Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2015 (Third Quarter and First Nine Months)
Business Overview: Berkshire operates a diversified portfolio including insurance (GEICO, General Re, BHRG), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), manufacturing, service and retailing, and finance and financial products. The company is characterized by decentralized management and significant capital allocation decisions made at the corporate level.
Key Financial Metrics
| Metric (in millions) | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Total Revenues | $58,989 | $51,199 | $159,001 | $146,414 |
| Net Earnings (Total) | $9,527 | $4,721 | $18,867 | $15,952 |
| Net Earnings Attributable to Shareholders | $9,428 | $4,617 | $18,605 | $15,717 |
| EPS (Equivalent Class A) | $5,737 | $2,811 | $11,323 | $9,562 |
| Operating Cash Flows (9M) | $24,155 | $24,157 | $24,155 | $24,157 |
| Cash and Cash Equivalents (Total) | $66,260 | $62,380 | $66,260 | $62,380 |
| Total Shareholders' Equity | $251,321 | $243,027 | $251,321 | $243,027 |
Note: Revenues and earnings are significantly impacted by investment and derivative gains/losses, which are volatile and not indicative of operating performance.
Material Changes vs. Prior Period
- Investment Gains: Net earnings surged primarily due to a non-cash holding gain of approximately $6.8 billion (pre-tax) in the third quarter related to the Kraft Heinz merger. This reduced Berkshire's ownership stake from ~52.5% to ~26.8%, triggering a gain under equity method accounting.
- Insurance Underwriting: After-tax underwriting earnings declined to $414 million in Q3 2015 from $629 million in Q3 2014. GEICO experienced higher loss ratios (80.4% vs 78.2%) due to increased claim frequency and severity. BHRG and General Re also saw declines in underwriting gains.
- Railroad (BNSF): Pre-tax earnings increased 11% in Q3 2015 to $1.8 billion, driven by improved service levels and significantly lower fuel costs (down 40% year-over-year), despite a 5% decline in revenues due to lower fuel surcharges.
- Utilities and Energy: Earnings increased due to the inclusion of AltaLink (acquired late 2014) and a lower effective tax rate. Real estate brokerage revenues and earnings grew significantly.
- Acquisitions: In Q1 2015, Berkshire acquired the Van Tuyl Group (renamed Berkshire Hathaway Automotive) for $4.1 billion, contributing to revenue growth in the service and retailing segment.
Guidance, Outlook, and Risks
- Management Commentary: Warren Buffett and management reiterate that investment and derivative gains/losses are often meaningless for evaluating economic performance due to their volatility. The focus remains on operating earnings and capital allocation.
- Share Repurchases: The Board has authorized repurchases of Class A and B shares at prices no higher than a 20% premium over book value, provided consolidated cash remains above $20 billion. No repurchases were made in the first nine months of 2015.
- Pending Acquisitions:
- Precision Castparts Corp. (PCC): Agreed to acquire for approximately $31.7 billion in cash. Expected to close in Q1 2016 pending regulatory approvals.
- Duracell: Agreed to acquire from Procter & Gamble in exchange for P&G stock held by Berkshire. Expected to close in Q1 2016.
- Risks and Contingencies:
- Derivatives: Significant liabilities exist for equity index put options (fair value ~$4.2 billion) and credit default contracts. Changes in market volatility and index levels cause significant earnings volatility.
- Insurance Reserves: Estimated liabilities for unpaid losses are $72.3 billion. Small percentage changes in these estimates can materially impact earnings.
- Goodwill: Total goodwill is $62.7 billion; impairment charges could materially affect earnings if valuations decline.
Investor Verification Checklist
- Kraft Heinz Gain: Verify the impact of the $6.8 billion non-cash holding gain on reported net earnings and EPS to understand the core operating performance.
- GEICO Loss Ratios: Monitor the trend in GEICO's loss ratios (80.4% in Q3 2015) and the effectiveness of premium rate increases in stabilizing underwriting profits.
- Cash Position: Confirm the consolidated cash balance of $66.3 billion remains sufficient to fund the pending $31.7 billion PCC acquisition and maintain the $20 billion liquidity floor for share repurchases.
- Derivative Liabilities: Review the fair value changes in equity index put options, which caused a $764 million pre-tax loss in Q3 2015, and assess the potential for future volatility.
- Regulatory Approvals: Track the status of antitrust clearances for the PCC and Duracell acquisitions, which are critical for closing in early 2016.