $607 | $1,682 |
| Operating Cash Flow | $3,353 million | $4,625 million |
| Cash and Cash Equivalents (Total) | $35,566 million | $46,027 million |
| Total Shareholders' Equity | $119,372 million | $120,733 million |
| Total Liabilities | $157,401 million | $149,759 million |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings dropped 64% year-over-year. The primary driver was a $1.641 billion pre-tax loss on derivative contracts (credit default and equity index put options), compared to a $143 million gain in Q1 2007. Investment gains also fell from $442 million to $115 million.
- Insurance Underwriting: Pre-tax underwriting gains decreased from $927 million in Q1 2007 to $282 million in Q1 2008. This was largely due to the absence of the $7.1 billion Equitas retroactive reinsurance transaction that occurred in Q1 2007. GEICO's loss ratio increased to 75.4% from 71.5%.
- Acquisitions: Berkshire acquired a 60% interest in Marmon Holdings, Inc. for $4.5 billion in March 2008. This acquisition significantly impacted the "Other manufacturing" segment revenues and earnings.
- Utilities and Energy: MidAmerican reported a slight increase in earnings ($316 million vs. $293 million), driven by higher revenues in regulated utilities, partially offset by a loss in the real estate brokerage segment due to the housing market downturn.
- Liquidity: Cash and cash equivalents decreased by approximately $10.5 billion, reflecting the Marmon acquisition, increased purchases of fixed maturity securities, and a net outflow from investing activities of $13.3 billion.
Guidance, Outlook, and Risks
- Insurance Outlook: Management expects underwriting gains in 2008 to be lower, and perhaps significantly lower, than in 2007 due to increased price competition and the absence of the Equitas transaction. Loss ratios are anticipated to be higher for the remainder of the year.
- Derivative Volatility: Management notes that periodic gains or losses on derivative contracts are not meaningful given the long-term nature of the contracts (some expiring up to 20 years out) and the volatility of equity and credit markets. The company intends to hold these contracts to expiration.
- Real Estate Impact: The downturn in the residential real estate market continues to negatively impact Shaw Industries (carpet sales) and the retailing segment (home furnishings and jewelry).
- Legal Contingencies: Ongoing investigations by the SEC and DOJ regarding "non-traditional products" and the AIG transaction involving General Re continue. Four former General Re executives were convicted in February 2008; the company paid a $5 million forfeiture. Berkshire cannot predict the outcome or potential loss range.
- Capital Commitments: Berkshire has committed to provide $6.5 billion in funding to Mars, Incorporated for the acquisition of Wrigley (subject to closing conditions).
Investor Verification Checklist
- Derivative Liability Exposure: Verify the magnitude of the $9.47 billion derivative contract liability and the assumptions used in fair value modeling, as these create significant earnings volatility.
- Insurance Loss Reserves: Review the $56.4 billion in unpaid loss reserves and the sensitivity of earnings to changes in these estimates.
- Marmon Integration: Assess the financial performance of the newly acquired Marmon Holdings and the terms of the remaining staged acquisitions.
- Real Estate Sensitivity: Monitor the impact of the housing market on Shaw Industries, Clayton Homes, and retail operations.
- Legal Proceedings: Track developments in the SEC/DOJ investigations regarding General Re and the potential for additional fines or penalties.