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 March 31,September 30, 2018
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 | |
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in 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 April 27,October 25, 2018:
Class A — | ||||
Class B — |
1
and Subsidiaries
(dollars in millions)
March 31, 2018 |
December 31, 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Insurance and Other: | ||||||||
Cash and cash equivalents | $ | 50,559 | $ | 25,460 | ||||
Short-term investments in U.S. Treasury Bills | 48,040 | 78,515 | ||||||
Investments in fixed maturity securities | 19,920 | 21,353 | ||||||
Investments in equity securities | 166,658 | 164,026 | ||||||
Investment in The Kraft Heinz Company (Fair Value: 2018 – $20,272; 2017 – $25,306) | 17,687 | 17,635 | ||||||
Receivables | 30,906 | 28,578 | ||||||
Inventories | 16,244 | 16,187 | ||||||
Property, plant and equipment | 23,807 | 20,104 | ||||||
Goodwill | 55,079 | 54,985 | ||||||
Other intangible assets | 32,260 | 32,518 | ||||||
Deferred charges under retroactive reinsurance contracts | 15,007 | 15,278 | ||||||
Other | 11,939 | 11,158 | ||||||
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|
|
| |||||
488,106 | 485,797 | |||||||
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|
|
| |||||
Railroad, Utilities and Energy: | ||||||||
Cash and cash equivalents | 3,550 | 2,910 | ||||||
Property, plant and equipment | 128,385 | 128,184 | ||||||
Goodwill | 24,766 | 24,780 | ||||||
Regulatory assets | 2,987 | 2,950 | ||||||
Other | 15,394 | 15,589 | ||||||
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|
|
| |||||
175,082 | 174,413 | |||||||
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| |||||
Finance and Financial Products: | ||||||||
Cash and cash equivalents | 3,772 | 3,213 | ||||||
Short-term investments in U.S. Treasury Bills | 2,641 | 5,856 | ||||||
Loans and finance receivables | 13,845 | 13,748 | ||||||
Property, plant and equipment and assets held for lease | 9,920 | 9,931 | ||||||
Goodwill | 1,492 | 1,493 | ||||||
Other | 7,793 | 7,644 | ||||||
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| |||||
39,463 | 41,885 | |||||||
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| |||||
$ | 702,651 | $ | 702,095 | |||||
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|
September 30, 2018 | December 31, 2017 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Insurance and Other: | ||||||||
Cash and cash equivalents* | $ | 36,506 | $ | 25,460 | ||||
Short-term investments in U.S. Treasury Bills | 59,947 | 78,515 | ||||||
Investments in fixed maturity securities | 18,271 | 21,353 | ||||||
Investments in equity securities | 201,226 | 164,026 | ||||||
Investment in The Kraft Heinz Company | 17,453 | 17,635 | ||||||
Receivables | 31,884 | 28,578 | ||||||
Inventories | 16,793 | 16,187 | ||||||
Property, plant and equipment | 24,357 | 20,104 | ||||||
Goodwill | 54,985 | 54,985 | ||||||
Other intangible assets | 31,626 | 32,518 | ||||||
Deferred charges under retroactive reinsurance contracts | 14,451 | 15,278 | ||||||
Other | 13,250 | 11,158 | ||||||
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520,749 | 485,797 | |||||||
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Railroad, Utilities and Energy: | ||||||||
Cash and cash equivalents* | 3,297 | 2,910 | ||||||
Property, plant and equipment | 130,387 | 128,184 | ||||||
Goodwill | 24,790 | 24,780 | ||||||
Regulatory assets | 2,928 | 2,950 | ||||||
Other | 16,020 | 15,589 | ||||||
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| |||||
177,422 | 174,413 | |||||||
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| |||||
Finance and Financial Products: | ||||||||
Cash and cash equivalents* | 1,635 | 3,213 | ||||||
Short-term investments in U.S. Treasury Bills | 2,258 | 5,856 | ||||||
Loans and finance receivables | 14,477 | 13,748 | ||||||
Property, plant and equipment and assets held for lease | 10,273 | 9,931 | ||||||
Goodwill | 1,552 | 1,493 | ||||||
Other | 8,093 | 7,644 | ||||||
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38,288 | 41,885 | |||||||
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$ | 736,459 | $ | 702,095 | |||||
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* | Cash and cash equivalents includes U.S. Treasury Bills with maturities of three months or less when purchased of $14.7 billion at September 30, 2018 and $5.7 billion at December 31, 2017. |
See accompanying Notes to Consolidated Financial Statements
2
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Insurance and Other: | ||||||||||||||||
Unpaid losses and loss adjustment expenses | $ | 62,094 | $ | 61,122 | $ | 64,263 | $ | 61,122 | ||||||||
Unpaid losses and loss adjustment expenses under retroactive reinsurance contracts | 42,344 | 42,937 | 41,935 | 42,937 | ||||||||||||
Unearned premiums | 18,448 | 16,040 | 19,011 | 16,040 | ||||||||||||
Life, annuity and health insurance benefits | 17,935 | 17,608 | 18,368 | 17,608 | ||||||||||||
Other policyholder liabilities | 7,864 | 7,654 | 6,692 | 7,654 | ||||||||||||
Accounts payable, accruals and other liabilities | 25,782 | 23,099 | 27,178 | 23,099 | ||||||||||||
Notes payable and other borrowings | 25,663 | 27,324 | 24,271 | 27,324 | ||||||||||||
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200,130 | 195,784 | 201,718 | 195,784 | |||||||||||||
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Railroad, Utilities and Energy: | ||||||||||||||||
Accounts payable, accruals and other liabilities | 10,786 | 11,334 | 11,269 | 11,334 | ||||||||||||
Regulatory liabilities | 7,599 | 7,511 | 7,723 | 7,511 | ||||||||||||
Notes payable and other borrowings | 62,667 | 62,178 | 62,599 | 62,178 | ||||||||||||
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81,052 | 81,023 | 81,591 | 81,023 | |||||||||||||
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Finance and Financial Products: | ||||||||||||||||
Accounts payable, accruals and other liabilities | 1,566 | 1,470 | 1,752 | 1,470 | ||||||||||||
Derivative contract liabilities | 2,378 | 2,172 | 1,869 | 2,172 | ||||||||||||
Notes payable and other borrowings | 10,755 | 13,085 | 10,770 | 13,085 | ||||||||||||
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14,699 | 16,727 | 14,391 | 16,727 | |||||||||||||
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Income taxes, principally deferred | 55,718 | 56,607 | 59,340 | 56,607 | ||||||||||||
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Total liabilities | 351,599 | 350,141 | 357,040 | 350,141 | ||||||||||||
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Shareholders’ equity: | ||||||||||||||||
Common stock | 8 | 8 | 8 | 8 | ||||||||||||
Capital in excess of par value | 35,681 | 35,694 | 35,713 | 35,694 | ||||||||||||
Accumulated other comprehensive income | (2,477 | ) | 58,571 | (3,927) | 58,571 | |||||||||||
Retained earnings | 315,952 | 255,786 | 346,503 | 255,786 | ||||||||||||
Treasury stock, at cost | (1,763 | ) | (1,763 | ) | (2,691) | (1,763) | ||||||||||
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Berkshire Hathaway shareholders’ equity | 347,401 | 348,296 | 375,606 | 348,296 | ||||||||||||
Noncontrolling interests | 3,651 | 3,658 | 3,813 | 3,658 | ||||||||||||
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| |||||||||||||
Total shareholders’ equity | 351,052 | 351,954 | 379,419 | 351,954 | ||||||||||||
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| |||||||||||||
$ | 702,651 | $ | 702,095 | $ | 736,459 | $ | 702,095 | |||||||||
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See accompanying Notes to Consolidated Financial Statements
3
and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
First Quarter | ||||||||
2018 | 2017 | |||||||
(Unaudited) | ||||||||
Revenues: | ||||||||
Insurance and Other: | ||||||||
Insurance premiums earned | $ 13,373 | $ 21,753 | ||||||
Sales and service revenues | 31,623 | 30,229 | ||||||
Interest, dividend and other investment income | 1,315 | 1,162 | ||||||
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46,311 | 53,144 | |||||||
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Railroad, Utilities and Energy operating and other revenues | 10,102 | 9,378 | ||||||
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Finance and Financial Products: | ||||||||
Sales and service revenues | 1,693 | 1,498 | ||||||
Interest, dividend and other investment income | 367 | 350 | ||||||
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| |||||
2,060 | 1,848 | |||||||
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| |||||
Total revenues | 58,473 | 64,370 | ||||||
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Investment and derivative contract gains/losses: | ||||||||
Investments gains (losses) | (7,809 | ) | 315 | |||||
Derivative contract gains (losses) | (206 | ) | 460 | |||||
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(8,015 | ) | 775 | ||||||
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Costs and expenses: | ||||||||
Insurance and Other: | ||||||||
Insurance losses and loss adjustment expenses | 8,963 | 18,566 | ||||||
Life, annuity and health insurance benefits | 1,287 | 1,227 | ||||||
Insurance underwriting expenses | 2,604 | 2,339 | ||||||
Cost of sales and services | 25,415 | 24,360 | ||||||
Selling, general and administrative expenses | 4,024 | 4,116 | ||||||
Interest expense | 390 | 270 | ||||||
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42,683 | 50,878 | |||||||
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Railroad, Utilities and Energy: | ||||||||
Cost of sales and operating expenses | 7,401 | 6,754 | ||||||
Interest expense | 710 | 693 | ||||||
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8,111 | 7,447 | |||||||
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Finance and Financial Products: | ||||||||
Cost of sales and services | 1,029 | 867 | ||||||
Selling, general and administrative expenses | 467 | 442 | ||||||
Interest expense | 92 | 104 | ||||||
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1,588 | 1,413 | |||||||
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Total costs and expenses | 52,382 | 59,738 | ||||||
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Earnings (loss) before income taxes and equity method earnings | (1,924 | ) | 5,407 | |||||
Equity method earnings | 401 | 281 | ||||||
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Earnings (loss) before income taxes | (1,523 | ) | 5,688 | |||||
Income tax expense (benefit) | (452 | ) | 1,549 | |||||
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Net earnings (loss) | (1,071 | ) | 4,139 | |||||
Earnings attributable to noncontrolling interests | 67 | 79 | ||||||
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Net earnings (loss) attributable to Berkshire Hathaway shareholders | $ (1,138 | ) | $ 4,060 | |||||
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Net earnings (loss) per average equivalent Class A share | $ (692 | ) | $ 2,469 | |||||
Net earnings (loss) per average equivalent Class B share* | $ (0.46 | ) | $ 1.65 | |||||
Average equivalent Class A shares outstanding | 1,644,958 | 1,644,425 | ||||||
Average equivalent Class B shares outstanding | 2,467,436,888 | 2,466,636,938 |
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues: | ||||||||||||||||
Insurance and Other: | ||||||||||||||||
Insurance premiums earned | $ | 14,333 | $ | 13,349 | $ | 41,855 | $ | 47,469 | ||||||||
Sales and service revenues | 33,249 | 32,055 | 98,128 | 94,017 | ||||||||||||
Interest, dividend and other investment income | 1,619 | 1,320 | 4,468 | 3,804 | ||||||||||||
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49,201 | 46,724 | 144,451 | 145,290 | |||||||||||||
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Railroad, Utilities and Energy operating and other revenues | 11,818 | 10,633 | 32,815 | 29,833 | ||||||||||||
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Finance and Financial Products: | ||||||||||||||||
Sales and service revenues | 2,057 | 1,790 | 5,742 | 4,936 | ||||||||||||
Interest, dividend and other investment income | 374 | 360 | 1,115 | 1,074 | ||||||||||||
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2,431 | 2,150 | 6,857 | 6,010 | |||||||||||||
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Total revenues | 63,450 | 59,507 | 184,123 | 181,133 | ||||||||||||
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Investment and derivative contract gains/losses: | ||||||||||||||||
Investments gains (losses) | 14,569 | 657 | 12,750 | 1,262 | ||||||||||||
Derivative contract gains (losses) | 137 | 308 | 303 | 703 | ||||||||||||
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14,706 | 965 | 13,053 | 1,965 | |||||||||||||
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Costs and expenses: | ||||||||||||||||
Insurance and Other: | ||||||||||||||||
Insurance losses and loss adjustment expenses | 9,932 | 12,137 | 28,296 | 39,450 | ||||||||||||
Life, annuity and health insurance benefits | 1,448 | 1,213 | 4,153 | 3,703 | ||||||||||||
Insurance underwriting expenses | 2,352 | 2,207 | 7,079 | 6,924 | ||||||||||||
Cost of sales and services | 26,789 | 25,815 | 78,684 | 75,594 | ||||||||||||
Selling, general and administrative expenses | 3,984 | 3,965 | 12,158 | 12,101 | ||||||||||||
Interest expense | 116 | 435 | 246 | 1,405 | ||||||||||||
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44,621 | 45,772 | 130,616 | 139,177 | |||||||||||||
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Railroad, Utilities and Energy: | ||||||||||||||||
Cost of sales and operating expenses | 8,087 | 6,984 | 23,451 | 20,678 | ||||||||||||
Interest expense | 698 | 700 | 2,110 | 2,090 | ||||||||||||
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8,785 | 7,684 | 25,561 | 22,768 | |||||||||||||
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Finance and Financial Products: | ||||||||||||||||
Cost of sales and services | 1,273 | 1,062 | 3,519 | 2,891 | ||||||||||||
Selling, general and administrative expenses | 564 | 531 | 1,549 | 1,442 | ||||||||||||
Interest expense | 82 | 98 | 253 | 305 | ||||||||||||
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1,919 | 1,691 | 5,321 | 4,638 | |||||||||||||
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Total costs and expenses | 55,325 | 55,147 | 161,498 | 166,583 | ||||||||||||
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Earnings before income taxes and equity method earnings | 22,831 | 5,325 | 35,678 | 16,515 | ||||||||||||
Equity method earnings | 316 | 305 | 1,044 | 932 | ||||||||||||
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Earnings before income taxes | 23,147 | 5,630 | 36,722 | 17,447 | ||||||||||||
Income tax expense | 4,440 | 1,427 | 7,009 | 4,750 | ||||||||||||
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Net earnings | 18,707 | 4,203 | 29,713 | 12,697 | ||||||||||||
Earnings attributable to noncontrolling interests | 167 | 136 | 300 | 308 | ||||||||||||
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Net earnings attributable to Berkshire Hathaway shareholders | $ | 18,540 | $ | 4,067 | $ | 29,413 | $ | 12,389 | ||||||||
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Net earnings per average equivalent Class A share* | $ | 11,280 | $ | 2,473 | $ | 17,885 | $ | 7,533 | ||||||||
Net earnings per average equivalent Class B share* | $ | 7.52 | $ | 1.65 | $ | 11.92 | $ | 5.02 | ||||||||
Average Class A shares outstanding | 736,262 | 756,528 | 744,126 | 766,245 | ||||||||||||
Average Class B shares outstanding | 1,360,940,890 | 1,332,192,917 | 1,350,588,758 | 1,317,463,821 |
* |
|
See accompanying Notes to Consolidated Financial Statements
4
and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
(Unaudited) |
(Unaudited) | (Unaudited) | ||||||||||||||||||||||
Net earnings (loss) | $ | (1,071 | ) | $ | 4,139 | |||||||||||||||||||
Net earnings | $ | 18,707 | $ | 4,203 | $ | 29,713 | $ | 12,697 | ||||||||||||||||
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Other comprehensive income: | ||||||||||||||||||||||||
Net change in unrealized appreciation of investments | (45 | ) | 8,377 | 5 | 4,952 | (132) | 18,040 | |||||||||||||||||
Applicable income taxes | (2 | ) | (2,872 | ) | (1) | (1,716) | 19 | (6,247) | ||||||||||||||||
Reclassification of investment appreciation in net earnings | (221 | ) | (305 | ) | (34) | (646) | (299) | (1,235) | ||||||||||||||||
Applicable income taxes | 46 | 107 | 7 | 226 | 63 | 432 | ||||||||||||||||||
Foreign currency translation | 601 | 558 | (79) | 771 | (842) | 2,127 | ||||||||||||||||||
Applicable income taxes | (6 | ) | (69 | ) | 9 | (24) | 46 | (116) | ||||||||||||||||
Prior service cost and actuarial gains/losses of defined benefit pension plans | (24 | ) | (10 | ) | (13) | (3) | 50 | (57) | ||||||||||||||||
Applicable income taxes | 17 | 7 | 3 | 6 | — | 31 | ||||||||||||||||||
Other, net | (31 | ) | 3 | (21) | 32 | (57) | 38 | |||||||||||||||||
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Other comprehensive income, net | 335 | 5,796 | (124) | 3,598 | (1,152) | 13,013 | ||||||||||||||||||
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Comprehensive income | (736 | ) | 9,935 | 18,583 | 7,801 | 28,561 | 25,710 | |||||||||||||||||
Comprehensive income attributable to noncontrolling interests | 75 | 103 | 162 | 203 | 271 | 436 | ||||||||||||||||||
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Comprehensive income attributable to Berkshire Hathaway shareholders | $ | (811 | ) | $ | 9,832 | $ | 18,421 | $ | 7,598 | $ | 28,290 | $ | 25,274 | |||||||||||
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and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(dollars in millions)
Berkshire Hathaway shareholders’ equity | Total | 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 | Common stock and capital in excess of par value | Accumulated other comprehensive income | Retained earnings | Treasury stock | Non- controlling interests | |||||||||||||||||||||||||||||||||||||||
First nine months 2017: | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2016 | $ | 35,689 | $ | 37,298 | $ | 210,846 | $ | (1,763 | ) | $ | 3,358 | $ | 285,428 | $ | 35,689 | $ | 37,298 | $ | 210,846 | $ | (1,763) | $ | 3,358 | $ | 285,428 | |||||||||||||||||||||||
Net earnings | — | — | 4,060 | — | 79 | 4,139 | — | — | 12,389 | — | 308 | 12,697 | ||||||||||||||||||||||||||||||||||||
Other comprehensive income, net | — | 5,772 | — | — | 24 | 5,796 | — | 12,885 | — | — | 128 | 13,013 | ||||||||||||||||||||||||||||||||||||
Issuance of common stock | 34 | — | — | — | — | 34 | 58 | — | — | — | — | 58 | ||||||||||||||||||||||||||||||||||||
Transactions with noncontrolling interests | (16 | ) | — | — | — | (32 | ) | (48 | ) | (55) | — | — | — | (220) | (275) | |||||||||||||||||||||||||||||||||
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Balance at March 31, 2017 | $ | 35,707 | $ | 43,070 | $ | 214,906 | $ | (1,763 | ) | $ | 3,429 | $ | 295,349 | |||||||||||||||||||||||||||||||||||
Balance at September 30, 2017 | $ | 35,692 | $ | 50,183 | $ | 223,235 | $ | (1,763) | $ | 3,574 | $ | 310,921 | ||||||||||||||||||||||||||||||||||||
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First nine months 2018: | ||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 35,702 | $ | 58,571 | $ | 255,786 | $ | (1,763 | ) | $ | 3,658 | $ | 351,954 | $ | 35,702 | $ | 58,571 | $ | 255,786 | $ | (1,763) | $ | 3,658 | $ | 351,954 | |||||||||||||||||||||||
Adoption of new accounting pronouncements | — | (61,375 | ) | 61,304 | — | — | (71 | ) | — | (61,375) | 61,304 | — | — | (71) | ||||||||||||||||||||||||||||||||||
Net earnings (loss) | — | — | (1,138 | ) | — | 67 | (1,071 | ) | ||||||||||||||||||||||||||||||||||||||||
Net earnings | — | — | 29,413 | — | 300 | 29,713 | ||||||||||||||||||||||||||||||||||||||||||
Other comprehensive income, net | — | 327 | — | — | 8 | 335 | — | (1,123) | — | — | (29) | (1,152) | ||||||||||||||||||||||||||||||||||||
Issuance of common stock | 24 | — | — | — | — | 24 | ||||||||||||||||||||||||||||||||||||||||||
Issuance (acquisition) of common stock | 54 | — | — | (928) | — | (874) | ||||||||||||||||||||||||||||||||||||||||||
Transactions with noncontrolling interests | (37 | ) | — | — | — | (82 | ) | (119 | ) | (35) | — | — | — | (116) | (151) | |||||||||||||||||||||||||||||||||
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Balance at March 31, 2018 | $ | 35,689 | $ | (2,477 | ) | $ | 315,952 | $ | (1,763 | ) | $ | 3,651 | $ | 351,052 | ||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | 35,721 | $ | (3,927) | $ | 346,503 | $ | (2,691) | $ | 3,813 | $ | 379,419 | ||||||||||||||||||||||||||||||||||||
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See accompanying Notes to Consolidated Financial Statements
5
and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
First Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net earnings (loss) | $ | (1,071 | ) | $ | 4,139 | |||||||||||
Adjustments to reconcile net earnings (loss) to operating cash flows: | ||||||||||||||||
Net earnings | $ | 29,713 | $ | 12,697 | ||||||||||||
Adjustments to reconcile net earnings to operating cash flows: | ||||||||||||||||
Investment gains/losses | 7,809 | (315 | ) | (12,750) | (1,262) | |||||||||||
Depreciation and amortization | 2,387 | 2,243 | 7,169 | 6,835 | ||||||||||||
Other | (1 | ) | 120 | (677) | 1,110 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Losses and loss adjustment expenses | 69 | 16,900 | 2,272 | 22,615 | ||||||||||||
Deferred charges reinsurance assumed | 271 | (5,783 | ) | 827 | (5,525) | |||||||||||
Unearned premiums | 2,352 | 1,829 | 2,974 | 2,253 | ||||||||||||
Receivables and originated loans | (2,186 | ) | (1,197 | ) | (4,781) | (2,890) | ||||||||||
Other assets | (881 | ) | (339 | ) | (1,788) | (1,287) | ||||||||||
Other liabilities | (392 | ) | (753 | ) | 805 | 360 | ||||||||||
Income taxes | (801 | ) | 1,451 | 2,791 | 2,593 | |||||||||||
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Net cash flows from operating activities | 7,556 | 18,295 | 26,555 | 37,499 | ||||||||||||
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Cash flows from investing activities: | ||||||||||||||||
Purchases of U.S. Treasury Bills and fixed maturity securities | (13,037 | ) | (45,342 | ) | (85,502) | (106,597) | ||||||||||
Purchases of equity securities | (14,765 | ) | (10,590 | ) | (38,552) | (14,936) | ||||||||||
Sales of U.S. Treasury Bills and fixed maturity securities | 13,577 | 10,048 | 26,903 | 35,143 | ||||||||||||
Redemptions and maturities of U.S. Treasury Bills and fixed maturity securities | 35,088 | 23,990 | 83,742 | 65,666 | ||||||||||||
Sales and redemptions of equity securities | 4,240 | 3,452 | 14,164 | 10,572 | ||||||||||||
Purchases of loans and finance receivables | (41 | ) | (52 | ) | (1,748) | (1,392) | ||||||||||
Collections of loans and finance receivables | 100 | 97 | 266 | 1,599 | ||||||||||||
Acquisitions of businesses, net of cash acquired | (112 | ) | (1,599 | ) | (521) | (2,640) | ||||||||||
Purchases of property, plant and equipment | (2,589 | ) | (2,355 | ) | (10,040) | (8,411) | ||||||||||
Other | (153 | ) | (181 | ) | 257 | (150) | ||||||||||
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Net cash flows from investing activities | 22,308 | (22,532 | ) | (11,031) | (21,146) | |||||||||||
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Cash flows from financing activities: | ||||||||||||||||
Proceeds from borrowings of insurance and other businesses | 17 | 1,203 | 55 | 1,321 | ||||||||||||
Proceeds from borrowings of railroad, utilities and energy businesses | 3,613 | 2,094 | 7,019 | 2,812 | ||||||||||||
Proceeds from borrowings of finance businesses | 20 | 1,298 | 2,339 | 1,298 | ||||||||||||
Repayments of borrowings of insurance and other businesses | (1,840 | ) | (1,130 | ) | (2,661) | (1,763) | ||||||||||
Repayments of borrowings of railroad, utilities and energy businesses | (1,221 | ) | (446 | ) | (3,658) | (1,944) | ||||||||||
Repayments of borrowings of finance businesses | (2,352 | ) | (1,068 | ) | (4,661) | (3,605) | ||||||||||
Changes in short term borrowings, net | (1,929 | ) | 87 | (2,754) | 122 | |||||||||||
Acquisition of treasury stock | (928) | — | ||||||||||||||
Other | (102 | ) | (23 | ) | (277) | (108) | ||||||||||
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Net cash flows from financing activities | (3,794 | ) | 2,015 | (5,526) | (1,867) | |||||||||||
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Effects of foreign currency exchange rate changes | 92 | 61 | (109) | 222 | ||||||||||||
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Increase (decrease) in cash and cash equivalents and restricted cash | 26,162 | (2,161 | ) | |||||||||||||
Increase in cash and cash equivalents and restricted cash | 9,889 | 14,708 | ||||||||||||||
Cash and cash equivalents and restricted cash at beginning of year | 32,212 | 28,643 | 32,212 | 28,643 | ||||||||||||
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Cash and cash equivalents and restricted cash at end of first quarter * | $ | 58,374 | $ | 26,482 | ||||||||||||
Cash and cash equivalents and restricted cash at end of third quarter * | $ | 42,101 | $ | 43,351 | ||||||||||||
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*Cash and cash equivalents and restricted cash are comprised of the following: | ||||||||||||||||
Beginning of year— | ||||||||||||||||
Insurance and Other | $ | 25,460 | $ | 23,581 | $ | 25,460 | $ | 23,581 | ||||||||
Railroad, Utilities and Energy | 2,910 | 3,939 | 2,910 | 3,939 | ||||||||||||
Finance and Financial Products | 3,213 | 528 | 3,213 | 528 | ||||||||||||
Restricted cash, included in other assets | 629 | 595 | 629 | 595 | ||||||||||||
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$32,212 | $28,643 | $ | 32,212 | $ | 28,643 | |||||||||||
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End of first quarter— | ||||||||||||||||
End of third quarter— | ||||||||||||||||
Insurance and Other | $ | 50,559 | $ | 18,362 | $ | 36,506 | $ | 35,247 | ||||||||
Railroad, Utilities and Energy | 3,550 | 5,584 | 3,297 | 4,448 | ||||||||||||
Finance and Financial Products | 3,772 | 2,017 | 1,635 | 3,011 | ||||||||||||
Restricted cash, included in other assets | 493 | 519 | 663 | 645 | ||||||||||||
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$58,374 | $26,482 | $ | 42,101 | $ | 43,351 | |||||||||||
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See accompanying Notes to Consolidated Financial Statements
6
and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31,September 30, 2018
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. Changes to those policies due to the adoption of new accounting standards effective January 1, 2018 are described in Note 2. Certain immaterial amounts in 2017 related to equity method earnings were reclassified in the accompanying 2017 Consolidated Financial Statements to conform to current presentations.
