UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 20162017

OR

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number001-14905

 

BERKSHIRE HATHAWAY INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware 47-0813844

(State or other jurisdiction of

incorporation or organization)

 

(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 RegulationS-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, anon-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

    ☒
  

Accelerated filer

 

¨

    ☐
Non-accelerated filer    ☐Smaller reporting company    ☐

Non-accelerated filer

  

¨

Emerging growth company
 

Smaller reporting company

¨

    ☐

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 Rule12b-2 of the Act).    Yes  ¨    No  x

Number of shares of common stock outstanding as of July 28, 2016:27, 2017:

 

Class A —

 788,894755,437 

Class B —

 1,282,442,5611,333,772,187 

 

 

 


BERKSHIRE HATHAWAY INC.

 

  Page No. 

Part I –Financial Information

 

Item 1. Financial Statements

 
    

Consolidated Balance Sheets—June 30, 20162017 and December  31, 20152016

  22-3 
    

Consolidated Statements of Earnings—Second Quarter and First Six Months 20162017 and 20152016

  4 
    

Consolidated Statements of Comprehensive Income—Second Quarter and First Six Months 20162017 and 20152016

  5 
    

Consolidated Statements of Changes in Shareholders’ Equity—First Six Months 20162017 and 20152016

  5 
    

Consolidated Statements of Cash Flows—First Six Months 20162017 and 20152016

  6 
    

Notes to Consolidated Financial Statements

  7-24 

Item 2.

    

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  25-42 

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

  43 

Item 4.

    

Controls and Procedures

  43 

Part II –Other Information

 

Item 1.

    

Legal Proceedings

  43 

Item 1A.

    

Risk Factors

  43 

Item 2.

    

Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

  43 

Item 3.

    

Defaults Upon Senior Securities

  43 

Item 4.

    

Mine Safety Disclosures

  43 

Item 5.

    

Other Information

  43 

Item 6.

    

Exhibits

  44 

Signature

  44 

1


Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

  June 30,
2016
   December 31,
2015
   June 30,
2017
   December 31,
2016
 
  (Unaudited)       (Unaudited)     

ASSETS

        

Insurance and Other:

        

Cash and cash equivalents

  $61,788     $61,181      $      20,142     $  23,581  

Investments:

    

Fixed maturity securities

   23,744      25,988   

Equity securities

   102,563      110,212   

Other

   14,487      15,998   

Investments in The Kraft Heinz Company

   15,752      23,424   

Short-term investments in U.S. Treasury Bills

   66,008     47,338  

Investments in fixed maturity securities

   23,381     23,432  

Investments in equity securities

   135,355     120,471  

Investment in The Kraft Heinz Company (Fair Value: June 30, 2017 – $27,871; December 31, 2016 – $28,418)

   15,584     15,345  

Other investments

   16,838     14,364  

Receivables

   27,162      23,303      28,953     27,097  

Inventories

   15,720      11,916      16,442     15,727  

Property, plant and equipment

   19,072      15,540      19,790     19,325  

Goodwill

   53,564      37,188      54,471     53,994  

Other intangible assets

   35,179      9,148      33,220     33,481  

Deferred charges reinsurance assumed

   7,652      7,687      13,597     8,047  

Other

   7,464      6,697      7,560     7,126  
  

 

   

 

   

 

   

 

 
   384,147      348,282      451,341     409,328  
  

 

   

 

   

 

   

 

 

Railroad, Utilities and Energy:

        

Cash and cash equivalents

   3,036      3,437      4,962     3,939  

Property, plant and equipment

   121,977      120,279      125,328     123,759  

Goodwill

   24,241      24,178      24,306     24,111  

Regulatory assets

   4,306      4,285      4,644     4,457  

Other

   13,840      12,833      14,129     13,550  
  

 

   

 

   

 

   

 

 
   167,400      165,012      173,369     169,816  
  

 

   

 

   

 

   

 

 

Finance and Financial Products:

        

Cash and cash equivalents

   7,855      7,112      1,314     528  

Short-term investments in U.S. Treasury Bills

   7,323     10,984  

Investments in equity and fixed maturity securities

   360      411      408     408  

Other investments

   6,339      5,719      3,396     2,892  

Loans and finance receivables

   13,088      12,772      14,559     13,300  

Property, plant and equipment and assets held for lease

   9,662      9,347      9,791     9,689  

Goodwill

   1,372      1,342      1,398     1,381  

Other

   2,593      2,260      2,691     2,528  
  

 

   

 

   

 

   

 

 
   41,269      38,963      40,880     41,710  
  

 

   

 

   

 

   

 

 
  $    592,816     $    552,257      $    665,590     $620,854  
  

 

   

 

   

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

2


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

   June 30,
2016
   December 31,
2015
 
   (Unaudited)     

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Insurance and Other:

    

Losses and loss adjustment expenses

  $74,708     $73,144    

Unearned premiums

   14,768      13,311    

Life, annuity and health insurance benefits

   14,974      14,497    

Other policyholder liabilities

   7,214      7,123    

Accounts payable, accruals and other liabilities

   20,468      17,879    

Notes payable and other borrowings

   27,567      14,599    
  

 

 

   

 

 

 
   159,699      140,553    
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Accounts payable, accruals and other liabilities

   11,597      11,994    

Regulatory liabilities

   3,062      3,033    

Notes payable and other borrowings

   58,595      57,739    
  

 

 

   

 

 

 
   73,254      72,766    
  

 

 

   

 

 

 

Finance and Financial Products:

    

Accounts payable, accruals and other liabilities

   1,548      1,398    

Derivative contract liabilities

   4,626      3,836    

Notes payable and other borrowings

   15,251      11,951    
  

 

 

   

 

 

 
   21,425      17,185    
  

 

 

   

 

 

 

Income taxes, principally deferred

   72,180      63,126    
  

 

 

   

 

 

 

Total liabilities

   326,558      293,630    
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock

   8      8    

Capital in excess of par value

   35,710      35,620    

Accumulated other comprehensive income

   30,777      33,982    

Retained earnings

   198,293      187,703    

Treasury stock, at cost

   (1,763)      (1,763)    
  

 

 

   

 

 

 

Berkshire Hathaway shareholders’ equity

   263,025      255,550    

Noncontrolling interests

   3,233      3,077    
  

 

 

   

 

 

 

Total shareholders’ equity

   266,258      258,627    
  

 

 

   

 

 

 
  $ 592,816     $ 552,257    
  

 

 

   

 

 

 

 

   June 30,
2017
  December 31,
2016
 
   (Unaudited)    

Insurance and Other:

   

Losses and loss adjustment expenses

   $      95,307   $    76,918 

Unearned premiums

   16,129   14,245 

Life, annuity and health insurance benefits

   16,663   15,977 

Other policyholder liabilities

   7,357   6,714 

Accounts payable, accruals and other liabilities

   21,024   22,164 

Notes payable and other borrowings

   27,781   27,175 
  

 

 

  

 

 

 
   184,261   163,193 
  

 

 

  

 

 

 

Railroad, Utilities and Energy:

   

Accounts payable, accruals and other liabilities

   11,273   11,434 

Regulatory liabilities

   3,156   3,121 

Notes payable and other borrowings

   60,701   59,085 
  

 

 

  

 

 

 
   75,130   73,640 
  

 

 

  

 

 

 

Finance and Financial Products:

   

Accounts payable, accruals and other liabilities

   1,510   1,444 

Derivative contract liabilities

   2,494   2,890 

Notes payable and other borrowings

   13,788   15,384 
  

 

 

  

 

 

 
   17,792   19,718 
  

 

 

  

 

 

 

Income taxes, principally deferred

   84,314   77,944 
  

 

 

  

 

 

 

  Total liabilities

   361,497   334,495 
  

 

 

  

 

 

 

Shareholders’ equity:

   

Common stock

   8   8 

Capital in excess of par value

   35,663   35,681 

Accumulated other comprehensive income

   46,652   37,298 

Retained earnings

   220,099   211,777 

Treasury stock, at cost

   (1,763  (1,763
  

 

 

  

 

 

 

 Berkshire Hathaway shareholders’ equity

   300,659   283,001 

Noncontrolling interests

   3,434   3,358 
  

 

 

  

 

 

 

 Total shareholders’ equity

   304,093   286,359 
  

 

 

  

 

 

 
   $    665,590   $  620,854 
  

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements

3


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

  Second Quarter First Six Months  Second Quarter First Six Months 
  2016 2015 2016     2015  2017 2016 2017 2016 
  (Unaudited) (Unaudited)  (Unaudited) (Unaudited) 

Revenues:

            

Insurance and Other:

            

Insurance premiums earned

   $10,799      $10,400      $21,923       $19,940    $12,367    $10,799     $34,120   $21,923   

Sales and service revenues

   30,542     27,792     58,821       52,733   31,733   30,542    61,962  58,821   

Interest, dividend and other investment income

   1,617     1,323     3,008       2,626   1,322   1,411    2,484  2,562   

Investment gains/losses

   640     136     2,486       232   287   640    599  2,486   
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 
   43,598     39,651     86,238       75,531   45,709   43,392    99,165  85,792   
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Railroad, Utilities and Energy:

            

Revenues

   8,851     9,866     17,696       19,757   9,843   8,851    19,247  17,696   
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Finance and Financial Products:

            

Sales and service revenues

   1,577     1,383     2,969       2,605   1,664   1,577    3,178  2,969  

Interest, dividend and other investment income

   411     416     743       748   364   411    714  743  

Investment gains/losses

   3     226     7       227     3    6   

Derivative gains/losses

   20     (174)    (790     1,144   (65)  20    395  (790) 
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 
   2,011     1,851     2,929       4,724   1,966   2,011    4,293  2,929  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 
   54,460     51,368     106,863       100,012  

Total revenues

 57,518   54,254    122,705  106,417  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Costs and expenses:

            

Insurance and Other:

            

Insurance losses and loss adjustment expenses

   7,178     6,692     14,710       12,693   8,747   7,178    27,313  14,710  

Life, annuity and health insurance benefits

   1,241     1,738     2,408       2,918   1,263   1,241    2,490  2,408  

Insurance underwriting expenses

   1,870     2,018     3,947       3,630   2,378   1,870    4,717  3,947  

Cost of sales and services

   24,349     22,589     47,145       42,848   25,419   24,349    49,779  47,145  

Selling, general and administrative expenses

   4,066     3,378     7,788       6,456   4,020   4,066    8,136  7,788  

Interest expense

   28     217     415       361   700   28    970  415  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 
   38,732     36,632     76,413       68,906   42,527   38,732    93,405  76,413  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Railroad, Utilities and Energy:

            

Cost of sales and operating expenses

   6,339     6,999     12,658       13,967   6,940   6,339    13,694  12,658  

Interest expense

   596     653     1,281       1,285   697   596    1,390  1,281  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 
   6,935     7,652     13,939       15,252   7,637   6,935    15,084  13,939  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Finance and Financial Products:

            

Cost of sales and services

   875     739     1,643       1,398   962   875    1,829  1,643  

Selling, general and administrative expenses

   443     402     836       767   469   443    911  836  

Interest expense

   103     97     204       196   103   103    207  204  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 
   1,421     1,238     2,683       2,361   1,534   1,421    2,947  2,683  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Total costs and expenses

 51,698   47,088    111,436  93,035  
   47,088     45,522     93,035       86,519   

 

  

 

  

 

  

 

 

Earnings before income taxes and equity in earnings of Kraft Heinz Company

 5,820   7,166    11,269  13,382  

Equity in earnings of Kraft Heinz Company

 309   206    548  446  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Earnings before income taxes

   7,372     5,846     13,828       13,493   6,129   7,372    11,817  13,828  

Income tax expense

   2,290     1,739     3,089       4,153   1,774   2,290    3,323  3,089  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Net earnings

   5,082     4,107     10,739       9,340   4,355   5,082    8,494  10,739  

Less: Earnings attributable to noncontrolling interests

   81     94     149       163   93   81    172  149  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Net earnings attributable to Berkshire Hathaway shareholders

   $5,001      $4,013      $10,590       $9,177    $4,262    $5,001     $8,322   $10,590  
  

 

  

 

  

 

     

 

  

 

  

 

  

 

  

 

 

Net earnings per share attributable to Berkshire Hathaway shareholders *

   $3,042      $2,442      $6,443       $5,585    $2,592    $3,042     $5,060   $6,443  

Average equivalent Class A Shares outstanding *

   1,643,745     1,643,084     1,643,616       1,643,018   1,644,580   1,643,745    1,644,503  1,643,616  

 

*

Average shares outstanding and net earnings per share are shown on an equivalent Class A common stock basis. Equivalent Class B shares outstanding are 1,500 times the equivalent Class A amount. Net earnings per equivalent Class B share outstanding areone-fifteen-hundredth (1/1,500) of the equivalent Class A amount.

See accompanying Notes to Consolidated Financial Statements

4


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

  Second Quarter     First Six Months 
  Second Quarter First Six Months   2017   2016     2017     2016 
  2016 2015 2016     2015   (Unaudited)     (Unaudited) 
  (Unaudited) (Unaudited)           

Net earnings

   $  5,082      $4,107      $  10,739       $9,340     $4,355     $5,082      $8,494      $  10,739 
  

 

  

 

  

 

     

 

   

 

   

 

    

 

     

 

 

Other comprehensive income:

                   

Net change in unrealized appreciation of investments

   (271)    234     (2,962     (3,562   4,711     (271)      13,088      (2,962

Applicable income taxes

   94     (151)    993       1,280     (1,659)    94       (4,531     993 

Reclassification of investment appreciation in net earnings

   (9)    (104)    (1,816     (195   (284)    (9)      (589     (1,816

Applicable income taxes

   4     36     636       68     99     4       206      636 

Foreign currency translation

   (607)    577     (114     (783   798     (607)      1,356      (114

Applicable income taxes

   44     4     14       (19   (23)    44       (92     14 

Prior service cost and actuarial gains/losses of defined benefit pension plans

   51     (44)    55       5     (44)    51       (54     55 

Applicable income taxes

   (19)    13     (19     (2   18     (19)      25      (19

Other, net

   16     25     (6     (100       16       6      (6
  

 

  

 

  

 

     

 

   

 

   

 

    

 

     

 

 

Other comprehensive income, net

   (697)    590     (3,219     (3,308   3,619     (697)      9,415      (3,219
  

 

  

 

  

 

     

 

   

 

   

 

    

 

     

 

 

Comprehensive income

   4,385     4,697     7,520       6,032     7,974     4,385       17,909      7,520 

Comprehensive income attributable to noncontrolling interests

   61     131     135       170     130     61       233      135 
  

 

  

 

  

 

     

 

   

 

   

 

    

 

     

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

   $4,324      $  4,566      $7,385       $5,862     $    7,844     $    4,324       $  17,676      $7,385 
  

 

  

 

  

 

     

 

   

 

   

 

    

 

     

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

 

  Berkshire Hathaway shareholders’ equity       Total 
Common stock
and capital in
excess of par
value
 Accumulated
other
comprehensive
income
   Retained
earnings
   Treasury
stock
   Non-
controlling
interests
   

Balance at December 31, 2014

   $      35,581     $        42,732      $      163,620     $      (1,763)     $    2,857      $243,027    

Net earnings

   —     —      9,177          163      9,340    

Other comprehensive income, net

   —    (3,315)                    (3,308)   

Issuance of common stock

   30     —                —      30    

Transactions with noncontrolling interests

   (19)    —                132      113    
  

 

  

 

   

 

   

 

   

 

   

 

 

Balance at June 30, 2015

   $35,592     $39,417     $172,797     $(1,763)     $3,159      $249,202    
  

 

  

 

   

 

   

 

   

 

   

 

   Berkshire Hathaway shareholders’ equity         Total 
Common stock
and capital in
excess of par
value
 Accumulated
other
comprehensive
income
   Retained
earnings
   Treasury
stock
   Non-
controlling
interests
     

Balance at December 31, 2015

   $35,628     $33,982     $187,703     $(1,763)     $3,077      $258,627       $35,628      $33,982       $187,703      $(1,763)     $3,077     $258,627 

Net earnings

   —     —      10,590          149      10,739          —        10,590           149     10,739 

Other comprehensive income, net

   —    (3,205)               (14)     (3,219)        (3,205)    —           (14    (3,219

Issuance of common stock

   52     —                —      52       52   —        —                52 

Transactions with noncontrolling interests

   38     —                21      59       38   —        —           21     59 
  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

    

 

    

 

 

Balance at June 30, 2016

   $      35,718     $30,777     $198,293     $(1,763)     $3,233      $  266,258       $35,718      $30,777       $198,293      $(1,763)     $3,233     $266,258 
  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

    

 

    

 

 

Balance at December 31, 2016

   $35,689      $37,298       $211,777       $(1,763)     $3,358     $286,359 

Net earnings

      —        8,322           172     8,494 

Other comprehensive income, net

     9,354      —           61     9,415 

Issuance of common stock

   40   —        —                40 

Transactions with noncontrolling interests

   (58  —        —           (157    (215
  

 

  

 

   

 

   

 

    

 

    

 

 

Balance at June 30, 2017

   $35,671      $46,652       $220,099      $  (1,763)     $3,434     $  304,093 
  

 

  

 

   

 

   

 

    

 

    

 

 

See accompanying Notes to Consolidated Financial Statements

5


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

  First Six Months   First Six Months 
  2016 2015   2017 2016 
  (Unaudited)   (Unaudited) 

Cash flows from operating activities:

      

Net earnings

  $10,739   $9,340    $8,494  $10,739   

Adjustments to reconcile net earnings to operating cash flows:

      

Investment gains/losses

   (2,493 (459   (605 (2,493)  

Depreciation and amortization

   4,359   3,812     4,539  4,359   

Other

   (72 160     403  (119)  

Changes in operating assets and liabilities:

      

Losses and loss adjustment expenses

   1,769   670     18,075  1,769   

Deferred charges reinsurance assumed

   35   246     (5,550 35   

Unearned premiums

   1,444   1,379     1,830  1,444   

Receivables and originated loans

   (2,716 (2,667   (1,608 (2,716)  

Derivative contract assets and liabilities

   790   (1,144   (395 790   

Income taxes

   1,822   2,763     1,893  1,822   

Other

   (366 (157   (449 (366)  
  

 

  

 

   

 

  

 

 

Net cash flows from operating activities

   15,311   13,943     26,627  15,264   
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Purchases of fixed maturity securities

   (3,130 (3,001

Purchases of U.S. Treasury Bills and fixed maturity securities

   (68,547 (33,029)  

Purchases of equity securities

   (4,129 (4,714   (13,628 (4,129)  

Sales of fixed maturity securities

   926   622  

Redemptions and maturities of fixed maturity securities

   4,767   2,295  

Sales of U.S. Treasury Bills and fixed maturity securities

   20,164  2,625   

Redemptions and maturities of U.S. Treasury Bills and fixed maturity securities

   34,164  8,828   

Sales and redemptions of equity securities

   12,444   2,160     7,815  12,444   

Purchases of loans and finance receivables

   (188 (57   (1,350 (188)  

Collections of loans and finance receivables

   174   246     393  174   

Acquisitions of businesses, net of cash acquired

   (30,440 (4,500   (1,721 (30,440)  

Purchases of property, plant and equipment

   (6,144 (6,836   (5,149 (6,144)  

Other

   (397 41     (112 (397)  
  

 

  

 

   

 

  

 

 

Net cash flows from investing activities

   (26,117 (13,744   (27,971 (50,256)  
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Proceeds from borrowings of insurance and other businesses

   8,600   3,253     1,295  8,600   

Proceeds from borrowings of railroad, utilities and energy businesses

   2,211   3,238     2,413  2,211   

Proceeds from borrowings of finance businesses

   3,494   998     1,298  3,494   

Repayments of borrowings of insurance and other businesses

   (1,148 (1,843   (1,180 (1,148)  

Repayments of borrowings of railroad, utilities and energy businesses

   (1,781 (848   (1,768 (1,781)  

Repayments of borrowings of finance businesses

   (195 (1,173   (2,897 (195)  

Changes in short term borrowings, net

   618   (246   462  618   

Acquisitions of noncontrolling interests

   (2 (70

Other

   (44 (113   (92 (46)  
  

 

  

 

   

 

  

 

 

Net cash flows from financing activities

   11,753   3,196     (469 11,753   
  

 

  

 

   

 

  

 

 

Effects of foreign currency exchange rate changes

   2   (77   183  2   
  

 

  

 

   

 

  

 

 

Increase in cash and cash equivalents

   949   3,318     (1,630 (23,237)  

Cash and cash equivalents at beginning of year

   71,730   63,269  

Cash and cash equivalents at beginning of year *

   28,048  67,161   
  

 

  

 

   

 

  

 

 

Cash and cash equivalents at end of second quarter *

  $72,679     $  66,587  

Cash and cash equivalents at June 30 *

  $26,418  $43,924   
  

 

  

 

   

 

  

 

 

* Cash and cash equivalents are comprised of the following:

      

Beginning of year—

      

Insurance and Other

  $61,181     $57,974    $23,581   $56,612   

Railroad, Utilities and Energy

   3,437    3,001     3,939    3,437   

Finance and Financial Products

   7,112    2,294     528    7,112   
  

 

  

 

   

 

  

 

 
  $71,730     $63,269    $28,048   $67,161   
  

 

  

 

   

 

  

 

 

End of second quarter—

   

June 30—

   

Insurance and Other

  $61,788     $60,394    $20,142   $33,033   

Railroad, Utilities and Energy

   3,036    3,860     4,962    3,036   

Finance and Financial Products

   7,855    2,333     1,314    7,855   
  

 

  

 

   

 

  

 

 
  $72,679     $66,587    $26,418   $43,924   
  

 

  

 

   

 

  

 

 

See accompanying Notes to Consolidated Financial Statements

6


BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 20162017

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 Form10-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. At December 31, 2016, we began presenting U.S. Treasury Bills with maturity dates greater than three months from their purchase dates separately in our Consolidated Balance Sheets. Accordingly, we revised the comparative 2016 Consolidated Statement of Cash Flows to reflect this change.

Financial information in this Quarterly Report reflects anyall 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. Variations in the amount and timing of investment gains/losses can cause significant variations in periodic net earnings. Investment gains/losses are recorded when investments are disposed or are other-than-temporarily impaired. In addition, changes in the fair values of liabilities associated with derivative contracts and gains and losses associated with the periodic revaluation of certain assets and liabilities denominated in foreign currencies can cause significant variations in periodic net earnings.

Note 2. New accounting pronouncements

In May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued ASU2014-09 “Revenue from Contracts with Customers.” ASU2014-09 applies to contracts with customers, excluding, most notably, insurance and leasing contracts. ASU 2014-09 prescribes aThe framework in accounting for revenues from contracts within its scope, includingprescribed by ASU2014-09 includes (a) identifying the contract, (b) identifying the related performance obligations, under the contract, (c) determining the transaction price, (d) allocating the transaction price to the identified performance obligations and (e) recognizing revenues as the identified performance obligations are satisfied. Based on our evaluationsto-date, we do not currently believe the adoption of ASU2014-09 will have a material effect on our Consolidated Financial Statements. However, timing of the recognition of revenue and related costs may change with respect to certain of our contracts with customers. For instance, revenues and costs for certain contracts may be recognized over time rather than when the product or service is delivered, as is the current practice. In addition, certain contracts may be treated as leases for accounting purposes, rather than contracts with customers subject to ASU2014-09. Our evaluations of these and other issues and implementation efforts concerning ASU2014-09 are ongoing and also prescribes additional financial statement presentations and disclosures.include consideration of the new disclosure requirements. We currently expect towill adopt ASU2014-09 as of January 1, 2018, under the modified retrospective method where the cumulative effect is recognized at the date of initial application. Our evaluation of ASU 2014-09 is ongoing and not complete. The FASB has issued and may issue in the future, interpretative guidance, which may cause our evaluation to change. While we anticipate some changes to revenue recognition for certain customer contracts, we do not currently believe ASU 2014-09 will have a material effect on our Consolidated Financial Statements.

In May 2015, the FASB issued ASU 2015-09 “Financial Services—Insurance—Disclosures about Short-Duration Contracts,” which requires additional disclosures in annual and interim reporting periods by insurance entities regarding liabilities for unpaid claims and claim adjustment expenses, and changes in assumptions or methodologies for calculating such liabilities. ASU 2015-09 is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. We continue to evaluate the effect adopting this standard will have on the disclosures in our Consolidated Financial Statements.method.

In January 2016, the FASB issued ASU2016-01 “Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU2016-01 generally requires that equity investmentssecurities (excluding equity method investments) be measured at fair value with changes in fair value recognized in net income. Under existing GAAP, changes in fair value ofavailable-for-sale equity investments are recorded in other comprehensive income. Given the current magnitude of our investments in equity investments,securities, the adoption of ASU2016-01 will likely have a significant impact on the periodic net earnings reported in our Consolidated Statement of Earnings, although it will likely not significantly impactaffect our comprehensive income or total shareholders’ equity. We will adopt ASU2016-01 is effective for annual and interim periods beginning after December 15, 2017, with the cumulative effect of the adoption made to the balance sheet as of theJanuary 1, 2018. As of that date, of adoption. Thus, the adoption will result in a reclassification of the related accumulated unrealized appreciation relating to our investments in equity securities, which is currently included in accumulated other comprehensive income, will be reclassified to retained earnings, with no impact on Berkshire shareholders’ equity.earnings.

In February 2016, the FASB issued ASU2016-02 “Leases.” ASU2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and aright-of-use asset representing its right to use the underlying asset for the lease term, along with additional qualitative and quantitative disclosures. ASU2016-02 is effective for annualreporting periods beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.

In June 2016, the FASB issued ASU2016-13 “Financial Instruments—Credit Losses,” which provides for the recognition and measurement at the reporting date of all expected credit losses for financial assets held at amortized cost andavailable-for-sale debt securities. Currently, credit losses are recognized and measured when such losses become probable based on the prevailing facts and circumstances. ASU2016-13 is effective for reporting periods beginning after December 15, 2019. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.

7


Notes to Consolidated Financial Statements(Continued)

Note 2. New accounting pronouncements(Continued)

In January 2017, the FASB issued ASU2017-04 “Simplifying the Test for Goodwill Impairment.” ASU2017-04 eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. ASU2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.

Note 3. Significant business acquisitions

Our long-held acquisition strategy is to acquire businesses at sensible prices that have consistent earning power, good returns on equity and able and honest management. Financial results attributable to business acquisitions are included in our Consolidated Financial Statements beginning on their respective acquisition dates.

