Berkshire Hathaway released its 2nd quarter 10-Q and operating earnings this morning. Despite little activity on the capital allocation front, Berkshire’s key businesses produced generally solid profitability, and FAR BETTER than is being generally reported. A brief summary: 1/5
Most observers reported operating earnings declined by 3.8% from $11.6 billion in 2024’s second quarter to $11.16 billion. When properly assessed, operating earnings in fact increased 7.9% from $11.2 billion to $12.0 billion when excluding a mark-to-market currency translation to U.S. dollars on Berkshire’s $22 billion foreign-denominated borrowings.
Berkshire releases a supplemental non-GAAP presentation of its operating earnings which logically excludes realized and unrealized investment gains and losses. Prior to 2018, unrealized gains and losses were not included in the income statement. The operating earnings presentation does include foreign currency gains and losses in each reporting period relating to translating the face value of debt borrowed in three foreign currencies for the period’s change in the exchange rate. Berkshire includes the loss or gain in operating earnings because as its balance sheet carrying value for the debt liability fluctuates, the unrealized, non-cash gain or loss is also included in SG&A on the income statement.
But think about what investments the internationally-denominated debt finances. In the case of Berkshire’s $14 billion of Japanese yen borrowed (long-term at an average 1.1% interest rate) the proceeds were used to purchase shares in five publicly-traded Japanese trading companies. The five companies had a combined market value of $23.6 billion at March 31. They have gained in price above Berkshire’s evolving cost basis and it has also increased position sizes in each. The dollar declined 4% against the yen during the second quarter. Berkshire includes any market value changes on the stocks trading on Japanese exchanges for each quarterly and yearly reporting period. It also includes any currency change in the translation to U.S. dollars in the market value of each stock position. In a period such at 2025’s second quarter, the declining dollar will add value to reported market value of the stocks, but will create a loss on the carrying value of the debt Berkshire borrowed in yen. Because Berkshire excludes the gains and losses on the stocks in each period (both from price change in yen but also from currency change), the analyst should also exclude the losses and gains on the debt translation. Berkshire’s debt footnote 16 in the 10-Q quantifies the underlying face value of borrowings in euros, British pounds and Japanese yen, the period U.S. translated carrying value, and the pre-tax gain or loss flowing through SG&A. The operating earnings supplement found in each quarter’s press release quantifies the after-tax quarterly gain or loss from currency on the debt in an italicized footnote, making the needed adjustment straightforward.
Long story short, properly excluding currency changes on foreign-denominated debt, operating earnings rose 7.9% in the second quarter and 3.1% for the first half, where most are reporting a 3.8% decline in the quarter and 8.9% decline in the first half.
It’s also being reported that Berkshire’s substantial cash holdings declined $3.6 billion in the quarter, from ~$348 billion to ~$344 billion. NO! Berkshire occasionally purchases a T-bill position on the final trading day of a quarter. When doing so, cash and the T-bill BOTH appear as assets on the first page (asset side) of the balance sheet and an offsetting liability for the purchase amount appears on the second page of liabilities and equity. On the next business day, cash and the liability disappear. Berkshire’s balance sheet had no liability for T-bills purchase at June 30 but did have liabilities of $12.8 billion at year-end 2024 and $14.4 billion at March 31. 2/5
Berkshire releases a supplemental non-GAAP presentation of its operating earnings which logically excludes realized and unrealized investment gains and losses. Prior to 2018, unrealized gains and losses were not included in the income statement. The operating earnings presentation does include foreign currency gains and losses in each reporting period relating to translating the face value of debt borrowed in three foreign currencies for the period’s change in the exchange rate. Berkshire includes the loss or gain in operating earnings because as its balance sheet carrying value for the debt liability fluctuates, the unrealized, non-cash gain or loss is also included in SG&A on the income statement.