Financial information in this Quarterly Report reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement of results for the interim periods in accordance with accounting principles generally accepted in the United States (“GAAP”). For a number of reasons, our results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be more significant to results of interim periods than to results for a full year. Changes in market prices of the equity securities we own can produce significant effects on our consolidated shareholders’ equity. Beginning in 2018, those effects are included in our Consolidated Statements of Earnings, whereas inpre-2018 periods, such effects were included in other comprehensive income. In addition, changes in the fair values of certain derivative contract liabilities and gains and losses from the periodic revaluation of certain assets and liabilities denominated in foreign currencies can cause significant variations in our periodic net earnings.
Note 2. New Accounting Pronouncements
On January 1, 2018, we adopted Accounting Standards Update (“ASU”)2016-01 “Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU2016-01”), ASU2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU2018-02”) and Accounting Standards Codification (“ASC”) 606 – “Revenues from Contracts with Customers” (“ASC 606”). A summary of the effects of the initial adoption of ASU2016-01, ASU2018-02 and ASC 606 follows (in millions).
ASU 2016-01 | ASU 2018-02 | ASC 606 | Total | ASU 2016-01 | ASU 2018-02 | ASC 606 | Total | |||||||||||||||||||||||||
Increase (decrease): | ||||||||||||||||||||||||||||||||
Assets | $ | — | $ | — | $ | 3,382 | $ | 3,382 | $ | — | $ | — | $ | 3,382 | $ | 3,382 | ||||||||||||||||
Liabilities | — | — | 3,453 | 3,453 | — | — | 3,453 | 3,453 | ||||||||||||||||||||||||
Accumulated other comprehensive income | (61,459 | ) | 84 | — | (61,375 | ) | (61,459) | 84 | — | (61,375) | ||||||||||||||||||||||
Retained earnings | 61,459 | (84 | ) | (71 | ) | 61,304 | 61,459 | (84) | (71) | 61,304 | ||||||||||||||||||||||
Shareholders’ equity | — | — | (71 | ) | (71 | ) | — | — | (71) | (71) |
With respect to ASU2016-01, beginning in 2018, we reclassified netafter-taxare including unrealized gains onand losses arising from the changes in the fair values of our equity securities during the period as a component of investment gains in the Consolidated Statements of Earnings. For periods ending prior to January 1, 2018, we recognized gains and losses in earnings when we sold equity securities, based on the difference between the sale proceeds and the cost of the securities, and for other-than-temporary impairment losses. We recorded unrealized gains and losses from accumulatedthe changes in fair value ofavailable-for-sale equity securities in other comprehensive income to retained earnings.income. We continue to carry our investments in equity securities at fair value and there is no change to the asset values or total shareholders’ equity thatamounts we would have otherwise recorded. Beginning in 2018, we are including unrealized gains and losses arising from the changes in the fair values of our equity securities as a component of investment gains in the Consolidated Statements of Earnings. ASU2016-01 prohibited the restatement of prior year financial statements and for periods ending prior tostatements. However, as of January 1, 2018, we reclassified netafter-tax unrealized gains and losses from the changes in fair value ofavailable-for-saleon equity securities were recorded infrom accumulated other comprehensive income.income to retained earnings.
We also
Notes to Consolidated Financial Statements(Continued)
Note 2. New Accounting Pronouncements(Continued)
In connection with our adoption of ASU2018-02, we reclassified the stranded deferred income taxestax effects that were included in accumulated other comprehensive income as of January 1, 2018 to retained earnings in connection with our adoption of ASU2018-02.earnings. These stranded deferred income tax effects arose from the reduction in the U.S. statutory income tax rate under the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017. Prior year financial statements were not restated. The effect of the reduction in the statutory income tax rate on accumulated other comprehensive income items was recorded in earnings in December 2017. Prior year financial statements were not restated.
We adopted ASC 606 using the modified retrospective method, whereby the cumulative effect of the adoption was recorded as an adjustment to retained earnings. Prior year financial statements were not restated. The initial adoption of ASC 606 as of January 1, 2018 resulted in an increaseincreases to both assets (primarily property, plant and equipment) and other liabilities, andwith a relatively minor reduction in retained earnings asearnings. Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the term of the beginningrelated management services agreements, as the transfers of 2018.the ownership interests were inseparable from the management services agreements. These agreements also include provisions that require us to repurchase the fractional interest at fair market value at contract termination or upon the customer’s request following the end of a minimum commitment period. ASC 606 also provides that such contracts are subject to accounting guidance for certainlease contracts and not ASC 606. The principal effects of thisre-characterization were to increase both property, plant and equipment and other disclosures which are included in Note 3.
7
Notes to Consolidated Financial Statements(Continued)
Note 2. New accounting pronouncements(Continued)
liabilities by approximately $3.5 billion. There-characterization of these fractional ownership interests as operating leases did not have a material effect on our consolidated revenues or earnings for the first nine months of 2018.
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU2016-02 “Leases.“Leases,” ASU2016-02which together with subsequent amendments is included in ASC 842. Most significantly, ASC 842 requires a lessee to recognize in the statement of financial position a liability to make lease payments and aright-of-usean asset representingwith respect to its right to use the underlying asset for the lease termterm. ASC 842 also addresses accounting and also requires additionalreporting by lessors, which is not significantly different from current accounting and reporting, and further provides for qualitative and quantitative disclosures. ASU2016-02 is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. We intend to adopt ASC 842 as of January 1, 2019 under the modified retrospective method.
We are currently evaluatingparty to contracts where we are the lessee and other contracts where we are the lessor. For contracts where we are the lessee, we will record lease liabilities and right of use assets for contracts in effect this standardon January 1, 2019 based on the facts and circumstances as of that date. While we continue to evaluate certain provisions of ASC 842, based on our current estimates, we expect to recognize right of use assets and lessee lease liabilities of approximately $6 billion with respect to operating leases. We do not believe the adoption of ASC 842 will have a material effect on our Consolidated Financial Statements.consolidated financial position, results of operations or cash flows.
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.
In January 2017, the FASB issued ASU2017-04 “Simplifying the Test for Goodwill Impairment.” ASU2017-04 eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption of ASU2017-04, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. ASU2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.
In August 2018, the FASB issued ASU2018-12 “Targeted Improvements to the Accounting for Long-Duration Contracts.” ASU2018-12 requires periodic reassessment of actuarial and discount rate assumptions used in the valuation of policyholder liabilities and deferred acquisition costs arising from the issuance of long-duration insurance and reinsurance contracts, with the effects of changes in cash flow assumptions reflected in earnings and the effects of changes in discount rate assumptions reflected in other comprehensive income. Under current accounting guidance, the actuarial and discount rate assumptions are set at the contract inception date and not subsequently changed, except under limited circumstances. ASU2018-12 also requires new disclosures and is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We are evaluating the effect this standard will have on our Consolidated Financial Statements.
Notes to Consolidated Financial Statements(Continued)
Note 3. Revenues from contracts with customers
As discussed in Note 2, on January 1, 2018, we adopted ASC 606 “Revenues from Contracts with Customers” on January 1, 2018. OurCustomers.” Except as described in Note 2, our revenue recognition practices for contracts with customers under ASC 606 do not differ materiallysignificantly from prior practices. Under ASC 606, revenues are recognized when a good or service is transferred to a customer. A good or service is transferred when (or as) the customer obtains control of that good or service. Revenues are based on the consideration we expect to receive in connection with our promises to deliver goods and services to our customers. Our accounting policies related to revenue from contracts with customers follow.
We manufacture and/or distribute a wide variety of industrial, building and consumer products. Our sales contracts provide customers with manufacturedthese products and goods acquired for resale through wholesale and retail channels in exchange for consideration specified under the contracts. Contracts generally represent customer orders for individual products at stated prices. Sales contracts may contain either single or multiple performance obligations. In instances where contracts contain multiple performance obligations, we allocate the expected considerationrevenue to each obligation based on the relative stand-alone selling prices of each product or service.
Expected consideration (and therefore revenue)Sales revenue reflects reductions for returns, allowances, volume discounts and other incentives, some of which may be contingent on future events. In certain customer contracts of our grocery distribution business, considerationsales revenue includes certain state and local excise taxes billed to customers on specified products when those taxes are levied directly upon us by the taxing authorities. Expected considerationSales revenue excludes sales taxes and value-added taxes collected on behalf of taxing authorities. RevenueSales revenue includes consideration for shipping and other fulfillment activities performed prior to the customer obtaining control of the goods. We also elect to treat consideration for such services performed after control has passed to the customer as fulfillment activities.sales revenue.
Our product sales revenues are predominantlygenerally recognized at a point in time when control of the product transfers to the customer, which coincides with customer pickup or product delivery or acceptance, depending on terms of the arrangement. We recognize sales revenues and related costs with respect to certain contracts over time, primarily from certain castings, forgings and aerostructures contracts. Control of the product units under these contracts transfers continuously to the customer as the product is manufactured, given themanufactured. These products generally have no alternative use and the contract requires the customer to provide reasonable compensation if terminated for reasons other than breach of contract.
Our energy revenue derives primarily from tariff based sales arrangements approved by various regulatory bodies. These tariff based revenues are mainly comprised of energy, transmission, distribution and natural gas and have performance obligations to deliver energy products and services to customers which are satisfied over time as energy is delivered or services are provided. Our nonregulated energy revenue primarily relates to our renewable energy business.
Energy revenues recognized are equivalent to the amounts we have the right to invoice as it correspondsand correspond directly with the value to the customer of the performance to date and includesinclude billed and unbilled amounts. As of March 31,September 30, 2018 and December 31, 2017, trade receivables netwere approximately $2.2 billion and $2.0 billion, respectively, and were included in other assets of our railroad, utilities and energy businesses on the Consolidated Balance SheetsSheets. Such amounts substantially relate substantially to customer revenue and includesincluded unbilled revenue of $582$624 million as of September 30, 2018 and $665 million respectively.as of December 31, 2017. Payments from customers are generally due from the customer within 30 days of billing. Rates charged for energy products and services are established by regulators or contractual arrangements that establish the transaction price, as well as the allocation of price amongst the separate performance obligations. When preliminary regulated rates are permitted to be billed prior to final approval by the applicable regulator, certain revenue collected may be subject to refund and a liability for estimated refunds is accrued.
8
Notes to Consolidated Financial Statements(Continued)
Note 3. Revenues from contracts with customers(Continued)
Service revenues mainly derive from contracts with customers in which performance obligations are satisfied over time, including instances where customers receive and consume benefits as we perform the services. Revenues under such contracts are recorded over time. Service revenues primarily derive from contracts for freight rail transportation, real estate brokerage, automotive repair, aircraft management, aviation training and news distribution services.
The primary performance obligation under our freight rail transportation service contracts is to move freight from a point of origin to a point of destination for its customers.destination. The performance obligations are represented by bills of lading which create a series of distinct services that have a similar pattern of transfer to the customer. The revenues for each performance obligation are based on various factors including the product being shipped, the origin and destination pair, and contract incentives which are outlined in various private rate agreements, common carrier public tariffs, interline foreign road agreements and pricing quotes. The transaction price is generally a per car amount to transport railcars from a specified origin to a specified destination. Freight revenues are recognized over time as the service is performed because the customer simultaneously receives and consumes the benefits of the service. Revenues recognized represent the proportion of the service completed as of the balance sheet date. Receivables related to customer contracts were approximately $1.3 billion at September 30, 2018 and $1.2 billion at December 31, 2017 and were included in other assets of our railroad, utilities and energy businesses. Invoices for freight transportation services are generally issued to customers and paid within thirty days or less. Customer incentives, which are primarily provided for shipping a specified cumulative volume or shipping to/from specific locations, are recorded as a reduction to revenue on apro-rata basis based on actual or projected future customer shipments.
PriorOther service revenues derive from contracts with customers in which performance obligations are satisfied over time, where customers receive and consume benefits as we perform the services, or at a point in time when the services are provided. Other service revenues primarily derive from real estate brokerage, automotive repair, aircraft management, aviation training, franchising and news distribution services.
Notes to January 1, 2018, we recognized revenuesConsolidated Financial Statements(Continued)
Note 3. Revenues from the sales of fractional ownership interests in aircraft over the terms of the related management services agreements, as the transfers of the ownership interests were inseparable from the management services agreements. These agreements also include provisions that require us to repurchase the fractional interest at fair market value at contract termination or upon the customer’s request following the minimum commitment period. ASC 606 provides that such contracts are subject to accounting guidance for lease contracts and not ASC 606. The principal effects of thisre-characterization were to increase both assets (primarily property, plant and equipment) and other liabilities by approximately $3.5 billion with a small reduction to retained earnings as of January 1, 2018. There-categorization of these contracts as operating leases did not have a significant effect on our consolidated revenues or earnings for the first three months of 2018.customers(Continued)
The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue for the three and nine months ended March 31,ending September 30, 2018 (in millions). Other revenues included in our consolidated revenues were primarily insurance premiums earned, interest, dividend and other investment income and lease income which are not within the scope of ASC 606.
Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Finance and Financial Products | Insurance, Corporate and other | Total | |||||||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||||||||||||||
Industrial and commercial products | $ | 6,393 | $ | — | $ | 54 | $ | — | $ | — | $ | 161 | $ | — | $ | 6,608 | ||||||||||||||||||||||||
Building products | 2,919 | — | — | — | — | 1 | — | 2,920 | ||||||||||||||||||||||||||||||||
Consumer products | 2,848 | — | — | — | — | 848 | — | 3,696 | ||||||||||||||||||||||||||||||||
Grocery and convenience store distribution | — | 8,512 | — | — | — | — | — | 8,512 | ||||||||||||||||||||||||||||||||
Food and beverage distribution | — | 3,643 | — | — | — | — | — | 3,643 | ||||||||||||||||||||||||||||||||
Auto sales | — | — | 1,931 | — | — | — | — | 1,931 | ||||||||||||||||||||||||||||||||
Other retail and wholesale distribution | 496 | — | 2,694 | — | — | 20 | — | 3,210 | ||||||||||||||||||||||||||||||||
Service | 218 | 17 | 942 | 5,580 | 700 | 8 | — | 7,465 | ||||||||||||||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 3,524 | — | — | 3,524 | ||||||||||||||||||||||||||||||||
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Total | 12,874 | 12,172 | 5,621 | 5,580 | 4,224 | 1,038 | — | 41,509 | ||||||||||||||||||||||||||||||||
Other revenue | 38 | 17 | 939 | 10 | 288 | 1,022 | 14,650 | 16,964 | ||||||||||||||||||||||||||||||||
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$ | 12,912 | $ | 12,189 | $ | 6,560 | $ | 5,590 | $ | 4,512 | $ | 2,060 | $ | 14,650 | $ | 58,473 | |||||||||||||||||||||||||
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9
Notes to Consolidated Financial Statements(Continued)
Note 3. Revenues from contracts with customers(Continued)
Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Finance and Financial Products | Insurance, Corporate and other | Total | |||||||||||||||||||||||||
Three months ending September 30, 2018 | ||||||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||||||
Industrial and commercial products | $ | 6,384 | $ | — | $ | 47 | $ | — | $ | — | $ | 82 | $ | — | $ | 6,513 | ||||||||||||||||
Building products | 3,473 | — | — | — | — | 4 | — | 3,477 | ||||||||||||||||||||||||
Consumer products | 2,838 | — | — | — | — | 1,170 | — | 4,008 | ||||||||||||||||||||||||
Grocery and convenience store distribution | — | 8,709 | — | — | — | — | — | 8,709 | ||||||||||||||||||||||||
Food and beverage distribution | — | 4,079 | — | — | — | — | — | 4,079 | ||||||||||||||||||||||||
Auto sales | — | — | 2,083 | — | — | — | — | 2,083 | ||||||||||||||||||||||||
Other retail and wholesale distribution | 521 | — | 3,117 | — | — | 23 | — | 3,661 | ||||||||||||||||||||||||
Service | 262 | 16 | 965 | 6,099 | 1,140 | 148 | — | 8,630 | ||||||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 4,267 | — | — | 4,267 | ||||||||||||||||||||||||
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Total | 13,478 | 12,804 | 6,212 | 6,099 | 5,407 | 1,427 | — | 45,427 | ||||||||||||||||||||||||
Other revenue | 51 | 18 | 743 | 13 | 299 | 1,004 | 15,895 | 18,023 | ||||||||||||||||||||||||
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$ | 13,529 | $ | 12,822 | $ | 6,955 | $ | 6,112 | $ | 5,706 | $ | 2,431 | $ | 15,895 | $ | 63,450 | |||||||||||||||||
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Manufacturing | McLane Company | Service and Retail | BNSF | Berkshire Hathaway Energy | Finance and Financial Products | Insurance, Corporate and other | Total | |||||||||||||||||||||||||
Nine months ending September 30, 2018 | ||||||||||||||||||||||||||||||||
Manufactured products: | ||||||||||||||||||||||||||||||||
Industrial and commercial products | $ | 19,306 | $ | — | $ | 155 | $ | — | $ | — | $ | 503 | $ | — | $ | 19,964 | ||||||||||||||||
Building products | 9,817 | — | — | — | — | 11 | — | 9,828 | ||||||||||||||||||||||||
Consumer products | 8,734 | — | — | — | — | 3,124 | — | 11,858 | ||||||||||||||||||||||||
Grocery and convenience store distribution | — | 25,128 | — | — | — | — | — | 25,128 | ||||||||||||||||||||||||
Food and beverage distribution | — | 12,203 | — | — | — | — | — | 12,203 | ||||||||||||||||||||||||
Auto sales | — | — | 6,087 | — | — | — | — | 6,087 | ||||||||||||||||||||||||
Other retail and wholesale distribution | 1,533 | — | 8,734 | — | — | 65 | — | 10,332 | ||||||||||||||||||||||||
Service | 759 | 53 | 2,912 | 17,510 | 3,026 | 174 | — | 24,434 | ||||||||||||||||||||||||
Electricity and natural gas | — | — | — | — | 11,357 | — | — | 11,357 | ||||||||||||||||||||||||
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Total | 40,149 | 37,384 | 17,888 | 17,510 | 14,383 | 3,877 | — | 131,191 | ||||||||||||||||||||||||
Other revenue | 132 | 54 | 2,664 | 37 | 885 | 2,980 | 46,180 | 52,932 | ||||||||||||||||||||||||
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$ | 40,281 | $ | 37,438 | $ | 20,552 | $ | 17,547 | $ | 15,268 | $ | 6,857 | $ | 46,180 | $ | 184,123 | |||||||||||||||||
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A summary of the transaction price allocated to the significant unsatisfied remaining performance obligations relating to contracts with expected durations in excess of one year as of March 31,September 30, 2018 follows (in millions). Such contracts relate to our utilities and energy businesses.
Performance obligations expected to be satisfied: | ||||||||||||
Less than 12 months | Greater than 12 months | Total | ||||||||||
Electricity and natural gas | $ | 1,007 | $ | 4,352 | $ | 5,359 |
Performance obligations expected to be satisfied: | ||||||||||||
Less than 12 months | Greater than 12 months | Total | ||||||||||
Manufactured products: | ||||||||||||
Industrial and commercial products | $ | 50 | $ | 2,549 | $ | 2,599 | ||||||
Electricity and natural gas | 1,011 | 5,879 | 6,890 |
Notes to Consolidated Financial Statements(Continued)
Note 4. Investments in fixed maturity securities
InvestmentsOur investments in securities with fixed maturitiesmaturity securities as of March 31,September 30, 2018 and December 31, 2017 are summarized by type below (in millions).
Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
March 31, 2018 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,633 | $ | 11 | $ | (36 | ) | $ | 3,608 | |||||||
States, municipalities and political subdivisions | 737 | 30 | (8 | ) | 759 | |||||||||||
Foreign governments | 7,837 | 83 | (32 | ) | 7,888 | |||||||||||
Corporate bonds | 6,308 | 519 | (8 | ) | 6,819 | |||||||||||
Mortgage-backed securities | 761 | 88 | (3 | ) | 846 | |||||||||||
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$ | 19,276 | $ | 731 | $ | (87 | ) | $ | 19,920 | ||||||||
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December 31, 2017 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,975 | $ | 4 | $ | (26 | ) | $ | 3,953 | |||||||
States, municipalities and political subdivisions | 847 | 19 | (12 | ) | 854 | |||||||||||
Foreign governments | 8,572 | 274 | (24 | ) | 8,822 | |||||||||||
Corporate bonds | 6,279 | 588 | (5 | ) | 6,862 | |||||||||||
Mortgage-backed securities | 772 | 92 | (2 | ) | 862 | |||||||||||
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$ | 20,445 | $ | 977 | $ | (69 | ) | $ | 21,353 | ||||||||
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Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | |||||||||||||
September 30, 2018 | ||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,626 | $ | 8 | $ | (35) | $ | 3,599 | ||||||||
U.S. states, municipalities and political subdivisions | 276 | 15 | (1) | 290 | ||||||||||||
Foreign governments | 7,362 | 45 | (37) | 7,370 | ||||||||||||
Corporate bonds | 6,029 | 436 | (7) | 6,458 | ||||||||||||
Mortgage-backed securities | 502 | 56 | (4) | 554 | ||||||||||||
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$ | 17,795 | $ | 560 | $ | (84) | $ | 18,271 | |||||||||
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U.S. Treasury, U.S. government corporations and agencies | $ | 3,975 | $ | 4 | $ | (26) | $ | 3,953 | ||||||||
U.S. states, municipalities and political subdivisions | 847 | 19 | (12) | 854 | ||||||||||||
Foreign governments | 8,572 | 274 | (24) | 8,822 | ||||||||||||
Corporate bonds | 6,279 | 588 | (5) | 6,862 | ||||||||||||
Mortgage-backed securities | 772 | 92 | (2) | 862 | ||||||||||||
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$ | 20,445 | $ | 977 | $ | (69) | $ | 21,353 | |||||||||
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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 March 31,September 30, 2018, approximately 89% of foreign government holdings were rated AA or higher by at least one of the major rating agencies.
The amortized cost and estimated fair value of fixed maturity securities with fixed maturities at March 31,September 30, 2018 are summarized below by contractual maturity dates. Amounts are in millions. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers. Amounts are in millions.
Due in one year or less | Due after one year through five years | Due after five years through ten years | Due after ten years | Mortgage- backed securities | Total | |||||||||||||||||||
Amortized cost | $ | 7,178 | $ | 9,884 | $ | 460 | $ | 993 | $ | 761 | $ | 19,276 | ||||||||||||
Fair value | 7,227 | 9,982 | 515 | 1,350 | 846 | 19,920 |
10
Notes to Consolidated Financial Statements(Continued)
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 | $ | 7,275 | $ | 9,057 | $ | 387 | $ | 574 | $ | 502 | $ | 17,795 | ||||||||||||
Fair value | 7,274 | 9,108 | 435 | 900 | 554 | 18,271 |
Note 5. Investments in equity securities
InvestmentsOur investments in equity securities as of March 31,September 30, 2018 and December 31, 2017 are summarized based on the primary industry of the investee in the table belowas follows (in millions).