On August 8, 2015,January 29, 2016, Berkshire entered into a definitive agreement withacquired all outstanding common stock of Precision Castparts Corp. (“PCC”) to acquire all outstanding PCC shares of common stock for $235 per share in cash. The acquisition was completed on January 29, 2016.cash pursuant to a merger agreement dated August 8, 2015. The aggregate consideration paid was approximately $32.7 billion, which included the value of PCC shares we already owned. We funded the acquisition with a combination of existing cash balances and proceeds from a short-term credit facility.

PCC is a worldwide, diversified manufacturer of complex metal components and products. It serves the aerospace, power and general industrial markets. PCC is a market leader in manufacturing complex structural investment castings and forged components for aerospace markets, machined airframe components and highly engineered critical fasteners for aerospace applications, and in manufacturing airfoil castings for the aerospace and industrial gas turbine markets. PCC also is a leading producer of titanium and nickel superalloy melted and mill products for the aerospace, chemical processing, oil and gas and pollution control industries, and manufactures extruded seamless pipe, fittings and forgings for power generation and oil and gas applications.

In November 2014, Berkshire entered into a definitive agreement withOn February 29, 2016, we acquired the Duracell business from The Procter & Gamble Company (“P&G”) pursuant to acquire the Duracell business from P&G. The transaction closed on February 29, 2016. Duracell is a leading manufacturer of high-performance alkaline batteries and is an innovatoragreement entered into in renewable power and wireless charging technologies.November 2014. Pursuant to the agreement, we received a recapitalized Duracell Company in exchange for shares of P&G common stock held by Berkshire subsidiaries, which had a fair value of approximately $4.2 billion. Duracell is a leading manufacturer of high-performance alkaline batteries and is an innovator in wireless charging technologies.

Financial results attributable to these business acquisitions are includedPro forma consolidated revenues and net earnings data for 2016 was not materially different from the amounts reflected in ourthe accompanying Consolidated Financial Statements beginning on their respective acquisition dates. The fair values of certain assets and liabilities, particularly property, plant and equipment and intangible assets, are provisional and are subject to revision as the related valuations are completed.Statements. Goodwill from these acquisitions is not amortizable for income tax purposes. PreliminaryThe fair values of identified assets acquired and liabilities assumed and residual goodwill of PCC and Duracell at their respective acquisition dates are summarized in the table thatas follows (in millions).

 

  PCC   Duracell   PCC   Duracell 

Cash and cash equivalents

   $250     $1,807      $250    $1,807 

Inventories

   3,431     326     3,430    319 

Property, plant and equipment

   2,771     364     2,765    359 

Goodwill

   15,793     614     16,011    866 

Other intangible assets

   24,197     2,024     23,527    1,550 

Other assets

   1,914     256     1,916    242 
  

 

   

 

   

 

   

 

 

Assets acquired

   $48,356     $5,391      $47,899    $5,143 
  

 

   

 

   

 

   

 

 

Accounts payable, accruals and other liabilities

   $2,445     $392      $2,442    $410 

Notes payable and other borrowings

   5,251          5,251     

Income taxes, principally deferred

   8,002     760     7,548    494 
  

 

   

 

   

 

   

 

 

Liabilities assumed

   $15,698     $1,152      $15,241    $904 
  

 

   

 

   

 

   

 

 

Net assets

   $32,658     $    4,239      $32,658    $4,239 
  

 

   

 

   

 

   

 

 

The following table sets forth certain unaudited pro forma consolidated earnings data for the first six months of 2015 as if the acquisitions discussed previously were consummated on the same terms at the beginning of the year preceding their respective acquisition dates (in millions, except per share amount). Pro forma data for the first six months of 2016 was not materially different from the amounts reflected in the accompanying Consolidated Financial Statements.

First Six Months
      2015      

Revenues

$  105,602    

Net earnings attributable to Berkshire Hathaway shareholders

9,421    

Net earnings per equivalent Class A common share attributable to Berkshire Hathaway shareholders

5,734    

8


Notes to Consolidated Financial Statements(Continued)

 

Note 4. Investments in fixed maturity securities

Investments in securities with fixed maturities as of June 30, 20162017 and December 31, 20152016 are summarized by type below (in millions).

 

  Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

June 30, 2016

       

June 30, 2017

       

U.S. Treasury, U.S. government corporations and agencies

   $3,511     $25     $    $3,536      $4,800     $6     $(14   $4,792 

States, municipalities and political subdivisions

   1,266     66     (1 1,331     1,050    54    (1 1,103 

Foreign governments

   9,613     359     (50 9,922     8,726    223    (27 8,922 

Corporate bonds

   6,951     753     (10 7,694     6,897    668    (6 7,559 

Mortgage-backed securities

   1,133     169     (5 1,297     924    115    (4 1,035 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 
   $  22,474     $1,372     $(66  $23,780      $  22,397     $1,066     $(52   $ 23,411 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

December 31, 2015

       

December 31, 2016

       

U.S. Treasury, U.S. government corporations and agencies

   $3,425     $10     $(8  $3,427      $4,519     $16     $(8   $4,527 

States, municipalities and political subdivisions

   1,695     71     (2 1,764     1,159    58    (1 1,216 

Foreign governments

   11,327     226     (85 11,468     8,860    207    (66 9,001 

Corporate bonds

   7,323     632     (29 7,926     6,899    714    (9 7,604 

Mortgage-backed securities

   1,279     168     (5 1,442     997    126    (6 1,117 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 
   $25,049     $1,107     $(129  $26,027      $22,434     $    1,121     $(90   $23,465 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Investments in fixed maturity securities are reflected in our Consolidated Balance Sheets as follows (in millions).

 

  June 30,
2016
  December 31,
2015
   June 30, 
2017
    December 31, 
2016
 

Insurance and other

   $23,744    $25,988    $  23,381   $23,432 

Finance and financial products

   36    39    30    33 
   

 

    

 

   

 

   

 

 
   $23,780    $  26,027    $23,411    $  23,465 
   

 

    

 

   

 

   

 

 

Investments in foreign government securities include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of June 30, 2016,2017, approximately 93% of foreign government holdings were rated AA or higher by at least one of the major rating agencies. Approximately 80%81% of foreign government holdings were issued or guaranteed by the United Kingdom, Germany, Australia or Canada.

The amortized cost and estimated fair value of securities with fixed maturities at June 30, 20162017 are summarized below by contractual maturity dates. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers. 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  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

   $6,344    $11,403    $1,209    $2,385    $ 1,133    $22,474    $8,690          $10,009          $  607           $2,167       $   924         $22,397   

Fair value

   6,361    11,866    1,330    2,926    1,297    23,780    8,762          10,280          660           2,674       1,035        23,411   

9


Notes to Consolidated Financial Statements(Continued)

 

Note 5. Investments in equity securities

Investments in equity securities as of June 30, 20162017 and December 31, 20152016 are summarized based on the primary industry of the investee in the table below (in millions).

 

  Cost Basis   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
   Cost Basis   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

June 30, 2016 *

       

June 30, 2017 *

       

Banks, insurance and finance

   $19,852     $22,247     $(284  $41,815     $20,887    $32,754    $—    $53,641 

Consumer products

   5,259     17,956     (112 23,103     19,495    22,267    —   41,762 

Commercial, industrial and other

   33,822     7,422     (1,928 39,316     31,540    10,946    (776 41,710 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 
   $  58,933     $  47,625     $  (2,324  $104,234     $    71,922    $    65,967    $  (776  $  137,113 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

 

*

Approximately 61%62% of the aggregate fair value was concentrated in the equity securities of four companies (Americanfive companies: American Express Company – $9.2 billion; Wells Fargo &- $12.8 billion, Apple Inc. - $19.4 billion, The Coca-Cola Company – $23.7 billion;- $17.9 billion, International Business Machines Corporation (“IBM”) – $12.3 billion;- $8.3 billion and The Coca-ColaWells Fargo & Company – $18.1 billion).- $27.3 billion.

 

  Cost Basis   Unrealized
Gains
   Unrealized
Losses
   Fair
Value
   Cost Basis   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

December 31, 2015 *

        

December 31, 2016*

       

Banks, insurance and finance

   $20,026     $27,965     $(21)      $47,970     $19,852    $30,572    $—     $50,424 

Consumer products

   6,867     18,022     (1)      24,888     10,657    16,760    (9 27,408 

Commercial, industrial and other

   35,417     6,785     (3,238)      38,964     35,868    9,033    (701 44,200 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 
   $  62,310     $  52,772     $  (3,260)      $111,822     $    66,377    $    56,365    $  (710  $  122,032 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

*

Approximately 59%62% of the aggregate fair value was concentrated in the equity securities of four companies (Americanfive companies: American Express Company – $10.5 billion; Wells Fargo & Company – $27.2 billion; IBM –- $11.2 billion; and billion, Apple Inc. - $7.1 billion, The Coca-Cola Company – $17.2 billion).- $16.6 billion, IBM - $13.5 billion and Wells Fargo & Company - $27.6 billion.

As of June 30, 20162017 and December 31, 2015, we concluded that the unrealized losses shown in the tables above were temporary. Our conclusions were based on: (a) our ability and intent to hold the securities to recovery; (b) our assessment that the underlying business and financial condition of the issuers was favorable; (c) our opinion that the relative price declines were not significant; and (d) our belief that market prices will increase to and exceed our cost. As of June 30, 2016, and December 31, 2015, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $908$110 million and $989$551 million, respectively.

Unrealized losses at June 30, 2016 included approximately $1.5 billion related to our investment in IBM common stock (of which $848 million related to IBM shares that had been in a continuous unrealized loss position for more than twelve consecutive months), which represented 11% of our cost. IBM continues to be profitable and generate significant cash flows. We currently do not intend to dispose of our IBM common stock and we expect that the fair value of this investment will recover and ultimately exceed our cost.

Investments in equity securities are reflected in our Consolidated Balance Sheets as follows (in millions).

 

  June 30,
2016
    December 31, 
2015
   June 30,
2017
     December 31,  
2016
 

Insurance and other

    $102,563       $110,212       $ 135,355     $ 120,471 

Railroad, utilities and energy *

   1,347      1,238      1,380    1,186 

Finance and financial products

   324      372      378    375 
  

 

   

 

   

 

   

 

 
    $104,234       $111,822       $ 137,113     $ 122,032 
  

 

   

 

   

 

   

 

 

 

*

Included in other assets.

Note 6. Investments in The Kraft Heinz Company

10In June 2013, Berkshire invested $12.25 billion in a newly-formed company, H.J. Heinz Holding Corporation (“Heinz Holding”), consisting of 425 million shares of common stock, warrants to acquire approximately 46 million additional shares of common stock at $0.01 per share and cumulative compounding preferred stock (“Preferred Stock”) with a liquidation preference of $8 billion. An affiliate of the global investment firm 3G Capital (such affiliate, “3G”) also acquired 425 million shares of Heinz Holding common stock for $4.25 billion. At that time, Berkshire and 3G each owned a 50% share of Heinz Holding common stock. Heinz Holding then acquired H.J. Heinz Company.


Notes to Consolidated Financial Statements(Continued)

 

Note 6. Other investments Investments in The Kraft Heinz Company(Continued)

Other investments include preferred stock

In March 2015, Heinz Holding entered into an agreement to acquire all of Wm. Wrigley Jr. Company (“Wrigley”), The Dow Chemical Company (“Dow”) and Bank of America Corporation (“BAC”) warrants to purchasethe outstanding common stock of BACKraft Foods Group, Inc. (“Kraft”). In June 2015, Berkshire exercised the aforementioned common stock warrants. On July 1, 2015, Berkshire and preferred3G also acquired new shares of Heinz Holding common stock for $5.26 billion and $4.74 billion, respectively. After these transactions, Berkshire owned approximately 52.5% of the outstanding shares of Heinz Holding. On July 2, 2015, Heinz Holding completed its acquisition of Kraft, at which time Heinz Holding was renamed The Kraft Heinz Company (“Kraft Heinz”). In connection with its acquisition of Kraft, Kraft Heinz issued one new share of Kraft Heinz common stock for each share of Kraft common stock, which reduced Berkshire’s and 3G’s ownership interests in Kraft Heinz to 26.8% and 24.2%, respectively.

Berkshire currently owns 26.7% of the outstanding shares of Kraft Heinz common stock. We account for our investment in Kraft Heinz common stock pursuant to the equity method. The carrying value of this investment was approximately $15.6 billion at June 30, 2017 and $15.3 billion at December 31, 2016. Our earnings determined under the equity method for the first six months were $548 million in 2017 and $446 million in 2016. We received dividends on the common stock of Restaurant Brands International, Inc. (“RBI”). Other investments are classified$391 million in the first six months of 2017 and $374 million in the first six months of 2016, which we recorded as available-for-salereductions of our investment. In the second quarter of 2016, we also received dividends of $180 million on our Preferred Stock investment, which Kraft Heinz redeemed for cash of $8.32 billion on June 7, 2016.

Kraft Heinz is one of the world’s largest manufacturers and are shown in our Consolidated Balance Sheets asmarketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products. Summarized consolidated financial information of Kraft Heinz follows (in millions).

       July 1, 2017           December 31, 2016     

Assets

   $119,416      $120,480       

Liabilities

   60,870      62,906       

 

   Cost   Fair Value 
   June 30,
2016
    December 31, 
2015
   June 30,
2016
   December 31,
2015
 

Insurance and other

   $9,970     $9,970      $14,487     $15,998   

Finance and financial products

   3,052     3,052      6,339     5,719   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $  13,022     $    13,022      $ 20,826     $    21,717   
  

 

 

   

 

 

   

 

 

   

 

 

 

We own $2.1 billion liquidation amount of Wrigley preferred stock that was acquired pursuant to a shareholder agreement in conjunction with Mars Incorporated’s acquisition of Wrigley in 2008. The Wrigley preferred stock is entitled to dividends at 5% per annum. Pursuant to certain put and call provisions in the shareholder agreement, up to 50% of our original investment may be redeemed over a 90-day period beginning October 6, 2016. We currently anticipate that such shares will be redeemed. The shareholder agreement also provides that beginning in 2021, our then outstanding investment will be subject to annual put and call arrangements. The consideration due under the put and call arrangements is based upon the earnings of Wrigley.

We own 3,000,000 shares of Series A Cumulative Convertible Perpetual Preferred Stock of Dow (“Dow Preferred”) with a liquidation value of $1,000 per share. Each share of the Dow Preferred is convertible into 24.201 shares of Dow common stock (equivalent to a conversion price of $41.32 per share). Dow currently has the option to cause some or all of the Dow Preferred to be converted into Dow common stock at the then applicable conversion rate, if the New York Stock Exchange closing price of its common stock exceeds $53.72 per share for any 20 trading days within a period of 30 consecutive trading days ending the day before Dow exercises its option. The Dow Preferred is entitled to dividends at a rate of 8.5% per annum.

We own 50,000 shares of 6% Non-Cumulative Perpetual Preferred Stock of BAC (“BAC Preferred”) with a liquidation value of $100,000 per share and warrants to purchase 700,000,000 shares of common stock of BAC (“BAC Warrants”). The BAC Preferred is redeemable at the option of BAC beginning on May 7, 2019 at a redemption price of $105,000 per share (or $5.25 billion in aggregate). The BAC Warrants expire in 2021 and are exercisable for an additional aggregate cost of $5 billion ($7.142857/share).

We own Class A 9% Cumulative Compounding Perpetual Preferred Shares of RBI (“RBI Preferred”) having a stated value of $3 billion. RBI, domiciled in Canada, is the ultimate parent company of Burger King and Tim Hortons. The RBI Preferred is entitled to dividends on a cumulative basis of 9% per annum plus an additional amount, if necessary, to produce an after-tax yield to Berkshire as if the dividends were paid by a U.S.-based company.

   Second Quarter     First Six Months 
   2017     2016     2017     2016 

Sales

   $    6,677       $    6,793       $    13,041      $ 13,363 
  

 

 

     

 

 

     

 

 

     

 

 

 

Net earnings attributable to Kraft Heinz common shareholders

   $    1,159       $    770       $2,052      $1,666 
  

 

 

     

 

 

     

 

 

     

 

 

 

Note 7. InvestmentsOther investments

Other investments include preferred stock of Bank of America Corporation (“BAC”), warrants to purchase common stock of BAC and preferred stock of Restaurant Brands International, Inc. (“RBI”). Other investments are classified asavailable-for-sale and carried at fair value and are shown in The Kraft Heinz Companyour Consolidated Balance Sheets as follows (in millions).

On June 7, 2013, Berkshire and an affiliate of the global investment firm 3G Capital (such affiliate, “3G”), each made equity investments in H.J. Heinz Holding Corporation (“Heinz Holding”), which, together with debt financing obtained by Heinz Holding, was used to acquire H. J. Heinz Company (“Heinz”). Heinz is one of the world’s leading marketers and producers of healthy, convenient and affordable foods specializing in ketchup, sauces, meals, soups, snacks and infant nutrition. Heinz is comprised of a global family of leading branded products, including Heinz® Ketchup, sauces, soups, beans, pasta, infant foods, Ore-Ida® potato products, Weight Watchers® Smart Ones® entrées and T.G.I. Friday’s® snacks.

   Cost     Fair Value 
    June 30, 
2017
    December 31, 
2016
      June 30, 
2017
    December 31, 
2016
 

Insurance and other

   $  6,720    $6,720     $  16,838    $14,364 

Finance and financial products

   1,000    1,000     3,396    2,892 
  

 

 

   

 

 

    

 

 

   

 

 

 
   $  7,720    $7,720     $  20,234    $17,256 
  

 

 

   

 

 

    

 

 

   

 

 

 

Berkshire’s initial investments consisted of 425 millionWe currently own 50,000 shares of Heinz Holding common stock,6%Non-Cumulative Perpetual Preferred Stock of BAC (“BAC Preferred”) with a liquidation value of $100,000 per share and warrants which were exercised in June 2015, to acquire approximately 46 million additionalpurchase 700,000,000 shares of common stock of BAC (“BAC Warrants”). The BAC Preferred is redeemable at one centthe option of BAC beginning on May 7, 2019 at a redemption price of $105,000 per share (or $5.25 billion in aggregate). The BAC Warrants expire in 2021 and cumulative compounding preferred stock (“Preferred Stock”) with a liquidation preference of $8 billion. Theare exercisable for an aggregate cost of our investments was $12.25 billion. 3G also acquired 425 million shares$5 billion ($7.142857/share). On June 28, 2017, BAC’s Board of Heinz HoldingDirectors announced plans to increase the quarterly dividend on BAC’s common stock for $4.25 billion.to $0.12 per share, beginning in the third quarter of 2017. On June 7, 2016, Kraft Heinz redeemed30, 2017, we announced our intention to exercise all of the BAC Warrants we currently own when the BAC quarterly dividend increase occurs. We currently expect to use substantially all of our BAC Preferred Stock investmentas consideration for cashthe $5 billion cost to exercise the BAC Warrants.

We currently own Class A 9% Cumulative Compounding Perpetual Preferred Shares of $8.32RBI (“RBI Preferred”) having a stated value of $3 billion. RBI, domiciled in Canada, franchises and operates quick service restaurants. The RBI Preferred Stock wasis entitled to dividends aton a cumulative basis of 9% per annum.annum plus an additional amount, if necessary, to produce anafter-tax yield to Berkshire as if the dividends were paid by a U.S.-based company. The RBI Preferred is redeemable at the option of RBI beginning on December 12, 2017. In the second quarter of 2017, RBI announced its intention to redeem all or a portion of our RBI Preferred investment. If not redeemed prior to December 12, 2024, we can cause RBI to redeem the RBI Preferred. In either case, the redemption price will be 109.9% of the stated value of such shares.

11


Notes to Consolidated Financial Statements(Continued)

 

Note 7. Investments in The Kraft Heinz Company(Continued)

On July 1, 2015, Berkshire acquired 262.9 million shares of newly issued common stock of Heinz Holding for $5.26 billion and 3G acquired 237.1 million shares of newly issued common stock for $4.74 billion. Immediately thereafter, Heinz Holding executed a reverse stock split at a rate of 0.443332 of a share for each share.

On July 2, 2015, Heinz Holding acquired Kraft Foods Group, Inc. (“Kraft”). Kraft shareholders received one share of newly issued Heinz Holding common stock for each share of Kraft common stock (or 593 million shares) and a special cash dividend of $16.50 per share. Upon completion of the acquisition, Heinz Holding was renamed The Kraft Heinz Company (“Kraft Heinz”). Following the issuance of these additional shares, Berkshire and 3G together owned approximately 51% of the outstanding Kraft Heinz common stock, with Berkshire owning approximately 26.8% and 3G owning 24.2%. Kraft is one of North America’s largest consumer packaged food and beverage companies, with annual revenues of more than $18 billion. The company’s iconic brands includeKraft,Capri Sun,Jell-O,Kool-Aid,Lunchables,Maxwell House,Oscar Mayer,Philadelphia,PlantersandVelveeta.

A summary of our investments in Kraft Heinz follows (in millions).

   Carrying Value
       June 30,    
2016
  December 31,
2015

Common stock

   $15,752    $15,714 

Preferred Stock

         7,710 
   

 

 

    

 

 

 
   $15,752    $23,424 
   

 

 

    

 

 

 

We account for our investment in Kraft Heinz common stock on the equity method. Our equity method earnings on the common stock and dividends earned on the Preferred Stock in the first six months were $626 million in 2016 and $231 million in 2015 and are included in interest, dividend and other investment income in our Consolidated Statements of Earnings. Preferred Stock dividends received in the second quarter and first six months of 2016 were $180 million. In 2015, Preferred Stock dividends received were $180 million in the second quarter and $360 million in the first six months.

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

          July 3, 2016                 January 3, 2016        

Assets

   $121,684        $122,973     

Liabilities

   63,637        56,737     

           Second Quarter            First Six Months
   2016    2015    2016    2015

Sales

   $    6,793        $    2,616        $  13,363      $    5,094 
   

 

 

      

 

 

      

 

 

      

 

 

 

Net earnings (loss) attributable to Kraft Heinz

   $950        $(164)        $1,846      $112 
   

 

 

      

 

 

      

 

 

      

 

 

 

Note 8. Income taxes

Our consolidated effective income tax rates for the second quarter and first six months of 20162017 were 28.9% and 28.1%, respectively, and 31.1% and 22.3%, respectively. In 2015, our effective income tax rates were 29.7% forrespectively, in the second quarter and 30.8% for the first six months.months of 2016. Our effective income tax rate normally reflects recurring benefits from the recurring impact offrom: (a) dividends received deductions applicable to certain investments in equity securities, (b) income production tax credits fromrelated to wind-powered electricity generation placed in service in the U.S. and (c) lower income tax rates applicable to earnings of certain foreign subsidiaries.

As discussed in Notes 3 and 9 to these Consolidated Financial Statements, onOn February 29, 2016, we exchanged our long-held investment in P&G common stock for the common stock of Duracell. This exchange produced apre-tax gain of $1.1 billion for financial reporting purposes. The exchange transaction was structured as atax-free reorganization under the Internal Revenue Code. As a result, no income taxes are currentlywere payable on the excess of the fair value of the business received over the tax basis of the P&G shares exchanged, and we recorded aone-time reduction of certain deferred income tax liabilities (approximately $750 million) that were recorded in 2005 in connection with our exchange of The Gillette Company common stock for P&G common stock upon the merger of those two companies. The P&G/Duracell exchange produced an 8.3 percentage point reduction in our consolidated effective income tax rate for the first six months of 2016.

12


Notes to Consolidated Financial Statements(Continued)

Note 9. Investment gains/losses

Investment gains/losses included in earnings are summarized below (in millions).

   Second Quarter   First Six Months 
         2017               2016               2017               2016       

Fixed maturity securities—

        

Gross gains from sales and redemptions

  $15    $20    $26    $39   

Gross losses from sales and redemptions

   (8)    (14)    (14)    (17)  

Equity securities—

        

Gross gains from sales and redemptions

   359     740     784     2,547   

Gross losses from sales and redemptions

   (82)    (53)    (207)    (63)  

Other-than-temporary impairment losses

   —     (63)    —     (63)  

Other

       13     16     50   
  

 

 

   

 

 

   

 

 

   

 

 

 
  $    290    $    643    $605    $2,493   
  

 

 

   

 

 

   

 

 

   

 

 

 

           Second Quarter                     First Six Months         
       2016           2015             2016          2015     

Fixed maturity securities—

         

Gross gains from sales and redemptions

  $20      $53        $39   $82   

Gross losses from sales and redemptions

   (14)      (46)        (17  (84)  

Equity securities—

         

Gross gains from sales and redemptions

   740       342         2,547    448   

Gross losses from sales and redemptions

   (53)      (14)        (63  (20)  

Other-than-temporary impairment losses

   (63)      —          (63  —   

Other

   13       27         50    33   
  

 

 

   

 

 

     

 

 

  

 

 

 
  $643      $362        $2,493   $459   
  

 

 

   

 

 

     

 

 

  

 

 

 

We record investments in equity and fixed maturity securities classified asavailable-for-sale at fair value and record the difference between fair value and cost in other comprehensive income. We recognize investment gains and losses when we sell or otherwise dispose such securities. Gains from sales and redemptions of equity securities in the second quarter of 2016 included $610 million from the redemption of our investment in Kraft Heinz Preferred Stock. Gains in the first six months of 2016 also included a pre-tax non-cash holding gain of approximately $1.1 billion from the exchange of our P&G common stock in connection with the acquisition of Duracell.

We record investments in equity and fixed maturity securities classified as available-for-sale at fair value and record the difference between fair value and cost in other comprehensive income. Other-than-temporary impairment losses recognized in earnings represent reductions in the cost basis of the investment, but not the fair value. Accordingly, such losses that are included in earnings are generally offset by a credit to other comprehensive income, producing no net effect on shareholders’ equity as of the balance sheet date.

Note 10. Inventories

Inventories are comprised of the following (in millions).

       June 30,    
2016
   December 31,
2015
 

Raw materials

  $2,916    $1,852   

Work in process and other

   2,464     778   

Finished manufactured goods

   4,289     3,369   

Goods acquired for resale

   6,051     5,917   
  

 

 

   

 

 

 
  $    15,720    $11,916   
  

 

 

   

 

 

 

Inventories at June 30, 2016 include approximately $3.6 billion related to PCC and Duracell.

