Business Context and Reporting Period
This summary covers the Form 10-Q filed by Berkshire Hathaway Inc. for the quarterly period ended June 30, 2018. The company operates a diverse portfolio of businesses including insurance (GEICO, Reinsurance Group, Primary Group), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), manufacturing, service, retailing, and finance. 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 recorded in net earnings rather than other comprehensive income.
Key Financial Metrics
| Metric | Q2 2018 | Q2 2017 | YTD 6 Months 2018 | YTD 6 Months 2017 |
|---|---|---|---|---|
| Total Revenues | $62.2 billion | $57.3 billion | $120.7 billion | $121.6 billion |
| Net Earnings (Attributable to Shareholders) | $12.0 billion | $4.3 billion | $10.9 billion | $8.3 billion |
| Investment & Derivative Gains/Losses | $6.4 billion | $0.2 billion | ($1.7 billion) | $1.0 billion |
| Insurance Underwriting Gain | $1.2 billion | ($0.02 billion) | $1.7 billion | ($0.4 billion) |
| Cash & Cash Equivalents (Total) | $65.2 billion | $27.0 billion | $65.2 billion | $27.0 billion |
| Total Shareholders' Equity | $361.8 billion | $303.2 billion | $361.8 billion | $303.2 billion |
| Debt (Notes Payable & Borrowings) | $96.8 billion | $102.6 billion | $96.8 billion | $102.6 billion |
Material Changes vs. Prior Period
- Net Earnings Surge: Net earnings attributable to shareholders increased significantly in Q2 2018 ($12.0 billion) compared to Q2 2017 ($4.3 billion). This was primarily driven by a $6.4 billion gain from investments and derivatives in Q2 2018, compared to a $0.2 billion gain in the prior year. This volatility is due to the new accounting standard (ASU 2016-01) which now includes unrealized equity gains/losses in earnings.
- Insurance Underwriting: The insurance segment returned to profitability. Pre-tax underwriting gains were $1.2 billion in Q2 2018 and $1.7 billion YTD, reversing the losses seen in the same periods in 2017. Improvements were driven by lower loss ratios at GEICO and favorable foreign currency effects.
- Liquidity Position: Cash and cash equivalents (including U.S. Treasury Bills) held by insurance and other businesses rose to approximately $103.2 billion at June 30, 2018, up from $73.3 billion at year-end 2017. Total consolidated cash and equivalents reached $65.2 billion.
- Operating Segments:
- BNSF: Revenues increased 12% in Q2 and 10% YTD due to higher volume and revenue per car/unit.
- Manufacturing: Revenues increased 9% in Q2 and 8% YTD; pre-tax earnings rose 10% and 17% respectively.
- Utilities & Energy: Revenues increased 10% in Q2 and 8% YTD, though pre-tax earnings declined slightly in Q2 due to tax reform impacts on regulated rates.
Guidance, Outlook, and Risks
- Accounting Volatility: Management explicitly states that investment and derivative gains/losses are "meaningless" for evaluating economic performance due to their volatility. The inclusion of unrealized equity gains/losses in earnings will cause significant fluctuations in periodic net earnings.
- Repurchase Program: On July 17, 2018, the Board amended the share repurchase program. Berkshire may now repurchase shares whenever management believes the price is below intrinsic value, provided consolidated cash and U.S. Treasury Bills remain above $20 billion. No repurchases were made in the first six months of 2018.
- Capital Expenditures: BNSF and Berkshire Hathaway Energy are forecast to spend approximately $10 billion on capital expenditures for the full year 2018.
- Risks: Key risks include the inherent uncertainty in insurance loss reserves (approx. $105 billion), potential goodwill impairment ($81 billion recorded), and the impact of catastrophic events on insurance operations. Additionally, changes in foreign currency exchange rates significantly impact the valuation of Euro-denominated debt and foreign liabilities.
Investor Verification Checklist
- Investment Portfolio Valuation: Verify the composition of the $179.7 billion equity portfolio, noting that ~70% is concentrated in five companies (Apple, Bank of America, Coca-Cola, Wells Fargo, American Express).
- Insurance Loss Reserves: Review the $105 billion in unpaid loss reserves and the $1.05 billion reduction in prior-year estimates, which boosted current earnings.
- Derivative Liabilities: Confirm the $2.0 billion liability for equity index put options written prior to 2008 and the associated volatility risks.
- Debt Maturities: Check upcoming maturities, including $750 million of Berkshire term debt in August 2018 and $1.7 billion of BHE debt over the remainder of the year.
- Tax Rate Impact: Assess the ongoing impact of the Tax Cuts and Jobs Act (21% statutory rate) on future earnings versus the 35% rate in 2017.