BERKSHIRE HATHAWAY INC - Quarter Report: 2020 June (Form 10-Q)

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

(Mark One)

For the quarterly period ended June 30, 2020

OR

For the transition period from                  to

Commission file number 001-14905

BERKSHIRE HATHAWAY INC.

(Exact name of registrant as specified in its charter)

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)

Securities registered pursuant to Section 12(b) of the Act:

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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Number of shares of common stock outstanding as of July 30, 2020:

BERKSHIRE HATHAWAY INC.

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Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

See accompanying Notes to Consolidated Financial Statements

2

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

See accompanying Notes to Consolidated Financial Statements

3

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

See accompanying Notes to Consolidated Financial Statements

4

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

See accompanying Notes to Consolidated Financial Statements

5

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

See accompanying Notes to Consolidated Financial Statements

6

BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

Note 1. General

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”), which includes 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. Changes to those policies due to the adoption of new accounting standards are described in Note 2.

Financial information in this Quarterly Report reflects all 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 more significant to results of interim periods than to results for a full year. Given the size of our equity security investment portfolio, changes in market prices and the related changes in unrealized gains on equity securities will produce significant volatility in our interim and annual earnings. In addition, changes in the fair values of certain derivative contract liabilities, gains and losses from the periodic revaluation of certain assets and liabilities denominated in foreign currencies and the magnitude of asset impairment charges can cause significant variations in periodic net earnings.

The novel coronavirus (“COVID-19”) spread rapidly across the world in the first quarter of 2020 and was declared a pandemic by the World Health Organization. The government and private sector responses to contain its spread began to significantly affect our operating businesses in March and adversely affected nearly all of our operations in the second quarter, although such effects vary significantly. The duration and extent of the effects over longer terms cannot be reasonably estimated at this time. The risks and uncertainties resulting from the pandemic that may affect our future earnings, cash flows and financial condition include the nature and duration of the curtailment or closure of our various facilities and the long-term effect on the demand for our products and services. Accordingly, significant estimates used in the preparation of our financial statements including those associated with evaluations of certain long-lived assets, goodwill and other intangible assets for impairment, expected credit losses on amounts owed to us and the estimations of certain losses assumed under insurance and reinsurance contracts may be subject to significant adjustments in future periods. Additionally, GEICO’s underwriting results will likely be negatively affected over the remainder of the year and in the first quarter of 2021 as the full impact of the GEICO Giveback program (a program whereby auto insurance policies renewed and newly issued during the period between April 8, 2020 and October 7, 2020 receive a 15% premium rate reduction) will be reflected in earned premiums during these periods.

Note 2. New accounting pronouncements

We adopted Accounting Standards Codification (“ASC”) 326 “Financial Instruments-Credit Losses” on January 1, 2020. ASC 326 provides for the measurement of expected credit losses on financial assets that are carried at amortized cost based on the net amounts expected to be collected. Measurements of expected credit losses therefore include provisions for non-collection, whether the risk is probable or remote. Prior to the adoption of ASC 326, credit losses were measured when non-collection was considered probable based on the prevailing facts and circumstances. We elected to not measure an allowance for expected credit losses on accrued interest and instead reverse uncollectible accrued interest through interest income on a timely basis.

Upon adoption of ASC 326, we recorded a charge to retained earnings of $388 million representing the cumulative after-tax increase in our allowances for credit losses, which was primarily related to our manufactured housing loans. Expected credit losses for such financial assets are based on the net present value of future principal payments less estimated expenses related to the charge-off and foreclosure of expected uncollectible loans and include provisions for loans that are not in foreclosure. Our principal credit quality indicator is whether the loans are performing. Expected credit loss estimates consider historical default rates, collateral recovery rates, historical runoff rates, interest rates, reductions of future cash flows for modified loans, the historical time elapsed from last payment until foreclosure, among other matters. In addition, our estimates consider current conditions and reasonable and supportable forecasts.