   June 30,
2017
   December 31,
2016
 

Raw materials

  $2,935     $2,789   

Work in process and other

   2,787    2,506   

Finished manufactured goods

   4,199    4,033   

Goods acquired for resale

   6,521    6,399   
  

 

 

   

 

 

 
  $16,442     $15,727   
  

 

 

   

 

 

 

Note 11. Receivables

Receivables of insurance and other businesses are comprised of the following (in millions).

   June 30,
2017
  December 31,
2016
 

Insurance premiums receivable

  $11,124  $10,462   

Reinsurance recoverable on unpaid losses

   3,076   3,338   

Trade and other receivables

   15,089   13,630   

Allowances for uncollectible accounts

   (336  (333)  
  

 

 

  

 

 

 
  $28,953  $27,097   
  

 

 

  

 

 

 

       June 30,    
2016
  December 31,
2015

Insurance premiums receivable

   $9,995     $8,843 

Reinsurance recoverable on unpaid losses

    3,473      3,307 

Trade and other receivables

    14,036      11,521 

Allowances for uncollectible accounts

    (342)     (368) 
   

 

 

    

 

 

 
   $    27,162     $    23,303 
   

 

 

    

 

 

 

Trade and other receivables at June 30, 2016 include approximately $1.8 billion related to PCC and Duracell.

13


Notes to Consolidated Financial Statements(Continued)

 

Note 11. Receivables(Continued)

 

LoansA summary of loans and finance receivables of finance and financial products businesses are summarized as follows (in millions).

 

  June 30,
2016
   December 31,
2015
    June 30, 
2017
  December 31, 
2016
 

Loans and finance receivables before allowances and discounts

  $    13,547     $    13,186     $14,967   $13,728 

Allowances for uncollectible loans

   (182)     (182)    (177 (182

Unamortized acquisition discounts

   (277)     (232)    (231 (246
  

 

   

 

   

 

  

 

 
  $    13,088     $    12,772     $ 14,559   $    13,300 
  

 

   

 

   

 

  

 

 

Loans and finance receivables are predominantlyprimarily installment loans originated or acquired by our manufactured housing installment loans.business. In June 2017, we agreed to provide a Canada-based financial institution with a C$2 billion (approximately $1.5 billion) one-year secured revolving credit facility. The agreement expires on June 29, 2018. The outstanding loan balance of C$1.4 billion at June 30, 2017 was repaid during July. Provisions for loan losses in both the first six months of 2017 and 2016 were $78 million in 2016 and $77 million in 2015.million. Loan charge-offs, net of recoveries, in the first six months were $83 million in 2017 and $78 million in 2016 and $93 million in 2015.2016. At June 30, 2016,2017, we evaluated approximately 98% of the manufactured housing loan balances were evaluated collectively for impairment. As a part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing ornon-performing. At June 30, 2016,2017, we considered approximately 98%99% of the loan balances were determined to be performing and approximately 95% of the loan balances were current as to payment status.

Note 12. Property, plant and equipment and assets held for lease

A summary of property, plant and equipment of our insurance and other businesses follows (in millions).

 

   Range of
estimated useful life
   June 30,
2016
   December 31,
2015
 

Land

   —      $2,071     $1,689    

Buildings and improvements

   5 – 40 years     8,091      7,329    

Machinery and equipment

   3 – 25 years     19,550      17,054    

Furniture, fixtures and other

   2 – 18 years     4,318      3,545    
    

 

 

   

 

 

 
     34,030      29,617    

Accumulated depreciation

     (14,958)     (14,077)   
    

 

 

   

 

 

 
    $19,072     $15,540    
    

 

 

   

 

 

 

Property, plant and equipment at June 30, 2016 included approximately $3.2 billion related to PCC and Duracell.

   Ranges of
 estimated useful life 
   June 30, 
2017
   December 31, 
2016
 

Land

      $2,213   $2,108 

Buildings and improvements

   5 – 40 years   8,538   8,360 

Machinery and equipment

   3 – 25 years   21,220   20,463 

Furniture, fixtures and other

   2 – 15 years   4,395   4,080 
   

 

 

  

 

 

 
    36,366   35,011 

Accumulated depreciation

    (16,576  (15,686
   

 

 

  

 

 

 
    $19,790   $ 19,325 
   

 

 

  

 

 

 

A summary of property, plant and equipment of our railroad and our utilities and energy businesses follows (in millions).

   Ranges of
  estimated useful life  
    June 30, 
2017
    December 31, 
2016
 

Railroad:

      

Land

       $6,074      $6,063   

Track structure and other roadway

   7 – 100 years    50,344      48,277   

Locomotives, freight cars and other equipment

   6 – 41 years    12,264      12,075   

Construction in progress

       896      965   
    

 

 

   

 

 

 
     69,578      67,380   

Accumulated depreciation

     (7,936)     (6,130)  
    

 

 

   

 

 

 
     61,642      61,250   
    

 

 

   

 

 

 

Utilities and energy:

  

Utility generation, transmission and distribution systems

   5 – 80 years    72,317      71,536   

Interstate natural gas pipeline assets

   3 – 80 years    6,969      6,942   

Independent power plants and other assets

   3 – 30 years    7,044      6,596   

Construction in progress

       2,607      2,098   
    

 

 

   

 

 

 
     88,937      87,172   

Accumulated depreciation

     (25,251)     (24,663)  
    

 

 

   

 

 

 
     63,686      62,509  
    

 

 

   

 

 

 
     $    125,328      $    123,759   
    

 

 

   

 

 

 

Notes to Consolidated Financial Statements(Continued)

Note 12. Property, plant and equipment and assets held for lease(Continued)

The utility generation, transmission and distribution systems and interstate natural gas pipeline assets are owned by regulated public utility and natural gas pipeline subsidiaries.

   Range of
estimated useful life
   June 30,
2016
   December 31,
2015
 

Railroad:

      

Land

   —      $6,054     $6,037    

Track structure and other roadway

   7 – 100 years     46,955      45,967    

Locomotives, freight cars and other equipment

   6 – 40 years     11,758      11,320    

Construction in progress

   —       1,131      1,031    
    

 

 

   

 

 

 
     65,898      64,355    

Accumulated depreciation

     (5,370)     (4,845)   
    

 

 

   

 

 

 
    $60,528     $59,510    
    

 

 

   

 

 

 

Utilities and energy:

  

Utility generation, transmission and distribution systems

   5 – 80 years    $69,955     $69,248    

Interstate natural gas pipeline assets

   3 – 80 years     6,835      6,755    

Independent power plants and other assets

   3 – 30 years     5,882      5,626    

Construction in progress

   —       2,701      2,627    
    

 

 

   

 

 

 
     85,373      84,256    

Accumulated depreciation

     (23,924)     (23,487)   
    

 

 

   

 

 

 
    $    61,449     $    60,769    
    

 

 

   

 

 

 

14


Notes to Consolidated Financial Statements(Continued)

Note 12. Property, plant and equipment(Continued)

Assets held for lease and property, plant and equipment of our finance and financial products businesses are summarized below (in millions).

 

  Range of
estimated useful life
  June 30,
2016
   December 31,
2015
   Ranges of
estimated useful life
    June 30, 
2017
  December 31, 
2016
 

Assets held for lease

  5 – 35 years  $    11,769     $11,317       5 – 35 years    $12,110   $11,902 

Land

  —     222      220           226  224 

Buildings, machinery and other

  3 – 50 years   1,267      1,207       3 – 50 years    1,365  1,302 
    

 

   

 

     

 

  

 

 
     13,258      12,744         13,701  13,428 

Accumulated depreciation

     (3,596)     (3,397)        (3,910 (3,739
    

 

   

 

     

 

  

 

 
    $9,662     $9,347         $    9,791   $  9,689 
    

 

   

 

     

 

  

 

 

A summary of depreciation expense follows (in millions).

 

  First Six Months   First Six Months 
  2016   2015   2017   2016 

Insurance and other

  $1,037    $824     $ 1,089    $ 1,037 

Railroad, utilities and energy

   2,298     2,155     2,389    2,298 

Finance and financial products

   308     296     321    308 
  

 

   

 

   

 

   

 

 
  $3,643    $3,275     $ 3,799    $ 3,643 
  

 

   

 

   

 

   

 

 

Note 13. Goodwill and other intangible assets

A reconciliation of the change in the carrying value of goodwill is as follows (in millions).

 

  June 30,
2016
   December 31,
2015
    June 30, 
2017
    December 31, 
2016
 

Balance at beginning of year

  $  62,708     $60,714       $79,486   $62,708 

Acquisitions of businesses

   16,772      2,563       616    17,650 

Other, including foreign currency translation

   (303)     (569)      73    (872
  

 

   

 

   

 

   

 

 

Balance at end of period

  $79,177     $62,708       $ 80,175    $ 79,486 
  

 

   

 

   

 

   

 

 

Other intangible assets are summarized as follows (in millions).

 

  June 30, 2016  December 31, 2015 June 30, 2017   December 31, 2016
  Gross carrying
amount
  Accumulated
amortization
  Gross carrying
amount
  Accumulated
amortization
 Gross carrying
amount
     Accumulated
amortization
   Gross carrying
amount
   Accumulated
amortization

Insurance and other

   $41,360    $6,181    $14,610    $5,462  $40,419    $7,199    $39,976     $6,495 

Railroad, utilities and energy

   894    266    888    239  903    312    898     293 
   

 

    

 

    

 

    

 

  

 

     

 

     

 

     

 

  
   $42,254    $6,447    $15,498    $5,701  $41,322    $7,511    $40,874     $6,788 
   

 

    

 

    

 

    

 

  

 

     

 

     

 

     

 

  

Trademarks and trade names

   $6,034    $801    $3,041    $765  $  5,275    $   653    $  5,175     $   616 

Patents and technology

   4,389    2,237    4,252    2,050  4,435    2,512    4,341     2,328 

Customer relationships

   28,727    2,511    5,474    2,131  28,457    3,299    28,243     2,879 

Other

   3,104    898    2,731    755  3,155    1,047    3,115     965 
   

 

    

 

    

 

    

 

  

 

     

 

     

 

     

 

  
   $42,254    $6,447    $15,498    $5,701  $41,322    $7,511    $40,874     $6,788 
   

 

    

 

    

 

    

 

  

 

     

 

     

 

     

 

  

Other intangible assets at June 30, 2016 included preliminary fair values of intangible assets of PCC and Duracell of approximately $26 billion, which included approximately $17.5 billion in customer relationships and trade names that were preliminarily determined to have indefinite lives. Amortization expense in the first six months was $740 million in 2017 and $716 million in 2016 and $537 million in 2015.2016. Intangible assets with indefinite lives excluding business acquisitions completed in 2016, were approximately $3$18.8 billion as of June 30, 20162017 and $18.7 billion as of December 31, 2015.2016.

15


Notes to Consolidated Financial Statements(Continued)

 

Note 14. Derivative contracts

Derivative We are party to derivative contracts have been entered into primarily through our finance and financial products and our utilities and energy businesses. DerivativeCurrently, the derivative contracts of our finance and financial products businesses consist ofinclude equity index put option contracts written between 2004 and a credit default contract. A summary of the2008. The liabilities and related notional values of thesesuch contracts follows (in millions).

 

  June 30, 2016  December 31, 2015 
   Liabilities   

 

 Notional 
Value

   Liabilities    Notional 
Value
 

Equity index put options

  $4,431      $27,905(1)   $3,552      $ 27,722(1) 

Credit default(2)

  195      7,792    284      7,792  
 

 

 

   

 

 

  
  $4,626       $3,836     
 

 

 

   

 

 

  
   June 30, 2017   December 31, 2016 
    Liabilities    

 

  Notional  

Value

    Liabilities    

 

  Notional  

Value

 

Equity index put options

   $  2,494      $27,911(1)    $  2,890      $26,497(1) 

 

(1)

Represents the aggregate undiscounted amounts payable assuming that the value of each index is zero at each contract’s expiration date. Certain of these contracts are denominated in foreign currencies. Notional amounts are based on the foreign currency exchange rates as of each balance sheet date.

(2)

In July 2016, the credit default contract was terminated by mutual agreement with the counterparty. We paid $195 million upon termination and, thereafter, we have no exposure to losses under the contract.

TheWe record derivative contracts of our finance and financial products businesses are recordedcontract liabilities at fair value and include the changes in the fair values of such contracts are reported in earnings as derivative gains/losses. We entered into these contracts with the expectation that the premiums received would exceed the amounts ultimately paid to counterparties. A summary of the derivative gains (losses)gains/losses included in our Consolidated Statements of Earnings follows (in millions).

 

  Second Quarter     First Six Months   Second Quarter   First Six Months 
  

 

      2016      

         2015               2016             2015       

 

2017

   2016   2017   2016 

Equity index put options

   $(83)       $(138)         $(879     $1,173     $(65)      $    (83)      $395     $(879)   

Credit default

   103        (36)         89       (29   —       103       —       89    
  

 

   

 

     

 

     

 

   

 

   

 

   

 

   

 

 
   $20        $(174)         $(790     $1,144     $    (65)      $    20       $    395     $    (790)   
  

 

   

 

     

 

     

 

   

 

   

 

   

 

   

 

 

The equity index put option contracts are European style options written between 2004 and 2008 on four major equity indexes. These contracts willindexes and expire between June 2018 and January 2026. Future payments, if any, under any given contract will be required if the prevailing index value is below the contract strike price at the expiration date. We received theaggregate premiums of $4.2 billion on these contracts at the contract inception dates and therefore we have no counterparty credit risk.

The aggregate intrinsic value (the undiscounted liability assuming the contracts are settled based on the index values and foreign currency exchange rates as of the balance sheet date) of our equity index put option contracts was approximately $2.0 billion$842 million at June 30, 20162017 and $1.1$1.0 billion at December 31, 2015.2016. However, these contracts may not be unilaterally terminated or fully settled before the expiration dates. Therefore, the ultimate amount of cash basis gains or losses on these contracts will not be determined for several years. The remaining weighted average life of all contracts was approximately 4.43.4 years at June 30, 2016.2017.

A limited number of our equity index put option contracts contain collateral posting requirements with respect to changes in the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. As of June 30, 2016,2017, we did not have any collateral posting requirements. If Berkshire’s credit ratings (currently AA from Standard & Poor’s and Aa2 from Moody’s) are downgraded below eitherA- by Standard & Poor’s or A3 by Moody’s, collateral of up to $1.1 billion could be required to be posted.

16


Notes to Consolidated Financial Statements(Continued)

Note 14. Derivative contracts(Continued)

In July 2016, our last remaining credit default contract was terminated by mutual agreement with the counterparty. We paid $195 million upon termination of the contract.

Our regulated utility subsidiaries are exposed to variations in the prices of fuel required to generate electricity, wholesale electricity purchased and sold and natural gas supplied for customers. Derivative instruments, including forward purchases and sales, futures, swaps and options, are used to manage a portion of these price risks. Derivative contract assets are included in other assets and were $109$123 million as of June 30, 20162017 and $103$142 million as of December 31, 2015.2016. Derivative contract liabilities are included in accounts payable, accruals and other liabilities and were $199$139 million as of June 30, 20162017 and $237$145 million as of December 31, 2015.2016. Net derivative contract assets or liabilities of our regulated utilities that are probable of recovery through rates, of our regulated utilities are offset by regulatory liabilities or assets. Unrealized gains or losses on contracts accounted for as cash flow or fair value hedges are recorded in other comprehensive income or in net earnings, as appropriate.

Notes to Consolidated Financial Statements(Continued)

Note 15. Supplemental cash flow information

A summary of supplementalSupplemental cash flow information is presented in the following tablefollows (in millions).

 

  First Six Months    First Six Months 
  

 

2016

 

    2015    

  

 

  2017  

         2016     

Cash paid during the period for:

        

Income taxes

   $1,055   $    1,128   $    1,082   $  1,055     

Interest:

        

Insurance and other businesses

   253   185   390    253     

Railroad, utilities and energy businesses

   1,406   1,319   1,410    1,406     

Finance and financial products businesses

   184   215   211    184     

Non-cash investing and financing activities:

        

Liabilities assumed in connection with business acquisitions

   16,997   2,478   167    16,997     

Equity securities exchanged in connection with business acquisition

   4,239   —         4,239     

Note 16. Unpaid losses and loss adjustment expenses

The liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under our short duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates forincurred-but-not-reported (“IBNR”) claims. Reconciliations of the changes in claim liabilities for the six months ending June 30, 2017 and 2016 follows (in millions).

   2017   2016 

Unpaid losses and loss adjustment expenses—beginning of year:

    

Gross liabilities

    $  76,918        $73,144  

Reinsurance recoverable and deferred charges

   (11,385)      (10,994) 
  

 

 

   

 

 

 

Net balance

   65,533       62,150  
  

 

 

   

 

 

 

Incurred losses and loss adjustment expenses with respect to:

    

Current accident year events

   16,980       14,898  

Prior accident years’ events

   (199)      (1,071) 

Retroactive reinsurance and discount accretion

   10,532       883  
  

 

 

   

 

 

 

Total incurred losses and loss adjustment expenses

       27,313       14,710  
  

 

 

   

 

 

 

Paid losses and loss adjustment expenses with respect to:

    

Current accident year events

   (6,656)      (6,049) 

Prior accident years’ events

   (7,265)      (6,512) 

Retroactive reinsurance

   (618)      (534) 
  

 

 

   

 

 

 

Total payments

   (14,539)      (13,095) 
  

 

 

   

 

 

 

Foreign currency translation adjustment

   327       (168) 
  

 

 

   

 

 

 

Unpaid losses and loss adjustment expenses—June 30:

    

Net balance

   78,634           63,597  

Reinsurance recoverable and deferred charges

   16,673       11,111  
  

 

 

   

 

 

 

Gross liabilities

    $95,307        $74,708  
  

 

 

   

 

 

 

Incurred losses and loss adjustment expenses in the preceding table reflect the losses and loss adjustment expenses recorded in earnings in each period related to insured events occurring in the current year and in prior years. We present incurred and paid losses under retroactive reinsurance contracts and discount accretion separately. Such amounts relate to prior accident years.

Notes to Consolidated Financial Statements(Continued)

Note 16. Unpaid losses and loss adjustment expenses(Continued)

Incurred losses and loss adjustment expenses in the first six months of 2017 and 2016 reflected decreases of $199 million and $1,071 million, respectively, in the estimated ultimate liabilities for prior accident years’ events. In the first six months of 2017, the decrease included a $532 million decrease related to primary insurance operations (primarily private passenger automobile, healthcare malpractice and workers’ compensation coverages), which was partly offset by an increase attributable to reinsurance operations. The increase related to our reinsurance operations included $215 million with respect to certain personal injury claims in the United Kingdom due to a regulatory decision that increases calculated lump sum settlement amounts. In addition, during 2017, we increased ultimate liability estimates under certain reinsurance contracts due to higher than expected reported losses from hurricane and earthquake events that occurred in 2016. In the first six months of 2016, we reduced estimated ultimate liabilities for prior accident years’ events for reinsurance operations ($619 million) and primary insurance ($452 million). The reductions related to reinsurance operations were primarily attributable to lower than expected reported losses, while the reductions for primary insurance primarily related to private passenger automobile, healthcare malpractice and workers’ compensation coverages.

In January 2017, a Berkshire subsidiary, National Indemnity Company (“NICO”), entered into a retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”). NICO received cash consideration of $10.2 billion and agreed to indemnify AIG for 80% of up to $25 billion, excess of $25 billion retained by AIG, of losses and allocated loss adjustment expenses with respect to certain commercial insurance loss events occurring in years prior to 2016. The transaction became effective on February 2, 2017. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement.

We accounted for the AIG agreement as retroactive reinsurance of short-duration insurance contracts. As of the effective date, we recorded premiums earned and losses and loss adjustment expenses incurred of $10.2 billion. We also recorded a liability for unpaid losses and loss adjustment expenses of $16.4 billion, representing the estimated ultimate liabilities assumed, and a deferred charge reinsurance assumed asset of $6.2 billion, representing the excess of the liability over the premiums earned. This deferred charge asset will be amortized over the estimated claims settlement period using the interest method based on the estimated timing and amount of future loss payments. Amortization charges are included in losses and loss adjustment expenses in the Consolidated Statements of Earnings.

Note 16.17. Notes payable and other borrowings

Notes payable and other borrowings are summarized below (in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of June 30, 2016.2017.

 

 Weighted
Average
 Interest Rate 
 June 30,
2016
 December 31,
2015
   Weighted
Average
  Interest Rate  
    June 30, 
2017
     December 31,  
2016
 

Insurance and other:

        

Berkshire Hathaway Inc. (“Berkshire”) due 2016-2047

 2.3%    $ 18,035    $9,799     

Issued by Berkshire:

      

U.S. Dollar denominated borrowings due 2017-2047

   2.8%          $10,615    $11,709 

Euro denominated borrowings due 2020-2035

   1.1%          7,766    5,994 

Short-term subsidiary borrowings

 2.1%   2,172   1,989        3.0%          2,013    2,094 

Other subsidiary borrowings due 2016-2044

 3.9%   7,360   2,811     

Other subsidiary borrowings due 2017-2045

   3.9%          7,387    7,378 
  

 

  

 

     

 

   

 

 
   $ 27,567    $14,599           $27,781     $27,175 
  

 

  

 

     

 

   

 

 

OnIn January 8, 2016, Berkshire entered into a $10 billion 364-day revolving credit agreement. Borrowings under the credit agreement were unsecured and there were no materially restrictive covenants. In connection with the PCC acquisition, Berkshire borrowed $10 billion under the credit agreement. In March 2016,2017, Berkshire issued €2.75€1.1 billion in senior unsecured notes. The notes consistingconsisted of €1.0 billion of 0.50% notes due in 2020, €1.0 billion of 1.30% notes due in 2024 and €750€550 million of 2.15% notes due in 2028. In March 2016, Berkshire also issued $5.5 billion in senior unsecured notes consisting of $1.0 billion of 2.20%0.25% notes due in 2021 $2.0 billionand €550 million of 2.75%0.625% notes due in 2023 and $2.52023. In January 2017, senior notes of $1.1 billion of 3.125% notes due in 2026.matured. The proceeds from these debt issues were usedincrease in the repaymentcarrying value of all outstanding borrowings underBerkshire’s Euro denominated senior notes in the aforementioned credit agreement. In June 2016,first six months of 2017 included $597 million that was charged to earnings as additional interest expense for the revolving credit agreement was terminated. Other subsidiary borrowings at June 30, 2016 included $4.6 billionfirst six months of 2017 (including $526 million in the second quarter) and resulted from the revaluation attributable to PCC.changes in foreign currency exchange rates.

17


Notes to Consolidated Financial Statements(Continued)

 

Note 16.17. Notes payable and other borrowings(Continued)

 

  Weighted
Average
 Interest Rate 
  June 30,
2016
  December 31,
2015
 

Railroad, utilities and energy:

  

Berkshire Hathaway Energy Company (“BHE”) and its subsidiaries:

  

BHE senior unsecured debt due 2017-2045

  5.1%    $7,816    $7,814    

Subsidiary and other debt due 2016-2064

  4.8%    28,590    28,188    

Burlington Northern Santa Fe (“BNSF”) due 2016-2097

  4.9%    22,189    21,737    
  

 

 

  

 

 

 
   $ 58,595    $57,739    
  

 

 

  

 

 

 

   Weighted
Average
 Interest Rate 
  June 30,
2017
    December 31, 
2016
 

Railroad, utilities and energy:

   

Issued by Berkshire Hathaway Energy Company (“BHE”) and its subsidiaries:

     

BHE senior unsecured debt due 2018-2045

   5.4%  $7,420     $7,818 

Subsidiary and other debt due 2017-2064

   4.6%   30,729    29,223 

Issued by BNSF due 2017-2097

   4.8%   22,552    22,044 
   

 

 

   

 

 

 
   $60,701     $59,085 
   

 

 

   

 

 

 

BHE subsidiary debt represents amounts issued pursuant to separate financing agreements. Substantially all of the assets of certain BHE subsidiaries are, or may be, pledged or encumbered to support or otherwise secure debt. These borrowing arrangements generally contain various covenants including, but not limited to, leverage ratios, interest coverage ratios and debt service coverage ratios. During the first six months of 2017, BHE and its subsidiaries issued approximately $1.275 billion of debt with maturity dates ranging from 2027 to 2057 and a weighted average interest rate of 3.7%.

BNSF’s borrowings are primarily senior unsecured debentures. In May 2016,March 2017, BNSF issued $1.25 billion of senior unsecured debentures consisting of $500 million of 3.25% debentures due in 2027 and $750 million of 3.9%4.125% debentures due in 2046.2047. In May 2017, $650 million of BNSF debentures matured. As of June 30, 2016,2017, BNSF, and BHE and their subsidiaries were in compliance with all applicable debt covenants. Berkshire does not guarantee any debt, borrowings or lines of credit of BNSF, BHE or their subsidiaries.

 

  Weighted
Average
 Interest Rate 
  June 30,
2016
  December 31,
2015
 

Finance and financial products:

  

Berkshire Hathaway Finance Corporation (“BHFC”) due 2016-2043

  2.5%    $ 14,173    $10,679    

Other subsidiary borrowings due 2016-2036

  5.0%    1,078    1,272    
  

 

 

  

 

 

 
   $ 15,251    $11,951    
  

 

 

  

 

 

 
   Weighted
Average
 Interest Rate 
   June 30, 
2017
    December 31, 
2016
 

Finance and financial products:

   

Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2017-2043

   2.7%   $13,323    $14,423 

Issued by other subsidiaries due 2017-2036

   4.7%   465    961 
   

 

 

   

 

 

 
    $13,788    $15,384 
   

 

 

   

 

 

 

In March 2016,January 2017, BHFC issued $3.5$1.3 billion of senior notes consisting of $750$950 million of 1.45% notes due in 2018, $1.0 billion floating rate notes that mature in 2018, $1.25 billion of 1.70% notes due in 2019 and $500$350 million of floating rate notes that maturedue in 2019.2020. In the first six months of 2017, senior notes of $2.4 billion matured. The borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, are fully and unconditionally guaranteed by Berkshire.

As of June 30, 2016,2017, our subsidiaries also had unused lines of credit and commercial paper capacity aggregating approximately $8.5$8.4 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included about $4.4$4.8 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, Berkshire guarantees certain other subsidiary borrowings, which aggregated approximately $3.3 billion at June 30, 2016.2017, Berkshire guaranteed approximately $2.6 billion of other subsidiary borrowings. 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.

