Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
Overview: Berkshire Hathaway operates a diverse portfolio of businesses including insurance, railroad, utilities and energy, manufacturing, service, retailing, and finance. The company reported a significant increase in shareholders' equity driven by net earnings and substantial unrealized investment gains, despite underwriting losses in its insurance segment due to major catastrophe events.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | 9 Months 2017 | 9 Months 2016 |
|---|---|---|---|---|
| Total Revenues | $60,525 million | $58,843 million | $183,230 million | $165,260 million |
| Net Earnings (Attributable to Shareholders) | $4,067 million | $7,198 million | $12,389 million | $17,788 million |
| Net Earnings Per Equivalent Class A Share | $2,473 | $4,379 | $7,533 | $10,822 |
| Operating Cash Flows (9 Months) | $37,497 million (vs. $25,097 million in 2016) | |||
| Cash & Cash Equivalents (Total) | $42,706 million (as of Sept 30, 2017) | |||
| U.S. Treasury Bills | $80.6 billion (as of Sept 30, 2017) | |||
| Total Shareholders' Equity | $311,852 million (as of Sept 30, 2017) |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings attributable to shareholders decreased 43% in Q3 2017 compared to Q3 2016, and 30% for the first nine months. This was primarily due to lower investment gains and significant insurance underwriting losses.
- Insurance Underwriting Losses: The insurance group reported a pre-tax underwriting loss of $2.2 billion in Q3 2017 and $2.6 billion for the first nine months. This contrasts with gains in the prior year periods. The losses were driven by approximately $3.0 billion in estimated pre-tax losses from Hurricanes Harvey, Irma, Maria, and an earthquake in Mexico.
- Investment Gains: Pre-tax investment gains were $657 million in Q3 2017, significantly lower than the $3.15 billion recorded in Q3 2016 (which included a $2.4 billion gain from the sale of Wrigley preferred stock).
- Operating Segments:
- Railroad (BNSF): Earnings increased 4.7% in Q3 and 11.2% for the first nine months, driven by increased unit volume.
- Utilities & Energy: Earnings increased due to higher pre-tax earnings and lower effective tax rates.
- Manufacturing: Earnings were relatively flat in Q3 but increased 5.4% for the first nine months.
- Float Increase: Insurance float increased to approximately $113 billion from $91 billion at the end of 2016, reflecting growth in unpaid losses and retroactive reinsurance liabilities.
Guidance, Outlook, and Risks
- Accounting Changes (2018): Berkshire will adopt new accounting standards (ASU 2016-01) on January 1, 2018. This will require unrealized gains and losses on equity securities to be included in net earnings rather than other comprehensive income. Management warns this will significantly increase the volatility of reported periodic earnings, though it will not affect total shareholders' equity.
- Stock Repurchases: The Board has authorized repurchases of Class A and Class B shares at prices no higher than a 20% premium over book value, provided consolidated cash and U.S. Treasury Bills remain above $20 billion. No repurchases were made in the first nine months of 2017.
- Capital Expenditures: BNSF and Berkshire Hathaway Energy (BHE) are expected to continue significant capital expenditures. BHE and BNSF spent $3.2 billion and $2.4 billion respectively in the first nine months of 2017.
- Risks and Contingencies:
- Catastrophe Exposure: Significant volatility in earnings due to potential natural disasters (hurricanes, earthquakes) affecting insurance operations.
- Derivative Contracts: Berkshire holds long-duration equity index put option contracts with a liability of $2.2 billion. Changes in market volatility and index values can cause significant earnings fluctuations.
- Foreign Currency: Fluctuations in exchange rates, particularly the Euro, impacted earnings through non-cash losses on debt revaluation ($571 million after-tax loss in the first nine months of 2017).
- Acquisitions: Berkshire acquired a 38.6% interest in Pilot Flying J in October 2017 and is pursuing the acquisition of Medical Liability Mutual Insurance Company (MLMIC), expected to close in early 2018.
Key Facts for Investor Verification
- Catastrophe Loss Estimates: Verify the finality of the $3.0 billion pre-tax loss estimate for Q3 2017 hurricanes and the Mexico earthquake, as these are subject to development over time.
- Investment Portfolio Concentration: Approximately 62% of the fair value of equity securities is concentrated in five companies: Wells Fargo, Apple, Bank of America, Coca-Cola, and American Express.
- Float Cost: The average cost of float for the first nine months of 2017 was approximately 2.5%, calculated against pre-tax underwriting losses of $2.6 billion.
- Debt Maturities: Monitor upcoming debt maturities, including $1.55 billion of Berkshire term debt, $650 million of BNSF debentures, and $4.1 billion of BHFC senior notes maturing within the next 12 to 18 months.
- Unrealized Gains: As of September 30, 2017, accumulated after-tax net unrealized appreciation related to equity securities was approximately $53 billion, which will impact future earnings volatility under new accounting rules.