7

Notes to Consolidated Financial Statements (Continued)

Note 2. New accounting pronouncements (Continued)

Trade receivables, insurance premium receivables and other receivables are primarily short-term in nature with stated collection terms of less than one year from the date of origination. In establishing credit loss allowances for such receivables, we primarily utilize credit loss history. However, credit loss allowances may be adjusted as a result of current conditions and when we expect reasonable and supportable forecasts to deviate from historical experience. In evaluating expected credit losses of reinsurance recoverables on unpaid losses, we review the credit quality of the counterparty and consider credit ratings, right-of-offset provisions within reinsurance contracts and other forms of credit enhancement including, collateral, funds held arrangements, guarantees and other publicly available information.

We adopted ASU 2017-04 “Simplifying the Test for Goodwill Impairment” as of January 1, 2020. Under ASU 2017-04, the measurement of a goodwill impairment is represented by the excess of the carrying value over the fair value of the reporting unit and is limited to the carrying value of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after its adoption date.

In August 2018, the FASB issued ASU 2018-12 “Targeted Improvements to the Accounting for Long-Duration Contracts.” ASU 2018-12 requires periodic reassessment of actuarial and discount rate assumptions used to value policyholder liabilities and deferred acquisition costs arising from long-duration insurance and reinsurance contracts, with the effects of changes in cash flow assumptions reflected in earnings and the effects of changes in discount rate assumptions reflected in other comprehensive income. Currently, the actuarial and discount rate assumptions are set at the contract inception date and not subsequently changed, except under limited circumstances. ASU 2018-12 requires new disclosures and is effective for fiscal years beginning after December 15, 2021, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements.

Note 3. Investments in fixed maturity securities

Investments in fixed maturity securities as of June 30, 2020 and December 31, 2019 are summarized by type below (in millions).

Investments in foreign governments include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of June 30, 2020, approximately 88% of our foreign government holdings were rated AA or higher by at least one of the major rating agencies.

The amortized cost and estimated fair value of fixed maturity securities as of June 30, 2020 are summarized below by contractual maturity dates (in millions). Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers.

8

Notes to Consolidated Financial Statements (Continued)

Note 4. Investments in equity securities

Investments in equity securities as of June 30, 2020 and December 31, 2019 are summarized based on the primary industry of the investee in the tables below (in millions).

On August 8, 2019, Berkshire invested a total of $10 billion in Occidental Corporation (“Occidental”) newly issued Occidental Cumulative Perpetual Preferred Stock with an aggregate liquidation value of $10 billion, and warrants to purchase up to 80 million shares of Occidental common stock at an exercise price of $62.50 per share. In accordance with the terms of the warrants, on August 3, 2020, the number of shares of common stock that can be purchased was increased to 83.86 million shares and the exercise price was reduced to $59.62 per share. The preferred stock accrues dividends at 8% per annum and is redeemable at the option of Occidental commencing on the tenth anniversary of issuance at a redemption price equal to 105% of the liquidation preference plus any accumulated and unpaid dividends, or mandatorily under certain specified capital return events. Dividends on the preferred stock may be paid in cash or, at Occidental’s option, in shares of Occidental common stock. The warrants are exercisable in whole or in part until one year after the redemption of the preferred stock. Our investments in Occidental are included in the commercial, industrial and other category in the preceding tables.

Note 5. Equity method investments

Berkshire and its subsidiaries hold investments in certain businesses that are accounted for pursuant to the equity method. Currently, the most significant of these is our investment in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.6% of the outstanding shares.

Shares of Kraft Heinz common stock are publicly-traded and the fair value of our investment was approximately $10.4 billion at June 30, 2020 and $10.5 billion at December 31, 2019. The carrying value of our investment was approximately $13.1 billion at June 30, 2020 and $13.8 billion at December 31, 2019.

As disclosed in Berkshire’s Form 10-Qs for the first three quarters of 2019, Kraft Heinz’s financial statements for the first and second quarters of 2019 were not available until August 13, 2019 when Kraft Heinz filed financial statements for those periods with the Securities and Exchange Commission. Thus, Berkshire did not record equity method earnings attributable to Kraft Heinz for each of those periods until the third quarter of 2019.  Our equity method losses for the second quarter and first six months of 2020 were $440 million and $339 million, respectively, which included approximately $750 million representing our proportionate share of the goodwill and identifiable intangible asset impairment charges recorded by Kraft Heinz in the second quarter. We received dividends on the common stock of $260 million in each of the first six months of 2020 and 2019, which were recorded as reductions to the carrying value of our investment.

