UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
OR
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission file number 001-14905
BERKSHIRE HATHAWAY INC.
(Exact name of registrant as specified in its charter)
|
Delaware
|
47-0813844
|
|
(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer Identification Number)
|
| |
3555 Farnam Street, Omaha, Nebraska 68131
(Address of principal executive office)
(Zip Code)
(402) 346-1400
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x
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Accelerated filer ¨
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Non-accelerated filer ¨
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Smaller reporting company ¨
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Number of shares of common stock outstanding as of April 30, 2010:
| |
Class A — 1,001,313 |
| |
Class B — 968,746,390 |
BERKSHIRE HATHAWAY INC.
| |
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Page No.
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2 |
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3 |
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4 |
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5 |
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6-20 |
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21-34 |
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34 |
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34 |
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35 |
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35 |
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35 |
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35 |
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35 |
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35 |
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35 |
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35 |
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and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
| |
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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ASSETS
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Insurance and Other:
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Cash and cash equivalents
|
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$ |
22,720 |
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$ |
28,223 |
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Investments:
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Fixed maturity securities
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35,543 |
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35,729 |
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Equity securities
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58,012 |
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56,562 |
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Other
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22,990 |
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29,440 |
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Receivables
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17,799 |
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14,792 |
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Inventories
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6,451 |
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6,147 |
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Property, plant and equipment
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15,566 |
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15,720 |
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Goodwill
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27,610 |
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27,614 |
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Other
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13,005 |
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13,070 |
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219,696 |
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227,297 |
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Railroad, Utilities and Energy:
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|
|
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|
|
|
|
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Cash and cash equivalents
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1,756 |
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|
429 |
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Property, plant and equipment
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74,948 |
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30,936 |
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Goodwill
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20,080 |
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5,334 |
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Other
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14,208 |
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8,072 |
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110,992 |
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44,771 |
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Finance and Financial Products:
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Cash and cash equivalents
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1,194 |
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1,906 |
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Investments in fixed maturity securities
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1,277 |
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1,402 |
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Other investments
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|
3,153 |
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3,160 |
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Loans and finance receivables
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15,423 |
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13,989 |
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Goodwill
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|
1,024 |
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|
1,024 |
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Other
|
|
|
3,561 |
|
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|
3,570 |
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| |
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25,632 |
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|
|
25,051 |
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$ |
356,320 |
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$ |
297,119 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Insurance and Other:
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|
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Losses and loss adjustment expenses
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$ |
59,084 |
|
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$ |
59,416 |
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Unearned premiums
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|
9,164 |
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|
7,925 |
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Life, annuity and health insurance benefits
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6,985 |
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5,228 |
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Accounts payable, accruals and other liabilities
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14,998 |
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15,530 |
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Notes payable and other borrowings
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12,339 |
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4,561 |
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102,570 |
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92,660 |
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Railroad, Utilities and Energy:
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Accounts payable, accruals and other liabilities
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12,386 |
|
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5,895 |
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Notes payable and other borrowings
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|
30,599 |
|
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19,579 |
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42,985 |
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25,474 |
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Finance and Financial Products:
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Accounts payable, accruals and other liabilities
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|
882 |
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|
937 |
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Derivative contract liabilities
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8,667 |
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9,269 |
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Notes payable and other borrowings
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14,689 |
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13,769 |
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24,238 |
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23,975 |
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Income taxes, principally deferred
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34,603 |
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19,225 |
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Total liabilities
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204,396 |
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161,334 |
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Shareholders’ equity:
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Common stock
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8 |
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8 |
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Capital in excess of par value
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38,034 |
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27,074 |
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Accumulated other comprehensive income
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19,307 |
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17,793 |
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Retained earnings
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89,860 |
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86,227 |
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Berkshire Hathaway shareholders’ equity
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147,209 |
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131,102 |
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Noncontrolling interests
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4,715 |
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4,683 |
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Total shareholders’ equity
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151,924 |
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135,785 |
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$ |
356,320 |
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$ |
297,119 |
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See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
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First Quarter
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2010
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2009
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(Unaudited)
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Revenues:
|
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Insurance and Other:
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Insurance premiums earned
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$ |
7,426 |
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$ |
8,183 |
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Sales and service revenues
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15,531 |
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|
14,310 |
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Interest, dividend and other investment income
|
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|
1,295 |
|
|
|
1,374 |
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Investment gains/losses
|
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|
1,315 |
|
|
|
(370 |
) |
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Other-than-temporary impairment losses on investments
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|
|
— |
|
|
|
(3,096 |
) |
| |
|
|
25,567 |
|
|
|
20,401 |
|
| |
|
|
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|
|
|
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Railroad, Utilities and Energy:
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Operating revenues
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|
5,010 |
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|
2,969 |
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Other
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40 |
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(20 |
) |
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5,050 |
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2,949 |
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Finance and Financial Products:
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Interest, dividend and other investment income
|
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|
401 |
|
|
|
362 |
|
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Investment gains/losses
|
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|
3 |
|
|
|
— |
|
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Derivative gains/losses
|
|
|
411 |
|
|
|
(1,517 |
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Other
|
|
|
605 |
|
|
|
589 |
|
| |
|
|
1,420 |
|
|
|
(566 |
) |
| |
|
|
32,037 |
|
|
|
22,784 |
|
| |
|
|
|
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Costs and expenses:
|
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|
|
|
|
|
|
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Insurance and Other:
|
|
|
|
|
|
|
|
|
|
Insurance losses and loss adjustment expenses
|
|
|
4,186 |
|
|
|
6,014 |
|
|
Life, annuity and health insurance benefits
|
|
|
1,492 |
|
|
|
508 |
|
|
Insurance underwriting expenses
|
|
|
1,403 |
|
|
|
1,348 |
|
|
Cost of sales and services
|
|
|
12,906 |
|
|
|
11,958 |
|
|
Selling, general and administrative expenses
|
|
|
1,839 |
|
|
|
1,963 |
|
|
Interest expense
|
|
|
67 |
|
|
|
48 |
|
| |
|
|
21,893 |
|
|
|
21,839 |
|
| |
|
|
|
|
|
|
|
|
|
Railroad, Utilities and Energy:
|
|
|
|
|
|
|
|
|
|
Cost of sales and operating expenses
|
|
|
3,832 |
|
|
|
2,355 |
|
|
Interest expense
|
|
|
347 |
|
|
|
291 |
|
| |
|
|
4,179 |
|
|
|
2,646 |
|
|
Finance and Financial Products:
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
179 |
|
|
|
149 |
|
|
Other
|
|
|
688 |
|
|
|
693 |
|
| |
|
|
867 |
|
|
|
842 |
|
| |
|
|
26,939 |
|
|
|
25,327 |
|
| |
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes and equity method earnings
|
|
|
5,098 |
|
|
|
(2,543 |
) |
|
Income tax expense/benefit
|
|
|
1,336 |
|
|
|
(1,014 |
) |
|
Earnings from equity method investments
|
|
|
50 |
|
|
|
83 |
|
| |
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
3,812 |
|
|
|
(1,446 |
) |
|
Less: Earnings attributable to noncontrolling interests
|
|
|
179 |
|
|
|
88 |
|
| |
|
|
|
|
|
|
|
|
|
Net earnings (loss) attributable to Berkshire Hathaway
|
|
$ |
3,633 |
|
|
$ |
(1,534 |
) |
| |
|
|
|
|
|
|
|
|
|
Average common shares outstanding *
|
|
|
1,599,167 |
|
|
|
1,549,483 |
|
|
Net earnings (loss) per share attributable to Berkshire Hathaway shareholders *
|
|
$ |
2,272 |
|
|
$ |
(990 |
) |
|
*
|
Average shares outstanding include average Class A common shares and average Class B common shares determined on an equivalent Class A common stock basis. Net earnings (loss) per common share attributable to Berkshire Hathaway shown above represents net earnings (loss) per equivalent Class A common share. Net earnings (loss) per Class B common share is equal to one-fifteen-hundredth (1/1,500) of such amount.
