Berkshire Hathaway Inc. 10-Q Summary: Q2 2012
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2012, for Berkshire Hathaway Inc. The company operates through three primary segments: Insurance and Other, Railroad, Utilities and Energy, and Finance and Financial Products. The filing includes unaudited consolidated financial statements and management discussion regarding results of operations, liquidity, and capital resources.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Total Revenues | $38,546 million | $38,274 million | $76,693 million | $71,994 million |
| Net Earnings (Attributable to Berkshire) | $3,108 million | $3,417 million | $6,353 million | $4,928 million |
| Net Earnings Per Share (Class A equiv.) | $1,882 | $2,072 | $3,847 | $2,989 |
| Operating Cash Flows (YTD) | $9,509 million (2012) vs $9,983 million (2011) | |||
| Cash and Cash Equivalents | $40,661 million (June 30, 2012) | |||
| Total Shareholders' Equity | $181,715 million (June 30, 2012) |
Material Changes vs. Prior Period
- Insurance Underwriting: The insurance group generated a pre-tax underwriting gain of $957 million in Q2 2012, a significant improvement from a $9 million loss in Q2 2011. This was driven by the absence of major catastrophe losses in 2012 compared to significant losses in 2011 (Japan/New Zealand earthquakes). GEICO premiums earned increased 8.2% year-over-year.
- Investment and Derivative Gains/Losses: Net earnings were impacted by a pre-tax loss of $943 million in Q2 2012 from investment and derivative activities, compared to a gain of $1,105 million in Q2 2011. The 2011 gain included a $1.25 billion realized gain from the redemption of Goldman Sachs preferred stock. In 2012, derivative contracts (primarily equity index put options) generated a pre-tax loss of $1,068 million.
- Other-than-Temporary Impairment (OTTI): Berkshire recorded OTTI losses of $337 million in the first six months of 2012 related to fixed maturity investments in Texas Competitive Electric Holdings. No OTTI losses were recorded in Q2 2012.
- Operating Segments:
- BNSF (Railroad): Revenues increased 6% in Q2 2012 due to higher average revenue per car/unit and increased volume in consumer and industrial products, offset by declines in coal and agricultural volumes.
- MidAmerican (Utilities/Energy): Earnings attributable to Berkshire increased to $253 million in Q2 2012 from $215 million in Q2 2011.
- Manufacturing/Service: Revenues increased significantly, largely due to the full-year inclusion of The Lubrizol Corporation (acquired Sept 2011) and growth in Forest River and building products.
Guidance, Outlook, and Risks
- Management Commentary: Management notes that periodic results are not indicative of full-year results due to the volatility of investment gains/losses and catastrophe losses. They emphasize that realized investment gains/losses often have little analytical value for evaluating economic performance.
- Stock Repurchases: The Board authorized a repurchase program in September 2011 at prices no higher than a 10% premium over book value. No repurchases were made in the first six months of 2012. Repurchases will not occur if consolidated cash equivalents fall below $20 billion.
- Capital Expenditures: BNSF and MidAmerican maintain large capital asset bases. Forecasted capital expenditures for the remainder of 2012 are approximately $2.1 billion for BNSF and $2.3 billion for MidAmerican.
- Risks and Contingencies:
- Derivatives: Significant exposure to equity index put options and credit default contracts. Net liabilities for these contracts were approximately $9.9 billion as of June 30, 2012. Collateral posting requirements were $271 million.
- Insurance Reserves: Estimated liabilities for unpaid losses are $63.0 billion. Small percentage changes in these estimates can materially affect earnings.
- Legal Proceedings: BNSF is involved in consolidated class action litigation regarding fuel surcharges. Management believes the claims are without merit.
Investor Verification Checklist
- Verify the impact of the new accounting standard (ASU 2010-26) on GEICO's underwriting expenses, which accelerated the recognition of advertising costs.
- Review the valuation assumptions for Level 3 derivative liabilities (equity index put options and credit default contracts), which rely on unobservable inputs like volatility and credit spreads.
- Monitor the status of the $1.45 billion potential acquisition of mortgage loan portfolios from Residential Capital (ResCap), subject to a bankruptcy court auction.
- Assess the sustainability of BNSF's volume growth in consumer and industrial products versus the decline in coal shipments due to low natural gas prices.
- Confirm the company's cash position remains above the $20 billion threshold required for share repurchases.