UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM10-Q

 

(Mark One)

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

For the quarterly period ended SeptemberJune 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  ☒    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 ☒    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     ☒  Accelerated filer     ☐
Non-accelerated filer     ☐  Smaller reporting company     ☐
Emerging growth 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  ☒

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

 

 Class A — 784,669755,437 
 Class B — 1,289,055,3221,333,772,187 

 

 

 


BERKSHIRE HATHAWAY INC.

 

   Page No.  

Part I – Financial Information

 

Item 1. Financial Statements

 
    

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

  22-3 
    

Consolidated Statements of Earnings—ThirdSecond Quarter and First NineSix Months 20162017 and 20152016

  4 
    

Consolidated Statements of Comprehensive Income—ThirdSecond Quarter and First NineSix Months 20162017 and 20152016

  5 
    

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

  5 
    

Consolidated Statements of Cash Flows—First NineSix 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

  25-4325-42 

Item 3.

    

Quantitative and Qualitative Disclosures About Market Risk

  4443 

Item 4.

    

Controls and Procedures

  4443 

Part II – Other Information

 

Item 1.

    

Legal Proceedings

  4443 

Item 1A.

    

Risk Factors

  4443 

Item 2.

    

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

  4443 

Item 3.

    

Defaults Upon Senior Securities

  4443 

Item 4.

    

Mine Safety Disclosures

  4443 

Item 5.

    

Other Information

  4443 

Item 6.

    

Exhibits

  4544 

Signature

  4544 

Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

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

ASSETS

        

Insurance and Other:

        

Cash and cash equivalents

   $68,269      $61,181      $      20,142     $  23,581  

Investments:

    

Fixed maturity securities

   24,613      25,988   

Equity securities

   100,757      110,212   

Other

   15,415      15,998   

Investments in The Kraft Heinz Company (Fair Value: September 30, 2016 – $29,130; December 31, 2015 – $32,042)

   15,711      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

   27,544      23,303      28,953     27,097  

Inventories

   15,763      11,916      16,442     15,727  

Property, plant and equipment

   19,326      15,540      19,790     19,325  

Goodwill

   53,832      37,188      54,471     53,994  

Other intangible assets

   35,034      9,148      33,220     33,481  

Deferred charges reinsurance assumed

   7,505      7,687      13,597     8,047  

Other

   8,685      6,697      7,560     7,126  
  

 

   

 

   

 

   

 

 
   392,454      348,282      451,341     409,328  
  

 

   

 

   

 

   

 

 

Railroad, Utilities and Energy:

        

Cash and cash equivalents

   3,893      3,437      4,962     3,939  

Property, plant and equipment

   123,005      120,279      125,328     123,759  

Goodwill

   24,186      24,178      24,306     24,111  

Regulatory assets

   4,369      4,285      4,644     4,457  

Other

   14,219      12,833      14,129     13,550  
  

 

   

 

   

 

   

 

 
   169,672      165,012      173,369     169,816  
  

 

   

 

   

 

   

 

 

Finance and Financial Products:

        

Cash and cash equivalents

   12,673      7,112      1,314     528  

Short-term investments in U.S. Treasury Bills

   7,323     10,984  

Investments in equity and fixed maturity securities

   336      411      408     408  

Other investments

   2,078      5,719      3,396     2,892  

Loans and finance receivables

   13,213      12,772      14,559     13,300  

Property, plant and equipment and assets held for lease

   9,737      9,347      9,791     9,689  

Goodwill

   1,374      1,342      1,398     1,381  

Other

   2,501      2,260      2,691     2,528  
  

 

   

 

   

 

   

 

 
   41,912      38,963      40,880     41,710  
  

 

   

 

   

 

   

 

 
   $    604,038      $    552,257      $    665,590     $620,854  
  

 

   

 

   

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

    September 30, 
2016
    December 31, 
2015
 
   (Unaudited)     

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Insurance and Other:

    

Losses and loss adjustment expenses

   $75,469      $73,144   

Unearned premiums

   15,223      13,311   

Life, annuity and health insurance benefits

   15,405      14,497   

Other policyholder liabilities

   7,259      7,123   

Accounts payable, accruals and other liabilities

   22,426      17,879   

Notes payable and other borrowings

   27,514      14,599   
  

 

 

   

 

 

 
   163,296      140,553   
  

 

 

   

 

 

 

Railroad, Utilities and Energy:

    

Accounts payable, accruals and other liabilities

   11,590      11,994   

Regulatory liabilities

   3,094      3,033   

Notes payable and other borrowings

   58,811      57,739   
  

 

 

   

 

 

 
   73,495      72,766   
  

 

 

   

 

 

 

Finance and Financial Products:

    

Accounts payable, accruals and other liabilities

   1,616      1,398   

Derivative contract liabilities

   3,973      3,836   

Notes payable and other borrowings

   15,473      11,951   
  

 

 

   

 

 

 
   21,062      17,185   
  

 

 

   

 

 

 

Income taxes, principally deferred

   73,570      63,126   
  

 

 

   

 

 

 

Total liabilities

   331,423      293,630   
  

 

 

   

 

 

 

Shareholders’ equity:

    

Common stock

   8      8   

Capital in excess of par value

   35,730      35,620   

Accumulated other comprehensive income

   29,798      33,982   

Retained earnings

   205,491      187,703   

Treasury stock, at cost

   (1,763)     (1,763)  
  

 

 

   

 

 

 

Berkshire Hathaway shareholders’ equity

   269,264      255,550   

Noncontrolling interests

   3,351      3,077   
  

 

 

   

 

 

 

Total shareholders’ equity

   272,615      258,627   
  

 

 

   

 

 

 
   $  604,038      $  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

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

 Third Quarter First Nine 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

  $11,364    $10,514    $33,287    $30,454    $12,367    $10,799     $34,120   $21,923   

Sales and service revenues

 30,536   27,436   89,357   80,169   31,733   30,542    61,962  58,821   

Interest, dividend and other investment income

 1,276   1,132   4,284   3,758   1,322   1,411    2,484  2,562   

Investment gains/losses

 735   8,339   3,221   8,571   287   640    599  2,486   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 43,911   47,421   130,149   122,952   45,709   43,392    99,165  85,792   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Railroad, Utilities and Energy:

        

Revenues

 10,330   10,697   28,026   30,454   9,843   8,851    19,247  17,696   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Finance and Financial Products:

        

Sales and service revenues

 1,588   1,379   4,557   3,984   1,664   1,577    3,178  2,969  

Interest, dividend and other investment income

 366   329   1,109   1,077   364   411    714  743  

Investment gains/losses

 2,415   (73)  2,422   154     3    6   

Derivative gains/losses

 458   (764)  (332 380   (65)  20    395  (790) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 4,827   871   7,756   5,595   1,966   2,011    4,293  2,929  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 59,068   58,989   165,931   159,001  

Total revenues

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

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Costs and expenses:

        

Insurance and Other:

        

Insurance losses and loss adjustment expenses

 7,615   6,831   22,325   19,524   8,747   7,178    27,313  14,710  

Life, annuity and health insurance benefits

 1,339   1,165   3,747   4,083   1,263   1,241    2,490  2,408  

Insurance underwriting expenses

 2,001   1,875   5,948   5,505   2,378   1,870    4,717  3,947  

Cost of sales and services

 24,472   22,297   71,617   65,145   25,419   24,349    49,779  47,145  

Selling, general and administrative expenses

 3,959   3,721   11,747   10,177   4,020   4,066    8,136  7,788  

Interest expense

 259   88   674   449   700   28    970  415  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 39,645   35,977   116,058   104,883   42,527   38,732    93,405  76,413  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Railroad, Utilities and Energy:

        

Cost of sales and operating expenses

 6,763   7,018   19,421   20,985   6,940   6,339    13,694  12,658  

Interest expense

 681   672   1,962   1,957   697   596    1,390  1,281  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 7,444   7,690   21,383   22,942   7,637   6,935    15,084  13,939  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Finance and Financial Products:

        

Cost of sales and services

 886   736   2,529   2,134   962   875    1,829  1,643  

Selling, general and administrative expenses

 465   409   1,301   1,176   469   443    911  836  

Interest expense

 103   105   307   301   103   103    207  204  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 1,454   1,250   4,137   3,611   1,534   1,421    2,947  2,683  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total costs and expenses

 51,698   47,088    111,436  93,035  
 48,543   44,917   141,578   131,436   

 

  

 

  

 

  

 

 

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

 10,525   14,072   24,353   27,565   6,129   7,372    11,817  13,828  

Income tax expense

 3,192   4,545   6,281   8,698   1,774   2,290    3,323  3,089  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net earnings

 7,333   9,527   18,072   18,867   4,355   5,082    8,494  10,739  

Less: Earnings attributable to noncontrolling interests

 135   99   284   262   93   81    172  149  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net earnings attributable to Berkshire Hathaway shareholders

  $7,198    $9,428    $17,788    $18,605    $4,262    $5,001     $8,322   $10,590  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net earnings per share attributable to Berkshire Hathaway shareholders*

  $4,379    $5,737    $10,822    $11,323  

Average equivalent Class A Shares outstanding*

 1,643,913   1,643,316   1,643,716   1,643,118  

Net earnings per share attributable to Berkshire Hathaway shareholders *

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

Average equivalent Class A Shares outstanding *

 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

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

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

Net earnings

   $7,333     $9,527      $18,072       $  18,867      $4,355     $5,082      $8,494      $  10,739 
  

 

   

 

    

 

     

 

   

 

   

 

    

 

     

 

 

Other comprehensive income:

                      

Net change in unrealized appreciation of investments

   1,581     (8,623)     (1,381     (12,185)     4,711     (271)      13,088      (2,962

Applicable income taxes

   (515)    2,957      478       4,237      (1,659)    94       (4,531     993 

Reclassification of investment appreciation in net earnings

   (3,088)    (1,586)     (4,904     (1,781)     (284)    (9)      (589     (1,816

Applicable income taxes

   1,080     555      1,716       623      99     4       206      636 

Foreign currency translation

   (44)    (716)     (158     (1,499)     798     (607)      1,356      (114

Applicable income taxes

       (11)     23       (30)     (23)    44       (92     14 

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

   (21)    247      34       252      (44)    51       (54     55 

Applicable income taxes

   13     (85)     (6     (87)     18     (19)      25      (19

Other, net

       (4)     (3     (104)         16       6      (6
  

 

   

 

    

 

     

 

   

 

   

 

    

 

     

 

 

Other comprehensive income, net

   (982)    (7,266)     (4,201     (10,574)     3,619     (697)      9,415      (3,219
  

 

   

 

    

 

     

 

   

 

   

 

    

 

     

 

 

Comprehensive income

   6,351     2,261      13,871       8,293      7,974     4,385       17,909      7,520 

Comprehensive income attributable to noncontrolling interests

   132     47      267       217      130     61       233      135 
  

 

   

 

    

 

     

 

   

 

   

 

    

 

     

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

   $    6,219     $    2,214      $  13,604       $8,076      $    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

   —       —       18,605       —        262      18,867   

Other comprehensive income, net

   —       (10,529)       —       —        (45)      (10,574)  

Issuance of common stock

   63       —       —       —        —       63   

Transactions with noncontrolling interests

   (26)       —       —       —        (36)      (62)  
  

 

   

 

   

 

   

 

    

 

    

 

 

Balance at September 30, 2015

   $35,618       $32,203       $182,225       $(1,763)        $3,038      $251,321   
  

 

   

 

   

 

   

 

    

 

    

 

   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

   —       —       17,788       —        284      18,072         —        10,590           149     10,739 

Other comprehensive income, net

   —       (4,184)       —       —        (17)      (4,201)       (3,205)    —           (14    (3,219

Issuance of common stock

   80       —       —       —        —       80      52   —        —                52 

Transactions with noncontrolling interests

   30       —       —       —             37      38   —        —           21     59 
  

 

   

 

   

 

   

 

    

 

    

 

   

 

  

 

   

 

   

 

    

 

    

 

 

Balance at September 30, 2016

   $35,738       $29,798       $205,491       $(1,763)        $3,351      $272,615   

Balance at June 30, 2016

   $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

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

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

Cash flows from operating activities:

      

Net earnings

   $18,072   $18,867    $8,494  $10,739   

Adjustments to reconcile net earnings to operating cash flows:

      

Investment gains/losses

   (5,643 (8,725   (605 (2,493)  

Depreciation and amortization

   6,605   5,801     4,539  4,359   

Other

   27   620     403  (119)  

Changes in operating assets and liabilities:

      

Losses and loss adjustment expenses

   2,615   1,195     18,075  1,769   

Deferred charges reinsurance assumed

   182   369     (5,550 35   

Unearned premiums

   1,906   2,311     1,830  1,444   

Receivables and originated loans

   (3,445 (3,021   (1,608 (2,716)  

Derivative contract assets and liabilities

   137   (296   (395 790   

Income taxes

   3,601   5,954     1,893  1,822   

Other

   1,114   1,080     (449 (366)  
  

 

  

 

   

 

  

 

 

Net cash flows from operating activities

   25,171   24,155     26,627  15,264   
  

 

  

 

   

 

  

 

 

Cash flows from investing activities:

      

Purchases of fixed maturity securities

   (6,009 (5,365

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

   (68,547 (33,029)  

Purchases of equity securities

   (5,185 (8,809   (13,628 (4,129)  

Purchase of Kraft Heinz Company common stock

      (5,258

Sales of fixed maturity securities

   1,121   791  

Redemptions and maturities of fixed maturity securities

   6,640   4,421  

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

   19,989   5,755     7,815  12,444   

Purchases of loans and finance receivables

   (224 (144   (1,350 (188)  

Collections of loans and finance receivables

   271   345     393  174   

Acquisitions of businesses, net of cash acquired

   (30,815 (4,802   (1,721 (30,440)  

Purchases of property, plant and equipment

   (9,429 (11,803   (5,149 (6,144)  

Other

   (611 21     (112 (397)  
  

 

  

 

   

 

  

 

 

Net cash flows from investing activities

   (24,252 (24,848   (27,971 (50,256)  
  

 

  

 

   

 

  

 

 

Cash flows from financing activities:

      

Proceeds from borrowings of insurance and other businesses

   9,385   3,271     1,295  8,600   

Proceeds from borrowings of railroad, utilities and energy businesses

   2,234   4,468     2,413  2,211   

Proceeds from borrowings of finance businesses

   4,740   998     1,298  3,494   

Repayments of borrowings of insurance and other businesses

   (1,921 (1,875   (1,180 (1,148)  

Repayments of borrowings of railroad, utilities and energy businesses

   (1,879 (1,050   (1,768 (1,781)  

Repayments of borrowings of finance businesses

   (1,220 (1,254   (2,897 (195)  

Changes in short term borrowings, net

   888   (508   462  618   

Acquisitions of noncontrolling interests

   (3 (71

Other

   (28 (181   (92 (46)  
  

 

  

 

   

 

  

 

 

Net cash flows from financing activities

   12,196   3,798     (469 11,753   
  

 

  

 

   

 

  

 

 

Effects of foreign currency exchange rate changes

   (10 (114   183  2   
  

 

  

 

   

 

  

 

 

Increase in cash and cash equivalents

   13,105   2,991     (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 third quarter *

   $84,835     $  66,260  

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 third quarter—

   

June 30—

   

Insurance and Other

   $68,269     $56,166    $20,142   $33,033   

Railroad, Utilities and Energy

   3,893    4,691     4,962    3,036   

Finance and Financial Products

   12,673    5,403     1,314    7,855   
  

 

  

 

   

 

  

 

 
   $84,835     $66,260    $26,418   $43,924   
  

 

  

 

   

 

  

 

 

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

SeptemberJune 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 annual and interimreporting 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.