|
See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
| |
|
First Quarter
|
|
| |
|
2010
|
|
|
2009
|
|
| |
|
(Unaudited)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
3,812 |
|
|
$ |
(1,446 |
) |
|
Adjustments to reconcile net earnings to operating cash flows:
|
|
|
|
|
|
|
|
|
|
Investment (gains) losses and other-than-temporary impairment losses
|
|
|
(1,318 |
) |
|
|
3,466 |
|
|
Depreciation
|
|
|
915 |
|
|
|
758 |
|
|
Other
|
|
|
98 |
|
|
|
(130 |
) |
|
Changes in operating assets and liabilities before business acquisitions:
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
153 |
|
|
|
2,225 |
|
|
Deferred charges reinsurance assumed
|
|
|
117 |
|
|
|
(55 |
) |
|
Unearned premiums
|
|
|
1,274 |
|
|
|
1,311 |
|
|
Receivables and originated loans
|
|
|
(3,013 |
) |
|
|
(1,020 |
) |
|
Derivative contract assets and liabilities
|
|
|
(632 |
) |
|
|
854 |
|
|
Income taxes
|
|
|
583 |
|
|
|
(957 |
) |
|
Other assets and liabilities
|
|
|
1,324 |
|
|
|
(364 |
) |
|
Net cash flows from operating activities
|
|
|
3,313 |
|
|
|
4,642 |
|
| |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of fixed maturity securities
|
|
|
(1,951 |
) |
|
|
(4,897 |
) |
|
Purchases of equity securities
|
|
|
(1,644 |
) |
|
|
(624 |
) |
|
Purchases of other investments
|
|
|
— |
|
|
|
(3,098 |
) |
|
Sales of fixed maturity securities
|
|
|
1,109 |
|
|
|
1,655 |
|
|
Redemptions and maturities of fixed maturity securities
|
|
|
1,031 |
|
|
|
1,614 |
|
|
Sales of equity securities
|
|
|
2,283 |
|
|
|
739 |
|
|
Purchases of loans and finance receivables
|
|
|
(82 |
) |
|
|
(110 |
) |
|
Principal collections on loans and finance receivables
|
|
|
174 |
|
|
|
174 |
|
|
Acquisitions of businesses, net of cash acquired
|
|
|
(14,911 |
) |
|
|
(530 |
) |
|
Purchases of property, plant and equipment
|
|
|
(1,170 |
) |
|
|
(1,373 |
) |
|
Other
|
|
|
(210 |
) |
|
|
1,023 |
|
|
Net cash flows from investing activities
|
|
|
(15,371 |
) |
|
|
(5,427 |
) |
| |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings of finance businesses
|
|
|
1,037 |
|
|
|
467 |
|
|
Proceeds from borrowings of railroad, utilities and energy businesses
|
|
|
— |
|
|
|
992 |
|
|
Proceeds from other borrowings
|
|
|
8,036 |
|
|
|
25 |
|
|
Repayments of borrowings of finance businesses
|
|
|
(1,588 |
) |
|
|
(114 |
) |
|
Repayments of borrowings of railroad, utilities and energy businesses
|
|
|
(54 |
) |
|
|
(195 |
) |
|
Repayments of other borrowings
|
|
|
(90 |
) |
|
|
(230 |
) |
|
Change in short term borrowings, net
|
|
|
(62 |
) |
|
|
1 |
|
|
Acquisitions of noncontrolling interests and other
|
|
|
(85 |
) |
|
|
(21 |
) |
|
Net cash flows from financing activities
|
|
|
7,194 |
|
|
|
925 |
|
|
Effects of foreign currency exchange rate changes
|
|
|
(24 |
) |
|
|
(128 |
) |
|
Increase (decrease) in cash and cash equivalents
|
|
|
(4,888 |
) |
|
|
12 |
|
|
Cash and cash equivalents at beginning of year *
|
|
|
30,558 |
|
|
|
25,539 |
|
|
Cash and cash equivalents at end of first quarter *
|
|
$ |
25,670 |
|
|
$ |
25,551 |
|
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
* Cash and cash equivalents are comprised of the following:
|
|
|
|
|
|
|
|
|
|
Beginning of year—
|
|
|
|
|
|
|
|
|
|
Insurance and Other
|
|
$ |
28,223 |
|
|
$ |
24,356 |
|
|
Railroad, Utilities and Energy
|
|
|
429 |
|
|
|
280 |
|
|
Finance and Financial Products
|
|
|
1,906 |
|
|
|
903 |
|
| |
|
$ |
30,558 |
|
|
$ |
25,539 |
|
| |
|
|
|
|
|
|
|
|
|
End of first quarter—
|
|
|
|
|
|
|
|
|
|
Insurance and Other
|
|
$ |
22,720 |
|
|
$ |
22,768 |
|
|
Railroad, Utilities and Energy
|
|
|
1,756 |
|
|
|
1,072 |
|
|
Finance and Financial Products
|
|
|
1,194 |
|
|
|
1,711 |
|
| |
|
$ |
25,670 |
|
|
$ |
25,551 |
|
See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(dollars in millions)
| |
|
Berkshire Hathaway shareholders’ equity
|
|
|
|
|
| |
|
Common stock
and capital in
excess of par
value
|
|
|
Accumulated
other
comprehensive
income
|
|
|
Retained
earnings
|
|
|
Total
|
|
|
Non-
controlling
interests
|
|
|
Balance at December 31, 2008
|
|
$ |
27,141 |
|
|
$ |
3,954 |
|
|
$ |
78,172 |
|
|
$ |
109,267 |
|
|
$ |
4,440 |
|
|
Net earnings (loss)
|
|
|
— |
|
|
|
— |
|
|
|
(1,534 |
) |
|
|
(1,534 |
) |
|
|
88 |
|
|
Other comprehensive income, net
|
|
|
— |
|
|
|
(4,993 |
) |
|
|
— |
|
|
|
(4,993 |
) |
|
|
(94 |
) |
|
Issuance of common stock and other transactions
|
|
|
176 |
|
|
|
— |
|
|
|
— |
|
|
|
176 |
|
|
|
— |
|
|
Changes in noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests acquired and other transactions
|
|
|
(227 |
) |
|
|
109 |
|
|
|
— |
|
|
|
(118 |
) |
|
|
(313 |
) |
|
Balance at March 31, 2009
|
|
$ |
27,090 |
|
|
$ |
(930 |
) |
|
$ |
76,638 |
|
|
$ |
102,798 |
|
|
$ |
4,121 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$ |
27,082 |
|
|
$ |
17,793 |
|
|
$ |
86,227 |
|
|
$ |
131,102 |
|
|
$ |
4,683 |
|
|
Net earnings
|
|
|
— |
|
|
|
— |
|
|
|
3,633 |
|
|
|
3,633 |
|
|
|
179 |
|
|
Other comprehensive income, net
|
|
|
— |
|
|
|
1,513 |
|
|
|
— |
|
|
|
1,513 |
|
|
|
20 |
|
|
Issuance of common stock and other transactions
|
|
|
10,974 |
|
|
|
— |
|
|
|
— |
|
|
|
10,974 |
|
|
|
— |
|
|
Changes in noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interests acquired and other transactions
|
|
|
(14 |
) |
|
|
1 |
|
|
|
— |
|
|
|
(13 |
) |
|
|
(167 |
) |
|
Balance at March 31, 2010
|
|
$ |
38,042 |
|
|
$ |
19,307 |
|
|
$ |
89,860 |
|
|
$ |
147,209 |
|
|
$ |
4,715 |
|
| |
|
First Quarter
|
|
| |
|
2010
|
|
|
2009
|
|
|
Comprehensive income attributable to Berkshire:
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$ |
3,633 |
|
|
$ |
(1,534 |
) |
| |
|
|
|
|
|
|
|
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
Net change in unrealized appreciation of investments
|
|
|
3,130 |
|
|
|
(10,463 |
) |
|
Applicable income taxes
|
|
|
(1,110 |
) |
|
|
3,660 |
|
|
Reclassification of investment appreciation in earnings
|
|
|
(335 |
) |
|
|
3,429 |
|
|
Applicable income taxes
|
|
|
117 |
|
|
|
(1,200 |
) |
|
Foreign currency translation
|
|
|
(435 |
) |
|
|
(405 |
) |
|
Applicable income taxes
|
|
|
— |
|
|
|
55 |
|
|
Prior service cost and actuarial gains/losses of defined benefit plans
|
|
|
51 |
|
|
|
15 |
|
|
Applicable income taxes
|
|
|
(13 |
) |
|
|
(4 |
) |
|
Other
|
|
|
108 |
|
|
|
(80 |
) |
|
Other comprehensive income, net
|
|
|
1,513 |
|
|
|
(4,993 |
) |
|
Comprehensive income attributable to Berkshire
|
|
$ |
5,146 |
|
|
$ |
(6,527 |
) |
|
Comprehensive income of noncontrolling interests
|
|
$ |
199 |
|
|
$ |
(6 |
) |
See accompanying Notes to Consolidated Financial Statements
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