Cost Basis | Net Unrealized Gains | Fair Value | Cost Basis | Net Unrealized Gains | Fair Value | |||||||||||||||||||
March 31, 2018 * | ||||||||||||||||||||||||
September 30, 2018 * | ||||||||||||||||||||||||
Banks, insurance and finance | $ | 25,986 | $ 50,091 | $ | 76,077 | $ | 42,010 | $ | 51,499 | $ | 93,509 | |||||||||||||
Consumer products | 38,130 | 23,864 | 61,994 | 38,793 | 39,858 | 78,651 | ||||||||||||||||||
Commercial, industrial and other | 21,714 | 13,191 | 34,905 | 21,035 | 14,137 | 35,172 | ||||||||||||||||||
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$ | 85,830 | $ 87,146 | $ | 172,976 | $ | 101,838 | $ | 105,494 | $ | 207,332 | ||||||||||||||
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* | Approximately |
Notes to Consolidated Financial Statements(Continued)
Note 5. Investments in equity securities(Continued)
Cost Basis | Net Unrealized Gains | Fair Value | Cost Basis | Net Unrealized Gains | Fair Value | |||||||||||||||||||
December 31, 2017 * | ||||||||||||||||||||||||
Banks, insurance and finance | $ | 25,783 | $ 55,026 | $ | 80,809 | $ | 25,783 | $ | 55,026 | $ | 80,809 | |||||||||||||
Consumer products | 25,177 | 25,698 | 50,875 | 25,177 | 25,698 | 50,875 | ||||||||||||||||||
Commercial, industrial and other | 23,716 | 15,140 | 38,856 | 23,716 | 15,140 | 38,856 | ||||||||||||||||||
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$ | 74,676 | $ 95,864 | $ | 170,540 | $ | 74,676 | $ | 95,864 | $ | 170,540 | ||||||||||||||
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* | Approximately 65% of the aggregate fair value was concentrated in five companies (American Express Company – $15.1 billion; Apple Inc. – $28.2 billion; Bank of America Corporation – $20.7 billion; The Coca-Cola Company – $18.4 billion and Wells Fargo & Company – $29.3 billion). |
Investments in equity securities are reflected in our Consolidated Balance Sheets as follows (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Insurance and other | $ | 166,658 | $ | 164,026 | $ | 201,226 | $ | 164,026 | ||||||||
Railroad, utilities and energy * | 1,755 | 1,961 | 1,616 | 1,961 | ||||||||||||
Finance and financial products * | 4,563 | 4,553 | 4,490 | 4,553 | ||||||||||||
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$ | 172,976 | $ | 170,540 | $ | 207,332 | $ | 170,540 | |||||||||
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* | Included in other assets. |
Note 6. Equity Method Investments
Berkshire holds investments in certain businesses that are accounted for pursuant to the equity method. Currently, the most significant of these is our investment in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.7% of the outstanding shares. The carrying value and fair value of this investment at September 30, 2018 was approximately $17.7$17.5 billion at March 31, 2018 and $17.6$17.9 billion, respectively, and at December 31, 2017.2017 was $17.6 billion and $25.3 billion, respectively. Our earnings determined under the equity method during the first quarternine months of 2018 and 2017 were $265$635 million and $239$800 million, in the first quarter of 2017.respectively. We received dividends on the common stock of $203$610 million duringin the first quarternine months of 2018 and $195$594 million in the first nine months of 2017, which we recorded as reductions of our investment.
11
Notes to Consolidated Financial Statements (Continued)
Note 6. Equity Method Investments(Continued)
Summarized consolidated financial information of Kraft Heinz follows (in millions).
March 31, 2018 | December 30, 2017 | September 29, 2018 | December 30, 2017 | |||||||||||||||||||||||||
Assets | $ | 120,787 | $120,232 | $ | 119,730 | $ | 120,232 | |||||||||||||||||||||
Liabilities | 54,324 | 53,985 | 54,152 | 53,985 | ||||||||||||||||||||||||
First Quarter | ||||||||||||||||||||||||||||
2018 | 2017 | Third Quarter | First Nine Months | |||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Sales | $ | 6,304 | $ 6,324 | $ | 6,378 | $ | 6,280 | $ | 19,368 | $ | 19,241 | |||||||||||||||||
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Net earnings attributable to Kraft Heinz common shareholders | $ | 993 | $ 893 | $ | 630 | $ | 944 | $ | 2,379 | $ | 2,996 | |||||||||||||||||
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Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC (“Berkadia”), Pilot Travel Centers LLC, d/b/a Pilot Flying J (“Pilot Flying J”), and Electric Transmission Texas, LLC (“ETT”). Our investments in these entities were approximately $3.5$3.6 billion as of March 31,September 30, 2018 and $3.4 billion as of December 31, 2017 and were included in other assets. Our equity method earnings in these entities for the first quarternine months were $136$409 million in 2018 and $42$132 million in 2017. Additional information concerning these investments follows.
Notes to Consolidated Financial Statements(Continued)
Note 6. Equity Method Investments(Continued)
We own a 50% interest in Berkadia with Jefferies Financial Group Inc. (“Jefferies”), formerly known as 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 source of funding for Berkadia’s operations is through its issuance of commercial paper, which is currently limited to $1.5 billion. We support theThe commercial paper withis supported by a surety policy issued by a Berkshire insurance subsidiary. LeucadiaJefferies is obligated to indemnify us forone-half of any losses incurred under the policy. We also ownIn addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% ownership interest in ETT, through a subsidiaryan owner and operator of Berkshire Hathaway Energy Company. ETT owns and operates electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.
On October 3, 2017, we entered into an investment agreement and an equity purchase agreement whereby we acquired a 38.6% interest in Pilot Flying J, headquartered in Knoxville, Tennessee. Pilot Flying J is one of the largest operators of travel centers in North America, with more than 27,00028,000 team members, 750 locations across the U.S. and Canada and approximatelymore than $20 billion in annual revenues. The Haslam family currently owns a 50.1% interest in Pilot Flying J and a third party owns the remaining 11.3% interest. We also entered into an agreement to acquire in 2023 an additional 41.4% interest in Pilot Flying J with the Haslam family retaining a 20% interest. As a result, Berkshire will become the majority owner of Pilot Flying J in 2023.
Note 7. Income taxes
Our consolidated effective income tax rates for the third quarter and first quarternine months of 2018 were 19.2% and 2017 were 29.7%19.1%, respectively, and 25.3% and 27.2%, in the third quarter and first nine months of 2017, respectively. Our effective income tax rate normally reflects recurring benefits from: (a) dividends received deductions applicable to certain investments in equity securities and (b) income production tax credits related to wind-powered electricity generation placed in service in the U.S. In 2018, our effective income tax rate reflects the current U.S. statutory rate of 21%, while the rate for 2017 reflects the then current U.S. statutory rate of 35%. Our periodic effective income tax rate is also affected by theThe relative mix ofpre-tax earnings or losses and underlying income tax rates applicable to the various taxing jurisdictions.jurisdictions can also affect our periodic consolidated effective income tax rate.
In December 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin 118 (“SAB 118”) to provide clarification in implementing the Tax Cuts and Jobs Act of 2017 (“TCJA”) when registrants do not have the necessary information available to complete the accounting for an element of the TCJA in the period of its enactment. SAB 118 provides for tax amounts to be classified as provisional and subject to remeasurement for up to one year from the enactment date for such elements when the accounting effect is not complete, but can be reasonably estimated. We considerrecorded income tax expense of approximately $1.4 billion in the fourth quarter of 2017, representing our provisional estimate of the taxU.S. Federal and state income taxes on the deemed repatriation of accumulated undistributed earnings of foreign subsidiariessubsidiaries. We continue to consider this estimate to be provisional and subject to remeasurement when we obtain the necessary additional information to complete the accounting. Whilemeasurement. As of September 30, 2018, we believe our estimate is reasonable, it will take additional time to validatehad not finalized the inputs to the foreign earnings and profits calculations, the basis on which the repatriation tax is determined, and how the applicable states will address the U.S. repatriation tax. We currently expect that ourincome taxes are determined. Our accounting for the repatriation tax under the TCJA will be completed byduring the endfourth quarter of 2018.
12
Notes We do not anticipate significant adjustments to Consolidated Financial Statements (Continued)
the provisional estimates.
Note 8. Investment gains/losses
A summary of investment gains and losses in the third quarter and first quarternine months of 2018 and 2017 follows (in millions).
Third Quarter | First Nine Months | |||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Equity securities: | ||||||||||||||||||||||||
Investment gains and losses during 2018 on securities sold in 2018 | $ (240) | $ | — | |||||||||||||||||||||
Unrealized investment gains and losses on securities held at the end of the period | (7,807) | — | ||||||||||||||||||||||
Unrealized investment gains/losses on securities held at the end of the period | $ | 14,294 | $ | — | $ | 12,126 | $ | — | ||||||||||||||||
Investment gains/losses during 2018 on securities sold in 2018 | 244 | — | 307 | — | ||||||||||||||||||||
Gross realized gains | — | 425 | — | 1,011 | — | 1,795 | ||||||||||||||||||
Gross realized losses | — | (125 | ) | — | (419) | — | (626) | |||||||||||||||||
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(8,047) | 300 | 14,538 | 592 | 12,433 | 1,169 | |||||||||||||||||||
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Fixed maturity securities: | ||||||||||||||||||||||||
Gross realized gains | 359 | 11 | 44 | 56 | 451 | 82 | ||||||||||||||||||
Gross realized losses | (138) | (6 | ) | (10) | (2) | (152) | (16) | |||||||||||||||||
Other | 17 | 10 | (3) | 11 | 18 | 27 | ||||||||||||||||||
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$(7,809) | $ | 315 | $ | 14,569 | $ | 657 | $ | 12,750 | $ | 1,262 | ||||||||||||||
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We recognize
Notes to Consolidated Financial Statements(Continued)
Note 8. Investment gains/losses(Continued)
Prior to 2018, we recognized investment gains and losses in earnings when we sellsold or otherwise disposedisposed of such securities.equity securities based on the difference between the proceeds from the sale and the cost of the securities and also when we recognized other-than-temporary impairment losses. Beginning in 2018, equity security investmentsecurities gains and losses also include unrealized gains and losses from changes in market pricesfair values during the period. See Note 2.period on equity securities we still own. Prior to 2018, we recorded the changes in unrealized gains and losses on our investments in equity securities in other comprehensive income. See Note 2.
During the first nine months of 2018, as reflected on the Consolidated Statement of Cash Flows, we received proceeds of approximately $14.2 billion from sales of equity securities. In the table above, investment gains/losses on equity securities sold during 2018 reflect the difference between proceeds from sales and the fair value of the equity security sold at the beginning of the period or the purchase date, if later. Our taxable gains on equity securities sold during the third quarter and first nine months of 2018, which are generally the difference between the proceeds from sales and our original cost, were $1,329 million and $2,688 million, respectively.
Note 9. Receivables
Receivables of insurance and other businesses are comprised of the following (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Insurance premiums receivable | $ | 12,570 | $ | 11,058 | $ | 13,002 | $ | 11,058 | ||||||||
Reinsurance recoverable on unpaid losses | 3,048 | 3,201 | 2,944 | 3,201 | ||||||||||||
Trade receivables | 12,568 | 11,756 | 13,197 | 11,756 | ||||||||||||
Other | 3,078 | 2,925 | 3,121 | 2,925 | ||||||||||||
Allowances for uncollectible accounts | (358) | (362) | (380) | (362) | ||||||||||||
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A summary of loans and finance receivables of our finance and financial products businesses follows (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Loans and finance receivables before allowances and discounts | $ | 14,209 | $ | 14,126 | $ | 14,832 | $ | 14,126 | ||||||||
Allowances for uncollectible loans | (179) | (180) | (183) | (180) | ||||||||||||
Unamortized acquisition discounts | (185) | (198) | (172) | (198) | ||||||||||||
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$ | 13,845 | $ | 13,748 | $ | 14,477 | $ | 13,748 | |||||||||
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Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses in the first quarternine months of 2018 and 2017 were $34$109 million and $38$124 million, respectively. Loan charge-offs, net of recoveries, in the first quarternine months were $35$106 million in 2018 and $43$126 million in 2017. At March 31,September 30, 2018, we evaluated approximately 98% of the loan balances were evaluated collectively for impairment. As part of the evaluation process, credit quality indicators arewere reviewed and loans arewere designated as performing ornon-performing. At March 31,September 30, 2018, we considered approximately 99% of the loan balances to be performing and approximately 96%95% of the loan balances to be current as to payment status. In June 2017, we agreed to provide a Canada-based financial institution with a C$2 billion (approximately $1.55 billion)one-year secured revolving credit facility. The agreement expires on June 29, 2018. There was no outstanding loan balance as of March 31, 2018.
13
Notes to Consolidated Financial Statements(Continued)
Note 10. Inventories
Inventories are comprised of the following (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Raw materials | $ | 3,094 | $ | 2,997 | $ | 3,326 | $ | 2,997 | ||||||||
Work in process and other | 2,228 | 2,315 | 2,232 | 2,315 | ||||||||||||
Finished manufactured goods | 4,188 | 4,179 | 4,150 | 4,179 | ||||||||||||
Goods acquired for resale | 6,734 | 6,696 | 7,085 | 6,696 | ||||||||||||
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$ | 16,244 | $ | 16,187 | $ | 16,793 | $ | 16,187 | |||||||||
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Notes to Consolidated Financial Statements(Continued)
Note 11. 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).
September 30, 2018 | December 31, 2017 | |||||||
Land | $ | 2,272 | $ | 2,292 | ||||
Buildings and improvements | 9,034 | 8,810 | ||||||
Machinery and equipment | 28,594 | 21,935 | ||||||
Furniture, fixtures and other | 4,972 | 4,387 | ||||||
|
|
|
| |||||
44,872 | 37,424 | |||||||
Accumulated depreciation | (20,515) | (17,320) | ||||||
|
|
|
| |||||
$ | 24,357 | $ | 20,104 | |||||
|
|
|
|
In conjunction with the adoption of ASC 606, we recorded a net asset of approximately $3.5 billion inrelated to aircraft sold under fractional aircraft ownership programs in machinery and equipment. Such amount consisted ofincluded cost of approximately $5.3 billion, andnet of accumulated depreciation of $1.8 billion. We also recorded other liabilities of approximately $3.5 billion for estimated aircraft repurchase obligations and unearned lease revenues, substantially offsetting the amount recorded in machinery and equipment. See Note 2.
March 31, 2018 | December 31, 2017 | |||||||
Land | $ | 2,310 | $ 2,292 | |||||
Buildings and improvements | 8,961 | 8,810 | ||||||
Machinery and equipment | 27,707 | 21,935 | ||||||
Furniture, fixtures and other | 4,493 | 4,387 | ||||||
|
|
|
| |||||
43,471 | 37,424 | |||||||
Accumulated depreciation | (19,664 | ) | (17,320 | ) | ||||
|
|
|
| |||||
$ | 23,807 | $20,104 | ||||||
|
|
|
|
A summary of property, plant and equipment of our railroad and our utilities and energy businesses follows (in millions). The utility generation, transmission and distribution systems and interstate natural gas pipeline assets are owned by regulated public utility and natural gas pipeline subsidiaries.
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Railroad: | ||||||||||||||||
Land | $ | 6,090 | $ | 6,088 | ||||||||||||
Track structure and other roadway | 51,652 | 51,320 | ||||||||||||||
Land, track structure and other roadway | $ | 58,755 | $ | 57,408 | ||||||||||||
Locomotives, freight cars and other equipment | 12,600 | 12,543 | 12,731 | 12,543 | ||||||||||||
Construction in progress | 943 | 989 | 910 | 989 | ||||||||||||
|
|
|
| |||||||||||||
71,285 | 70,940 | 72,396 | 70,940 | |||||||||||||
Accumulated depreciation | (8,954 | ) | (8,627 | ) | (9,596) | (8,627) | ||||||||||
|
|
|
| |||||||||||||
62,331 | 62,313 | 62,800 | 62,313 | |||||||||||||
|
|
|
| |||||||||||||
Utilities and energy: | ||||||||||||||||
Utility generation, transmission and distribution systems | 75,068 | 74,660 | 75,751 | 74,660 | ||||||||||||
Interstate natural gas pipeline assets | 7,230 | 7,176 | 7,295 | 7,176 | ||||||||||||
Independent power plants and other assets | 7,622 | 7,499 | 8,156 | 7,499 | ||||||||||||
Construction in progress | 2,735 | 2,556 | 3,724 | 2,556 | ||||||||||||
|
|
|
| |||||||||||||
92,655 | 91,891 | 94,926 | 91,891 | |||||||||||||
Accumulated depreciation | (26,601 | ) | (26,020 | ) | (27,339) | (26,020) | ||||||||||
|
|
|
| |||||||||||||
66,054 | 65,871 | 67,587 | 65,871 | |||||||||||||
|
|
|
| |||||||||||||
$ | 128,385 | $ | 128,184 | $ | 130,387 | $ | 128,184 | |||||||||
|
|
|
|
14
Notes to Consolidated Financial Statements(Continued)
Note 11. Property, plant and equipment and assets held for lease(Continued)
Assets held for lease and property, plant and equipment of our finance and financial products businesses are summarized below (in millions). Assets held for lease includesinclude railcars, intermodal tank containers, cranes,over-the-road trailers, storage units and furniture.
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||||
Assets held for lease | $ | 12,337 | $ | 12,318 | $ | 12,736 | $ | 12,318 | ||||||||||
Land | 232 | 231 | 240 | 231 | ||||||||||||||
Buildings, machinery and other | 1,464 | 1,444 | 1,527 | 1,444 | ||||||||||||||
|
|
|
| |||||||||||||||
14,033 | 13,993 | 14,503 | 13,993 | |||||||||||||||
Accumulated depreciation | (4,113 | ) | (4,062 | ) | (4,230) | (4,062) | ||||||||||||
|
|
|
| |||||||||||||||
$ | 9,920 | $ | 9,931 | $ | 10,273 | $ | 9,931 | |||||||||||
|
|
|
|
A summary of depreciation expense for the first quartersnine months of 2018 and 2017 follows (in millions).
First Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Insurance and other | $ | 649 | $ | 542 | $ | 1,954 | $ | 1,636 | ||||||||
Railroad, utilities and energy | 1,225 | 1,175 | 3,678 | 3,604 | ||||||||||||
Finance and financial products | 161 | 159 | 485 | 487 | ||||||||||||
|
|
|
| |||||||||||||
$ | 2,035 | $ | 1,876 | $ | 6,117 | $ | 5,727 | |||||||||
|
|
|
|
Note 12. Goodwill and other intangible assets
A reconciliation of the change in the carrying value of goodwill is as follows (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Balance at beginning of year | $ | 81,258 | $ | 79,486 | $ | 81,258 | $ | 79,486 | ||||||||
Acquisitions of businesses | 52 | 1,545 | 250 | 1,545 | ||||||||||||
Other, including foreign currency translation | 27 | 227 | (181) | 227 | ||||||||||||
|
|
|
| |||||||||||||
Balance at end of period | $ | 81,337 | $ | 81,258 | $ | 81,327 | $ | 81,258 | ||||||||
|
|
|
|
Other intangible assets are summarized as follows (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||||||||
Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | Gross carrying amount | Accumulated amortization | |||||||||||||||||||||||||
Insurance and other | $ | 40,317 | $ | 8,057 | $ | 40,225 | $ | 7,707 | $ | 40,288 | $ | 8,662 | $ | 40,225 | $ | 7,707 | ||||||||||||||||
Railroad, utilities and energy | 993 | 334 | 988 | 324 | 1,026 | 362 | 988 | 324 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
$ | 41,310 | $ | 8,391 | $ | 41,213 | $ | 8,031 | $ | 41,314 | $ | 9,024 | $ | 41,213 | $ | 8,031 | |||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Trademarks and trade names | $ | 5,394 | $ | 710 | $ | 5,381 | $ | 692 | $ | 5,396 | $ | 744 | $ | 5,381 | $ | 692 | ||||||||||||||||
Patents and technology | 4,383 | 2,579 | 4,341 | 2,493 | 4,408 | 2,716 | 4,341 | 2,493 | ||||||||||||||||||||||||
Customer relationships | 28,353 | 3,943 | 28,322 | 3,722 | 28,343 | 4,351 | 28,322 | 3,722 | ||||||||||||||||||||||||
Other | 3,180 | 1,159 | 3,169 | 1,124 | 3,167 | 1,213 | 3,169 | 1,124 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
$ | 41,310 | $ | 8,391 | $ | 41,213 | $ | 8,031 | $ | 41,314 | $ | 9,024 | $ | 41,213 | $ | 8,031 | |||||||||||||||||
|
|
|
|
|
|
|
|
Amortization expense in the first quarternine months was $352$1,052 million in 2018 and $367$1,108 million in 2017. Intangible assets with indefinite lives were approximately $18.9 billion as of March 31,September 30, 2018 and December 31, 2017.
15
Notes to Consolidated Financial Statements(Continued)
Note 13. Derivative contracts
We are party to derivative contracts primarily through our finance and financial products and our utilities and energy businesses. Currently, the derivative contracts of our finance and financial products businesses consist of equity index put option contracts written between 2004 and 2008. The liabilities and related notional values of such contracts follows (in millions).
March 31, 2018 | December 31, 2017 | |||||||||||||||
Liabilities | Notional Value | Liabilities | Notional Value | |||||||||||||
Equity index put options | $ | 2,378 | $ | 29,479 | (1) | $ | 2,172 | $ | 28,753 | (1) |
September 30, 2018 | December 31, 2017 | |||||||||||||||
Liabilities | Notional Value | Liabilities | Notional Value | |||||||||||||
Equity index put options | $ | 1,869 | $ | 27,434(1) | $ | 2,172 | $ | 28,753 (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. |
We record derivativeequity index put option contract liabilities at fair value and include the changes in the fair values of such contracts in earnings as derivative contract gains/losses. A summary of derivative contract gains/losses included in our Consolidated Statements of Earnings in the first quarter of 2018 and 2017 follows (in millions).
First Quarter | ||||||||||
2018 | 2017 | |||||||||
Equity index put options | $ | (206 | ) | $ | 460 |
Third Quarter | First Nine Months | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Equity index put options | $ | 137 | $ | 308 | $ | 303 | $ | 703 |
The equity index put option contracts are European style options written prior to March 2008 on four major equity indexes. The remaining contracts expire between June 2018April 2019 and January 2026. At September 30, 2018, the remaining weighted average life of all contracts was approximately 2.25 years. In the second quarter of 2018, one equity index put option contract expired with no payment to the counterparty.
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 aggregate premiums of $4.2approximately $4.1 billion on thesethe remaining contracts at the contract inception dates and 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) was approximately $1.0 billion$919 million at March 31,September 30, 2018 and $789 million at December 31, 2017. These contracts may not be unilaterally terminated or fully settled before the expiration dates and the ultimate amount of cash basis gains or losses on these contracts will not be determined until the contract expiration dates. The remaining weighted average life of all contracts was approximately 2.7 years at March 31, 2018.
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 March 31,September 30, 2018, 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.
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. We may use forward purchases and sales, futures, swaps and options to manage a portion of these price risks. Derivative contract assets included in other assets were $141 million as of March 31, 2018 and $142 million as of December 31, 2017. Derivative contract liabilities included in other liabilities were $105 million as of March 31, 2018 and $82 million as of December 31, 2017. Most of the net derivative contract assets or liabilities of our regulated utilities are probable of recovery through rates and are offset by regulatory liabilities or assets. Unrealized gains or losses on contracts accounted for as cash flow or fair value hedgesDerivative contract assets are recordedincluded in other comprehensive income orassets and were $154 million as of September 30, 2018 and $142 million as of December 31, 2017. Derivative contract liabilities are included in net earnings,other liabilities and were $80 million as appropriate.of September 30, 2018 and $82 million as of December 31, 2017.
Notes to Consolidated Financial Statements(Continued)
Note 14. Supplemental cash flow information
Supplemental cash flow information follows (in millions).
First Quarter | ||||||||
2018 | 2017 | |||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 289 | $ | 26 | ||||
Interest: | ||||||||
Insurance and other businesses | 338 | 306 | ||||||
Railroad, utilities and energy businesses | 747 | 737 | ||||||
Finance and financial products businesses | 83 | 78 | ||||||
Non-cash investing and financing activities: | ||||||||
Liabilities assumed in connection with business acquisitions | 4 | 142 |
16
Notes to Consolidated Financial Statements(Continued)
First Nine Months | ||||||||
2018 | 2017 | |||||||
Cash paid during the period for: | ||||||||
Income taxes | $ | 3,977 | $ | 1,774 | ||||
Interest: | ||||||||
Insurance and other businesses | 677 | 747 | ||||||
Railroad, utilities and energy businesses | 2,129 | 2,111 | ||||||
Finance and financial products businesses | 257 | 296 | ||||||
Non-cash investing and financing activities: | ||||||||
Liabilities assumed in connection with business acquisitions | 93 | 685 | ||||||
Equity securities surrendered in connection with warrant exercise | — | 4,965 |
Note 15. Unpaid losses and loss adjustment expenses
Our liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) undershort-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, excluding liabilities under retroactive reinsurance contracts (see Note 16), for each of the threenine months ending March 31,September 30, 2018 and 2017 follow (in millions).