Notes to Consolidated Financial Statements(Continued)

 

Note 2. New accounting pronouncements(Continued)

 

In June 2016,January 2017, the FASB issued ASU 2016-13 “Financial Instruments—Credit Losses,2017-04 “Simplifying the Test for Goodwill Impairment.which provides forASU2017-04 eliminates the recognition andrequirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption, the measurement atof a goodwill impairment will represent the excess of the reporting dateunit’s carrying value over fair value, limited to the carrying value of all expected credit losses for financial assets held at amortized cost and available-for-sale debt securities. Currently credit losses are recognized and measured when such losses become probable based on the prevailing facts and circumstances.goodwill. ASU 2016-132017-04 is effective for reporting periodsgoodwill impairment tests in fiscal years beginning after December 15, 2019. We are currently evaluating the effect this standard will have on our Consolidated Financial Statements.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 acquisition date fair values of certain assets and liabilities, particularly property, plant and equipment and intangible assets, and related estimated useful lives are provisional and are subject to revision as the related valuations are completed. We expect such values will be finalized as of December 31, 2016.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

   3,430       326     3,430    319 

Property, plant and equipment

   2,772       364     2,765    359 

Goodwill

   15,880       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

   $ 48,443       $    5,391      $47,899    $5,143 
  

 

     

 

   

 

   

 

 

Accounts payable, accruals and other liabilities

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

Notes payable and other borrowings

   5,251            5,251     

Income taxes, principally deferred

   8,092       760     7,548    494 
  

 

     

 

   

 

   

 

 

Liabilities assumed

   $15,785       $1,152      $15,241    $904 
  

 

     

 

   

 

   

 

 

Net assets

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

 

     

 

   

 

   

 

 

Notes to Consolidated Financial Statements(Continued)

Note 3. Significant business acquisitions(Continued)

The following table sets forth certain unaudited pro forma consolidated earnings data for the first nine 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 nine months of 2016 was not materially different from the amounts reflected in the accompanying Consolidated Financial Statements.

First Nine Months
      2015      

Revenues

$  167,315

Net earnings attributable to Berkshire Hathaway shareholders

19,086

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

11,615

Note 4. Investments in fixed maturity securities

Investments in securities with fixed maturities as of SeptemberJune 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
 

September 30, 2016

              

June 30, 2017

       

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

    $4,549        $17        $(1      $4,565      $4,800     $6     $(14   $4,792 

States, municipalities and political subdivisions

   1,216       64       (1     1,279     1,050    54    (1 1,103 

Foreign governments

   9,454       362       (21     9,795     8,726    223    (27 8,922 

Corporate bonds

   6,996       800       (7     7,789     6,897    668    (6 7,559 

Mortgage-backed securities

   1,068       156       (5     1,219     924    115    (4 1,035 
  

 

     

 

     

 

     

 

   

 

   

 

   

 

  

 

 
    $  23,283        $1,399        $(35      $ 24,647      $  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).

 

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

Insurance and other

    $24,613           $25,988     $  23,381   $23,432 

Finance and financial products

   34          39     30    33 
   

 

      

 

   

 

   

 

 
    $  24,647           $  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 SeptemberJune 30, 2016,2017, approximately 92%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.

Notes to Consolidated Financial Statements(Continued)

Note 4. Investments in fixed maturity securities(Continued)

The amortized cost and estimated fair value of securities with fixed maturities at SeptemberJune 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 (in millions).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

   $8,007        $10,773        $1,076        $2,359        $1,068        $23,283     $8,690          $10,009          $  607           $2,167       $   924         $22,397   

Fair value

   8,068        11,224        1,177        2,959        1,219        24,647     8,762          10,280          660           2,674       1,035        23,411   

Notes to Consolidated Financial Statements(Continued)

Note 5. Investments in equity securities

Investments in equity securities as of SeptemberJune 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
 

September 30, 2016 *

       

June 30, 2017 *

       

Banks, insurance and finance

   $19,852     $21,695     $(173  $41,374     $20,887    $32,754    $—    $53,641 

Consumer products

   5,149     16,790        21,939     19,495    22,267    —   41,762 

Commercial, industrial and other

   32,517     7,904     (1,199 39,222     31,540    10,946    (776 41,710 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 
   $    57,518     $    46,389     $  (1,372  $  102,535     $    71,922    $    65,967    $  (776  $  137,113 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

 

*

Approximately 60%62% of the aggregate fair value was concentrated in the equity securities of four companies (Americanfive companies: American Express Company – $9.7 billion; Wells Fargo &- $12.8 billion, Apple Inc. - $19.4 billion, The Coca-Cola Company – $22.1 billion;- $17.9 billion, International Business Machines Corporation (“IBM”) – $12.9 billion;- $8.3 billion and The Coca-ColaWells Fargo & Company – $16.9 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 SeptemberJune 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 September 30, 2016, and December 31, 2015, unrealized losses on equity securities in a continuous unrealized loss position for more than twelve consecutive months were $995$110 million and $989$551 million, respectively.

Unrealized losses at September 30, 2016 included $941 million related to our investment in IBM common stock of which $855 million had been in a continuous unrealized loss position for more than twelve months. Unrealized losses represented 7% 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.

Notes to Consolidated Financial Statements(Continued)

Note 5. Investments in equity securities(Continued)

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

 

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

Insurance and other

    $ 100,757         $ 110,212       $ 135,355     $ 120,471 

Railroad, utilities and energy *

   1,476        1,238      1,380    1,186 

Finance and financial products

   302        372      378    375 
  

 

   

 

   

 

   

 

 
    $ 102,535         $ 111,822       $ 137,113     $ 122,032 
  

 

   

 

   

 

   

 

 

 

*

Included in other assets.

Note 6. Other investmentsInvestments in The Kraft Heinz Company

Other investments includeIn 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 of Wm. Wrigley Jr. Company (“Wrigley”), The Dow Chemical Company (“Dow”) and Bank of America Corporation (“BAC”) warrants to purchase common stock of BAC and preferred and common stock of Restaurant Brands International, Inc. (“RBI”). Other investments are classified as available-for-sale and are shown in our Consolidated Balance Sheets as follows (in millions).

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

Insurance and other

   $9,970         $9,970       $15,415         $15,998   

Finance and financial products

   1,000         3,052       2,078         5,719   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $10,970         $13,022       $17,493         $21,717  
  

 

 

   

 

 

    

 

 

   

 

 

 

During 2008, we purchased $2.1 billion of Wrigley preferred stock that was acquired pursuant to a shareholder agreement in conjunction with Mars Incorporated’s acquisition of Wrigley. Pursuant to certain put and call provisions in the shareholder agreement, up to 50% of our original investment was redeemable over a 90-day period that was scheduled to begin on October 6, 2016. On August 8, 2016, we entered into a stock purchase agreement with Mars, under which Mars agreed to acquire all of the Wrigley preferred stock for approximately $4.56 billion, which included a prorated dividend that would have otherwise been payable on October 6, 2016. The transaction was completed on September 27, 2016.

We own 3,000,000 shares of Series A Cumulative Convertible Perpetual Preferred Stock of Dow (“Dow Preferred”Stock”) with a liquidation valuepreference of $1,000 per share. Each$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 the Dow Preferred is convertible into 24.201 shares of DowHeinz Holding 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 thestock. Heinz Holding 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. The RBI Preferred is redeemable at the option of RBI beginning on December 12, 2017. 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.acquired H.J. Heinz Company.

Notes to Consolidated Financial Statements(Continued)

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

In March 2015, Heinz Holding entered into an agreement to acquire all of the outstanding common stock of Kraft Foods Group, Inc. (“Kraft”). In June 2015, Berkshire exercised the aforementioned common stock warrants. On July 1, 2015, Berkshire and 3G 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 $391 million in the first six months of 2017 and $374 million in the first six months of 2016, which we recorded as reductions 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 marketers 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       

   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”). Berkshire’s initial investments consisted of 425 million

   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 
  

 

 

   

 

 

    

 

 

   

 

 

 

We 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. On June 7, 2016, our Preferred Stock investment was redeemed for cash of $8.32 billion. Prior to its redemption, the Preferred Stock was entitled to dividends at 9%$0.12 per annum.

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”). Upon completion of the acquisition, Heinz Holding was renamed The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee, and other grocery products, in the world. Kraft Heinz’s leading iconic brands includeKraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta.

In connection with Heinz Holding’s acquisition of Kraft, Kraft shareholders received one share of newly issued Heinz Holding common stock for each share of Kraft common stock and a special cash dividend of $16.50 per share. 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%. We account for our investment in Kraft Heinz common stock on the equity method. Under the equity method, the issuance of shares by an investee is accounted for by the investor as if the investor had sold a proportionate share of its investment. As a result, we recorded a non-cash pre-tax holding gain of approximately $6.8 billionbeginning in the third quarter of 2015, representing the excess2017. On June 30, 2017, we announced our intention to exercise all of the fairBAC Warrants we currently own when the BAC quarterly dividend increase occurs. We currently expect to use substantially all of our BAC Preferred as consideration for the $5 billion cost to exercise the BAC Warrants.

We currently own Class A 9% Cumulative Compounding Perpetual Preferred Shares of RBI (“RBI Preferred”) having a stated value of Kraft Heinz common stock$3 billion. RBI, domiciled in Canada, franchises and operates quick service restaurants. The RBI Preferred is entitled to dividends on a cumulative basis of 9% per 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 dateoption 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 merger over our carryingstated value associated with the reduction in our ownership.

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

   Carrying Value
    September 30, 
2016
     December 31, 
2015

Common stock

    $15,711           $15,714  

Preferred Stock

    —           7,710  
   

 

 

      

 

 

 
    $15,711           $23,424  
   

 

 

      

 

 

 

Our equity method earnings on the common stock and dividends earned on the Preferred Stock in the first nine months of 2016 and 2015 were $851 million and $329 million, respectively, and are included in interest, dividend and other investment income in our Consolidated Statements of Earnings. Preferred Stock dividends received in the first nine months of 2016 were $180 million. In 2015, Preferred Stock dividends received were $180 million in the third quarter and $540 million in the first nine months.

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

       October 2, 2016          January 3, 2016    

Assets

    $121,080       $122,973   

Liabilities

    63,212       56,737   

   Third Quarter    First Nine Months
   2016    2015    2016    2015

Sales

    $    6,267        $    6,120         $    19,630        $ 11,214 ��    
   

 

 

      

 

 

      

 

 

      

 

 

 

Net earnings (loss) attributable to common shareholders

    $842        $(303)        $2,508        $(551)     
   

 

 

      

 

 

      

 

 

      

 

 

 

Notes to Consolidated Financial Statements(Continued)

 

Note 8. Income taxes

Our consolidated effective income tax rates for the thirdsecond quarter and first ninesix months of 20162017 were 30.3%28.9% and 25.8%28.1%, respectively. In 2015, our effective income tax rates were 32.3% forrespectively, and 31.1% and 22.3%, respectively, in the thirdsecond quarter and 31.6% for the first nine months.six 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 a 4.7an 8.3 percentage point reduction in our consolidated effective income tax rate for the first ninesix months of 2016.

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   
  

 

 

   

 

 

   

 

 

   

 

 

 

     Third Quarter     First Nine Months 
         2016             2015             2016             2015     

Fixed maturity securities—

                

Gross gains from sales and redemptions

     $5         $6        $44         $88   

Gross losses from sales and redemptions

     (24)        (44)       (41)        (128)  

Equity securities—

                

Gross gains from sales and redemptions

     3,173         8,407        5,720         8,855   

Gross losses from sales and redemptions

     (13)        (75)       (76)        (95)  

Other-than-temporary impairment losses

     —        (26)       (63)        (26)  

Other

     9         (2)       59         31   
    

 

 

     

 

 

     

 

 

     

 

 

 
     $  3,150         $  8,266        $  5,643         $  8,725   
    

 

 

     

 

 

     

 

 

     

 

 

 

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 2016 included gainsthe second quarter of approximately $2.4 billion from the disposition of our investment in Wrigley preferred stock in the third quarter, and in the first nine months also2016 included $610 million from the redemption of our investment in Kraft Heinz Preferred Stock and a non-cash holding gainStock. Gains in the first six months of 2016 also included approximately $1.1 billion from the exchange of our P&G common stock in connection with the acquisition of Duracell. The non-cash gain from the P&G/Duracell exchange represented the excess of the fair value of net assets of Duracell over the cost basis of the P&G stock exchanged. Gains from sales and redemptions of equity securities in the third quarter and first nine months of 2015 included a non-cash holding gain of approximately $6.8 billion in connection with our investment in Kraft Heinz common stock.

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).

       September 30,    
2016
        December 31,    
2015

Raw materials

    $2,909             $1,852   

Work in process and other

    2,461             778   

Finished manufactured goods

    4,287             3,369   

Goods acquired for resale

    6,106             5,917   
   

 

 

      

 

 

 
    $  15,763             $  11,916   
   

 

 

      

 

 

 

Inventories at September 30, 2016 included approximately $3.6 billion related to PCC and Duracell.

Notes to Consolidated Financial Statements(Continued)

   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   
  

 

 

  

 

 

 

Notes to Consolidated Financial Statements(Continued)

 

    September 30, 
2016
    December 31, 
2015
 

Insurance premiums receivable

   $10,226        $8,843     

Reinsurance recoverable on unpaid losses

   3,482        3,307     

Trade and other receivables

   14,181        11,521     

Allowances for uncollectible accounts

   (345)        (368)    
  

 

 

   

 

 

 
   $ 27,544        $23,303     
  

 

 

   

 

 

 

Trade and other receivables at September 30, 2016 included approximately $1.9 billion related to PCC and Duracell.Note 11. Receivables(Continued)

Loans

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

 

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

Loans and finance receivables before allowances and discounts

   $13,663       $13,186       $14,967   $13,728 

Allowances for uncollectible loans

   (183)       (182)       (177 (182

Unamortized acquisition discounts

   (267)       (232)       (231 (246
  

 

   

 

   

 

  

 

 
   $ 13,213       $    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 ninesix months of 2017 and 2016 and 2015 were $124 million and $119 million, respectively.$78 million. Loan charge-offs, net of recoveries, in the first ninesix months of 2016were $83 million in 2017 and 2015 were $123$78 million and $136 million, respectively.in 2016. At SeptemberJune 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 SeptemberJune 30, 2016,2017, we considered approximately 98%99% of the loan balances were determined to be performing and approximately 94%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 
   September 30, 
2016
   December 31, 
2015
 

Land

      $2,128        $1,689    

Buildings and improvements

   5 – 40 years    8,315        7,329    

Machinery and equipment

   3 – 25 years    20,103        17,054    

Furniture, fixtures and other

   2 – 15 years    4,419        3,545    
   

 

 

  

 

 

 
    34,965        29,617    

Accumulated depreciation

    (15,639)        (14,077)   
   

 

 

  

 

 

 
    $19,326        $ 15,540    
   

 

 

  

 

 

 

Property, plant and equipment at September 30, 2016 included approximately $3.3 billion related to PCC and Duracell.