The accompanying unaudited Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. (“Berkshire” or “Company”) consolidated with the accounts of all its subsidiaries and affiliates in which Berkshire holds controlling financial interests as of the financial statement date. In these notes the terms “us,” “we,” or “our” refer to Berkshire and its consolidated subsidiaries. Reference is made to Berkshire’s most recently issued Annual Report on Form 10-K (“Annual Report”) that included information necessary or useful to understanding Berkshire’s businesses and financial statement presentations. Our significant accounting policies and practices were presented as Note 1 to the Consolidated Financial Statements included in the Annual Report. Certain immaterial amounts in 2009 have been reclassified to conform with the current year presentation. Financial information in this Report reflects any adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement of results for the interim periods in accordance with accounting principles generally accepted in the United States (“GAAP”).
For a number of reasons, our results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be relatively more significant to results of interim periods than to results for a full year. Variations in the amounts and timing of investment gains/losses and other-than-temporary impairment losses on investments can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are sold or in instances when investments are required to be marked-to-market. In addition, changes in the fair value of derivative assets/liabilities associated with derivative contracts that do not qualify for hedge accounting treatment can cause significant variations in periodic net earnings.
In 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-16 which eliminated the concept of a qualifying special-purpose entity (“QSPE”) and the exemption of QSPEs from previous consolidation guidance. ASU 2009-16 also modified the criteria for derecognizing financial assets by transferors. In 2009, the FASB also issued ASU 2009-17, which amended the standards related to consolidation of variable interest entities. ASU 2009-17 included new criteria for determining the primary beneficiary of variable interest entities and increased the frequency in which reassessments must be made to determine the primary beneficiary of variable interest entities. ASU 2009-16 and 2009-17 became effective for fiscal years beginning after November 15, 2009. See Note 14 for a description of the effect on our financial statements of adopting ASU 2009-16 and ASU 2009-17.
In January 2010, the FASB issued ASU 2010-06, “Improving Disclosures About Fair Value Measurements.” Effective January 1, 2010, ASU 2010-06 requires the separate disclosure of significant transfers into and out of the Level 1 and Level 2 categories and the reasons for such transfers, and also requires fair value measurement disclosures for each class of assets and liabilities as well as disclosures about valuation techniques and inputs used for recurring and nonrecurring Level 2 and Level 3 fair value measurements. Effective in fiscal years beginning after December 31, 2010, ASU 2010-06 also requires Level 3 disclosure of purchases, sales, issuances and settlements activity on a gross rather than a net basis. We do not anticipate that the remaining disclosures under ASU 2010-06 will have a material impact on our Consolidated Financial Statements.
Notes To Consolidated Financial Statements (Continued)
Our long-held acquisition strategy is to purchase businesses with consistent earnings power, good returns on equity and able and honest management at sensible prices.
On February 12, 2010, we acquired all of the outstanding common stock of the Burlington Northern Santa Fe Corporation that we did not already own (about 264.5 million shares or 77.5%) for aggregate consideration of $26.5 billion that consisted of cash of approximately $15.9 billion with the remainder in Berkshire common stock (80,931 Class A shares and 20,976,621 Class B shares). Approximately 50% of the cash component was funded with existing cash balances and the remaining 50% was funded with proceeds from new debt issued by Berkshire. The acquisition was completed through the merger of a wholly-owned merger subsidiary (a Delaware limited liability company) and Burlington Northern Santa Fe Corporation. The merger subsidiary was the surviving entity and was renamed Burlington Northern Santa Fe, LLC (“BNSF”). BNSF is based in Fort Worth, Texas, and through BNSF Railway Company operates one of the largest railroad systems in North America with approximately 32,000 route miles of track in 28 states and two Canadian provinces.
Prior to February 12, 2010, we owned 76.8 million shares of BNSF (22.5% of the outstanding shares), which were acquired between August 2006 and January 2009. We accounted for those shares pursuant to the equity method and as of February 12, 2010, our investment had a carrying value of $6.6 billion. We are accounting for the acquisition of BNSF pursuant to the acquisition method under Accounting Standards Codification Section 805 Business Combinations (“ASC 805”). Upon completion of the acquisition of the remaining BNSF shares, we were required under ASC 805 to re-measure our previously owned investment in BNSF at fair value as of the acquisition date. In the first quarter of 2010, we recognized a one-time holding gain of approximately $1.0 billion for the difference between the fair value of the BNSF shares and our carrying value under the equity method.
A preliminary allocation of the aggregate $34.5 billion purchase price (including the fair value of the previously owned shares of BNSF and the value of certain BNSF outstanding equity awards that were converted into Berkshire Class B equity awards on the acquisition date) to BNSF’s assets and liabilities is summarized below (in millions):
|
Assets:
|
|
|
|
Liabilities and Net assets acquired:
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
971 |
|
Accounts payable and other liabilities
|
|
$ |
6,623 |
|
|
Property, plant and equipment
|
|
|
43,987 |
|
Notes payable and other borrowings
|
|
|
11,142 |
|
|
Goodwill
|
|
|
14,803 |
|
Income taxes, principally deferred
|
|
|
13,203 |
|
|
Other
|
|
|
5,702 |
|
|
|
|
30,968 |
|
| |
|
$ |
65,463 |
|
Net assets acquired
|
|
|
34,495 |
|
| |
|
|
|
|
|
|
$ |
65,463 |
|
BNSF’s financial statements are included in our consolidated financial statements beginning as of February 12, 2010. The following table sets forth certain unaudited pro forma consolidated earnings data for 2010 and 2009, as if the BNSF acquisition was consummated on the same terms at the beginning of 2010 and 2009. Amounts are in millions, except earnings per share.
| |
|
2010
|
|
|
2009
|
|
|
Total revenues
|
|
$ |
33,856 |
|
|
$ |
26,266 |
|
|
Net earnings attributable to Berkshire Hathaway shareholders
|
|
|
3,900 |
|
|
|
(1,272 |
) |
|
Earnings per equivalent Class A common share attributable to Berkshire Hathaway shareholders
|
|
|
2,368 |
|
|
|
(774 |
) |
Notes To Consolidated Financial Statements (Continued)
Investments in securities with fixed maturities as of March 31, 2010 and December 31, 2009 are summarized below (in millions).