2018 | 2017 | 2018 | 2017 | |||||||||||||
Balances – beginning of year: | ||||||||||||||||
Gross liabilities | $ | 61,122 | $ | 53,379 | $ | 61,122 | $ | 53,379 | ||||||||
Reinsurance recoverable on unpaid losses | (3,201 | ) | (3,338 | ) | (3,201) | (3,338) | ||||||||||
|
|
|
| |||||||||||||
Net liabilities | 57,921 | 50,041 | 57,921 | 50,041 | ||||||||||||
|
|
|
| |||||||||||||
Incurred losses and loss adjustment expenses: | ||||||||||||||||
Current accident year events | 9,475 | 8,165 | 29,071 | 28,632 | ||||||||||||
Prior accident years’ events | (753 | ) | 134 | (1,566) | (461) | |||||||||||
|
|
|
| |||||||||||||
Total incurred losses and loss adjustment expenses | 8,722 | 8,299 | 27,505 | 28,171 | ||||||||||||
|
|
|
| |||||||||||||
Paid losses and loss adjustment expenses: | ||||||||||||||||
Current accident year events | (3,091 | ) | (2,678 | ) | (12,474) | (11,539) | ||||||||||
Prior accident years’ events | (4,759 | ) | (4,216 | ) | (11,516) | (9,952) | ||||||||||
|
|
|
| |||||||||||||
Total payments | (7,850 | ) | (6,894 | ) | (23,990) | (21,491) | ||||||||||
|
|
|
| |||||||||||||
Foreign currency translation adjustment | 253 | 77 | (117) | 603 | ||||||||||||
Balances – March 31: | ||||||||||||||||
|
| |||||||||||||||
Balances – September 30: | ||||||||||||||||
Net liabilities | 59,046 | 51,523 | 61,319 | 57,324 | ||||||||||||
Reinsurance recoverable on unpaid losses | 3,048 | 3,221 | 2,944 | 3,254 | ||||||||||||
|
|
|
| |||||||||||||
Gross liabilities | $ | 62,094 | $ | 54,744 | $ | 64,263 | $ | 60,578 | ||||||||
|
|
|
|
Incurred losses and loss adjustment expenses in the first quarternine months of 2018 and 2017 included net reductions of estimated ultimate claim liabilities for prior accident years of $753$1,566 million comparedand $461 million, respectively. We reduced estimated ultimate claim liabilities for prior accident years related to netprimary insurance by $985 million in the first nine months of 2018 and $569 million in the first nine months of 2017, which included reductions of $478 million in 2018 and increases of $134$37 million in 2017.2017 related to private passenger automobile insurance coverages. We decreasedalso reduced estimated ultimate claim liabilities with respect to primary insuranceprior accident years for property and casualty reinsurance by $571$581 million in the first quarter of 2018 and $261 million in 2017. In each period, these reductions primarily related to medical malpractice, workers’ compensation and private passenger automobile insurance. Estimated ultimate liabilities with respect to property and casualty reinsurance decreased by $182 million in the first quarternine months of 2018, compared to an increase of $395$108 million in 2017. Incurred losses for prior years’ events in 2017 included increases in the estimated liabilities for certain personal injury claims in the United Kingdom due to a regulatory decision, for unanticipated property claims under certain reinsurance contracts and for estimatesfirst nine months of IBNR losses.2017.
17
Notes to Consolidated Financial Statements(Continued)
Note 16. Retroactive reinsurance contracts
Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses of short-duration insurance contracts with respect to underlying loss events that occurred prior to the contract inception date. Claims payments may commence immediately after the contract date or, if applicable, once a contractual retention amount has been reached. Reconciliations of the changes in estimated liabilities for retroactive reinsurance unpaid losses and loss adjustment expenses (“claim liabilities”) and related deferred charge reinsurance assumed assets for each of the threenine months ending March 31,September 30, 2018 and 2017 follows (in millions).
2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | Unpaid losses and loss adjustment expenses | Deferred charges reinsurance assumed | |||||||||||||||||||||||||
Balances – beginning of year: | $ | 42,937 | $ | (15,278) | $ | 24,972 | $ | (8,047) | $ | 42,937 | $ | (15,278) | $ | 24,972 | $ | (8,047) | ||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Incurred losses and loss adjustment expenses | ||||||||||||||||||||||||||||||||
Current year contracts | — | — | 16,448 | (6,192) | — | — | 17,213 | (6,170) | ||||||||||||||||||||||||
Prior years’ contracts | (30) | 271 | (398) | 409 | (36) | 827 | (409) | 645 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Total | (30) | 271 | 16,050 | (5,783) | (36) | 827 | 16,804 | (5,525) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Paid losses and loss adjustment expenses | (563) | — | (435) | — | (966) | — | (783) | — | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Balances – March 31: | $ | 42,344 | $ | (15,007) | $ | 40,587 | $ | (13,830) | ||||||||||||||||||||||||
Balances – September 30: | $ | 41,935 | $ | (14,451) | $ | 40,993 | $ | (13,572) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
| |||||||||||||||||||||||||
Incurred losses and loss adjustment expenses, net of deferred charges | $ | 241 | $ | 10,267 | $ | 791 | $ | 11,279 | ||||||||||||||||||||||||
|
|
|
|
In the preceding table, classifications of incurred losses and loss adjustment expenses are based on the inception dates of the contracts. We do not believe that analysis of losses incurred and paid by accident year of the underlying event is relevant or meaningful given that our exposure to losses incepts when the contract incepts. Further, we believe the classifications of reported claims and case development liabilities has little or no practical analytical value.
In the first quarter of 2017, we entered into an agreement through a Berkshire subsidiary, National Indemnity Company (“NICO”), a wholly-owned subsidiary, entered into an agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”), which became effective on February 2, 2017. Under this agreement, NICO agreed to indemnify AIG for 80% of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG with respect to certain commercial insurance loss events occurring prior to 2016. As of the effective date, we recorded premiums earned of $10.2 billion a liabilityand losses incurred of $10.2 billion, which consisted of liabilities for unpaid losses and loss adjustment expenses of $16.4 billion and a deferred charge reinsurance assumed assetassets of $6.2 billion. Berkshire agreed to guarantee the timely payment of all amounts due to AIG under the agreement. Our estimated ultimate claim liabilities with respect to the AIG contract at March 31,September 30, 2018 and at December 31, 2017 were $18.2 billion.billion, which reflected an increase of $1.8 billion in estimated ultimate claim liabilities recorded in the fourth quarter of 2017. Deferred charge assets related to the AIG contract were approximately $7.4$7.1 billion at March 31,September 30, 2018 and $7.5 billion at December 31, 2017, which reflectedincluded an additional $1.7 billion arising from the aforementioned increase in estimatedto ultimate claim liabilities recorded in the fourth quarter of 2017 of $1.8 billion.quarter.
Incurred losses and loss adjustment expenses related to contracts written in prior years were $241$791 million in the first quarternine months of 2018 and $11$236 million in the first quarternine months of 2017. Such losses included recurring amortization of deferred charge assets and net gains from contract commutations in 2018 and 2017.reductions of estimated ultimate claim liabilities.
Note 17. Notes payable and other borrowings
Notes payable and other borrowings are summarized below (in(dollars in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of March 31,September 30, 2018.
Weighted Average Interest Rate | March 31, 2018 | December 31, 2017 | Weighted Average Interest Rate | September 30, 2018 | December 31, 2017 | |||||||||||||||||||||||
Insurance and other: | ||||||||||||||||||||||||||||
Issued by Berkshire: | ||||||||||||||||||||||||||||
U.S. Dollar denominated borrowings due 2018-2047 | 3.0% | $ | 9,804 | $10,603 | 3.1 | % | $ | 9,058 | $ | 10,603 | ||||||||||||||||||
Euro denominated borrowings due 2020-2035 | 1.1% | 8,383 | 8,164 | 1.1 | % | 7,897 | 8,164 | |||||||||||||||||||||
Short-term subsidiary borrowings | 3.7% | 1,800 | 1,832 | 4.1 | % | 1,733 | 1,832 | |||||||||||||||||||||
Other subsidiary borrowings due 2018-2045 | 4.0% | 5,676 | 6,725 | 4.0 | % | 5,583 | 6,725 | |||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||
$ | 25,663 | $27,324 | $ | 24,271 | $ | 27,324 | ||||||||||||||||||||||
|
|
|
|
18
Notes to Consolidated Financial Statements(Continued)
Note 17. Notes payable and other borrowings(Continued)
In 2018, theThe carrying value of Berkshire’s Euro denominated senior notes increased $217 million due toreflects the Euro/U.S. Dollar exchange rate as of the balance sheet date. The gains or losses arising from the changes in the Euro/U.S. Dollar exchange rates. This increase producedrate during the period are recorded in earnings as a corresponding charge topre-tax earningscomponent of $217 million, which was recorded as additionalnon-cash interest expense. DuringThe change in the Euro/U.S. Dollar exchange rate in the first quarternine months of 2018 $800resulted in reductions of $273 million in interest expense and to the carrying value of Berkshire U.S. Dollarthe Euro denominated senior notes matured.compared to increases of $860 million in interest expense and to the carrying value of the notes in the first nine months of 2017.
Weighted Average Interest Rate | March 31, 2018 | December 31, 2017 | Weighted Average Interest Rate | September 30, 2018 | December 31, 2017 | |||||||||||||||||||
Railroad, utilities and energy: | ||||||||||||||||||||||||
Issued by Berkshire Hathaway Energy Company (“BHE”) and its subsidiaries: | ||||||||||||||||||||||||
BHE senior unsecured debt due 2018-2048 | 4.6% | $ | 8,627 | $ | 6,452 | |||||||||||||||||||
Subsidiary and other debt due 2018-2064 | 4.8% | 28,871 | 28,739 | |||||||||||||||||||||
BHE senior unsecured debt due 2018-2049 | 4.5% | $ | 8,970 | $ | 6,452 | |||||||||||||||||||
Subsidiary and other debt due 2019-2064 | 4.7% | 28,588 | 28,739 | |||||||||||||||||||||
Short-term debt | 2.6% | 2,608 | 4,488 | 3.0% | 1,784 | 4,488 | ||||||||||||||||||
Issued by BNSF due 2018-2097 | 4.7% | 22,561 | 22,499 | 4.7% | 23,257 | 22,499 | ||||||||||||||||||
|
|
|
| |||||||||||||||||||||
$ | 62,667 | $ | 62,178 | $ | 62,599 | $ | 62,178 | |||||||||||||||||
|
|
|
|
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 limitedwhich pertain to leverage ratios, interest coverage ratios andand/or debt service coverage ratios, among other covenants. In JanuaryDuring the first nine months of 2018, BHE and its subsidiaries issued $2.2approximately $5.5 billion of senior notes withlong-term debt, including $2.05 billion in the third quarter. The debt issued in 2018 has maturity dates ranging from 20212020 to 2048 with2049 and a weighted average interest rate of 3.2%3.6%. Proceeds from thisthese debt issuanceissuances were used to repay short-term debt, to fund capital expenditures and for general corporate purposes.
BNSF’s borrowings are primarily senior unsecured debentures. In the first quarternine months of 2018, BNSF issued $750 million$1.5 billion of 4.05% senior unsecured debentures due in 2048, andincluding $750 million in the third quarter. These debentures have a weighted average interest rate of 4.1%. In 2018, BNSF repaid $650 million of debentures matured.maturing debentures. As of March 31,September 30, 2018, BNSF, 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 | March 31, 2018 | December 31, 2017 | ||||||||||
Finance and financial products: | ||||||||||||
Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2018-2043 | 3.1% | $ | 10,578 | $ | 12,926 | |||||||
Issued by other subsidiaries due 2019-2028 | 4.0% | 177 | 159 | |||||||||
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$ | 10,755 | $ | 13,085 | |||||||||
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Weighted Average Interest Rate | September 30, 2018 | December 31, 2017 | ||||||||||
Finance and financial products: | ||||||||||||
Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2019-2048 | 3.3% | $ | 10,649 | $ | 12,926 | |||||||
Issued by other subsidiaries due 2018-2028 | 3.6% | 121 | 159 | |||||||||
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$ | 10,770 | $ | 13,085 | |||||||||
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Borrowings of BHFC, area wholly owned finance subsidiary of Berkshire, consist of senior unsecured notes used to fund manufactured housing loans originated or acquired and assets held for lease of certain finance subsidiaries. TheIn August 2018, BHFC issued $2.35 billion of 4.2% senior notes due in 2048. Such borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, consist of senior unsecured notes, which are fully and unconditionally guaranteed by Berkshire. During the first quarternine months of 2018, $2.35BHFC repaid $4.6 billion of BHFCmaturing senior notes matured.notes.
As of March 31,September 30, 2018, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $7.3$8.4 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included about $5.3approximately $6.8 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, at March 31, 2018, Berkshire guaranteed approximately $1.9$1.7 billion of other subsidiary borrowings.borrowings at September 30, 2018. 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 payment obligations.
19
Notes to Consolidated Financial Statements(Continued)
Note 18. Fair value measurements
Our financial assets and liabilities are summarized below as of March 31,September 30, 2018 and December 31, 2017 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) | |||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||||||||||
September 30, 2018 | ||||||||||||||||||||||||||||||||||||||||
Investments in fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,608 | $ | 3,608 | $ | 2,399 | $ 1,209 | $ — | $ | 3,599 | $ | 3,599 | $ | 2,378 | $ | 1,221 | $ | — | ||||||||||||||||||||||
States, municipalities and political subdivisions | 759 | 759 | — | 759 | — | |||||||||||||||||||||||||||||||||||
U.S. states, municipalities and political subdivisions | 290 | 290 | — | 290 | — | |||||||||||||||||||||||||||||||||||
Foreign governments | 7,888 | 7,888 | 5,906 | 1,982 | — | 7,370 | 7,370 | 5,162 | 2,208 | — | ||||||||||||||||||||||||||||||
Corporate bonds | 6,819 | 6,819 | — | 6,813 | 6 | 6,458 | 6,458 | — | 6,453 | 5 | ||||||||||||||||||||||||||||||
Mortgage-backed securities | 846 | 846 | — | 846 | — | 554 | 554 | — | 554 | — | ||||||||||||||||||||||||||||||
Investments in equity securities | 172,976 | 172,976 | 172,928 | 48 | — | 207,332 | 207,332 | 206,985 | 47 | 300 | ||||||||||||||||||||||||||||||
Investment in Kraft Heinz common stock | 17,687 | 20,272 | 20,272 | — | — | 17,453 | 17,935 | 17,935 | — | — | ||||||||||||||||||||||||||||||
Loans and finance receivables | 13,845 | 14,084 | — | 18 | 14,066 | 14,477 | 14,735 | — | 59 | 14,676 | ||||||||||||||||||||||||||||||
Derivative contract assets(1) | 141 | 141 | 1 | 26 | 114 | 154 | 154 | 3 | 41 | 110 | ||||||||||||||||||||||||||||||
Derivative contract liabilities: | ||||||||||||||||||||||||||||||||||||||||
Railroad, utilities and energy(1) | 105 | 105 | — | 88 | 17 | 80 | 80 | 1 | 63 | 16 | ||||||||||||||||||||||||||||||
Equity index put options | 2,378 | 2,378 | — | — | 2,378 | 1,869 | 1,869 | — | — | 1,869 | ||||||||||||||||||||||||||||||
Notes payable and other borrowings: | ||||||||||||||||||||||||||||||||||||||||
Insurance and other | 25,663 | 26,046 | — | 26,046 | — | 24,271 | 24,422 | — | 24,422 | — | ||||||||||||||||||||||||||||||
Railroad, utilities and energy | 62,667 | 68,603 | — | 68,603 | — | 62,599 | 66,823 | — | 66,823 | — | ||||||||||||||||||||||||||||||
Finance and financial products | 10,755 | 11,059 | — | 11,035 | 24 | 10,770 | 10,979 | — | 10,953 | 26 | ||||||||||||||||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||||||||||
Investments in fixed maturity securities: | ||||||||||||||||||||||||||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,953 | $ | 3,953 | $ | 2,360 | $ 1,593 | $ — | $ | 3,953 | $ | 3,953 | $ | 2,360 | $ | 1,593 | $ | — | ||||||||||||||||||||||
States, municipalities and political subdivisions | 854 | 854 | — | 854 | — | |||||||||||||||||||||||||||||||||||
U.S. states, municipalities and political subdivisions | 854 | 854 | — | 854 | — | |||||||||||||||||||||||||||||||||||
Foreign governments | 8,822 | 8,822 | 6,946 | 1,876 | — | 8,822 | 8,822 | 6,946 | 1,876 | — | ||||||||||||||||||||||||||||||
Corporate bonds | 6,862 | 6,862 | — | 6,856 | 6 | 6,862 | 6,862 | — | 6,856 | 6 | ||||||||||||||||||||||||||||||
Mortgage-backed securities | 862 | 862 | — | 862 | — | 862 | 862 | — | 862 | — | ||||||||||||||||||||||||||||||
Investments in equity securities | 170,540 | 170,540 | 170,494 | 46 | — | 170,540 | 170,540 | 170,494 | 46 | — | ||||||||||||||||||||||||||||||
Investment in Kraft Heinz common stock | 17,635 | 25,306 | 25,306 | — | — | 17,635 | 25,306 | 25,306 | — | — | ||||||||||||||||||||||||||||||
Loans and finance receivables | 13,748 | 14,136 | — | 17 | 14,119 | 13,748 | 14,136 | — | 17 | 14,119 | ||||||||||||||||||||||||||||||
Derivative contract assets(1) | 142 | 142 | 1 | 28 | 113 | 142 | 142 | 1 | 28 | 113 | ||||||||||||||||||||||||||||||
Derivative contract liabilities: | ||||||||||||||||||||||||||||||||||||||||
Railroad, utilities and energy(1) | 82 | 82 | 3 | 69 | 10 | 82 | 82 | 3 | 69 | 10 | ||||||||||||||||||||||||||||||
Equity index put options | 2,172 | 2,172 | — | — | 2,172 | 2,172 | 2,172 | — | — | 2,172 | ||||||||||||||||||||||||||||||
Notes payable and other borrowings: | ||||||||||||||||||||||||||||||||||||||||
Insurance and other | 27,324 | 28,180 | — | 28,180 | — | 27,324 | 28,180 | — | 28,180 | — | ||||||||||||||||||||||||||||||
Railroad, utilities and energy | 62,178 | 70,538 | — | 70,538 | — | 62,178 | 70,538 | — | 70,538 | — | ||||||||||||||||||||||||||||||
Finance and financial products | 13,085 | 13,582 | — | 13,577 | 5 | 13,085 | 13,582 | — | 13,577 | 5 |
(1) | Assets are included in other assets and liabilities are included in accounts payable, accruals and other liabilities. |
20
Notes to Consolidated Financial Statements(Continued)
Note 18. Fair value measurements(Continued)
The fair values of substantially all of our financial instruments were measured using market or income approaches. 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;markets or quoted prices for identical assets or liabilities exchanged in inactive markets;markets. In addition, other inputs that may be considered in fair value determinations of the assets or liabilities, such asmay include interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates;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 threenine months ended March 31,ending September 30, 2018 and 2017 follow (in millions).
Investments in equity and fixed maturity securities | Net derivative contract liabilities | Investments in equity and fixed maturity securities | Net derivative contract liabilities | |||||||||||||
Three months ending March 31, 2018 | ||||||||||||||||
Nine months ending September 30, 2018 | ||||||||||||||||
Balance at December 31, 2017 | $ | 6 | $ | (2,069 | ) | $ | 6 | $ | (2,069) | |||||||
Gains (losses) included in: | ||||||||||||||||
Earnings | — | (176 | ) | — | 446 | |||||||||||
Other comprehensive income | — | (1 | ) | |||||||||||||
Regulatory assets and liabilities | — | (9 | ) | — | (11) | |||||||||||
Acquisitions, dispositions and settlements | — | (26 | ) | (1) | (141) | |||||||||||
Transfers into/out of Level 3 | — | — | ||||||||||||||
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Balance at March 31, 2018 | $ | 6 | $ | (2,281 | ) | |||||||||||
Balance at September 30, 2018 | $ | 5 | $ | (1,775) | ||||||||||||
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Three months ending March 31, 2017 | ||||||||||||||||
Nine months ending September 30, 2017 | ||||||||||||||||
Balance at December 31, 2016 | $ | 17,321 | $ | (2,824 | ) | $ | 17,321 | $ | (2,824) | |||||||
Gains (losses) included in: | ||||||||||||||||
Earnings | — | 499 | — | 822 | ||||||||||||
Other comprehensive income | 1,157 | (2 | ) | 1,157 | (3) | |||||||||||
Regulatory assets and liabilities | — | 1 | — | (5) | ||||||||||||
Acquisitions, dispositions and settlements | (3 | ) | (23 | ) | (58) | (78) | ||||||||||
Transfers into/out of Level 3 | (1 | ) | — | (18,413) | — | |||||||||||
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Balance at March 31, 2017 | $ | 18,474 | $ | (2,349 | ) | |||||||||||
Balance at September 30, 2017 | $ | 7 | $ | (2,088) | ||||||||||||
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Gains and losses included in earnings are includedreported as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate. GainsIn 2017, gains and losses included in other comprehensive income arewere primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings as appropriate in our Consolidated Statements of Comprehensive Income.
On June 30, 2017, we announced our intention to exercise our investment in Bank of America Corporation Warrants (“BAC Warrants”) for common stock in the third quarter of 2017 and that we expected to use our investment in Bank of America Corporation Preferred Stock as consideration. In the second quarter of 2017, Restaurant Brands International, Inc. (“RBI”) announced its intention to redeem our investment in RBI Preferred Shares in the fourth quarter of 2017. As of June 30, 2017, we based our valuations of these investments on such 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 Shares were not significant and that the valuations of such investments were deemed Level 2 measurements.
21
Notes to Consolidated Financial Statements(Continued)
Note 18. Fair value measurements(Continued)
Quantitative information as of March 31,September 30, 2018, with respect to 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 | |||||||||||||
Derivative liabilities: | ||||||||||||||||
Equity index put options | $2,378 | Option pricing model | Volatility | 18% |
Fair Value | Principal Valuation Techniques | Unobservable Inputs | Weighted Average | |||||||||||
Derivative contract liabilities – Equity index put options | $ | 1,869 | Option pricing model | Volatility | 16% |
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 certain of the contracts have relatively long durations. For these and other reasons, we classified these contracts as Level 3.3 measurements. The methods we use to value these contractsmeasure fair values are those that we believe market participants would use in determining exchange prices with respect to our contracts.
We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshirenon-performance input) which are observable. However, we believe that the valuation of long-duration optionsour longer duration contracts 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. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.
Note 19. Common stock
Changes in Berkshire’s issued, treasury and outstanding common stock during the threenine months ending March 31,September 30, 2018 are shown in the table below. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.
Class A, $5 Par Value (1,650,000 shares authorized) | Class B, $0.0033 Par Value (3,225,000,000 shares authorized) | 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 | Issued | Treasury | Outstanding | Issued | Treasury | Outstanding | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | 762,755 | (11,680 | ) | 751,075 | 1,342,066,749 | (1,409,762 | ) | 1,340,656,987 | 762,755 | (11,680) | 751,075 | 1,342,066,749 | (1,409,762) | 1,340,656,987 | ||||||||||||||||||||||||||||||||||
Conversions of Class A common stock to Class B common stock and exercises of | (3,038 | ) | — | (3,038 | ) | 4,806,083 | — | 4,806,083 | (16,850) | — | (16,850) | 25,886,063 | — | 25,886,063 | ||||||||||||||||||||||||||||||||||
Treasury stock acquired | — | (225) | (225) | — | (4,139,192) | (4,139,192) | ||||||||||||||||||||||||||||||||||||||||||
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Balance at March 31, 2018 | 759,717 | (11,680 | ) | 748,037 | 1,346,872,832 | (1,409,762 | ) | 1,345,463,070 | ||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2018 | 745,905 | (11,905) | 734,000 | 1,367,952,812 | (5,548,954) | 1,362,403,858 | ||||||||||||||||||||||||||||||||||||||||||
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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 1,645,0121,642,269 shares outstanding as of March 31,September 30, 2018 and 1,644,846 shares outstanding as of December 31, 2017. In addition to our
Since we have two classes of common stock, 1,000,000we provide earnings per share data on the Consolidated Statements of Earnings for average equivalent Class A shares outstanding and average equivalent Class B shares outstanding. Class B shares are economically equivalent toone-fifteen-hundredth (1/1,500) of preferred stock are authorized, but none are issued.a Class A share. Average equivalent Class A shares outstanding represents average Class A shares outstanding plusone-fifteen-hundredth (1/1,500) of the average Class B shares outstanding. Average equivalent Class B shares outstanding represents average Class B shares outstanding plus 1,500 times average Class A shares outstanding.
Berkshire’s Board of Directors has approvedFor several years, Berkshire had a common stock repurchase program, permittingwhich permitted Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. On July 17, 2018, Berkshire’s Board of Directors authorized an amendment to the program, permitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, a Vice-Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. The program allowscontinues to allow share repurchases in the open market or through privately negotiated transactions and 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 U.S. Treasury Bills holdings below $20 billion. The repurchase program does not obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the program.
22
Notes to Consolidated Financial Statements(Continued)
Note 20. Accumulated other comprehensive income
A summary of the net changes inafter-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and amounts reclassified out of accumulated other comprehensive income for the threenine months ending March 31,September 30, 2018 and 2017 follows (in millions).