18


Notes to Consolidated Financial Statements(Continued)

 

Note 17.18. Fair value measurements

Our financial assets and liabilities are summarized below as of June 30, 20162017 and December 31, 20152016 with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.

 

  

     Carrying     
Value

  

    Fair Value    

  

Quoted
Prices
      (Level 1)      

    

Significant Other
Observable Inputs
(Level 2)

    

Significant
Unobservable Inputs
(Level 3)

 Carrying
Value
 Fair Value Quoted
Prices
 (Level 1) 
 Significant Other
 Observable Inputs 
(Level 2)
 Significant
 Unobservable Inputs 
(Level 3)

June 30, 2016

              

June 30, 2017

     

Investments in fixed maturity securities:

                   

U.S. Treasury, U.S. government corporations and agencies

  $    3,536   $    3,536      $    2,407        $    1,129          $    —         $    4,792 $    4,792     $    3,326   $    1,466      $    —  

States, municipalities and political subdivisions

  1,331   1,331      —          1,331          —         1,103 1,103      —     1,103      —  

Foreign governments

  9,922   9,922      7,656        2,266          —         8,922 8,922     7,143   1,779      —  

Corporate bonds

  7,694   7,694      —          7,589          105       7,559 7,559      —     7,552     7

Mortgage-backed securities

  1,297   1,297      —          1,297          —         1,035 1,035      —     1,035      —  

Investments in equity securities

  104,234   104,234      104,198        35          1       137,113 137,113     137,104   8     1  

Investment in Kraft Heinz common stock

  15,752   28,795      28,795        —            —         15,584 27,871     27,871    —        —  

Other investments

  20,826   20,826      351        —            20,475       20,234 20,234      —     20,234      —  

Loans and finance receivables

  13,088   13,450      —          14          13,436       14,559 15,015      —     1,095     13,920

Derivative contract assets(1)

  109   109      2        12          95       123 123     2   15     106

Derivative contract liabilities:

                   

Railroad, utilities and energy(1)

  199   199      5��       157          37       139 139     2   120     17

Finance and financial products:

              

Equity index put options

  4,431   4,431      —          —            4,431       2,494 2,494      —      —       2,494

Credit default

  195   195      —          195          —        

Notes payable and other borrowings:

                   

Insurance and other

  27,567   28,982      —          28,982          —         27,781 28,489      —     28,489      —  

Railroad, utilities and energy

  58,595   68,757      —          68,757          —         60,701 68,603      —     68,603      —  

Finance and financial products

  15,251   16,068      —          15,656          412       13,788 14,296      —     13,973     323

December 31, 2015

              

December 31, 2016

     

Investments in fixed maturity securities:

                   

U.S. Treasury, U.S. government corporations and agencies

  $    3,427   $    3,427      $    2,485        $     942          $     —         $    4,527 $    4,527     $    3,099   $    1,428      $—  

States, municipalities and political subdivisions

  1,764   1,764      —          1,764          —         1,216 1,216      —     1,216      —  

Foreign governments

  11,468   11,468      9,188        2,280          —         9,001 9,001     7,237   1,764      —  

Corporate bonds

  7,926   7,926      —          7,826          100       7,604 7,604      —     7,540     64

Mortgage-backed securities

  1,442   1,442      —          1,442          —         1,117 1,117      —     1,117      —  

Investments in equity securities

  111,822   111,822      111,786        35          1       122,032 122,032     122,031    —       1

Investment in Kraft Heinz common stock

  15,714   23,679      23,679        —            —         15,345 28,418     28,418    —        —  

Investment in Kraft Heinz Preferred Stock

  7,710   8,363      —          —            8,363      

Other investments

  21,717   21,717      315        —            21,402       17,256 17,256      —      —       17,256

Loans and finance receivables

  12,772   13,112      —          16          13,096       13,300 13,717      —     13     13,704

Derivative contract assets(1)

  103   103      —          5          98       142 142     5   43     94

Derivative contract liabilities:

                   

Railroad, utilities and energy(1)

  237   237      13        177          47       145 145     3   114     28

Finance and financial products:

              

Equity index put options

  3,552   3,552      —          —            3,552       2,890 2,890      —      —       2,890

Credit default

  284   284      —          —            284      

Notes payable and other borrowings:

                   

Insurance and other

  14,599   14,773      —          14,773          —         27,175 27,712      —     27,712      —  

Railroad, utilities and energy

  57,739   62,471      —          62,471          —         59,085 65,774      —     65,774      —  

Finance and financial products

  11,951   12,363      —          11,887          476       15,384 15,825      —     15,469     356

 

(1)

Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities.

19


Notes to Consolidated Financial Statements(Continued)

 

Note 17.18. Fair value measurements(Continued)

 

The fair values of 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 fair values presented are not necessarily indicative of the amounts that could be realized in an actual current market exchange. The use of alternative 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, which are described below.

Level 1—Inputs represent unadjusted quoted prices for identical assets or liabilities exchanged in active markets.

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. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations 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 and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.

Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the six months ending June 30, 20162017 and 20152016 follow (in millions).

 

  Investments 
in fixed
maturity
securities
   Investments
in equity
securities
and other
 investments 
   Net
 derivative 
contract
liabilities

Six months ending June 30, 2017

     

Balance at December 31, 2016

 $  64    $17,257   $ (2,824

Gains (losses) included in:

     

Earnings

  —      —    473

Other comprehensive income

   1,156  (2)

Regulatory assets and liabilities

  —      —    (2)

Acquisitions, dispositions and settlements

 (58)    —    (50)

Transfers into/out of Level 3

  —     (18,412)   —  
 

 

   

 

   

 

 

Balance at June 30, 2017

 $    7    $1   $  (2,405
  Investments
in fixed
maturity
securities
 Investments
in equity
securities
and other
investments
 Net
derivative
contract
liabilities
 

 

   

 

   

 

 

Six months ending June 30, 2016

          

Balance at December 31, 2015

   $100  $21,403  $(3,785) $100    $21,403   $(3,785)

Gains (losses) included in:

          

Earnings

    —     —    (737)  —      —    (737)

Other comprehensive income

   1  (927)  —      (927)   —  

Regulatory assets and liabilities

    —     —    (11)  —      —    (11)

Acquisitions, dispositions and settlements

   5   —    (35)    —    (35)

Transfers into/out of Level 3

   (1)  —    195  (1)    —    195
   

 

  

 

  

 

  

 

   

 

   

 

 

Balance at June 30, 2016

   $105  $20,476  $(4,373) $105    $  20,476   $  (4,373
   

 

  

 

  

 

  

 

   

 

   

 

 

Six months ending June 30, 2015

     

Balance at December 31, 2014

   $8  $21,996  $(4,759)

Gains (losses) included in:

     

Earnings

    —     —    1,200 

Other comprehensive income

    —    (329) (3)

Regulatory assets and liabilities

    —     —    (17)

Dispositions and settlements

   (1)  —    (51)

Transfers into/out of Level 3

    —     —    3 
   

 

  

 

  

 

 

Balance at June 30, 2015

   $7  $21,667  $(3,627)
   

 

  

 

  

 

 

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate and are primarily related to changes in the fair values of derivative contracts and settlement transactions. Gains and losses included in other comprehensive income are primarily represent the net change in unrealized appreciation of investments.investments and the reclassification of investment appreciation in net earnings, as appropriate in our Consolidated Statements of Comprehensive Income.

20


Notes to Consolidated Financial Statements(Continued)

 

Note 17.18. Fair value measurements(Continued)

 

As disclosed in Note 7, we expect to exercise our BAC Warrants in the third quarter of 2017 using the BAC Preferred as consideration and additionally, RBI intends to redeem our RBI Preferred investment. As of June 30, 2017, we based our valuations of these investments on these expectations and we significantly reduced expected durations and effectively eliminated the discounts for transferability and other restrictions. As a result, we concluded the Level 3 inputs used in the previous fair value determinations of our investments in BAC Warrants and RBI Preferred were not significant and that the valuations of such investments were Level 2 measurements as of June 30, 2017.

Quantitative information as of June 30, 2016,2017, with respect to significant assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).

 

   

Fair

Value

  

Principal Valuation

Techniques

  

Unobservable Inputs

  Weighted
Average

Other investments:

        

Preferred stocks

  $16,093  Discounted cash flow  Expected duration  5 years
      Discount for transferability restrictions and subordination  134 basis points

Common stock warrants

  4,382  Warrant pricing model  Discount for transferability and hedging restrictions  8%

Net derivative liabilities:

        

Equity index put options

  4,431  Option pricing model  Volatility  21%

Other investments consist of perpetual preferred stocks and common stock warrants that we acquired in a few relatively large private placement transactions. These investments are subject to contractual restrictions on transferability and may contain provisions that prevent us from economically hedging our investments. In applying discounted estimated cash flow techniques in valuing the perpetual preferred stocks, we made assumptions regarding the expected durations of the investments, as the issuers may have the right to redeem or convert these investments. We also made estimates regarding the impact of subordination, as the preferred stocks have a lower priority in liquidation than debt instruments of the issuers. In valuing the common stock warrants, we used a warrant valuation model. While most of the inputs to the model are observable, we are subject to the aforementioned contractual restrictions and we have applied discounts with respect to such restrictions. Increases or decreases to these inputs would result in decreases or increases to the fair values of the investments.

   Fair
  Value  
   

Principal Valuation

        Techniques         

  Unobservable Inputs   Weighted
    Average    
 

Derivative contract liabilities:

        

Equity index put options

  $2,494   Option pricing model   Volatility    19% 

Our equity index put option contracts are illiquid and contain contract terms that are not standard in derivatives markets. For example, we are not required to post collateral under most of our contracts and manycertain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshirenon-performance input) which are observable. However, we believe that the valuation of long-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Expected volatilityVolatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates without offsetting transactions occurring in the interim.dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.

Note 18.19. Common stock

Changes in Berkshire’s issued, treasury and outstanding common stock during the first six months of 20162017 are shown in the table below.

 

   Class A, $5 Par Value
(1,650,000 shares authorized)
  Class B, $0.0033 Par Value
(3,225,000,000 shares authorized)
   Issued  Treasury    Outstanding   Issued  Treasury  Outstanding

Balance at December 31, 2015

    820,102      (11,680)     808,422      1,253,866,598     (1,409,762)     1,252,456,836 

Conversions of Class A common stock to Class B common stock and exercises of replacement stock options issued in a business acquisition

    (4,230)     —       (4,230)     6,975,341     —       6,975,341 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2016

    815,872      (11,680)     804,192      1,260,841,939     (1,409,762)     1,259,432,177 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

21


Notes to Consolidated Financial Statements(Continued)

Note 18. Common stock(Continued)

   Class A, $5 Par Value
(1,650,000 shares authorized)
  Class B, $0.0033 Par Value
(3,225,000,000 shares authorized)
 
   

 

Issued

     Treasury       Outstanding    Issued   Treasury   Outstanding 

Balance at December 31, 2016

   788,058     (11,680)    776,378   1,303,323,927     (1,409,762)    1,301,914,165   

Conversions of Class A common stock to Class B common stock and exercises of replacement stock options issued in a business acquisition

   (8,124)    —      (8,124  12,609,748     —       12,609,748   
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

   779,934     (11,680)    768,254   1,315,933,675     (1,409,762)    1,314,523,913   
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Each Class A common share is entitled to one vote per share. Class B common stock possesses dividend and distribution rights equal toone-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent toone-ten-thousandth (1/10,000) of the voting rights of a Class A share. Unless otherwise required under Delaware General Corporation Law, Class A and Class B common shares vote as a single class. Each share of Class A common stock is convertible, at the option of the holder, into 1,500 shares of Class B common stock. Class B common stock is not convertible into Class A common stock. On an equivalent Class A common stock basis, there were 1,643,8131,644,603 shares outstanding as of June 30, 20162017 and 1,643,3931,644,321 shares outstanding as of December 31, 2015.2016. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.

Notes to Consolidated Financial Statements(Continued)

Note 19. Common stock(Continued)

Berkshire’s Board of Directors (“Berkshire’s Board”) has approved a common stock repurchase program under which Berkshire may repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. Berkshire may repurchase shares in the open market or through privately negotiated transactions. Berkshire’s Board authorization does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire’s consolidated cash, cash equivalents and cash equivalentU.S. Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares and there is no expiration date to the program.

Note 19.20. Accumulated other comprehensive income

A summary of the net changes inafter-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and significant amounts reclassified out of accumulated other comprehensive income for the six months ending June 30, 20162017 and 20152016 follows (in millions).

 

  Unrealized
appreciation of
investments
 Foreign
currency
translation
 Prior service
and actuarial
gains/losses of
defined benefit
pension plans
   Other   Accumulated
other
comprehensive
income
 Unrealized
 appreciation of 

investments, net
 

  

 Foreign
currency
 translation 
    Prior service
and actuarial
gains/losses of
 defined benefit 

pension plans
 

  

 Other    Accumulated
other
 comprehensive 
income

Six months ending June 30, 2016

       

Balance at December 31, 2015

   $38,598  $(3,856) $(762) $2  $33,982 

2017

         

Balance at December 31, 2016

  $43,176    $(5,268)   $(593)    $(17)    $  37,298

Other comprehensive income, net before reclassifications

   (1,971) (78) (5) (22) (2,076) 8,540   1,221  (64)   (7)   9,690

Reclassifications from accumulated other comprehensive income

   (1,180)  —    35  16  (1,129)

Reclassifications from accumulated other comprehensive income into net earnings

 (383   —      34   13    (336)
   

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Balance at June 30, 2016

   $35,447  $(3,934) $(732) $(4) $30,777 

Balance at June 30, 2017

  $51,333   $(4,047)   $(623)   $(11)    $46,652
   

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Reclassifications from other comprehensive income into net earnings:

       

Reclassifications into net earnings:

         

Investment gains/losses

   $(1,816) $—    $—    $ —    $(1,816)  $(589)   $—       $—      $ —      $(589)

Other

    —     —    51  35  86   —     —      45   24   69
   

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Reclassifications before income taxes

   (1,816)  —    51  35  (1,730) (589)   —      45   24   (520)

Applicable income taxes

   (636)  —    16  19  (601) (206)   —      11   11   (184)
   

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 
   $(1,180) $—    $35  $16  $(1,129)  $(383   $—       $34     $13    $(336)
   

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

2016

         

Balance at December 31, 2015

  $38,598    $(3,856)    $(762)    $2     $33,982 

Other comprehensive income, net before reclassifications

 (1,971  (78)  (5)   (22)    (2,076)

Reclassifications from accumulated other comprehensive income into net earnings

 (1,180   —      35   16     (1,129)
 

 

   

 

   

 

   

 

 

  

 

 

Balance at June 30, 2016

  $35,447    $(3,934)    $(732)    $(4)     $30,777 
 

 

   

 

   

 

   

 

 

  

 

 

Reclassifications into net earnings:

         

Investment gains/losses

  $(1,816)   $—       $—     $—    $(1,816)

Other

  —     —      51   35   86
 

 

   

 

   

 

   

 

 

  

 

 

Reclassifications before income taxes

 (1,816)   —      51  35   (1,730)

Applicable income taxes

 (636)   —      16  19   (601)
 

 

   

 

   

 

   

 

 

  

 

 
  $(1,180   $—        $35     $16    $ (1,129
 

 

   

 

   

 

   

 

 

  

 

 

22


Notes to Consolidated Financial Statements(Continued)

Note 19. Accumulated other comprehensive income(Continued)

   Unrealized
appreciation of
investments
 Foreign
currency
translation
 Prior service
and actuarial
gains/losses of
defined benefit
pension plans
   Other   Accumulated
other
comprehensive
income

Six months ending June 30, 2015

           

Balance at December 31, 2014

   $45,636   $(1,957)  $(1,039)  $92   $42,732 

Other comprehensive income, net before reclassifications

    (2,306)   (787)   (6)   (100)   (3,199)

Reclassifications from accumulated other comprehensive income

    (127)   —      8    3    (116)
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

   $43,203   $(2,744)  $(1,037)  $(5)  $39,417 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications from other comprehensive income into net earnings:

           

Investment gains/losses

   $(195)  $—     $ —     $—     $(195)

Other

    —      —      15    9    24 
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications before income taxes

    (195)   —      15    9    (171)

Applicable income taxes

    (68)   —      7    6    (55)
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $(127)  $—      8   $3   $(116)
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 20.21. Contingencies and Commitments

We are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.

In the third quarter of 2016, NICO entered into a definitive agreement to acquire Medical Liability Mutual Insurance Company (“MLMIC”), a writer of medical professional liability insurance domiciled in New York. MLMIC’s assets and policyholders’ surplus determined under statutory accounting principles as of March 31, 2017 were approximately $5.6 billion and $2.1 billion, respectively. The acquisition price will be an amount equal to the sum of: (i) the tangible book value of MLMIC at the closing date (determined under U.S. GAAP); plus (ii) $100 million. The acquisition will involve the conversion of MLMIC from a mutual company to a stock company. The closing of the transaction is subject to various regulatory approvals, customary closing conditions and the approval of the MLMIC policyholders eligible to vote on the proposed demutualization and sale. We currently expect this transaction will be completed in late 2017.

We own a 50% interest in a joint venture, Berkadia Commercial Mortgage LLC (“Berkadia”), with Leucadia National Corporation (“Leucadia”) 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 significant source of funding for Berkadia’s operations is through the issuance of commercial paper. Repayment of thepaper, which is limited to $1.5 billion. Berkadia’s commercial paper outstanding is supported by a surety policy issued by a Berkshire insurance subsidiary. Leucadia has agreed to indemnify us forone-half of any losses incurredwe incur under the policy. Berkadia’s maximum

On July 7, 2017, Berkshire Hathaway Energy Company (“BHE”) agreed to acquire 80.03% of the outstanding balanceequity interests of commercial paper borrowingsOncor Electric Delivery Company LLC (“Oncor”) for $9 billion pursuant to an agreement between BHE and Energy Future Holdings Corp. (“EFH”). Since April 2014, EFH and the substantial majority of its direct and indirect subsidiaries, excluding Oncor, have operated asdebtors-in-possession under the jurisdiction of the U.S. Bankruptcy Court and pursuant to Chapter 11 of the U.S. Bankruptcy Code.

Oncor is currently limiteda regulated electricity transmission and distribution company that operates the largest transmission and distribution system in Texas, delivering electricity to $1.5 billion. On June 30, 2016,more than 3.4 million homes and businesses and operating more than 122,000 miles of transmission and distribution lines. Texas Transmission Investment LLC owns 19.75% and certain Oncor directors, employees and retirees own the aggregate amountremaining 0.22% of Berkadia commercial paper outstanding was $1.47 billion.Oncor’s equity interests. BHE intends to acquire the remaining 19.97% minority interest positions in Oncor through transactions separate from the agreement with EFH.

The completion of this transaction is subject to numerous approvals, rulings and conditions, including those from the U.S. Bankruptcy Court, the Public Utility Commission of Texas and the Federal Energy Regulatory Commission (“FERC”), and the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Subject to obtaining the necessary approvals, we expect the transaction between BHE and EFH will close in the fourth quarter of 2017.

23


Notes to Consolidated Financial Statements(Continued)

 

Note 21.22. Business segment data

Our operating businesses include a large and diverse group of insurance, finance, manufacturing, service and retailing businesses. Our manufacturingreportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses include PCChave been grouped together for segment reporting based upon similar products or product lines, marketing, selling and Duracell, which were acquired in the first quarter of 2016.distribution characteristics, even though those business units are operated under separate local management. Revenues by segment for the second quarter and first six months of 2017 and 2016 were as follows (in millions).

 

  Second Quarter     First Six Months 
  2016  2015     2016     2015 

Operating Businesses:

          

Insurance group:

          

Underwriting:

          

GEICO

 $6,247     $5,619        $12,297       $11,004   

General Re

  1,389      1,494         2,779        2,992   

Berkshire Hathaway Reinsurance Group

  1,652      1,978         3,895        3,425   

Berkshire Hathaway Primary Group

  1,511      1,309         2,952        2,519   

Investment income

  1,236      1,338         2,385        2,428   
 

 

 

  

 

 

     

 

 

     

 

 

 

Total insurance group

  12,035      11,738         24,308        22,368   

BNSF

  4,585      5,369         9,352        10,971   

Berkshire Hathaway Energy

  4,299      4,543         8,417        8,874   

Manufacturing

  12,201      9,524         22,755        18,387   

McLane Company

  12,049      12,293         23,850        23,936   

Service and retailing

  6,385      6,294         12,276        10,815   

Finance and financial products

  1,989      1,799         3,715        3,353   
 

 

 

  

 

 

     

 

 

     

 

 

 
  53,543      51,560         104,673        98,704   

Reconciliation of segments to consolidated amount:

          

Investment and derivative gains/losses

  663      188         1,703        1,603   

Income from Kraft Heinz

  386      —         626        231   

Eliminations and other

  (132)     (380)        (139)       (526)  
 

 

 

  

 

 

     

 

 

     

 

 

 
 $        54,460     $        51,368        $        106,863       $        100,012   
 

 

 

  

 

 

     

 

 

     

 

 

 

Earnings before income taxes by segment were as follows (in millions).

  Second Quarter     First Six Months 
  2016  2015     2016     2015 

Operating Businesses:

          

Insurance group:

          

Underwriting:

          

GEICO

 $150       $53          $414       $213  

General Re

  2        107           44        60  

Berkshire Hathaway Reinsurance Group

  184        (411)          105        48  

Berkshire Hathaway Primary Group

  174        203           295        378  

Investment income

  1,235        1,334           2,377        2,421  
 

 

 

  

 

 

     

 

 

     

 

 

 

Total insurance group

  1,745        1,286           3,235        3,120  

BNSF

  1,238        1,536           2,496        3,208  

Berkshire Hathaway Energy

  666        649           1,235        1,245  

Manufacturing

  1,687        1,393           3,169        2,598  

McLane Company

  129        147           265        278  

Service and retailing

  457        498           781        882  

Finance and financial products

  583        550           1,061        994  
 

 

 

  

 

 

     

 

 

     

 

 

 
  6,505        6,059           12,242        12,325  

Reconciliation of segments to consolidated amount:

          

Investment and derivative gains/losses

  663        188           1,703        1,603  

Income from Kraft Heinz

  386        —           626        231  

Interest expense, not allocated to segments

  31        (189)          (317)       (308)  

Eliminations and other

  (213)       (212)          (426)       (358)  
 

 

 

  

 

 

     

 

 

     

 

 

 
 $        7,372       $        5,846          $        13,828       $        13,493  
 

 

 

  

 

 

     

 

 

     

 

 

 

24


  Second Quarter  First Six Months 
  2017  2016  2017  2016 

Operating Businesses:

    

Insurance group:

    

Underwriting:

    

GEICO

  $7,244     $6,247    $14,089     $12,297   

General Re

  1,578     1,389     2,969     2,779   

Berkshire Hathaway Reinsurance Group

  1,786     1,652     13,627     3,895   

Berkshire Hathaway Primary Group

  1,759     1,511     3,435     2,952   

Investment income

  1,284     1,236     2,416     2,385   
 

 

 

  

 

 

  

 

 

  

 

 

 

Total insurance group

  13,651     12,035     36,536     24,308   

BNSF

  5,250     4,585     10,435     9,352   

Berkshire Hathaway Energy

  4,623     4,299     8,880     8,417   

Manufacturing

  12,738     12,201     24,835     22,755   

McLane Company

  12,581     12,049     24,682     23,850   

Service and retailing

  6,550     6,385     12,643     12,276   

Finance and financial products

  2,033     1,989     3,898     3,715   
 

 

 

  

 

 

  

 

 

  

 

 

 
  57,426     53,543     121,909     104,673   

Reconciliation of segments to consolidated amount:

    

Investment and derivative gains/losses

  225     663     1,000     1,703   

Eliminations and other

  (133)    48     (204)    41   
 

 

 

  

 

 

  

 

 

  

 

 

 
  $            57,518      $            54,254     $            122,705     $            106,417   
 

 

 

  

 

 

  

 

 

  

 

 

 

Earnings before income taxes by segment were as follows (in millions).

 

  
  Second Quarter  First Six Months 
  2017  2016  2017  2016 

Operating Businesses:

    

Insurance group:

    

Underwriting:

    

GEICO

  $119    $150    $294    $414  

General Re

  25    2    (118)   44  

Berkshire Hathaway Reinsurance Group

  (400)   184    (1,000)   105  

Berkshire Hathaway Primary Group

  232    174    421    295  

Investment income

  1,283    1,235    2,412    2,377  
 

 

 

  

 

 

  

 

 

  

 

 

 

Total insurance group

  1,259    1,745    2,009    3,235  

BNSF

  1,537    1,238    2,882    2,496  

Berkshire Hathaway Energy

  670    666    1,285    1,235  

Manufacturing

  1,939    1,687    3,426    3,169  

McLane Company

  69    129    157    265  

Service and retailing

  555    457    948    781  

Finance and financial products

  508    583    974    1,061  
 

 

 

  

 

 

  

 

 

  

 

 

 
  6,537    6,505    11,681    12,242  

Reconciliation of segments to consolidated amount:

    

Investment and derivative gains/losses

  225    663    1,000    1,703  

Income from Kraft Heinz

  309    386    548    626  

Interest expense, not allocated to segments

  (646)   31    (857)   (317)  

Eliminations and other

  (296)   (213)   (555)   (426)  
 

 

 

  

 

 

  

 

 

  

 

 

 
  $              6,129    $              7,372    $              11,817    $              13,828  
 

 

 

  

 

 

  

 

 

  

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Net earnings attributable to Berkshire Hathaway shareholders are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests. Amounts are in millions.interests (in millions).

