Berkshire Hathaway Inc. 2019 Q2 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2019, and the first six months of 2019. Berkshire Hathaway Inc. operates a diversified portfolio including insurance (GEICO, Reinsurance Group, Primary Group), railroad (BNSF), utilities and energy (Berkshire Hathaway Energy), and various manufacturing, service, and retailing businesses. The company is a large accelerated filer.
Key Financial Metrics
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total Revenues | $63.6 billion | $62.2 billion | $124.3 billion | $120.7 billion |
| Net Earnings (Attributable to Shareholders) | $14.1 billion | $12.0 billion | $35.7 billion | $10.9 billion |
| Investment & Derivative Gains | $10.0 billion | $6.4 billion | $30.4 billion | $(1.7) billion |
| Cash & Cash Equivalents (Insurance/Other) | $41.4 billion | $27.7 billion | $41.4 billion | $27.7 billion |
| Total Shareholders' Equity | $386.4 billion | $361.8 billion | $386.4 billion | $361.8 billion |
| Float (Insurance Liabilities) | $125.0 billion | $123.0 billion | $125.0 billion | $123.0 billion |
Note: YTD figures represent the first six months. Investment gains include significant unrealized appreciation on equity securities.
Material Changes vs. Prior Period
- Net Earnings Surge: Net earnings attributable to shareholders increased significantly year-over-year, driven primarily by a $30.4 billion pre-tax investment gain in the first six months of 2019, compared to a $1.7 billion loss in the same period of 2018. This volatility is attributed to changes in market prices of equity securities.
- Insurance Underwriting: Pre-tax underwriting gains decreased to $943 million for the first six months of 2019 from $1.7 billion in 2018. GEICO's loss ratio increased to 79.1% (from 77.7%), while the Reinsurance Group reported a pre-tax underwriting loss of $357 million (vs. a gain of $39 million in 2018) due to increased estimated liabilities for prior years' events.
- Operating Segments:
- BNSF: Earnings increased 8.5% year-to-date despite lower freight volumes due to severe weather, offset by higher rates per car/unit.
- Utilities & Energy: Earnings increased 3.9% year-to-date, aided by production tax credits.
- Manufacturing: Earnings were slightly lower year-to-date, with declines in consumer products (Forest River, Duracell) offset by gains in building products (Clayton Homes).
- Equity Portfolio: Investments in equity securities rose to $200.5 billion from $172.8 billion at year-end 2018, with approximately 69% concentrated in five companies (Apple, Bank of America, Coca-Cola, Wells Fargo, American Express).
Guidance, Outlook, and Risks
- Management Commentary: Management states that investment gains/losses are often meaningless for evaluating periodic economic performance due to their volatility. They emphasize maintaining ample liquidity and safety over yield for short-term investments.
- Capital Allocation: The company repurchased $2.1 billion of its own stock in the first six months of 2019. The repurchase program continues indefinitely, provided cash and Treasury Bill holdings remain above $20 billion.
- Contingencies:
- Occidental Petroleum: Committed to invest $10 billion in Occidental Petroleum (preferred stock and warrants) contingent on the completion of Occidental's acquisition of Anadarko Petroleum.
- Kraft Heinz: Berkshire's share of Kraft Heinz earnings for the first six months of 2019 was excluded from the filing as Kraft Heinz's financial statements were not yet available. Berkshire is monitoring the investment for potential impairment.
- Tax Equity Funds: Recorded a $377 million income tax expense adjustment related to investments in tax equity funds where benefits are now deemed invalid due to alleged fraud by the sponsor.
- Risks: Key risks include volatility in equity markets, catastrophic insurance losses, changes in tax laws, and foreign currency fluctuations affecting non-U.S. dollar denominated liabilities.
Investor Verification Checklist
- Investment Volatility: Verify the extent to which reported earnings are driven by unrealized gains on equity securities versus operating cash flow.
- Insurance Reserves: Review the increase in estimated ultimate liabilities for prior years' events in the Reinsurance Group and the rising loss ratio at GEICO.
- Occidental Commitment: Monitor the status of the Occidental/Anadarko merger and the potential deployment of the $10 billion capital commitment.
- Kraft Heinz Status: Track the release of Kraft Heinz's 2019 financials to assess the impact on Berkshire's equity method earnings and potential impairment charges.
- Liquidity Position: Confirm the total cash and U.S. Treasury Bill balance remains well above the $20 billion threshold required for continued share repurchases.