Business Context and Reporting Period
Company: Berkshire Hathaway Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2018
Overview: Berkshire is a holding company with diverse operations including insurance (GEICO, Reinsurance Group, Primary Group), freight rail (BNSF), utilities and energy (Berkshire Hathaway Energy), and a wide array of manufacturing, service, and retailing businesses. The company operates on a decentralized basis with minimal corporate involvement in day-to-day activities.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total Revenues | $247.8 billion | $239.9 billion |
| Net Earnings (Attributable to Berkshire) | $4.0 billion | $44.9 billion |
| Operating Earnings (Excl. Investment Gains/Losses) | $29.2 billion | $21.4 billion |
| Investment & Derivative Gains/Losses | $(22.5) billion | $2.1 billion |
| Total Assets | $707.8 billion | $702.1 billion |
| Shareholders' Equity | $348.7 billion | $348.3 billion |
| Cash & Equivalents (Consolidated) | $109.0 billion | $114.0 billion |
| Debt (Notes Payable & Borrowings) | $97.5 billion | $102.6 billion |
Material Changes vs. Prior Period
- Net Earnings Decline: Net earnings dropped significantly from $44.9 billion in 2017 to $4.0 billion in 2018. This was primarily due to a $22.5 billion pre-tax loss on investments and derivatives in 2018, compared to a $2.1 billion gain in 2017. Additionally, 2017 included a one-time $29.1 billion tax benefit from the Tax Cuts and Jobs Act (TCJA).
- Operating Earnings Growth: Excluding investment gains/losses, operating earnings increased 36% to $29.2 billion, driven by lower tax rates and improved performance in manufacturing, service, and retailing segments.
- Insurance Underwriting: Pre-tax underwriting results improved from a $3.2 billion loss in 2017 to a $2.0 billion gain in 2018. This was aided by lower catastrophe losses ($1.6 billion in 2018 vs. $3.0 billion in 2017) and favorable foreign currency impacts.
- Accounting Change: Beginning in 2018, unrealized gains and losses on equity securities are recorded in net earnings rather than other comprehensive income, increasing earnings volatility.
Guidance, Outlook, and Risks
- Capital Allocation: Management continues to prioritize maintaining a strong cash position (targeting at least $20 billion in cash/T-bills) to weather market downturns. The stock repurchase program was amended in July 2018 to allow repurchases whenever shares trade below intrinsic value, with no expiration date.
- Succession Planning: The Board has identified Gregory Abel (Non-Insurance) and Ajit Jain (Insurance) as Vice Chairmen to succeed Warren Buffett, mitigating key-person risk.
- Key Risks:
- Investment Concentration: Approximately 68% of equity securities are concentrated in five issuers (Apple, Bank of America, Coca-Cola, American Express, Wells Fargo).
- Derivatives: Significant exposure to equity index put options with a fair value liability of $2.45 billion; potential for large cash settlements if markets decline sharply.
- Regulatory & Environmental: Utilities and railroads face significant regulatory changes regarding emissions, rates, and safety (e.g., Positive Train Control).
- Cybersecurity: Reliance on technology exposes the company to cyber attacks that could disrupt operations or compromise data.
Investor Verification Checklist
- Investment Portfolio Volatility: Verify the impact of the new accounting standard (ASU 2016-01) on reported earnings, noting that the $17.7 billion after-tax investment loss was largely unrealized.
- Insurance Float Cost: Confirm the cost of float remains negative (profitable underwriting) despite catastrophe losses, which is a key competitive advantage.
- Operating Earnings Quality: Review the $29.2 billion in operating earnings to assess the underlying business performance independent of market fluctuations.
- Debt Maturities: Check the schedule of debt maturities for BNSF and BHE, which are not guaranteed by the parent company, to assess refinancing risks.
- Succession Execution: Monitor the transition of capital allocation responsibilities as Warren Buffett ages (88 at filing).