Unrealized appreciation of investments, net | 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 | |||||||||||||||||||||||||||||||
2018 | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | 62,093 | $ | (3,114 | ) | $ | (420 | ) | $ | 12 | $ | 58,571 | $ | 62,093 | $ | (3,114) | $ | (420) | $ | 12 | $ | 58,571 | ||||||||||||||||||
Reclassifications to retained earnings | (61,340 | ) | (65 | ) | 36 | (6 | ) | (61,375 | ) | |||||||||||||||||||||||||||||||
Reclassifications to retained earnings upon adoption of new accounting standards | (61,340) | (65) | 36 | (6) | (61,375) | |||||||||||||||||||||||||||||||||||
Other comprehensive income, net before reclassifications | (74 | ) | 585 | (17 | ) | 2 | 496 | (142) | (776) | (33) | (19) | (970) | ||||||||||||||||||||||||||||
Reclassifications into net earnings | (175 | ) | — | 9 | (3 | ) | (169 | ) | (236) | — | 76 | 7 | (153) | |||||||||||||||||||||||||||
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Balance at March 31, 2018 | $ | 504 | $ | (2,594 | ) | $ | (392 | ) | $ | 5 | $ | (2,477 | ) | |||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | 375 | $ | (3,955) | $ | (341) | $ | (6) | $ | (3,927) | ||||||||||||||||||||||||||||||
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Reclassifications into net earnings: | ||||||||||||||||||||||||||||||||||||||||
Reclassifications before income taxes | $ | (221 | ) | $ | — | $ | 10 | $ | (5 | ) | $ | (216 | ) | $ | (299) | $ | — | $ | 101 | $ | 10 | $ | (188) | |||||||||||||||||
Applicable income taxes | (46 | ) | — | 1 | (2 | ) | (47 | ) | (63) | — | 25 | 3 | (35) | |||||||||||||||||||||||||||
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$ | (175 | ) | $ | — | $ | 9 | $ | (3 | ) | $ | (169 | ) | $ | (236) | $ | — | $ | 76 | $ | 7 | $ | (153) | ||||||||||||||||||
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Balance at December 31, 2016 | $ | 43,176 | $ | (5,268 | ) | $ | (593 | ) | $ | (17 | ) | $ | 37,298 | $ | 43,176 | $ | (5,268) | $ | (593) | $ | (17) | $ | 37,298 | |||||||||||||||||
Other comprehensive income, net before reclassifications | 5,497 | 475 | (22 | ) | (6 | ) | 5,944 | 11,734 | 1,946 | (90) | 19 | 13,609 | ||||||||||||||||||||||||||||
Reclassifications into net earnings | (198 | ) | — | 18 | 8 | (172 | ) | (803) | — | 61 | 18 | (724) | ||||||||||||||||||||||||||||
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Balance at March 31, 2017 | $ | 48,475 | $ | (4,793 | ) | $ | (597 | ) | $ | (15 | ) | $ | 43,070 | |||||||||||||||||||||||||||
Balance at September 30, 2017 | $ | 54,107 | $ | (3,322) | $ | (622) | $ | 20 | $ | 50,183 | ||||||||||||||||||||||||||||||
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Reclassifications into net earnings: | ||||||||||||||||||||||||||||||||||||||||
Reclassifications before income taxes | $ | (305 | ) | $ | — | $ | 24 | $ | 14 | $ | (267 | ) | $ | (1,235) | $ | — | $ | 82 | $ | 32 | $ | (1,121) | ||||||||||||||||||
Applicable income taxes | (107 | ) | — | 6 | 6 | (95 | ) | (432) | — | 21 | 14 | (397) | ||||||||||||||||||||||||||||
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$ | (198 | ) | $ | — | $ | 18 | $ | 8 | $ | (172 | ) | $ | (803) | $ | — | $ | 61 | $ | 18 | $ | (724) | |||||||||||||||||||
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Note 21. Contingencies and CommitmentsSubsequent Event
We are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.
In 2016, NICO entered into a definitive agreement to acquire Medical Liability Mutual Insurance Company, (“MLMIC”Medical Liability Mutual”), a writer of medical professional liability insurance domiciled in New York. The acquisition price will bewas approximately $2.5 billion. The acquisition will involveinvolved the conversion of MLMICMedical Liability Mutual from a mutual company to a stock company. The closing of the transaction iswas subject to various regulatory approvals, customary closing conditions and the approval of the MLMICMedical Liability Mutual policyholders eligible to vote on the proposed demutualization and sale. The acquisition closed on October 1, 2018, at which time, Medical Liability Mutual’s name was changed to the MLMIC Insurance Company (“MLMIC”). The results of MLMIC will be included in Berkshire’s consolidated results beginning as of that date. As of the acquisition date, the preliminary fair values of MLMIC’s assets were approximately $6.3 billion, consisting primarily of cash and investments, and liabilities were approximately $3.8 billion, consisting primarily of unpaid losses and loss adjustment expenses and unearned insurance premiums. We currently expectbelieve goodwill arising from this acquisition will be completed ininsignificant. MLMIC’s premiums earned for the third quarterfirst nine months of 2018.2018 were approximately $300 million.
23
Notes to Consolidated Financial Statements(Continued)
Note 22. Business segment data
Our operating businesses include a large and diverse group of insurance, railroad, utilities and energy, finance, manufacturing, service and retailing businesses. Our reportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses have been grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics, even though those business units are operated under separate local management. Revenues by segment for the third quarter and first quarternine months of 2018 and 2017 were as follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Operating Businesses: | ||||||||||||||||||||||||
Insurance: | ||||||||||||||||||||||||
Underwriting: | ||||||||||||||||||||||||
GEICO | $ 7,915 | $ 6,845 | $ | 8,506 | $ | 7,543 | $ | 24,705 | $ | 21,632 | ||||||||||||||
Berkshire Hathaway Reinsurance Group | 3,540 | 13,232 | 3,777 | 3,954 | 11,229 | 20,550 | ||||||||||||||||||
Berkshire Hathaway Primary Group | 1,918 | 1,676 | 2,050 | 1,852 | 5,921 | 5,287 | ||||||||||||||||||
Investment income | 1,213 | 1,132 | 1,446 | 1,248 | 4,058 | 3,664 | ||||||||||||||||||
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Total insurance | 14,586 | 22,885 | 15,779 | 14,597 | 45,913 | 51,133 | ||||||||||||||||||
BNSF | 5,624 | 5,185 | 6,147 | 5,314 | 17,649 | 15,749 | ||||||||||||||||||
Berkshire Hathaway Energy | 4,512 | 4,231 | 5,706 | 5,351 | 15,268 | 14,184 | ||||||||||||||||||
Manufacturing | 12,934 | 12,097 | 13,552 | 12,819 | 40,339 | 37,654 | ||||||||||||||||||
McLane Company | 12,189 | 12,101 | 12,822 | 12,798 | 37,438 | 37,480 | ||||||||||||||||||
Service and retailing | 6,587 | 6,093 | 6,974 | 6,527 | 20,623 | 19,170 | ||||||||||||||||||
Finance and financial products | 2,063 | 1,849 | 2,432 | 2,153 | 6,861 | 6,019 | ||||||||||||||||||
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58,495 | 64,441 | 63,412 | 59,559 | 184,091 | 181,389 | |||||||||||||||||||
Reconciliation of segments to consolidated amount: | ||||||||||||||||||||||||
Corporate, eliminations and other | (22) | (71) | 38 | (52) | 32 | (256) | ||||||||||||||||||
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$ 58,473 | $ 64,370 | $ | 63,450 | $ | 59,507 | $ | 184,123 | $ | 181,133 | |||||||||||||||
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Earnings before income taxes by segment for the third quarter and first quarternine months of 2018 and 2017 were as follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Operating Businesses: | ||||||||||||||||||||||||
Insurance: | ||||||||||||||||||||||||
Underwriting: | ||||||||||||||||||||||||
GEICO | $ 677 | $ 175 | $ | 627 | $ | (416) | $ | 1,977 | $ | (122) | ||||||||||||||
Berkshire Hathaway Reinsurance Group | (258) | (743) | (163) | (1,845) | (124) | (2,963) | ||||||||||||||||||
Berkshire Hathaway Primary Group | 99 | 189 | 135 | 52 | 468 | 473 | ||||||||||||||||||
Investment income | 1,205 | 1,129 | 1,455 | 1,246 | 4,052 | 3,658 | ||||||||||||||||||
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Total insurance | 1,723 | 750 | 2,054 | (963) | 6,373 | 1,046 | ||||||||||||||||||
BNSF | 1,513 | 1,345 | 1,879 | 1,710 | 5,047 | 4,592 | ||||||||||||||||||
Berkshire Hathaway Energy | 487 | 589 | 1,165 | 1,243 | 2,238 | 2,481 | ||||||||||||||||||
Manufacturing | 1,855 | 1,487 | 2,012 | 2,002 | 6,002 | 5,428 | ||||||||||||||||||
McLane Company | 60 | 88 | 44 | 45 | 171 | 202 | ||||||||||||||||||
Service and retailing | 515 | 393 | 628 | 491 | 1,840 | 1,439 | ||||||||||||||||||
Finance and financial products | 494 | 450 | 530 | 496 | 1,589 | 1,438 | ||||||||||||||||||
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6,647 | 5,102 | 8,312 | 5,024 | 23,260 | 16,626 | |||||||||||||||||||
Reconciliation of segments to consolidated amount: | ||||||||||||||||||||||||
Investment and derivative gains/losses | (8,015) | 775 | ||||||||||||||||||||||
Investment and derivative contract gains/losses | 14,706 | 965 | 13,053 | 1,965 | ||||||||||||||||||||
Interest expense, not allocated to segments | (337) | (211) | (60) | (386) | (77) | (1,243) | ||||||||||||||||||
Equity method investments | 401 | 281 | 316 | 305 | 1,044 | 932 | ||||||||||||||||||
Corporate, eliminations and other | (219) | (259) | (127) | (278) | (558) | (833) | ||||||||||||||||||
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$ | (1,523) | $ | 5,688 | $ | 23,147 | $ | 5,630 | $ | 36,722 | $ | 17,447 | |||||||||||||
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24
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings (loss) attributable to Berkshire Hathaway shareholders are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Insurance – underwriting | $ | 407 | $ | (267 | ) | $ | 441 | $ | (1,439) | $ | 1,791 | $ | (1,728) | |||||||||||
Insurance – investment income | 1,012 | 908 | 1,239 | 1,044 | 3,393 | 2,917 | ||||||||||||||||||
Railroad | 1,145 | 838 | 1,393 | 1,042 | 3,847 | 2,838 | ||||||||||||||||||
Utilities and energy | 585 | 480 | 1,091 | 952 | 2,257 | 1,941 | ||||||||||||||||||
Manufacturing, service and retailing | 1,822 | 1,317 | 2,097 | 1,694 | 6,060 | 4,673 | ||||||||||||||||||
Finance and financial products | 374 | 291 | 390 | 319 | 1,193 | 933 | ||||||||||||||||||
Investment and derivative gains/losses | (6,426 | ) | 504 | 11,660 | 623 | �� | 10,352 | 1,270 | ||||||||||||||||
Other | (57 | ) | (11 | ) | 229 | (168) | 520 | (455) | ||||||||||||||||
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Net earnings (loss) attributable to Berkshire Hathaway shareholders | $ | (1,138 | ) | $ | 4,060 | |||||||||||||||||||
Net earnings attributable to Berkshire Hathaway shareholders | $ | 18,540 | $ | 4,067 | $ | 29,413 | $ | 12,389 | ||||||||||||||||
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Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions 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. Beginning in 2018, our periodic net earnings will include changes in unrealized gains and losses on our investments in equity securities. These gains and losses are likely to be very significant given the size of our current holdings and the inherent volatility inherent in securities prices. Prior to 2018, thesechanges in unrealized gains and losses were recorded in other comprehensive income. Thus, the new accounting treatment has no effect on the consolidated shareholders’ equity we would have otherwise reported.equity. The business segment data (Note 22 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Ourafter-tax earnings in the third quarter and first quarternine months of 2018 were favorably affected by lower U.S. income tax expense, primarily attributable to a reduction in the U.S. statutory income tax rate from 35% to 21% effective January 1, 2018 in connection with the Tax Cuts and Jobs Act of 2017 (“TCJA”) enacted on December 22, 2017. The effect of the lower U.S. statutory income tax rate in 2018 generally resulted in increased comparativeafter-tax earnings of our various business operations, although the effects varied, reflecting the differences in the mix of earnings subject to income tax, in the U.S. and internationallyincome tax credits and the varying effects of U.S. state and local income taxes. Further, the effective U.S. income tax rates on dividend income under the TCJA are not significantly different from the prior income tax law.
Our insurance businesses generatedafter-tax earnings from underwriting of $407$441 million and $1.8 billion in the third quarter and first quarternine months of 2018, respectively, compared to a losslosses of $267 million$1.4 billion and $1.7 billion, respectively, in 2017.the corresponding 2017 periods. Results in 2018 included reductions of lossesestimated ultimate liabilities for prior years’ property/casualty loss events, gains from foreign currency exchange rate changes on certainnon-U.S. Dollar denominated liabilities of U.S subsidiaries and the favorable effect of a lower effective income tax rate. Underwriting results in the third quarter of 2017 included estimatedpre-tax losses of approximately $3.0 billion ($1.95 billionafter-tax) attributable to three major hurricanes in the U.S. and Puerto Rico and an earthquake in Mexico. Underwriting results in 2017 also included foreign currency exchange rate partly offset by increased losses on retroactive reinsurance contracts.from the revaluation of certainnon-U.S. Dollar denominated liabilities.
Our railroad business generated increased after-tax earnings in the third quarter and first quarternine months of 2018 compared to 2017, reflecting an increase in unit volume, higher average revenue per car/unit and a lower effective income tax rate, partly offset by increased fuel and other operating costs. Our utilities and energy businessbusinesses produced higherafter-tax earnings in the third quarter and first quarternine months of 2018 compared to 2017, reflectingprimarily due to a lower overall effective income tax rate. Earningsrate and increasedpre-tax earnings from renewables and natural gas pipelines. After-tax earnings from our manufacturing, service and retailing businesses in the third quarter and first quarternine months of 2018 increased 38%24% and 30%, respectively, over 2017, due to lower effective income tax rates and a 23%13% increase inyear-to-datepre-tax earnings.
After-tax investmentgains in the third quarter and first nine months of 2018 from investments and derivative contracts were $11.7 billion and $10.4 billion, respectively. Investment gains/losses includedafter-tax gains of approximately $11.4 billion in the third quarter and $9.6 billion in the first quarter were $6.4 billion in 2018, which included anafter-tax charge of approximately $6.2 billionnine months from changes in market values onof our investments in equity securities held at March 31,September 30, 2018. In the first quarter of 2017,after-tax investment gains on equity securities included only the gains and losses realizedarose from the dispositionsdisposition or exchangesexchange of securities during the period.period based on the cost of the disposed security. In the first quarternine months of 2017, we also recordedafter-tax unrealized gains on our investments in equity securities of approximately $5.3$10.9 billion in other comprehensive income. We believe that investment and derivative gains/losses, whether realized from dispositions or settlements or from unrealized gains and losses from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating ourthe economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.
25
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Results of Operations(Continued)
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 GEICO, Berkshire Hathaway Reinsurance Group (“BHRG”) and Berkshire Hathaway Primary Group.
Our management views insurance businesses as possessing two distinct operations – underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett and Berkshire’s corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, asnon-operating based on our long-held philosophy of acquiring securities and holding those securities for long periods. Accordingly, we believe that such gains and losses are not predictable or necessarily meaningful in understanding the operating results of our insurance businesses.
The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider catastrophe losses in excess of $100 million(pre-tax) from a current year event as significant. We incurred estimatedpre-tax losses of $372 million from two significant catastrophe events in the third quarter of 2018. In the third quarter of 2017, we incurredpre-tax losses of approximately $3.0 billion from four significant catastrophe events. In October 2018, Hurricane Michael hit the Southeastern United States. Incurred losses in the fourth quarter from this event are currently estimated to be in the $350 million to $550 million range.
Changes in estimates for unpaid losses and loss adjustment expenses, including amounts established for occurrences in prior years, can also significantly affect our periodic underwriting results. Unpaid loss estimates, including estimates under retroactive reinsurance contracts, were approximately $106 billion as of March 31, 2018 were approximately $104 billion.September 30, 2018. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation ofnon-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations.
Underwriting results of our insurance businesses are summarized below (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Underwriting gain (loss): | ||||||||||||||||||||||||
GEICO | $ | 677 | $ | 175 | $ | 627 | $ | (416) | $ | 1,977 | $ | (122) | ||||||||||||
Berkshire Hathaway Reinsurance Group | (258) | (743 | ) | (163) | (1,845) | (124) | (2,963) | |||||||||||||||||
Berkshire Hathaway Primary Group | 99 | 189 | 135 | 52 | 468 | 473 | ||||||||||||||||||
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Pre-tax underwriting gain (loss) | 518 | (379) | 599 | (2,209) | 2,321 | (2,612) | ||||||||||||||||||
Income taxes and noncontrolling interests | 111 | (112) | 158 | (770) | 530 | (884) | ||||||||||||||||||
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Net underwriting gain (loss) | $ | 407 | $ | (267) | $ | 441 | $ | (1,439) | $ | 1,791 | $ | (1,728) | ||||||||||||
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Effective income tax rate | 21.4% | 30.6% | 25.9% | 35.1% | 22.6% | 34.4% | ||||||||||||||||||
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GEICO
GEICO writes private passenger automobile insurance, offering coverages to insureds in all 50 states and the District of Columbia. GEICO markets its policies mainly by direct response methods where most customers apply for coverage directly to the company via the Internet or over the telephone. A summary of GEICO’s underwriting results follows (dollars in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||
Premiums written | $ | 8,689 | $ | 7,587 | $ | 8,952 | $ | 8,130 | $ | 25,878 | $ | 22,987 | ||||||||||||||||||||||||||||||||||||
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Premiums earned | $ | 7,915 | 100.0 | $ | 6,845 | 100.0 | $ | 8,506 | 100.0 | $ | 7,543 | 100.0 | $ | 24,705 | 100.0 | $ | 21,632 | 100.0 | ||||||||||||||||||||||||||||||
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Losses and loss adjustment expenses | 6,075 | 76.7 | 5,590 | 81.7 | 6,725 | 79.1 | 6,933 | 91.9 | 19,305 | 78.1 | 18,631 | 86.1 | ||||||||||||||||||||||||||||||||||||
Underwriting expenses | 1,163 | 14.7 | 1,080 | 15.7 | 1,154 | 13.5 | 1,026 | 13.6 | 3,423 | 13.9 | 3,123 | 14.5 | ||||||||||||||||||||||||||||||||||||
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Total losses and expenses | 7,238 | 91.4 | 6,670 | 97.4 | 7,879 | 92.6 | 7,959 | 105.5 | 22,728 | 92.0 | 21,754 | 100.6 | ||||||||||||||||||||||||||||||||||||
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Pre-tax underwriting gain | $ | 677 | $ | 175 | ||||||||||||||||||||||||||||||||||||||||||||
Pre-tax underwriting gain (loss) | $ | 627 | $ | (416) | $ | 1,977 | $ | (122) | ||||||||||||||||||||||||||||||||||||||||
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26
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Insurance—Underwriting(Continued)
GEICO (Continued)
Premiums written and earned in the third quarter and first quarternine months of 2018 were approximately $8.7$9.0 billion and $7.9$25.9 billion, respectively, representing increases of 14.5%10.1% and 15.6%12.6%, respectively, compared to 2017. These increases reflected increases in voluntary autopolicy-in-forcepolicies-in-force growth of 6.5%3.7% and increased premiums per auto policy of approximately 8.2%7.8% over the past twelve months. The increase in premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. The rate increases in rates were in response to accelerating lossesclaim costs in recent years. VoluntaryAlthoughpolicies-in-force increased 461,000 during the first nine months of 2018, the rate of increase slowed, as voluntary auto new business sales in the first quarter of 2018 decreased 11.8%6.6% compared to the record first quarter of 2017, while our voluntary autopolicies-in-force increased approximately 290,000 during the first quarter of 2018.2017.
Losses and loss adjustment expenses decreased $208 million (3.0%) in the third quarter and increased $674 million (3.6%) in the first quarternine months of 2018 were approximately $6.1 billion, an increase of $485 million (8.7%) compared to 2017. Our ratioratios of losses and loss adjustment expenses to premiums earned (the “loss ratio”) infor the third quarter and first quarternine months of 2018 was 76.7%were 79.1% and 78.1%, a declinerespectively, declines of 5.012.8 and 8.0 percentage points compared to the third quarter and first nine months of 2017, respectively. In the third quarter of 2017. The decline2018, we recorded estimated losses of $30 million related to Hurricane Florence. In the third quarter of 2017, we incurred estimated losses related to Hurricanes Harvey and Irma of approximately $500 million (6.6% of premiums earned in the third quarter and 2.3% in the first nine months).
Our losses and loss ratio reflectedadjustment expenses incurred in the effectsfirst nine months of premium rate increases and comparatively lower storm-related losses.
We2018 also reducedincluded reductions of $478 million with respect to ultimate claim loss estimates for prior years’ loss events, which produced a corresponding increase inpre-tax underwriting gains. By comparison, we increased loss estimates for prior years’ events by $407$37 million in the first quarternine months of 2018 and $93 million in 2017. These reductions produced corresponding increases inpre-tax underwriting gains. The increase in such gains was primarily related to collision and property damage losses, which usually have short claim-tails. Claims frequencies in the first quarternine months of 2018 for property damage, collision, and collision coveragesbodily and personal injury protection coverage were down slightlycoverages declined (two to three percent range) compared to 2017, and decreased about two percent for bodily injury coverage.2017. Average claims severities in the first quarternine months of 2018 were higherincreased for property damage and collision coverages (four to six percent range) and bodily injury coverage (five to seven percent range).
Our underwriting expenses in the first quarternine months of 2018 were approximately $1.2$3.4 billion, an increase of $83$300 million (7.7%(9.6%) over 2017. Our expense ratio (underwriting expenses to premiums earned) infor the first quarternine months of 2018 decreased 1.00.6 percentage pointpoints compared to 2017. The largest components of underwriting expenses are employee-related expenses (salaries and benefits) and advertising costs. The increaseincreases in underwriting expenses reflects the increasewere primarily attributable to increases inpolicies-in-force. advertising expenses, insurance premium taxes and employee-related costs, which included wage and staffing increases.
Berkshire Hathaway Reinsurance Group
We offerexcess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several legal entities, led by National Indemnity Company (“NICO Group”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN Group”), and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, “General Re Group”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, the BHLN Group writes periodic payment annuity contracts.
With the exception of our retroactive reinsurance and periodic payment annuity businesses, we strive to generatepre-tax underwriting profits.Time-value-of-money concepts are important elements in establishing prices for our retroactive reinsurance and periodic payment annuity businesses due to the expected long durations of the liabilities. We expect to incurpre-tax underwriting losses from such businesses, primarily through deferred charge amortization and discount accretion charges. Premiums receivedWe receive premiums at the inception underof these contracts, are often large, which are then available for investment. A summary of the premiums andpre-tax underwriting results of our reinsurance business follows (in millions).
First Quarter | Premiums earned | Pre-tax underwriting gain (loss) | ||||||||||||||||||||||||||||||||||||||||||||||
Premiums earned | Pre-tax underwriting gain (loss) | Third Quarter | First Nine Months | Third Quarter | First Nine Months | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
Property/casualty | $ | 2,026 | $ | 1,742 | $ | 130 | $ | (410) | $ | 2,157 | $ | 2,061 | $ | 6,479 | $ | 5,763 | $ | 67 | $ | (1,486) | $ | 535 | $ | (1,856) | ||||||||||||||||||||||||
Retroactive reinsurance | — | 10,185 | (311) | (261) | 1 | 550 | 1 | 10,736 | (246) | (287) | (704) | (881) | ||||||||||||||||||||||||||||||||||||
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2,026 | 11,927 | (181) | (671) | 2,158 | 2,611 | 6,480 | 16,499 | (179) | (1,773) | (169) | (2,737) | |||||||||||||||||||||||||||||||||||||
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Life/health | 1,234 | 1,085 | 96 | 73 | 1,307 | 1,146 | 3,855 | 3,404 | 108 | 113 | 324 | 302 | ||||||||||||||||||||||||||||||||||||
Periodic payment annuity | 280 | 220 | (173) | (145) | 312 | 197 | 894 | 647 | (92) | (185) | (279) | (528) | ||||||||||||||||||||||||||||||||||||
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1,514 | 1,305 | (77) | (72) | 1,619 | 1,343 | 4,749 | 4,051 | 16 | (72) | 45 | (226) | |||||||||||||||||||||||||||||||||||||
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$ | 3,540 | $ | 13,232 | $ | (258) | $ | (743) | $ | 3,777 | $ | 3,954 | $ | 11,229 | $ | 20,550 | $ | (163) | $ | (1,845) | $ | (124) | $ | (2,963) | |||||||||||||||||||||||||
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27
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting(Continued)
Property/casualty
A summary of premiums and underwriting results of our property/casualty reinsurance businesses follows (in millions).
First Quarter | Premiums earned | Pre-tax underwriting gain (loss) | ||||||||||||||||||||||||||||||||||||||||||||||
Premiums earned | Pre-tax underwriting gain (loss) | Third Quarter | First Nine Months | Third Quarter | First Nine Months | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
NICO Group | $ | 1,054 | $ | 1,088 | $ | 23 | $ | (269) | $ | 1,077 | $ | 1,217 | $ | 3,394 | $ | 3,488 | $ | (29) | $ | (927) | $ | 272 | $ | (1,144) | ||||||||||||||||||||||||
General Re Group | 972 | 654 | 107 | (141) | 1,080 | 844 | 3,085 | 2,275 | 96 | (559) | 263 | (712) | ||||||||||||||||||||||||||||||||||||
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$ | 2,026 | $ | 1,742 | $ | 130 | $ | (410) | $ | 2,157 | $ | 2,061 | $ | 6,479 | $ | 5,763 | $ | 67 | $ | (1,486) | $ | 535 | $ | (1,856) | |||||||||||||||||||||||||
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NICO Group’s premiums earned in the third quarter and first quarternine months of 2018 declined 3%decreased 11.5% and 2.7%, respectively, compared to 2017. In each period,Premiums earned in the third quarter of 2017 included additional amounts related to certain contracts where policy limits were fully exhausted due to catastrophe losses during the quarter. Such amounts would have been earned in future periods. The effect of significant catastrophe losses in 2018 on the timing of premiums earned was relatively insignificant. For the first nine months of 2018, approximately 40% of NICO Group’s premiums earned derived from a10-year, 20% quota-share contract with Insurance Australia Group Ltd. that inceptedexpires in July 2015.2025. General Re Group’s premiums earned in the third quarter and first quarternine months of 2018 were $972increased $236 million an increase of $318(28.0%) and $810 million (49%(35.6%), respectively, compared to 2017. The increaseincreases reflected higher direct and broker markets business, and derived primarily from new business and increased participations for renewal business and foreign currency translation effects. Industry capacity dedicated toin both property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices are inadequate.lines.