| |
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses *
|
|
|
Fair
Value
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$ |
2,365 |
|
|
$ |
48 |
|
|
$ |
— |
|
|
$ |
2,413 |
|
|
States, municipalities and political subdivisions
|
|
|
3,605 |
|
|
|
262 |
|
|
|
— |
|
|
|
3,867 |
|
|
Foreign governments
|
|
|
11,231 |
|
|
|
395 |
|
|
|
(42 |
) |
|
|
11,584 |
|
|
Corporate bonds
|
|
|
13,264 |
|
|
|
2,419 |
|
|
|
(617 |
) |
|
|
15,066 |
|
|
Mortgage-backed securities
|
|
|
3,592 |
|
|
|
318 |
|
|
|
(20 |
) |
|
|
3,890 |
|
| |
|
$ |
34,057 |
|
|
$ |
3,442 |
|
|
$ |
(679 |
) |
|
$ |
36,820 |
|
|
Insurance and other
|
|
$ |
32,874 |
|
|
$ |
3,348 |
|
|
$ |
(679 |
) |
|
$ |
35,543 |
|
|
Finance and financial products
|
|
|
1,183 |
|
|
|
94 |
|
|
|
— |
|
|
|
1,277 |
|
| |
|
$ |
34,057 |
|
|
$ |
3,442 |
|
|
$ |
(679 |
) |
|
$ |
36,820 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$ |
2,362 |
|
|
$ |
46 |
|
|
$ |
(1 |
) |
|
$ |
2,407 |
|
|
States, municipalities and political subdivisions
|
|
|
3,689 |
|
|
|
275 |
|
|
|
(1 |
) |
|
|
3,963 |
|
|
Foreign governments
|
|
|
11,518 |
|
|
|
368 |
|
|
|
(42 |
) |
|
|
11,844 |
|
|
Corporate bonds
|
|
|
13,094 |
|
|
|
2,080 |
|
|
|
(502 |
) |
|
|
14,672 |
|
|
Mortgage-backed securities
|
|
|
3,961 |
|
|
|
310 |
|
|
|
(26 |
) |
|
|
4,245 |
|
| |
|
$ |
34,624 |
|
|
$ |
3,079 |
|
|
$ |
(572 |
) |
|
$ |
37,131 |
|
|
Insurance and other
|
|
$ |
33,317 |
|
|
$ |
2,984 |
|
|
$ |
(572 |
) |
|
$ |
35,729 |
|
|
Finance and financial products
|
|
|
1,307 |
|
|
|
95 |
|
|
|
— |
|
|
|
1,402 |
|
| |
|
$ |
34,624 |
|
|
$ |
3,079 |
|
|
$ |
(572 |
) |
|
$ |
37,131 |
|
|
*
|
Includes $625 million at March 31, 2010 and $471 million at December 31, 2009, related to securities that have been in an unrealized loss position for 12 months or more.
|
The amortized cost and estimated fair value of securities with fixed maturities at March 31, 2010 are summarized below by contractual maturity dates. Actual maturities will differ from contractual maturities because issuers of certain of the securities retain early call or prepayment rights. Amounts are in millions.
| |
|
Due in one
year or less
|
|
|
Due after one
year through
five years
|
|
|
Due after five
years through
ten years
|
|
|
Due after
ten years
|
|
|
Mortgage-backed
securities
|
|
|
Total
|
|
|
Amortized cost
|
|
$ |
5,603 |
|
|
$ |
14,497 |
|
|
$ |
7,106 |
|
|
$ |
3,259 |
|
|
$ |
3,592 |
|
|
$ |
34,057 |
|
|
Fair value
|
|
|
5,929 |
|
|
|
15,516 |
|
|
|
7,655 |
|
|
|
3,830 |
|
|
|
3,890 |
|
|
|
36,820 |
|
Notes To Consolidated Financial Statements (Continued)
Investments in equity securities as of March 31, 2010 and December 31, 2009 are summarized below (in millions).
| |
|
Cost Basis
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Express Company
|
|
$ |
1,287 |
|
|
$ |
4,968 |
|
|
$ |
— |
|
|
$ |
6,255 |
|
|
The Coca-Cola Company
|
|
|
1,299 |
|
|
|
9,701 |
|
|
|
— |
|
|
|
11,000 |
|
|
The Procter & Gamble Company
|
|
|
4,460 |
|
|
|
268 |
|
|
|
— |
|
|
|
4,728 |
|
|
Wells Fargo & Company
|
|
|
7,394 |
|
|
|
3,406 |
|
|
|
(399 |
) |
|
|
10,401 |
|
|
Other
|
|
|
22,095 |
|
|
|
7,507 |
|
|
|
(1,213 |
) |
|
|
28,389 |
|
| |
|
$ |
36,535 |
|
|
$ |
25,850 |
|
|
$ |
(1,612 |
) |
|
$ |
60,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other
|
|
$ |
35,866 |
|
|
$ |
23,757 |
|
|
$ |
(1,611 |
) |
|
$ |
58,012 |
|
|
Railroad, utilities and energy *
|
|
|
232 |
|
|
|
2,009 |
|
|
|
— |
|
|
|
2,241 |
|
|
Finance and financial products *
|
|
|
437 |
|
|
|
84 |
|
|
|
(1 |
) |
|
|
520 |
|
| |
|
$ |
36,535 |
|
|
$ |
25,850 |
|
|
$ |
(1,612 |
) |
|
$ |
60,773 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American Express Company
|
|
$ |
1,287 |
|
|
$ |
4,856 |
|
|
$ |
— |
|
|
$ |
6,143 |
|
|
The Coca-Cola Company
|
|
|
1,299 |
|
|
|
10,101 |
|
|
|
— |
|
|
|
11,400 |
|
|
The Procter & Gamble Company
|
|
|
4,962 |
|
|
|
78 |
|
|
|
— |
|
|
|
5,040 |
|
|
Wells Fargo & Company
|
|
|
7,394 |
|
|
|
2,721 |
|
|
|
(1,094 |
) |
|
|
9,021 |
|
|
Other
|
|
|
22,265 |
|
|
|
7,118 |
|
|
|
(1,953 |
) |
|
|
27,430 |
|
| |
|
$ |
37,207 |
|
|
$ |
24,874 |
|
|
$ |
(3,047 |
) |
|
$ |
59,034 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other
|
|
$ |
36,538 |
|
|
$ |
23,070 |
|
|
$ |
(3,046 |
) |
|
$ |
56,562 |
|
|
Railroad, utilities and energy *
|
|
|
232 |
|
|
|
1,754 |
|
|
|
— |
|
|
|
1,986 |
|
|
Finance and financial products *
|
|
|
437 |
|
|
|
50 |
|
|
|
(1 |
) |
|
|
486 |
|
| |
|
$ |
37,207 |
|
|
$ |
24,874 |
|
|
$ |
(3,047 |
) |
|
$ |
59,034 |
|
|
*
|
Included in Other assets.
|
Unrealized losses of other equity investments at March 31, 2010, included $1,198 million related to securities that have been in an unrealized loss position for 12 months or more. Approximately 94% of these losses at March 31, 2010 were concentrated in four issuers. In addition, although our investment in Wells Fargo & Company is in a net unrealized gain position of $3,007 million, certain of the shares with aggregate gross unrealized losses of $399 million have been in an unrealized loss position for greater than 12 months. We use no bright-line test in determining whether impairments are temporary or other than temporary. We consider several factors in determining other-than-temporary impairment losses including the current and expected long-term business prospects of the issuer, the length of time and relative magnitude of the price decline and our ability and intent to hold the investment until the price recovers. In our judgment, the future earnings potential and underlying business economics of these companies are favorable and we possess the ability and intent to hold these securities until their prices recover. Changing market conditions and other facts and circumstances may change the business prospects of these issuers as well as our ability and intent to hold these securities until the prices recover.
