Berkshire Hathaway Inc. Q1 2018 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2018. Berkshire Hathaway Inc. 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
- Revenue: Total revenues were $58.5 billion, a decrease from $64.4 billion in Q1 2017.
- Net Earnings (Loss): Net loss attributable to Berkshire Hathaway shareholders was $(1.1) billion, compared to net earnings of $4.1 billion in Q1 2017.
- Operating Earnings: Excluding investment and derivative gains/losses, operating earnings were positive across most segments, driven by lower tax rates and improved underwriting.
- Cash Flow: Net cash provided by operating activities was $7.6 billion. Net cash provided by investing activities was $22.3 billion, primarily due to sales and maturities of securities exceeding purchases.
- Liquidity: Cash, cash equivalents, and U.S. Treasury Bills held by insurance and other businesses totaled approximately $98.6 billion as of March 31, 2018.
- Debt: Total notes payable and other borrowings were approximately $99.1 billion. Parent company debt was $18.2 billion.
- Shareholders' Equity: Total shareholders' equity was $351.1 billion, with Berkshire Hathaway shareholders' equity at $347.4 billion.
Material Changes vs. Prior Period
- Investment Losses: The primary driver of the net loss was a pre-tax investment loss of $7.8 billion, largely due to unrealized losses on equity securities (including Apple, Bank of America, and Wells Fargo) now required to be reported in earnings. In Q1 2017, such unrealized gains were reported in other comprehensive income.
- Insurance Underwriting: Insurance underwriting generated a pre-tax gain of $518 million in Q1 2018, compared to a loss of $379 million in Q1 2017. This improvement was due to favorable loss reserve development and lower tax rates, offset by increased losses on retroactive reinsurance contracts.
- Tax Rate Impact: The effective income tax rate decreased significantly due to the Tax Cuts and Jobs Act (TCJA), reducing the U.S. statutory rate from 35% to 21%.
- Segment Performance:
- GEICO: Pre-tax underwriting gain of $677 million (vs. $175 million in 2017) due to improved loss ratios.
- BNSF: Pre-tax earnings increased 12.5% to $1.5 billion, driven by higher volume and revenue per car.
- Manufacturing: Pre-tax earnings increased 25% to $1.9 billion, aided by the absence of a $184 million loss recorded in Q1 2017 related to a Lubrizol business disposition.
Guidance, Outlook, and Risks
- Management Commentary: Management states that investment and derivative gains/losses are often meaningless for evaluating periodic economic performance due to their volatility. They emphasize that operating earnings provide a better view of business performance.
- Capital Allocation: The Board has authorized share repurchases at prices no higher than a 20% premium over book value, provided cash and Treasury holdings remain above $20 billion. No repurchases were made in Q1 2018.
- Capital Expenditures: BNSF and Berkshire Hathaway Energy forecast capital expenditures of approximately $10 billion for 2018.
- Risks and Contingencies:
- Accounting Volatility: Future earnings will be subject to significant volatility due to the new accounting standard for equity securities.
- Insurance Reserves: Estimated liabilities for unpaid losses are approximately $104 billion; small percentage changes in estimates could materially affect earnings.
- Derivatives: Equity index put option liabilities were $2.4 billion. Changes in market indices or volatility could significantly impact earnings.
- Regulatory: Utilities and energy businesses are subject to regulatory approval for rates, which may not fully recover costs including taxes.
Key Facts for Investor Verification
- Verify the impact of the new accounting standard (ASU 2016-01) on future quarterly earnings volatility, specifically regarding the $173 billion equity portfolio.
- Monitor the development of insurance loss reserves, particularly for retroactive reinsurance contracts (e.g., the AIG agreement), which carry significant liabilities.
- Track the performance of the Kraft Heinz investment (carrying value $17.7 billion), which is accounted for under the equity method and represents a significant portion of equity method earnings.
- Review the status of the pending acquisition of Medical Liability Mutual Insurance Company (MLMIC), expected to close in Q3 2018 for approximately $2.5 billion.
- Assess the sustainability of GEICO's improved loss ratio (76.7% in Q1 2018) given the competitive insurance market environment.