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 September 30, 2018March 31, 2019

OR

 

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

For the transition period from                  to                 

Commission file number001-14905

 

 

BERKSHIRE HATHAWAY INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 47-0813844

            (State(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

3555 Farnam Street, Omaha, Nebraska 68131

(Address of principal executive office)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 Exchange Act).    Yes  ☐    No  ☒

Number of shares of common stock outstanding as of OctoberApril 25, 2018:2019:

 

Class A —

723,114

Class B —

1,368,243,498

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

Class A —Title of each class

  733,152                                                 

Trading Symbols

  


        Name of each exchange on which registered         

Class A Common Stock

Class B Common Stock

  1,362,792,906                                                 

BRK.A

BRK.B

  

New York Stock Exchange

New York Stock Exchange

 

 

 


BERKSHIRE HATHAWAY INC.

 

         Page No.       

Part I – Financial Information

  

Item 1. Financial Statements

  
 Consolidated Balance Sheets—September 30, 2018March 31, 2019 and December 31, 20172018   2-3 
 

Consolidated Statements of Earnings—ThirdFirst Quarter 2019 and First Nine Months 2018 and 2017

   4 
 

Consolidated Statements of Comprehensive Income— ThirdFirst Quarter 2019 and First Nine Months 2018 and 2017

   5 
 

Consolidated Statements of Changes in Shareholders’ Equity—First Nine MonthsQuarter 2019 and 2018 and 2017

   5 
 

Consolidated Statements of Cash Flows—First Nine MonthsQuarter 2019 and 2018 and 2017

   6 
 

Notes to Consolidated Financial Statements

   7-257-24 

Item 2.

 

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

   26-4425-42 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   4542 

Item 4.

 

Controls and Procedures

   4542 

Part II – Other Information

   4543 

Item 1.

 

Legal Proceedings

   4543 

Item 1A.

 

Risk Factors

   4543 

Item 2.

 Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities   4543 

Item 3.

 

Defaults Upon Senior Securities

   4643 

Item 4.

 

Mine Safety Disclosures

   4643 

Item 5.

 

Other Information

   4643 

Item 6.

 

Exhibits

   4644 

Signature

   4644 

Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

  September 30,
2018
   December 31,
2017
   

 

    March 31,    
2019

  

 

  December 31,  
2018

  (Unaudited)       (Unaudited)   

ASSETS

        

Insurance and Other:

        

Cash and cash equivalents*

   $36,506     $25,460     $22,487    $27,749 

Short-term investments in U.S. Treasury Bills

   59,947     78,515     88,029    81,506 

Investments in fixed maturity securities

   18,271     21,353     19,415    19,898 

Investments in equity securities

   201,226     164,026     191,771    172,757 

Investment in The Kraft Heinz Company

   17,453     17,635  

Receivables

   31,884     28,578  

Equity method investments

   17,308    17,325 

Loans and finance receivables

   16,432    16,280 

Other receivables

   33,710    31,564 

Inventories

   16,793     16,187     19,454    19,069 

Property, plant and equipment

   24,357     20,104     20,825    20,628 

Equipment held for lease

   14,429    14,298 

Goodwill

   54,985     54,985     56,449    56,323 

Other intangible assets

   31,626     32,518     31,266    31,499 

Deferred charges under retroactive reinsurance contracts

   14,451     15,278     13,831    14,104 

Other

   13,250     11,158     12,726    9,307 
  

 

   

 

   

 

  

 

   520,749     485,797           558,132        532,307 
  

 

   

 

   

 

  

 

Railroad, Utilities and Energy:

        

Cash and cash equivalents*

   3,297     2,910     3,652    2,612 

Receivables

   3,460    3,666 

Property, plant and equipment

   130,387     128,184     132,170    131,780 

Goodwill

   24,790     24,780     24,771    24,702 

Regulatory assets

   2,928     2,950     3,154    3,067 

Other

   16,020     15,589     13,385    9,660 
  

 

   

 

   

 

  

 

   177,422     174,413     180,592    175,487 
  

 

   

 

   

 

  

 

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  
  

 

   

 

    $738,724    $707,794 
   38,288     41,885    

 

  

 

  

 

   

 

 
   $    736,459     $    702,095  
  

 

   

 

 

 

*

Cash and cash equivalents includes U.S. Treasury Bills with maturities of three months or less when purchased of $14.7$2.1 billion at September 30, 2018March 31, 2019 and $5.7$3.9 billion at December 31, 2017.2018.

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

  September 30,
2018
   December 31,
2017
   

 

    March 31,    
2019

 

 

  December 31,  
2018

      (Unaudited)           (Unaudited)  

LIABILITIES AND SHAREHOLDERS’ EQUITY

       

Insurance and Other:

       

Unpaid losses and loss adjustment expenses

   $64,263   $61,122    $69,535   $68,458 

Unpaid losses and loss adjustment expenses under retroactive reinsurance contracts

   41,935    42,937        41,633      41,834 

Unearned premiums

   19,011    16,040    20,172  18,093 

Life, annuity and health insurance benefits

   18,368    17,608    18,918  18,632 

Other policyholder liabilities

   6,692    7,654    7,742  7,675 

Accounts payable, accruals and other liabilities

   27,178    23,099    25,164  25,776 

Derivative contract liabilities

   1,682  2,452 

Aircraft repurchase liabilities and unearned lease revenues

   5,071  4,593 

Notes payable and other borrowings

   24,271    27,324    33,847  34,975 
  

 

   

 

   

 

 

 

   201,718    195,784          223,764  222,488 
  

 

   

 

   

 

 

 

Railroad, Utilities and Energy:

       

Accounts payable, accruals and other liabilities

   11,269    11,334    14,643  11,410 

Regulatory liabilities

   7,723    7,511    7,528  7,506 

Notes payable and other borrowings

   62,599    62,178 
  

 

   

 

 
   81,591    81,023 
  

 

   

 

 

Finance and Financial Products:

    

Accounts payable, accruals and other liabilities

   1,752    1,470 

Derivative contract liabilities

   1,869    2,172 

Notes payable and other borrowings

   10,770    13,085    63,346  62,515 
  

 

   

 

   

 

 

 

   14,391    16,727    85,517  81,431 
  

 

   

 

   

 

 

 

Income taxes, principally deferred

   59,340    56,607    56,852  51,375 
  

 

   

 

   

 

 

 

Total liabilities

   357,040    350,141    366,133  355,294 
  

 

   

 

   

 

 

 

Shareholders’ equity:

       