Notes to Consolidated Financial Statements(Continued)

Note 12. Property, plant and equipment(Continued)

   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  
    September 30, 
2016
    December 31, 
2015
 

Railroad:

      

Land

       $6,060      $6,037   

Track structure and other roadway

   7 – 100 years     47,586      45,967   

Locomotives, freight cars and other equipment

   6 – 40 years     11,860      11,320   

Construction in progress

       1,064      1,031   
    

 

 

   

 

 

 
     66,570      64,355   

Accumulated depreciation

     (5,673)      (4,845)  
    

 

 

   

 

 

 
     $60,897      $59,510   
    

 

 

   

 

 

 

Utilities and energy:

  

Utility generation, transmission and distribution systems

   5 – 80 years     $70,316     $69,248   

Interstate natural gas pipeline assets

   3 – 80 years     6,866      6,755   

Independent power plants and other assets

   3 – 30 years     6,056      5,626   

Construction in progress

       3,175     2,627   
    

 

 

   

 

 

 
     86,413      84,256   

Accumulated depreciation

     (24,305)     (23,487)  
    

 

 

   

 

 

 
     $    62,108     $    60,769   
    

 

 

   

 

 

 

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

Assets held for lease

   5 – 35 years     $11,906       $11,317       5 – 35 years    $12,110   $11,902 

Land

       223       220           226  224 

Buildings, machinery and other

   3 – 50 years     1,289       1,207       3 – 50 years    1,365  1,302 
    

 

   

 

     

 

  

 

 
     13,418       12,744         13,701  13,428 

Accumulated depreciation

     (3,681)       (3,397)        (3,910 (3,739
    

 

   

 

     

 

  

 

 
     $    9,737       $    9,347         $    9,791   $  9,689 
    

 

   

 

     

 

  

 

 

A summary of depreciation expense follows (in millions).

 

   First Nine Months 
   2016   2015 

Insurance and other

   $ 1,595     $ 1,240  

Railroad, utilities and energy

   3,459     3,276  

Finance and financial products

   466     447  
  

 

 

   

 

 

 
   $ 5,520     $ 4,963  
  

 

 

   

 

 

 

Notes to Consolidated Financial Statements(Continued)

   First Six Months 
   2017   2016 

Insurance and other

   $ 1,089    $ 1,037 

Railroad, utilities and energy

   2,389    2,298 

Finance and financial products

   321    308 
  

 

 

   

 

 

 
   $ 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).

 

   September 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

   17,016       2,563       616    17,650 

Other, including foreign currency translation

   (332)       (569)      73    (872
  

 

   

 

   

 

   

 

 

Balance at end of period

   $79,392       $62,708       $ 80,175    $ 79,486 
  

 

   

 

   

 

   

 

 

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

 

 September 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

   $41,575      $6,541      $14,610      $5,462   $40,419    $7,199    $39,976     $6,495 

Railroad, utilities and energy

  897     279     888     239   903    312    898     293 
  

 

     

 

     

 

     

 

   

 

     

 

     

 

     

 

  
   $42,472      $6,820      $15,498      $5,701   $41,322    $7,511    $40,874     $6,788 
  

 

     

 

     

 

     

 

   

 

     

 

     

 

     

 

  

Trademarks and trade names

   $6,049      $821      $3,041      $765   $  5,275    $   653    $  5,175     $   616 

Patents and technology

  4,455     2,329     4,252     2,050   4,435    2,512    4,341     2,328 

Customer relationships

  28,851     2,721     5,474     2,131   28,457    3,299    28,243     2,879 

Other

  3,117     949     2,731     755   3,155    1,047    3,115     965 
  

 

     

 

     

 

     

 

   

 

     

 

     

 

     

 

  
   $42,472      $6,820      $15,498      $5,701   $41,322    $7,511    $40,874     $6,788 
  

 

     

 

     

 

     

 

   

 

     

 

     

 

     

 

  

Other intangible assets at September 30, 2016 included preliminary fair values of intangible assets of PCC and Duracell of approximately $26.2 billion, which included approximately $17.6 billion in customer relationships and trade names that were preliminarily determined to have indefinite lives. Amortization expense in the first ninesix months of 2016was $740 million in 2017 and 2015 was $1,085$716 million and $837 million, respectively.in 2016. Intangible assets with indefinite lives excluding intangible assets related to business acquisitions completed in 2016, were approximately $3.0$18.8 billion as of SeptemberJune 30, 20162017 and $18.7 billion as of December 31, 2015.2016.

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. During 2016,Currently, the derivative contracts of our finance and financial products businesses consisted 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).

 

   September 30, 2016  December 31, 2015 
    Liabilities    

 

  Notional  

Value

   Liabilities    

 

  Notional  

Value

 

Equity index put options

   $  3,973     $  27,982(1)   $  3,552     $  27,722(1) 

Credit default(2)

   —          284      7,792  
  

 

 

    

 

 

   
   $3,973       $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, our remaining credit default contract was terminated by mutual agreement with the counterparty. We no longer have any exposure to losses under credit default contracts.

Notes to Consolidated Financial Statements(Continued)

Note 14. Derivative contracts(Continued)

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).

 

  Third Quarter   First Nine Months   Second Quarter   First Six Months 
  

 

2016

   2015   2016 2015   

 

2017

   2016   2017   2016 

Equity index put options

   $458       $(802)      $(421  $371      $(65)      $    (83)      $395     $(879)   

Credit default

   —       38       89        —       103       —       89    
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 
   $    458       $    (764)      $  (332  $    380      $    (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 $1.6 billion$842 million at SeptemberJune 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 4.23.4 years at SeptemberJune 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 SeptemberJune 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.

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 $105$123 million as of SeptemberJune 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 $198$139 million as of SeptemberJune 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 Nine Months     First Six Months 
  

 

2016

   2015   

 

  2017  

         2016     

Cash paid during the period for:

         

Income taxes

   $  2,237    $  2,575     $    1,082   $  1,055     

Interest:

         

Insurance and other businesses

   499     312     390    253     

Railroad, utilities and energy businesses

   2,130     2,043     1,410    1,406     

Finance and financial products businesses

   263     274     211    184     

Non-cash investing and financing activities:

         

Liabilities assumed in connection with business acquisitions

   17,319     2,792     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 SeptemberJune 30, 2016.2017.

 

  Weighted
Average
 Interest Rate 
  September 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

   2.2%    $18,108           $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

   2.2%   2,019           1,989         3.0%          2,013    2,094 

Other subsidiary borrowings due 2016-2044

   4.0%   7,387           2,811      

Other subsidiary borrowings due 2017-2045

   3.9%          7,387    7,378 
   

 

   

 

     

 

   

 

 
    $27,514           $14,599            $27,781     $27,175 
   

 

   

 

     

 

   

 

 

OnIn January 8, 2016, Berkshire entered into a $10 billion 364-day revolving credit agreement. 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. 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. In August 2016, Berkshire issued $750first six months of 2017 (including $526 million in senior unsecured notes consisting of $500 million of 1.15% notes due in 2018the second quarter) and $250 million of floating rate notes due in 2018, to replace $750 million of maturing debt. Other subsidiary borrowings at September 30, 2016 included $4.7 billionresulted from the revaluation attributable to PCC.changes in foreign currency exchange rates.

Notes to Consolidated Financial Statements(Continued)

 

   Weighted
Average
  Interest Rate  
   September 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%    $7,817           $7,814      

Subsidiary and other debt due 2016-2064

   4.7%    28,828           28,188      

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

   4.8%    22,166           21,737      
   

 

 

   

 

 

 
    $58,811           $57,739      
   

 

 

   

 

 

 

Note 17. Notes payable and other borrowings(Continued)

   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 SeptemberJune 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 
  September 30, 
2016
    December 31, 
2015
 

Finance and financial products:

   

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

  2.5%  $14,421          $10,679      

Other subsidiary borrowings due 2016-2036

  5.0%  1,052          1,272      
   

 

 

   

 

 

 
    $15,473          $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 million of 1.45% notes due in 2018, $1.0 billion of floating rate notes due in 2018, $1.25 billion of 1.70% notes due in 2019 and $500 million of floating rate notes due in 2019. In August 2016, BHFC issued $1.25 billion of senior notes consisting of $1 billion of 1.30% notes due in 2019 and $250$950 million of floating rate notes due in 2019 primarily to replace $1and $350 million of floating rate notes due in 2020. In the first six months of 2017, senior notes of $2.4 billion of maturing debt.matured. The borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, are fully and unconditionally guaranteed by Berkshire.

As of SeptemberJune 30, 2016,2017, our subsidiaries also had unused lines of credit and commercial paper capacity aggregating approximately $8.2$8.4 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included about $4.0$4.8 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, at June 30, 2017, Berkshire guarantees certainguaranteed approximately $2.6 billion of other subsidiary borrowings, which aggregated approximately $3.2 billion at September 30, 2016.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.

Notes to Consolidated Financial Statements(Continued)

 

Note 17.18. Fair value measurements

Our financial assets and liabilities are summarized below as of SeptemberJune 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)

September 30, 2016

     

June 30, 2017

     

Investments in fixed maturity securities:

          

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

 $    4,565  $    4,565      $    3,318    $    1,247       $    —          $    4,792 $    4,792     $    3,326   $    1,466      $    —  

States, municipalities and political subdivisions

 1,279  1,279       —      1,279       —          1,103 1,103      —     1,103      —  

Foreign governments

 9,795  9,795      7,704    2,091       —          8,922 8,922     7,143   1,779      —  

Corporate bonds

 7,789  7,789       —      7,682      107        7,559 7,559      —     7,552     7

Mortgage-backed securities

 1,219  1,219       —      1,219       —          1,035 1,035      —     1,035      —  

Investments in equity securities

 102,535  102,535      102,534     —        1        137,113 137,113     137,104   8     1  

Investment in Kraft Heinz common stock

 15,711  29,130      29,130     —         —          15,584 27,871     27,871    —        —  

Other investments

 17,493  17,493      376     —        17,117        20,234 20,234      —     20,234      —  

Loans and finance receivables

 13,213  13,650       —      14      13,636        14,559 15,015      —     1,095     13,920

Derivative contract assets(1)

 105  105      1    5      99        123 123     2   15     106

Derivative contract liabilities:

          

Railroad, utilities and energy(1)

 198  198      5    161      32        139 139     2   120     17

Finance and financial products:

     

Equity index put options

 3,973  3,973       —       —        3,973        2,494 2,494      —      —       2,494

Notes payable and other borrowings:

          

Insurance and other

 27,514  29,119       —      29,119       —          27,781 28,489      —     28,489      —  

Railroad, utilities and energy

 58,811  69,130       —      69,130       —          60,701 68,603      —     68,603      —  

Finance and financial products

 15,473  16,251       —      15,862      389        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.

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 ninesix months ending SeptemberJune 30, 20162017 and 20152016 follow (in millions).

 

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

Nine months ending September 30, 2016

     

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
 

 

   

 

   

 

 

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

  —     2,409   (221)  —      —    (737)

Other comprehensive income

 3   (2,233)  (2)   (927)   —  

Regulatory assets and liabilities

  —      —     (12)  —      —    (11)

Acquisitions, dispositions and settlements

 5   (4,461)  (81)    —    (35)

Transfers into/out of Level 3

 (1)   —     195  (1)    —    195
 

 

   

 

   

 

  

 

   

 

   

 

 

Balance at September 30, 2016

  $107    $17,118    $(3,906)

Balance at June 30, 2016

 $105    $  20,476   $  (4,373
 

 

   

 

   

 

  

 

   

 

   

 

 

Nine months ending September 30, 2015

     

Balance at December 31, 2014

  $8    $21,996    $(4,759)

Gains (losses) included in:

     

Earnings

  —      —     467 

Other comprehensive income

  —     (1,722)  (5)

Regulatory assets and liabilities

  —      —     (21)

Acquisition, dispositions and settlements

 103    —     (65)

Transfers into/out of Level 3

  —      —     3 
 

 

   

 

   

 

 

Balance at September 30, 2015

  $  111    $20,274    $(4,380)
 

 

   

 

   

 

 

Gains and losses included in earnings are included as components of investment gains/losses, derivative gains/losses orand 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. Ininvestments and the third quarterreclassification of 2016,investment appreciation in net earnings, as appropriate in our investment in Wrigley preferred stock was redeemed.Consolidated Statements of Comprehensive Income.

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 SeptemberJune 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

  $11,615    Discounted cash flow   Expected duration     6 years  
       
 
Discount for transferability
restrictions and subordination
  
  
   159 basis points  

Common stock warrants

   5,502    Warrant pricing model               
 
Discount for transferability and
hedging restrictions
  
  
   7%  

Net derivative liabilities:

        

Equity index put options

   3,973    Option pricing model   Volatility     21%  

Other investments consist of perpetual preferred stocks and common stock warrants that we acquired in 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 the index price, contract duration and dividend and interest ratesrate 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. Volatility 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 ninesix 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

    (22,628)      —       (22,628)   34,899,211     —        34,899,211 
   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Balance at September 30, 2016

    797,474      (11,680)      785,794    1,288,765,809     (1,409,762)      1,287,356,047 
   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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 1,644,0311,644,603 shares outstanding as of SeptemberJune 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 ninesix months ending SeptemberJune 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

Nine months ending September 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

 (912)    (101)  (39)    (26)  (1,078) 8,540   1,221  (64)   (7)   9,690

Reclassifications from accumulated other comprehensive income

 (3,188)     —     59     23   (3,106)

Reclassifications from accumulated other comprehensive income into net earnings

 (383   —      34   13    (336)
 

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Balance at September 30, 2016

  $34,498      $(3,957)   $(742)     $(1)   $29,798 

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

  $(4,904)     $—      $—       $ —      $(4,904)  $(589)   $—       $—      $ —      $(589)

Other

  —       —     79     41   120   —     —      45   24   69
 

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 

Reclassifications before income taxes

 (4,904)     —     79     41   (4,784) (589)   —      45   24   (520)

Applicable income taxes

 (1,716)     —     20     18   (1,678) (206)   —      11   11   (184)
 

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

 
  $(3,188)     $—      $59      $23    $(3,106)  $(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
 

 

   

 

   

 

   

 

 

  

 

 

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

Nine months ending September 30, 2015

                  

Balance at December 31, 2014

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

Other comprehensive income, net before reclassifications

   (7,958)       (1,602)       162        (113)     (9,511)   

Reclassifications from accumulated other comprehensive income

   (1,158)       128               11      (1,018)   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Balance at September 30, 2015

   $36,520        $(3,431)       $(876)       $(10)     $32,203    
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Reclassifications from other comprehensive income into net earnings:

                  

Investment gains/losses

   $(1,781)       $197        $—         $—        $(1,584)   

Other

   —         —                18      20    
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Reclassifications before income taxes

   (1,781)       197               18      (1,564)   

Applicable income taxes

   (623)       69               7      (546)   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 
   $(1,158)       $128               $11      $ (1,018)   
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

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.