Notes To Consolidated Financial Statements (Continued)
A summary of other investments follows (in millions).
| |
|
Cost
|
|
|
Unrealized
Gains/Losses
|
|
|
Fair
Value
|
|
|
Carrying
Value
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
$ |
5,400 |
|
|
$ |
986 |
|
|
$ |
6,386 |
|
|
$ |
5,400 |
|
|
Equity securities
|
|
|
15,689 |
|
|
|
5,054 |
|
|
|
20,743 |
|
|
|
20,743 |
|
| |
|
$ |
21,089 |
|
|
$ |
6,040 |
|
|
$ |
27,129 |
|
|
$ |
26,143 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other
|
|
$ |
18,347 |
|
|
$ |
5,618 |
|
|
$ |
23,965 |
|
|
$ |
22,990 |
|
|
Finance and financial products
|
|
|
2,742 |
|
|
|
422 |
|
|
|
3,164 |
|
|
|
3,153 |
|
| |
|
$ |
21,089 |
|
|
$ |
6,040 |
|
|
$ |
27,129 |
|
|
$ |
26,143 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity and equity securities
|
|
$ |
21,089 |
|
|
$ |
5,879 |
|
|
$ |
26,968 |
|
|
$ |
26,014 |
|
|
Equity method
|
|
|
5,851 |
|
|
|
1,721 |
|
|
|
7,572 |
|
|
|
6,586 |
|
| |
|
$ |
26,940 |
|
|
$ |
7,600 |
|
|
$ |
34,540 |
|
|
$ |
32,600 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other
|
|
$ |
24,198 |
|
|
$ |
7,172 |
|
|
$ |
31,370 |
|
|
$ |
29,440 |
|
|
Finance and financial products
|
|
|
2,742 |
|
|
|
428 |
|
|
|
3,170 |
|
|
|
3,160 |
|
| |
|
$ |
26,940 |
|
|
$ |
7,600 |
|
|
$ |
34,540 |
|
|
$ |
32,600 |
|
Fixed maturity and equity investments in the preceding table include our investments in The Goldman Sachs Group, Inc. (“GS”) and The General Electric Company (“GE”), that we made in 2008 and investments in Swiss Reinsurance Company Ltd. (“Swiss Re”) and The Dow Chemical Company (“Dow”) that we made in 2009. In addition, fixed maturity and equity investments include investments in Wm. Wrigley Jr. Company (“Wrigley”) that we made in both 2008 and 2009. Additional information regarding these investments follows.
We own 50,000 shares of 10% Cumulative Perpetual Preferred Stock of GS (“GS Preferred”) and Warrants to purchase 43,478,260 shares of common stock of GS (“GS Warrants”) which were acquired for a combined cost of $5 billion. The GS Preferred may be redeemed at any time by GS at a price of $110,000 per share ($5.5 billion in aggregate). The GS Warrants expire in 2013 and can be exercised for an additional aggregate cost of $5 billion ($115/share). We also own 30,000 shares of 10% Cumulative Perpetual Preferred Stock of GE (“GE Preferred”) and Warrants to purchase 134,831,460 shares of common stock of GE (“GE Warrants”) which were acquired for a combined cost of $3 billion. The GE Preferred may be redeemed by GE beginning in October 2011 at a price of $110,000 per share ($3.3 billion in aggregate). The GE Warrants expire in 2013 and can be exercised for an additional aggregate cost of $3 billion ($22.25/share).
We own $4.4 billion par amount of 11.45% subordinated notes due 2018 of Wrigley (“Wrigley Notes”) and $2.1 billion of 5% preferred stock of Wrigley (“Wrigley Preferred”). The Wrigley Notes and Wrigley Preferred were acquired in 2008 in connection with Mars, Incorporated’s acquisition of Wrigley. During 2009, we also acquired $1.0 billion par amount of Wrigley senior notes due in 2013 and 2014. The Wrigley subordinated and senior notes are classified as held-to-maturity and accordingly we are carrying these investments at cost.
On March 23, 2009, we acquired a 12% convertible perpetual capital instrument issued by Swiss Re at a cost of $2.7 billion. The instrument has a face amount of 3 billion Swiss Francs (“CHF”) and has no maturity or mandatory redemption date but can be redeemed under certain conditions at the option of Swiss Re at 140% of the face amount until March 23, 2011 and thereafter at 120% of the face amount. The instrument possesses no voting rights and is subordinated to senior securities of Swiss Re as defined in the agreement. Beginning on March 23, 2012, the instrument can be converted at our option into 120,000,000 common shares of Swiss Re (a rate of 25 CHF per share of Swiss Re common stock).
On April 1, 2009, we acquired 3,000,000 shares of Series A Cumulative Convertible Perpetual Preferred Stock of Dow (“Dow Preferred”) for a cost of $3 billion. The Dow Preferred was issued in connection with Dow’s acquisition of the Rohm and Haas Company. Under certain conditions, each share of the Dow Preferred is convertible into 24.201 shares of Dow
Notes To Consolidated Financial Statements (Continued)
Note 6. Other Investments (Continued)
common stock. Beginning in April 2014, if Dow’s common stock price exceeds $53.72 per share for any 20 trading days in a consecutive 30-day window, Dow, at its option, at any time, in whole or in part, may convert the Dow Preferred into Dow common stock at the then applicable conversion rate. The Dow Preferred is entitled to dividends at a rate of 8.5% per annum.
As of December 31, 2009, we owned 22.5% of BNSF’s outstanding common stock. As of December 31, 2009, our equity in net assets of BNSF was $2,884 million and the excess of our carrying value over our equity in net assets of BNSF was $3,702 million. Prior to February 12, 2010, we accounted for our investment in BNSF pursuant to the equity method. Upon completion of the acquisition of the remaining outstanding shares of BNSF, we discontinued the use of the equity method. See Note 3.
Investment gains/losses are summarized below (in millions).
| |
|
First Quarter
|
|
| |
|
2010
|
|
|
2009
|
|
|
Fixed maturity securities —
|
|
|
|
|
|
|
|
Gross gains from sales and other disposals
|
|
$ |
298 |
|
|
$ |
150 |
|
|
Gross losses from sales and other disposals
|
|
|
(3 |
) |
|
|
(9 |
) |
|
Equity securities —
|
|
|
|
|
|
|
|
|
|
Gross gains from sales and other disposals
|
|
|
212 |
|
|
|
34 |
|
|
Gross losses from sales
|
|
|
(172 |
) |
|
|
(508 |
) |
|
Other*
|
|
|
983 |
|
|
|
(37 |
) |
| |
|
$ |
1,318 |
|
|
$ |
(370 |
) |
|
*
|
In 2010 includes a one-time holding gain of $979 million related to the BNSF acquisition. See Note 3.
|
Net investment gains/losses are reflected in the Consolidated Statements of Earnings as follows.
|
Insurance and other
|
|
$ |
1,315 |
|
|
$ |
(370 |
) |
|
Finance and financial products
|
|
|
3 |
|
|
|
— |
|
| |
|
$ |
1,318 |
|
|
$ |
(370 |
) |
Receivables of insurance and other businesses are comprised of the following (in millions).