Common stock

         8  8 

Capital in excess of par value

   35,713    35,694    35,622  35,707 

Accumulated other comprehensive income

   (3,927)    58,571    (4,727 (5,015

Retained earnings

   346,503    255,786    342,773  321,112 

Treasury stock, at cost

   (2,691)    (1,763)    (4,799 (3,109
  

 

   

 

   

 

 

 

Berkshire Hathaway shareholders’ equity

   375,606    348,296    368,877  348,703 

Noncontrolling interests

   3,813    3,658    3,714  3,797 
  

 

   

 

   

 

 

 

Total shareholders’ equity

   379,419    351,954    372,591  352,500 
  

 

   

 

   

 

 

 

   $        736,459   $        702,095    $738,724   $707,794 
  

 

   

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

 

  Third Quarter First Nine Months First Quarter
  2018 2017 2018 2017 2019  2018
  (Unaudited) (Unaudited) (Unaudited)

Revenues:

        

Insurance and Other:

        

Insurance premiums earned

   $14,333  $13,349  $41,855  $47,469    $    14,319   $    13,373

Sales and service revenues

   33,249 32,055 98,128 94,017   32,409   31,882

Leasing revenues

 1,436   1,434

Interest, dividend and other investment income

   1,619 1,320 4,468 3,804   2,117   1,682
  

 

 

 

 

 

 

 

 

 

  

 

   49,201 46,724 144,451 145,290   50,281   48,371
  

 

 

 

 

 

 

 

 

 

  

 

Railroad, Utilities and Energy operating and other revenues

   11,818 10,633 32,815 29,833  
  

 

 

 

 

 

 

 

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  

Railroad, Utilities and Energy:

   

Freight rail transportation revenues

 5,725   5,590

Energy operating revenues

 3,825   3,679

Service revenues and other income

 847   833
  

 

 

 

 

 

 

 

 

 

  

 

   2,431 2,150 6,857 6,010   10,397   10,102
  

 

 

 

 

 

 

 

 

 

  

 

Total revenues

   63,450 59,507 184,123 181,133   60,678   58,473
  

 

 

 

 

 

 

 

 

 

  

 

Investment and derivative contract gains/losses:

     

Investments gains (losses)

   14,569 657 12,750 1,262  

Investment and derivative contract gains (losses):

   

Investment gains (losses)

 19,552    (7,809

Derivative contract gains (losses)

   137 308 303 703   770    (206
  

 

 

 

 

 

 

 

 

 

  

 

   14,706 965 13,053 1,965   20,322    (8,015
  

 

 

 

 

 

 

 

 

 

  

 

Costs and expenses:

        

Insurance and Other:

        

Insurance losses and loss adjustment expenses

   9,932 12,137 28,296 39,450   10,174   8,963

Life, annuity and health insurance benefits

   1,448 1,213 4,153 3,703   904   1,287

Insurance underwriting expenses

   2,352 2,207 7,079 6,924   2,756   2,604

Cost of sales and services

   26,789 25,815 78,684 75,594   25,767   25,461

Cost of leasing

 1,020   983

Selling, general and administrative expenses

   3,984 3,965 12,158 12,101   4,432   4,708

Interest expense

   116 435 246 1,405   262   265
  

 

 

 

 

 

 

 

 

 

  

 

   44,621 45,772 130,616 139,177   45,315   44,271
  

 

 

 

 

 

 

 

 

 

  

 

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  
  

 

 

 

 

 

 

 

   8,785 7,684 25,561 22,768  
  

 

 

 

 

 

 

 

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  

Freight rail transportation expenses

 3,982   3,852

Utilities and energy cost of sales and other expenses

 2,842   2,800

Other expenses

 653   749

Interest expense

   82 98 253 305   729   710
  

 

 

 

 

 

 

 

 

 

  

 

   1,919 1,691 5,321 4,638   8,206   8,111
  

 

 

 

 

 

 

 

 

 

  

 

Total costs and expenses

   55,325 55,147 161,498 166,583   53,521   52,382
  

 

 

 

 

 

 

 

 

 

  

 

Earnings before income taxes and equity method earnings

   22,831 5,325 35,678 16,515  

Earnings (loss) before income taxes and equity method earnings (losses)

 27,479   (1,924

Equity method earnings

   316 305 1,044 932   168   401
  

 

 

 

 

 

 

 

 

 

  

 

Earnings before income taxes

   23,147 5,630 36,722 17,447  

Income tax expense

   4,440 1,427 7,009 4,750  

Earnings (loss) before income taxes

 27,647   (1,523

Income tax expense (benefit)

 5,915   (452
  

 

 

 

 

 

 

 

 

 

  

 

Net earnings

   18,707 4,203 29,713 12,697  

Net earnings (loss)

 21,732   (1,071

Earnings attributable to noncontrolling interests

   167 136 300 308   71   67
  

 

 

 

 

 

 

 

 

 

  

 

Net earnings attributable to Berkshire Hathaway shareholders

   $18,540  $4,067  $29,413  $12,389  

Net earnings (loss) attributable to Berkshire Hathaway shareholders

  $21,661   $(1,138
  

 

 

 

 

 

 

 

 

 

  

 

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  

Net earnings (loss) per average equivalent Class A share

  $13,209   $(692

Net earnings (loss) per average equivalent Class B share*

  $8.81   $(0.46

Average equivalent Class A shares outstanding

 1,639,821   1,644,958

Average equivalent Class B shares outstanding

 2,459,731,886   2,467,436,888

 

*

Class B shares are economically equivalent toone-fifteen-hundredth of a Class A share. Accordingly, net earningsearnings/loss per average equivalent Class B share outstanding is equal toone-fifteen-hundredth of the equivalent Class A amount. See Note 19.20.

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

  Third Quarter   First Nine Months   First Quarter
  2018   2017   2018   2017       2019         2018    
  

 

(Unaudited)

   (Unaudited)   (Unaudited)

Net earnings

   $18,707    $4,203    $29,713    $12,697 

Net earnings (loss)

   $    21,732   $    (1,071
  

 

   

 

   

 

   

 

   

 

 

 

Other comprehensive income:

           

Net change in unrealized appreciation of investments

      4,952    (132)    18,040    117  (45

Applicable income taxes

   (1)    (1,716)    19    (6,247)    (27 (2

Reclassification of investment appreciation in net earnings

   (34)    (646)    (299)    (1,235)    5  (221

Applicable income taxes

      226    63    432    (1 46 

Foreign currency translation

   (79)    771    (842)    2,127    183  601 

Applicable income taxes

      (24)    46    (116)    (3 (6

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

   (13)    (3)    50    (57) 

Defined benefit pension plans

   66  (24

Applicable income taxes

             31    (17 17 

Other, net

   (21)    32    (57)    38    (13 (31
  

 

   

 

   

 

   