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 the commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Leucadia has agreed to indemnify us for one-half of any losses incurred under the policy. Berkadia’s maximum outstanding balance of commercial paper borrowings is currently limited to $1.5 billion. On September 30, 2016, the aggregate amount of Berkadia commercial paper outstanding was $1.47 billion.

In the third quarter of 2016, our wholly-owned subsidiary, National Indemnity CompanyNICO 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 June 30, 2016March 31, 2017 were approximately $5.5$5.6 billion and $1.9$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. TheWe currently expect this transaction is currently expected towill 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. A significant source of funding for Berkadia’s operations is through the issuance of commercial paper, 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 we incur under the policy.

On July 7, 2017, Berkshire Hathaway Energy Company (“BHE”) agreed to acquire 80.03% of the outstanding equity interests of Oncor 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 a regulated electricity transmission and distribution company that operates the largest transmission and distribution system in Texas, delivering electricity to 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 remaining 0.22% of 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.

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).

 

                                                        
  Third Quarter  First Nine Months 
  2016  2015  2016  2015 

Operating Businesses:

    

Insurance group:

    

Underwriting:

    

GEICO

  $6,474     $5,788     $18,771     $16,792   

General Re

  1,389     1,405     4,168     4,397   

Berkshire Hathaway Reinsurance Group

  1,872     1,892     5,767     5,317   

Berkshire Hathaway Primary Group

  1,629     1,429     4,581     3,948   

Investment income

  1,043     1,046     3,428     3,474   
 

 

 

  

 

 

  

 

 

  

 

 

 

Total insurance group

  12,407     11,560     36,715     33,928   

BNSF

  5,167     5,600     14,519     16,571   

Berkshire Hathaway Energy

  5,198     5,144     13,615     14,018   

Manufacturing

  12,082     9,181     34,837     27,568   

McLane Company

  12,271     12,264     36,121     36,200   

Service and retailing

  6,331     6,151     18,607     16,966   

Finance and financial products

  1,962     1,725     5,677     5,078   
 

 

 

  

 

 

  

 

 

  

 

 

 
  55,418     51,625     160,091     150,329   

Reconciliation of segments to consolidated amount:

    

Investment and derivative gains/losses

  3,608     7,502     5,311     9,105   

Income from Kraft Heinz

  225     98     851     329   

Eliminations and other

  (183)    (236)    (322)     (762)   
 

 

 

  

 

 

  

 

 

  

 

 

 
  $            59,068     $            58,989     $            165,931     $            159,001   
 

 

 

  

 

 

  

 

 

  

 

 

 

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

  $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).

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

 

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

Operating Businesses:

        

Insurance group:

        

Underwriting:

        

GEICO

  $138     $258     $552     $471     $119    $150    $294    $414  

General Re

 100    (2)   144    58    25   2   (118)  44  

Berkshire Hathaway Reinsurance Group

 (19)   199    86    247    (400)  184   (1,000)  105  

Berkshire Hathaway Primary Group

 190    188    485    566    232   174   421   295  

Investment income

 1,029    1,045    3,406    3,466    1,283   1,235   2,412   2,377  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total insurance group

 1,438      1,688      4,673    4,808    1,259   1,745   2,009   3,235  

BNSF

 1,633    1,839    4,129    5,047    1,537   1,238   2,882   2,496  

Berkshire Hathaway Energy

 1,246    1,153    2,481    2,398    670   666   1,285   1,235  

Manufacturing

 1,981    1,259    5,150    3,857    1,939   1,687   3,426   3,169  

McLane Company

 106    106    371    384    69   129   157   265  

Service and retailing

 449    378    1,230    1,260    555   457   948   781  

Finance and financial products

 517    486    1,578    1,480    508   583   974   1,061  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 7,370    6,909    19,612     19,234     6,537   6,505   11,681   12,242  

Reconciliation of segments to consolidated amount:

        

Investment and derivative gains/losses

 3,608    7,502    5,311    9,105    225   663   1,000   1,703  

Income from Kraft Heinz

 225    98    851    329    309   386   548   626  

Interest expense, not allocated to segments

 (201)   (83)   (518)    (391)    (646)  31   (857)  (317)  

Eliminations and other

 (477)   (354)   (903)    (712)    (296)  (213)  (555)  (426)  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
  $          10,525     $          14,072     $              24,353     $              27,565     $              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 in millions.after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).

 

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

Insurance – underwriting

   $272    $414     $822     $856     $(22)    $337    $(289)    $550  

Insurance – investment income

 850  840   2,747   2,692   965   978  1,873   1,897  

Railroad

 1,020  1,156   2,576   3,164   958   772  1,796   1,556  

Utilities and energy

 932  786   1,855   1,709   516   482  1,017   923  

Manufacturing, service and retailing

 1,702  1,177   4,461   3,609   1,662   1,493  2,979   2,759  

Finance and financial products

 337  303   1,044   962   332   396  635   707  

Investment and derivative gains/losses

   2,347    4,877   4,593   5,920   143   394  647   2,246  

Other

 (262 (125 (310)   (307)   (292)  149  (336)  (48) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net earnings attributable to Berkshire Hathaway shareholders

   $7,198    $9,428     $  17,788     $    18,605     $    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.

Earnings of ourOur insurance businesses generatedafter-tax losses from underwriting operations were lower in the thirdsecond quarter and first ninesix 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 2015. In2016 due to decreased earnings from the first nine monthsre-estimation of 2016, the Berkshire Hathaway Reinsuranceultimate liabilities for prior years’ loss events, higher losses from current year catastrophe events and Primary Groups generated lower net underwriting earnings while GEICO and General Re had earnings increases.increased deferred charge amortization on retroactive reinsurance contracts. Our railroad business generated lower netcomparative increases in earnings in the thirdsecond quarter and first ninesix months of 2017 compared to 2016, primarily due to a 6.6% year-to-date decline inreflecting increased unit volume. Earnings of our utilitiesvolume, partly offset by increased fuel and other costs. Our utility and energy businesses increasedbusiness produced higher earnings in the thirdsecond quarter and first ninesix months of 2017 compared to 2016, which was attributable to increased pre-tax earnings andreflecting lower effective income tax rates. The increases in net earnings fromEarnings of our manufacturing, service and retailing businesses in 2017 increased 11.3% in the second quarter and 8.0% in the first six months compared to the 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 thirdsecond quarter and first ninesix months of 2017 were approximately $2.3$143 million and $647 million, respectively, and $394 million and $2.25 billion in the second quarter and $4.6 billion, respectively, infirst six months of 2016, compared to $4.9 billion and $5.9 billion, respectively, in 2015. respectively.After-tax investment gains in the third quarterfirst six months of 2016 included approximately $1.6 billion from the sale of our Wrigley preferred stock investment and in the first nine months also included anon-cash gains gain of approximately $1.9 billion related to the exchange of P&G common stock for 100% of the common stock of Duracell. After-tax investment and derivative gains in the third quarter of 2015 included non-cash holding gains of approximately $4.4 billion in connection with our investment in Kraft Heinz common stock. 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.

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. In the first nine months of 2016, we had no significant catastrophe losses. Based on preliminary estimates, we believe that losses arising from Hurricane Matthew in October 2016 will not be material. In the third quarter of 2015, we recorded estimated losses of $130 million in connection with a property loss event in China. 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 U.S. 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.

 

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

Underwriting gain (loss) attributable to:

                    

GEICO

   $138        $258          $552      $471     $119       $150          $294      $414 

General Re

   100       (2)        144     58     25      2         (118)    44 

Berkshire Hathaway Reinsurance Group

   (19)      199         86     247     (400)     184           (1,000)        105 

Berkshire Hathaway Primary Group

   190       188         485     566     232      174         421     295 
  

 

   

 

     

 

   

 

   

 

   

 

     

 

   

 

 

Pre-tax underwriting gain

   409       643           1,267       1,342  

Pre-tax underwriting gain (loss)

   (24)     510         (403)    858 

Income taxes and noncontrolling interests

   137       229         445     486     (2)     173         (114)    308 
  

 

   

 

     

 

   

 

   

 

   

 

     

 

   

 

 

Net underwriting gain

   $     272        $  414          $822      $856  

Net underwriting gain (loss)

   $     (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).

 

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

Premiums written

  $6,977       $6,141       $  19,771       $  17,618       $7,270      $6,229      $  14,857      $  12,794    
 

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

Premiums earned

  $  6,474       100.0     $5,788       100.0     $18,771       100.0      $16,792       100.0     $  7,244      100.0     $6,247      100.0     $14,089      100.0    $12,297      100.0   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Losses and loss adjustment expenses

 5,335     82.4    4,658     80.4    15,331     81.7     13,673     81.4    6,108    84.3    5,173    82.8    11,698    83.0    9,996    81.3   

Underwriting expenses

 1,001     15.5    872     15.1    2,888     15.4     2,648     15.8    1,017    14.1    924    14.8    2,097    14.9    1,887    15.3   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Total losses and expenses

 6,336     97.9        5,530     95.5    18,219     97.1     16,321     97.2    7,125    98.4        6,097    97.6    13,795    97.9    11,883    96.6   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Pre-tax underwriting gain

  $138       $258       $552       $471       $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.

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

 

Insurance—Underwriting(Continued)

 

GEICO (Continued)

 

Premiums written inIn the thirdsecond quarter and first ninesix months of 2016 were $7.0 billion and $19.8 billion, respectively, increases of 13.6% and 12.2%, respectively,2017, ourpre-tax underwriting gains declined compared to the third quarter and first nine months of 2015. Premiums earned in 2016, increased $686 million (11.9%) in the third quarter and $2.0 billion (11.8%) in the first nine months, as compared to the same periods in 2015. These increases reflected voluntary auto policy-in-force growth of 5.2% and increased averageclaim costs grew faster than premiums per auto policy of approximately 6.9% over the past twelve months, which were attributable to rate increases, coverage changes and changes in state and risk mix. Throughout 2015, we experienced increases in claims frequencies and severities across all of our major coverages. As a result, we implemented premium rate increases as necessary. Voluntary auto new business sales in 2016 increased 16.5% in the third quarter and 6.8% in the first nine months compared to 2015. The significant growth in voluntary auto new business during the third quarter has continued in October. In 2016, voluntary auto policies-in-force increased by approximately 276,000 in the third quarter and 670,000 in the first nine months.

earned. Losses and loss adjustment expenses incurred in 20162017 increased $677$935 million (14.5%(18.1%) in the thirdsecond quarter and $1.7 billion (12.1%(17.0%) in the first ninesix 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) increased 2.01.5 percentage points in the thirdsecond quarter and 0.31.7 percentage points in the first ninesix months of 2017 as compared to 2015, reflecting increased storm losses and claims severity, partly offset by the aforementioned premium rate increases.2016. Claims frequencies (claim counts per exposure unit) in the first ninesix months of 20162017 were relatively flat for property damage and collision coverages, were relatively unchanged as the decreases experienced in the first quarter were offset by subsequent increases. Claim frequenciesincreased approximately three percent for bodily injury coverage and decreased about two percent for the first nine months of 2016 were relatively unchanged from 2015.personal injury protection coverage compared to 2016. Average claims severities were higher in the first ninesix months of 20162017 for physicalproperty damage and collision coverages (four to sixfive percent range) and bodily injury coverage (five(four to sevensix percent range). Losses and loss adjustment expenses in the first six months of 2017 and 2016 included reductions of $106 million and $216 million, respectively, from there-estimation of liabilities for prior years’ claims. In addition, storm-related losses (primarily from hail and flooding) in the third quarter and first ninesix months of 2016 were2017, we incurred storm losses of approximately $90$268 million and $380 million, respectively,(1.9% of premiums earned), compared to $5$290 million and $129 million, respectively,(2.4% of premiums earned) in the corresponding 2015 periods.first six months of 2016.

Underwriting expenses in the thirdsecond quarter and first ninesix months of 2016 were $1.0 billion and $2.9 billion, respectively, increases of $1292017 increased $93 million (14.8%(10.1%) and $240$210 million (9.1%(11.1%), respectively, over 2015.compared to 2016. Our expense ratioratios (underwriting expenses to premiums earned) in 2016 increased 0.42017 declined 0.7 percentage points in the thirdsecond quarter and decreased 0.4 percentage points in the first ninesix months 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 reflected the increases 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. Property and casualty reinsurance is written primarily on a direct basis, but isWe also written through brokers and intermediaries. Lifewrite life and health reinsurance is written primarily on a direct basis through General Re Life Corporation and 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) 
 Third Quarter First Nine Months Third Quarter First Nine 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

    $643        $683        $1,919          $2,119        $66       $(9)      $119       $65       $777        $  624        $1,431          $1,276      $  (14)     $23      $(157)   $53   

Life/health

  746      722      2,249      2,278      34     7     25     (7)    801      765      1,538      1,503      39    (21)   39    (9)  
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
    $1,389        $1,405        $4,168          $4,397        $  100       $    (2)      $  144       $    58       $1,578        $1,389        $2,969          $2,779      $25      $2      $    (118)   $    44   
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Property/casualty

In the thirdsecond quarter and first six months of 2016,2017, property/casualty premiums written were relatively unchanged from 2015, reflecting a modest increase in North America, offset by modestly lower volume in international markets. In the first nine months, property/casualty premiums written in 2016 declined $215earned increased $153 million (9%(25%) compared to 2015, primarily due to lower volume in international treaty and broker market business, and to a lesser degree, to unfavorable foreign currency exchange rate changes. In 2016, premiums earned decreased $40$155 million (6%(12%) in the third quarter and $200 million (9%) in the first nine months, respectively, as compared to 2016. The increases reflected higher written premiums in both direct and broker markets, primarily attributable to new business and increased participations for renewals. Despite the same periodsincrease in 2015. The declinespremiums in earned premiums reflected lower volume and unfavorable changes in foreign currency exchange rates. Insurance2017, 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.written in prior years. The increase was the result of the U.K. Ministry of Justice’s decision in the first quarter to reduce the 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.

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

 

Insurance—Underwriting(Continued)

 

General Re (Continued)

 

Life/health

Life/health premiums earned in the second quarter and first six months of 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 property business generated life/health operations producedpre-tax underwriting gains of $76$39 million in the thirdsecond quarter and $154first six months of 2017 compared topre-tax underwriting losses of $21 million in the second quarter and $9 million in the first ninesix months of 2016 compared to gains of $15 million and $114 million, respectively, in the corresponding 2015 periods. There were no significant catastrophe losses during the first nine months of 2016, while2016. The improved underwriting results in 2015 included estimated losses of $44 million from an explosion in Tianjin, China during the third quarter. In the first nine months of 2016, we recognized pre-tax gains from reductions of estimated losses on prior years’ business of approximately $160 million, which were relatively unchanged from 2015.