9

Notes to Consolidated Financial Statements (Continued)

Note 5. Equity method investments (Continued)

As of June 30, 2020, the carrying value of our investment in Kraft Heinz exceeded the fair value based on the quoted market price by $2.7 billion (20.6%). In light of that fact, we evaluated our investment in Kraft Heinz for impairment. We utilize no bright-line tests in such evaluations. Based on the available facts and information regarding the operating results of Kraft Heinz, our ability and intent to hold the investment until recovery, the relative amount of the decline, and the length of time that fair value was less than carrying value, we concluded that recognition of an impairment loss in earnings was not required. However, we will continue to monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in facts and circumstances or intentions.

Summarized consolidated financial information of Kraft Heinz follows (in millions).

Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC (“Berkadia”), Pilot Travel Centers LLC (“Pilot”) and Electric Transmission Texas, LLC (“ETT”). The carrying value of our investments in these entities was approximately $4.0 billion as of June 30, 2020 and $3.7 billion as of December 31, 2019. Our equity method earnings from these entities in the first six months were $382 million in 2020 and $314 million in 2019. Additional information concerning these investments follows.

We own a 50% interest in Berkadia, with Jefferies Financial Group Inc. (“Jefferies”) owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. A source of funding for Berkadia’s operations is through its issuance of commercial paper, which is currently limited to $1.5 billion. On June 30, 2020, Berkadia’s commercial paper outstanding was $1.47 billion. The commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us for one-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% interest in ETT, an owner and operator of electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.

In 2017, we acquired a 38.6% interest in Pilot, headquartered in Knoxville, Tennessee. Pilot is the largest operator of travel centers in North America, supplying more than 11 billion gallons of fuel per year via more than 950 retail locations across 44 U.S. states and six Canadian provinces and through wholesale distribution. The Haslam family currently owns a 50.1% interest in Pilot and a third party owns the remaining 11.3% interest. We also entered into an agreement to acquire in 2023 an additional 41.4% interest in Pilot with the Haslam family retaining a 20% interest. As a result, Berkshire will become the majority owner of Pilot in 2023.

10

Notes to Consolidated Financial Statements (Continued)

Note 6. Investment gains/losses

Investment gains/losses in the second quarter and first six months of 2020 and 2019 are summarized as follows (in millions).

Equity securities gains and losses include unrealized gains and losses from changes in fair values during the period on equity securities we still own.

In the first six months of 2020 and 2019, as reflected in the Consolidated Statements of Cash Flows, we received proceeds of approximately $15.7 billion and $4.5 billion, respectively, from sales of equity securities. In the preceding table, investment gains/losses on equity securities sold reflect the difference between proceeds from sales and the fair value of the equity securities sold at the beginning of the applicable quarterly or annual period or the purchase date, if later. The losses on securities sold in the first six months of 2020 ($11.2 billion) include losses of $10.7 billion from market value changes in the first quarter on securities that were sold in the second quarter. Our taxable gains/losses on equity securities sold are generally the difference between the proceeds from sales and original cost. Taxable losses were $4.5 billion and $3.3 billion in the second quarter and first six months of 2020, respectively, and taxable gains were $832 million and $1.35 billion in the second quarter and first six months of 2019, respectively.

Note 7. Loans and finance receivables

Loans and finance receivables are summarized as follows (in millions).

Loans and finance receivables are principally installment loans originated or acquired by our manufactured housing business. The changes in the allowance for credit losses for each of the first six months of 2020 and 2019 follow (in millions).

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Notes to Consolidated Financial Statements (Continued)

Note 7. Loans and finance receivables (Continued)

As of June 30, 2020, approximately 99% of the manufactured housing loan balances were evaluated collectively for impairment. As of June 30, 2020, we considered approximately 98% of the loan balances to be current as to payment status. Manufactured housing loan balances before discounts and allowances designated as performing or non-performing are presented below by year of loan origination as of June 30, 2020 (in millions).