 

   

 

 

 

Other comprehensive income, net

   (124)    3,598    (1,152)    13,013    310  335 
  

 

   

 

   

 

   

 

   

 

 

 

Comprehensive income

   18,583    7,801    28,561    25,710    22,042  (736

Comprehensive income attributable to noncontrolling interests

   162    203    271    436    93  75 
  

 

   

 

   

 

   

 

   

 

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

   $    18,421    $    7,598    $    28,290    $    25,274    $21,949   $(811
  

 

   

 

   

 

   

 

   

 

 

 

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

 

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

First nine months 2017:

            

Balance at December 31, 2016

   $35,689   $37,298   $210,846    $(1,763)    $3,358    $285,428 

Net earnings

   —     —     12,389    —     308    12,697 

Other comprehensive income, net

   —     12,885    —     —     128    13,013 

Issuance of common stock

   58    —     —     —     —     58 

Transactions with noncontrolling interests

   (55)    —     —     —     (220)    (275) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

   $35,692   $50,183   $223,235    $(1,763)    $3,574    $310,921 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

First nine months 2018:

            

Balance at December 31, 2017

   $35,702   $58,571   $255,786    $(1,763)    $3,658    $351,954 

Adoption of new accounting pronouncements

   —     (61,375)    61,304    —     —     (71) 

Net earnings

   —     —     29,413    —     300    29,713 

Other comprehensive income, net

   —     (1,123)    —     —     (29)    (1,152) 

Issuance (acquisition) of common stock

   54    —     —     (928)    —     (874) 

Transactions with noncontrolling interests

   (35)    —     —     —     (116)    (151) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

   $    35,721   $    (3,927)   $    346,503    $    (2,691)    $    3,813    $    379,419 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Balance at December 31, 2017

   $    35,702   $    58,571   $  255,786   $    (1,763  $    3,658   $  351,954 

Adoption of new accounting pronouncements

      (61,375  61,304         (71

Net earnings (loss)

         (1,138     67   (1,071

Other comprehensive income, net

      327         8   335 

Issuance (acquisition) of common stock

   24               24 

Transactions with noncontrolling interests

   (37           (82  (119
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

   $35,689   $(2,477  $315,952   $(1,763  $3,651   $351,052 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

   $35,715   $(5,015  $321,112   $(3,109  $3,797   $352,500 

Net earnings (loss)

         21,661      71   21,732 

Other comprehensive income, net

      288         22   310 

Issuance (acquisition) of common stock

   13         (1,690     (1,677

Transactions with noncontrolling interests

   (98           (176  (274
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

   $35,630   $(4,727  $342,773   $(4,799  $3,714   $372,591 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

          First Nine Months           First Quarter
      2018           2017           2019         2018    
  (Unaudited)   (Unaudited)

Cash flows from operating activities:

       

Net earnings

   $29,713    $12,697 

Adjustments to reconcile net earnings to operating cash flows:

    

Investment gains/losses

   (12,750)    (1,262) 

Net earnings (loss)

   $    21,732   $(1,071

Adjustments to reconcile net earnings (loss) to operating cash flows:

   

Investment (gains) losses

   (19,552     7,809 

Depreciation and amortization

   7,169    6,835    2,417  2,387 

Other

   (677)    1,110    (469 (1

Changes in operating assets and liabilities:

          

Losses and loss adjustment expenses

   2,272    22,615    778  69 

Deferred charges reinsurance assumed

   827    (5,525)    273  271 

Unearned premiums

   2,974    2,253    2,054  2,352 

Receivables and originated loans

   (4,781)    (2,890)    (2,237 (2,186

Other assets

   (1,788)    (1,287)    (990 (881

Other liabilities

   805    360    (1,800 (392

Income taxes

   2,791    2,593    5,371  (801
  

 

   

 

   

 

 

 

Net cash flows from operating activities

   26,555    37,499    7,577  7,556 
  

 

   

 

   

 

 

 

Cash flows from investing activities:

       

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

   (85,502)    (106,597)    (30,918 (13,037

Purchases of equity securities

   (38,552)    (14,936)    (1,527 (14,765

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

   26,903    35,143    2,334  13,577 

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

   83,742    65,666    21,114  35,088 

Sales and redemptions of equity securities

   14,164    10,572    2,063  4,240 

Purchases of loans and finance receivables

   (1,748)    (1,392)    (14 (41

Collections of loans and finance receivables

   266    1,599    93  100 

Acquisitions of businesses, net of cash acquired

   (521)    (2,640)    (262 (112

Purchases of property, plant and equipment

   (10,040)    (8,411) 

Purchases of property, plant and equipment and equipment held for lease

   (3,151 (2,589

Other

   257    (150)    67  (153
  

 

   

 

   

 

 

 

Net cash flows from investing activities

   (11,031)    (21,146)    (10,201 22,308 
  

 

   

 

   

 

 

 

Cash flows from financing activities:

       

Proceeds from borrowings of insurance and other businesses

   55    1,321    1,996  37 

Proceeds from borrowings of railroad, utilities and energy businesses

   7,019    2,812    2,945  3,613 

Proceeds from borrowings of finance businesses

   2,339    1,298 

Repayments of borrowings of insurance and other businesses

   (2,661)    (1,763)    (2,811 (4,192

Repayments of borrowings of railroad, utilities and energy businesses

   (3,658)    (1,944)    (1,431 (1,221

Repayments of borrowings of finance businesses

   (4,661)    (3,605) 

Changes in short term borrowings, net

   (2,754)    122    (503 (1,929

Acquisition of treasury stock

   (928)    —     (1,585   

Other

   (277)    (108)    (289 (102
  

 

   

 

   

 

 

 

Net cash flows from financing activities

   (5,526)    (1,867)    (1,678 (3,794
  

 

   

 

   

 

 

 

Effects of foreign currency exchange rate changes

   (109)    222    15  92 
  

 

   

 

   

 

 

 

Increase in cash and cash equivalents and restricted cash

   9,889    14,708 

Increase (decrease) in cash and cash equivalents and restricted cash

   (4,287 26,162 

Cash and cash equivalents and restricted cash at beginning of year

   32,212    28,643    30,811  32,212 
  

 

   

 

   

 

 

 

Cash and cash equivalents and restricted cash at end of third quarter *

   $42,101    $43,351 

Cash and cash equivalents and restricted cash at end of first quarter *

   $26,524   $58,374 
  

 

   

 

   

 

 

 

*Cash and cash equivalents and restricted cash are comprised of the following:

       

Beginning of year—

       