Our casualty/workers’ compensation business produced pre-tax2017 reflected lower underwriting losses of $10 million in the third quarter and $35 million in the first nine months of 2016 and pre-tax losses of $24 million in the third quarter and $49 million in the first nine months of 2015. Underwriting results in 2016 and 2015 included net losses on current year business and charges for recurring discount accretion on workers’ compensation liabilities and deferred charge amortization on retroactive reinsurance contracts, partially offset by gains from reductions of estimated losses on prior years’ business. 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 third quarter and first nine months of 2016, life/health premiums earned increased $24 million (3%) and decreased $29 million (1%), respectively, compared to 2015. Adjusting for changes in foreign currency exchange rates, premiums earned in 2016 increased $31 million (4%) in the third quarter and $32 million (1%) in the first nine months, reflecting growth across a number of non-U.S. markets, particularly in Asiaexpenses and the United Kingdom. Our life/health business produced pre-tax underwriting gainsimpact of $25 million in the first nine months of 2016 compared to losses of $7 million in the first nine months of 2015. In the first nine months of 2016, underwriting results reflected gains from our international life business offset by losses from the recurring discount accretion on long-term care liabilities and higher than expected individual life claim frequency in North America. Our international underwriting results in 2016 were adversely affected by increasedincreasing liabilities for estimated premium deficiencies on certain disability business in 2016. Underwriting results in the second quarter, partly offset by reductions in both foreign currency exchangefirst six months of 2017 and 2016 includedpre-tax losses from the runoff of U.S. long-term care and disability business of $38 million and $37 million, respectively, which were primarily due to the adverse impact from lower interest rates compared to 2015.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. 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 belowfollows (in millions).

 Premiums earned     Pre-tax underwriting gain (loss)  Premiums earned     Pre-tax underwriting gain (loss) 
 Third Quarter     First Nine Months     Third Quarter     First Nine 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

   $1,164         $1,341         $3,358         $3,168         $40        $315           $415      $737     $1,183         $1,067         $2,271         $2,194       $52        $249        $(217)       $375  

Retroactive reinsurance

  —        1        582        4            (114)      2          (196   (283 1        2        10,186        582      (331)            (590)      (82) 

Life and annuity

 708        550        1,827        2,145        55         (118)          (133    (207 602        583        1,170        1,119      (121)      (74)      (193)      (188) 
 

 

     

 

     

 

     

 

     

 

     

 

     

 

   

 

  

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

 
   $  1,872         $  1,892         $    5,767         $  5,317         $(19)       $199           $86      $247     $  1,786         $  1,652         $  13,627         $  3,895       $    (400)       $    184        $(1,000)       $105  
 

 

     

 

     

 

     

 

     

 

     

 

     

 

   

 

  

 

     

 

     

 

     

 

     

 

     

 

     

 

     

 

 

Property/casualty

Premiums written inIn the thirdsecond quarter and first ninesix months of 2016 decreased $9452017, premiums earned increased $116 million (50.2%(11%) and $322$77 million (8.2%(4%), respectively, compared to 2015. The decline during the third quarter was primarily due to the impact2016. Approximately half of the quota-share contract with Insurance Australia Group Ltd. (“IAG”), which became effective on July 1, 2015. Premiumsour premiums written in the third quarter of 2015 included a quota-share percentage of IAG’s unearned premiums in-force as of the effective date. Premiumsand earned decreased $177 million (13.2%) in the third quarter and increased $190 million (6.0%) in the first ninesix months compared to 2015. The increase in the first nine months was primarily attributable to increased premiums earnedof 2017 derived from the IAG contract, partially offset by lower premiums from property business.two contracts. Our premium volume is generallywas constrained for most property/casualty reinsurance coverages, and for property catastrophe reinsurance 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 $40 million and $415$52 million in the thirdsecond quarter andpre-tax losses of $217 million in the first ninesix 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 increased liability estimates attributable to the Ogden discount rate decrease. In the first six months of 2016, respectively, compared to $315we reduced estimated ultimate liabilities for prior years’ loss events by approximately $375 million, and $737 million, respectively, in 2015. In the third quarter of 2015, the property/casualty business incurred losses of $86 million from an explosion in Tianjin, China. The declines in pre-tax underwriting gains in 2016 were primarily due to comparatively lower gains from reductionsthan 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’ events.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.

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 also include foreign currency transaction gains/losses associated with foreign currency denominated liabilities of U.S.-based subsidiaries. In 2016, foreign currency gains were $21 million in the third quarter and $198 million in the first nine months. In 2015, foreign currency gains were $120 million in the third quarter and $92 million in the first nine months. Before foreign currency gains/losses, retroactive reinsurance contracts producedpre-tax underwriting losses of $229 million and $399 million in the second quarter and first six months of 2017, respectively, and $149 million and $259 million, respectively, in the comparable 2016 periods. The comparative increases in such losses in 2017 were primarily due to deferred charge amortization related to the AIG Agreement and another retroactive reinsurance contract written in December 2016, partly offset by a small net gain from a contract commuted in the first nine monthsquarter of $394 million in 20162017 and $375 million in 2015, primarily from recurring periodiccomparatively lower deferred charge amortization. Gross unpaidamortization 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 assumed underand loss adjustment expenses associated with our retroactive reinsurance contracts were approximately $23.7$40.1 billion at SeptemberJune 30, 20162017 and $24.7 billion at December 31, 2015.2016. Unamortized deferred charges related to such reinsurancethese contracts were approximately $7.4$13.5 billion at SeptemberJune 30, 20162017 and $7.6$8.0 billion at December 31, 2015.2016.

Life and annuity

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

 

 Premiums earned Pre-tax underwriting gain (loss)  Premiums earned Pre-tax underwriting gain (loss) 
 Third Quarter First Nine Months Third Quarter First Nine 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 

Periodic payment annuity

   $367     $195      $771      $1,062       $(61)     $(6)     $(123)      $(159)     $230    $195      $450      $404      $(198)    $8       $(343)    $(62) 

Life reinsurance

       337         350        1,043        1,068     (9)   (13)   5     (81)           368  383    712    706      3     (2)  14  

Variable annuity guarantee

 4   5    13    15         125         (99)   (15)    33   4  5    8    9    74   (85)    152   (140) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
   $708     $550      $1,827      $2,145       $55     $(118)     $    (133)      $    (207)     $602    $        583      $        1,170      $        1,119      $        (121)    $        (74)      $        (193)    $        (188) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Premiums earnedPeriodic 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 increased $172were $112 million (88.2%) in the third quarter and declined $291 million (27.4%) in the first nine months compared to 2015. Premiums earned in 2016 increased in the third quarter due to increased direct annuity volume, which for the first nine months was more than offset by the impact of a sizable reinsurance contract written in the second quarter of 2015.

Periodic payment annuity contracts generated pre-tax underwriting losses of $61 million in the third quarter and $123$233 million in the first ninesix months of 20162017 and $6$118 million and $228 million, respectively, in the thirdsecond quarter and $159 million in the first ninesix months of 2015. Our2016. We expect these contracts will generatepre-tax underwriting losses over time attributable to the accretion of discounted annuity liabilities. Discounted periodic payment annuity liabilities underwere 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 reflected lower claims and underwriting expenses.

Underwriting results of our variable annuity business (reinsurance contracts that provide guarantees on closed blocks of a U.S. subsidiary are denominated in foreign currencies, most significantly the Great Britain Pound (“GBP”). In 2016, the value of the U.S. Dollar strengthened versus the GBP, producing reductions in our liabilities in U.S. Dollars and resulting in pre-tax gains of $216 millionvariable annuity business) in the first nine months of 2016 and $53 million in the first nine months of 2015. Before the impact of foreign currency exchange rate changes, pre-tax underwriting losses from annuity contracts were $111 million and $339 million in the thirdsecond quarter and first ninesix months of 2016, respectively, compared to $662017 producedpre-tax underwriting gains of $74 million and $212$152 million, respectively, andpre-tax underwriting losses of $85 million and $140 million, respectively, in the corresponding 2015 periods. This business is expected to generate underwritingperiods of 2016. Underwriting gains and losses attributable to the recurring accretion of discounted annuity liabilities. The increases in underwriting losses (before foreign currency impacts)each period reflected increasedchanges in liabilities for guaranteed benefits, resulting from new business written over the past two yearschanges in securities markets and the impact of lower interest rates and from the periodic recognition of expected profit margins, which increased expected future loss payments under certain reinsurance contracts. Aggregatetogether, affected our liability estimates. Our estimated liabilities for variable annuity liabilitiesguarantees were approximately $9.6$1.9 billion at SeptemberJune 30, 20162017 and $8.7$2.1 billion at December 31, 2015.2016. Periodic underwriting results from these contracts can be volatile reflecting the volatility of securities markets.

InBerkshire Hathaway Primary Group

The 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 third quarter and first nine months of 2016, life reinsurance premiums were relatively unchanged compared to 2015. The life reinsurance business produced a pre-tax underwriting loss of $9 million in the third quarter and a pre-tax gain of $5 million in the first nine months of 2016. Underwriting losses of $81 million in the first nine months of 2015 included losses of $53 million incurred in connection with business terminated in the second quarter.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 changes in liabilities for guaranteed benefits which are impacted by changes in securities markets and interest rates. Periodic results from these contracts can be volatile reflecting changes in investment market conditions, which impact the underlying insured exposures. In the third quarter of 2016, the pre-tax underwriting gains were primarily due to better than expected equity market performance, which was more than offset in the first nine months of 2016 by lower interest rates. In the third quarter of 2015, pre-tax underwriting losses were primarily due to lower equity markets and interest rates which partly offset the underwriting gains in the first six months.

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 and workers’ compensation insurance; 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, a providerCompany. A summary of creditBH 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 Medicare Supplement insurance.

Premiums earnedfirst 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 ninesix months of 2016 were $4.58 billion, an increase of 16.0%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 2015. The increase2016 reflecting the increases in premiums was primarily attributable to volume increases from BH Specialty, MedPro Group, BHHC and GUARD. written.

The BH Primary insurers produced aggregate pre-tax underwriting gains of $485$232 million in the second quarter and $421 million in the first ninesix 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 corresponding increase inpre-tax underwriting gains. Underwriting results in the first six months of 2016 and $566included gains of $236 million in 2015. Combined loss ratios were 61% infrom the first nine monthsnet reductions of 2016 and 59% in 2015.estimated ultimate claims liabilities for prior years’ events. The comparative increase ingains from the loss ratio reflected comparative declines in favorable loss development of prior years’ loss events, partly offset by lower loss ratios 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).

 

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

Interest income

   $224        $221        $668     $675     $280      $214      $526     $444  

Dividend income

 805      824      2,738   2,791   1,003    1,021    1,886   1,933  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net investment income before income taxes and noncontrolling interests

 1,029      1,045      3,406   3,466  

Investment income before income taxes and noncontrolling interests

 1,283    1,235    2,412   2,377  

Income taxes and noncontrolling interests

 179      205      659   774   318    257    539   480  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Net investment income

   $850        $840        $  2,747     $2,692     $    965      $978      $1,873    $1,897  
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Pre-tax investment income in the thirdsecond quarter and first ninesix months of 2016 declined $162017 increased $48 million (2%(4%) and $60$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 equivalents 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 $91$107 billion at SeptemberJune 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.

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).

 

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

Cash and cash equivalents

    $50,242         $43,762     

Cash and cash equivalents and U.S. Treasury Bills

    $60,198       $48,888   

Equity securities

   100,277        109,607        134,525      119,780   

Fixed maturity securities

   23,630        23,621        22,696      22,778   

Other investments

   15,415        15,998        16,838      14,364   
  

 

   

 

   

 

   

 

 
    $    189,564         $    192,988         $234,257       $205,810   
  

 

   

 

   

 

   

 

 

Fixed maturity investmentssecurities as of SeptemberJune 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

   $4,053     $16     $4,069      $4,444     $(7)     $4,437 

States, municipalities and political subdivisions

   1,180     62     1,242     1,022    52     1,074 

Foreign governments

   9,319     341     9,660     8,724    196     8,920 

Corporate bonds, investment grade

   5,491     515     6,006     5,715    441     6,156 

Corporate bonds, non-investment grade

   1,280     277     1,557     989    219     1,208 

Mortgage-backed securities

   949     147     1,096     793    108     901 
  

 

   

 

   

 

   

 

   

 

   

 

 
   $    22,272     $      1,358     $ 23,630      $21,687     $    1,009      $22,696 
  

 

   

 

   

 

   

 

   

 

   

 

 

U.S. government obligations are rated AA+ or Aaa by the major rating agencies and approximately 87%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).

 

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

Revenues

    $5,167       $5,600       $  14,519      $    16,571      $5,250       $4,585      $  10,435     $    9,352   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Operating expenses:

               

Compensation and benefits

   1,193      1,220      3,535     3,826     1,242      1,134    2,525    2,342   

Fuel

   533      670      1,359     2,080     577      431    1,182    826   

Purchased services

   562      633      1,789     1,909     609      589    1,235    1,227   

Depreciation and amortization

   534      503      1,584     1,488     592      530    1,165    1,050   

Equipment rents, materials and other

   462      497      1,379     1,538     437      414    938    917   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Total operating expenses

   3,284      3,523      9,646     10,841         3,457      3,098    7,045    6,362   

Interest expense

   250      238      744     683     256      249    508    494   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 
   3,534      3,761      10,390     11,524     3,713      3,347    7,553    6,856   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Pre-tax earnings

   1,633      1,839      4,129     5,047     1,537      1,238    2,882    2,496   

Income taxes

   613      683      1,553     1,883     579      466    1,086    940   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

Net earnings

    $    1,020       $    1,156       $2,576      $3,164      $958       $    772      $1,796     $1,556   
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

 

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 thirdsecond quarter and first ninesix months of 20162017 were approximately $5.2$5.3 billion and $14.5$10.4 billion, respectively, representing decreasesincreases of $433$665 million (7.7%(14.5%) and $2.1 billion (12.4%$1,083 million (11.6%), respectively, versus the corresponding periods in 2015. 2016.Pre-tax earnings in the thirdsecond quarter and first ninesix months of 2016 declined 11.2%2017 increased 24.2% and 18.2%15.5%, respectively, compared to the same periods in 2015. In 2016, our revenues and earnings were negatively impacted by lower volumes versus 2015, particularly in the coal and petroleum products categories.2016.

In the first ninesix months of 2016,2017, revenues reflected a 4.1% comparative declinesincrease in average revenue per car/unit (6.5%) and a 7.6% increase in volumes (6.6%).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 business mix changes. The fuel price impact on fuel surcharges generally lags its impact on fuel costs. This timing difference contributed to the decline in earnings in the first quarter of 2016changes, as compared to 2015 because the price of fuel declined more significantly in early 2015. The effect of the timing difference has moderated since the first quarter and is not expected to be significant in the fourth quarter.well as increased rates per car/unit.

Freight revenues from consumer products in the third quarter of 20162017 were $1.7 billion a decline of 3.4% from 2015, driven by a 3.6% decline in volume. Revenues forthe second quarter and $3.4 billion in the first ninesix months, representing increases of 2016 were $4.8 billion, a decline8.4% and 8.6%, respectively, compared to 2016. The revenue increases reflected volume increases of 2.2% from 2015. Volume for5.8% in the second quarter and 5.7% in the first ninesix 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 was relatively flat, as increased automotive volumes, due to the addition of a new customer, andretail inventories, which benefited domestic intermodal, volumes were offset by lower international intermodal volumes attributable to soft economic activity and excess retail inventories.automotive volumes.