 

  Second Quarter First Six Months  Second Quarter First Six Months 
  2016   2015 2016   2015  2017 2016 2017 2016 

Insurance – underwriting

   $337      $(38  $550      $442      $(22)    $337    $(289)    $550  

Insurance – investment income

   978      977   1,897      1,852    965   978  1,873   1,897  

Railroad

   772      963   1,556      2,008    958   772  1,796   1,556  

Utilities and energy

   482      502   923      923    516   482  1,017   923  

Manufacturing, service and retailing

   1,493      1,309   2,759      2,432    1,662   1,493  2,979   2,759  

Finance and financial products

   396      370   707      659    332   396  635   707  

Investment and derivative gains/losses

   394      123   2,246      1,043    143   394  647   2,246  

Other

   149      (193 (48)     (182)   (292)  149  (336)  (48) 
  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Net earnings attributable to Berkshire Hathaway shareholders

   $  5,001      $  4,013    $  10,590      $  9,177      $    4,262     $    5,001    $    8,322     $  10,590  
  

 

   

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Through our subsidiaries, we engage in a number of diverse business activities. OurWe manage our operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by our corporate headquarters in theday-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshire’s corporate governance practices, including, but not limited to, communicating the appropriate “tone at the top” messages to its employees and associates, monitoring governance efforts, including those at the operating businesses, and participating in the resolution of governance-related issues as needed. The business segment data (Note 2122 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

Our insurance businesses generatedafter-tax losses from underwriting operationsin the second quarter and first six months of 2017. These losses included foreign currency exchange rate losses from the revaluation of reinsurance liabilities denominated in foreign currencies of $122 million in the second quarter and $196 million in the first six months of 2017. Ourafter-tax underwriting earnings in 2016 included foreign currency exchange rate gains of $185 million in the second quarter and $223 million in the first six months. Additionally, underwriting results in 2017 declined as compared to 2016 due to decreased earnings from there-estimation of ultimate liabilities for prior years’ loss events, higher losses from current year catastrophe events and increased deferred charge amortization on retroactive reinsurance contracts. Our railroad business generated increased netcomparative increases in earnings in the second quarter and first six months of 20162017 compared to 2015. The increases reflected variations in the foreign currency exchange gains/losses related to claim liabilities denominated in foreign currencies under certain Berkshire Hathaway Reinsurance Group retroactive reinsurance and periodic payment annuity contracts, as well as2016, reflecting increased underwriting gains from GEICO,unit volume, partly offset by lower gains from General Reincreased fuel and Berkshire Hathaway Primary Group operations.other costs. Our railroadutility and energy business generated significantly lower netproduced higher earnings in the second quarter and first six months of 20162017 compared to 2015, primarily due to a 7.5% year-to-date decline in unit volume. Net earnings2016, reflecting lower effective income tax rates. Earnings of our utilities and energy businesses were relatively unchanged in the second quarter and first six months of 2016 compared to 2015. Net earnings from our manufacturing, service and retailing businesses in 20162017 increased 14.1%11.3% in the second quarter and 13.4%8.0% in the first six months as compared to 2015, reflectingthe same periods in 2016. These increases reflected comparatively higher earnings from several of our larger operations and the impact of the PCCbusinesses acquired in 2016 (PCC and Duracell acquisitions,Duracell), partly offset by lower aggregate earnings fromlosses and impairment charges related to the other businesses within this group.disposition of a priorbolt-on acquisition by one of our manufacturing businesses.

After-tax investment and derivative gains in the second quarter and first six months of 2017 were $143 million and $647 million, respectively, and $394 million and $2.25 billion respectively, in the second quarter and first six months of 2016, compared to $123 million and $1.04 billion, respectively, in 2015. Gainsrespectively.After-tax investment gains in the first six months of 2016 included anon-cash after-tax gain of approximately $1.9 billion related to the exchange of P&G common stock for 100% of the common stock of Duracell. We believe that investment and derivative gains/losses are often meaningless in terms of understanding our reported results or evaluating our economic performance. Investment and derivative gains and losses have caused and will likely continue to cause significant volatility in our periodic earnings. Other earnings in 2017 are net ofafter-tax foreign currency exchange rate losses of $342 million in the second quarter and $399 million for the first six months from the revaluation of parent company Euro denominated notes payable. In 2016, other earnings includedafter-tax foreign currency exchange rate gains of $101 million in the second quarter and losses of $60 million in the first six months from the revaluation of Euro denominated notes payable.

Insurance—Underwriting

We engage in both primary insurance and reinsurance of property/casualty, life and health risks. In primary insurance activities, we assume defined portions of the risks of loss from persons or organizations that are directly subject to the risks. In reinsurance activities, we assume defined portions of similar or dissimilar risks that other insurers or reinsurers have subjected themselves to in their own insuring activities. Our insurance and reinsurance businesses are: (1)are disaggregated as follows: GEICO, (2) General Re, (3) Berkshire Hathaway Reinsurance Group (“BHRG”) and (4) Berkshire Hathaway Primary Group.

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Insurance—Underwriting(Continued)

 

Our management views insurance businesses as possessing two distinct operations – underwriting and investing. Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains.gains/losses.

The timing and amount of large property catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Our periodic underwriting results may be affected significantly by changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years. Actual claim settlements and revised loss estimates will develop over time. Unpaidtime and the unpaid loss estimates recorded as of the balance sheet date will develop upward or downward in future periods, producing a corresponding decrease or increase topre-tax earnings. VariationsOur periodic underwriting results may also include significant gains and losses arising from the changes in the valuation ofnon-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries as a result of foreign currency exchange rate fluctuations. Foreign currency exchange rates can producebe volatile and the resulting impact on our underwriting earnings can be relatively significant foreign currency exchange gains and losses in our periodic earnings with respect to non-U.S. dollar liabilities of our U.S.-based insurance subsidiaries.

A key marketing strategy of our insurance businesses is the maintenance of extraordinary capital strength. A measure of capital strength is combined shareholders’ equity determined pursuant to statutory accounting rules (“Statutory Surplus”). Statutory Surplus of our insurance businesses was approximately $124 billion at December 31, 2015. This superior capital strength creates opportunities, especially with respect to reinsurance activities, to negotiate and enter into insurance and reinsurance contracts specially designed to meet the unique needs of insurance and reinsurance buyers.significant. Underwriting results of our insurance businesses are summarized below. Amounts are in millions.

 

    Second Quarter     First Six Months   Second Quarter     First Six Months 
    2016     2015     2016     2015   2017   2016     2017   2016 

Underwriting gain (loss) attributable to:

                          

GEICO

     $150          $53          $414       $213     $119       $150          $294      $414 

General Re

     2          107          44       60     25      2         (118)    44 

Berkshire Hathaway Reinsurance Group

     184          (411)         105       48     (400)     184           (1,000)        105 

Berkshire Hathaway Primary Group

     174          203          295       378     232      174         421     295 
    

 

     

 

     

 

     

 

   

 

   

 

     

 

   

 

 

Pre-tax underwriting gain (loss)

     510          (48)         858       699     (24)     510         (403)    858 

Income taxes and noncontrolling interests

     173          (10)         308       257     (2)     173         (114)    308 
    

 

     

 

     

 

     

 

   

 

   

 

     

 

   

 

 

Net underwriting gain (loss)

     $   337          $   (38)         $   550       $   442     $     (22)      $  337          $(289)     $550 
    

 

     

 

     

 

     

 

   

 

   

 

     

 

   

 

 

GEICO

GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO’s policies are marketed mainly by direct response methods in which most customers apply for coverage directly to the company via the Internet or over the telephone. This is a significant element in our strategy to be a low-cost auto insurer. In addition, we strive to provide excellent service to customers, with the goal of establishing long-term customer relationships. GEICO’s underwriting results are summarized below. Dollars arebelow (dollars in millions.millions).

 

  Second Quarter   First Six Months  Second Quarter First Six Months 
  2016   2015   2016   2015  2017 2016 2017 2016 
  Amount   %   Amount   %   Amount   %   Amount   %  Amount % Amount % Amount % Amount % 

Premiums written

   $      6,229        $     5,591        $12,794        $    11,477       $7,270      $6,229      $  14,857      $  12,794    
  

 

     

 

     

 

     

 

    

 

   

 

   

 

   

 

  

Premiums earned

   $6,247      100.0       $5,619      100.0       $12,297      100.0       $    11,004      100.0      $  7,244      100.0     $6,247      100.0     $14,089      100.0    $12,297      100.0   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Losses and loss adjustment expenses

   5,173      82.8       4,699      83.6       9,996      81.3       9,015      81.9     6,108    84.3    5,173    82.8    11,698    83.0    9,996    81.3   

Underwriting expenses

   924      14.8       867      15.4       1,887      15.3      

 

1,776 

  

   16.1     1,017    14.1    924    14.8    2,097    14.9    1,887    15.3   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total losses and expenses

   6,097      97.6       5,566      99.0       11,883      96.6       10,791      98.0     7,125    98.4        6,097    97.6    13,795    97.9    11,883    96.6   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Pre-tax underwriting gain

   $150        $53        $414        $         213       $119      $150      $294      $414    
  

 

     

 

     

 

     

 

    

 

   

 

   

 

   

 

  

Premiums written in the second quarter and first six months of 2017 increased $1.0 billion (16.7%) and $2.1 billion (16.1%), respectively, compared to 2016. Over the past year, voluntary autopolicies-in-force grew approximately 10.2% and premiums per auto policy increased 5.0%. The increase in average premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. Voluntary auto new business sales in 2017 increased 17.8% in the second quarter and 24.1% in the first six months compared to the same periods in 2016. Voluntary autopolicies-in-force increased approximately 876,000 during the first six months of 2017. Premiums earned in 2017 increased 16.0% in the second quarter and 14.6% in the first six months compared to the same periods in 2016.

26


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Insurance—Underwriting(Continued)

 

GEICO (Continued)

 

Premiums written in the second quarter and first six months of 2016 were $6.2 billion and $12.8 billion, respectively, increases of 11.4% and 11.5%, respectively, compared to the second quarter and first six months of 2015. Premiums earned in 2016 increased $628 million (11.2%) in the second quarter and $1.3 billion (11.8%) in the first six months, as compared to the same periods in 2015. These increases reflected voluntary auto policy-in-force growth of 4.2% and increased average premiums per auto policy of approximately 7.1% over the past twelve months due to rate increases, coverage changes and state and risk mix. Throughout 2015, we experienced increases in claims frequencies and severities across all of our major coverages, which resulted in relatively significant increases in our loss ratios. As a result, we implemented premium rate increases where necessary. Voluntary auto new business sales in 2016 increased 4.2% in the second quarter and 1.9% in the first six months compared to 2015. The growth in voluntary auto new business sales accelerated in June and has continued in July. During the first six months of 2016, voluntary auto policies-in-force increased by approximately 394,000.

In the second quarter and first six months of 2016,2017, ourpre-tax underwriting gains were $150 million and $414 million, respectively, increases of $97 million and $201 million, respectively,declined compared to the same periods in 2015.2016, as claim costs grew faster than premiums earned. Losses and loss adjustment expenses incurred in 20162017 increased $474$935 million (10.1%(18.1%) in the second quarter and $981 million (10.9%$1.7 billion (17.0%) in the first six months as compared to 2015. In 2016, ourover the corresponding periods in 2016. Our loss ratio (the ratio of losses and loss adjustment expenses to earned premiums) declined 0.8increased 1.5 percentage points in the second quarter and 0.61.7 percentage points in the first six months of 2017 as compared to 2015, reflecting the impact of the aforementioned premium rate increases, partly offset by increased storm losses.2016. Claims frequencies (claim counts per exposure unit) in the first six months of 20162017 were relatively flat for property damage and collision coverages, decreased in the one to twoincreased approximately three percent range, which was primarily attributable to mild weather in the first quarter. Claim frequencies for bodily injury coverage and decreased about two percent for the first six months of 2016 were relatively unchanged from 2015.personal injury protection coverage compared to 2016. Average claims severities were higher in the first six months of 20162017 for physicalproperty damage and collision coverages (four to sixfive percent range) and bodily injury coverage (five(four to sevensix percent range). In addition, we experienced storm losses of approximately $290 millionLosses and loss adjustment expenses in the first six months of 2017 and 2016 compared to $124included reductions of $106 million and $216 million, respectively, from there-estimation of liabilities for prior years’ claims. In addition, in the first six months of 2015.2017, we incurred storm losses of approximately $268 million (1.9% of premiums earned), compared to $290 million (2.4% of premiums earned) in the first six months of 2016.

Underwriting expenses in the second quarter and first six months of 2016 were $9242017 increased $93 million and $1.9 billion, respectively, increases of $57 million (6.6%(10.1%) and $111$210 million (6.3%(11.1%), respectively, over 2015.compared to 2016. Our expense ratioratios (underwriting expenses to premiums earned) in 2017 declined 0.7 percentage points in the second quarter and 0.4 percentage points in the first six months of 2016 declined 0.6 and 0.8 percentage points, respectively, compared to 2015.2016. The largest components of underwriting expenses are employee-related expenses (salaries and benefits) and advertising costs. The increases in underwriting expenses reflect the increase in policies-in-force.

General Re

General Re conducts a reinsurance business offering property and casualty coverages to clients worldwide through General Reinsurance Corporation, Germany-based General Reinsurance AG, Faraday Holdings in London and other wholly-owned affiliates. We also write life and health coverages to clients worldwide. We write property and casualty reinsurance in North Americaprimarily on a direct basis through General Reinsurance Corporation and internationally through Germany-based General Reinsurance AG and other wholly-owned affiliates. Property and casualty reinsurance is also written in broker markets through Faraday in London. Life and health reinsurance is written in North America through General Re Life Corporation and internationally through General Reinsurance AG. General Re strivesWe strive to generate underwriting profits in essentially all of itsour product lines. Our management does not evaluate underwriting performance based upon market share and our underwriters are instructed to reject inadequately priced risks. General Re’s underwriting results are summarized in the following table. Amounts are in millions.table (in millions).

 

 Premiums earned Pre-tax underwriting gain (loss) 
 Premiums earned Pre-tax underwriting gain (loss)  Second Quarter First Six Months Second Quarter First Six Months 
 Second Quarter First Six Months Second Quarter First Six Months  2017 2016 2017 2016 2017 2016 2017 2016 
 

 

    2016    

 

     2015     

 

    2016    

 

      2015     

 

   2016   

 

     2015     

 

   2016   

 

   2015   

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Property/casualty

  $624     $706     $1,276     $1,436     $23        $88      $53    $74      $777        $  624        $1,431          $1,276      $  (14)     $23      $(157)   $53   

Life/health

 765    788    1,503    1,556    (21)      19     (9 (14  801      765      1,538      1,503      39    (21)   39    (9)  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
  $1,389     $1,494     $2,779     $2,992     $2        $107      $44    $60      $1,578        $1,389        $2,969          $2,779      $25      $2      $    (118)   $    44   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Property/casualty

In the second quarter and first six months of 2016,2017, property/casualty premiums written declined $23earned increased $153 million (5%(25%) and $214$155 million (13%), respectively, while premiums earned decreased $82 million (12%) and $160 million (11%), respectively, as compared to 2015. Adjusting for changes2016. The increases reflected higher written premiums in foreign currency exchange rates, premiums written in the second quarter and first six months of 2016 declined 4% and 11%, respectively, while premiums earned in the second quarter and first six months of 2016 declined 11% and 10%, respectively, compared to 2015. Our premium volume declined in both the direct and broker markets. Insurancemarkets, primarily attributable to new business and increased participations for renewals. Despite the increase in premiums in 2017, industry capacity dedicated to property and casualty markets remains high and price competition in most property/casualty reinsurance markets persists. We continue to decline business when we believe prices are inadequate. However,

Our property/casualty operations generatedpre-tax underwriting losses of $14 million in the second quarter and $157 million in the first six months of 2017 compared topre-tax underwriting gains of $23 million and $53 million, respectively, in the comparable 2016 periods. In the first six months of 2017, we remain preparedincreased our estimates for unpaid losses approximately $140 million with respect to write substantially morecertain United Kingdom (“U.K.”) liability business when more appropriate prices can be attained relativewritten in prior years. The increase was the result of the U.K. Ministry of Justice’s decision in the first quarter to reduce the risks assumed.fixed discount rate required in lump sum settlement calculations of U.K. personal injury claims. The discount rate, referred to as the Ogden rate, was reduced from 2.5% to negative 0.75%. We expect the Ogden rate decrease will significantly increase claim costs associated with currently unsettled cases, as well as for future cases. Underwriting results in the first six months of 2017 also included estimated losses of $50 million from a cyclone in Australia. General Re incurred no losses from significant catastrophe loss events in the first six months of 2016.

27


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Insurance—Underwriting(Continued)

 

General Re (Continued)

 

InLife/health

Life/health premiums earned in the second quarter and first six months of 2016, our property business generated 2017 increased $36 million (5%) and $35 million (2%), respectively, compared to 2016. The increases reflected growth in North America and certain international markets. Our life/health operations producedpre-tax underwriting gains of $23$39 million and $78 million, respectively, compared to gains of $104 million and $99 million, respectively, in 2015. The comparative decrease in second quarter underwriting gains was driven by a comparative increase in the current accident year loss ratio and lower gains from prior years’ business. Gains from reductions of estimated losses on prior years’ business were relatively unchanged in the first six months of 2016 as compared to 2015. While there were no significant losses from catastrophe events in the first six months of 2016 and 2015, the timing and magnitude of such losses can produce significant volatility in our periodic underwriting results.

Our casualty/workers’ compensation business produced a breakeven result in the second quarter and a first six months of 2017 compared topre-tax underwriting losslosses of $25$21 million in the second quarter and $9 million in the first six months of 2016. In 2015, this business produced pre-taxThe improved underwriting losses of $16 million in the second quarter and $25 million in the first six months. Underwriting results in 2017 reflected lower underwriting expenses and the first six monthsimpact of 2016 and 2015 included net losses on current year business, partially offset by gains from reductions of estimated losses on prior years’ business of $110 million in 2016 and $106 million in 2015. The gains from prior years’ business were net of recurring charges for discount accretion on workers’ compensation liabilities and deferred charge amortization on retroactive reinsurance contracts. Casualty losses tend to be long-tailed and it should not be assumed that favorable loss experience in a given period means that the ultimate liability estimates currently established will continue to develop favorably.

Life/health

In the second quarter and first six months of 2016, life/health premiums earned decreased $23 million (3%) and $53 million (3%), respectively, compared to 2015. Adjusting for changes in foreign currency exchange rates, premium volume in the first six months of 2016 was relatively unchanged from 2015. The life/health business produced pre-tax underwriting losses of $9 million in the first six months of 2016 compared to losses of $14 million in the first six months of 2015. Underwriting results in the first six months of 2016 and 2015 reflected underwriting gains from our international life business offset by losses from the periodic discount accretion on long-term care liabilities and higher than expected individual life claim frequency in North America. Additionally, our international underwriting results were adversely affected by increasedincreasing liabilities for estimated premium deficiencies on certain disability business in 2016. Underwriting results in the second quarterfirst six months of 2017 and 2016 includedpre-tax losses from the runoff of U.S. long-term care and foreign currency exchange losses in 2015.disability business of $38 million and $37 million, respectively, which were primarily due to the periodic discount accretion on long-term care liabilities.

Berkshire Hathaway Reinsurance Group

BHRG underwritesexcess-of-loss reinsurance and quota-share coverages on property and casualty risks for insurers and reinsurers worldwide, including property catastrophe insurance and reinsurance. The timing and magnitude of catastrophe losses can produce extraordinary volatility in the periodic underwriting results. BHRG also writes retroactive reinsurance on property/casualty exposures as well as life reinsurance and periodic payment annuity business. A summary of BHRG’s underwriting results are summarized in the table below. Amounts are in millions.follows (in millions).

  Premiums earned   Pre-tax underwriting gain (loss)  Premiums earned     Pre-tax underwriting gain (loss) 
  Second Quarter   First Six Months   Second Quarter   First Six Months  Second Quarter     First Six Months     Second Quarter     First Six Months 
  2016   2015   2016   2015   2016   2015   2016 2015  2017     2016     2017     2016     2017     2016     2017     2016 

Property/casualty

   $ 1,067     $911     $2,194     $1,827     $249        $15        $375    $422     $1,183         $1,067         $2,271         $2,194       $52        $249        $(217)       $375  

Retroactive reinsurance

           582         9        (283)      (82 (285 1        2        10,186        582      (331)            (590)      (82) 

Life and annuity

   583     1,064     1,119     1,595     (74)      (143)      (188 (89 602        583        1,170        1,119      (121)      (74)      (193)      (188) 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

 
   $1,652     $1,978     $ 3,895     $3,425     $   184        $(411)      $105    $48     $  1,786         $  1,652         $  13,627         $  3,895       $    (400)       $    184        $(1,000)       $105  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Property/casualty

Premiums written inIn the second quarter and first six months of 20162017, premiums earned increased $386$116 million (57%(11%) and $624$77 million (30%(4%), respectively, compared to 2015, while2016. Approximately half of our premiums written and earned increased $156 million (17%) and $367 million (20%), respectively. These increases were attributable to a quota-share contract with Insurance Australia Group Ltd., which became effective on July 1, 2015, partially offset by lower premiumsin the first six months of 2017 derived from property catastrophe and other property/casualty business.two contracts. Our premium volume is generallywas constrained for most property/casualtyreinsurance coverages, and for property catastrophe coverages in particular as rates, in our view, arewere generally inadequate. However, weWe have the capacity and desire to write more business when appropriate pricing can be obtained.prices are appropriate.

Our property/casualty business generatedpre-tax underwriting gains of $249 million and $375$52 million in the second quarter and first six months, respectively,pre-tax losses of 2016 compared to $15$217 million and $422 million, respectively, in 2015. The pre-tax underwriting gains in the first six months of 2017, compared topre-tax gains of $249 million in the second quarter and $375 million in the first six months of 2016. In the first six months of 2017, we incurred losses of approximately $250 million related to prior years’ loss events, which included losses from unanticipated reported claims from hurricane and earthquake events in 2016 and 2015 wereincreased liability estimates attributable to the Ogden discount rate decrease. In the first six months of 2016, we reduced estimated ultimate liabilities for prior years’ loss events by approximately $375 million, primarily due to reductionslower than expected reported losses. In the first six months of 2017, we also incurred estimated losses of approximately $115 million from a cyclone in Australia. In the first six months of 2016, we incurred no significant losses from catastrophe loss events.

Retroactive reinsurance

We periodically write retroactive reinsurance contracts, which provide indemnification of losses and loss adjustment expenses with respect to past loss events. In January 2017, NICO entered into an aggregateexcess-of-loss retroactive reinsurance agreement with AIG (the “AIG Agreement”) that became effective on prior years’ business.February 2, 2017. In connection with the AIG Agreement, we received cash premiums of $10.2 billion. As of the effective date, we recorded losses and loss adjustment expenses incurred of $10.2 billion, representing our initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by a deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on ourpre-tax underwriting results. See Note 16 to the accompanying Consolidated Financial Statements.

Pre-tax underwriting results in 2017 included losses of $102 million in the second quarter and $191 million in the first six months from changes in foreign currency exchange rates, which increased foreign currency denominated liabilities of U.S subsidiaries. In 2016, foreign currency exchange rate changes reduced such liabilities and resulted inpre-tax gains of $158 million in the second quarter and $177 million in the first six months.

28


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Insurance—Underwriting(Continued)

 

Berkshire Hathaway Reinsurance Group (Continued)

 

Retroactive reinsurance (Continued)

Retroactive reinsurance contracts provide indemnification of losses and loss adjustment expenses with respect to past loss events, and related claims are generally expected to be paid over long periods of time. At the inception of a contract, deferred charge assets are recorded for the excess, if any, of the estimated ultimate losses payable over the premiums earned. Deferred charges are subsequently amortized over the estimated claims payment period based on estimates of the timing and amount of future loss payments. The original estimates of the timing and amount of loss payments are periodically analyzed against actual experience and revised based on an actuarial evaluation of the expected remaining losses. Amortization charges and deferred charge adjustments resulting from changes to the estimated timing and amount of future loss payments are included in periodic earnings.

Pre-tax underwriting results from retroactive reinsurance contracts include deferred charge amortization and foreign currency transaction gains/losses associated with foreign currency denominated liabilities of U.S.-based subsidiaries. In 2016, foreign currency gains were $158 million in the second quarter and $177 million in the first six months. In 2015, foreign currency losses were $152 million in the second quarter and $28 million in the first six months. Before foreign currency gains/losses, retroactive reinsurance contracts producedpre-tax losses in the first six months of $259 million in 2016 and $257 million in 2015, which were primarily from recurring periodic deferred charge amortization. Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $24.0 billion at June 30, 2016 and $23.7 billion at December 31, 2015. Unamortized deferred charges related to such reinsurance contracts were approximately $7.6 billion as of June 30, 2016 and December 31, 2015. As previously stated, the amortization of deferred charge balances will be charged to earnings in the future.

Life and annuity

BHRG’s life and annuity underwriting results are summarized as follows (in millions).

   Premiums earned   Pre-tax underwriting gain (loss) 
   Second Quarter   First Six Months   Second Quarter  First Six Months 
   2016   2015   2016   2015   2016   2015  2016   2015 

Periodic payment annuity

   $    195     $    674       $    404       $    867     $     $    (163  $(62)        $    (153)  

Life reinsurance

   383     385       706       718          (59  14         (68)  

Variable annuity guarantee

   5     5       9       10     (85)     79    (140)        132   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 
   $583     $1,064       $  1,119       $    1,595     $    (74)     $(143  $    (188)        $(89)  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

   

 

 

 

Premiums earned in 2016 from periodic payment annuity contracts declined $479 million (71%) in the second quarter and $463 million (53%) in the first six months compared to the same periods in 2015. The comparative declines were primarily due to a sizable annuity reinsurance contract written in the second quarter of 2015. There were no such reinsurance contracts written in 2016. Periodic payment annuity contracts generated pre-tax underwriting gains of $8 million in the second quarter and losses of $62 million in the first six months of 2016. In 2015, this business produced pre-tax losses of $163 million in the second quarter and $153 million in the first six months. Before the impact of foreign currency exchange rate changes on foreign currency denominated liabilities of U.S.-based subsidiaries, annuity contracts produced pre-tax underwriting losses of $118$229 million and $228$399 million in the second quarter and first six months of 2017, respectively, of 2016 compared to losses of $72and $149 million and $146$259 million, respectively, in 2015. This business is expectedthe comparable 2016 periods. The comparative increases in such losses in 2017 were primarily due to generate underwriting losses attributabledeferred charge amortization related to the recurring accretionAIG Agreement and another retroactive reinsurance contract written in December 2016, partly offset by a small net gain from a contract commuted in the first quarter of discounted annuity liabilities. The increases in underwriting2017 and comparatively lower deferred charge amortization from other contracts. We currently estimatepre-tax deferred charge amortization for the year ending December 31, 2017 will approximate $975 million, which includes the aforementioned AIG Agreement.

Liabilities for losses in 2016 compared to 2015 reflected increased liabilities from new business written over the past year and the impact of lower interest rates which increased expected future loss payments under certainadjustment expenses associated with our retroactive reinsurance contracts. Aggregate annuity liabilitiescontracts were approximately $9.1$40.1 billion at June 30, 20162017 and $8.7$24.7 billion at December 31, 2015.2016. Unamortized deferred charges related to these contracts were approximately $13.5 billion at June 30, 2017 and $8.0 billion at December 31, 2016.