Insurance and Other

   $25,460    $23,581    $27,749   $28,673 

Railroad, Utilities and Energy

   2,910    3,939    2,612   2,910 

Finance and Financial Products

   3,213    528 

Restricted cash, included in other assets

   629    595    450   629 
  

 

   

 

   

 

 

 

   $32,212    $28,643    $30,811   $32,212 
  

 

   

 

   

 

 

 

End of third quarter—

          

End of first quarter—

   

Insurance and Other

   $36,506    $35,247    $22,487   $54,331 

Railroad, Utilities and Energy

   3,297    4,448    3,652   3,550 

Finance and Financial Products

   1,635    3,011 

Restricted cash, included in other assets

   663    645   385   493 
  

 

   

 

   

 

 

 

   $    42,101    $    43,351    $26,524   $58,374 
  

 

   

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018March 31, 2019

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. As described in the Annual Report, we modified certain presentations to our Consolidated Financial Statements. Presentations in these interim Consolidated Financial Statements conform to the presentations in the Annual Report. Changes to those policies due to the adoption of a new accounting standards effective January 1, 2018 arestandard is described in Note 2. Certain immaterial amounts 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. ChangesIn light of the size of our equity security investment portfolio, changes in market prices ofand the related changes in unrealized gains on equity securities we own canwill produce significant effects on our consolidated shareholders’ equity. Beginning in 2018, those effects are includedvolatility in our Consolidated Statements of Earnings, whereas inpre-2018 periods, such effects were included in other comprehensive income.interim and annual earnings. 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

Berkshire adopted Accounting Standards Codification (“ASC”) 842 “Leases” on January 1, 2019. Most significantly, ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. Upon the adoption of ASC 842, we recognized operating lease assets of approximately $6.2 billion and lease liabilities of $5.9 billion. We also reduced other assets by approximately $300 million. Consequently, our consolidated assets and liabilities increased by approximately $5.9 billion.

We are party to contracts where we lease property from others (“lessee” contracts) and where we lease property to others (“lessor” contracts). In adopting and applying ASC 842, we elected to use practical expedients, including but not limited to, not reassessing past lease and easement accounting, not separating lease components fromnon-lease components by class of asset and not recording assets or liabilities for leases with terms of one year or less. We adopted ASC 842 as of January 1, 2019 with regard to contracts in effect as of that date and elected to not restate prior period financial statements. ASC 842 did not have a material effect on our accounting for our lessor contracts or for lessee contracts classified as financing leases.

Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. In this regard, lease payments include fixed payments and variable payments that depend on an index or rate. The lease term is generally thenon-cancellable lease period. Certain lease contracts contain renewal options or other terms that provide for variable payments based on performance or usage or changes in an index or interest rates. Options are not included in determining lease assets or liabilities unless it is reasonably certain that options will be exercised. Generally, incremental borrowing rates are used in measuring lease liabilities. Lease assets are subject to review for impairment.

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”),Liabilities,” ASU2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU2018-02”)and Accounting Standards Codification (“ASC”)ASC 606 “Revenues from Contracts with Customers” (“ASC 606”). Prior year financial statements were not restated. A summary of the effects of the initial adoption of ASU2016-01, ASU2018-02 and ASC 606 on our shareholders’ equity 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 

Liabilities

  —    —   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 (70 61,305

Shareholders’ equity

  —    —   (71)  (71)         (70 (70

With respect to ASU2016-01, beginning in 2018, we are including unrealized gains and losses arising from the changes in the fair values of our equity securities during the period as a component ofare included within investment gains (losses) 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 the changes in fair value ofavailable-for-sale equity securities in other comprehensive 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 amounts we would have otherwise recorded. ASU2016-01 prohibited the restatement of prior year financial statements. However, asAs of January 1, 2018, we reclassified netafter-tax unrealized gains on equity securities from accumulated other comprehensive income to retained earnings.

Notes to Consolidated Financial Statements(Continued)

Note 2. New Accounting Pronouncements(Continued)

 

In connection with our adoption ofadopting ASU2018-02, we reclassified the stranded deferred income tax effects that were included in accumulated other comprehensive income as of January 1, 2018 to retained earnings. These stranded income tax effects arosearising 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. The effect of the reductionthat were included 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 into retained earnings.

In adopting ASC 606, we recorded increases to certain assets and other liabilities, with a relatively minor reduction inthe cumulative net effect recorded to retained earnings. Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the term 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 end of a minimum commitment period. ASC 606 provides that such contracts are subject to accounting guidance for lease contracts and not ASC 606.contracts. The principal effects of thisre-characterization were to increase both property, plantequipment held for lease and equipmentaircraft repurchase liabilities and other liabilitiesunearned lease revenues 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,” which together with subsequent amendments is included in ASC 842. Most significantly, ASC 842 requires a lessee to recognize a liability to make lease payments and an asset with respect to its right to use the underlying asset for the lease term. ASC 842 also addresses accounting and reporting by lessors, which is not significantly different from current accounting and reporting, and further provides for qualitative and quantitative disclosures. We intend to adopt ASC 842 as of January 1, 2019 under the modified retrospective method.

We are party 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 on 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 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 and foravailable-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 its fair value and will be 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 ofto value 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,Currently, 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.

Note 3. Investments in fixed maturity securities

Investments in fixed maturity securities as of March 31, 2019 and December 31, 2018 are summarized by type below (in millions).

   Amortized
Cost
   Unrealized
Gains
     Unrealized  
Losses
 Fair
Value
 

March 31, 2019

       

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

   $ 3,901    $29    $ (12  $ 3,918 

States, municipalities and political subdivisions

   145    6       151 

Foreign governments

   8,047    60    (16  8,091 

Corporate bonds

   6,259    470    (5  6,724 

Mortgage-backed securities

   470    63    (2  531 
  

 

 

   

 

 

   

 

 

 

 

 

 

 
   $ 18,822    $ 628    $ (35  $ 19,415 
  

 

 

   

 

 

   

 

 

 

 

 

 

 

December 31, 2018

       

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

   $4,223    $22    $ (22  $4,223 

States, municipalities and political subdivisions

   182    7       189 

Foreign governments

   7,480    50    (28  7,502 

Corporate bonds

   7,055    408    (23  7,440 

Mortgage-backed securities

   487    59    (2  544 
  

 

 

   

 

 

   

 

 

 

 

 

 

 
   $    19,427    $546 ��  $ (75  $    19,898 
  

 

 

   

 

 

   

 

 

 

 

 

 

 

Investments in foreign governments include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of March 31, 2019, approximately 88% of our foreign government holdings were rated AA or higher by at least one of the major rating agencies.

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.” Except as described in Note 2, our revenue recognition practices for contracts with customers under ASC 606 do not differ significantly 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 these products 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 revenue to each obligation based on the relative stand-alone selling prices of each product or service.