In the third quarter and first nine months of 2016, freightFreight revenues from industrial products in 2017 were $1.2$1.3 billion in the second quarter and $3.6$2.5 billion respectively, which decreased 15.2%for the first six months, or increases of 7.4% and 15.8%5.7%, respectively, from the comparable 20152016 periods. The decreases reflected lower volumes (8.0%increases were attributable to higher average revenue per car/unit, as well as volume increases of 4.1% in the thirdsecond quarter and 7.5%2.3% in the first nine months), primarilysix months. Volumes in 2017 were higher for minerals, steel and other commodities that support domestic drilling activity as well as higher taconite, partly offset by lower petroleum products reflectingvolume, due to pipeline displacement of U.S. crude rail traffic, and lower U.S. oil production. This decline was partially offset by increased plastics products volume. For the first nine months of 2016, we also experienced lower demand for taconite and steel products partially offset by increased movements of non-owned rail equipment. With oil production at low levels, along with pipeline displacement of rail, we expect comparative volume declines in petroleum and related products for the remainder of 2016.

Freight revenues in 2016 from agricultural products in 2017 increased 7.8%18.0% in the thirdsecond quarter to $1.1 billion and decreased 1.8%increased 11.4% to $3.1$2.2 billion in the first ninesix months compared to the same periods in 2015.2016. The increase in revenue growth reflected higher volumes, 14.5% in the thirdsecond quarter of 2016 was driven by a volume increase of 13.2% compared to 2015. The decrease inand 7.8% for the first ninesix months, of 2016 was primarily attributable to lower averageas well as higher revenue per car, partly offset by acar/unit. The volume increase of 6.7%. In the third quarter and first nine months of 2016 volumes increasedgrowth in 2017 was primarily due to higher corn, soybeans and wheatgrain exports.

Freight revenues in 2016 from coal declined 18.5%in 2017 increased 39.2% in the thirdsecond quarter to $1.0 billion$912 million and 33.0%30.5% in the first ninesix months to $2.4$1.9 billion compared to the same periods2016. The increase in 2015. Coalrevenues reflected higher volumes, declined 13.0%20.7% in the thirdsecond quarter and 26.5%19.5%year-to-date, as well as higher average revenue per car/unit. The volume increases in 2017 were due to mild winter weather in the first nine monthsquarter 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 from2016 and higher demand in the early part of the year as utility customers restocked coal inventories. Although natural gas prices have risen in the third quarter, we expect declinesfirst half of 2017. Together, these factors led to increased utility coal usage in coal volumes for2017, which were partly offset by the resteffects of 2016, driven by coal unit retirements and elevated utilityof coal inventories.generating facilities.

Operating expenses in the thirdsecond quarter and first ninesix months of 20162017 were $3.3$3.5 billion and $9.6$7.0 billion, respectively, representing decreasesincreases of $239$359 million (6.8%(11.6%) and $1.2 billion (11.0%$683 million (10.7%), respectively, compared to the same periods in 2015.2016. Our ratios of operating expenses to revenues in 2016 increased 0.7decreased 1.7 percentage points to 63.6%65.8% in the thirdsecond quarter and 1.00.5 percentage points to 66.4%67.5% for the first ninesix months of 2017 versus the corresponding 20152016 periods.

Compensation and benefits expenses decreased $27increased $108 million (2.2%(9.5%) for the thirdsecond quarter and $291$183 million (7.6%(7.8%) for the first ninesix months of 2016 as compared to 2015.2016. The declinesincreases were primarily due to lower employment levels, as a result of lower freight volumes,higher health and productivity improvements, partially offset by inflation.welfare costs, wage inflation and volume-related increases. Fuel expenses declined $137increased $146 million (20.4%(33.9%infor the thirdsecond quarter and $721$356 million (34.7%(43.1%) infor the first ninesix months of 2016 as compared to 20152016, due to lowerhigher average fuel prices and lower volumes. Purchased services declined $71increased volumes, partially offset by improved efficiency. Depreciation and amortization expense increased $62 million (11.2%(11.7%infor the thirdsecond quarter and $120$115 million (6.3%(11.0%) infor the first ninesix months of 2016 as compared to 2015,2016 due to volume-based and other cost reductions. Depreciation expense increased $31 million (6.2%) in the third quarter and $96 million (6.5%) in the first nine monthsa larger base of 2016 as compared to 2015, due to increaseddepreciable assets in service reflecting our ongoing capital additions and improvement programs. In the third quarter and first nine months of 2016, equipment rents, materials and other expense declined $35 million (7.0%) and $159 million (10.3%), respectively, compared to the same periods of 2015. These declines resulted from lower freight volumes and productivity improvements in both periods, as well as, lower derailment and other casualty related costs in the nine-month period.

Interest expense in the third quarter and first nine months of 2016 was $250 million and $744 million, respectively, increases of $12 million (5.0%) and $61 million (8.9%), 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.

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).

 

 Third Quarter First Nine 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

   $1,445        $1,432      $365     $354     $3,952      $3,977      $867      $799      $1,256        $1,243      $258      $258      $2,548      $2,507      $523      $502   

MidAmerican Energy Company

 806      685    241   163   2,031    2,017    389    310    669      593    90    95    1,377    1,225    152    148   

NV Energy

 997      1,130    345   340   2,335    2,688    495    529    761      714    141    118    1,355    1,338    192    150   

Northern Powergrid

 220      264    57   95   749    852    274    352    220      250    64    92    465    529    167    217   

Natural gas pipelines

 204      198    59   52   709    743    288    277    190      189    43    49    508    505    243    229   

Other energy businesses

 703      686    204   191   1,677    1,782    336    341    568      466    72    78    1,081    974    113    132   

Real estate brokerage

 823      749    89   80   2,162    1,959    187    166    959      844    113    95    1,546    1,339    116    98   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
   $  5,198        $     5,144        $    13,615      $     14,018        $  4,623        $     4,299        $  8,880      $     8,417     
 

 

  

 

    

 

  

 

    

 

  

 

    

 

  

 

   

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

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

  

     1,360       1,275       2,836      2,774   

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

 

        781           785        1,506      1,476   

Corporate interest

Corporate interest

  

 114   122     355    376   

Corporate interest

 

 111    119      221    241   

Income taxes and noncontrolling interests

Income taxes and noncontrolling interests

  

 314   367     626    689   

Income taxes and noncontrolling interests

 

 154    184      268    312   
 

 

  

 

    

 

  

 

  

 

  

 

    

 

  

 

 

Net earnings attributable to Berkshire Hathaway shareholders

Net earnings attributable to Berkshire Hathaway shareholders

  

   $932     $786       $1,855      $1,709   

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 thirdsecond quarter and first ninesix months of 2016 were $1.45 billion2017 increased $13 million (1%) and $3.95 billion,$41 million (2%), respectively, compared with 2016. In the second quarter and were relativelyfirst 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 2015. Revenues2016, as a slight increase in 2016 reflected increased retail revenuesgross margins and lower wholesale revenues.operations and maintenance expenses were substantially offset by increased depreciation and amortization expense. EBIT increased $21 million (4%) in the first six months of 2017, as compared to 2016. The year-to-datecomparative increase in retail revenuesEBIT was primarily due to higher retail rates as average customer loads were relatively unchanged. The declinesan increase in wholesale revenues were attributable to lower volumes and average prices. EBIT in the third quarter and first nine months of 2016 increased $11 million (3.1%) and $68 million (8.5%), respectively, from the same periods of 2015. The increases were primarily due to increased gross margins as energy costs declined due 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 increased $121 million (17.7%) in the thirdsecond quarter of 20162017 increased $76 million (13%) compared to 2015, while revenues in the first nine months were comparatively flat versus 2015.2016. The revenue increase in the third quarter was primarily due to increases in electric operating revenues ($56 million), due principally to higher retailwholesale volumes and wholesalerates, and natural gas revenues ($18 million) due to higher averageper-unit cost of gas sold (offset in cost of sales). EBIT in the second quarter of 2017 decreased $5 million (5%) compared 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 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 ($10767 million), substantially due to higher wholesale volumes and average rates, and increased retail revenues ($23 million). The increase in retail electric revenues resulted primarilyreflected increased recoveries through bill riders (which are substantially offset by increases in costs and expenses) and from a 3.6% increasenon-weather usage and rate factors, partially offset by the unfavorable impact of temperatures in customer load and higher electric rates, and the increase in wholesale revenues was due to increased wholesale prices and volumes and transmission revenue. Revenues2017. EBIT in the first ninesix months of 2016 included2017 increased electric revenues ($100 million), which were largely offset by lower natural gas revenues ($69 million) and other revenues. The decline in natural gas revenues was primarily due to lower average per-unit cost of gas sold ($61 million) which is offset in cost of sales, and a 6.3% decline in retail sales volumes, primarily from warmer winter temperatures in 2016. EBIT increased $78$4 million (47.9%(3%) in the third quarter and $79 million (25.5%) in the first nine months of 2016 as compared to 2015.2016. The increase in EBIT was primarily due to increased gross margins from electricreflected the increases in revenues partiallysubstantially offset by higher coal-fueled generation and purchased power costs, higher per-unit cost of natural gas sold and increased depreciation, maintenance and amortization from additional assets placed in service and higher interestother operating expenses. In addition, EBIT in the first nine months of 2015 included a gain of $13 million from the sale of a generating facility lease.

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 thirdsecond quarter and $17 million (1%) in the first ninesix months of 2016 were approximately $1.0 billion and $2.3 billion, respectively, decreases of $133 million (11.8%) and $353 million (13.1%), respectively, versus2017 compared to the same periods in 2015. The2016. These increases were due primarily to increases in retail electric operating revenues, which reflected a combination of increased rates from pass-through cost adjustments and higher volumes, partly offset by lower revenues from energy efficiency programs, which are offset by lower operating expenses. In 2017, NV Energy also experienced declines were primarily attributablein operating revenues from commercial and industrial customers electing to lower electric retail rates resultingpurchase power from lower energy costs. Electric retail customer loadalternative sources and, thus, becoming distribution service only customers. Natural gas operating revenue decreased in the first ninesix months of 20162017 primarily due to lower rates, partially offset by higher customer usage.

EBIT increased 1.4% compared to 2015. EBIT were relatively unchanged$23 million (19%) in the thirdsecond quarter and fell $34$42 million (6.4%(28%) in the first ninesix months of 20162017 compared to 2015. Inthe corresponding 2016 the negative impact of the revenue declinesperiods. These increases were substantially offset by the declines in energy costs. However, operating expensesprimarily due to increased $6 million (2%) in the third quartergross margins and $48 million (7%) in the first nine months compared to 2015. The year-to-date increase resulted primarily from higher depreciation and amortization and property and other taxes. In addition, operating expenses in the first nine months of 2015 included non-recurring benefits from reductions in certain accrued liabilities.lower interest expense.

Northern Powergrid

Revenues in the thirdsecond quarter and first ninesix months of 20162017 declined $44$30 million (16.7%(12%) to $220and $64 million and $103 million (12.1%(12%) to $749 million, respectively, as compared to 2015. The unfavorable impact from a stronger U.S. Dollar reduced revenues by $40 million in the third quarter and $72 million in the first nine months. In the first nine months of 2016, revenues also declined, due to lower tariff rates from a new price control period that became effective April 1, 2015. EBIT in the third quarter and first nine months of 2016 declined $38 million (40.0%) to $57 million and $78 million (22.2%) to $274 million, respectively, as compared to 2015. The declines were primarily due to the impactunfavorable currency translation effect of lower tariff rates and thea comparatively stronger U.S. Dollar in 2017 and lower distribution revenue, partially offset by higher smart metering revenue. Changes in the average foreign currency exchange rates accounted for $27 million and $65 million of the comparative revenue declines in the second quarter and first six months of 2017, respectively. Distribution revenues in the first six months of 2017 declined 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 distribution 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 increases inhigher depreciation expense from additional assets placedin-serviceand other operatingincreased pension expenses.

Natural gas pipelines

Revenues in the thirdsecond quarter and first six months of 2016 increased 3.0% and for2017 were relatively unchanged from 2016. In the first ninesix months declined 4.6% asof 2017, higher gas sales, primarily from system balancing activities (largely offset in cost of sales), and higher transportation revenues at Northern Natural Gas were offset by lower transportation revenues at Kern River. EBIT in the first six months of 2017 increased $14 million (6%) compared to 2015.2016. The revenue increase in the third quarter was primarily attributabledue to transportation revenues from expansion projects. For the first nine months of 2016, the decline was duea reduction in expenses and regulatory liabilities related to the impact of lower gas sales from balancing activities and lower transportation revenues from lower volumes and rates, in part due to comparatively milder temperaturesan alternative rate structure approved by Kern River’s regulators in the first quarter. EBITquarter of 2017 and from the changes in 2016 increased $7 million (13.5%) in the third quarter and $11 million (4.0%) in the first nine months versus 2015. These increases reflected lower interest expense in 2016, as a result of lower average debt balances, partly offset by increased depreciation expense.transportation revenues.

Other energy businesses

Revenues in the thirdsecond quarter and first six months of 20162017 increased $17$102 million (2.5%(22%) and for the first nine months declined $105$107 million (5.9%(11%), respectively, compared to the corresponding 2015 periods. The increasesame periods in third quarter revenues was2016. These increases were primarily attributabledue to increased revenues from AltaLink as a result of increased assets in service. The declines in comparative revenues in the first nine months were principally attributable to lower revenues from AltaLink and from our unregulated retail services business. AltaLink’s year-to-date revenue decline reflected the impacteffects of a regulatory decision in the second quarter that resulted in one-time net reductions in revenue,May 2016 by AltaLink’s regulator, which more than offset increased revenues from additional assets placed in service. The regulatory decision changed the timing of whenconstruction-in-progress expenditures included in rate base are billable to customers and earned in revenues, but had no impact onrevenues. The decision resulted in aone-time net earnings asreduction in revenue in the one-time revenuesecond quarter of 2016, with an offsetting reduction was offset by one-time reductions in expenses.

Otherwise, operating revenues from renewable energy increased 18% in the first six months of 2017 due to increased assets in service and increased solar generation, while revenues from the unregulated retail services business declined 9%. EBIT in the thirdsecond quarter and first six months of 2016 increased $13 million (6.8%) over 2015, while EBIT in the first nine months2017 declined $5 million (1.5%)8% and 14%, respectively, compared to 2015.2016. The increase in third quarter EBIT was primarily due todeclines reflected higher other operating costs, partly offset by increased earnings from our renewable energy and transmission businesses, while the decline in the first nine months reflected lower solar generation primarily from transformer related forced outages.energy.

Real estate brokerage

Revenues in the third quarter and first ninesix months of 20162017 increased 9.9%$207 million (15%) compared to $8232016. The increase was primarily due to recent business acquisitions, and modest increases in closed sales units and average transaction prices for existing businesses. EBIT in the first six months of 2017 increased $18 million and 10.4% to $2.16 billion, respectively, as compared to 2015. The increases were primarily attributable to increased closed brokerage transactions (primarily as a result of business acquisitions) and from modest increases in average home prices, as well as higher mortgage revenues. EBIT in the third quarter and first nine months of 2016 increased $9 million (11.3%) and $21 million (12.7%), respectively, compared to 2015, primarily reflecting the increases in mortgage revenues.

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

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

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 effective income tax rate for the first nine months was approximately 15.9% in 2016 and 19.8% in 2015. BHE’sconsolidated effective income tax rates regularly reflect significantfor the first six months of 2017 and 2016 were approximately 11% and 16%, respectively. The effective tax rate decreased primarily due to an increase in 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.tax status of certain subsidiaries.