But think about what investments the internationally-denominated debt finances. In the case of Berkshire’s $14 billion of Japanese yen borrowed (long-term at an average 1.1% interest rate) the proceeds were used to purchase shares in five publicly-traded Japanese trading companies. The five companies had a combined market value of $23.6 billion at March 31. They have gained in price above Berkshire’s evolving cost basis and it has also increased position sizes in each. The dollar declined 4% against the yen during the second quarter. Berkshire includes any market value changes on the stocks trading on Japanese exchanges for each quarterly and yearly reporting period. It also includes any currency change in the translation to U.S. dollars in the market value of each stock position. In a period such at 2025’s second quarter, the declining dollar will add value to reported market value of the stocks, but will create a loss on the carrying value of the debt Berkshire borrowed in yen. Because Berkshire excludes the gains and losses on the stocks in each period (both from price change in yen but also from currency change), the analyst should also exclude the losses and gains on the debt translation. Berkshire’s debt footnote 16 in the 10-Q quantifies the underlying face value of borrowings in euros, British pounds and Japanese yen, the period U.S. translated carrying value, and the pre-tax gain or loss flowing through SG&A. The operating earnings supplement found in each quarter’s press release quantifies the after-tax quarterly gain or loss from currency on the debt in an italicized footnote, making the needed adjustment straightforward.
Long story short, properly excluding currency changes on foreign-denominated debt, operating earnings rose 7.9% in the second quarter and 3.1% for the first half, where most are reporting a 3.8% decline in the quarter and 8.9% decline in the first half.
It’s also being reported that Berkshire’s substantial cash holdings declined $3.6 billion in the quarter, from ~$348 billion to ~$344 billion. NO! Berkshire occasionally purchases a T-bill position on the final trading day of a quarter. When doing so, cash and the T-bill BOTH appear as assets on the first page (asset side) of the balance sheet and an offsetting liability for the purchase amount appears on the second page of liabilities and equity. On the next business day, cash and the liability disappear. Berkshire’s balance sheet had no liability for T-bills purchase at June 30 but did have liabilities of $12.8 billion at year-end 2024 and $14.4 billion at March 31. 2/5
Most observers don’t know to subtract the liability from cash and overstate Berkshire’s cash balance in reporting periods where a liability for T-bill purchase exists. I wrote in the last annual letter that my fantasy is that Berkshire will spend ALL of its cash on a T-bill position on the final trading day of a quarter or year. Heads will explode.
Enough on accounting. The capital allocation front was remarkably quiet during the second quarter. As expected Berkshire repurchased no shares. The stock actually traded above my appraisal of intrinsic value earlier in the quarter for the first time since our owning the stock in February 2000. The shares peaked the Friday before this year’s annual meeting at its highest fundamental valuation since 1998. Ongoing growth in intrinsic value and a ~12% price decline from the peak has the share now at about 85% of my appraisal and back down to valuation levels where Berkshire last bought back shares.
The common stock portfolio (largely held in the insurance operation) again saw net quarterly sales for nearly three years in a row. $6.9 billion of sales were less than offset by $3.9 billion of purchases in the quarter. That’s $3 billion of net sales for the quarter and $4.5 billion for the year.
Berkshire’s operating companies are earning good and progressively improving earnings. BNSF is solidly turning the corner. Cost misalignment and operational issues hampered profitability for several years, as did weak car loadings/volumes. The business is improving on all fronts with second quarter net income up 19.5% over last year and up 13.1% for the first half. Improvement came via overhead improvement, lower fuel costs, and car loadings up nearly 2%, with particular strength in ag and huge growth in coal. Yep. Coal. BNSF was underearning by perhaps $2 billion annually recently and has closed to gap to ~$1 billion. More work to to do but the progress is undeniable. Unmentioned was the recent offer by Union Pacific to buy Norfolk Southern, a transcontinental merger I never would have imagined passing antitrust review, but with the current administration, all bets are off. The combination would impart huge competitive pressure on the remaining Class I North American rails. Expect rail customers, and perhaps the other rails, to lobby hard against the merger.