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, sales 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. Sales revenue excludes sales taxes and value-added taxes collected on behalf of taxing authorities. Sales 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 sales revenue.

Our product sales revenues are generally 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. 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 are equivalent to the amounts we have the right to invoice and correspond directly with the value to the customer of the performance to date and include billed and unbilled amounts. As of September 30, 2018 and December 31, 2017, trade receivables were 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 Sheets. Such amounts substantially relate to customer revenue and included unbilled revenue of $624 million as of September 30, 2018 and $665 million 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.

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. 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.

Other 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 Consolidated Financial Statements(Continued)

Note 3. Revenues from contracts with customersInvestments in fixed maturity securities(Continued)

 

The following table summarizes customer contract revenues disaggregatedamortized cost and estimated fair value of fixed maturity securities at March 31, 2019 are summarized below by reportable segment and the source of the revenue for the three and nine months ending September 30, 2018 (in millions). Other revenues includedcontractual maturity dates. Amounts are 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.millions. Actual maturities may differ from contractual maturities due to early call or prepayment rights held by issuers.

 

   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 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $13,529    $12,822    $6,955    $6,112    $5,706    $2,431    $  15,895    $63,450 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   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 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $40,281    $37,438    $20,552    $  17,547    $  15,268    $6,857    $  46,180    $  184,123 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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 September 30, 2018 follows (in millions).

       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)

   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

   $ 7,198    $ 10,331    $ 364    $ 459    $ 470    $ 18,822 

Fair value

   7,242    10,443    410    789    531    19,415 

Note 4. Investments in fixed maturity securities

Our investments in fixed maturity securities as of September 30, 2018 and December 31, 2017 are summarized by type below (in millions).

     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 
  

 

 

 

  

 

 

 

  

 

 

   

 

 

 

   $17,795    $560    $(84)    $18,271 
  

 

 

 

  

 

 

 

  

 

 

   

 

 

 

December 31, 2017

        

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 
  

 

 

 

  

 

 

 

  

 

 

   

 

 

 

   $20,445    $977    $(69)    $    21,353 
  

 

 

 

  

 

 

 

  

 

 

   

 

 

 

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 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 at 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.

   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

Our investmentsInvestments in equity securities as of September 30, 2018March 31, 2019 and December 31, 20172018 are summarized based on the primary industry of the investee as followsin the table below (in millions).

 

  Cost Basis  Net Unrealized
Gains
  Fair
    Value    
  Cost Basis  Net
Unrealized
Gains
  Fair
Value

September 30, 2018 *

      

March31, 2019*

      

Banks, insurance and finance

   $42,010    $51,499    $93,509    $ 44,710    $ 46,029    $ 90,739 

Consumer products

   38,793    39,858    78,651    38,909    31,232    70,141 

Commercial, industrial and other

   21,035    14,137    35,172    19,280    11,611    30,891 
  

 

  

 

  

 

  

 

  

 

  

 

   $    101,838    $105,494    $    207,332    $    102,899    $     88,872    $    191,771 
  

 

  

 

  

 

  

 

  

 

  

 

 

*

Approximately 69%68% of the aggregate fair value was concentrated in five companies (American Express Company – $16.1$16.6 billion; Apple Inc. – $57.6$48.5 billion; Bank of America Corporation – $26.5$25.4 billion; The Coca-Cola Company – $18.5$18.7 billion and Wells Fargo & Company – $24.4$20.9 billion).

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 *      

December 31, 2018*

      

Banks, insurance and finance

   $25,783    $55,026    $80,809    $ 44,332    $ 38,260    $ 82,592 

Consumer products

   25,177    25,698    50,875    38,783    22,838    61,621 

Commercial, industrial and other

   23,716    15,140    38,856    19,752    8,792    28,544 
  

 

  

 

  

 

  

 

  

 

  

 

   $    74,676    $95,864    $170,540    $    102,867    $    69,890    $    172,757 
  

 

  

 

  

 

  

 

  

 

  

 

 

*

Approximately 65%68% of the aggregate fair value was concentrated in five companies (American Express Company – $15.1$14.5 billion; Apple Inc. – $28.2$40.3 billion; Bank of America Corporation – $20.7$22.6 billion; The Coca-Cola Company – $18.4$18.9 billion and Wells Fargo & Company – $29.3$20.7 billion).

InvestmentsNote 5. Equity method investments

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

Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.7% of the outstanding shares. Shares of Kraft Heinz common stock are publicly-traded and the fair value of our investment was approximately $10.6 billion at March 31, 2019 and $14.0 billion at December 31, 2018. The carrying value of our investment was approximately $13.7 billion at March 31, 2019 and $13.8 billion at December 31, 2018. As of May 3, 2019, Kraft Heinz has not filed its 2018 Form10-K with the Securities and Exchange Commission. In addition, Kraft Heinz has not made its financial statements for the first quarter of 2019 available to Berkshire. Accordingly, Berkshire does not have the necessary financial information to determine its share of the earnings and other comprehensive income of Kraft Heinz for the first quarter of 2019. As a result, Berkshire’s first quarter 2019 earnings and other comprehensive income exclude such amounts. Berkshire will record its share of Kraft Heinz’s earnings and other comprehensive income for the three months ended March 31, 2019 during the period that such information becomes available. We recorded equity method earnings in the first quarter of 2018 of approximately $265 million. We received dividends on the common stock of $130 million and $203 million in the first quarter of 2019 and 2018, respectively, which we recorded as reductions of our investment.

Notes to Consolidated Financial Statements(Continued)

Note 5. Equity method investments(Continued)

Summarized unaudited financial information of Kraft Heinz as of December 29, 2018 and for the first quarter of 2018 follows (in millions).

December 29,
2018

Assets

 $ 103,627

Liabilities

51,721
  First Quarter  
2018

Sales

 $6,304

Net earnings attributable to Kraft Heinz common shareholders

 $993

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”). The carrying value of our investments in these entities was approximately $3.6 billion as of March 31, 2019 and $3.5 billion as of December 31, 2018. Our equity method earnings in these entities in the first quarter were $167 million in 2019 and $136 million in 2018. Additional information concerning these investments follows.

We own a 50% interest in Berkadia, with Jefferies Financial Group Inc. (“Jefferies”), formerly known as Leucadia National Corporation, owning the other 50% interest. Berkadia is a servicer of commercial real estate loans in the U.S., performing primary, master and special servicing functions for U.S. government agency programs, commercial mortgage-backed securities transactions, banks, insurance companies and other financial institutions. A source of funding for Berkadia’s operations is through its issuance of commercial paper, which is currently limited to $1.5 billion. On March 31, 2019, Berkadia’s commercial paper outstanding was $1.47 billion. The commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us forone-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% interest in ETT, an owner and operator of electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.

