Berkshire Hathaway Inc. 10-Q Summary: Q1 2010
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2010. The most significant event during this period was the completion of the acquisition of Burlington Northern Santa Fe Corporation (BNSF) on February 12, 2010. Berkshire acquired the remaining 77.5% of BNSF shares it did not own for approximately $26.5 billion, consisting of $15.9 billion in cash and $10.6 billion in Berkshire common stock. BNSF results are consolidated beginning February 12, 2010. The company also executed a 50-for-1 split of its Class B common stock in January 2010.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Total Revenues | $32,037 million | $22,784 million |
| Net Earnings (Attributable to Berkshire) | $3,633 million | ($1,534 million) loss |
| Net Earnings Per Share (Class A equiv.) | $2,272 | ($990) |
| Operating Cash Flows | $3,313 million | $4,642 million |
| Cash and Cash Equivalents (End of Period) | $25,670 million | $25,551 million |
| Total Shareholders' Equity | $151,924 million | $135,785 million |
| Total Debt (Notes Payable & Borrowings) | $57,627 million | $37,909 million |
Note: Debt figures include parent company, railroad/utilities, and finance subsidiaries. The increase in debt is primarily due to $8.0 billion in new debt issued to fund the BNSF acquisition.
Material Changes vs. Prior Period
- Turnaround in Profitability: The company reported a net profit of $3.6 billion compared to a net loss of $1.5 billion in Q1 2009. This reversal was driven by improved operating results across manufacturing and service sectors and a significant swing in investment and derivative gains.
- Investment Gains: Q1 2010 included a one-time holding gain of approximately $979 million related to the BNSF acquisition. In contrast, Q1 2009 included a $3.1 billion other-than-temporary impairment loss on ConocoPhillips stock and significant losses on credit default contracts.
- Revenue Growth: Total revenues increased by approximately 41% year-over-year, largely due to the inclusion of BNSF revenues ($2.1 billion for the partial quarter) and growth in manufacturing and service segments.
- Insurance Underwriting: Pre-tax underwriting gains improved to $345 million in 2010 from $313 million in 2009. GEICO reported a pre-tax underwriting gain of $299 million, up from $148 million.
- Balance Sheet Expansion: Total assets increased from $297.1 billion to $356.3 billion, reflecting the addition of BNSF assets ($65.5 billion) and the issuance of new debt.
Guidance, Outlook, and Risks
Management Commentary: Management noted that operating results for manufacturing, service, and retailing businesses improved in Q1 2010 compared to Q1 2009, reflecting a stabilization of economic conditions following the recession. However, they cautioned that periodic earnings remain volatile due to investment gains/losses and derivative contract valuations.
Outlook: The company expects premium volume in its reinsurance businesses to remain constrained until premium rates rise. Capital expenditures for the railroad and utilities/energy segments are forecasted at $3.9 billion for the remainder of 2010, funded by operating cash flows and debt.
Risks and Contingencies:
- Derivative Contracts: Berkshire holds significant equity index put options and credit default obligations. While these generated a gain of $411 million in Q1 2010, management notes that fair value changes are volatile and not necessarily indicative of ultimate cash obligations.
- Legal Proceedings: General Re settled investigations with the DOJ and SEC regarding non-traditional products (AIG and Prudential transactions), paying $19.5 million to the DOJ and $12.2 million to the SEC. No material remaining governmental investigations were identified.
- Market Risk: Significant exposure to changes in market prices of fixed maturity and equity securities, as well as credit default spreads.
Key Facts for Investor Verification
- BNSF Integration: Verify the pro forma impact of BNSF on future earnings, noting that Q1 2010 results only include roughly 45 days of BNSF operations.
- Debt Structure: Confirm the maturity profile of the $8.0 billion in new debt issued for BNSF and the $11.5 billion in BHFC notes, particularly the $2 billion maturing within 12 months.
- Investment Portfolio: Review the composition of unrealized losses in equity securities (approx. $1.6 billion), noting management's intent to hold these positions until recovery.
- Insurance Float: Monitor the cost of float, which remained negative (profitable) in Q1 2010, and the adequacy of loss reserves given the $59.1 billion in unpaid loss liabilities.
- Derivative Exposure: Assess the potential collateral requirements if credit ratings were downgraded (estimated at an additional $1.1 billion) and the long-term nature of equity index put option liabilities.