| |
|
March 31,
|
|
|
December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
|
Insurance premiums receivable
|
|
$ |
6,952 |
|
|
$ |
5,295 |
|
|
Reinsurance recoverables
|
|
|
3,543 |
|
|
|
2,922 |
|
|
Trade and other receivables
|
|
|
7,700 |
|
|
|
6,977 |
|
|
Allowances for uncollectible accounts
|
|
|
(396 |
) |
|
|
(402 |
) |
| |
|
$ |
17,799 |
|
|
$ |
14,792 |
|
Loans and finance receivables of finance and financial products businesses are comprised of the following (in millions).
| |
|
March 31,
|
|
|
December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
|
Consumer installment loans and finance receivables
|
|
$ |
14,202 |
|
|
$ |
12,779 |
|
|
Commercial loans and finance receivables
|
|
|
1,594 |
|
|
|
1,558 |
|
|
Allowances for uncollectible loans
|
|
|
(373 |
) |
|
|
(348 |
) |
| |
|
$ |
15,423 |
|
|
$ |
13,989 |
|
Notes To Consolidated Financial Statements (Continued)
Inventories are comprised of the following (in millions).
| |
|
March 31,
|
|
|
December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
|
Raw materials
|
|
$ |
943 |
|
|
$ |
924 |
|
|
Work in process and other
|
|
|
497 |
|
|
|
438 |
|
|
Finished manufactured goods
|
|
|
1,958 |
|
|
|
1,959 |
|
|
Purchased goods
|
|
|
3,053 |
|
|
|
2,826 |
|
| |
|
$ |
6,451 |
|
|
$ |
6,147 |
|
A reconciliation of the change in the carrying value of goodwill is as follows (in millions).
| |
|
March 31,
|
|
|
December 31,
|
|
| |
|
2010
|
|
|
2009
|
|
|
Balance at beginning of year
|
|
$ |
33,972 |
|
|
$ |
33,781 |
|
|
Acquisition of BNSF
|
|
|
14,803 |
|
|
|
— |
|
|
Other
|
|
|
(61 |
) |
|
|
191 |
|
|
Ending balance
|
|
$ |
48,714 |
|
|
$ |
33,972 |
|
Property, plant and equipment of insurance and other businesses is comprised of the following (in millions).
| |
|
Ranges of
estimated useful life
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Land
|
|
— |
|
|
$ |
742 |
|
|
$ |
740 |
|
|
Buildings and improvements
|
|
3 – 40 years
|
|
|
|
4,621 |
|
|
|
4,606 |
|
|
Machinery and equipment
|
|
3 – 25 years
|
|
|
|
10,839 |
|
|
|
10,845 |
|
|
Furniture, fixtures and other
|
|
3 – 20 years
|
|
|
|
1,661 |
|
|
|
1,595 |
|
|
Assets held for lease
|
|
12 – 30 years
|
|
|
|
5,734 |
|
|
|
5,706 |
|
| |
|
|
|
|
|
|
23,597 |
|
|
|
23,492 |
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(8,031 |
) |
|
|
(7,772 |
) |
| |
|
|
|
|
|
$ |
15,566 |
|
|
$ |
15,720 |
|
Depreciation expense of insurance and other businesses for the first quarter of 2010 and 2009 was $380 million and $403 million, respectively.
Property, plant and equipment of railroad, utilities and energy businesses is comprised of the following (in millions).
| |
|
Ranges of
estimated useful life
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Railroad:
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
— |
|
|
$ |
5,823 |
|
|
$ |
— |
|
|
Track structure and other roadway
|
|
5 – 100 years
|
|
|
|
34,254 |
|
|
|
— |
|
|
Locomotives, freight cars and other equipment
|
|
1 – 37 years
|
|
|
|
3,824 |
|
|
|
— |
|
|
Construction in progress
|
|
— |
|
|
|
633 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities and Energy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utility generation, distribution and transmission system
|
|
5 – 85 years
|
|
|
|
35,204 |
|
|
|
35,616 |
|
|
Interstate pipeline assets
|
|
3 – 67 years
|
|
|
|
5,797 |
|
|
|
5,809 |
|
|
Independent power plants and other assets
|
|
3 – 30 years
|
|
|
|
1,153 |
|
|
|
1,157 |
|
|
Construction in progress
|
|
— |
|
|
|
2,210 |
|
|
|
2,152 |
|
| |
|
|
|
|
|
|
88,898 |
|
|
|
44,734 |
|
|
Accumulated depreciation
|
|
|
|
|
|
|
(13,950 |
) |
|
|
(13,798 |
) |
| |
|
|
|
|
|
$ |
74,948 |
|
|
$ |
30,936 |
|
Notes To Consolidated Financial Statements (Continued)
Note 11. Property, plant and equipment (Continued)
Railroad property, plant and equipment includes the land, other roadway, track structure and rolling stock (primarily locomotives and freight cars) of BNSF, which we acquired on February 12, 2010. See Note 3. The cost of these assets represents the estimated fair value of these assets as of the acquisition date. Through BNSF Railway Company, BNSF operates one of the largest railroad systems in North America with approximately 32,000 route miles of track in 28 states and two Canadian provinces.
Railroad property, plant and equipment is depreciated and amortized on a straight-line basis over the estimated useful lives. Depreciation is determined under the group method in which a single depreciation rate is applied to the gross investment in a particular class of property. BNSF conducts studies of depreciation rates and the required accumulated depreciation balance as required by the Surface Transportation Board, which is generally every three years for equipment property and every six years for track structure and other roadway property. The effect of changes in the estimated service lives of these assets is recorded on a prospective basis. Upon normal sale or retirement of most depreciable railroad property, no gain or loss is recognized. The disposals of land and non-rail property as well as significant premature retirements are recorded as gains or losses at the time of their occurrence.
The utility generation, distribution and transmission system and interstate pipeline assets are the regulated assets of public utility and natural gas pipeline subsidiaries. At March 31, 2010 and December 31, 2009, accumulated depreciation and amortization related to regulated assets was $13.2 billion and $13.3 billion, respectively. Substantially all of the construction in progress at March 31, 2010 and December 31, 2009 related to the construction of regulated assets.
Depreciation expense of the railroad, utilities and energy businesses for the first quarter of 2010 and 2009 was $483 million and $304 million, respectively.
Derivative contracts are used primarily by our finance and financial products businesses and our railroad, utilities and energy businesses. As of March 31, 2010, substantially all of the derivative contracts in-force of our finance and financial products businesses are not designated as hedges for financial reporting purposes. These contracts were initially entered into with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. Changes in the fair values of such contracts are reported in earnings as derivative gains/losses. A summary of derivative contracts of our finance and financial products businesses follows (in millions).
| |
|
March 31, 2010
|
|
|
December 31, 2009
|
|
| |
|
Assets (3)
|
|
|
Liabilities
|
|
|
Notional
Value
|
|
|
Assets (3)
|
|
|
Liabilities
|
|
|
Notional
Value
|
|
|
Equity index put options
|
|
$ |
— |
|
|
$ |
7,131 |
|
|
$ |
36,760 |
(1) |
|
$ |
— |
|
|
$ |
7,309 |
|
|
$ |
37,990 |
(1) |
|
Credit default obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High yield indexes
|
|
|
— |
|
|
|
500 |
|
|
|
5,423 |
(2) |
|
|
— |
|
|
|
781 |
|
|
|
5,533 |
(2) |
|
States/municipalities
|
|
|
— |
|
|
|
841 |
|
|
|
16,042 |
(2) |
|
|
— |
|
|
|
853 |
|
|
|
16,042 |
(2) |
|
Individual corporate
|
|
|
89 |
|
|
|
— |
|
|
|
3,565 |
(2) |
|
|
81 |
|
|
|
— |
|
|
|
3,565 |
(2) |
|
Other
|
|
|
309 |
|
|
|
224 |
|
|
|
|
|
|
|
378 |
|
|
|
360 |
|
|
|
|
|
|
Counterparty netting and funds held as collateral
|
|
|
(75 |
) |
|
|
(29 |
) |
|
|
|
|
|
|
(193 |
) |
|
|
(34 |
) |
|
|
|
|
| |
|
$ |
323 |
|
|
$ |
8,667 |
|
|
|
|
|
|
$ |
266 |
|
|
$ |
9,269 |
|
|
|
|
|
|
(1)
|
Represents the aggregate undiscounted amount payable at the contract expiration dates assuming that the value of each index is zero at the contract expiration date.
