10-QPeriod: Q3 FY2008

BERKSHIRE HATHAWAY INC Quarterly Report for Q3 Ended Sep 30, 2008

Filed November 7, 2008For Securities:BRK-BBRK-A

Summary

Berkshire Hathaway Inc. reported its financial results for the third quarter and first nine months of 2008, a period marked by significant economic turbulence. The company experienced a substantial decline in net earnings, largely driven by negative investment and derivative gains/losses, which contrasted sharply with strong gains in the prior year. While underwriting results in the insurance segment showed weakness, particularly in the third quarter due to significant catastrophe losses from Hurricanes Gustav and Ike, the overall insurance operations, including investment income, remained a key contributor. The acquisition of a 60% stake in Marmon Holdings, Inc. for $4.5 billion was a notable strategic move during the period. Management highlighted the company's strong capital base and liquidity, despite the challenging market conditions, and noted significant investments made in late 2008 in Goldman Sachs and General Electric preferred stock, which are expected to boost future investment income.

Financial Highlights

16 data points
Beta

Revenue

$27.93B

Net Income

$1.06B

3.8% Net Margin

EPS (Diluted)

$13.64

Cash & Equivalents

$33.37B

Free Cash Flow

$4.23B

Financial Statements
Beta
Revenue$27.93B
Operating Expenses$26.42B
Net Income$1.06B
EPS (Basic)$13.64
Shares Outstanding (Basic)77.46M

Key Highlights

  • 1Net earnings declined significantly in Q3 2008 and the first nine months of 2008 compared to the prior year, primarily due to substantial investment and derivative losses.
  • 2The insurance underwriting segment saw a notable decrease in profitability, impacted by significant catastrophe losses from Hurricanes Gustav and Ike in Q3 2008.
  • 3Berkshire Hathaway acquired a 60% controlling interest in Marmon Holdings, Inc. for $4.5 billion in March 2008, adding a diverse group of manufacturing and service businesses.
  • 4The company made substantial investments in late 2008 in preferred stock and warrants of Goldman Sachs and General Electric, totaling $14.5 billion, aimed at increasing future investment income.
  • 5Consolidated shareholders' equity remained strong at $120.2 billion as of September 30, 2008, underscoring the company's financial resilience.
  • 6Despite market volatility, Berkshire maintained significant liquidity, with cash and cash equivalents of $27.9 billion in the Insurance and Other segment.
  • 7The Finance and Financial Products segment experienced a significant increase in liabilities, particularly from derivative contract liabilities and notes payable, reflecting market conditions.

Frequently Asked Questions

The primary driver for the decline in net earnings was a substantial negative swing in investment and derivative gains/losses. In the third quarter of 2008, Berkshire reported investment and derivative losses of $1.557 billion, compared to gains of $3.063 billion in the same period of 2007. This significant adverse variance, coupled with weaker underwriting results, led to the overall decrease in net earnings.

Berkshire acquired a 60% stake in Marmon Holdings, Inc. for $4.5 billion in March 2008, with the results of Marmon's operations included in Berkshire's consolidated statements from the acquisition date. Marmon's diverse manufacturing and service businesses contributed $1.878 billion in revenues and $247 million in pre-tax earnings in the third quarter of 2008, and $4.044 billion in revenues and $536 million in pre-tax earnings for the first nine months of 2008. The acquisition also added $1.071 billion in notes payable and other borrowings to Berkshire's liabilities.

In October 2008, shortly after the reporting period, Berkshire invested $8 billion in preferred stock and warrants of Goldman Sachs and General Electric. These investments, carrying a 10% dividend rate on the preferred stock, are expected to significantly increase Berkshire's future investment income. For example, these new investments are projected to generate approximately $1.4 billion in pre-tax interest and dividends annually, a substantial increase compared to existing short-term investment yields.

Management acknowledges the restricted credit markets and general economic crisis, which have impacted operations, particularly in the utilities and energy and finance/financial products segments. However, Berkshire maintains a strong capital base and sufficient liquidity to weather these conditions. Management believes the current extraordinary economic conditions are temporary and that equity prices will ultimately recover over time, although short-term volatility is expected to persist.