Item 2. Management’s Discussion and Canada, respectively, compared to the statutory tax rate in the U.S.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).

 

  Third Quarter  First Nine Months 
  Revenues  Earnings*  Revenues  Earnings* 
  2016  2015  2016  2015  2016  2015  2016  2015 

Manufacturing

  $12,082      $9,181      $1,981      $1,259      $34,837      $27,568      $5,150      $3,857    

Service and retailing

  18,602      18,415      555      484      54,728      53,166      1,601      1,644    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $    30,684      $  27,596        $  89,565      $  80,734      
 

 

 

  

 

 

    

 

 

  

 

 

   

Pre-tax earnings

      2,536        1,743        6,751      5,501    

Income taxes and noncontrolling interests

  

  834      566        2,290      1,892    
   

 

 

  

 

 

    

 

 

  

 

 

 
    $1,702      $1,177        $    4,461      $    3,609    
   

 

 

  

 

 

    

 

 

  

 

 

 

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

Manufacturing

  $12,738   $12,201   $1,939   $1,687   $24,835   $22,755   $3,426     $3,169   

Service and retailing

  19,131   18,434   624   586   37,325   36,126   1,105     1,046   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $  31,869   $  30,635     $  62,160  $  58,881   
 

 

 

  

 

 

    

 

 

  

 

 

   

Pre-tax earnings

      2,563     2,273     4,531     4,215   

Income taxes and noncontrolling interests

 

  901   780     1,552     1,456   
   

 

 

  

 

 

    

 

 

  

 

 

 
    $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. In the third quarter, the Theafter-tax acquisition accounting expenses excluded from earnings above for the second quarter and first six months of 2017 were $281$169 million inand $301 million, respectively, compared to $114 million and $205 million for the second quarter and first six months of 2016, and $190 million in 2015. For the first nine months such expenses were $486 million in 2016 and $372 million in 2015.respectively. These expenses are included in “other” in the summary of earnings summarized on page 25.25 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. Amounts are in millions.follows (in millions).

 

  Third Quarter  First Nine Months 
  Revenues  Pre- tax earnings  Revenues  Pre- tax earnings 
  2016  2015  2016  2015  2016  2015  2016  2015 

Industrial products

  $6,400      $4,208      $1,347      $753      $18,599      $12,917      $3,534      $2,387    

Building products

  2,841      2,809      362      346      8,149      7,846      909      917    

Consumer products

  2,841      2,164      272      160      8,089      6,805      707      553    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  $  12,082      $  9,181      $  1,981      $  1,259      $  34,837      $  27,568      $  5,150      $  3,857    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

Manufacturing, Service and Retailing(Continued)

Manufacturing (Continued)

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

Industrial products

  $6,637     $6,505     $1,267     $1,133     $13,145     $12,199     $2,261     $2,187   

Building products

  3,125     2,847     401     305     5,859     5,308     650     547   

Consumer products

  2,976     2,849     271     249     5,831     5,248     515     435   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
   $  12,738     $12,201     $  1,939     $  1,687     $  24,835     $  22,755     $  3,426     $  3,169   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Aggregate revenues in 2016 were approximately $12.1 billionfrom manufacturing increased $537 million (4%) in the thirdsecond quarter and $34.8$2.1 billion (9%) in the first nine months, representing increases of approximately $2.9 billion (31.6%) and $7.3 billion (26.4%), respectively, from the corresponding 2015 periods. Pre-tax earnings were approximately $2.0 billion in the third quarter and $5.2 billion in the first ninesix months of 2016, representing increases of $722 million (57.3%) and $1.3 billion (33.5%), respectively,2017 compared to the same periods in 2015. Excluding2016.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 aggregate pre-taxfrom their respective acquisition dates.Pre-tax earnings increased 2.9% in the third quarter and were relatively unchanged in the first nine months.six months of 2017 also includedpre-tax losses of $193 million in connection with the disposition of an underperformingbolt-on business acquired by Lubrizol in 2014.

Industrial products

Revenues in the thirdsecond quarter and first ninesix months of 20162017 increased approximately $2.2 billion (52.1%$132 million (2%) and $5.7 billion (44.0%), respectively, versus the same periods in 2015. These increases were due to the inclusion of PCC, partially offset by revenue declines of $210$946 million (5.0%) in the third quarter and $832 million (6.4%) in the first nine months across our other businesses. In 2016, sales volumes of our other businesses were lower compared to 2015, reflecting sluggish demand for most products, and particularly for products sold to businesses in the oil and gas and heavy equipment industries. In addition, lower costs of oil-based raw materials and metals and increased competitive pressures continued to lower average selling prices.

Pre-tax earnings in 2016 increased $594 million (78.9%) in the third quarter and $1,147 million (48.1%) in the first nine months as compared to 2015. The increases in pre-tax earnings reflected the inclusion of PCC, partially offset by comparative declines in earnings (7.1% for the third quarter and 6.3% for the first nine months) from our other businesses, primarily IMC International, Lubrizol and several of Marmon’s businesses. Generally, these businesses were negatively affected by a combination of weaker customer demand and price and mix changes and increased restructuring costs, partly offset by the impacts of cost containment initiatives and lower average material prices. We expect the prevailing market conditions to continue during the remainder of 2016 and we may take additional cost containment actions in response to further slowdowns in customer demand.

Building products

Revenues in the third quarter and first nine months of 2016 increased $32 million (1.1%) and $303 million (3.9%), respectively, compared to the same periods in 2015. In the third quarter, volume-driven revenue increases achieved by MiTek and Johns Manville were partially offset by revenue declines at Benjamin Moore and Shaw. In the first nine months, the revenue increase reflected increased unit sales across most of our product categories, and was partly offset by lower average sales prices and changes in product mix.

Pre-tax earnings in 2016 increased $16 million (4.6%) in the third quarter and decreased $8 million (0.9%) in the first nine months as compared to the corresponding periods in 2015. In the first nine months, the favorable impact from increased sales volume and lower manufacturing costs attributable to deflation in certain commodity unit costs was essentially offset by increased charges related to asset impairments, pension settlements and environmental claims.

Consumer products

Revenues in the third quarter and first nine months of 2016 were approximately $2.8 billion and $8.1 billion, respectively, increases of $677 million (31.3%) and approximately $1.3 billion (18.9%(8%), respectively, compared to the corresponding 20152016 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 reflected the inclusion of Duracellfrom IMC and increases in Forest River’s revenues of 19% in the third quarter and 12% in the first nine months, whichLSPI were primarily attributabledue to increased unit sales. ApparelPCC’s revenues in the third quarter increased $18 million (1.6%) and17% in the first ninesix months declined $56 million (1.8%)of 2017 compared to 2015. The the five-month post-acquisition period in 2016. Comparatively higher unit sales droveyear-to-date decline reflected revenue increases of LSPI (17%) and IMC (8%), while increases from business acquisitions, partly offset by lower footwear salesaverage selling prices and the impact of the disposition of a historically unprofitable operation within Fruit of the Loom in 2015.mix changes accounted for CTB’s 5%year-to-date revenue

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

 

Manufacturing, Service and Retailing(Continued)

 

ConsumerIndustrial products(Continued)

 

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 thirdsecond quarter and first ninesix months of 20162017 increased $112$134 million (70.0%(12%) and $154$74 million (27.8%(3%), respectively, compared to the same periodssecond quarter and first six months of 2016. In the second quarter and first six months of 2017, PCC, IMC and LSPI generated earnings increases, while earnings from Lubrizol and CTB were lower. Lubrizol recognizedpre-tax losses of $193 million in 2015.the first six months of 2017, substantially all of which was in the first quarter, related to the disposition of an underperformingbolt-on business and related intangible asset impairment and restructuring charges. Over the first six months of 2017, Lubrizol, CTB, as well as certain other businesses, experienced selling price pressures and higher manufacturing costs, driven by increased prices for petroleum-based materials and certain metals, which contributed to comparativepre-tax earnings declines. We continue to implement cost containment and other initiatives intended to improve productivity at several of our businesses.

Building products

Revenues in the second quarter and first six months of 2017 increased $278 million (10%) and $551 million (10%), respectively, compared to 2016. The increases were primarily due to the effect ofbolt-on business acquisitions (Shaw and MiTek) and sales volume increases (MiTek and Johns Manville), partly offset by lower average sales prices and changes in product mix.

Pre-tax earnings in the second quarter and first six months of 2017 increased $96 million (31%) and $103 million (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 2016 periods. The second 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 of Duracell, which we acquired February 29, 2016, and a 9% increase in Forest River’s revenues, primarily due to a 10% increase in unit sales. Apparel revenues in the first six months of 2017 declined slightly (1%) compared to 2016.

Pre-tax earnings in the second quarter and first six months of 2017 increased $22 million (9%) and $80 million (18%), respectively, compared to 2016. The increases in thirdearnings in the second quarter earnings reflected the impactand first six months of the Duracell acquisition as well as2017 were primarily due to increased earnings from Duracell and Forest River, and certain of ourpartly offset by lower apparel businesses. Duracell contributed pre-tax earnings of $39 millionearnings. Duracell’s comparative results in the third quarter of2017 periods reflected significant decreases in transition and integration costs arising from the acquisition in 2016 and $5 million from its acquisition date,otherwise improved operating results. The declines in apparel earnings were primarily attributable to Fruit of the Loom, reflecting the impact of transition and integration costs. Forest River generated pre-tax earnings increases of 34% in the third quarter and 24% in the first nine months, primarily due to increased unit saleslower gross margins and higher gross margin rates. Earnings of our apparel businesses increased 62% in the third quarter and 29% in the first nine months. The comparative increases were primarily attributable to lower restructuring costs in 2016 and a loss on the disposition of the Fruit of the Loom unprofitable operation in 2015, partly offset by lower earnings in 2016 from our footwear businesses.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. Amounts are in millions.follows (in millions).

 

 Third Quarter First Nine 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

   $2,619       $2,469       $305      $287       $7,557     $7,579     $826     $919       $2,792        $2,577      $  351    $  296       $5,409     $4,938     $     611    $     521   

Retailing

 3,712     3,682     144    91     11,050   9,387   404   341      3,758       3,808     204    161      7,234   7,338   337  260   

McLane Company

 12,271     12,264     106    106     36,121   36,200   371   384        12,581         12,049     69    129        24,682     23,850   157  265   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

 
   $    18,602       $  18,415       $     555      $     484       $    54,728     $      53,166     $  1,601     $    1,644       $  19,131        $  18,434      $  624    $  586       $  37,325     $  36,126     $  1,105    $  1,046   
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

  

 

  

 

 

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

Manufacturing, 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 thirdsecond quarter and first six months of 20162017 increased $150$215 million (6.1%(8%) and 471 million (10%), respectively, as compared to 2015, while revenues for the first nine months of 2016 were relatively unchanged from 2015. NetJets’ comparative revenues increased 3.9% in the third quarter and decreased 6.3% for the first nine months.2016. The increase in NetJets’ third quarter revenues reflected a 2% increase in operating revenues and increased gains from aircraft dispositions, while the decline in revenues for the first nine months was primarily due to lower aircraft sales. TTI’s revenue increases in 2016 were 9.1% in the third quarter and 5.5% for the first nine months and were primarily due to increasedincreases from NetJets and TTI. The revenue increases at NetJets reflected increases in aircraft sales and lease revenues and a 4% year-to-date increase in revenue flight hours. The increases in TTI’s revenues were primarily due to unit volume increases in Europe and through the Internet.most of its markets.

Pre-tax earnings increased $18 million (6.3%) in the third quarter and decreased $93 million (10.1%) in the first nine months of 2016 as compared to corresponding periods in 2015. Pre-tax earnings in the thirdsecond quarter includedand first six months of 2017 increased $55 million (19%) and $90 million (17%), respectively, compared to 2016. The increases in earnings were primarily attributable to increased earnings fromof NetJets and TTI partly offset by lower earnings from several of our other servicemedia and logistics services businesses. The year-to-date decline in earnings was primarily due to lower earnings from NetJets, FlightSafety and our newspaper businesses. The decline in NetJets’ earnings for the first nine months was primarily due to increased depreciation expense and lower aircraft sales margins. TTI’s earnings were relatively flat in 2016 as changes in geographic sales mix and price competition produced lower gross margin rates, offsetting the aforementioned revenue increases.

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”) which was acquired in the first quarter of 2015.. BHA currently includes 83 auto dealerships. BHA sellsdealerships, which sell 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.

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

Manufacturing, Service and Retailing(Continued)

Retailing (Continued)

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 thirdsecond quarter and first ninesix months of 2016 increased approximately $30 million (0.8%2017 decreased (1%) and $1.7 billion (17.7%), respectively, as compared to the same periods in 2015. The increase2016. These decreases were primarily due to lower revenues at BHA as a result of lower vehicle units sold, partly offset by increases in year-to-date revenues reflected the impact of the BHA and Louis acquisitions, which accounted for approximately $1.5 billion of the comparative increase. Revenues of our home furnishings retailers, Pampered Chef and See’s Candies.

Pre-tax earnings in the thirdsecond quarter and first ninesix months of 20162017 from retailing increased $11$43 million (1.3%(27%) and $180$77 million (8.5%(30%), respectively, over 2015,2016. 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 new stores opened in 2015increased earnings from service, finance and insurance activities, partly offset by Nebraska Furniture Mart and Jordan’s. Pre-taxlower auto sales margins. The earnings in 2016increases from the retail group increased $53 million (58.2%)our home furnishings retailers were attributable to overall increases in the third quartergross margin rates and $63 million (18.5%) in the first nine months.relatively lower operating expenses. The increases from Pampered Chef and See’s Candies were primarily attributable to BHA, Louisyear-to-date revenue increases of 13% and our home furnishings businesses.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”) and to restaurants (“foodservice”). McLane also operates businesses that are wholesale distributors of distilled spirits, wine and beer (“beverage”). The grocery and foodservice businessesunits 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 thirdsecond quarter and first ninesix months of 2017 were $12.6 billion and $24.7 billion, respectively, increases of 4.4% and 3.5% over the second quarter and first six months of 2016, were $12.3 billion and $36.1 billion, respectively, and were relatively unchanged as compared withrespectively. The increase in revenues for the corresponding periods in 2015. Year-to-date revenues in 2016 reflected a comparative decline in grocery salesfirst six months of 2%, attributable to lower unit volume, partly offset by price and mix changes. Year-to-date foodservice revenues increased 3%,2017 was primarily due to an overalla 4.6% increase in unit volume. Earningsgrocery sales.Pre-tax earnings in the thirdsecond quarter and first ninesix months of 20162017 were $106$69 million and $371$157 million, respectively, unchanged from the third quarterdecreases of 2015$60 million (47%) and a decrease of $13$108 million (3%(41%) compared to the first nine monthscorresponding 2016 periods. The earnings declines reflected a 59% decline inyear-to-date earnings of 2015. Pre-tax earningsour 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 first nine months of 2015 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 ninesix months of 2016 was 1.03%, compared to 1.01% in 2015. The grocery2017.

Item 2. Management’s Discussion and foodservice business has beenAnalysis of Financial Condition and is expected to continue to be highly competitive.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).