On a combined basis, our property/casualty reinsurance business generatedpre-tax underwriting gains of $130$67 million and $535 million in the third quarter and first quarternine months of 2018, compared torespectively, andpre-tax losses of $410 millionapproximately $1.5 billion in 2017. There were no significant catastrophe loss eventsthe third quarter and $1.9 billion in the first quarternine months of 2018.2017. We incurred estimated losses of $102approximately $267 million in the firstthird quarter of 2018 related to Hurricane Florence and Typhoon Jebi and approximately $2.29 billion in the third quarter of 2017 related to Hurricanes Harvey, Irma and Maria and an earthquake in Mexico. Our losses from a cyclone in Australia.significant catastrophe events were approximately $2.45 billion for the first nine months of 2017.
In the first quarter of 2018,addition, we also decreasedreduced estimated ultimate claims liabilities in the first nine months of 2018 for prior years’ loss events by $581 million. We increased estimated ultimate liabilities for prior years’ loss events by $182 million, compared to an increase of $395$108 million in the first quarternine months of 2017. The increase in 2017, was driven bywhich reflected 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 and unanticipated property claims from events in 2016 and increases in estimatedincurred-but-not reported losses.2016.
Retroactive reinsurance
Premiums earned in the first quarternine months of 2017 included $10.2 billion from an aggregateexcess-of-loss retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (the “AIG Agreement”), which became effective on February 2, 2017. At the inception of the AIG Agreement, weWe also recorded losses and loss adjustment expenses incurred of $10.2 billion at the inception of the AIG Agreement, representing our initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by an initial deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on ourpre-tax underwriting results.
Pre-tax underwriting losses from retroactive reinsurance contracts in the third quarter and first quarternine months of 2018 were $311$246 million and $704 million, respectively, compared to $287 million and $881 million, respectively, in 2018 and $261 millionthe same periods in 2017. Certain liabilities relatedrelating to retroactive reinsurance contracts written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results in the first quarter includedpre-taxinclude gains and losses of $60 million in 2018 and $89 million in 2017 associated withfrom there-measurement of such liabilities due to changes in foreign currency exchange rates. Changes in exchange rates generatedpre-tax gains of $35 million and $99 million in the third quarter and first nine months of 2018, respectively, compared topre-tax losses in the third quarter and first nine months of $60 million and $251 million, respectively, in 2017.
Pre-tax underwriting losses before foreign currency gains/losses in the first quarter were $251 million innine months of 2018 and $1722017 were $803 million in 2017.and $630 million, respectively. The increase inpre-tax losses was primarily due to increased amortization charges related to the AIG Agreement, which included the effects of a previously reported increaseincreases to our ultimate claim liability estimates of approximately(approximately $1.8 billionbillion) and related deferred charge asset (approximately $1.7 billion) in the fourth quarter of 2017 and an increase in the related deferred charge asset of $1.7 billion.2017.
Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $42.3$41.9 billion at March 31,September 30, 2018 and $42.9 billion at December 31, 2017. Unamortized deferred charge assets related to such reinsurance contracts were approximately $15.0$14.5 billion at March 31,September 30, 2018 and $15.3 billion at December 31, 2017. Deferred charge asset balances will be amortized as charges topre-tax earnings over the expected remaining claims settlement periods.
28
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting(Continued)
Life/health
Premiums earned andpre-tax underwriting results of our life/health reinsurance businesses are further summarized as follows (in millions).
First Quarter | Premiums earned | Pre-tax underwriting gain (loss) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Premiums earned | Pre-tax underwriting gain (loss) | Third Quarter | First Nine Months | Third Quarter | First Nine Months | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||||||||
General Re Group | $ | 919 | $ | 737 | $ | 47 | $ | — | $ | 964 | $ | 786 | $ | 2,819 | $ | 2,324 | $ | 38 | $ | 57 | $ | 152 | $ | 96 | ||||||||||||||||||||||||||||||||||||
BHLN Group | 315 | 348 | 49 | 73 | 343 | 360 | 1,036 | 1,080 | 70 | 56 | 172 | 206 | ||||||||||||||||||||||||||||||||||||||||||||||||
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$ | 1,234 | $ | 1,085 | $ | 96 | $ | 73 | $ | 1,307 | $ | 1,146 | $ | 3,855 | $ | 3,404 | $ | 108 | $ | 113 | $ | 324 | $ | 302 | |||||||||||||||||||||||||||||||||||||
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General Re Group’s premiums earned in the third quarter and first quarternine months of 2018 were $919increased $178 million an increase of $182(22.6%) and $495 million (25%(21.3%), respectively, compared to 2017, which was2017. The increases were primarily attributable to growth in the Asia and Australia markets and foreign currency translation effects.effects of a comparatively weaker U.S. Dollar. The General Re Group producedpre-tax underwriting gains of $47 million in the first nine months of $152 million in 2018 and $96 million in 2017. The comparative increase in the first nine months reflected increased earnings from international business, primarily due to increased volumes and foreign currency translation, improved earnings from life business in North America and lower losses from the run-off of long-term care and disability business.
BHLN Group’s life reinsurance premiums earned in the third quarter and first nine months of 2018 were $340 million and $1,025 million, respectively, compared to $355 million and $1,067 million, respectively, in the corresponding 2017 periods. BHLN Group’s business during the last two years covered predominantly life risks in North America, with approximatelytwo-thirds of the premiums earned deriving from one reinsurance contract. BHLN Group’s life reinsurance business produced near break-even results in each of the first nine months of 2018 and break-even results in the first quarter of 2017. First quarter results in 2018 reflected increasedpre-tax gains from international life business and lowerpre-tax losses from business in North America.
BHLN Group’spre-tax underwriting results in the first nine months of 2018 and 2017 includedpre-tax gains of $45$166 million in the first quarter of 2018 and $78$197 million, in the first quarter of 2017respectively, from therun-off of variable annuity reinsurance contracts that provide guarantees on closed blocks of variable annuity business. Periodic underwriting results from this business reflect changes in estimated liabilities for guaranteed benefits, which result from changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Periodic underwritingUnderwriting results from variable annuity contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. Estimated liabilities for variable annuity guaranteesguarantee liabilities were approximately $1.7$1.6 billion at March 31,September 30, 2018 and $1.8 billion at December 31, 2017. BHLN Group’s life reinsurance premiums earned in the first quarter were $311 million in 2018 and $344 million in 2017. This business produced near break-evenpre-tax underwriting results in each period.
Periodic payment annuity
Periodic payment annuity premiums earned in the third quarter and first quarternine months of 2018 were $280increased $115 million an increase of $60(58.4%) and $247 million (27%(38.2%), respectively, compared to 2017. Periodic payment annuity contracts producedPre-taxpre-tax losses from these contractsof $92 million and $279 million in the third quarter and first quarternine months of 2018, were $173respectively, compared topre-tax losses of $185 million compared to $145and $528 million, respectively, for the same periods in 2017. Certain periodic payment annuity liabilitiescontracts written by our U.S. subsidiaries are denominated in foreign currencies, primarily the Great Britain Pound Sterling. First quarterpre-taxPre-tax underwriting results in 2018 includedpre-tax lossesgains of $70$21 million in 2018the third quarter and $24$57 million in 2017 associated withthe first nine months from there-measurement of such liabilities due to changes in exchange rates.
rates compared topre-tax losses of $63 million in the third quarter and $173 million in the first nine months of 2017. Before the effect of foreign currency gains and losses, this business generatedpre-tax underwriting losses were $103of $336 million in the first quarternine months of 2018 and $121$355 million in the first quarternine months of 2017. These losses were primarily attributable to the recurring discount accretion onof annuity liabilities. Discounted annuity liabilities which approximated $11.6$12.2 billion at March 31,September 30, 2018 and $11.2 billion at December 31, 2017. The2017, reflecting a weighted average discount rate on our liabilities at March 31, 2018 wasof approximately 4.1%.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Underwriting(Continued)
Berkshire 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 solutions, 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 Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”) and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company.
29
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Insurance—Underwriting (Continued)
Berkshire Hathaway Primary Group (Continued)
A summary of BH Primary underwriting results follows (dollars in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||||||||
Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | |||||||||||||||||||||||||||||||||||||
Premiums written | $ | 2,161 | $ | 1,849 | $ | 2,227 | $ | 1,995 | $ | 6,498 | $ | 5,645 | ||||||||||||||||||||||||||||||||||||
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Premiums earned | $ | 1,918 | 100.0 | $ | 1,676 | 100.0 | $ | 2,050 | 100.0 | $ | 1,852 | 100.0 | $ | 5,921 | 100.0 | $ | 5,287 | 100.0 | ||||||||||||||||||||||||||||||
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Losses and loss adjustment expenses | 1,251 | 65.2 | 1,037 | 61.9 | 1,419 | 69.2 | 1,342 | 72.5 | 3,884 | 65.6 | 3,426 | 64.8 | ||||||||||||||||||||||||||||||||||||
Underwriting expenses | 568 | 29.6 | 450 | 26.8 | 496 | 24.2 | 458 | 24.7 | 1,569 | 26.5 | 1,388 | 26.3 | ||||||||||||||||||||||||||||||||||||
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Total losses and expenses | 1,819 | 94.8 | 1,487 | 88.7 | 1,915 | 93.4 | 1,800 | 97.2 | 5,453 | 92.1 | 4,814 | 91.1 | ||||||||||||||||||||||||||||||||||||
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Pre-tax underwriting gain | $ | 99 | $ | 189 | $ | 135 | $ | 52 | $ | 468 | $ | 473 | ||||||||||||||||||||||||||||||||||||
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Premiums written in the third quarter and first quarternine months of 2018 were $2.2 billion, an increase of 17%increased 11.6% and 15.1%, respectively, compared to 2017. The increase wasthe corresponding 2017 periods. These increases were primarily attributable to BH Specialty, MedPro Group, GUARD and BHHC. Premiums earned in the first nine months of 2018 increased $242$634 million (14%(12.0%) compared to the first quarternine months of 2017, reflecting the growth of written premiumspremium increases of these businesses over the past year.businesses.
BH Primary producedpre-tax underwriting gains of $99$135 million and $468 million in the third quarter and first quarternine months of 2018, respectively, compared to $52 million and $189$473 million in 2017. BH Primary’sthe third quarter and first nine months of 2017, respectively. Underwriting results in the third quarter loss ratios were 65.2%included estimated losses of approximately $75 million in 2018 from Hurricane Florence and 61.9%$225 million in 2017. 2017 from Hurricanes Harvey, Irma and Maria.
Losses and loss adjustment expenses in the first quarternine months also included net reductions of estimated ultimate liabilities for prior years’ loss events of $164$507 million in 2018 and $168$606 million in 2017, which produced corresponding increases inpre-tax underwriting gains. The liability reductions of prior years’ loss estimates in each year primarily related to healthcare malpractice and workers’ compensation business. BH Primary writes significant levels of commercial and professional liability and workers’ compensation insurance and the related claim costs may be subject to higher severity and longer claim-tails, which could contributegive rise to significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation outcomes or judicial rulings and other factors we have not currently anticipated.
Insurance—Investment Income
A summary of net investment income generated from investments held by our insurance operations follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
Interest and other investment income | $ | 452 | $ | 246 | $ | 495 | $ | 344 | $ | 1,346 | $ | 870 | ||||||||||||||||||
Dividend income | 753 | 883 | 960 | 902 | 2,706 | 2,788 | ||||||||||||||||||||||||
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Investment income before income taxes and noncontrolling interests | 1,205 | 1,129 | 1,455 | 1,246 | 4,052 | 3,658 | ||||||||||||||||||||||||
Income taxes and noncontrolling interests | 193 | 221 | 216 | 202 | 659 | 741 | ||||||||||||||||||||||||
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Net investment income | $ | 1,012 | $ | 908 | $ | 1,239 | $ | 1,044 | $ | 3,393 | $ | 2,917 | ||||||||||||||||||
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Effective income tax rate | 15.9% | 19.5% | 14.7% | 16.2% | 16.2% | 20.2% | ||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Insurance—Investment Income(Continued)
Pre-tax interest and other investment income in the third quarter and first nine months of 2018 increased $206$151 million (43.9%) and $476 million (54.7%), respectively, compared to the same periods in 2017. The increases reflected the effect of higher short-term interest rates in 2018 and income from a limited partnership investment in the first quarter, partly offset by lower interest from reduced investments in fixed maturity securities. Our invested assets continue to include significant levels of 2018 comparedshort-term investments. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to 2017, attributable to an increase in interest income, primarily due to higher interest rates applicable to our short-term investments and to a fair value adjustment related to a limited partnership investment. such investments.
Dividend income declined $130increased $58 million (6.4%) in the third quarter and decreased $82 million (2.9%) in the first quarternine months of 2018 as compared to the same periods in 2017. The decline was primarily attributable tocomparative changes in dividend income reflected the impact of Restaurant Brands International’s redemption of our $3 billion investment in 9% preferred stock in December 2017 and other changesincreases in our portfolio of marketable equity securities. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.
Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance and reinsurance contracts or “float.” The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health insurance benefit liabilities, unearned premiums and other liabilities due to policyholders, less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $116$118 billion at March 31,September 30, 2018 and $114 billion at December 31, 2017. Our combined insurance operations generatedpre-tax underwriting earnings of $2.3 billion in the first nine months of 2018, and consequently, the average cost of float in the first quarter of 2018for that period was negative, as our underwriting operations generatedpre-tax earnings of $518 million.negative. Our average cost of float for the year ending December 31, 2017 was approximately 3%, reflectingpre-tax underwriting losses of approximately $3.2 billion.
30
Item 2. Management’s Discussion and Analysisbillion, most of Financial Condition and Resultswhich was incurred in the second half of Operations (Continued)
Insurance—Investment Income (Continued)
the year.
A summary of cash and investments held in our insurance businesses as of March 31,September 30, 2018 and December 31, 2017 follows (in millions).
March 31, 2018 | December 31, 2017 | September 30, 2018 | December 31, 2017 | |||||||||||||
Cash, cash equivalents and U.S. Treasury Bills | $ | 66,776 | $ | 73,285 | $ | 59,292 | $ | 73,285 | ||||||||
Equity securities | 165,828 | 163,134 | 199,860 | 163,134 | ||||||||||||
Fixed maturity securities | 19,679 | 21,092 | 18,057 | 21,092 | ||||||||||||
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$ | 252,283 | $ | 257,511 | $ | 277,209 | $ | 257,511 | |||||||||
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Fixed maturity investments as of March 31,September 30, 2018 were as follows (in millions).
Amortized cost | Unrealized gains/losses | Carrying value | Amortized cost | Unrealized gains/losses | Carrying value | |||||||||||||||||||
U.S. Treasury, U.S. government corporations and agencies | $ | 3,626 | $ | (25 | ) | $ | 3,601 | $ | 3,618 | $ | (26) | $ | 3,592 | |||||||||||
States, municipalities and political subdivisions | 730 | 22 | 752 | 259 | 14 | 273 | ||||||||||||||||||
Foreign governments | 7,835 | 51 | 7,886 | 7,360 | 8 | 7,368 | ||||||||||||||||||
Corporate bonds, investment grade | 5,408 | 346 | 5,754 | 5,321 | 388 | 5,709 | ||||||||||||||||||
Corporate bonds,non-investment grade | 729 | 165 | 894 | 563 | 42 | 605 | ||||||||||||||||||
Mortgage-backed securities | 707 | 85 | 792 | 457 | 53 | 510 | ||||||||||||||||||
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$ | 19,035 | $ | 644 | $ | 19,679 | $ | 17,578 | $ | 479 | $ | 18,057 | |||||||||||||
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U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 87%88% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher.Non-investment grade securities represent securities rated belowBBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
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, as well as in three Canadian provinces. BNSF’sBNSF classifies its major business groups are classified by type of product shipped, andwhich include consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (in millions).
First Quarter | ||||||||
2018 | 2017 | |||||||
Revenues | $ | 5,624 | $ | 5,185 | ||||
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Operating expenses: | ||||||||
Compensation and benefits | 1,315 | 1,297 | ||||||
Fuel | 767 | 605 | ||||||
Purchased services | 692 | 626 | ||||||
Depreciation and amortization | 571 | 573 | ||||||
Equipment rents, materials and other | 510 | 487 | ||||||
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Total operating expenses | 3,855 | 3,588 | ||||||
Interest expense | 256 | 252 | ||||||
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Pre-tax earnings | 1,513 | 1,345 | ||||||
Income taxes | 368 | 507 | ||||||
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Net earnings | $ | 1,145 | $ | 838 | ||||
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Effective income tax rate | 24.3% | 37.7% | ||||||
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2018 | 2017 | 2018 | 2017 | |||||||||||||
Revenues | $ | 6,147 | $ | 5,314 | $ | 17,649 | $ | 15,749 | ||||||||
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Operating expenses: | ||||||||||||||||
Compensation and benefits | 1,378 | 1,173 | 4,021 | 3,725 | ||||||||||||
Fuel | 859 | 595 | 2,456 | 1,777 | ||||||||||||
Purchased services | 718 | 608 | 2,124 | 1,843 | ||||||||||||
Depreciation and amortization | 580 | 591 | 1,726 | 1,756 | ||||||||||||
Equipment rents, materials and other | 471 | 384 | 1,501 | 1,295 | ||||||||||||
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Total operating expenses | 4,006 | 3,351 | 11,828 | 10,396 | ||||||||||||
Interest expense | 262 | 253 | 774 | 761 | ||||||||||||
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4,268 | 3,604 | 12,602 | 11,157 | |||||||||||||
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Pre-tax earnings | 1,879 | 1,710 | 5,047 | 4,592 | ||||||||||||
Income taxes | 486 | 668 | 1,200 | 1,754 | ||||||||||||
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Net earnings | $ | 1,393 | $ | 1,042 | $ | 3,847 | $ | 2,838 | ||||||||
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Effective income tax rate | 25.9% | 39.1% | 23.8% | 38.2% | ||||||||||||
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31BNSF’s revenues in the third quarter and first nine months of 2018 were $6.1 billion and $17.6 billion, respectively, representing increases of $833 million (15.7%) and $1.9 billion (12.1%), respectively, versus the corresponding periods in 2017. During the first nine months of 2018, our overall average revenue per car/unit increased 6.1% and our aggregate volume increased 4.6%. Ouryear-to-date volume was approximately 8.0 million cars/units compared to 7.6 million in 2017. The increase in average revenue per car/unit was attributable to business mix changes, higher fuel surcharge revenue driven primarily by higher fuel prices, and increased rates per car/unit.Pre-tax earnings were approximately $1.9 billion and $5.0 billion in the third quarter and first nine months of 2018, respectively, increases of 9.9% compared to the corresponding periods in 2017.
Revenues from industrial products in 2018 were $1.6 billion in the third quarter and $4.4 billion for the first nine months, or increases of 24.3% and 17.3%, respectively, from the comparable 2017 periods. These increases were attributable to volume increases of 13.1% in the third quarter and 10.9% in the first nine months as well as higher average revenue per car. Volumes in 2018 were higher primarily due to strength in the industrial and energy sectors, which drove higher demand for petroleum products, rocks, steel, and plastics. Volumes in the first nine months of 2018 were also higher for sand and taconite.
Revenues from agricultural products in 2018 increased 17.4% in the third quarter to $1.2 billion and increased 10.2% to $3.5 billion for the first nine months when compared to the same periods in 2017. The third quarter revenue increase reflected a 16.3% increase in volumes and higher average revenue per car. In the first nine months, the increase in revenues was attributable to volume increases of 10.5%, partially offset by slightly lower average revenue per car. Volumes in 2018 increased due to strong export and domestic grain shipments, as well as higher fertilizer and other grain products volumes.
Revenues from coal in 2018 increased 5.9% in the third quarter to $1.1 billion and 1.6% in the first nine months to $2.9 billion compared to 2017. These increases reflected higher average revenue per car partially offset by lower volumes of 4.6% in the third quarter and 2.6%year-to-date. The volume decreases in 2018 were due mainly to plant retirements combined with competition from natural gas and renewables, partially offset by market share gains and improved export volumes.
Operating expenses in the third quarter and first nine months of 2018 were $4.0 billion and $11.8 billion, respectively, increases of $655 million (19.5%) and $1.4 billion (13.8%), respectively, compared to the same periods in 2017. Our ratios of operating expenses to revenues were 65.2% in the third quarter and 67.0% for the first nine months of 2018, or increases of 2.1 and 1.0 percentage points, respectively, versus the corresponding prior year periods.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Railroad (“Burlington Northern Santa Fe”)(Continued)
BNSF’s revenues were $5.6 billion inCompensation and benefits expenses increased $205 million (17.5%) for the firstthird quarter of 2018 representing an increase of $439and $296 million (8.5%(7.9%) versus 2017. Duringfor the first quarternine months of 2018, revenues reflected a 1.8% comparative increase in average revenue per car/unit and a 5.1% increase in volume. Our volume was 2.6 million cars/units in the first quarter of 2018 compared to 2.5 million in 2017. We expect modest volume growth over the remainder of the year. The increase in average revenue per car/unit was primarily attributable to higher fuel surcharge revenue driven primarily by higher fuel prices and increased rates per car/unit, partially offset by business mix changes.Pre-tax earnings were approximately $1.5 billion in the first quarter of 2018, an increase of 12.5% compared to 2017. The increase was attributable to the increase in revenues, partly offset by higher fuel and volume-related expenses.
Revenues from consumer products were $1.9 billion in the first quarter of 2018, representing an increase of 10.7% compared to 2017, reflecting volume increases of 6.2% as well as higher average revenue per car/unit. The volume increases were primarily attributable to higher domestic intermodal and international intermodal volumes due to economic growth and tightening truck capacity leading to conversion from highway to rail.
Revenues from industrial products were $1.4 billion in the first quarter of 2018, an increase of 10.9% from 2017, attributable to a volume increase of 9.2% as well as higher average revenue per car/unit. Volumes in the first quarter of 2018 were higher primarily due to wage inflation, including a change in estimate of the effect of a pending labor agreement recorded in 2017, increased sandheadcount and other products that support drilling and broad strengthening in the industrial sector which drove demand for steel, taconite, chemicals and plastics.
Revenues from agricultural products increased 4.0% to $1.2 billion in the first quarter of 2018 compared to 2017, primarily due to a volume increase of 6.4%, partially offset by lower average revenue per car/unit. Volumes increased due to stronger export and domestic grain shipments as well as higher ethanol and other grain products volumes.
Revenues from coal decreased 1.3% to $948 million in the first quarter of 2018 compared to 2017, which reflected a decrease in volume of 2.3%, partially offset by higher average revenue per car/unit. The volume decreases in the first quarter of 2018 were primarily due to utility plant retirements, partially offset by market share gains.
Operating expenses were $3.9 billion in the first quarter of 2018, an increase of $267 million (7.4%) compared to 2017. Our ratio of operating expenses to revenues decreased 0.7 percentage points to 68.5% in the first quarter of 2018 versus 2017.training costs. Fuel expenses increased $162$264 million (26.8%(44.4%) compared to 2017for the third quarter and $679 million (38.2%) for the first nine months of 2018, primarily due to higher average fuel prices and increased volumes.
Purchased services expenseexpenses increased $66$110 million (10.5%(18.1%) in the third quarter and $281 million (15.2%) in the first nine months of 2018 as compared to 20172017. The increases were due to higher purchased transportation costs of our logistics services business, which are offset in revenues, as well as increased intermodal ramping, drayage and drayage activities.other volume-related costs.
In the third quarter and first nine months of 2018, equipment rents, materials and other expense increased $87 million (22.7%) and $206 million (15.9%), respectively, compared to 2017. These increases resulted from higher locomotive materials, personal injury expenses and property taxes. The first nine months also included higher derailment-related costs.
BNSF’s effective income tax rate was 24.3%25.9% and 37.7%23.8% for the threethird quarter and first nine months ended March 31,of 2018, respectively, as compared to 39.1% and 2017, respectively.38.2%, respectively, in the corresponding periods in 2017. The decrease was driven by the reduction in the U.S. statutory income tax rate under the TCJA, effective January 1, 2018, drove most of the effective income tax rate reduction. In addition, certain states enacted income tax rate reductions in 2018.
Utilities and Energy (“Berkshire Hathaway Energy Company”)
We currently own 90.4% of the outstanding common stock of Berkshire Hathaway Energy Company (“BHE”), which operates a 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 a regulated electricity transmission-only business in Alberta, Canada (“AltaLink, L.P.”) and a diversified portfolio of mostly renewable 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.