InLife and annuity

A summary of BHRG’s life and annuity underwriting results follows (in millions).

  Premiums earned  Pre-tax underwriting gain (loss) 
  Second Quarter  First Six Months  Second Quarter  First Six Months 
  2017  2016  2017  2016  2017  2016  2017  2016 

Periodic payment annuity

   $230    $195      $450      $404      $(198)    $8       $(343)    $(62) 

Life reinsurance

          368   383     712     706        3      (2)   14  

Variable annuity guarantee

  4   5     8     9     74    (85)     152    (140) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   $602    $        583      $        1,170      $        1,119      $        (121)    $        (74)      $        (193)    $        (188) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Periodic payment annuity premiums consist of upfront consideration received under direct and assumed contracts that provide for structured settlement annuity payments, typically over very long periods.Pre-tax underwriting losses in 2017 included losses of $86 million in the second quarter and $110 million in the first six months from changes in foreign currency exchange rates. In 2016, foreign currency exchange rate changes resulted inpre-tax gains of $126 million in the second quarter and $166 million in the first six months.

Before foreign currency gains and losses,pre-tax underwriting losses from periodic payment annuity contracts were $112 million in the second quarter and $233 million in the first six months of 2016, life reinsurance premiums were relatively unchanged compared to 2015. The life reinsurance business produced underwriting gains of $32017 and $118 million and $14$228 million, respectively, in the second quarter and first six months of 2016. We expect these contracts will generatepre-tax underwriting losses over time attributable to the accretion of discounted annuity liabilities. Discounted periodic payment annuity liabilities were approximately $10.6 billion at June 30, 2017, reflecting a weighted average interest rate of approximately 4.1%.

Our underwriting results in 2017 from life reinsurance included higher than expected mortality, partially offset by decreased benefit liabilities for certain blocks of business. Underwriting gains in 2016 reflectingreflected lower claims and underwriting expenses.

Underwriting lossesresults of our variable annuity business (reinsurance contracts that provide guarantees on closed blocks of variable annuity business) in the second quarter and first six months of 2015 included 2017 producedpre-tax underwriting gains of $74 million and $152 million, respectively, andpre-tax underwriting losses of $53$85 million in connection with business terminatedand $140 million, respectively, in the second quarter.corresponding periods of 2016. Underwriting gains and losses in each period reflected changes in liabilities for guaranteed benefits, resulting from changes in securities markets and interest rates and from the periodic recognition of expected profit margins, which together, affected our liability estimates. Our estimated liabilities for variable annuity guarantees were approximately $1.9 billion at June 30, 2017 and $2.1 billion at December 31, 2016. Periodic underwriting results from these contracts can be volatile reflecting the volatility of securities markets.

Berkshire Hathaway Primary Group

29The Berkshire Hathaway Primary Group (“BH Primary”) consists of a wide variety of independently managed insurance underwriting businesses that primarily provide a variety of commercial insurance products, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers include the MedPro Group, National Indemnity Company (“NICO Primary”), Berkshire Hathaway Homestate


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Insurance—Underwriting(Continued)

 

Berkshire Hathaway Reinsurance Group (Continued)

Our variable annuity business primarily consists of contracts that provide guarantees on closed blocks of variable annuity business written by other insurers. The periodic underwriting gains and losses in each period reflect the impacts of changes in equity markets and interest rates which produce increases or decreases in estimated liabilities for guaranteed minimum benefits. Periodic results from these contracts can be volatile reflecting changes in investment market conditions, which impact the underlying insured exposures. In the first six months of 2016, the pre-tax underwriting losses were primarily due to lower interest rates, which resulted in increased estimated liabilities. In the first six months of 2015, pre-tax underwriting gains were primarily due to rising equity markets and interest rates, which resulted in lower estimated liabilities.

Berkshire Hathaway Primary Group

The Berkshire Hathaway Primary Group (“BH Primary”) consists of several independently managed insurance businesses. These businesses include: MedPro Group, providers of healthcare malpractice insurance coverages; National Indemnity Company’s primary group (“NICO Primary”), writers of commercial motor vehicle and general liability coverages; U.S. Investment Corporation, whose subsidiaries underwrite specialty insurance coverages; a group of companies referred to as Berkshire Hathaway Homestate Companies (“BHHC”), providers of commercial multi-line insurance, including workers’ compensation; Berkshire Hathaway Specialty Insurance (“BH Specialty”), which concentrates on providing large scale insurance solutions for commercial property and casualty risks; Applied Underwriters, a provider of integrated workers’ compensation solutions; Berkshire Hathaway GUARD Insurance Companies (“GUARD”), providers of workers’ compensation and commercial property and casualty insurance coverage to small and mid-sized businesses;. Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company,Company. A summary of BH Primary’s underwriting results follows (dollars in millions).

  Second Quarter  First Six Months 
  2017  2016  2017  2016 
  Amount  %  Amount  %  Amount  %  Amount  % 

Premiums written

   $      1,801       $      1,654       $      3,650       $      3,223    
 

 

 

   

 

 

   

 

 

   

 

 

  

Premiums earned

   $1,759       100.0      $1,511       100.0      $3,435       100.0      $2,952       100.0   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Losses and loss adjustment expenses

  1,047     59.5     921     61.0     2,084     60.7     1,832     62.1   

Underwriting expenses

  480     27.3     416     27.5     930     27.0     825     27.9   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total losses and expenses

  1,527     86.8     1,337     88.5     3,014     87.7     2,657     90.0   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Pre-tax underwriting gain

   $232       $174       $421       $295    
 

 

 

   

 

 

   

 

 

   

 

 

  

Premiums written in the second quarter and first six months in 2017 increased 8.9% and 13.2%, respectively, over the same periods in 2016. All of the BH Primary insurers generated increased premiums written in the first six months of 2017, led by BH Specialty (23%), GUARD (28%) and BHHC (11%). Premiums earned increased $248 million (16.4%) in the second quarter and $483 million (16.4%) in the first six months as compared to 2016 reflecting the increases in premiums written.

The BH Primary insurers producedpre-tax underwriting gains of $232 million in the second quarter and $421 million in the first six months of 2017. Losses and loss adjustment expenses for the first six months of 2017 included net reductions of estimated ultimate liabilities for prior years’ loss events of $426 million, which produced a provider of credit and Medicare Supplement insurance.

Premiums earnedcorresponding increase inpre-tax underwriting gains. Underwriting results in the first six months of 2016 were $2.95 billion compared to $2.52 billion in 2015. The increase in premiums was primarily attributable to volume increases from BH Specialty, MedPro Group, BHHC and GUARD. The BH Primary insurers produced aggregate pre-tax underwritingincluded gains of $295$236 million infrom the first six monthsnet reductions of 2016 and $378 million in 2015. Combined loss ratios were 62% inestimated ultimate claims liabilities for prior years’ events. The gains from the first six months of 2016 and 58% in 2015. The comparative increase in the first six months of 2016 loss ratio reflected comparative declines in favorable loss development of prior years’ loss events, partly offset by improved underwriting results on current yearclaim estimates in 2017 were primarily attributable to healthcare malpractice and workers’ compensation business. Our primary insurersMany of our businesses write considerable amounts ofprimarily liability and workers’ compensation business and the related claim costs may be subject to higher severity and longer-claims tails, which can have extended claim tails. It should not be assumed that the current claim experiencemay contribute to significant claims development gains or underwriting results will continue intolosses in the future.

Insurance—Investment Income

A summary of net investment income generated by investments held by our insurance operations follows. Amounts are in millions.follows (in millions).

 

 Second Quarter First Six Months  Second Quarter First Six Months 
 2016 2015 2016 2015  2017 2016 2017 2016 

Interest income

  $214      $234      $444    $454     $280      $214      $526     $444  

Dividend income

 1,021     1,100     1,933   1,967   1,003    1,021    1,886   1,933  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Investment income before income taxes and noncontrolling interests

 1,235     1,334     2,377   2,421   1,283    1,235    2,412   2,377  

Income taxes and noncontrolling interests

 257     357     480   569   318    257    539   480  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net investment income

  $978      $977      $ 1,897    $1,852     $    965      $978      $1,873    $1,897  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Pre-tax investment income in the second quarter and first six months of 2016 declined $992017 increased $48 million (7%(4%) and $44$35 million (2%(1%), respectively, from 2015, due primarily to lower dividends from foreign issuers as a result of investment dispositionsthe same periods in 2015,2016. These increases reflected increased interest income, partly offset by increased dividends from domestic issuers.lower dividend income. We continue to hold significant amounts of cash and cash equivalent balancesequivalents and U.S. Treasury Bills earning very low yields. While still historically low, the yields were higher in 2017 than in 2016. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to such balances. The decrease in dividends in 2017 reflected Dow Chemical Company’s redemption of our $3 billion investment in 8.5% preferred stock in December 2016, partly offset by increased dividend income from investments in other equity securities attributable to increased dividend rates of certain issuers and increased overall investment levels.

Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance contracts or “float.” The major components of float are unpaid losses, life, annuity and health benefit liabilities, unearned premiums and other liabilities to policyholders less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $90$107 billion at June 30, 20162017 and $88$91 billion at December 31, 2015.2016. The increase in float in 2017 was primarily attributable to the AIG Agreement. Our average cost of float was negativeapproximately 0.4% in the first six months of 2017, as our insurance businesses overallwe generated an aggregatepre-tax underwriting gains in each period.loss of $403 million.

30


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Insurance—Investment Income(Continued)

 

A summary of cash and investments held in our insurance businesses follows. Amounts are in millions.follows (in millions).

 

  June 30,
2016
   December 31,
2015
   June 30,
2017
   December 31,
2016
 

Cash and cash equivalents

   $44,986       $43,762    

Cash and cash equivalents and U.S. Treasury Bills

    $60,198       $48,888   

Equity securities

   102,017       109,607       134,525      119,780   

Fixed maturity securities

   23,141       23,621       22,696      22,778   

Other investments

   14,487       15,998       16,838      14,364   
  

 

   

 

   

 

   

 

 
   $  184,631       $  192,988        $234,257       $205,810   
  

 

   

 

   

 

   

 

 

Fixed maturity investmentssecurities as of June 30, 20162017 were as follows. Amounts are in millions.follows (in millions).

 

  Amortized
cost
   Unrealized
gains/losses
   Carrying
value
   Amortized
cost
   Unrealized
gains(losses)
   Carrying
value
 

U.S. Treasury, U.S. government corporations and agencies

   $3,498     $25     $3,523      $4,444     $(7)     $4,437 

States, municipalities and political subdivisions

   1,224     64     1,288     1,022    52     1,074 

Foreign governments

   9,398     309     9,707     8,724    196     8,920 

Corporate bonds, investment grade

   5,277     493     5,770     5,715    441     6,156 

Corporate bonds, non-investment grade

   1,439     252     1,691     989    219     1,208 

Mortgage-backed securities

   1,002     160     1,162     793    108     901 
  

 

   

 

   

 

   

 

   

 

   

 

 
   $  21,838     $      1,303     $23,141      $21,687     $    1,009      $22,696 
  

 

   

 

   

 

   

 

   

 

   

 

 

U.S. government obligations are rated AA+ or Aaa by the major rating agencies and approximately 88% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher. higher by the major rating agencies.Non-investment grade securities represent securities that are rated belowBBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.

Railroad (“Burlington Northern Santa Fe”)

Burlington Northern Santa Fe, LLC (“BNSF”) operates one of the largest railroad systems in North America. BNSF operates approximately 32,500 route miles of track in 28 states. BNSF also operatesstates, as well as in three Canadian provinces. BNSF’s major business groups are classified by type of product shipped and include consumer products, coal, industrial products and agricultural products and coal. Earningsproducts. A summary of BNSF are summarized belowBNSF’s earnings follows (in millions).

 

  Second Quarter   First Six Months   Second Quarter First Six Months 
  2016   2015   2016   2015   2017   2016 2017   2016 

Revenues

   $  4,585       $  5,369       $  9,352     $  10,971      $5,250       $4,585      $  10,435     $    9,352   
  

 

   

 

  

 

   

 

 
  

 

   

 

   

 

   

 

 

Operating expenses:

               

Compensation and benefits

   1,134       1,268       2,342     2,606     1,242      1,134    2,525    2,342   

Fuel

   431       697       826     1,410     577      431    1,182    826   

Purchased services

   589       628       1,227     1,276     609      589    1,235    1,227   

Depreciation and amortization

   530       489       1,050     985     592      530    1,165    1,050   

Equipment rents, materials and other

   414       523       917     1,041     437      414    938    917   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Total operating expenses

   3,098       3,605       6,362     7,318         3,457      3,098    7,045    6,362   

Interest expense

   249       228       494     445     256      249    508    494   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 
   3,347       3,833       6,856     7,763     3,713      3,347    7,553    6,856   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Pre-tax earnings

   1,238       1,536       2,496     3,208     1,537      1,238    2,882    2,496   

Income taxes

   466       573       940     1,200     579      466    1,086    940   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Net earnings

   $772       $963       $1,556     $2,008      $958       $    772      $1,796     $1,556   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

31


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Railroad (“Burlington Northern Santa Fe”)(Continued)

 

Consolidated revenues in the second quarter and first six months of 20162017 were approximately $4.6$5.3 billion and $9.4$10.4 billion, respectively, representing decreasesincreases of $784$665 million (14.6%(14.5%) and $1.6 billion (14.8%$1,083 million (11.6%), respectively, versus the corresponding periods in 2015. 2016.Pre-tax earnings in the second quarter and first six months of 2016 declined 19.4%2017 increased 24.2% and 22.2%15.5%, respectively, compared to the same periods in 2015. In 2016, our revenues and earnings were negatively impacted by lower volumes, particularly in the coal and petroleum products categories. Our system velocity and on-time performance continued to improve.2016.

In the first six months of 2016,2017, revenues reflected a 4.1% comparative declinesincrease in average revenue per car/unit (8.3%) and a 7.6% increase in volumes (7.5%).volume. Ouryear-to-date volume was 5.0 million cars/units compared to 4.7 million in 2016. We currently expect our overall volume growth will moderate in the second half of 2017 compared to the growth experienced in the first six months of 2017. The decreaseincrease in average revenue per car/unit was primarily attributable to lowerhigher fuel surcharge revenue driven by lower fuel prices and to business mix changes, partially offset byas well as increased raterates per car/unit. The fuel price impact on fuel surcharges generally lags its impact on fuel costs. The impact

Freight revenues from this timing difference resultedconsumer products in a decline2017 were $1.7 billion in earnings compared tothe second quarter and $3.4 billion in the first six months, representing increases of 2015 because the price8.4% and 8.6%, respectively, compared to 2016. The revenue increases reflected volume increases of fuel declined more significantly5.8% in 2015.

In the second quarter and 5.7% in the first six months as well as higher average revenue per car/unit. The volume increases were primarily attributable to higher market share, improving economic conditions, and normalizing of 2016, freightretail inventories, which benefited domestic intermodal, international intermodal and automotive volumes.

Freight revenues from industrial products in 2017 were $1.2$1.3 billion in the second quarter and $2.4$2.5 billion respectively, which decreased 14.3%for the first six months, or increases of 7.4% and 16.1%5.7%, respectively, from the comparable 20152016 periods. The decreases reflected lower volumes (5.2%increases were attributable to higher average revenue per car/unit, as well as volume increases of 4.1% in the second quarter and 7.2%2.3% in the first six months), primarilymonths. Volumes in 2017 were higher for petroleum productsminerals, steel and other commodities that support domestic drilling which reflectsactivity as well as higher taconite, partly offset by lower petroleum products volume, due to pipeline displacement of U.S. crude rail traffic, and lower U.S. production. In addition, we experienced lower demand for taconite and steel products, partly offset by increased movements of non-owned rail equipment and increased plastics products volume. With oil at low production levels, along with pipeline displacement, we expect comparative volume declines in petroleum-related categories for the remainder of 2016.

Freight revenues in 2016 from agricultural products decreased 1.7%in 2017 increased 18.0% in the second quarter to $0.9$1.1 billion and decreased 6.4%increased 11.4% to $2.0$2.2 billion in the first six months compared to the same periods in 2015.2016. The decreases were primarily attributable to lower averagerevenue growth reflected higher volumes, 14.5% in the second quarter and 7.8% for the first six months, as well as higher revenue per car, partly offset bycar/unit. The volume increases. Volumes increasedgrowth in 2017 was primarily due to higher grain exports.

Freight revenues in 2016 from coal declined 41.6%in 2017 increased 39.2% in the second quarter to $0.7 billion$912 million and 40.0%30.5% in the first six months to $1.4$1.9 billion compared to the same periods2016. The increase in 2015. Coalrevenues reflected higher volumes, declined 33.4% in the first six months of 2016. In recent years demand for coal by utilities has declined, as other fuel sources, particularly natural gas, have increased. Coal volumes in 2015 also benefitted from higher demand in the early part of the year as utility customers restocked coal inventories. Utility coal inventories remain relatively high and natural gas prices are relatively low, so we expect declines in coal volume over the remainder of 2016.

Freight revenues from consumer products20.7% in the second quarter of 2016 were $1.6 billion, a decline of 5.3% from 2015, reflecting a 3.5% decline in volume and lower19.5%year-to-date, as well as higher average revenue per car/unit. The volume reduction was primarilyincreases in 2017 were due to lower intermodal volume,mild winter weather in the first quarter of 2016 and higher natural gas prices in the first half of 2017. Together, these factors led to increased utility coal usage in 2017, which we attribute to soft economic activity and excess retail inventories, partiallywere partly offset by increased automotive volumes due to the additioneffects of a new automotive customer. Revenues for the first six monthsunit retirements of 2016 were $3.2 billion, a decline of 1.5% from 2015, as lower average revenue per car/unit more than offset a 2.3% increase in volume. The comparative year-to-date increase in volumes was primarily due to increases in the domestic intermodal and automotive categories.coal generating facilities.

Operating expenses in the second quarter and first six months of 20162017 were $3.1$3.5 billion and $6.4$7.0 billion, respectively, representing decreasesincreases of $507$359 million (14.1%(11.6%) and $956$683 million (13.1%(10.7%), respectively, compared to the same periods in 2015.2016. Our ratios of operating expenses to revenues in 2016 increased 0.5decreased 1.7 percentage points to 67.6%65.8% in the second quarter and 1.30.5 percentage points to 68.0%67.5% for the first six months of 2017 versus the corresponding 20152016 periods.

Compensation and benefits expenses in 2016 decreased $134increased $108 million (10.6%(9.5%) for the second quarter and $264$183 million (10.1%(7.8%) for the first six months as compared to 2015.2016. The declinesincreases were primarily due to lower employment levels in response to decreased volumeshigher health and productivity improvements, partially offset bywelfare costs, wage inflation.inflation and volume-related increases. Fuel expenses in 2016 declined $266increased $146 million (38.2%(33.9%infor the second quarter and $584$356 million (41.4%(43.1%) infor the first six months compared to 2016, due to significantly lowerhigher average fuel prices and lower volumes.increased volumes, partially offset by improved efficiency. Depreciation and amortization expense in 2016 increased 8.4% in$62 million (11.7%) for the second quarter and 6.6% in$115 million (11.0%) for the first six months as compared to 2015,2016 due to increaseda larger base of depreciable assets in service reflecting our ongoing capital additions and improvement programs. In the second quarter and first six months of 2016, equipment rents, materials and other expense declined $109 million (20.8%) and $124 million (11.9%), respectively, compared to the same periods of 2015, as a result of lower volumes and productivity improvements in both periods, as well as, lower derailment and other casualty related costs in the six-month period.

Interest expense in the second quarter and first six months of 2016 was $249 million and $494 million, respectively, increases of $21 million (9.2%) and $49 million (11.0%), respectively, compared to 2015. BNSF funds its capital expenditures with cash flow from operations and new debt issuances. The increased interest expense in 2016 resulted from higher average outstanding debt.

32


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

service.

Utilities and Energy (“Berkshire Hathaway Energy Company”)

We hold an 89.9%a 90.2% ownership interest in Berkshire Hathaway Energy Company (“BHE”), which operates an internationala global energy business. BHE’s domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (“MEC”), and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include AltaLink, L.P. (“AltaLink”), a regulated electricity transmission-only business in Alberta, Canada and a diversified portfolio of independent power projects. In addition, BHE also operates the second-largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)

The rates our regulated businesses charge customers for energy and services are based, in large part, on the costs of business operations, including a return on capital, and are subject to regulatory approval. To the extent these operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. Revenues and earnings of BHE are summarized below. Amounts are in millions.below (in millions).

 

 Second Quarter   First Six Months  Second Quarter First Six Months 
 Revenues   Earnings   Revenues   Earnings  Revenues Earnings Revenues Earnings 
 2016   2015   2016   2015   2016   2015   2016   2015  2017 2016 2017 2016 2017 2016 2017 2016 

PacifiCorp

  $  1,243        $  1,282      $    258     $    248     $ 2,507        $  2,545       $502       $    445       $1,256        $1,243      $258      $258      $2,548      $2,507      $523      $502   

MidAmerican Energy Company

 593        583      95     73     1,225        1,332       148       147     669      593    90    95    1,377    1,225    152    148   

NV Energy

 714        842      118     120     1,338        1,558       150       189     761      714    141    118    1,355    1,338    192    150   

Northern Powergrid

 250        264      92     97     529        588       217       257     220      250    64    92    465    529    167    217   

Natural gas pipelines

 189        211      49     40     505        545       229       225     190      189    43    49    508    505    243    229   

Other energy businesses

 466        601      78     111     974        1,096       132       150     568      466    72    78    1,081    974    113    132   

Real estate brokerage

 844        760      95     87     1,339        1,210       98       86     959      844    113    95    1,546    1,339    116    98   
 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
  $4,299        $4,543          $8,417        $8,874           $  4,623        $     4,299        $  8,880      $     8,417     
 

 

   

 

       

 

   

 

      

 

  

 

    

 

  

 

   

Earnings before corporate interest and income taxes (“EBIT”)

Earnings before corporate interest and income taxes (“EBIT”)

  

   785     776         1,476       1,499    

Earnings before corporate interest and income taxes (“EBIT”)

 

        781           785        1,506      1,476   

Corporate interest

Corporate interest

  

   119     127         241       254    

Corporate interest

 

 111    119      221    241   

Income taxes and noncontrolling interests

Income taxes and noncontrolling interests

  

   184     147         312       322    

Income taxes and noncontrolling interests

 

 154    184      268    312   
  

 

   

 

       

 

   

 

  

 

  

 

    

 

  

 

 

Net earnings attributable to Berkshire Hathaway shareholders

Net earnings attributable to Berkshire Hathaway shareholders

  

   $482     $502         $923       $923    

Net earnings attributable to Berkshire Hathaway shareholders

 

   $516      $482        $1,017      $923   
  

 

   

 

       

 

   

 

  

 

  

 

    

 

  

 

 

PacifiCorp

PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. PacifiCorp’s revenuesRevenues in the second quarter and first six months of 2016 were $1.24 billion and $2.51 billion, respectively, decreases of $392017 increased $13 million (3%(1%) and $38$41 million (1%(2%), respectively, from 2015. Revenues in 2016 reflected lower average retail customer loads and wholesale volumes, partially offset by higher retail rates. EBIT incompared with 2016. In the second quarter and first six months of 2017, wholesale and other revenues increased due to higher volumes and average rates. In the second quarter of 2017, retail revenues declined slightly and for the first six months increased $14 million, due to higher volumes, partly offset by lower average rates.

EBIT in the second quarter of 2017 was unchanged from 2016, as a slight increase in gross margins and lower operations and maintenance expenses were $258 millionsubstantially offset by increased depreciation and $502 million, respectively, increases of $10amortization expense. EBIT increased $21 million (4%) and $57 million (13%), respectively, fromin the same periodsfirst six months of 2015.2017, as compared to 2016. The increases werecomparative increase in EBIT was primarily due to increasedan increase in gross margins as energy costs declined more than revenues. The declines in energy costs were primarily attributable to($18 million) and lower fuel pricesoperations and changes in fuel mix.maintenance expenses ($22 million), partially offset by increased depreciation, amortization and property tax expenses ($18 million).

MidAmerican Energy Company

MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in 2016 increased $10 million (2%) in the second quarter and declined $107of 2017 increased $76 million (8%(13%) in the first six months as compared to the same periods in 2015.2016. The revenue increase in the second quarter was primarily due to higherincreases in electric operating revenues ($2056 million), partly offset by lower natural gas revenues. The increase in second quarter electric revenues resulted primarily from increased retail customer load, partly offset by lowerdue principally to higher wholesale volume. The decline in revenues for the first six months included lowervolumes and rates, and natural gas revenues ($7718 million) and lower electric and other revenues. The decline in natural gas revenues was primarily due to lowerhigher averageper-unit cost of gas sold ($62 million) which is offset(offset in cost of sales, and lower volumes.sales). EBIT in the second quarter of 2016 were $952017 decreased $5 million an increase of $22 million (30%(5%overcompared to 2016. Although revenues and gross margin dollars increased in the second quarter, average gross margin percentages declined due to higher coal-fueled generation and purchased power costs. In addition, in the second quarter of 2015.2017, operating expenses increased $42 million compared to 2016, which included an increase in depreciation and amortization expense of $31 million attributable to higher regulatory provisions and increased assets in service.

Revenues in the first six months of 2017 increased $152 million (12%) compared to 2016. The increase reflected increases in electric operating revenues ($90 million) and natural gas operating revenues ($54 million). The increase in electric revenues was attributable to higher wholesale and other revenue ($67 million), substantially due to higher wholesale volumes and average rates, and increased retail revenues ($23 million). The increase in retail revenues reflected increased recoveries through bill riders (which are substantially offset by increases in costs and expenses) and fromnon-weather usage and rate factors, partially offset by the unfavorable impact of temperatures in 2017. EBIT in the first six months of 2016 were relatively unchanged from 2015. In 2016, gross margins2017 increased $4 million (3%) compared to 2015, which were partially2016. The increase in EBIT reflected the increases in revenues substantially offset by higher coal-fueled generation and purchased power costs, higher per-unit cost of natural gas sold and increased depreciation, maintenance and amortization and interestother operating expenses. In addition, EBIT in the first six months of 2015 included a gain of $13 million from the sale of a generating facility lease.