 

   Third Quarter First Nine Months
   Revenues Earnings Revenues Earnings
   2016 2015 2016 2015 2016 2015 2016 2015 

Manufactured housing and finance

  $1,099    $926    $165    $189    $3,057    $2,637    $514    $515  

Transportation equipment leasing

   655    633    235    235    2,009    1,849    731    655  

Other

   208    166    117    62    611    592    333    310  
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  $  1,962   $  1,725   $    517   $    486   $  5,677   $  5,078   $  1,578   $  1,480  
  

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

  

Income taxes and noncontrolling interests

     180    183      534    518  
    

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 
    $337   $303     $1,044   $962  
    

 

 

 

 

 

 

 

   

 

 

 

 

 

 

 

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

Finance and Financial Products(Continued)

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

Manufactured housing and finance

    $  1,199       $  1,065       $197       $179       $2,273     $1,958     $373     $349 

Transportation equipment leasing

   652      671      221      245      1,276    1,354    430    496 

Other

   182      253      90      159      349    403    171    216 
  

 

 

   

 

 

   

 

 

 

  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    $  2,033       $  1,989       $  508       $  583       $  3,898     $  3,715     $  974     $  1,061 
  

 

 

   

 

 

       

 

 

   

 

 

     

Income taxes and noncontrolling interests

       176      187          339    354 
      

 

 

 

  

 

 

       

 

 

   

 

 

 
        $  332       $  396           $  635     $  707 
      

 

 

 

  

 

 

       

 

 

   

 

 

 

Manufactured housing and finance

Clayton Homes’ revenues in the thirdsecond quarter and first ninesix months of 20162017 increased $173$134 million (19%(13%) and $420$315 million (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 27%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 22% increasebe higher. Site built gross sales margin rates, however, are typically lower than manufactured homes.Pre-tax earnings increased $18 million (10%) in units soldthe second quarter and changes in mix. Pre-tax earnings for the third quarter decreased 13% and$24 million (7%) in the first ninesix months of 2016 were flat as2017 compared to earningsthe corresponding 2016 periods. Earnings in the corresponding 2015 periods. Clayton’sfirst six months of 2017 included a gain of $11 million from a legal settlement. The earnings increases in 2016 were negatively impacted2017 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 claims, increased impairment charges on servicing assetsemployee healthcare, technology, marketing and lower gross sales margins, which partially offset the benefit from the significant increases in unit sales. As of September 30, 2016, approximately 94% of the installment loan portfolio was current in terms of payment status.legal expenses.

Transportation equipment leasing

Transportation equipment leasing revenues in the thirdsecond quarter and first ninesix months of 2016 increased $222017 decreased $19 million (3.5%(3%) and $160$78 million (8.7%(6%), respectively, compared to 2015.2016. The increases deriveddeclines were primarily from the acquisition of GE’sdue to comparative declines in leasing revenues, attributable to lower railcar servicesand trailer fleet and railcar repair services business in the last half of 2015 and an increase in core fleet size, offset in part by lower utilization rates, lower railcar rental renewal rates, and lower volume for crane services, partly offset by increases in repair revenues and lease termination fees. In the first six months of 2017, we also experienced lower tank car sales to third parties, although demand in North America and reduced volumes in other products and services primarily related to oil and gas markets.increased during the second quarter.

Pre-tax earnings in 2016 were unchanged in the thirdsecond quarter and increased $76first six months of 2017 declined $24 million (11.6%(10%) in the first nine monthsand $66 million (13%), respectively, compared to 2015. The year-to-date increase was primarily attributable to2016. These decreases reflected the aforementioned revenue growthdeclines and lower depreciation rates for certain railcars, partially offset by higher railcar repair costs and storage costs. In 2017, interest expense on newalso increased due to increased borrowings from a Berkshire financing subsidiary.subsidiary, partly offset by lower interest expense on third party borrowings. Significant components of our operating costs, such as depreciation expense, do not vary proportionately to revenue changes. 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 ninesix months of 2016, other earnings increased $232017 declined $45 million compared to 2015,2016, reflecting increased earningslower interest and dividend income from investment securitiesinvestments and CORT, partly offset by lower earnings from 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 $55$39 million in the first ninesix months of 20162017 and $47$35 million in 2015.2016.

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).

 

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

Investment gains/losses

  $3,150  $8,266   $5,643      $8,725   $290        $643       $   605       $2,493    

Derivative gains/losses

   458  (764)   (332)     380    (65)      20      395      (790)   
  

 

 

 

 

 

   

 

  

 

  

 

   

 

   

 

 

Gains/losses before income taxes and noncontrolling interests

   3,608   7,502  5,311      9,105    225       663      1,000      1,703    

Income taxes and noncontrolling interests

   1,261  2,625  718      3,185    82       269      353      (543)   
  

 

 

 

 

 

   

 

  

 

  

 

   

 

   

 

 

Net gains/losses

  $  2,347  $  4,877   $  4,593      $    5,920    $  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.

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

Investment and Derivative Gains/Losses(Continued)

Investment gains/losses (Continued)

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 as necessarily meaningful or useful in evaluating our periodic 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 third quarter and first ninesix months of 2017 and 2016 were $3.2$605 million and $2.5 billion, and $5.6 billion, respectively. InvestmentPre-tax investment gains in the thirdfirst quarter of 2016 included $2.4 billion from the disposition of our Wrigley preferred stock investment and in the first nine months also included $610 million from the redemption of our Kraft Heinz Preferred Stock investment 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. 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 Notes 8 and 9 to the accompanying Consolidated Financial Statements.Ourafter-tax gain from this transaction was approximately $1.9 billion. In 2015, pre-taxaddition, investment gains included non-cash holding gains related to our investment in Kraft Heinz of $6.8 billion in the third quarter, as well as net gains from dispositions of equity and fixed maturity securities of approximately $1.5 billion in the thirdsecond quarter and $1.9 billion in the first nine months.

Investment gains/losses also included pre-tax other-than-temporary impairment (“OTTI”) charges of $63 million and $26 million in the first ninesix months of 2016 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 2015, respectively. Althoughlosses on investments in equity securities and certain other investments. Upon adoption of this accounting standard, we have periodically recorded OTTI charges in earnings inwill reclassify the past, we continue to hold certain of those securities. If the market values of those securities increase following the date OTTI charges were recorded in earnings, the increasesnet unrealized gains from such investments, which are notpresently 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 valueto retained earnings. The amount of the security is permanent or that the market price of the securityreclassification will not subsequently increase to and ultimately exceedbe based on our original cost.

equity investments at December 31, 2017. As of SeptemberJune 30, 2016, gross2017, 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 on our investmentsof approximately $3.4 billion in equitythe first six months of 2016. These amounts would be included in earnings under the new accounting standard.

Item 2. Management’s Discussion and fixed maturity securities determined on an individual purchase lot basis were approximately $1.4 billion,Analysis of which $941 million pertained to our investment in IBM common stock. We concluded that such losses were temporary. We consider several factors in determining whether or not impairments are deemed to be other than temporary, including the currentFinancial Condition and expected long-term business prospectsResults of Operations(Continued)

Investment 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.Derivative Gains/Losses(Continued)

Derivative gains/losses

Derivative gains/losses primarily representedcurrently represent the changes in fair value of our equity index put option contract liabilities. PeriodicThe periodic changes in the fair values of liabilities reflectedthese contracts are recorded in earnings and can be significant, reflecting the volatility of underlying equity markets and fromthe changes in the inputs used to measure such liabilities.

In 2016, our equity index put optionDerivative contracts producedpre-tax gains of $458$395 million in the third quarter and pre-tax losses of $421 million for the first nine months. In each period, these gains and losses were primarily due to changes in the index values and interest rates and the passage of time. In 2015, our equity index put option contracts produced pre-tax losses of $802 million in the third quarter and pre-tax gains of $371 million in the first nine months. In the third quarter of 2015, the losses were driven by lower index prices and increased expected volatility assumptions, which produced an increase in the fair value of our liabilities. The third quarter losses offset much of the gains realized in the first six months of 2015, which2017 andpre-tax losses of $790 million in 2016. In July 2016, our last remaining credit default contract was terminated and thereafter, all of our 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 higherincreased index prices, a stronger U.S. Dollarvalues and increasedshorter contract durations, partly offset by unfavorable foreign currency exchange rate changes. The losses in 2016 were driven by lower index values and interest rates. As of SeptemberJune 30, 2016,2017, equity index put option intrinsic values were approximately $1.6 billion$842 million and our recorded liabilities at fair value were approximately $4.0$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.

In July 2016, our remaining credit default contract was terminated by mutual agreement with the counterparty and we paid $195 million upon termination. This contract produced pre-tax earnings of $89 million in the first nine months of 2016. We have no further exposure to losses under credit default contracts.

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

Other

A summary ofafter-tax other earnings which include corporate income (including(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 the second quarter and first six months of 2016, Kraft Heinz earnings also included $180 million in pre-tax dividend income from our investments in Kraft Heinz), expenses and income taxes not allocated to operating businesses is summarized below. Amounts are in millions.

   Third Quarter   First Nine Months 
   2016   2015   2016   2015

Kraft Heinz earnings

  $    146      $    115      $    552      $    315    

Acquisition accounting expenses

   (317)      (199)      (550)      (400)   

Corporate interest expense

   (116)      (41)      (297)      (216)   

Other

   25       —      (15)      (6)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

  $(262)     $(125)     $(310)     $(307)   
  

 

 

   

 

 

   

 

 

   

 

 

 

Our earnings in 2016 from our investments in Kraft Heinz included lower dividends on the Preferred Stock investment, which was redeemed in June 2016, and increased equity method earnings from our common stock investment. Our earnings, after allocated Berkshire corporate income taxes, were $146 million in the third quarter and $552 million in the first nine months of 2016. In 2015, these investments produced earnings of $115 million in the third quarter and $315 million for the first nine months.

After-tax corporate interest expense was $116 million in the third quarter and $297 million for the first nine months of 2016 and $41 million and $216 million, respectively, in the comparable 2015 periods. The increases in 2016 reflected the impact of increased average borrowings. The variations in comparative periodic after-tax corporate interest expense also reflected the impact of 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). Corporate interest included after-tax foreign currency exchange losses of $48 million in the third quarter and $107 million in the first nine months of 2016 and $4 million and $106 million, respectively, in the comparable 2015 periods. Relatively minor changes in the U.S. Dollar/Euro exchange rate can produce significant gains or losses given the current level of our Euro-denominated borrowings.

Also included in other earnings are(losses) also include charges related toarising from the application of the acquisition method in connection with Berkshire’s past business acquisitions. Such charges were primarily from the amortization of intangible assets recorded in connection with those business acquisitions. These charges (after-tax) were $317

In each of the last three years, Berkshire issued Euro-denominated debt and at 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 from the periodic revaluation of these liabilities into U.S. Dollars. After-tax corporate interest expense included foreign currency exchange rate losses in the second quarter and first six months of 2017 of $342 million and $550$399 million, respectively, with respect to the revaluation of the Euro denominated debt. In 2016, after-tax corporate interest included foreign currency exchange rate gains of $101 million in the thirdsecond quarter and losses of $60 million in the first ninesix months. Excluding these foreign currency gains and losses,after-tax corporate interest expense in the first six months of 2017 and 2016 respectively, compared to $199was $131 million and $400$121 million, respectively, in the comparable periods in 2015.respectively. The increase was attributable to increased average outstanding borrowings.

Financial Condition

Our balance sheet continues to reflectreflects significant liquidity and a strong capital base. Our consolidated shareholders’ equity at SeptemberJune 30, 20162017 was $269.3approximately $300.7 billion, an increase of $13.7about $17.7 billion since December 31, 2015.2016. Net earnings attributable to Berkshire shareholders in the first ninesix months of 20162017 were $17.8$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 SeptemberJune 30, 2016,2017, our insurance and other businesses held cash, and cash equivalents and U.S. Treasury Bills of $68.3approximately $86.1 billion and investments (excluding our investment in Kraft Heinz) of $140.8$175.6 billion. In June 2016, we received $8.32 billion in connection with the redemption of our Kraft Heinz Preferred Stock investment.

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 a2017, Berkshire issued new 364-day revolving credit agreement. In March 2016, we issued €2.75senior notes aggregating €1.1 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. In August 2016, we issued $750 million of senior unsecured notes to replace $750 million of maturing notes. Over the next twelve months,repaid $1.1 billion of parent companymaturing senior notesnotes. Berkshire term debt of $800 million will mature.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, which was primarily due to foreign currency exchange rate changes applicable to €6.85 billion par of Euro-denominated senior notes.

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

 

Financial Condition(Continued)

 

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 ninesix 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 $6.4 billion, including $3.5 billion by BHE and $2.9 billion by BNSF. Forecasted capital expenditures of the two businesses for the remainder of 20162017 will approximate $2.5 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 SeptemberJune 30, 2016,2017, an increase of $429$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 $36.6$38.1 billion as of Septemberat June 30, 2016,2017, an increase of $643 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 $41.9$40.9 billion as of SeptemberJune 30, 2016, an increase2017, a decrease of approximately $2.9 billion since$830 million from December 31, 2015.2016. Finance assets at September 30, 2016consist primarily consisted of loans and finance receivables, and various types of property held for lease, as well as significant cash, and cash equivalents, which included the proceeds of approximately $4.6 billion from the sale of our Wrigley preferred stock investment in September.

U.S. Treasury Bills and other investments. Finance and financial products liabilities weredecreased approximately $21.1$1.9 billion to approximately $17.8 billion as of SeptemberJune 30, 2016, an increase2017. The decrease was primarily due to a reduction in borrowings of approximately $3.9$1.6 billion, compared to December 31, 2015. The year-to-date 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”), including $3.5. The new BHFC notes 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 issuedwill mature and an additional $4.1 billion will mature in March. See Note 16 to 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, $2.8 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 nine 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 - $225; 2017 - $424; 2018 - $3,905; 2019 - $3,362; and 2020 and after - $15,756. generally noted above, actual payments under this agreement will likely vary, perhaps materially, from these estimates.

Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of SeptemberJune 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.

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 SeptemberJune 30, 20162017 includes estimated liabilities for unpaid losses from property and casualty insurance and reinsurance contracts of approximately $75.5$95 billion. Due to the inherent uncertainties in the process of establishing these liabilities,loss reserve amounts, the actual ultimate claim liabilitiesamounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude could havewill result in a material effect on our 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.

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

Critical Accounting Policies(Continued)

Our Consolidated Balance Sheet as of SeptemberJune 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 that adversely affectaffecting 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.

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 SeptemberJune 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 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.

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, and cash 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 ninesix 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

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 SeptemberJune 30, 2016,2017, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of SeptemberJune 30, 20162017 and December 31, 2015,2016, (ii) the Consolidated Statements of Earnings for each of the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20162017 and 2015,2016, (iii) the Consolidated Statements of Comprehensive Income for each of the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20162017 and 2015,2016, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for each of the nine-monthsix-month periods ended SeptemberJune 30, 20162017 and 2015,2016, (v) the Consolidated Statements of Cash Flows for each of the nine-monthsix-month periods ended SeptemberJune 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: NovemberAugust 4, 20162017

 

/S/ MARC D. HAMBURG

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

 

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