BERKSHIRE HATHAWAY INC quarterly report, Q3 FY2018

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Business Context and Reporting Period

This summary covers the Form 10-Q filed by Berkshire Hathaway Inc. for the quarterly period ended September 30, 2018. The company operates a diverse portfolio of businesses including insurance, railroad, utilities and energy, finance, manufacturing, service, and retailing. A significant accounting change occurred on January 1, 2018, with the adoption of ASU 2016-01, requiring unrealized gains and losses on equity securities to be reported in net earnings rather than other comprehensive income.

Key Financial Metrics

Metric Q3 2018 Q3 2017 9 Months 2018 9 Months 2017
Total Revenues $63,450 million $59,507 million $184,123 million $181,133 million
Net Earnings (Attributable to Shareholders) $18,540 million $4,067 million $29,413 million $12,389 million
Investment Gains/Losses (Pre-tax) $14,569 million $657 million $12,750 million $1,262 million
Cash and Cash Equivalents (Consolidated) $41,438 million $31,583 million $41,438 million $31,583 million
Shareholders' Equity $375,606 million $348,296 million $375,606 million $348,296 million
Effective Tax Rate 19.2% 25.3% 19.1% 27.2%

Note: Cash figures include U.S. Treasury Bills with maturities of three months or less. Q3 2018 cash and equivalents were $36,506 million (Insurance/Other) + $3,297 million (Railroad/Utilities) + $1,635 million (Finance) = $41,438 million.

Material Changes vs. Prior Period

  • Net Earnings Surge: Net earnings attributable to shareholders increased 356% in Q3 2018 compared to Q3 2017. This was primarily driven by a $14.3 billion unrealized gain on equity securities (due to the new accounting standard) and a lower effective tax rate (19.2% vs. 25.3%).
  • Insurance Underwriting: Insurance underwriting generated a pre-tax gain of $599 million in Q3 2018, a significant improvement from a $2.2 billion loss in Q3 2017. The 2017 loss was heavily impacted by $3.0 billion in catastrophe losses from hurricanes and an earthquake. Q3 2018 included estimated losses of $372 million from two significant events.
  • Operating Segments:
    • BNSF (Railroad): Pre-tax earnings rose 9.9% to $1.9 billion, driven by higher unit volumes and revenue per car.
    • Berkshire Hathaway Energy: Pre-tax earnings decreased slightly to $1.2 billion, impacted by regulatory rate reductions following the Tax Cuts and Jobs Act (TCJA).
    • Manufacturing: Pre-tax earnings remained relatively flat at $2.0 billion, with industrial products showing growth offset by higher raw material costs in building products.
  • Float: Insurance float approximated $118 billion at September 30, 2018, up from $114 billion at year-end 2017.

Guidance, Outlook, and Risks

  • Accounting Volatility: Management explicitly states that investment gains and losses (now including unrealized changes) are "meaningless" for evaluating periodic economic performance due to their volatility. Future earnings will fluctuate significantly based on equity market movements.
  • Share Repurchases: The Board amended the repurchase program on July 17, 2018, allowing repurchases whenever management believes the price is below intrinsic value, provided consolidated cash and U.S. Treasury Bills remain above $20 billion. In Q3 2018, the company repurchased $928 million of stock.
  • Capital Expenditures: Forecasted capital expenditures for BNSF and Berkshire Hathaway Energy for the full year 2018 are approximately $9.8 billion.
  • Risks and Contingencies:
    • Catastrophe Losses: Significant volatility remains due to potential natural disasters. Hurricane Michael (October 2018) is estimated to cause $350 million to $550 million in losses.
    • Derivatives: The company holds equity index put option liabilities of $1.9 billion. If credit ratings are downgraded below A- (S&P) or A3 (Moody's), up to $1.1 billion in collateral may be required.
    • Regulatory: Regulated utilities may pass tax savings from the TCJA to customers via lower rates, potentially reducing future revenues and pre-tax earnings.

Investor Verification Checklist

  • Investment Portfolio Concentration: Verify the current fair value of the top five equity holdings (Apple, Bank of America, Coca-Cola, American Express, Wells Fargo), which comprised approximately 69% of the equity portfolio's fair value.
  • Unrealized Gains Impact: Confirm the portion of net earnings derived from unrealized investment gains versus operating earnings to assess core business performance.
  • Insurance Loss Reserves: Monitor the $106 billion in unpaid loss reserves for potential adjustments, as small percentage changes can materially impact earnings.
  • Debt Maturities: Review upcoming debt maturities for BNSF, BHE, and BHFC, particularly the $2.7 billion of BHFC senior notes maturing in Q1 2019.
  • Float Cost: Track the cost of float, which was negative in the first nine months of 2018 due to underwriting profits, contrasting with a positive cost in 2017.