BHEs earnings were up 7.1% for the quarter and 31.1% in the first half. Margins were modestly better, expenses higher, but most of the improvement was due to no additional reserving at PacifiCorp for 2020s Oregon and Northern California wildfires. Berkshire and BHE did mention the “One Big Beautiful Bill Act” and its potential impact, yet unknowable, on the ability to deploy capex using production tax credits in wind, solar and portions of new grid capacity beginning in 2026. I’ve read the legislation related to energy and my guess is much of what was enacted will be subject to change and reinterpretation. Like the regulatory climate in socialist-leaning states, what happens with tax policy related to renewables will dictate Berkshire’s ability to earn decent returns on capital and to deploy new capital. The value of BHE is in harm’s way for sure. 3/5
Enough on accounting. The capital allocation front was remarkably quiet during the second quarter. As expected Berkshire repurchased no shares. The stock actually traded above my appraisal of intrinsic value earlier in the quarter for the first time since our owning the stock in February 2000. The shares peaked the Friday before this year’s annual meeting at its highest fundamental valuation since 1998. Ongoing growth in intrinsic value and a ~12% price decline from the peak has the share now at about 85% of my appraisal and back down to valuation levels where Berkshire last bought back shares.
The common stock portfolio (largely held in the insurance operation) again saw net quarterly sales for nearly three years in a row. $6.9 billion of sales were less than offset by $3.9 billion of purchases in the quarter. That’s $3 billion of net sales for the quarter and $4.5 billion for the year.
Berkshire’s operating companies are earning good and progressively improving earnings. BNSF is solidly turning the corner. Cost misalignment and operational issues hampered profitability for several years, as did weak car loadings/volumes. The business is improving on all fronts with second quarter net income up 19.5% over last year and up 13.1% for the first half. Improvement came via overhead improvement, lower fuel costs, and car loadings up nearly 2%, with particular strength in ag and huge growth in coal. Yep. Coal. BNSF was underearning by perhaps $2 billion annually recently and has closed to gap to ~$1 billion. More work to to do but the progress is undeniable. Unmentioned was the recent offer by Union Pacific to buy Norfolk Southern, a transcontinental merger I never would have imagined passing antitrust review, but with the current administration, all bets are off. The combination would impart huge competitive pressure on the remaining Class I North American rails. Expect rail customers, and perhaps the other rails, to lobby hard against the merger.
BHEs earnings were up 7.1% for the quarter and 31.1% in the first half. Margins were modestly better, expenses higher, but most of the improvement was due to no additional reserving at PacifiCorp for 2020s Oregon and Northern California wildfires. Berkshire and BHE did mention the “One Big Beautiful Bill Act” and its potential impact, yet unknowable, on the ability to deploy capex using production tax credits in wind, solar and portions of new grid capacity beginning in 2026. I’ve read the legislation related to energy and my guess is much of what was enacted will be subject to change and reinterpretation. Like the regulatory climate in socialist-leaning states, what happens with tax policy related to renewables will dictate Berkshire’s ability to earn decent returns on capital and to deploy new capital. The value of BHE is in harm’s way for sure. 3/5
Insurance underwriting profits declined 12% from $2.26 billion in 2024’s first quarter to $2.0 billion. However, the current year is comping against one of the best years in property/casualty insurance and reinsurance underwriting history so were expected to begin declining. The declines were attributable to BH Primary, which underwrote at a skinny 98.7% combined on lower underwritten premiums. GUARD continues to runoff several lines under new management.
In property/casualty reinsurance, premiums written declined 9.5%, primarily because BRKs reinsurers elected to write less property business. The cycle is long in the tooth, with recent record industry profits attracting new capital, with lots of alternative capital — cat bonds and insurance linked securities as well as private equity competing for business. Watch how few follow Berkshire to the exits when business is unattractive. Berkshire’s collection of reinsurers — National Indemnity, Gen Re and Trans Re were solidly profitable, just choosing to say no to some new business.
GEICO is largely fixed. It earned $1.82 billion pre-tax on $11.06 billion premium earned, an 83.5% combined ratio, or 16.5% underwriting margin. Premiums written and earned grew. Policies in force stabilized and have grown over the past several quarters having declined materially in recent years. GEICO had been the second largest market share underwriter in private passenger auto in 2019 at 16% but share dropped to 11.6% in 2024. Progressive has knocked the cover off the ball, moving from a close third in 2019 to nearly 17% today, with a 5% recent gap ahead of GEICO and closing fast on State Farm. Both GEICO and PGR target a ~4% underwriting margin. Both companies needed the huge price increases awarded to the industry over two years to offset inflationary-induced losses following the pandemic. Nobody will be getting price increases from state insurance commissions any time soon so until losses grow with inflation, the two companies and the industry will be aberrantly profitable for some time. Expect loss costs to incrementally grind higher over coming quarters. The frequencies of auto accidents is down significantly, offsetting inflation in bodily injury severities. I expect both PGR and GEICO to gain market share for several years. Most of GEICO’s technical and operational issues are largely fixed, making big strides in telematics and underwriting processes.
