BERKSHIRE HATHAWAY INC quarterly report, Q3 FY2009

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Berkshire Hathaway Inc. 10-Q Summary: Q3 2009

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2009. Berkshire Hathaway operates as a diversified holding company with three primary segments: Insurance and Other, Utilities and Energy (MidAmerican), and Finance and Financial Products. The company reported strong liquidity and a significant increase in shareholders' equity, driven largely by unrealized investment gains and improved market conditions compared to the prior year.

Key Financial Metrics

Metric Q3 2009 Q3 2008 YTD 9M 2009 YTD 9M 2008
Revenues $29,904 million $27,926 million $82,295 million $83,194 million
Net Earnings (Attributable to Berkshire) $3,238 million $1,057 million $4,999 million $4,877 million
EPS (Class A Equivalent) $2,087 $682 $3,223 $3,149
Operating Cash Flow (YTD) $12,026 million (2009) vs $8,428 million (2008)
Cash & Equivalents $26,919 million (Total Consolidated)
Total Assets $292,010 million
Shareholders' Equity $126,073 million (Berkshire Shareholders)

Material Changes vs. Prior Period

  • Profitability Surge: Net earnings attributable to Berkshire for Q3 2009 increased 206% compared to Q3 2008, primarily due to a reversal in derivative and investment losses.
  • Derivative Gains: The Finance segment recorded derivative gains of $1.732 billion in Q3 2009, compared to losses of $1.261 billion in the same period in 2008. This was driven by narrowing credit default spreads and gains on equity index put options.
  • Investment Portfolio: Equity securities fair value increased to $55.084 billion from $49.073 billion year-over-year. Unrealized gains on fixed maturity securities improved significantly as credit spreads tightened.
  • Operating Segments:
    • Insurance: Underwriting gains were $363 million (Q3 2009) vs $81 million (Q3 2008). GEICO premiums grew 9.5%, though loss ratios increased slightly due to higher claim frequencies.
    • Manufacturing/Service: Revenues declined across most sectors (e.g., Marmon, Shaw, NetJets) due to the ongoing global recession, with NetJets reporting significant pre-tax losses due to asset writedowns.
    • Utilities: Revenues declined due to lower energy prices and volumes, though earnings remained relatively stable.

Guidance, Outlook, and Risks

  • Acquisition Activity: On November 3, 2009 (subsequent to period end), Berkshire announced a definitive agreement to acquire the remaining 77.4% of Burlington Northern Santa Fe (BNSF) for approximately $26.4 billion. The deal is expected to close in Q1 2010.
  • Capital Allocation: Management continues to deploy capital into high-yield investments (e.g., Swiss Re, Dow Chemical) to generate income exceeding short-term rates. Berkshire maintains a policy of holding significant cash reserves to capitalize on market dislocations.
  • Risks and Contingencies:
    • Derivative Volatility: Earnings remain highly sensitive to changes in the fair value of long-duration equity index put options and credit default contracts. Management notes these periodic gains/losses may not reflect ultimate economic outcomes.
    • Legal Proceedings: Ongoing investigations by the SEC and DOJ regarding "non-traditional products" (finite reinsurance) involving General Re. While no material loss is currently estimated, the outcome remains uncertain.
    • Economic Recession: Continued weakness in consumer spending and industrial activity negatively impacts manufacturing, service, and retailing segments.

Investor Verification Checklist

  • BNSF Acquisition Funding: Verify the impact of the $26.4 billion BNSF acquisition on future debt levels and liquidity, noting the plan to fund 50% of the cash portion with borrowings.
  • Derivative Liability Exposure: Review the aggregate intrinsic value of equity index put options ($6.3 billion as of Sept 30, 2009) and potential collateral posting requirements if credit ratings are downgraded.
  • Insurance Loss Reserves: Monitor the $59.6 billion in unpaid loss reserves; small percentage changes in estimates can materially impact earnings.
  • NetJets Restructuring: Assess the timeline for NetJets to return to profitability following significant asset writedowns and downsizing costs in 2009.
  • Investment Impairments: Track the status of unrealized losses on equity securities (e.g., Kraft Foods, Wells Fargo) to determine if future other-than-temporary impairment (OTTI) charges are likely.