|
|
(2)
|
Represents the maximum undiscounted future value of losses payable under the contracts, assuming a sufficient number of credit defaults occur. The number of losses required to exhaust contract limits under substantially all of the contracts is dependent on the loss recovery rate related to the specific obligor at the time of the default.
|
|
(3)
|
Included in Other assets of finance and financial products businesses.
|
Notes To Consolidated Financial Statements (Continued)
Note 12. Derivative contracts (Continued)
A summary of derivative gains/losses included in the Consolidated Statements of Earnings are as follows (in millions).
| |
|
First Quarter
|
|
| |
|
2010
|
|
|
2009
|
|
|
Equity index put options
|
|
$ |
178 |
|
|
$ |
(166 |
) |
|
Credit default obligations
|
|
|
208 |
|
|
|
(1,351 |
) |
|
Other
|
|
|
25 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
411 |
|
|
$ |
(1,517 |
) |
The equity index put option contracts are European style options written on four major equity indexes. Future payments, if any, under these contracts will be required if the underlying index value is below the strike price at the contract expiration dates which occur between June 2018 and January 2028. We received the premiums on these contracts in full at the contract inception dates and therefore we have no counterparty credit risk.
At March 31, 2010, the aggregate intrinsic value (the undiscounted liability assuming the contracts are settled on their future expiration dates based on the March 31, 2010 index values) was approximately $4.1 billion. However, these contracts may not be terminated or fully settled before the expiration dates and therefore the ultimate amount of cash basis gains or losses on these contracts will not be determined for many years. The remaining weighted average life of all contracts was approximately 11.25 years at March 31, 2010.
Our credit default contracts pertain to various indexes of non-investment grade (or “high yield”) corporate issuers, state/municipal debt issuers and individual corporate issuers. These contracts cover the loss in value of specified debt obligations of the issuers arising from default events, which are usually for non-payment or bankruptcy. Loss amounts are subject to contract limits.
The high yield index contracts are comprised of specified North American corporate issuers (usually 100 in number at inception) whose obligations are rated below investment grade. High yield contracts remaining in-force at March 31, 2010 expire from 2010 through 2013. State and municipality contracts are comprised of over 500 state and municipality issuers and had a weighted average contract life at March 31, 2010 of approximately 11 years. Potential obligations related to approximately 50% of the notional amount of the state and municipality contracts cannot be settled before the maturity dates of the underlying obligations, which range from 2019 to 2054.
Premiums on the high yield index and state/municipality contracts are received in full at the inception dates of the contracts and, as a result, we have no counterparty credit risk. Our payment obligations under certain of these contracts are on a first loss basis. Losses under other contracts are subject to aggregate deductibles that must be satisfied before we have any payment obligations.
Individual corporate credit default contracts primarily relate to issuers of investment grade obligations. In most instances, premiums are due from counterparties on a quarterly basis over the terms of the contracts. As of March 31, 2010, all of the remaining in-force individual corporate issuer contracts expire in 2013.
With limited exceptions, our equity index put option and credit default contracts contain no collateral posting requirements with respect to changes in either the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. As of March 31, 2010, our collateral posting requirement under contracts with collateral provisions was $28 million compared to about $35 million at December 31, 2009. As of March 31, 2010, had Berkshire’s credit ratings (currently AA+ from Standard & Poor’s and Aa2 from Moody’s) been downgraded below either A- by Standard & Poor’s or A3 by Moody’s an additional $1.1 billion would have been required to be posted as collateral.
Our railroad and regulated utility subsidiaries are exposed to variations in the market prices in the purchases and sales of natural gas and electricity and in commodity fuel costs. Derivative instruments, including forward purchases and sales, futures, swaps and options are used to manage these price risks. Unrealized gains and losses under these contracts are either probable of recovery through rates and therefore are recorded as a regulatory net asset or liability or are accounted for as cash flow hedges and therefore are recorded as accumulated other comprehensive income or loss. Derivative contract assets included in other assets of railroad, utilities and energy businesses were $316 million and $188 million as of March 31, 2010 and December 31, 2009, respectively. Derivative contract liabilities included in accounts payable, accruals and other liabilities of railroad, utilities and energy businesses were $655 million as of March 31, 2010 and $581 million as of December 31, 2009.
Notes To Consolidated Financial Statements (Continued)
A summary of supplemental cash flow information for the first quarter of 2010 and 2009 is presented in the following table (in millions).
| |
|
First Quarter
|
|
| |
|
2010
|
|
|
2009
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
Income taxes
|
|
$ |
310 |
|
|
$ |
225 |
|
|
Interest of finance and financial products businesses
|
|
|
194 |
|
|
|
169 |
|
|
Interest of railroad, utilities and energy businesses
|
|
|
374 |
|
|
|
282 |
|
|
Interest of insurance and other businesses
|
|
|
38 |
|
|
|
35 |
|
| |
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in connection with acquisition of BNSF
|
|
|
30,968 |
|
|
|
— |
|
|
Common stock issued in connection with acquisition of BNSF
|
|
|
10,577 |
|
|
|
— |
|
Notes payable and other borrowings are summarized below (in millions). The average interest rates shown in the following tables are the weighted average interest rates on outstanding debt as of March 31, 2010.
| |
|
Average
Interest Rate
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Insurance and other:
|
|
|
|
|
|
|
|
|
|
|
Issued by Berkshire parent company due 2010-2033
|
|
|
1.4% |
|
|
$ |
8,322 |
|
|
$ |
340 |
|
|
Short-term subsidiary borrowings
|
|
|
0.3% |
|
|
|
1,423 |
|
|
|
1,607 |
|
|
Other subsidiary borrowings due 2010-2035
|
|
|
5.3% |
|
|
|
2,594 |
|
|
|
2,614 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
12,339 |
|
|
$ |
4,561 |
|
In February 2010, Berkshire issued $8.0 billion aggregate par amount of senior unsecured notes consisting of $2.0 billion par amount of floating rate notes due in 2011; $1.1 billion par amount of floating rate notes due in 2012; $1.2 billion par amount of floating rate notes due in 2013; $600 million par amount of 1.4% notes due in 2012; $1.4 billion par amount of 2.125% notes due in 2013; and $1.7 billion par amount of 3.2% notes due in 2015. These notes were issued in connection with the BNSF acquisition.
| |
|
Average
Interest Rate
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Railroad, utilities and energy:
|
|
|
|
|
|
|
|
|
|
|
Issued by MidAmerican Energy Holdings Company (“MidAmerican”) and its subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
MidAmerican senior unsecured debt due 2012-2037
|
|
|
6.1% |
|
|
$ |
5,371 |
|
|
$ |
5,371 |
|
|
Subsidiary and other debt due 2010-2039
|
|
|
5.9% |
|
|
|
14,155 |
|
|
|
14,208 |
|
|
Issued by BNSF due 2010-2097
|
|
|
6.0% |
|
|
|
11,073 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
30,599 |
|
|
$ |
19,579 |
|
Berkshire does not guaranty any debt or other borrowings of BNSF, MidAmerican or their subsidiaries. Subsidiary debt of utilities and energy businesses represents amounts issued by subsidiaries of MidAmerican pursuant to separate financing agreements. All or substantially all of the assets of certain MidAmerican subsidiaries are or may be pledged or encumbered to support or otherwise secure the debt. These borrowing arrangements generally contain various covenants including, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios. As of March 31, 2010, MidAmerican and its subsidiaries were in compliance with all applicable covenants.