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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 income taxes and a return on capital, and are subject to regulatory approval. To the extent these regulated operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. The Tax Cuts and Jobs Act of 2017Among its provisions, the TCJA reduced the U.S. federal statutory income tax rate of our domestic regulated utilities from 35% to 21%. The resulting effectsBHE’s regulated subsidiaries anticipate passing the benefits of the lower U.S. income tax expense of those regulated utilitiesattributable to the TCJA to customers through regulatory mechanisms, including lower rates and reductions to rate base, which would produce lower revenue and pre-tax earnings in 2018 and future years when compared to 2017. We do not expect the TCJA and related regulatory treatment to have a material adverse impact on BHE’s long-term operating cash flows, subject to actual rulings by regulatory commissions that are expected to be substantially offset over time by lower revenuesin 2018 andpre-tax earnings. 2019. Revenues and earnings of BHE are summarized below (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Earnings | Revenues | Earnings | Revenues | Earnings | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
PacifiCorp | $ | 1,202 | $ | 1,292 | $ | 173 | $ | 265 | $ | 1,386 | $ | 1,443 | $ | 319 | $ | 389 | $ | 3,786 | $ | 3,991 | $ | 704 | $ | 912 | ||||||||||||||||||||||||
MidAmerican Energy Company | 767 | 708 | 40 | 62 | 857 | 832 | 251 | 250 | 2,354 | 2,209 | 347 | 402 | ||||||||||||||||||||||||||||||||||||
NV Energy | 625 | 594 | 40 | 51 | 1,071 | 1,057 | 268 | 347 | 2,456 | 2,412 | 403 | 539 | ||||||||||||||||||||||||||||||||||||
Northern Powergrid | 275 | 245 | 109 | 103 | 233 | 220 | 58 | 48 | 756 | 685 | 217 | 215 | ||||||||||||||||||||||||||||||||||||
Natural gas pipelines | 379 | 318 | 219 | 200 | 268 | 198 | 104 | 60 | 889 | 706 | 376 | 303 | ||||||||||||||||||||||||||||||||||||
Other energy businesses | 500 | 487 | 20 | 15 | 669 | 636 | 184 | 179 | 1,764 | 1,670 | 318 | 245 | ||||||||||||||||||||||||||||||||||||
Real estate brokerage | 764 | 587 | (10 | ) | 3 | 1,222 | 965 | 83 | 81 | 3,263 | 2,511 | 180 | 197 | |||||||||||||||||||||||||||||||||||
Corporate interest | — | — | (104 | ) | (110 | ) | — | — | (102) | (111) | — | — | (307) | (332) | ||||||||||||||||||||||||||||||||||
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$ | 4,512 | $ | 4,231 | $ | 5,706 | $ | 5,351 | $ | 15,268 | $ | 14,184 | |||||||||||||||||||||||||||||||||||||
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Pre-tax earnings | Pre-tax earnings |
| 487 | 589 | Pre-tax earnings |
| 1,165 | 1,243 | 2,238 | 2,481 | ||||||||||||||||||||||||||||||||||||||
Income taxes and noncontrolling interests |
| (98 | ) | 109 | ||||||||||||||||||||||||||||||||||||||||||||
Income taxes | Income taxes |
| (49) | 177 | (279) | 296 | ||||||||||||||||||||||||||||||||||||||||||
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Net earnings | Net earnings |
| 1,214 | 1,066 | 2,517 | 2,185 | ||||||||||||||||||||||||||||||||||||||||||
Noncontrolling interests | Noncontrolling interests |
| 123 | 114 | 260 | 244 | ||||||||||||||||||||||||||||||||||||||||||
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Net earnings attributable to Berkshire Hathaway shareholders | Net earnings attributable to Berkshire Hathaway shareholders |
| $ | 585 | $ | 480 | Net earnings attributable to Berkshire Hathaway shareholders |
| $ | 1,091 | $ | 952 | $ | 2,257 | $ | 1,941 | ||||||||||||||||||||||||||||||||
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Effective income tax rate | Effective income tax rate |
| (34.3 | )% | 8.0 | % | Effective income tax rate |
| (4.2)% | 14.2% | (12.5)% | 11.9% | ||||||||||||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Utilities and Energy (“Berkshire Hathaway Energy Company”)(Continued)
PacifiCorp
PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in the third quarter and first quarternine months of 2018 were $1.2 billion, a decrease of 7%decreased 4% and 5%, respectively, compared to the same periodperiods in 2017. Retail revenues in the firstthird quarter of 2018 decreased $111$40 million and $218 million in the first nine months, compared to 2017, reflecting2017. The declines reflected the effects of lower average rates ($71 million)185 millionyear-to-date), primarily due to refund accruals related to 2017 tax reform, including the impact of the TCJA ($53 million in the third quarter and $159 million in the first nine months), and a 3.5%year-to-date reduction in volumes (0.9%), largely attributable to the impacts of weather. Wholesale and other revenues increased due to higher volumes offset by lower market rates.
Pre-tax earnings decreased $92$70 million (35%(18%) in the third quarter and $208 million (23%) in the first quarternine months of 2018 as compared to the same periodperiods in 2017. Utility marginsmargin (operating revenues less fuel and purchased energy costs) in the third quarter and first quarternine months of 2018 were $751$904 million a decreaseand $2,446 million, respectively, representing decreases of $89$61 million (11%(6%) and $205 million (8%), respectively, versus the comparable periods in 2017. The decrease wasThese decreases were primarily due to the declinedeclines in revenues.revenues, which included the effects of the TCJA. PacifiCorp’safter-tax earnings in the third quarter and first quarternine months of 2018 were $148$270 million and $603 million, respectively, representing an increase of $7 million (3%) in the third quarter and a declinedecrease of $31$15 million (17%(2%) compared tofrom the first nine months of 2017.
MidAmerican Energy Company
MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the third quarter and first quarternine months of 2018 were $767increased $25 million an increase of $59(3%) and $145 million (8%(7%), respectively, as compared to the same periodperiods in 2017. InElectric operating revenues in 2018 increased $20 million in the third quarter and $108 million in the first nine months versus 2017. The third quarter of 2018, electric operatingincrease was due to higher wholesale and other revenues increased $36 milliondue to increases in volumes and natural gas revenues increased $13 million compared to 2017.average prices. The increase in electric revenuesthe first nine months was primarily attributable to higher retail revenues ($32 million),of $96 million, reflecting comparative increases in aggregate volumes and average rates from higher recoveries through bill riders largely(substantially offset in cost of sales, operating expenses and income tax expense) and volumes, partially offset by refund accruals related to 2017 tax reform. The increase inlower average rates, predominantly from the impact of the TCJA. In the first nine months of 2018, natural gas revenues wasincreased $20 million, primarily due to increased volumes, partially offset by a lower averageper-unit costsprice and the effects of gas sold and refund accruals related to 2017 tax reform.the TCJA.
Pre-tax earnings in the firstthird quarter of 2018 were relatively unchanged and in the first nine months decreased $22$55 million (35%(14%) compared to the same periodperiods in 2017. Electric utility marginsmargin in the third quarter and first quarternine months of 2018 was $587 million and $1,419 million, respectively, increases of $10 million and $84 million, respectively, over the corresponding 2017 periods, which were $361 million, an increase of $30 million compared to 2017, which wasprimarily due to the net increase in retail revenues.revenues in the first nine months. However, thistheyear-to-date increase in electric utility margin was more than offset by increased depreciation, maintenance and other operating expenses. Theyear-to-date increase in depreciation reflects higher accruals of $27expense included $83 million forfrom Iowa regulatory arrangementsrevenue sharing and $47 million from additional wind generation and other plant placedplant-in-servicein-service. of $14 million.
MEC’safter-tax earnings arein the third quarter and first nine months of 2018 were $479 million and $685 million, respectively, increases of $96 million (25%) and $69 million (11%), respectively, as compared to the same periods in 2017. MEC’safter-tax earnings in 2018 and 2017 were significantly greater than itspre-tax earnings due to the significant production income tax credits it receives relatedreceived relating to its wind-powered generating facilities. MEC’safter-tax earnings in the first quarter of 2018 were $103 million, which was relatively unchanged from 2017.
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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 in the third quarter and first quarternine months of 2018 were $625 million, an increase of $31 million (5%)increased 1% and 2%, respectively, compared to the same periods in 2017. The increase was primarily due to an increase in retail electricElectric operating revenues increased $12 million in the third quarter and $34 million in the first nine months of $25 million, which reflected2018, reflecting increased rates from pass-through cost adjustments and higher volumes largely attributable to the impacts of weather and retail customer growth, partly offset by reductions from the impact of the TCJA and lower volumes.retail rates resulting from a 2017 regulatory rate review. Natural gas operating revenue increased $7$8 million in the first quarternine months of 2018, primarily due to a higher rates,averageper-unit price, partially offset by lower customer usage.
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 (Continued)
Pre-tax earnings in the third quarter and first quarternine months of 2018 decreased $11$79 million (22%(23%) and $136 million (25%), respectively, compared to the same periodperiods in 2017. The decreasedecreases were primarily due to lower electric utility margin and increased depreciation, maintenance and other operating costs. Electric utility margin in the third quarter and first nine months of 2018 was $623 million and $1,366 million, respectively, representing decreases of $17 million (3%) and $38 million (3%) versus the comparable periods in 2017. The decreases were primarily due to the higher revenues that wereeffects of the TCJA offset by the higher pass-through cost adjustments and increased depreciation as a result of a 2017 regulatory rate review outcome. Utility marginssales volumes. NV Energy’safter-tax earnings in the third quarter and first quarternine months of 2018 were relatively unchanged$201 million and $311 million, respectively, declines of 10% from 2017. NV Energy’s after-tax earnings ineach of the first quarter of 2018 were $33 million, which was unchanged from 2017.corresponding 2017 periods.
Northern Powergrid
Revenues increased $30$13 million and $71 million in the third quarter and first quarternine months of 2018 compared to same periods in 2017, primarily due to the favorable foreign currency translation effects of a weaker U.S. Dollar in 2018.the first nine months of 2018 and increased smart meter and distribution revenues.Pre-tax earnings in the firstthird quarter of 2018 increased $6$10 million (6%(21%) and $2 million (1%) in the first nine months of 2018 compared to 2017, primarily due to favorable foreign currency translation effects partiallyand the increases in revenues, partly offset by higher depreciation and other operating expenses.expenses, including higher pension settlement losses in 2018.
Natural gas pipelines
Revenues increased $61$70 million (19%(35%) in the third quarter and $183 million (26%) in the first quarternine months of 2018 compared to 2017, primarily due to higher transportation revenues of $36$58 million and $102 million, respectively, from higher volumes and rates due to unique market opportunities and increased gas sales volumes related to system balancing activities, which were largely offset in cost of sales.Pre-tax earnings increased $19$44 million (10%(73%) and $73 million (24%) in the third quarter and first quarternine months of 2018, respectively, compared to 2017. The increase wasincreases were primarily due to the changesincreases in transportation revenues and lower depreciation expense, partly offset by a comparative increaseincreases in operating expenses, which included the effects of an alternative rate structure approved by Kern River’s regulators that reduced expensesoperations and regulatory liabilities in the first quarter of 2017.maintenance expenses.
Other energy businesses
Revenues increased $13$33 million (3%(5%) in the third quarter and $94 million (6%) in the first quarternine months of 2018 compared to the same periodperiods in 2017, reflecting a comparative increase of 12%year-to-date increases from renewable energy of 10% and a comparative declinefrom AltaLink, L.P. of 5% from the unregulated service business.4%.Pre-tax earnings in the third quarter and first quarternine months of 2018 increased $5 million and $73 million, respectively, compared to the same periodperiods in 2017, which reflected2017. The increases were primarily attributable to the increased earningsrevenues from renewable energy and AltaLink, L.P., partly offset by increased depreciation expense and higher other operating expenses.
Real estate brokerage
Revenues in the third quarter and first quarternine months of 2018 increased 27% and 30%, respectively, as compared to the same periodperiods in 2017, primarily due to recent business acquisitions.Pre-tax earnings declined $13decreased $17 million in the first quarternine months of 2018 as compared to 2017, primarily due to higher operating costs and interest expenses,expense, partially offset by higher net revenues.margin.
Corporate interest
Corporate interest includes interest on unsecured debt issued by the BHE holding company and borrowings from Berkshire insurance subsidiaries in connection with certain of BHE’s business acquisitions, whichacquisitions. The borrowings from Berkshire insurance subsidiaries were fully repaid in the third quarter of 2017. Corporate interest declined 5%7.5% in the first threenine months of 2018 as compared to 2017, primarily due to lower average borrowings.
Income taxes
BHE’s consolidated effective income tax ratesrate for the first quartersnine months of 2018 and 2017 were approximately (34.3%)was (12.5)% and 8.0%11.9%, respectively. BHE’s effective income tax rates regularly reflect significant production tax credits from wind-powered electricity generation placed in service by our domestic regulated utilities and other energy businesses. The effective tax rate in the first quarternine months of 2018 decreased primarily due to the reduction in the U.S. federal corporate income tax rate, as well as from lower state income tax expense, an increase in recognized production tax credits, lower U.S. income taxes on foreign earnings an increase in recognized production tax credits and favorable impacts of rate making.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Earnings * | Revenues | Earnings * | Revenues | Earnings * | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
Manufacturing | $ | 12,934 | $ | 12,097 | $ | 1,855 | $ | 1,487 | $ | 13,552 | $ | 12,819 | $ | 2,012 | $ | 2,002 | $ | 40,339 | $ | 37,654 | $ | 6,002 | $ | 5,428 | ||||||||||||||||||||||||
Service and retailing | 18,776 | 18,194 | 575 | 481 | 19,796 | 19,325 | 672 | 536 | 58,061 | 56,650 | 2,011 | 1,641 | ||||||||||||||||||||||||||||||||||||
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$ | 31,710 | $ | 30,291 | $ | 33,348 | $ | 32,144 | $ | 98,400 | $ | 94,304 | |||||||||||||||||||||||||||||||||||||
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Pre-tax earnings | 2,430 | 1,968 | Pre-tax earnings |
| 2,684 | 2,538 | 8,013 | 7,069 | ||||||||||||||||||||||||||||||||||||||||
Income taxes and noncontrolling interests | 608 | 651 | Income taxes and noncontrolling interests |
| 587 | 844 | 1,953 | 2,396 | ||||||||||||||||||||||||||||||||||||||||
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$ | 1,822 | $ | 1,317 | $ | 2,097 | $ | 1,694 | $ | 6,060 | $ | 4,673 | |||||||||||||||||||||||||||||||||||||
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Effective income tax rate | 24.4% | 32.4% | Effective income tax rate |
| 21.3% | 32.7% | 23.8% | 33.3% | ||||||||||||||||||||||||||||||||||||||||
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* | Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified intangible assets recorded in connection with our business acquisitions. Theafter-tax acquisition accounting expenses excluded from earnings in the preceding table were |
Manufacturing
Our manufacturing group includes a variety of businesses that produce and distribute industrial, building and consumer products. Industrial products businesses include specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), complex metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (“PCC”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)), equipment and systems for the livestock and agricultural industries (CTB International (“CTB”)), and a variety of products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products (“LSPI”)).
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), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and the Duracell Company (“Duracell”), a leading manufacturer of high performance alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues andpre-tax earnings of our manufacturing operations follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
Industrial products | $ | 7,077 | $ | 6,508 | $ | 1,311 | $ | 994 | $ | 7,119 | $ | 6,657 | $ | 1,297 | $ | 1,247 | $ | 21,483 | $ | 19,802 | $ | 4,012 | $ | 3,508 | ||||||||||||||||||||||||
Building products | 2,834 | 2,734 | 251 | 249 | 3,389 | 3,124 | 375 | 407 | 9,563 | 8,983 | 1,042 | 1,057 | ||||||||||||||||||||||||||||||||||||
Consumer products | 3,023 | 2,855 | 293 | 244 | 3,044 | 3,038 | 340 | 348 | 9,293 | 8,869 | 948 | 863 | ||||||||||||||||||||||||||||||||||||
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$ | 12,934 | $ | 12,097 | $ | 1,855 | $ | 1,487 | $ | 13,552 | $ | 12,819 | $ | 2,012 | $ | 2,002 | $ | 40,339 | $ | 37,654 | $ | 6,002 | $ | 5,428 | |||||||||||||||||||||||||
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Aggregate revenues of our manufacturing businesses in the third quarter and first nine months of 2018 were approximately $13.6 billion and $40.3 billion, increases of $733 million (5.7%) and approximately $2.7 billion (7.1%), respectively, compared to the same periods in 2017.Pre-tax earnings in the third quarter of 2018 were $12.9approximately $2.0 billion, relatively unchanged from 2017, and $6.0 billion in the first nine months of 2018, an increase of $837$574 million (7%(10.6%) compared to 2017.Pre-tax earnings in the first quarter of 2018 were approximately $1.85 billion, an increase of $368 million (25%) from 2017.Pre-tax earnings in the first quarternine months of 2017 includedpre-tax losses of $184approximately $190 million (predominantly in the first quarter) in connection with the disposition of an underperformingbolt-on business acquired by Lubrizol in 2014. Excluding these losses,pre-tax earnings in the first nine months of 2018 increased 11%6.8% compared to 2017. Results of our manufacturing businesses in 2018 generally reflected higher revenues compared to 2017. However, manufacturing costs and operating expenses were also higher, partly offsetting the revenue increases, particularly in the third quarter.
Industrial products
Revenues in the first quarter of 2018from industrial products businesses were approximately $7.1 billion an increasein the third quarter and $21.5 billion in the first nine months of $5692018, or increases of $462 million (9%(6.9%) versusand $1.7 billion (8.5%), respectively, compared to 2017. PCC’s revenues in the third quarter and first quarternine months of 2018 increased 6%approximately 5.9% and 6.3%, respectively, over 2017, reflectingthe same periods in 2017. The increases reflected increased demand in aerospace markets in connection with new aircraft programs, partly offset by lower demand for industrial gas turbine demand. products.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
Lubrizol’s revenues in the third quarter and first quarternine months of 2018 increased 6%7.3% and 7.6%, respectively, compared to 2017, primarily due to higher prices, changes in product mix and favorable foreign currency translation. Overall,Lubrizol experienced a significant increase in average material unit costs during 2018 and 2017, necessitating increases in sales prices. Lubrizol’s unitconsolidated sales declined slightly fromvolumes increased 6% and 3%, respectively, in the third quarter and first nine months of 2018, as compared to 2017.
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Item 2. Management’s Discussion IMC’s revenues increased 11.7% in the third quarter and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing(Continued)
Industrial products (Continued)
Marmon’s revenues20.0% in the first quarter of 2018 increased 9% compared to 2017. Revenues increased due to higher metals prices, business acquisitions, growth in transportation and HVAC product lines and favorable foreign currency translation. These increases were partly offset by revenue decreases attributable to lower retail store and beverage products sales and lower steel distribution volume. IMC’s revenues increased 27% in the first quarternine months of 2018 compared to 2017, due to a combination of factors, including increased unit sales (particularly over the first half of the year), business acquisitions and foreign currency translation effects from a weaker U.S. Dollar in the first half of 2018.
Marmon’s revenues in the third quarter and first nine months of 2018 increased unit4.0% and 7.6%, respectively, as compared to 2017. Revenue increases were primarily attributable to higher average metals prices, business acquisitions and growth in heavy-duty transportation product lines, partially offset by lower sales from the beverage and higher financial income.retail products businesses and lower steel distribution volume. CTB’s revenues decreased 2%increased 6.0% in the first nine months of 2018 versus 2017, due to favorable foreign currency effects and modest sales growth in protein production and grain systems during the third quarter.
Pre-tax earnings of the industrial products group were $1.3 billion in the third quarter and $4.0 billion in the first nine months of 2018, representing increases of $50 million (4.0%) and $504 million (14.4%), respectively, compared to 2017. Our results in the first nine months of 2017 includedpre-tax losses of approximately $190 million, substantially all of which were in the first quarter, of 2018 versus 2017, primarily duerelated to sluggish demand and selling price pressures for grain systems and lower processing equipment volume, which more than offset increased protein production equipment sales and favorable foreign currency translation.
Pre-tax earnings in the first quarter of 2018 were approximately $1.3 billion, an increase of $317 million (32%) compared to 2017. The comparative increase in 2018 earnings was primarily attributable topre-tax losses of $184 million recognized by Lubrizol in the first quarter of 2017 in connection with theLubrizol’s disposition of thean underperformingbolt-on business and the recognition ofrelated intangible asset impairments and restructuring charges. Excluding the effects of thethese losses, in 2017,pre-tax earnings of the industrial products group increased 11%8.5% in the first nine months of 2018 as compared to 2017.
PCC’spre-tax earnings decreased 2.0% in the third quarter and 6.2% in the first quarternine months of 2018 compared to 2017. Results in 2018 were negatively affected by costs associated with the temporary unplanned shut-downs of certain metals facilities, metal press outages and lower earnings from the industrial gas turbine business. The closed facilities are gradually resuming production, with most expected to becoming fully operational by the end of 2018. In addition, the aforementioned new aircraft programs involve relatively complex manufacturing processes and manufacturing costs (including personnel training costs) have been relatively highto-date, but we expect costs will decline as processes and efficiencies develop.
ExcludingLubrizol’spre-tax earnings, excluding the effects of the aforementioned losses Lubrizol’spre-tax earningson the disposition of a bolt-on business in 2017, increased 19%approximately 16% in the first quarternine months of 2018 compared to 2017, which2017. The increase was primarily due to increases in sales volumes and selling prices, as well as by lower interest expense and the favorable effects of foreign currency translation. Lubrizol’s results continue to be adversely affectedtranslation, somewhat offset by significantly higher average raw material costs including base oil feedstock and petrochemicals.operating expenses. IMC’spre-tax earnings increased significantly in the first quarternine months of 2018 versuscompared to the same periods in 2017, reflecting a combination of increased sales, increased manufacturing efficiencies, the effects of business acquisitions and ongoing expense control efforts, partly offset by the effects of rising raw material costs. PCC’s
Marmon’spre-tax earnings decreased 7.5%in 2018 increased 3.2% in the third quarter and 12.3% in the first quarter of 2018nine months compared to the same periods in 2017. Results in 2018 were negatively affected by costs and lost earnings from the unplanned temporary shut-down of certain manufacturing facilitiesThe increase in the first quarternine months was primarily due to anon-recurring gain of 2018. These plants have been restarted and are expected to become fully operational by$43 million from the third quartersale of 2018. In addition,certain assets of its beverage products business in the aforementioned new aerospace programs involve more complex manufacturing processes and manufacturing costs are initially higher, but are expected to decline as processes and efficiencies develop over time.second quarter.
Building products
Revenues of the building products group in the third quarter and first quarternine months of 2018 were approximately $2.8$3.4 billion an increaseand $9.6 billion, respectively, increases of $100$265 million (4%(8.5%) and $580 million (6.5%), respectively, compared to 2017. In the corresponding 2017 periods. For the third quarter and first quarternine months of 2018, we generated increased sales ofthe increases reflected higher average selling prices, product mix changes and unit increases with respect to certain flooring products, primarily from hard surface volumes, and slightly higher revenues from Johns Manville and MiTek’s residential products business. We also experienced comparative volume declinesinsulation products. The selling price increases in 2018 for brick/masonry products, while volumes for paint/coatings were relatively unchanged.in response to significant material cost increases over the past two years.
Pre-tax earnings of the building products group in the third quarter and first quarternine months of 2018 were $251$375 million a slight increase (1%) over 2017. Our operating margins(pre-tax earnings to revenues) inand $1,042 million, respectively, decreases of 7.9% and 1.4%, respectively, versus the first quarter were 8.9% in 2018 and 9.1% in 2017.corresponding 2017 periods. Raw material and production costs continued to rise inrose over the first quarternine months of 2018, which together with increased facilities closure costs, more than offset most of the increaseincreases in revenues. In particular, we experienced higher pricescosts for steel, titanium dioxide and petrochemicals were substantially higher in 2018 which contributed to the comparative declinethan in our operating margin.
Consumer products
Revenues were approximately $3.0 billion in the first quarter of 2018, an increase of $168 million (6%) over 2017. The increaseincreases in revenues was primarily due to unit volumeselling prices have lagged the increases at Forest River, Brooks Sportsin raw materials costs and, Garan and from the foreign currency translation effects of a weaker U.S. Dollar in 2018, partly offset by lower unit sales at Fruit of the Loom.consequently, gross margin rates have deteriorated.
Pre-tax earnings were $293 million in the first quarter of 2018, an increase of $49 million (20%) compared to 2017. The increase reflected the changes in revenues described above and also included increased earnings from Duracell. Duracell’s results in the first quarter of 2018 increased primarily due to lower costs from ongoing operational restructuring efforts and comparatively lower restructuring charges in the first quarter of 2018.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing(Continued)
Consumer products
Revenues of the consumer products group in the third quarter of 2018 were approximately $3.0 billion, essentially unchanged from 2017. Our apparel and footwear businesses generated a comparative third quarter revenue increase of 6%, offset by lower revenues from Forest River and Duracell. These increases and decreases were primarily attributable to changes in unit sales, and to a lesser extent, selling prices and sales mix changes. Most significantly, Forest River experienced a comparative 7% decline in third quarter unit sales. Revenues in the first nine months of 2018 were approximately $9.3 billion, an increase of $424 million (4.8%) compared to the first nine months of 2017. Theyear-to-date increase included increases from Forest River (5%) and our apparel and footwear businesses (6%), which were primarily due to increased volume from Brooks Sports and Garan.
Pre-tax earnings of the consumer products group were $340 million in the third quarter of 2018, a decrease of 2.3% from 2017. The decline reflected lower earnings from Forest River (24%), partially offset by increased earnings from the apparel and footwear businesses (5%) and Duracell (8%).Pre-tax earnings for the first nine months of 2018 were $948 million, an increase of $85 million (9.8%) compared to 2017. The comparative increase inyear-to-date earnings reflected increases from Duracell (47%) and the apparel and footwear businesses (9%), partly offset by lower earnings from Forest River and Larson Juhl.