Manufacturing, Service and Retail profits were surprisingly strong overall, up 6.5% during the quarter. Much like Q1, results were a mixed bag. Manufacturing and retail are largely weak. I’ll skip a recap of most of the myriad companies among this group for space and time’s sake. I will say Precision Castparts is hugely improved with surging profitability. The homebuilding-related companies are weak as are their competitors. Consumer related goods manufacturers have very weak volumes. Pilot is a mess and I wouldn’t be surprised to see a write-down at some point. Berkshire was cheated in the price of the final tranche of three in the acquisition, either legally or ethically, and the final aggregate purchase price will likely prove high.
The $344 billion cash mountain now totals 29.5% of $1.164 trillion of total firm assets, up from an average 12-13% since the Gen Re acquisition in 1998. I presume roughly ~$100 billion is required as insurance reserves and as what Warren calls a $30 billion permanent cash floor. I like having more than a couple hundred billion, or roughly 20% of firm assets on the barrelhead for the next crisis or one-off opportunity. While dividend income is down due to portfolio sales, interest on T-bills remains at ~4.3% today. 4/5
In property/casualty reinsurance, premiums written declined 9.5%, primarily because BRKs reinsurers elected to write less property business. The cycle is long in the tooth, with recent record industry profits attracting new capital, with lots of alternative capital — cat bonds and insurance linked securities as well as private equity competing for business. Watch how few follow Berkshire to the exits when business is unattractive. Berkshire’s collection of reinsurers — National Indemnity, Gen Re and Trans Re were solidly profitable, just choosing to say no to some new business.
GEICO is largely fixed. It earned $1.82 billion pre-tax on $11.06 billion premium earned, an 83.5% combined ratio, or 16.5% underwriting margin. Premiums written and earned grew. Policies in force stabilized and have grown over the past several quarters having declined materially in recent years. GEICO had been the second largest market share underwriter in private passenger auto in 2019 at 16% but share dropped to 11.6% in 2024. Progressive has knocked the cover off the ball, moving from a close third in 2019 to nearly 17% today, with a 5% recent gap ahead of GEICO and closing fast on State Farm. Both GEICO and PGR target a ~4% underwriting margin. Both companies needed the huge price increases awarded to the industry over two years to offset inflationary-induced losses following the pandemic. Nobody will be getting price increases from state insurance commissions any time soon so until losses grow with inflation, the two companies and the industry will be aberrantly profitable for some time. Expect loss costs to incrementally grind higher over coming quarters. The frequencies of auto accidents is down significantly, offsetting inflation in bodily injury severities. I expect both PGR and GEICO to gain market share for several years. Most of GEICO’s technical and operational issues are largely fixed, making big strides in telematics and underwriting processes.
Manufacturing, Service and Retail profits were surprisingly strong overall, up 6.5% during the quarter. Much like Q1, results were a mixed bag. Manufacturing and retail are largely weak. I’ll skip a recap of most of the myriad companies among this group for space and time’s sake. I will say Precision Castparts is hugely improved with surging profitability. The homebuilding-related companies are weak as are their competitors. Consumer related goods manufacturers have very weak volumes. Pilot is a mess and I wouldn’t be surprised to see a write-down at some point. Berkshire was cheated in the price of the final tranche of three in the acquisition, either legally or ethically, and the final aggregate purchase price will likely prove high.