The notes payable and other borrowings of BNSF were issued prior to our acquisition on February 12, 2010. Principal payments expected during the next five years with respect to BNSF’s borrowings as of March 31, 2010 are as follows (in millions): 2010 - $575; 2011 - $673; 2012 - $501; 2013 - $448; and 2014 - $641.
| |
|
Average
Interest Rate
|
|
|
March 31,
2010
|
|
|
December 31,
2009
|
|
|
Finance and financial products:
|
|
|
|
|
|
|
|
|
|
|
Issued by Berkshire Hathaway Finance Corporation (“BHFC”)
|
|
|
4.2% |
|
|
$ |
11,537 |
|
|
$ |
12,051 |
|
|
Issued by other subsidiaries due 2010-2036
|
|
|
5.3% |
|
|
|
3,152 |
|
|
|
1,718 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
14,689 |
|
|
$ |
13,769 |
|
Notes To Consolidated Financial Statements (Continued)
Note 14. Notes payable and other borrowings (Continued)
BHFC is a 100% owned finance subsidiary of Berkshire, which has fully and unconditionally guaranteed its securities. Debt issued by BHFC matures between 2010 and 2040. In January 2010, BHFC issued $1 billion par amount of senior notes consisting of $750 million par of 5.75% notes due in 2040 and $250 million par of floating rate notes due in 2012. In January 2010, $1.5 billion par amount of BHFC senior notes matured and were repaid.
Prior to our acquisition of Clayton Homes in 2003, certain of its subsidiaries regularly originated and acquired installment loans and sold those loans to QSPEs. The transferred loans were then securitized and sold to third party investors. We continue to service the installment loans and retain residual interests in the securitized loans. Upon adoption of ASU 2009-17 we reevaluated the QSPEs and determined that the QSPEs were variable interest entities that should be consolidated, primarily because we are the servicer of the loans and hold the residual interests. Consequently, as of January 1, 2010, we increased other borrowings of finance and financial products by approximately $1.5 billion with a corresponding increase in consumer installment loans receivable. The QSPEs continue to be distinct, bankruptcy remote entities that hold the interests in the related installment loans. The cash flows received from the collection of the installment loans continue to be pledged to satisfy the principal and interest due on the related debt now recorded in our Consolidated Financial Statements.
Our subsidiaries have approximately $6.1 billion of available unused lines of credit and commercial paper capacity in the aggregate at March 31, 2010 to support our short-term borrowing programs and provide additional liquidity. Generally, Berkshire’s guarantee of a subsidiary’s debt obligation is an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all present and future payment obligations.
The estimated fair values of our financial instruments as of March 31, 2010 and December 31, 2009 are shown in the following table (in millions). The carrying values of cash and cash equivalents, accounts receivable and accounts payable, accruals and other liabilities are deemed to be reasonable estimates of their fair values.
| |
|
Carrying Value
|
|
|
Fair Value
|
|
| |
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Investments in fixed maturity securities
|
|
$ |
36,820 |
|
|
$ |
37,131 |
|
|
$ |
36,820 |
|
|
$ |
37,131 |
|
|
Investments in equity securities
|
|
|
60,773 |
|
|
|
59,034 |
|
|
|
60,773 |
|
|
|
59,034 |
|
|
Other investments
|
|
|
26,143 |
|
|
|
32,600 |
|
|
|
27,129 |
|
|
|
34,540 |
|
|
Loans and finance receivables
|
|
|
15,423 |
|
|
|
13,989 |
|
|
|
13,961 |
|
|
|
12,415 |
|
|
Derivative contract assets (1)
|
|
|
639 |
|
|
|
454 |
|
|
|
639 |
|
|
|
454 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and other borrowings:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance and other
|
|
|
12,339 |
|
|
|
4,561 |
|
|
|
12,457 |
|
|
|
4,669 |
|
|
Railroad, utilities and energy
|
|
|
30,599 |
|
|
|
19,579 |
|
|
|
31,813 |
|
|
|
20,868 |
|
|
Finance and financial products
|
|
|
14,689 |
|
|
|
13,769 |
|
|
|
15,373 |
|
|
|
14,355 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contract liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Railroad, utilities and energy (2)
|
|
|
655 |
|
|
|
581 |
|
|
|
655 |
|
|
|
581 |
|
|
Finance and financial products
|
|
|
8,667 |
|
|
|
9,269 |
|
|
|
8,667 |
|
|
|
9,269 |
|
|
(1)
|
Included in Other assets
|
|
(2)
|
Included in Accounts payable, accruals and other liabilities
|
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. Fair value measurements assume the asset or liability is exchanged in an orderly manner; the exchange is in the principal market for that asset or liability (or in the most advantageous market when no principal market exists); and the market participants are independent, knowledgeable, able and willing to transact an exchange.
Fair values for substantially all of our financial instruments were measured using market or income approaches. Considerable judgment may be required in interpreting market data used to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value.
The hierarchy for measuring fair value consists of Levels 1 through 3.
Level 1 – Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets. Substantially all of our equity investments are traded on an exchange in active markets and fair values are based on the closing prices as of the balance sheet date.
Notes To Consolidated Financial Statements (Continued)
Note 15. Fair value measurements (Continued)
Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Fair values for our investments in fixed maturity securities are primarily based on market prices and market data available for instruments with similar characteristics. Pricing evaluations are generally based on discounted future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit rating, estimated duration, and yields for other instruments of the issuer or entities in the same industry sector.
Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities or related observable inputs that can be corroborated at the measurement date. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in pricing assets or liabilities. Measurements of non-exchange traded derivative contracts and certain other investments carried at fair value are based primarily on valuation models, discounted cash flow models or other valuation techniques that are believed to be used by market participants. We value equity index put option contracts based on the Black-Scholes option valuation model which we believe is widely used by market participants. Inputs to this model include current index price, expected volatility, dividend and interest rates and contract duration. Credit default contracts are primarily valued based on indications of bid or offer data as of the balance sheet date. These contracts are not exchange traded and certain of the terms of our contracts are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts. For these reasons, we classified these contracts as Level 3.
Financial assets and liabilities measured and carried at fair value on a recurring basis in our financial statements are summarized according to the hierarchy previously described as follows (in millions).
| |
|
Total
Fair Value
|
|
|
Quoted
Prices
(Level 1)
|
|
|
Significant Other
Observable
Inputs (Level 2)
|
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
|
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury, U.S. government corporations and agencies
|
|
$ |
2,413 |
|
|
$ |
565 |
|
|
$ |
1,844 |
|
|
$ |
4 |
|
|
States, municipalities and political subdivisions
|
|
|
3,867 |
|
|
|
— |
|
|
|
3,866 |
|
|
|
1 |
|
|
Foreign governments
|
|
|
11,584 |
|
|
|
5,656 |
|
|
|
5,824 |
|
|
|
104 |
|
|
Corporate bonds
|
|
|
15,066 |
|
|
|
— |
|
|
|
14,368 |
|
|
|
698 |
|
|
Mortgage-backed securities
|
|
|
3,890 |
|
|
|
— |
|
|
|
3,889 |
|
|
|
1 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
36,820 |
|
|
$ |
6,221 |
|
|
$ |
29,791 |
|
|
$ |
808 |
|
| |
|
|
|
|