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 28,000 team members, 750 locations across the U.S. and Canada, and nearly $30 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 6. Investment gains/losses

Investment gains/losses in the first quarter of 2019 and 2018 are reflected in our Consolidated Balance Sheetssummarized as follows (in millions).

 

       September 30,    
2018
      December 31,    
2017

Insurance and other

   $201,226    $164,026 

Railroad, utilities and energy *

   1,616    1,961 

Finance and financial products *

   4,490    4,553 
  

 

 

 

  

 

 

 

   $207,332    $170,540 
  

 

 

 

  

 

 

 

   2019 2018

Equity securities:

   

Unrealized investment gains (losses) on securities held at the end of the period

   $ 19,393   $ (7,807

Investment gains (losses) during the period

   161   (240
  

 

 

 

 

 

 

 

   19,554   (8,047

Fixed maturity securities:

   

Gross realized gains

   5   359

Gross realized losses

   (10  (138

Other

   3   17
  

 

 

 

 

 

 

 

   $    19,552   $  (7,809
  

 

 

 

 

 

 

 

Prior to 2018, we recognized investment gains and losses in earnings when we sold 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 securities gains and losses include unrealized gains and losses from changes in fair values during the 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.

Notes to Consolidated Financial Statements(Continued)

 

*

Included in other assets.

Note 6. Investment gains/losses(Continued)

In the first quarter of 2019 and 2018, as reflected in the Consolidated Statements of Cash Flows, we received proceeds of approximately $2.1 billion and $4.2 billion, respectively, from sales of equity securities. In the preceding table, investment gains/losses on equity securities sold in each period 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 first quarter of 2019 and 2018, which are generally the difference between the proceeds from sales and our original cost, were $518 million and $727 million, respectively.

Note 7. Loans and finance receivables

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

   March 31,
2019
  December 31,
2018
 

Loans and finance receivables before allowances and discounts

   $ 16,767   $ 16,622 

Allowances for uncollectible loans

   (176  (177

Unamortized acquisition discounts

   (159  (165
  

 

 

  

 

 

 
   $    16,432   $    16,280 
  

 

 

  

 

 

 

Loans and finance receivables are principally installment loans originated or acquired by our manufactured housing business. Provisions for loan losses for the first quarter were $32 million in 2019 and $34 million in 2018. Loan charge-offs, net of recoveries in the first quarter, were $33 million in 2019 and $35 million in 2018. At March 31, 2019, approximately 98% of the manufactured housing loan balances were evaluated collectively for impairment, with the remainder evaluated individually. As part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing ornon-performing. At March 31, 2019, we considered approximately 99% of the loan balances to be performing and approximately 97% of the loan balances to be current as to payment status.

Additionally, during 2018, an insurance subsidiary entered into an agreement with Seritage Growth Properties to provide a $2.0 billion term loan facility, which matures on July 31, 2023. As of March 31, 2019 and December 31, 2018, the outstanding loans under the facility were approximately $1.6 billion.

Note 8. Other receivables

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

   March 31,
2019
 December 31,
2018

Insurance premiums receivable

   $ 13,766   $ 12,452 

Reinsurance recoverable on unpaid losses

   3,164   3,060 

Trade receivables

   12,957   12,617 

Other

   4,188   3,823 

Allowances for uncollectible accounts

   (365  (388
  

 

 

 

 

 

 

 

   $    33,710   $    31,564 
  

 

 

 

 

 

 

 

Receivables of railroad and utilities and energy businesses are comprised of the following (in millions).

   March 31,
2019
 December 31,
2018

Trade receivables

   $ 3,237   $ 3,433 

Other

   354   362 

Allowances for uncollectible accounts

   (131  (129
  

 

 

 

 

 

 

 

   $      3,460   $      3,666 
  

 

 

 

 

 

 

 

Trade receivables include unbilled revenue of $569 million and $554 million as of March 31, 2019 and December 31, 2018, respectively, attributable to the regulated utility businesses.

Notes to Consolidated Financial Statements(Continued)

Note 9. Inventories

Inventories are comprised of the following (in millions).

   March 31,
2019
  December 31,
2018

Raw materials

   $ 4,249    $ 4,182 

Work in process and other

   2,678    2,625 

Finished manufactured goods

   4,789    4,541 

Goods acquired for resale

   7,738    7,721 
  

 

 

 

  

 

 

 

   $    19,454    $    19,069 
  

 

 

 

  

 

 

 

Note 10. Property, plant and equipment

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

   March 31,
2019
 December 31,
2018
 

Land

   $2,549   $2,536 

Buildings and improvements

   10,128   9,959 

Machinery and equipment

   22,682   22,574 

Furniture, fixtures and other

   5,049   4,758 
  

 

 

 

 

 

 

 
   40,408   39,827 

Accumulated depreciation

   (19,583  (19,199
  

 

 

 

 

 

 

 
   $    20,825   $    20,628 
  

 

 

 

 

 

 

 

A summary of property, plant and equipment of railroad and 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,
2019
 December 31,
2018
 

Railroad:

   

Land, track structure and other roadway

   $60,328   $59,509 

Locomotives, freight cars and other equipment

   13,185   13,016 

Construction in progress

   574   664 
  

 

 

 

 

 

 

 
   74,087   73,189 

Accumulated depreciation

   (10,865  (10,004
  

 

 

 

 

 

 

 
   63,222   63,185 
  

 

 

 

 

 

 

 

Utilities and energy:

   

Utility generation, transmission and distribution systems

   77,659   77,288 

Interstate natural gas pipeline assets

   7,547   7,524 

Independent power plants and other assets

   8,318   8,324 

Construction in progress

   3,388   3,110 
  

 

 

 

 

 

 

 
   96,912   96,246 

Accumulated depreciation

   (27,964  (27,651
  

 

 

 

 

 

 

 
   68,948   68,595 
  

 

 

 

 

 

 

 
   $ 132,170   $ 131,780 
  

 

 

 

 

 

 

 

Depreciation expense for the first quarter of 2019 and 2018 is summarized below (in millions).

   2019  2018

Insurance and other

   $542    $535 

Railroad, utilities and energy

   1,256    1,225 
  

 

 

 

  

 

 

 

   $  1,798    $  1,760 
  

 

 

 

  

 

 

 

Notes to Consolidated Financial Statements(Continued)

Note 11. Equipment held for lease

Equipment held for lease includes railcars, aircraft,over-the-road trailers, intermodal tank containers, cranes, storage units and furniture. Equipment held for lease is summarized below (in millions).

