Business Context and Reporting Period
This summary covers the Form 10-Q for Berkshire Hathaway Inc. for the quarterly period ended June 30, 2014. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The reporting period reflects the inclusion of NV Energy (acquired December 2013) and several smaller acquisitions completed in early 2014, including IMI plc beverage operations, Phillips Specialty Products, and WPLG.
Key Financial Metrics
| Metric | Q2 2014 | Q2 2013 | YTD 2014 | YTD 2013 |
|---|---|---|---|---|
| Total Revenues | $49,762 million | $44,693 million | $95,215 million | $88,560 million |
| Net Earnings (Attributable to Berkshire) | $6,395 million | $4,541 million | $11,100 million | $9,433 million |
| Net Earnings Per Share (Class A equiv.) | $3,889 | $2,763 | $6,751 | $5,740 |
| Operating Cash Flows (YTD) | $11,833 million | $12,911 million | $11,833 million | $12,911 million |
| Cash and Cash Equivalents (Total) | $55,455 million | $35,695 million | $55,455 million | $35,695 million |
| Total Shareholders' Equity | $236,760 million | $224,485 million | $236,760 million | $224,485 million |
| Total Debt (Notes Payable & Borrowings) | $74,087 million | $72,224 million | $74,087 million | $72,224 million |
Note: Debt figures represent the sum of "Notes payable and other borrowings" across all three segments as of June 30, 2014 and 2013.
Material Changes vs. Prior Period
- Investment Gains: Net earnings were significantly boosted by investment gains. Q2 2014 saw $2.366 billion in investment gains compared to $455 million in Q2 2013. YTD 2014 gains were $3.425 billion versus $889 million in 2013. A substantial portion of the 2014 gains ($1.1 billion in Q2 and $2.1 billion YTD) were non-cash holding gains from stock exchanges related to the acquisitions of Phillips Specialty Products and WPLG.
- Insurance Underwriting: After-tax underwriting earnings declined to $411 million in Q2 2014 from $530 million in Q2 2013, and $872 million YTD 2014 from $1,431 million YTD 2013. The decline was primarily due to large gains in the Berkshire Hathaway Reinsurance Group (BHRG) in 2013 that were not repeated in 2014. BHRG reported a pre-tax underwriting loss of $9 million in Q2 2014 compared to a gain of $391 million in Q2 2013.
- Utilities and Energy: Earnings increased due to the full inclusion of NV Energy results and higher earnings from other energy businesses. YTD 2014 earnings for this segment were $827 million compared to $673 million in 2013.
- Railroad (BNSF): Revenues increased 8% in Q2 2014 and 5% YTD. However, earnings for the first six months declined 2.5% to $1,640 million due to adverse weather and service-related challenges in the first quarter.
- Manufacturing: Earnings increased 19% YTD to $2,197 million, driven by growth in industrial products, building products, and apparel.
Guidance, Outlook, and Risks
- Capital Allocation: Management reiterated that repurchases of common stock will not be made if they would reduce consolidated cash and cash equivalent holdings below $20 billion. No repurchases were made in the first six months of 2014. The company maintains a policy of safety over yield for cash equivalents.
- Acquisitions: Berkshire Hathaway Energy Company (BHE) entered into an agreement to acquire AltaLink, L.P. for approximately $3.0 billion, expected to close by the end of 2014. BHE and BNSF forecast aggregate capital expenditures of approximately $6.9 billion for the remainder of 2014.
- Derivative Contracts: The company holds significant equity index put option and credit default contracts. As of June 30, 2014, liabilities for these contracts were approximately $4.9 billion. Management noted that if Berkshire's credit ratings were downgraded below A- (S&P) or A3 (Moody's), additional collateral of up to $1.1 billion could be required.
- Volatility Warning: Management cautioned that realized investment gains/losses and derivative gains/losses cause significant volatility in periodic earnings and are often meaningless for evaluating economic performance. Interim results are not necessarily indicative of full-year results due to the timing of catastrophe losses and investment gains.
Investor Verification Checklist
- Non-Cash Gains: Verify the impact of the $2.1 billion in non-cash holding gains from stock exchanges on reported net earnings for the first six months of 2014.
- Insurance Float: Review the cost of float, which was negative (indicating a net underwriting gain) for the first six months of 2014, and monitor the stability of loss reserves given the $65.6 billion in unpaid loss liabilities.
- Derivative Exposure: Assess the sensitivity of the $4.9 billion derivative liability to changes in equity index prices and interest rates, and the potential collateral requirements in the event of a credit rating downgrade.
- Capital Expenditures: Confirm the funding sources for the projected $6.9 billion in remaining 2014 capital expenditures for BNSF and BHE, primarily through operating cash flows and debt issuances.
- Debt Maturities: Note that $750 million of Berkshire parent senior notes mature in August 2014 and $1.7 billion in February 2015, with plans to issue new notes to replace them.