During 2018, and in the third quarter in particular, Forest River’s results were affected by higher material costs, which together with the effects of lower sales volume in the third quarter, contributed to reductions in its gross sales margin rates andpre-tax earnings. The comparative earnings increases of the apparel and footwear businesses in 2018 were primarily attributable to revenue increases. Duracell’s earnings increases in 2018 reflected the favorable effects of ongoing operational restructuring efforts and comparatively lower restructuring charges.
Service and retailing
A summary of revenues andpre-tax earnings of our service and retailing businesses follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | Revenues | Pre-tax earnings | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
Service | $ | 2,945 | $ | 2,617 | $ | 357 | $ | 260 | $ | 3,141 | $ | 2,775 | $ | 444 | $ | 315 | $ | 9,219 | $ | 8,184 | $ | 1,268 | $ | 926 | ||||||||||||||||||||||||
Retailing | 3,642 | 3,476 | 158 | 133 | 3,833 | 3,752 | 184 | 176 | 11,404 | 10,986 | 572 | 513 | ||||||||||||||||||||||||||||||||||||
McLane Company | 12,189 | 12,101 | 60 | 88 | 12,822 | 12,798 | 44 | 45 | 37,438 | 37,480 | 171 | 202 | ||||||||||||||||||||||||||||||||||||
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$ | 18,776 | $ | 18,194 | $ | 575 | $ | 481 | $ | 19,796 | $ | 19,325 | $ | 672 | $ | 536 | $ | 58,061 | $ | 56,650 | $ | 2,011 | $ | 1,641 | |||||||||||||||||||||||||
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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 franchise and service a network of quick service restaurants (Dairy Queen). Service businesses also include the electronic distribution of corporate news, multimedia and regulatory filings (Business Wire), publication of newspapers and other publications (Buffalo News and the BH Media Group) and operation 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 of the service group were approximately $3.1 billion in the third quarter and $9.2 billion in the first quarternine months of 2018, were approximately $2.9representing increases of $366 million (13.2%) and $1.0 billion an increase of $328 million (13%(12.6%), respectively, as compared to the same periods in 2017. FirstTTI’s revenues in the third quarter and first nine months of 2018 revenues of TTI increased 33%approximately 35% compared to 2017, reflectingthe same periods in 2017. The increases reflected an industry-wide increase in demand throughout 2018 for electronic components in many geographic markets around the world, and from the effects of business acquisitions and foreign currency translation due to a weaker U.S. Dollar. In addition,While TTI’s revenue increases were significant, we believe that demand is beginning to moderate. Otherwise, Charter Brokerage, FlightSafety and Charter BrokerageWPLG generated comparative revenue increases in the first quarter of 2018. NetJets revenues in the first quarternine months of 2018, were relatively unchangedwhile the revenues from most of our other service businesses declined from 2017.
Pre-tax earnings of the service group in the third quarter and first quarternine months of 2018 were $357$444 million an increaseand $1.3 billion, respectively, increases of $97$129 million (37%(41.0%) and $342 million (36.9%), respectively, compared to the same periods in 2017. With the exception of our media businesses, all of our service operations generatedThe comparative increases in first quarter earnings in 2018 were driven by the aforementioned revenue based increases at TTI, FlightSafety andwhich accounted for almost 70% of these increases, as well as from earnings increases at Charter Brokerage and increased earnings at NetJets.
Retailing
Our retailers include Berkshire Hathaway Automotive (“BHA”). BHA includes over 80 auto dealerships that sell new andpre-owned automobiles, and offer repair services and related products. BHA also operates two insurance businesses, two auto auctions and an automotive fluid maintenance products distributor. Our retailing businesses also include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics.
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.
RetailingRevenues of the retailing business revenues in the third quarter and first quarternine months of 2018 were $3.6$3.8 billion an increaseand $11.4 billion, respectively, increases of $166$81 million (5%(2.2%) and $418 million (3.8%), respectively, compared to the same periods in 2017. BHA’s revenues, which representrepresented approximately 64% of our aggregatetheyear-to-date retailing revenues in 2018, increased 4.5%2.1% in the third quarter and 4.0% in the first quarternine months of 2018 as compared to 2017. The increase wasincreases derived primarily from increasedpre-owned vehicle sales. Revenues from new vehicle sales were down 2.3% in the third quarter and relatively unchanged for the first nine months. In addition, See’s CandiesLouis revenues increased 23%9.1% in the first quarternine months of 2018, due primarily to foreign currency translation effects and comparatively higher sales. Revenues of our home furnishings businesses increased 5.4% in the first nine months of 2018 compared to 2017, due to the timing of the Easter holiday. The seasonal effects of the Easter holiday were in the first quarter of 2018 and primarily in the second quarter of 2017. Revenues of our home furnishings businesses increased 4% in the first quarter of 2018 versus 2017, due to higher volumes in certain geographic markets and the effect of a new store, which opened in 2018.
Pre-tax earnings in the third quarter and first quarternine months of 2018 from retailing were $158$184 million an increaseand $572 million, respectively, increases of $25$8 million (19%(4.5%) and $59 million (11.5%), respectively, over 2017, which was2017. The increases were primarily attributable to BHA and See’s Candies. EarningsLouis. The earnings increases of BHA increasedwere primarily due to increased earnings from finance and insurance activities, partly offset by lower vehicle gross margins. The increase inpre-tax earnings of See’s Candies waswhile the increases at Louis were primarily attributable to the timing of Easter.
37
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Manufacturing, Service and Retailing(Continued)
revenue increases.
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 units generate high sales volumes and very low profitoperating margins and have several significant customers, includingWal-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 third quarter and first quarternine months of 2018 were $12.2$12.8 billion an increase of 0.7% overand $37.4 billion, respectively, relatively unchanged compared to the first quarter of 2017, reflectingsame periods in 2017. On a slight increase inyear-to-date basis, grocery sales increased 0.8% and a slight decreasefoodservice sales declined 2.4%, compared to 2017. The decline in foodservice sales.revenues was primarily due to a net loss of customers.
Pre-tax earnings in the firstthird quarter of 2018 were $60$44 million, a decreaseessentially unchanged from 2017, whilepre-tax earnings in the first nine months of $282018 of $171 million (32%declined $31 million (15.3%), compared to 2017. McLane continuesMcLane’s grocery and foodservice businesses continue to operate in an intenselya highly competitive business environment, which is negatively affecting its current operating results. These conditions contributed to declining grossGross margin rates inincreased slightly over the first quarternine months of 2018, which together withbut were more than offset by increases in fuel, depreciation and certain other operating expenses, producedproducing a 23 basis point decline in its operating margin rate (ratio ofpre-tax earnings to revenues) compared to 2017. Our grocery and foodservice businesses is expected toWe expect the current unfavorable operating conditions will continue to be subject to intense competition over the remainder of 2018.into 2019.
Finance and Financial Products
Our finance and financial products businesses include manufactured and site built 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 earnings from our finance and financial products businesses follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues | Earnings | Revenues | Earnings | Revenues | Earnings | |||||||||||||||||||||||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||||||||||
Manufactured housing and finance | $ | 1,247 | $ | 1,074 | $ | 195 | $ | 176 | $ | 1,580 | $ | 1,318 | $ | 205 | $ | 173 | $ | 4,336 | $ | 3,591 | $ | 634 | $ | 546 | ||||||||||||||||||||||||
Transportation equipment leasing | 651 | 624 | 205 | 209 | 674 | 652 | 209 | 219 | 2,000 | 1,928 | 624 | 649 | ||||||||||||||||||||||||||||||||||||
Other | 165 | 151 | 94 | 65 | 178 | 183 | 116 | 104 | 525 | 500 | 331 | 243 | ||||||||||||||||||||||||||||||||||||
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$ | 2,063 | $ | 1,849 | $ | 2,432 | $ | 2,153 | $ | 6,861 | $ | 6,019 | |||||||||||||||||||||||||||||||||||||
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Pre-tax earnings | 494 | 450 | 530 | 496 | 1,589 | 1,438 | ||||||||||||||||||||||||||||||||||||||||||
Income taxes and noncontrolling interests | 120 | 159 | 140 | 177 | 396 | 505 | ||||||||||||||||||||||||||||||||||||||||||
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$ | 374 | $ | 291 | $ | 390 | $ | 319 | $ | 1,193 | $ | 933 | |||||||||||||||||||||||||||||||||||||
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Effective income tax rate | 24.3% | 35.5% | 26.6% | 35.6% | 25.0% | 35.1% | ||||||||||||||||||||||||||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Finance and Financial Products(Continued)
Manufactured housing and finance
Clayton Homes’ revenues in the third quarter and first quarternine months of 2018 were approximately $1.25$1.6 billion an increaseand $4.3 billion, respectively, increases of $173$262 million (16%(19.9%) compared to 2017.and $745 million (20.7%), respectively, over the corresponding 2017 periods. The increaseincreases reflected a 25% increaseyear-to-date increases in home sales of 29% and a 4% increase in financial services revenue.revenue of approximately 4%. The increase in home sales was primarily due to increaseda 104%year-to-date increase in unit sales of site built homes attributable to business acquisitions during the last two years, and to a lesser extent,increased unit sales of manufactured homes. Average unit prices of site built homes are considerably higher than our traditional manufactured homes. The increase in financial services revenue was primarily attributable to increased interest income from a 3%comparative increase in average loan balances.balances of approximately 5% over the first nine months of 2018 as compared to 2017. As of March 31,September 30, 2018, Clayton Homes’ loan balances were approximately $13.8$14.4 billion.
Pre-tax earnings in the third quarter and first quarternine months of 2018 were $195$205 million an increaseand $634 million, respectively, increases of $19$32 million (11%(18.5%) and $88 million (16.1%), respectively, compared to 2017, which was primarily attributable tothe same periods in 2017. The increases in earnings reflected increased earnings from increased sales ofmanufactured and site built homes,home sales and financial services andinterest income, lower corporate overhead costs. The increase inpre-tax earnings from financial services reflected increased interest incomecosts and lower credit losses, partly offset by increased interest expense which reflected increased average balances and borrowing rates.the effects of an $11 million gain from a legal settlement in 2017.
Transportation equipment leasing
Transportation equipment leasing revenues increased $27in 2018 were $674 million (4%)in the third quarter and $2.0 billion in the first nine months, increases of 3.4% and 3.7%, respectively, over the comparable 2017 periods. Revenues in 2018 of ourover-the-road trailer leasing business increased 14% in the third quarter of 2018 compared toand 13% in the first nine months over the same periods in 2017, primarily due to increased crane services,over-the-road trailer units on lease, increased equipment saleslease. Revenues in the third quarter of 2018 of our railcar and favorable foreign currency translation effects, partly offset by decreased railcar lease income. Excess railcar capacity for lease continuescrane services businesses were relatively unchanged compared to contribute to fewer units on lease and relatively low lease rates.
38
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Finance and Financial Products(Continued)
Transportation equipment leasing (Continued)
Pre-tax earnings were $205 million2017, while revenues in the first quarter of 2018, a decrease of $4nine months increased $32 million (2%) compared to 2017. The decreaseincrease inyear-to-date revenues was attributable to increased railcar equipment sales, railcar repair services and crane services, partly offset by lower railcar lease revenues. Throughout 2018, we have experienced negative impacts from lower railcar lease renewal rates versus the higher rates on expiring leases.
Pre-tax earnings in 2018 were $209 million in the third quarter and $624 million in the first nine months, decreases of $10 million (4.6%) and $25 million (3.9%), respectively, compared to the same periods in 2017. The decreases were due to lower earnings from the railcar leasing business, attributable to the decline in lease revenues and higher repair costs, partly offset by increased earnings from theof ourover-theover-the-road road-trailertrailer and crane services businesses. Significant components of the operating costs of our leasingthese businesses, such as depreciation, expenseinterest and financingcertain other operating costs, do not vary proportionately to revenue changes. Thus, changes in revenues can produce a disproportionate effect ondisproportionately affect earnings.
Other
Other earnings from our finance activities include CORT furniture leasing and interest and dividends fromother investment securities. In 2018, other earnings increased $29 million compared to 2017, reflecting increased interest and dividend income and earnings from CORT.income. Other earnings in 2018 included increasedalso include interest income on loans by a Berkshire financing subsidiary to Clayton Homes and UTLX and from other intercompany loans, which are used to finance loansClayton Homes’ loan portfolio and assetstransportation equipment held for lease. Correspondinglease (charged as interest expense is reflected in the earningsresults of those businesses.businesses) and interest expense on related borrowings of Berkshire Hathaway Finance Corporation (“BHFC”). The net interest (income, net of expense) related to such loans increased $81 million in the first nine months of 2018 compared to 2017, which reflected increased interest income and lower interest expense of BHFC.
Investment and Derivative Gains/Losses
A summary of investment and derivative gains and losses follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Investment gains/losses | $ | (7,809 | ) | $ | 315 | $ | 14,569 | $ | 657 | $ | 12,750 | $ | 1,262 | |||||||||||
Derivative gains/losses | (206 | ) | 460 | 137 | 308 | 303 | 703 | |||||||||||||||||
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Gains/losses before income taxes and noncontrolling interests | (8,015 | ) | 775 | 14,706 | 965 | 13,053 | 1,965 | |||||||||||||||||
Income taxes and noncontrolling interests | (1,589 | ) | 271 | 3,046 | 342 | 2,701 | 695 | |||||||||||||||||
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Net gains/losses | $ | (6,426 | ) | $ | 504 | $ | 11,660 | $ | 623 | $ | 10,352 | $ | 1,270 | |||||||||||
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Effective income tax rate | 19.8% | 35.0% | 20.5% | 35.3% | 20.8% | 35.3% | ||||||||||||||||||
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Investment and Derivative Gains/Losses(Continued)
Investment gains/losses
As discussed in Note 2 to the accompanying Consolidated Financial Statements, on January 1, 2018, we adopted a new accounting pronouncement as of January 1, 2018 (“ASU2016-01”), which requires thatthe recognition of unrealized gains and losses arising from changes in market values of our investments in equity securities be recorded in the Consolidated Statements of Earnings. Prior to 2018, investment gains/losses related to equity securities were generally recorded when weas the securities were sold, redeemed or exchanged investments.and were based on the cost of the disposed securities. While ASU2016-01 does not affect our consolidated shareholders’ equity or total comprehensive income, it is expected to produce a very significantsignificantly 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. Investment gains and losses have caused and will continue to cause significant volatility in earnings reported in our Consolidated Statements of Earnings.
Pre-tax investment gains/losses recordedreflected in earnings in 2018 included net unrealized gains of approximately $14.3 billion in the third quarter and $12.1 billion for the first quarter of 2018 included unrealized losses onnine months from investments in equity securities still held at March 31, 2018 of $7.8 billion.September 30, 2018. Prior to the adoption of ASU2016-01, such unrealized gains and losses were included in other comprehensive income. ASU2016-01 did not permit the restatement of prior years’ statements of earnings.
We believe that investment and derivative gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported results or evaluating our periodic economic performance. We continue to believe the amount of investment gains/losses included in earnings in any given period typically has little analytical or predictive value. The effects of changes in market prices for equity securities that are now reported in earnings are unpredictable particularly over any quarterly andor annual periods.
39
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Investment and Derivative Gains/Losses(Continued)
period.
Derivative gains/losses
Derivative contract gains/losses currently represent the changes in fair value of our equity index put option contract liabilities. TheThese liabilities relate to contracts entered into before March 2008 and that will expire between June 2018April 2019 and January 2026. The periodic changes in the fair values of these contractsliabilities are recorded in earnings and can be significant, reflecting the volatility of underlying equity markets and the changes in the inputs used to measure such liabilities.
As of March 31,September 30, 2018, the intrinsic value of our equity index put option intrinsic values werecontracts was approximately $1.0 billion$919 million and our recorded liabilities at fair value were approximately $2.4$1.9 billion. Our ultimate payment obligations, if any, under our equity index put option contracts will be determined as of the contract expiration dates and will be based on the intrinsic value as defined under the contracts. Derivative contracts producedpre-tax lossesgains in the first quarternine months of 2018 of $206$303 million, which were primarily due to lower equity index values and changes in foreign currency exchange rates, partly offset byrate changes and the effects of shorter average contract durations. In the first quarter of 2017, thesedurations, partially offset by lower values on certain indexes. Derivative contracts producedpre-tax gains of $460$703 million in the first nine months of 2017, which were primarily attributable to increasedhigher equity index values and shorter average contract durations.durations, partly offset by unfavorable foreign currency exchange rate changes.
Other
A summary ofafter-tax other earnings (losses) follows (in millions).
First Quarter | Third Quarter | First Nine Months | ||||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||
Equity method earnings | $ | 340 | $ | 255 | $ | 269 | $ | 248 | $ | 894 | $ | 807 | ||||||||||||
Acquisition accounting expenses | (218 | ) | (142 | ) | (199) | (196) | (637) | (518) | ||||||||||||||||
Corporate interest expense, before foreign currency effects | (77 | ) | (67 | ) | ||||||||||||||||||||
Corporate interest expense, Euro note foreign exchange rate effects | (163 | ) | (57 | ) | ||||||||||||||||||||
Corporate interest expense, before foreign currency exchange rate effects | (77) | (66) | (236) | (198) | ||||||||||||||||||||
Corporate interest expense, Euro note foreign currency exchange rate effects | 56 | (172) | 216 | (571) | ||||||||||||||||||||
Other | 61 | — | 180 | 18 | 283 | 25 | ||||||||||||||||||
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Net earnings (losses) attributable to Berkshire Hathaway shareholders | $ | (57 | ) | $ | (11 | ) | $ | 229 | $ | (168) | $ | 520 | $ | (455) | ||||||||||
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After-tax equity method earnings includes Berkshire’s share of earnings attributable to Kraft Heinz, Pilot Flying J, Berkadia and Electric Transmission of Texas.After-tax other earnings (losses) also include charges arising from the application of the acquisition method in connection with Berkshire’s past business acquisitions. Such charges were primarily from the amortization of intangible assets recorded in connection with those business acquisitions. Berkshire issued Euro-denominatedEuro denominated debt duringin 2015, 2016 and 2017 and at March 31,September 30, 2018, the aggregate par amount outstanding was €6.85 billion. Changes in foreign currency exchange rates can producein 2018 and 2017 produced sizablenon-cash gains and losses from the periodic revaluation of these liabilities into U.S. Dollars.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Financial Condition
Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Our consolidated shareholders’ equity at March 31,September 30, 2018 was $347.4$375.6 billion, a decreaseincreases of $895 million$17.5 billion since June 30, 2018 and $27.3 billion since December 31, 2017. Net lossesearnings attributable to Berkshire shareholders in the first nine months of 2018 were $1.1$29.4 billion, which includedafter-tax lossesgains on our investments in equity securities of approximately $6.4$10.1 billion. Most of these gains derived from changes in market prices for securities we owned at September 30, 2018.
At March 31,September 30, 2018, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of approximately $98.6$96.5 billion, and aggregate investmentswhich included $74.5 billion in U.S. Treasury Bills. Investments in securities (excluding our investment in Kraft Heinz) of $186.6were $219.5 billion. Berkshire parent company debt outstanding at March 31,September 30, 2018 was approximately $18.2$17.0 billion, a decrease of $580 million$1.8 billion from December 31, 2017, which was netreflecting maturities of $1.55 billion in term debt and a $217$273 million increaseyear-to-date decrease attributable to foreign currency exchange rate changes applicable to the €6.85 billion par amount of Euro-denominatedEuro denominated senior notes. The next maturity of Berkshire termparent company debt of $800 million matured in February 2018 and an additional $750 million will mature inis August 2018.2019.
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. We forecast capital expenditures of these two operations will approximate $10$9.8 billion infor the year ending December 31, 2018, of which approximately $1.6$6.4 billion was made inexpended during the first quarter.nine months.
BNSF’s outstanding debt approximated $22.6$23.3 billion as of March 31,September 30, 2018, an increase of $62$758 million since December 31, 2017. In MarchAugust 2018, BNSF issued $750 million of 4.15% senior unsecured debentures due in 2048 and repaid debentures of $650 million.2048. Outstanding borrowings of BHE and its subsidiaries were approximately $40.1$39.3 billion at March 31,September 30, 2018, an increasea decrease of $427$337 million since December 31, 2017. In JanuaryJuly 2018, BHE issued $1.0 billion of 4.45% senior unsecured debt of $2.2that matures in 2049. BHE subsidiaries also issued debt in July 2018, aggregating $1.05 billion with maturities ranging from 2021 to 2048.and due in 2049. The proceeds from these borrowingsfinancings were used to repay certain short-term borrowings and for other general corporate purposes. During the remainderApproximately $500 million of 2018, approximately $2.9 billion of BHE and subsidiary term debt will mature.mature in the fourth quarter of 2018, and another $1.4 billion will mature in the first quarter of 2019. 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, BHE or any of their subsidiaries.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)
Financial Condition (Continued)
Finance and financial products assets were approximately $39.5$38.3 billion as of March 31,September 30, 2018, a decrease of $2.4$3.6 billion fromsince December 31, 2017. Finance assets consist primarily of loans and finance receivables, various types of property held for lease, cash, cash equivalents and U.S. Treasury Bills. Finance and financial products liabilities declined $2.0$2.3 billion in the first quarternine months of 2018 to approximately $14.7$14.4 billion at March 31, 2018. TheSeptember 30, 2018, primarily attributable to a net decrease reflected $2.4 billion related to debt maturitiesin borrowings of a wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”). AnDuring the first nine months of 2018, BHFC repaid $4.6 billion of maturing senior notes and in August 2018 issued $2.35 billion of 4.2% senior notes due in 2048. In the first quarter of 2019, an additional $2.25$2.7 billion of BHFC senior notes will mature over the remainder of 2018.mature. BHFC’s senior note borrowings are used to fund loans originated and acquired by Clayton Homes and a portion of assets held for lease by our UTLX railcar leasing business. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes.
Berkshire’s Board of DirectorsBerkshire has authorizeda common stock repurchase program which, as amended on July 17, 2018, permits Berkshire management to repurchase at its discretion, Berkshire Class A and Class B common stockshares at prices no higher thanbelow Berkshire’s intrinsic value, as conservatively determined by Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, a 20% premium over book value per share.Vice-Chairman of the Board. The program allows share repurchases in the open market or through privately negotiated transactions and does not specify a maximum number of shares to be repurchased. The program is expected to continue indefinitely. We will 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. There is no obligation to repurchase any stock and the program is expected to continue indefinitely. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. There were no share repurchases in 2018.In the third quarter of 2018, Berkshire paid $928 million to repurchase shares of Class A and B common stock under the program.
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 included 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 pertainpertaining 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, but will be recognized in future periods as the goods are delivered or services are provided.
The timing and amount of the payments under certain contracts, such as insurance and reinsurance contracts, are contingent upon the outcome of future events and claim settlements. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.
Except as otherwise disclosed in this Quarterly Report, our
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
Contractual Obligations(Continued)
Our contractual obligations as of MarchDecember 31, 20182017 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, 2017. During the first nine months of 2018, our subsidiaries issued term debt of approximately $9.4 billion, which included approximately $5.2 billion in the third quarter. The borrowings in 2018 were used to repay existing debt, as well as for other corporate purposes. Interest and principal payments in connection with these new borrowings in the aggregate are due as follows: 2019 and 2020 — $1.3 billion; 2021 and 2022 — $1.1 billion; and thereafter $16.4 billion.
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, 2017.
Our Consolidated Balance Sheet as of March 31,September 30, 2018 includes estimated liabilities for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts of approximately $104$106 billion. Due to the inherent uncertainties in the process of establishing loss reserve amounts, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude will result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change.
Our Consolidated Balance Sheet as of March 31,September 30, 2018 includes goodwill of acquired businesses of approximately $81 billion. We evaluate goodwill for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2017. Although we believe that the goodwill reflected in the accompanying Consolidated Balance Sheet is not impaired, goodwill may subsequently become impaired as a result of changes in facts and circumstances affecting the valuation of the reporting 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 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.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations(Continued)
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 whichthat are predictive in nature, which depend upon or refer to future events or conditions whichand may 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 as well as 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 important 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, 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 March 31,September 30, 2018, there were no material changes in the market risks described in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2017.
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.
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Berkshire 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.
Our significant business risks are described in Item 1A to Form10-K for the year ended December 31, 2017 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 has approvedFor several years, Berkshire had a common stock repurchase program, permittingwhich permitted Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. TheOn July 17, 2018, Berkshire’s Board of Directors authorized an amendment to the program, allows share repurchasespermitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charles Munger, a Vice-Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. Repurchases may be in the open market or through privately negotiated transactionstransactions. Information with respect to Berkshire’s Class A and does not specify a maximum numberClass B common stock repurchased during the third quarter of shares to be repurchased. There were no share repurchases under the program in 2018.2018 follows.
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number or value of shares that yet may be repurchased under the program | ||||||||||
August 7 through August 24: | ||||||||||||||
Class A common stock | 225 | $312,806.74 | 225 | * | ||||||||||
Class B common stock | 4,139,192 | $207.09 | 4,139,192 | * |
* | The program does not specify a maximum number of shares to be repurchased or obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the repurchase program. Berkshire will not repurchase its common stock if the repurchases reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings to less than $20 billion. |
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.
None
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a. Exhibits | ||
3(i) | Restated Certificate of Incorporation Incorporated by reference to Exhibit 3(i) to Form10-K filed on March 2, 2015. | |
3(ii) | By-Laws Incorporated by reference to Exhibit 3(ii) to Form8-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 |
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: | /S/ MARC D. HAMBURG | |
(Signature) | ||
Marc D. Hamburg, | ||
Senior Vice President and | ||
Principal Financial Officer |
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