Berkshire Hathaway Inc. Q1 2015 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2015. Berkshire Hathaway Inc. operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The company reported a net earnings increase attributable to shareholders compared to the prior year, driven by strong operating performance in the railroad and manufacturing sectors, offset by lower investment gains and a significant decline in comprehensive income due to unrealized investment losses and foreign currency translation.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Total Revenues | $48,644 million | $45,453 million |
| Net Earnings (Attributable to Shareholders) | $5,164 million | $4,705 million |
| Net Earnings Per Share (Class A equiv.) | $3,143 | $2,862 |
| Comprehensive Income (Attributable to Shareholders) | $1,296 million | $5,729 million |
| Cash and Cash Equivalents | $63,711 million | $48,948 million |
| Total Shareholders' Equity | $244,839 million | $230,289 million |
| Operating Cash Flow | $5,963 million | $4,928 million |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased by approximately 7% year-over-year, driven by a 35% increase in Service and Retailing revenues (due to the Van Tuyl Group acquisition) and growth in Manufacturing and Railroad segments.
- Investment Gains: Investment gains/losses dropped significantly from $1,059 million in Q1 2014 to $96 million in Q1 2015. The prior year included a $949 million non-cash gain from the Phillips 66 exchange transaction.
- Derivative Gains: Derivative gains surged to $1,318 million in Q1 2015 compared to $236 million in Q1 2014, primarily due to favorable movements in equity index put option contracts.
- Comprehensive Income Decline: Despite higher net earnings, comprehensive income fell sharply due to a $3.8 billion net loss in other comprehensive income, driven by a $3.8 billion decline in unrealized appreciation of investments and a $1.4 billion foreign currency translation loss.
- Acquisitions: The company acquired the Van Tuyl Group (renamed Berkshire Hathaway Automotive) for $4.1 billion and AltaLink (energy transmission) for approximately $2.7 billion.
Outlook, Risks, and Management Commentary
- Capital Allocation: Management emphasized maintaining ample liquidity, with cash and cash equivalents exceeding $63 billion. The Board authorized share repurchases at prices no higher than a 20% premium over book value, provided cash holdings remain above $20 billion; no repurchases were made in Q1 2015.
- Insurance Underwriting: The insurance group generated a pre-tax underwriting gain of $747 million. GEICO saw a decline in underwriting gain due to higher loss ratios (80.1% vs 75.8%), while the Reinsurance Group benefited from foreign currency gains and favorable loss development.
- Railroad Performance: BNSF reported a 43% increase in pre-tax earnings, attributed to improved service levels, lower fuel costs, and volume increases in agricultural and coal products.
- Contingencies: Berkshire entered into an agreement to acquire the Duracell business from Procter & Gamble (expected to close H2 2015) and committed to acquire additional shares in H.J. Heinz Holding Corporation contingent on the Kraft merger.
- Risks: Key risks include volatility in investment and derivative gains, potential catastrophe losses in insurance, and the impact of foreign currency exchange rates on international operations.
Investor Verification Checklist
- Derivative Liability Exposure: Verify the fair value of equity index put option liabilities ($3.25 billion) and the potential for future cash outflows based on market indices at expiration.
- Insurance Loss Reserves: Review the $70.6 billion in unpaid loss reserves and the sensitivity of earnings to changes in these estimates.
- Acquisition Integration: Assess the financial impact and integration progress of the Van Tuyl Group and AltaLink acquisitions.
- Investment Portfolio Concentration: Note that approximately 58% of equity securities fair value is concentrated in four companies (American Express, Wells Fargo, IBM, Coca-Cola).
- Debt Maturities: Confirm the schedule of debt maturities for BNSF and Berkshire Hathaway Energy, particularly the $1.0 billion aggregate maturity in the remainder of 2015.