33


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)

 

NV Energy

NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues increased $47 million (7%) in the second quarter and first six months of 2016 were $714$17 million and $1.34 billion, respectively, decreases of $128 million (15%(1%) and $220 million (14%), respectively, versus the same periods in 2015. The declines were primarily attributable to lower electric retail rates resulting from lower energy costs. Electric retail customer load in the first six months of 2016 increased 1.3%2017 compared to 2015. EBITthe same periods in 2016. These increases were relatively unchangeddue primarily to increases in the second quarterretail electric operating revenues, which reflected a combination of 2016increased rates from pass-through cost adjustments and fell $39 millionhigher volumes, partly offset by lower revenues from energy efficiency programs, which are offset by lower operating expenses. In 2017, NV Energy also experienced declines in operating revenues from commercial and industrial customers electing to purchase power from alternative sources and, thus, becoming distribution service only customers. Natural gas operating revenue decreased in the first six months of 2016 compared2017 primarily due to 2015. In 2016, gross marginslower rates, partially offset by higher customer usage.

EBIT increased slightly as energy costs declined slightly more than revenues. However, operating expenses in 2016 increased $12$23 million (5%(19%) in the second quarter and $42 million (9%(28%) in the first six months of 2017 compared to 2015.the corresponding 2016 periods. These increases resulted from higher propertywere primarily due to increased gross margins and other taxes and depreciation and amortization. In addition, operating expenses in the first six months of 2015 included non-recurring benefits from reductions in certain accrued liabilities, as well as higher planned maintenance and other generating costs in 2016.lower interest expense.

Northern Powergrid

Revenues in the second quarter and first six months of 20162017 declined $14$30 million (5%(12%) to $250and $64 million and $59 million (10%(12%) to $529 million, respectively, as compared to 2015. The decreases were2016, primarily due to the unfavorable impact fromcurrency translation effect of a comparatively stronger U.S. Dollar of $17 millionin 2017 and lower distribution revenue, partially offset by higher smart metering revenue. Changes in the second quarteraverage foreign currency exchange rates accounted for $27 million and $33$65 million inof the first six months. In the first six months of 2016, revenues also declined, primarily due to lower tariff rates from a new price control period that became effective April 1, 2015. EBITcomparative revenue declines in the second quarter and first six months of 20162017, respectively. Distribution revenues in the first six months of 2017 declined $5 million (5%) to $92 million and $40 million (16%) to $217 million, respectively, as compared to 2015, primarily due to the recovery in the first quarter of 2016 of the December 2013 customer rebate ($11 million), unfavorable movements in regulatory provisions and lower revenuesdistribution volumes ($12 million), partially offset by higher tariff rates ($15 million). EBIT in the first six months of 2017 declined $50 million (23%) compared to 2016, primarily due to foreign currency translation effects, as well as higher depreciation expense from additional assets placedin-service and the stronger U.S. Dollar.increased pension expenses.

Natural gas pipelines

Revenues in the second quarter and first six months of 2016 declined $22 million (10%) to $189 million and $40 million (7%) to $505 million, respectively, as compared to 2015. The revenue declines in 2016 reflected lower2017 were relatively unchanged from 2016. In the first six months of 2017, higher gas sales, primarily from system balancing activities (largely offset in the second quartercost of sales), and higher transportation revenues at Northern Natural Gas were offset by lower transportation revenues in the first quarter resulting from lower volumes and rates in part due to comparatively warmer temperatures.at Kern River. EBIT in 2016 increased $9 million (23%) in the second quarter and $4 million (2%) in the first six months versus 2015.of 2017 increased $14 million (6%) compared to 2016. The increasesincrease was primarily due to a reduction in expenses and regulatory liabilities related to the impact of an alternative rate structure approved by Kern River’s regulators in the secondfirst quarter reflected lower operating expenses, due primarily toof 2017 and from the timing of pipeline maintenance and integrity projects, and lower interest expense, which more than offset the declineschanges in transportation revenues.

Other energy businesses

Revenues in the second quarter and first six months of 2016 declined $1352017 increased $102 million (22%) to $466 million and $122$107 million (11%) to $974 million,, respectively, compared to the corresponding 2015 periods. The declinessame periods in 2016. These increases were primarily due to lower revenues from AltaLink and the unregulated retail services business. Ineffects of a decision in May 2016 AltaLink received a decision from itsby AltaLink’s regulator, which changeschanged the timing of whenconstruction-in-progress expenditures included in rate base are billable to customers and earned in revenues. The decision resulted in aone-time net reductionsreduction in revenue with offsetting reductions in expenses, with no impact on net earnings. Otherwise, AltaLink generated increased operating revenue in 2016, primarily from additional assets placed in service.

EBIT in 2016 declined $33 million (30%) in the second quarter and $18 million (12%)of 2016, with an offsetting reduction in expenses. Otherwise, operating revenues from renewable energy increased 18% in the first six months as compared to 2015. EBIT from renewable energy businesses declined $25 million in the second quarter and $22 million in the first six months reflecting lower revenues and unfavorable changes in the values of certain interest rate swaps.

Real estate brokerage

Revenues in the second quarter and first six months of 2016 increased 11% to $844 million and 11% to $1.34 billion, respectively, as compared to 2015. The increases were primarily attributable2017 due to increased closed transactionsassets in service and increased solar generation, while revenues from the impact ofunregulated retail services business acquisitions.declined 9%. EBIT in the second quarter and first six months of 2016 increased $8 million (9%)2017 declined 8% and $12 million (14%)14%, respectively, compared to 2015, reflecting2016. The declines reflected higher other operating costs, partly offset by increased earnings from renewable energy.

Real estate brokerage

Revenues in the first six months of 2017 increased $207 million (15%) compared to 2016. The increase was primarily due to recent business acquisitions, and modest increases in revenues.closed sales units and average transaction prices for existing businesses. EBIT in the first six months of 2017 increased $18 million as compared to 2016.

Corporate interest and income taxes

Corporate interest includes interest on unsecured debt issued by BHE and borrowings from certain Berkshire insurance subsidiaries. The declines in corporate interest in 2016 were primarily due to lower average borrowings from Berkshire insurance subsidiaries. BHE’s consolidated effective income tax raterates for the first six months wasof 2017 and 2016 were approximately 16% in 201611% and 17%16%, respectively. The effective tax rate decreased primarily due to an increase in 2015. BHE’s effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service. In addition, pre-tax earnings of Northern Powergridrecognized and AltaLink are taxed at lower statutory ratesconsolidated deferred state income tax expenses due to changes in the U.K. and Canada, respectively, compared to the statutory tax rate in the U.S.status of certain subsidiaries.

34


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Manufacturing, Service and Retailing

A summary of revenues and earnings of our manufacturing, service and retailing businesses follows. Amounts are in millions.follows (in millions).

 

  Second Quarter   First Six Months  Second Quarter First Six Months 
  Revenues   Earnings   Revenues   Earnings  Revenues Earnings * Revenues Earnings * 
  2016   2015   2016   2015   2016   2015   2016   2015  2017 2016 2017 2016 2017 2016 2017 2016 

Manufacturing

   $  12,201     $9,524     $1,687          $1,393     $22,755     $18,387     $3,169     $2,598    $12,738   $12,201   $1,939   $1,687   $24,835   $22,755   $3,426     $3,169   

Service and retailing

   18,434     18,587     586        645     36,126     34,751     1,046     1,160   19,131  18,434  624  586  37,325  36,126  1,105    1,046   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
   $30,635     $    28,111         $    58,881     $    53,138        $  31,869   $  30,635     $  62,160  $  58,881   
  

 

   

 

       

 

   

 

      

 

  

 

    

 

  

 

   

Pre-tax earnings

       2,273        2,038         4,215     3,758       2,563    2,273    4,531    4,215   

Income taxes and noncontrolling interests

       780        729         1,456     1,326  

Income taxes and noncontrolling interests

 

 901  780    1,552    1,456   
      

 

   

 

       

 

   

 

    

 

  

 

    

 

  

 

 
       $    1,493          $    1,309         $  2,759     $  2,432      $1,662   $1,493     $    2,979     $    2,759   
      

 

   

 

       

 

   

 

    

 

  

 

    

 

  

 

 
*

Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified intangible assets recorded in connection with our business acquisitions. Theafter-tax acquisition accounting expenses excluded from earnings above for the second quarter and first six months of 2017 were $169 million and $301 million, respectively, compared to $114 million and $205 million for the second quarter and first six months of 2016, respectively. These expenses are included in “other” in the summary of earnings on page 25 and in the “other” earnings section on page 40.

Manufacturing

Our manufacturing group includes a variety of businesses that produce industrial, building and consumer products. Industrial products businesses include specialty chemicals (The Lubrizol Corporation)Corporation (“Lubrizol”)), metal cutting tools/systems (IMC International Metalworking Companies)Companies (“IMC”)), equipment and systems for the livestock and agricultural industries (CTB International)International (“CTB”)), and a variety of industrial products for diverse markets (Marmon, Scott Fetzer and Scott Fetzer)LiquidPower Specialty Products (“LSPI”)). Beginning on January 29, 2016, our industrial products group also includes Precision Castparts Corp. (“PCC”), a leading manufacturer of complex metal products for aerospace, power and general industrial markets.

Our building products businesses include flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). Our consumer products businesses include leisure vehicles (Forest River), sixseveral apparel and footwear operations (led by(including Fruit of the Loom, which includes Russell athletic apparelGaran, H.H. Brown Shoe Group and Vanity Fair Brands women’s intimate apparel)Brooks Sports), custom picture framing products (Larson Juhl) and jewelry products (Richline). Beginningbeginning on February 29, 2016, our consumer products group includes the Duracell Company (“Duracell”), a leading manufacturer of high performance alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues andpre-tax earnings of our manufacturing operations follows (in millions).

 

  Second Quarter   First Six Months  Second Quarter First Six Months 
  Revenues   Pre- tax earnings   Revenues   Pre- tax earnings  Revenues Pre- tax earnings Revenues Pre- tax earnings 
  2016   2015   2016   2015   2016   2015   2016   2015  2017 2016 2017 2016 2017 2016 2017 2016 

Industrial products

   $6,505     $4,416     $1,133     $848     $12,199     $8,709      $2,187      $1,634      $6,637     $6,505     $1,267     $1,133     $13,145     $12,199     $2,261     $2,187   

Building products

   2,847     2,710     305     341     5,308     5,037��     547      571     3,125    2,847    401    305    5,859    5,308    650    547   

Consumer products

   2,849     2,398     249     204     5,248     4,641      435      393     2,976    2,849    271    249    5,831    5,248    515    435   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
   $  12,201     $    9,524     $    1,687     $  1,393     $  22,755     $  18,387      $  3,169      $  2,598      $  12,738    $12,201    $  1,939    $  1,687    $  24,835    $  22,755    $  3,426    $  3,169   
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Aggregate revenues in 2016 were approximately $12.2 billionfrom manufacturing increased $537 million (4%) in the second quarter and $22.8$2.1 billion (9%) in the first six months representing increases of approximately $2.7 billion (28%) and $4.4 billion (24%), respectively, from the corresponding 2015 periods. Pre-tax earnings in 2016 were approximately $1.7 billion in the second quarter and $3.2 billion in the first six months, representing increases of $294 million (21%) and $571 million (22%), respectively,2017 compared to the same periods in 2015.2016.Pre-tax earnings in the second quarter and first six months of 2017 were $1.9 billion and $3.4 billion, respectively, representing increases of $252 million (15%) and $257 million (8%), respectively, over earnings in the corresponding 2016 periods. In 2016, operating results of our industrial products and consumer products businesses included the results of PCC and Duracell from their respective acquisition dates. ExcludingPre-tax earnings in the resultsfirst six months of PCC and Duracell, aggregate revenues2017 also includedpre-tax losses of $193 million in 2016 declined approximately 1%connection with the disposition of an underperformingbolt-on business acquired by Lubrizol in both2014.

Industrial products

Revenues in the second quarter and first six months versus 2015, while pre-tax earnings fell 4% inof 2017 increased $132 million (2%) and $946 million (8%), respectively, compared to the corresponding 2016 periods. In the second quarter, revenues of the IMC group increased 9%, PCC and Marmon each increased 2% and LSPI increased 36%, while revenues of Lubrizol declined 2%. The increases from IMC and LSPI were primarily due to increased unit sales. PCC’s revenues increased 17% in the first six months of 2016 as2017 compared earningsto the five-month post-acquisition period in the corresponding 2015 periods.2016. Comparatively higher unit sales droveyear-to-date revenue increases of LSPI (17%) and IMC (8%), while increases from business acquisitions, partly offset by lower average selling prices and mix changes accounted for CTB’s 5%year-to-date revenue

35


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Manufacturing, Service and Retailing(Continued)

Manufacturing (Continued)

 

Industrial products(Continued)

Revenues

increase. Marmon’s revenues increased 3% in the first six months of 2017 versus 2016, reflecting a mixture of increases from business acquisitions and higher average metal prices, partly offset by lower demand at some of its business units, particularly those that provide products for the retail, industrial equipment, agricultural, wire products and grocery store markets. On a comparable fullyear-to-date basis, PCC’s revenues increased approximately 3% compared to 2016. In 2017, PCC experienced revenue increases from structural castings, airfoils and industrial gas turbine products and from new business acquisitions, which were partly offset by lower revenues from airframe products.

Pre-tax earnings in the second quarter and first six months of 20162017 increased approximately $2.1 billion (47%$134 million (12%) and $3.5 billion (40%$74 million (3%), respectively, versus the same periods in 2015. These increases were primarily duecompared to inclusion of PCC, partially offset by declines in the second quarter (6%) and first six months (7%) across our other businesses.of 2016. In 2016, sales volumes were generally lower compared to 2015, particularly for products sold to businesses in the oil and gas and heavy equipment industries. In addition, lower costs of petroleum-based raw materials and metals and increased competitive pressures in 2016 continued to push selling prices lower. Changes in foreign currency exchange rates had a relatively minor impact on comparative second quarter revenues and for the first six months produced a decline of $88 million compared to 2015.

Pre-tax earnings in 2016 increased $285 million (34%) in the second quarter and $553 million (34%) in the first six months as compared to 2015. Our average of 2017, PCC, IMC and LSPI generated earnings increases, while earnings from Lubrizol and CTB were lower. Lubrizol recognizedpre-tax margin rate was 17.9% losses of $193 million in the first six months of 2016, compared2017, substantially all of which was in the first quarter, related to 18.8% in 2015. The increases in pre-tax earnings reflected earningsthe disposition of PCC, partially offset by comparative declines in earnings (8% for the second quarteran underperformingbolt-on business and 6% forrelated intangible asset impairment and restructuring charges. Over the first six months) from ourmonths of 2017, Lubrizol, CTB, as well as certain other businesses, primarily IMC International, Lubrizolexperienced selling price pressures and Marmon’s retail fixtureshigher manufacturing costs, driven by increased prices for petroleum-based materials and equipment, highway transportation equipment, wire products andcertain metals, distribution businesses. The declines inwhich contributed to comparativepre-tax earnings of these businesses were attributabledeclines. We continue to the aforementioned soft market conditions, somewhat offset by the impacts ofimplement cost containment and other initiatives and lower average material prices. We expect the prevailing market conditionsintended to continue over 2016 and we may take additional cost containment actions in response to further slowdowns in customer demand.improve productivity at several of our businesses.

Building products

Revenues in the second quarter and first six months of 20162017 increased $137$278 million (5%(10%) and $271$551 million (5%(10%), respectively, compared to 2016. The increases were primarily due to the same periods in 2015. The revenue increases reflectedeffect ofbolt-on business acquisitions (Shaw and MiTek) and sales volume increases across most of our product categories,(MiTek and Johns Manville), partly offset by lower average sales prices and changes in product mix. Pre-tax earnings in 2016 declined $36 million (11%) in the second quarter and $24 million (4%) in the first six months as compared to the corresponding periods in 2015. In the second quarter of 2016, the favorable impact from increased sales volume was more than offset by an increase in charges related to asset impairments, pension settlements and environmental claims.

Consumer products

RevenuesPre-tax earnings in the second quarter and first six months of 2016 were approximately $2.8 billion and $5.2 billion, respectively, increases of $4512017 increased $96 million (19%(31%) and $607$103 million (13%(19%), respectively, compared to 2016. These increases were attributable to asset impairment, pension settlement and environmental claim charges recorded in the second quarter of 2016 by Shaw and Benjamin Moore (aggregating about $90 million), and earnings from recentbolt-on acquisitions, partly offset by comparative declines in the average gross margin rates. Over the first six months of 2017, a combination of lower average selling prices and higher average raw materials costs negatively affected the operating results of our building products businesses.

Consumer products

Revenues increased $127 million (4%) in the second quarter and $583 million (11%) in the first six months of 2017 compared to the corresponding 20152016 periods. The increasessecond quarter revenue increase included a 12% comparative increase at Forest River, attributable to an 11% increase in unit sales. The increase in revenues for the first six months reflected a 74% increase in revenues fromof Duracell, which we acquired February 29, 2016, and a 9.3% year-to-date9% increase in Forest River’s revenues, primarily attributabledue to increaseda 10% increase in unit sales. Apparel revenues in the first six months of 20162017 declined $74 million (4%slightly (1%) compared to 2015, which was primarily attributable to lower footwear sales and the impact of an apparel business divested in 2015.2016.

Pre-tax earnings in the second quarter and first six months of 20162017 increased $45$22 million (22%(9%) and $42$80 million (11%(18%), respectively, compared to 2016. The increases in earnings in the same periods in 2015. In 2016,second quarter and first six months of 2017 were primarily due to increased earnings increases were generated byfrom Duracell and Forest River, which benefitted from increased sales and lower material costs, and our clothing apparel businesses, which benefitted from past restructuring activities and divestitures of unprofitable business lines. These increases were partly offset by lower earnings from our footwear businesses, reflecting relatively difficult retail footwear industry conditions and fromapparel earnings. Duracell’s comparative results in the 2017 periods reflected significant decreases in transition and integration costs arising from the acquisition in connection with2016 and otherwise improved operating results. The declines in apparel earnings were primarily attributable to Fruit of the Duracell acquisition.Loom, reflecting the impact of lower gross margins and higher operating expenses.

Service and retailing

Our service and retailing businesses are comprised of a large group of independently managed businesses engaged in a variety of activities. A summary of revenues andpre-tax earnings of these operations follows (in millions).

 

  Second Quarter   First Six Months   Second Quarter   First Six Months 
  Revenues Pre-tax earnings   Revenues Pre-tax earnings   Revenues   Pre-tax earnings   Revenues Pre-tax earnings 
  

        2016         

 

        2015        

 

        2016      

 

        2015         

   

        2016    

 

        2015         

 

    2016    

 

      2015       

   2017   2016   2017 2016   2017 2016 2017 2016 

Service

   $2,577       $2,685       $296      $      341        $4,938    $5,110    $521    $632      $2,792        $2,577      $  351    $  296       $5,409     $4,938     $     611    $     521   

Retailing

   3,808      3,609      161     157        7,338   5,705   260   250     3,758       3,808     204    161      7,234   7,338   337  260   

McLane Company

   12,049      12,293      129     147        23,850   23,936   265   278       12,581         12,049     69    129        24,682     23,850   157  265   
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

 
   $18,434       $18,587       $    �� 586      $645        $  36,126    $34,751    $1,046    $ 1,160      $  19,131        $  18,434      $  624    $  586       $  37,325     $  36,126     $  1,105    $  1,046   
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

 

36


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Manufacturing, Service and Retailing(Continued)

Service and retailing (Continued)

 

Service

Our service businesses offer fractional ownership programs for general aviation aircraft (NetJets) and high technology training to operators of aircraft (FlightSafety). We also distribute electronic components (TTI) and provideservice a network of quick service restaurant franchises (Dairy Queen). Service businesses also include the electronic distribution services of corporate news, multimedia and regulatory filings (Business Wire). We are a franchisor, publication of quick service restaurants (Dairy Queen), publish newspapers and other publications (Buffalo News and the BH Media Group) and operateoperation of a television station in Miami, Florida (WPLG). We also offer third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage).

Revenues in the second quarter and first six months of 2016 declined $1082017 increased $215 million (4%(8%) and $172471 million (3%(10%), respectively, as compared to 2015.2016. The decreasesincreases were primarily due to lower revenuesincreases from NetJets partly offset by increased revenues fromand TTI. NetJets’ comparative revenuesThe revenue increases at NetJets reflected increases in 2016 declined 14% in the second quarter and 11% for the first six months, primarily due to lower aircraft sales and lower fuel surchargelease revenues attributable to lower fuel prices. TTI’sand a 4% year-to-date increase in revenue flight hours. The increases in 2016 (8% in the second quarter and 4% for the first six months)TTI’s revenues were primarily due to increased salesunit volume increases in Europe and through the internet. most of its markets.

Pre-tax earnings in the second quarter and first six months of 2016 declined $452017 increased $55 million (13%(19%) and $111$90 million (18%(17%), respectively, as compared to corresponding periods2016. The increases in 2015. These declines primarily reflected lower earnings of NetJets. The declines in NetJets’ earnings were primarily due to lower aircraft sales and reduced margins from flight operations, due primarilyattributable to increased maintenance costsearnings of NetJets and personnel costs, as well as an increase in depreciation.TTI partly offset by lower earnings from media and logistics services businesses.

Retailing

Our retailing businesses include four distinct home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics. Our retailing businessesretailers also include Berkshire Hathaway Automotive (“BHA”). BHA includes 83 auto dealerships, which was acquired in the first quarter of 2015. BHA currently includes 84 auto dealerships. BHA sellssell new andpre-owned automobiles and offersoffer repair and other related services and products, andproducts. BHA also includes two related insurance businesses, two auto auctions and a distributor of automotive fluid maintenance products.

Our other retailing businesses include three jewelry retailing businesses (Borsheims, Helzberg and Ben Bridge), See’s Candies (confectionary products), Pampered Chef (high quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (“Louis”), a Germany-based retailer of motorcycle accessories based in Germany which was acquired in the second quarter of 2015.accessories.

Revenues of our retailing businesses in the second quarter and first six months of 2016 increased approximately $199 million (5.5%2017 decreased (1%) and $1.6 billion (29%), respectively, as compared to the same periods in 2015. The2016. These decreases were primarily due to lower revenues at BHA as a result of lower vehicle units sold, partly offset by increases reflected the impact of the BHA and Louis acquisitions, which accounted for approximately $183 million and $1.5 billion, respectively, of the comparative increases. Revenuesin revenues of our home furnishings retailers, Pampered Chef and See’s Candies.

Pre-tax earnings in the second quarter and first six months of 20162017 from retailing increased $34$43 million (5%(27%) and $170$77 million (13%(30%), respectively, over 2015, driven2016. These increases reflected higher earnings from BHA, our home furnishings retailers, Pampered Chef and See’s Candies. The earnings increases of BHA were primarily due to increased earnings from service, finance and insurance activities, partly offset by new stores opened by Nebraska Furniture Martlower auto sales margins. The earnings increases from our home furnishings retailers were attributable to overall increases in the gross margin rates and Jordan’s.relatively lower operating expenses. The increase in pre-tax earnings for the first six months wasincreases from Pampered Chef and See’s Candies were primarily attributable to BHAyear-to-date revenue increases of 13% and Louis.4%, respectively, and cost management efforts.

McLane Company

McLane operates a wholesale distribution business that provides grocery andnon-food consumer products to retailers and convenience stores (“grocery unit”grocery”) and to restaurants (“foodservice unit”foodservice”). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer (“beverage unit”beverage”). The grocery and foodservice units are marked by high sales volumes and very low profit margins and have several significant customers, including Wal-Mart, 7-ElevenWal-Mart,7-Eleven and Yum! Brands. A curtailment of purchasing by any of its significant customers could have an adverse impact on McLane’s periodic revenues and earnings.

Revenues for the second quarter and first six months of 20162017 were $12.0$12.6 billion and $23.9$24.7 billion, respectively, decreasesincreases of 2.0%4.4% and 0.4%, respectively, compared with3.5% over the corresponding periodssecond quarter and first six months of 2016, respectively. The increase in 2015. The year-to-date decreaserevenues for the first six months of 2017 was primarily due to a 2% reduction4.6% increase in grocery sales, partly offset by a 3% increase in foodservice sales. EarningsPre-tax earnings in the second quarter and first six months of 20162017 were $129$69 million and $265$157 million, respectively, decreases of $18$60 million (12%(47%) and $13$108 million (5%(41%), respectively, compared to 2015. Pre-taxcorresponding 2016 periods. The earnings declines reflected a 59% decline inyear-to-date earnings of our grocery operations. In 2017, significant pricing pressures and an increasingly competitive business environment negatively affected our operating results, particularly with respect to our grocery business. These conditions, together with increased fuel, trucking, insurance and depreciation expenses contributed to a 47 basis point decline in the 2015 periods included a gain of $19 million from the disposition of a subsidiary. Excluding this gain, theour overall operating margin (ratio ofpre-tax earnings to revenues) infor the first six months of 2016 was 1.11%, and was relatively unchanged from 2015.2017.

37


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Finance and Financial Products

Our finance and financial products businesses include manufactured housing and finance (Clayton Homes), transportation equipment manufacturing and leasing businesses (UTLX and XTRA, and together, “transportation equipment leasing”), as well as other leasing and financing activities. A summary of revenues and earnings from our finance and financial products businesses follows. Amounts are in millions.follows (in millions).