   March 31,
2019
 December 31,
2018

Railcars

   $8,992   $8,862 

Aircraft

   7,485   7,376 

Other equipment held for lease

   4,478   4,379 
  

 

 

 

 

 

 

 

   20,955   20,617 

Accumulated depreciation

   (6,526  (6,319
  

 

 

 

 

 

 

 

   $  14,429   $  14,298 
  

 

 

 

 

 

 

 

Depreciation expense for equipment held for lease in the first quarter was $286 million in 2019 and $275 million in 2018.

Note 12. Leases

We are party to contracts where we lease property from others. As a lessee, we primarily lease office and operating facilities, locomotives, freight cars, energy generation facilities and transmission assets. Operating leaseright-of-use assets and lease liabilities included in our March 31, 2019 Consolidated Balance Sheet were approximately $6.2 billion and $6.0 billion, respectively. Such amounts were included in other assets and accounts payable, accruals and other liabilities in our Consolidated Balance Sheet. The weighted average term of these leases was approximately 7.7 years and the weighted average discount rate used to measure lease liabilities was approximately 3.9%. A summary of our remaining operating lease payments as of March 31, 2019 and December 31, 2018 follows (in millions).

   

2019

  

2020

  

2021

  

2022

  

2023

  

Thereafter

  

Total lease
payments

  

Amount
representing
interest

 

Lease
liabilities

March 31, 2019

  $933   $ 1,312   $ 1,091   $    859   $    685   $ 2,183   $    7,063   $(1,053 $6,010 

December 31, 2018

   1,310    1,268    1,048    820    658    2,079    7,183    

Components of operating lease costs by type were as follows (in millions).

   

Operating

lease cost

  

Short-term

lease cost

  

Variable

lease cost

  

Sublease
income

 

Total

lease cost

First quarter of 2019

  $ 361   $ 44   $ 69   $ (6 $ 468 

We are also party to contracts where we lease property to others as a lessor. Operating lease revenues by type were as follows (in millions).

   

Fixed lease revenue

  

Variable lease revenue

  

Total

First quarter of 2019

   $      1,074   $      362   $  1,436

Future operating lease rentals to be received on assets we lease to others were as follows (in millions).

   

2019

  

2020

  

2021

  

2022

  

2023

  

Thereafter

  

Total

As of March 31, 2019

  $1,932   $1,928   $1,363   $  893   $  529     $ 485   $7,130 

Note 6. Equity Method Investments13. Goodwill and other intangible assets

Berkshire holds investments in certain businesses that are accounted for pursuant toReconciliations of the equity method. Currently, the most significant of these is our investmentchanges 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 of goodwill during 2019 and fair value of this investment at September 30, 2018 was approximately $17.5 billion and $17.9 billion, respectively, and at December 31, 2017 was $17.6 billion and $25.3 billion, respectively. Our earnings determined under the equity method during the first nine months of 2018 and 2017 were $635 million and $800 million, respectively. We received dividends on the common stock of $610 million in the first nine months of 2018 and $594 million in the first nine months of 2017, which we recorded as reductions of our investment.

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

 

                         September 29,  
2018
    December 30,  
2017

Assets

     $119,730    $120,232 

Liabilities

     54,152    53,985 
  Third Quarter   First Nine Months
          2018                  2017                   2018                  2017        

Sales

 $6,378    $6,280     $19,368     $19,241  
 

 

 

  

 

 

   

 

 

 

  

 

 

 

Net earnings attributable to Kraft Heinz common shareholders

 $630    $944     $2,379     $2,996  
 

 

 

  

 

 

   

 

 

 

  

 

 

 

   March 31,
2019
  December 31,
2018

Balance at beginning of year

   $ 81,025    $ 81,258 

Acquisitions of businesses

   159    376 

Other, including foreign currency translation

   36    (609
  

 

 

 

  

 

 

 

Balance at end of period

   $81,220    $81,025 
  

 

 

 

  

 

 

 

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 $3.6 billion as of 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 nine months were $409 million in 2018 and $132 million in 2017. Additional information concerning these investments follows.

Notes to Consolidated Financial Statements(Continued)

Note 6. Equity Method Investments13. Goodwill and other intangible assets(Continued)

 

We own a 50% interest in Berkadia with Jefferies Financial Group Inc. (“Jefferies”), formerly knownOur other intangible assets and related accumulated amortization are summarized as Leucadia National Corporation, 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. The commercial paper is supported by a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us forone-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% interest in ETT, an owner and operator of electric transmission assets in the Electric Reliability Council of Texas footprint. American Electric Power owns the other 50% interest.

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 28,000 team members, 750 locations across the U.S. and Canada and more 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 nine months of 2018 were 19.2% and 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%. The relative mix ofpre-tax earnings or losses and underlying income tax rates applicable to the various taxing 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 recorded income tax expense of approximately $1.4 billion in the fourth quarter of 2017, representing our provisional estimate of the U.S. Federal and state income taxes on the deemed repatriation of accumulated undistributed earnings of foreign subsidiaries. We continue to consider this estimate to be provisional and subject to remeasurement when we obtain the necessary additional information to complete the measurement. As of September 30, 2018, we had not finalized the inputs to the foreign earnings and profits calculations, the basis on which income taxes are determined. Our accounting for the repatriation tax under the TCJA will be completed during the fourth quarter of 2018. We do not anticipate significant adjustments to the provisional estimates.

Note 8. Investment gains/losses

A summary of investment gains and losses in the third quarter and first nine months of 2018 and 2017 follows (in millions).

 

   Third Quarter   First Nine Months 
       2018           2017           2018           2017     

Equity securities:

        

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

   —     1,011     —     1,795  

Gross realized losses

   —     (419)    —     (626) 
  

 

 

   

 

 

   

 

 

   

 

 

 
   14,538     592     12,433     1,169  
  

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturity securities:

        

Gross realized gains

   44     56     451     82  

Gross realized losses

   (10)    (2)    (152)    (16) 

Other

   (3)    11     18     27  
  

 

 

   

 

 

   

 

 

   

 

 

 
   $    14,569     $657     $    12,750     $    1,262  
  

 

 

   

 

 

   

 

 

   

 

 

 
   March 31, 2019  December 31, 2018
     Gross carrying  
amount
    Accumulated  
amortization
    Gross carrying  
amount
    Accumulated  
amortization

Insurance and other

   $ 40,553   $ 9,287   $ 40,493   $ 8,994 

Railroad, utilities and energy

   1,011   373   1,011   362 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $ 41,564   $ 9,660   $ 41,504   $9,356 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Trademarks and trade names

   $5,367   $757   $5,368   $750 

Patents and technology

   4,472   2,862   4,446   2,790 

Customer relationships

   28,426   4,782   28,375   4,573 

Other

   3,299   1,259   3,315   1,243 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $ 41,564   $ 9,660   $ 41,504   $9,356 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Intangible asset amortization expense in the first quarter was $333 million in 2019 and $352 million in 2018. Intangible assets with indefinite lives as of March 31, 2019 and December 31, 2018 were $18.9 billion and primarily related to certain customer relationships and trademarks and trade names.