The $344 billion cash mountain now totals 29.5% of $1.164 trillion of total firm assets, up from an average 12-13% since the Gen Re acquisition in 1998. I presume roughly ~$100 billion is required as insurance reserves and as what Warren calls a $30 billion permanent cash floor. I like having more than a couple hundred billion, or roughly 20% of firm assets on the barrelhead for the next crisis or one-off opportunity. While dividend income is down due to portfolio sales, interest on T-bills remains at ~4.3% today. 4/5
The Apple sale is proving perspicacious. I wish the entire position had been sold at a mid-30s multiple. The business isn’t worth that much, even net of tax. Berkshire sent more than $20 billion of taxes to Washington last year just as capital gains taxes on the Apple sale.
On a side note, I’m very disappointed to have given two hours over a couple phone calls this week to a journalist from the leading daily business newspaper in the world. I was asked to comment on my expectations for today’s earnings and wound up suggesting how newsworthy the currency issue was going to be for the quarter’s earnings, teaching the reporter how the aforementioned currency translation issue would show Berkshire’s operating earnings being understated by my estimate of $850 billion after tax (it would up being $877 billion). I walked the uninitiated reporter through how the income statement and balance sheet worked, how the dollar decline for each of three currencies would help the foreign stocks and other assets but create unrealized non-cash losses on the debt carrying value, which would be included in operating earnings. In a series of email requests yesterday I even agreed to review and even materially edited several paragraphs to the pre-written story. It appeared I’d be credited for my insights as well as current intrinsic value appraisal and was surprised to see zero attribution in this morning’s story. The headline even noted the currency issue. Most journalists I talk to, including others at this particular paper, are absolutely terrific and properly attribute and credit/quote when they should. Unfortunately, a few in every field choose to behave like SPAC promoters. The young and ambitious need to learn how to do the right thing. Otherwise they should find something different to do. I’m not trying to be sanctimonious but the slight was ridiculous. I am pleased to see that now two papers are finally reporting correctly operating earnings adjusted for currency as well as the correct figure for Berkshire’s cash balance, having helped on the issue at both over numerous conversations and over several years. I did get a brief thank you email this morning for my several hours of help this week right after the story dropped, which was nice.
In closing, Berkshire is performing very well across the majority of its businesses. Margin and volume pressure abounds among most of its competitors. The company has successfully dealt with operational and cost issues at all key subsidiaries in recent years and the results are demonstrably clear. That is doesn’t get reported that way is terrific for those who would like to buy shares at cheaper versus richer prices. Berkshire itself and yours truly are in that camp. Great quarter, guys. Enjoy the rest of the weekend.
On a side note, I’m very disappointed to have given two hours over a couple phone calls this week to a journalist from the leading daily business newspaper in the world. I was asked to comment on my expectations for today’s earnings and wound up suggesting how newsworthy the currency issue was going to be for the quarter’s earnings, teaching the reporter how the aforementioned currency translation issue would show Berkshire’s operating earnings being understated by my estimate of $850 billion after tax (it would up being $877 billion). I walked the uninitiated reporter through how the income statement and balance sheet worked, how the dollar decline for each of three currencies would help the foreign stocks and other assets but create unrealized non-cash losses on the debt carrying value, which would be included in operating earnings. In a series of email requests yesterday I even agreed to review and even materially edited several paragraphs to the pre-written story. It appeared I’d be credited for my insights as well as current intrinsic value appraisal and was surprised to see zero attribution in this morning’s story. The headline even noted the currency issue. Most journalists I talk to, including others at this particular paper, are absolutely terrific and properly attribute and credit/quote when they should. Unfortunately, a few in every field choose to behave like SPAC promoters. The young and ambitious need to learn how to do the right thing. Otherwise they should find something different to do. I’m not trying to be sanctimonious but the slight was ridiculous. I am pleased to see that now two papers are finally reporting correctly operating earnings adjusted for currency as well as the correct figure for Berkshire’s cash balance, having helped on the issue at both over numerous conversations and over several years. I did get a brief thank you email this morning for my several hours of help this week right after the story dropped, which was nice.
In closing, Berkshire is performing very well across the majority of its businesses. Margin and volume pressure abounds among most of its competitors. The company has successfully dealt with operational and cost issues at all key subsidiaries in recent years and the results are demonstrably clear. That is doesn’t get reported that way is terrific for those who would like to buy shares at cheaper versus richer prices. Berkshire itself and yours truly are in that camp. Great quarter, guys. Enjoy the rest of the weekend.
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