 

 Second Quarter First Six Months   Second Quarter   First Six Months 
 Revenues Earnings Revenues Earnings   Revenues   Earnings  Revenues   Earnings 
 

     2016    

 

    2015     

 

     2016    

 

    2015    

 

      2016     

 

     2015      

 

     2016     

 

    2015     

   2017   2016   2017  2016   2017   2016   2017   2016 

Manufactured housing and finance

  $1,065     $924     $179     $    177     $   1,958     $ 1,711     $349   $326      $  1,199       $  1,065       $197       $179       $2,273     $1,958     $373     $349 

Transportation equipment leasing

 671    618    245    215    1,354    1,216    496  420     652      671      221      245      1,276    1,354    430    496 

Other

 253    257    159    158    403    426    216  248     182      253      90      159      349    403    171    216 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 
  $ 1,989     $ 1,799     $583     $550     $3,715     $3,353     $ 1,061   $994      $  2,033       $  1,989       $  508       $  583       $  3,898     $  3,715     $  974     $  1,061 
 

 

  

 

    

 

  

 

     

 

   

 

       

 

   

 

     

Income taxes and noncontrolling interests

   187    180      354  335         176      187          339    354 
   

 

  

 

    

 

  

 

       

 

  

 

       

 

   

 

 
    $    396     $370       $707   $ 659          $  332       $  396           $  635     $  707 
   

 

  

 

    

 

  

 

       

 

  

 

       

 

   

 

 

Manufactured housing and finance

Clayton Homes’ revenues in the second quarter and first six months of 20162017 increased $141$134 million (15%(13%) and $247$315 million (14%(16%), respectively, compared to 2015. Thethe second quarter and first six months of 2016. These increases reflectedwere primarily due to higher home sales, attributable a 24%14%year-to-date increase in year-to-date revenues fromunit sales and higher average prices, which were primarily due to sales mix changes. In 2017, home sales due primarilyincluded a higher mix of site built homes, which have a higher land content and therefore unit prices tend to a 21% increase in units sold. be higher. Site built gross sales margin rates, however, are typically lower than manufactured homes.Pre-tax earnings in 2016 increased 1.1%$18 million (10%) in the second quarter and 7.1% for$24 million (7%) in the first six months.months of 2017 compared to the corresponding 2016 periods. Earnings in 2016 benefittedthe first six months of 2017 included a gain of $11 million from improved manufacturing results attributable to thea legal settlement. The earnings increases in unit sales, which were partially2017 also reflected increased earnings from manufacturing and retailing activities, comparatively lower servicing asset impairment charges and increased earnings from insurance services, partly offset by increased losses from insurance claimsemployee healthcare, technology, marketing and impairment charges on servicing assets. As of June 30, 2016, approximately 95% of the installment loan portfolio was current in terms of payment status.legal expenses.

Transportation equipment leasing

Transportation equipment leasing revenues in the second quarter and first six months of 2016 increased $532017 decreased $19 million (9%(3%) and $138$78 million (11%(6%), respectively, compared to 2015.2016. The increasesdeclines were primarily due to an increasecomparative declines in rail/tank cars on leaseleasing revenues, attributable to lower railcar and increased sales of railcars. The increase in rail/tank cars on lease reflected a largertrailer fleet size, due primarily to the acquisition of the GE Railcar Services fleet at the end of the third quarter of 2015, partiallyutilization rates, lower railcar rental renewal rates, and lower volume for crane services, partly offset by lower utilization rates.increases in repair revenues and lease termination fees. In 2016,the first six months of 2017, we also experienced lower crane leasetank car sales to third parties, although demand in North America and reduced volumes in other products and services attributable to lower oil and gas commodity prices.increased during the second quarter.

Pre-tax earnings in the second quarter and first six months of 2016 increased $302017 declined $24 million (14%(10%) and $76$66 million (18%(13%), respectively, compared to 2015. The increases were primarily attributable to2016. These decreases reflected the positive impact of theaforementioned revenue growthdeclines and lower depreciation rates for certain railcars, partially offset by higher railcar repair costs and storage costs. In 2017, interest expense attributablealso increased due to newincreased borrowings from a Berkshire financing subsidiary. A significant portionsubsidiary, partly offset by lower interest expense on third party borrowings. Significant components of the transportation equipment leasing expenses,our operating costs, such as depreciation expense, do not vary proportionately to revenue changes and thereforechanges. Therefore, changes in revenues can disproportionately impact earnings.

Other

OtherEarnings from other finance activities include CORT furniture leasing, our share of the earnings of a commercial mortgage servicing business (“Berkadia”) in which we own a 50% joint venture interest, and interest and dividends from a portfolio of investments. InPre-tax earnings in the first six months of 2016, other earnings decreased $322017 declined $45 million compared to 2015,2016, reflecting decreasedlower interest and dividend income from investments and lower earnings from investment securities and Berkadia.CORT. Other earnings also includes income from interest rate spreads charged on borrowings by a Berkshire financing subsidiary that are used to finance loans and assets held for lease. CorrespondingThe corresponding expenses are included in Clayton Homes’the results of our manufactured housing and UTLX’s results. Interestfinance and transportation equipment business groups. Pre-tax interest rate spreads charged to these businesses were $35$39 million in the first six months of 20162017 and $31$35 million in 2015.2016.

38


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Investment and Derivative Gains/Losses

A summary of investment and derivative gains and losses follows. Amounts are in millions.follows (in millions).

 

  Second Quarter   First Six Months   Second Quarter  First Six Months 
  

     2016     

   

     2015     

   

    2016    

 

       2015       

   2017  2016   2017   2016 

Investment gains/losses

   $643        $362        $2,493    $459     $290        $643       $   605       $2,493    

Derivative gains/losses

   20        (174)       (790 1,144      (65)      20      395      (790)   
  

 

   

 

   

 

  

 

   

 

  

 

   

 

   

 

 

Gains/losses before income taxes and noncontrolling interests

   663        188        1,703   1,603      225       663      1,000      1,703    

Income taxes and noncontrolling interests

   269        65        (543 560      82       269      353      (543)   
  

 

   

 

   

 

  

 

   

 

  

 

   

 

   

 

 

Net gains/losses

   $394        $123        $ 2,246    $  1,043     $  143        $  394       $   647       $  2,246    
  

 

   

 

   

 

  

 

   

 

  

 

   

 

   

 

 

Investment gains/losses

Investment gains/losses arise primarily from the sale, redemption or exchange of investments or when investments are carried at fair value with the periodic changes in fair values recorded in earnings.investments. The timing of gains or losses can have a material effect on periodic earnings. Investment gains and losses included in earnings usually have minimal impact on the periodic changes in our consolidated shareholders’ equity since most of our investments are recorded at fair value with the unrealized gains and losses included in shareholders’ equity as a component of accumulated other comprehensive income.

We believe the amount of investment gains/losses included in earnings in any given period typically has little analytical or predictive value. Our decisions to sell securities are not motivated by the impact that the resulting gains or losses will have on our reported earnings. Although we do not consider investment gains and losses in a given period as necessarily meaningful or useful in evaluating our periodic earnings,results, we are providing information to explain the nature of such gains and losses when reflected in our earnings.

Pre-tax investment gains in the second quarter and first six months of 2017 and 2016 were $643$605 million and $2.5 billion, respectively, and $362 million and $459 million, respectively,respectively.Pre-tax investment gains in the comparable periodsfirst quarter of 2015. Investment gains in 2016 included $610 million from the redemption of our Kraft Heinz Preferred Stock investment in the second quarter and $1.1 billion realized in connection with thetax-free exchange of shares of P&G common stock for 100% of the common stock of Duracell in the first quarter.Duracell. Income tax expense allocated to investment gains included a benefit from the reduction of certain deferred income tax liabilities in connection with the exchange of P&G common stock for Duracell. See Note 3 and Note 8 to the accompanying Consolidated Financial Statements.

Investment gains/losses included pre-tax other-than-temporary impairment (“OTTI”) charges of $63 millionOurafter-tax gain from this transaction was approximately $1.9 billion. In addition, investment gains in the second quarter and first six months of 2016. There were no OTTI charges2016 included a pre-tax gain of $610 million from the redemption of our Kraft Heinz Preferred Stock investment for cash of $8.32 billion.

As of January 1, 2018, we will adopt a new accounting standard that changes the reporting of unrealized gains and losses on investments in equity securities and certain other investments. Upon adoption of this accounting standard, we will reclassify the net unrealized gains from such investments, which are presently reflected in accumulated other comprehensive income, to retained earnings. The amount of the reclassification will be based on our equity investments at December 31, 2017. As of June 30, 2017, accumulatedafter-tax net unrealized appreciation related to our equity securities and other investments was approximately $50.6 billion. After December 31, 2017, the unrealized gains and losses on equity securities currently reported in other comprehensive income, as well as gains and losses realized from sales and dispositions, will be included in our periodic Consolidated Statements of Earnings. We do not expect the adoption of this standard will affect our total consolidated shareholders’ equity. However, it will likely produce a very significant increase in the volatility of our periodic net earnings given the magnitude of our existing equity securities portfolio and the inherent volatility of equity securities prices. In the first six months of 2017, our other comprehensive income included after-tax unrealized gains from equity securities and other investments of approximately $8.2 billion, compared to after-tax unrealized losses of approximately $3.4 billion in the first six months of 2015. Although we have periodically recorded OTTI charges2016. These amounts would be included in earnings inunder the past, we continue to hold certain of those securities. If the market values of those investments increase following the date OTTI charges were recorded in earnings, the increases are not reflected in earnings but are instead included in shareholders’ equity as a component of accumulated other comprehensive income. When recorded, OTTI charges have no impact whatsoever on the asset values otherwise recorded in our Consolidated Balance Sheets or on our consolidated shareholders’ equity. In addition, the recognition of such losses in earnings rather than in accumulated other comprehensive income does not necessarily indicate that sales are planned and ultimately sales may not occur for a number of years. Furthermore, the recognition of an OTTI charge does not necessarily indicate that the loss in value of the security is permanent or that the market price of the security will not subsequently increase to and ultimately exceed our original cost.new accounting standard.

As of June 30, 2016, gross unrealized losses on our investments in equity and fixed maturity securities determined on an individual purchase lot basis were approximately $2.4 billion, of which approximately $1.5 billion pertained to our investment in IBM common stock. We concluded that as of that date, such losses were temporary. We consider several factors in determining whether or not impairments are deemed to be other than temporary, including the current and expected long-term business prospects and if applicable, the creditworthiness of the issuer, our ability and intent to hold the investment until the price recovers and the length of time and relative magnitude of the price decline.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Investment and Derivative Gains/Losses(Continued)

 

Derivative gains/losses

Derivative gains/losses primarilycurrently represent the changes in fair value of our credit default and equity index put option contracts. Periodiccontract liabilities. The periodic changes in the fair values of these contracts are reflectedrecorded in earnings and can be significant, reflecting the volatility of underlying creditequity markets and equity markets.the changes in the inputs used to measure such liabilities.

Derivative contracts producedpre-tax gains in the second quarter of 2016 of $20 million and pre-tax losses of approximately $174$395 million in 2015. In the first six months these contracts produced of 2017 andpre-tax losses of $790 million in 2016. In July 2016, our last remaining credit default contract was terminated and pre-tax gainsthereafter, all of approximately $1.1 billion in 2015. In each period, theour derivative contract gains and losses derived from our equity index put option contracts. The gains in the first six months of 2017 were primarily attributable to non-cash changesincreased index values and shorter contract durations, partly offset by unfavorable foreign currency exchange rate changes. The losses in the fair values of our contacts. In 2016 our equity index contracts produced pre-tax losses of $83 million in the second quarter and $879 million for the first six months. These losses were driven by lower index values and interest rates. In the first six months of 2015, the gains reflected increased index values and the favorable impact of a stronger U.S. Dollar. As of June 30, 2016,2017, equity index put option intrinsic values were approximately $2.0 billion$842 million and our recorded liabilities at fair value were approximately $4.4$2.5 billion. Our ultimate payment obligations, if any, under our equity index put option contracts will be determined as of the contract expiration dates (beginning in 2018), and will be based on the intrinsic value as defined under the contracts.

Other

A summary ofafter-tax other earnings (losses) follows (in millions).

   Second Quarter  First Six Months 
   2017  2016   2017   2016 

Kraft Heinz earnings

  $288    $247    $510    $406  

Acquisition accounting expenses

     (180)      (126)    (322)      (260) 

Corporate interest expense

   (407)    32     (531)    (181) 

Other

       (4)        (13) 
  

 

 

 

  

 

 

   

 

 

   

 

 

 

Net earnings (losses) attributable to Berkshire Hathaway shareholders

  $    (292)   $149    $    (336)   $(48) 
  

 

 

 

  

 

 

   

 

 

   

 

 

 

Our after-tax Kraft Heinz earnings includes Berkshire’s share of Kraft Heinz’s earnings attributable to common shareholders determined pursuant to the equity method. In Julythe second quarter and first six months of 2016, Kraft Heinz earnings also included $180 million in pre-tax dividend income from our remaining credit default contractPreferred Stock investment, which was terminated by mutual agreementredeemed in June 2016. After-tax other earnings (losses) also include charges arising from the application of the acquisition method in connection with Berkshire’s past business acquisitions. Such charges were primarily from the counterparty. We paid $195 million upon terminationamortization of intangible assets recorded in connection with those business acquisitions.

In each of the last three years, Berkshire issued Euro-denominated debt and have no further exposure toat June 30, 2017, the aggregate par outstanding was €6.85 billion. Changes in foreign currency exchange rates can produce sizable non-cash gains and losses under this contract. This contract produced pre-tax earningsfrom the periodic revaluation of $103 millionthese liabilities into U.S. Dollars. After-tax corporate interest expense included foreign currency exchange rate losses in the second quarter and $89 million in the first six months of 2016.

Other

Other earnings include corporate income (including income from our investments in Kraft Heinz), expenses2017 of $342 million and income taxes not allocated to operating businesses. Earnings from our investments in Kraft Heinz included dividends on the Preferred Stock, which was redeemed in June 2016, and our equity method earnings from our common stock investment. Such earnings, after allocated corporate income taxes, were $247$399 million, in the second quarter and $406 million in the first six months of 2016. In 2015, our investments produced earnings of $50 million in the second quarter and $200 million for the first six months. See Note 7respectively, with respect to the accompanying consolidated financial statements for additional information regarding these investments.

Other earnings also includes corporate interest expense. After-tax corporate interest inrevaluation of the Euro denominated debt. In 2016, produced a credit to earnings of $32 million in the second quarter and a charge of $181 million for the first six months. In 2015, after-tax corporate interest expense was $110 million in the second quarter and $175 million in the first six months. The variations in comparative after-tax corporate interest expense were primarily attributable to foreign exchange gains and losses with respect to Euro denominated debt issued by Berkshire in March 2015 (€3.0 billion par) and March 2016 (€2.75 billion par). In 2016, corporate interest included after-tax foreign currency exchange rate gains of $101 million in the second quarter and after-tax losses of $60 million in the first six months. In 2015, after-taxExcluding these foreign currency exchangegains and losses, were $73 million in the second quarter and $102 millionafter-tax corporate interest expense in the first six months. Relatively minor changes in the U.S. Dollar/Euro exchange rate can produce significant gains or losses given the levelmonths of our Euro borrowings.

Also included in other earnings are charges related to the amortization of fair value adjustments made in connection with several business acquisitions. These charges (after-tax) were $1262017 and 2016 was $131 million and $233$121 million, in the second quarter and first six months, respectively, of 2016 comparedrespectively. The increase was attributable to $99 million and $201 million, respectively, in the comparable periods in 2015.increased average outstanding borrowings.

Financial Condition

Our balance sheet continues to reflectreflects significant liquidity and a strong capital base. Our consolidated shareholders’ equity at June 30, 20162017 was $263.0approximately $300.7 billion, an increase of $7.5about $17.7 billion since December 31, 2015.2016. Net earnings attributable to Berkshire shareholders in the first six months of 20162017 were $10.6$8.3 billion. Net unrealized appreciation of investments and foreign currency translation gains included in other comprehensive income in the first six months of 2017 were approximately $8.2 billion and $1.2 billion, respectively.

At June 30, 2016,2017, our insurance and other businesses held cash, and cash equivalents and U.S. Treasury Bills of $61.8approximately $86.1 billion and investments (excluding our investmentsinvestment in Kraft Heinz) of $140.8$175.6 billion. In January 2017, Berkshire issued new senior notes aggregating €1.1 billion and repaid $1.1 billion of maturing senior notes. Berkshire term debt of $800 million will mature in February 2018. Berkshire’s debt outstanding at June 30, 2017 was $18.4 billion, an increase of $678 million from December 31, 2016, we received a paymentwhich was primarily due to foreign currency exchange rate changes applicable to €6.85 billion par of $8.32 billion upon the redemption our investment in Kraft Heinz Preferred Stock.Euro-denominated senior notes.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Financial Condition(Continued)

 

In January 2016, we used cash of approximately $32.1 billion to fund the acquisition of PCC, which we funded through a combination of cash on hand and $10 billion borrowed under a new 364-day revolving credit agreement. In March 2016, Berkshire Hathaway parent company issued €2.75 billion and $5.5 billion of senior unsecured notes. The proceeds were used in the repayment of all outstanding borrowings under the aforementioned revolving credit agreement. In June, the revolving credit agreement was terminated. See Note 16 to the accompanying Consolidated Financial Statements. Over the next twelve months, $1.85 billion of parent company senior notes will mature.

Our railroad, utilities and energy businesses (conducted by BNSF and BHE) maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. In the first six months of 2016,2017, capital expenditures were $1.8 billion by BHE and $1.5 billion by BNSF. We forecast the aggregate capital expenditures of these businesses were approximately $4.1 billion, including $2.1 billion by BHE and $2.0 billion by BNSF. Forecasted capital expenditures of the two businesses for the remainder of 20162017 will approximate $4.5 billion. Future$4.8 billion and we currently expect to fund such future capital expenditures are expected to be funded fromwith cash flows from operations and debt issuances. In July 2017, BHE agreed to acquire approximately 80% of Oncor for $9 billion in cash and intends to acquire the remaining 20% in separate transactions. See Note 21 to the accompanying Consolidated Financial Statements.

BNSF’s outstanding debt was approximately $22.2approximated $22.6 billion as of June 30, 2016,2017, an increase of $452$508 million fromsince December 31, 2015.2016. In March 2017, BNSF issued $1.25 billion of senior unsecured debentures with $500 million due in 2027 and $750 million due in 2047. Approximately $650 million of BNSF debentures matured in May 2017 and another $650 million mature in March 2018. Outstanding borrowings of BHE and its subsidiaries, excluding its borrowings from Berkshire insurance subsidiaries, were approximately $36.4$38.1 billion as ofat June 30, 2016,2017, an increase of $404 million from$1.1 billion since December 31, 2015.2016. During the first six months of 2017, BHE and its subsidiaries issued approximately $1.275 billion of debt with maturity dates ranging from 2027 to 2057. Berkshire does not guarantee the repayment of debt issued by BNSF, BHE or any of their subsidiaries and is not committed to provide capital to support BNSF, or BHE or any of their subsidiaries.

Finance and financial products assets were approximately $41.3$40.9 billion as of June 30, 2016, an increase2017, a decrease of approximately $2.3 billion since$830 million from December 31, 2015.2016. Finance assets also includeconsist primarily of loans and finance receivables, and various types of property held for lease, as well as significant balances of cash, and cash equivalents, U.S. Treasury Bills and equity securities.

other investments. Finance and financial products liabilities weredecreased approximately $21.4$1.9 billion to approximately $17.8 billion as of June 30, 2016, an increase2017. The decrease was primarily due to a reduction in borrowings of approximately $4.2$1.6 billion, compared to December 31, 2015. The increase was primarily attributable to new debtreflecting repayments and maturities of $2.9 billion, partly offset by $1.3 billion of senior unsecured notes issued in January by a wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”). In March 2016,The new BHFC issued $3.5notes mature in 2019 and 2020. BHFC’s outstanding borrowings were $13.2 billion at June 30, 2017. Over the remainder of 2017, $400 million of BHFC senior notes. See Note 16 tonotes will mature and an additional $4.1 billion will mature in the accompanying Consolidated Financial Statements. The proceeds werefirst six months of 2018. BHFC’s senior note borrowings are used to fund loans originated and acquired by Clayton Homes and to fund a portion of existing assets held for lease by our rail tank carUTLX railcar leasing business, UTLX. Overbusiness. Berkshire guarantees the next twelve months, $3.4 billionfull and timely payment of BHFCprincipal and interest with respect to BHFC’s senior notesnotes.

Berkshire’s Board of Directors has authorized Berkshire management to repurchase, at its discretion, Berkshire Class A and Class B common stock at prices no higher than a 20% premium over book value. There is no obligation to repurchase any stock and the program is expected to continue indefinitely. We will mature.not repurchase our stock if it reduces the total amount of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $20 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. There were no repurchases in 2017.

Contractual Obligations

We are party to contracts associated with ongoing business and financing activities, which will result in cash payments to counterparties in future periods. Certain obligations are reflectedincluded in our Consolidated Balance Sheets, such as notes payable, which require future payments on contractually specified dates and in fixed and determinable amounts. Other obligations pertain to the acquisition of goods or services in the future, such as minimum rentals under operating leases and certain purchase obligations, and are not currently reflected in the financial statements. Such obligationsstatements, but will be reflectedrecognized in future periods as the goods are delivered or services are provided.

DuringThe timing and amount of the first six monthspayments under certain contracts, such as insurance and reinsurance contracts, are contingent upon the outcome of 2016,future events and claim settlements. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet. As previously discussed, we issued new term debtentered into a retroactive reinsurance agreement with AIG, which became effective in February 2017. In connection with this agreement, we recorded liabilities of $16.4 billion for unpaid losses and assumed debt throughloss adjustment expenses, representing our current estimate of the PCC business acquisition. Futureclaims we ultimately expect to pay under the agreement. We estimate future payments of principalunder this agreement as follows: 2020-2021 – $3.6 billion and interest related to such borrowings are summarizedthereafter – $12.8 billion; however, as follows (in millions): 2016 - $303; 2017 - $397; 2018 - $3,130; 2019 - $2,096; and 2020 and after - $15,798. generally noted above, actual payments under this agreement will likely vary, perhaps materially, from these estimates.

Except as otherwise disclosed herein,in this Quarterly Report, our contractual obligations as of June 30, 20162017 were, in the aggregate, not materially different from those disclosed in the “Contractual Obligations” section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2015.2016.

41


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)

 

Critical Accounting Policies

Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts currently recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. Reference is made to “Critical Accounting Policies” discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2015.2016.

Our Consolidated Balance Sheet as of June 30, 20162017 includes estimated liabilities for unpaid losses from property and casualty insurance and reinsurance contracts of approximately $75$95 billion. Due to the inherent uncertainties in the process of establishing loss reserve amounts, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude will result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change.

Our Consolidated Balance Sheet as of June 30, 20162017 includes goodwill of acquired businesses of approximately $79$80 billion. We evaluate goodwill for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2015.2016. Although we believe that the goodwill reflected in the Consolidated Balance Sheet is not impaired, goodwill may subsequently become impaired as a result of changes in facts and circumstances affecting the valuationsvaluation of the reporting units.unit. A goodwill impairment charge could have a material effect on periodic earnings.

Our Consolidated Balance Sheets include significant derivative contract liabilities with respect to our long-duration equity index put option contracts. The fair values recorded for these liabilities are based on valuation models that utilize various inputs and assumptions that we believe are used by market participants. We further believe that fair values based on such models are inherently subjective and the values in an actual transaction may differ significantly from the model values. Changes in the assumptions utilized within the valuation models may have a significant effect on recorded fair values and periodic earnings.

Information concerning new accounting pronouncements is included in Note 2 to the accompanying Consolidated Financial Statements.

Forward-Looking Statements

Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have no specific intention to update these statements.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principalimportant risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities, losses realized from derivative contracts, the occurrence of one or more catastrophic events, such as an earthquake, hurricane, or act of terrorism or cyber attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations, changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries, changes in federal income tax laws, and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.

42


Item 3. Quantitative and Qualitative Disclosures About Market Risk

Reference is made to Berkshire’s most recently issued Annual Report and in particular the “Market Risk Disclosures” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of June 30, 2016,2017, there were no material changes in the market risks described in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2015.2016.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule13a-15. Based upon that evaluation, the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer) concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. During the quarter, there have been no significant changes in the Company’s internal control over financial reporting or in other factors that could significantly affect internal control over financial reporting.

Part II Other Information

Item 1. Legal Proceedings

WeBerkshire and its subsidiaries are partyparties in a variety of legal actions arisingthat routinely arise out of the normal course of business. In particular, suchbusiness, including legal actions affect our insurance and reinsurance businesses. Such litigation generally seeksseeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.

Item 1A. Risk Factors

Our significant business risks are described in Item 1A to Form10-K for the year ended December 31, 20152016 to which reference is made herein.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

Berkshire’s Board of Directors (“Berkshire’s Board”) has approved a common stock repurchase program under which Berkshire may repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. Berkshire may repurchase shares in the open market or through privately negotiated transactions. Berkshire’s Board authorization does not specify a maximum number of shares to be repurchased. However, repurchases will not be made if they would reduce the total value of Berkshire’s consolidated cash, equivalentcash equivalents and U.S. Treasury Bills holdings below $20 billion. The repurchase program is expected to continue indefinitely and the amount of repurchases will depend entirely upon the level of cash available, the attractiveness of investment and business opportunities either at hand or on the horizon, and the degree of discount of the market price relative to management’s estimate of intrinsic value. The repurchase program does not obligate Berkshire to repurchase any dollar amount or number of Class A or Class B shares and there is no expiration date to the program. There were no share repurchases under the program in the first six months of 2016.2017.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Information regarding the Company’s mine safety violations and other legal matters disclosed in accordance with Section  1503(a) of the Dodd-Frank Reform Act is included in Exhibit 95 to this Form10-Q.

Item 5. Other Information

None

43


Item 6. Exhibits

 

 

a. Exhibits

3(ii)

    By-Laws

    Incorporated by reference to Exhibit 3(ii) to Form 8-K filed on May 4, 2016.

12

 

Calculation of Ratio of Consolidated Earnings to Consolidated Fixed Charges

31.1

 

Rule13a-14(a)/15d-14(a) Certifications

31.2

 

Rule13a-14(a)/15d-14(a) Certifications

32.1

 

Section 1350 Certifications

32.2

 

Section 1350 Certifications

95

 

Mine Safety Disclosures

101

 

The following financial information from Berkshire Hathaway Inc.’s Quarterly Report on Form10-Q for the quarter ended June 30, 2016,2017, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of June 30, 20162017 and December 31, 2015,2016, (ii) the Consolidated Statements of Earnings for each of the three-month andsix-month periods ended June 30, 20162017 and 2015,2016, (iii) the Consolidated Statements of Comprehensive Income for each of the three-month andsix-month periods ended June 30, 20162017 and 2015,2016, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for each of thesix-month periods ended June 30, 20162017 and 2015,2016, (v) the Consolidated Statements of Cash Flows for each of thesix-month periods ended June 30, 20162017 and 2015,2016, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail.

SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  BERKSHIRE HATHAWAY INC.

  (Registrant)

Date: August 5, 20164, 2017

 

/S/ MARC D. HAMBURG

 (Signature)
 Marc D. Hamburg,
 Senior Vice President and
 Principal Financial Officer

 

44