Berkshire Hathaway Inc. 10-Q Summary: Q2 2016
Business Context and Reporting Period
This filing covers the quarterly period ended June 30, 2016. Berkshire Hathaway operates a diversified portfolio including insurance, railroad, utilities, energy, manufacturing, service, retailing, and finance businesses. The period was marked by two significant acquisitions: Precision Castparts Corp. (PCC) (completed Jan 29, 2016) and Duracell (completed Feb 29, 2016). Additionally, the company redeemed its preferred stock investment in The Kraft Heinz Company in June 2016.
Key Financial Metrics
| Metric | Q2 2016 | Q2 2015 | YTD 2016 | YTD 2015 |
|---|---|---|---|---|
| Total Revenues | $54.46 billion | $51.37 billion | $106.86 billion | $100.01 billion |
| Net Earnings (Attributable to Shareholders) | $5.00 billion | $4.01 billion | $10.59 billion | $9.18 billion |
| Net Earnings Per Share (Class A equiv.) | $3,042 | $2,442 | $6,443 | $5,585 |
| Cash and Cash Equivalents | $72.68 billion | $66.59 billion | $72.68 billion | $66.59 billion |
| Total Shareholders' Equity | $266.26 billion | $249.20 billion | $266.26 billion | $249.20 billion |
| Investment Gains/Losses (Pre-tax) | $643 million | $362 million | $2.49 billion | $459 million |
Material Changes vs. Prior Period
- Acquisitions: The inclusion of PCC and Duracell significantly boosted revenues in the Manufacturing segment (up 28% in Q2) and increased goodwill by approximately $16.8 billion.
- Investment Activity: Investment gains were driven by a $610 million gain from the redemption of Kraft Heinz Preferred Stock and a $1.1 billion non-cash gain from the P&G/Duracell exchange.
- Railroad Performance: BNSF revenues and earnings declined (down 14.6% and 19.4% respectively in Q2) due to a 7.5% year-to-date decline in unit volume, particularly in coal and petroleum products.
- Insurance Underwriting: Pre-tax underwriting gains improved to $510 million in Q2 2016 compared to a loss of $48 million in Q2 2015, driven by gains at GEICO and BHRG.
- Derivatives: Derivative contracts produced a pre-tax gain of $20 million in Q2 2016, reversing a $174 million loss in the prior year period.
Guidance, Outlook, and Risks
- Capital Allocation: Management maintains a policy of holding cash balances above $20 billion. No share repurchases were made in the first six months of 2016.
- Outlook: BNSF expects continued volume declines in petroleum-related categories due to pipeline displacement and low oil production. Coal volumes are expected to decline further due to high utility inventories and low natural gas prices.
- Derivative Risks: Equity index put option liabilities stood at $4.4 billion (fair value) with an intrinsic value of $2.0 billion. A downgrade in Berkshire's credit rating could trigger collateral posting requirements of up to $1.1 billion.
- Accounting Changes: The company is evaluating the impact of new FASB standards (ASU 2016-01) regarding equity investments, which may significantly impact periodic net earnings upon adoption in 2018.
Investor Verification Checklist
- Acquisition Integration: Verify the preliminary fair value adjustments for PCC and Duracell, particularly regarding goodwill and intangible assets ($26 billion in intangibles for these two acquisitions).
- IBM Investment: Review the $1.5 billion unrealized loss on IBM common stock; management asserts these losses are temporary, but monitor for potential other-than-temporary impairment charges.
- Derivative Exposure: Assess the sensitivity of the $4.4 billion equity index put option liability to changes in market volatility and index levels.
- Railroad Volume Trends: Monitor BNSF's unit volume trends, specifically the displacement of rail traffic by pipelines in the energy sector.
- Float Cost: Confirm the continued negative cost of float (underwriting gains) which subsidizes investment operations.