Note 14. Derivative contracts

We are party to derivative contracts through certain of our subsidiaries. Currently, the most significant derivative contracts consist of equity index put option contracts. The liabilities and related notional values of these contracts follows (in millions).

   Liabilities  Notional
Value

March 31, 2019

  $ 1,682     $    26,522    

December 31, 2018

   2,452    26,759    

Notional value 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 recordedpre-tax gains of $770 million in the first quarter of 2019 and losses of $206 million in the first quarter of 2018 with respect to our equity index put option contracts.

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 April 2019 and October 2025. The weighted average life of unexpired contracts at March 31, 2019 was approximately 1.65 years. Contracts with notional values of $12.2 billion will expire over the remainder of 2019. 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 $4.0 billion on the contract inception dates with respect to unexpired contracts at March 31, 2019 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 $957 million at March 31, 2019 and $1,653 million at December 31, 2018. 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.

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, 2019, 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. 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. Derivative contract assets are included in other assets and were $171 million as of March 31, 2019 and $172 million as of December 31, 2018. Derivative contract liabilities are included in accounts payable, accruals and other liabilities and were $99 million as of March 31, 2019 and $111 million as of December 31, 2018.

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 sold or otherwise disposed of 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 securities gains and losses include unrealized gains and losses from changes in fair values during the 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).

   September 30,
2018
   December 31,
2017
 

Insurance premiums receivable

   $13,002    $11,058 

Reinsurance recoverable on unpaid losses

   2,944    3,201 

Trade receivables

   13,197    11,756 

Other

   3,121    2,925 

Allowances for uncollectible accounts

   (380)    (362) 
  

 

 

   

 

 

 
   $31,884    $28,578 
  

 

 

   

 

 

 

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

   September 30,
2018
   December 31,
2017
 

Loans and finance receivables before allowances and discounts

   $14,832    $14,126 

Allowances for uncollectible loans

   (183)    (180) 

Unamortized acquisition discounts

   (172)    (198) 
  

 

 

   

 

 

 
   $14,477    $13,748 
  

 

 

   

 

 

 

Loans and finance receivables are predominantly installment loans originated or acquired by our manufactured housing business. Provisions for loan losses in the first nine months of 2018 and 2017 were $109 million and $124 million, respectively. Loan charge-offs, net of recoveries, in the first nine months were $106 million in 2018 and $126 million in 2017. At September 30, 2018, we evaluated approximately 98% of the loan balances collectively for impairment. As part of the evaluation process, credit quality indicators were reviewed and loans were designated as performing ornon-performing. At September 30, 2018, we considered approximately 99% of the loan balances to be performing and approximately 95% of the loan balances to be current as to payment status.

Note 10. Inventories

Inventories are comprised of the following (in millions).

   September 30,
2018
  December 31,
2017

Raw materials

   $3,326    $2,997 

Work in process and other

   2,232    2,315 

Finished manufactured goods

   4,150    4,179 

Goods acquired for resale

   7,085    6,696 
  

 

 

 

  

 

 

 

   $16,793    $16,187 
  

 

 

 

  

 

 

 

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 related to aircraft sold under fractional aircraft ownership programs in machinery and equipment. Such amount included cost of approximately $5.3 billion, net 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.

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.

   September 30,
2018
   December 31,
2017
 

Railroad:

    

Land, track structure and other roadway

   $58,755     $57,408  

Locomotives, freight cars and other equipment

   12,731     12,543  

Construction in progress

   910     989  
  

 

 

   

 

 

 
   72,396     70,940  

Accumulated depreciation

   (9,596)    (8,627) 
  

 

 

   

 

 

 
   62,800     62,313  
  

 

 

   

 

 

 

Utilities and energy:

       

Utility generation, transmission and distribution systems

   75,751     74,660  

Interstate natural gas pipeline assets

   7,295     7,176  

Independent power plants and other assets

   8,156     7,499  

Construction in progress

   3,724     2,556  
  

 

 

   

 

 

 
   94,926     91,891  

Accumulated depreciation

   (27,339)    (26,020) 
  

 

 

   

 

 

 
   67,587     65,871  
  

 

 

   

 

 

 
   $130,387     $128,184  
  

 

 

   

 

 

 

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 include railcars, intermodal tank containers, cranes,over-the-road trailers, storage units and furniture.

   September 30,
2018
   December 31,
2017
 

Assets held for lease

   $12,736     $12,318  

Land

   240     231 

Buildings, machinery and other

   1,527     1,444  
  

 

 

   

 

 

 
   14,503     13,993  

Accumulated depreciation

   (4,230)    (4,062) 
  

 

 

   

 

 

 
   $10,273     $9,931  
  

 

 

   

 

 

 

A summary of depreciation expense for the first nine months of 2018 and 2017 follows (in millions).

           First Nine Months         
   2018   2017 

Insurance and other

   $1,954     $1,636  

Railroad, utilities and energy

   3,678     3,604  

Finance and financial products

   485     487  
  

 

 

   

 

 

 
   $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).

   September 30,
2018
   December 31,
2017
 

Balance at beginning of year

   $81,258     $79,486  

Acquisitions of businesses

   250     1,545  

Other, including foreign currency translation

   (181)    227  
  

 

 

   

 

 

 

Balance at end of period

   $81,327     $81,258  
  

 

 

   

 

 

 

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

   September 30, 2018   December 31, 2017 
     Gross carrying
amount
   Accumulated  
amortization
     Gross carrying
amount
   Accumulated  
amortization
 

Insurance and other

   $40,288    $8,662    $40,225    $7,707 

Railroad, utilities and energy

   1,026    362    988    324 
  

 

 

   

 

 

   

 

 

   

 

 

 
   $41,314    $9,024    $41,213    $8,031 
  

 

 

   

 

 

   

 

 

   

 

 

 

Trademarks and trade names

   $5,396    $744    $5,381    $692 

Patents and technology

   4,408    2,716    4,341    2,493 

Customer relationships

   28,343    4,351    28,322    3,722 

Other

   3,167    1,213    3,169    1,124 
  

 

 

   

 

 

   

 

 

   

 

 

 
   $41,314    $9,024    $41,213    $8,031 
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization expense in the first nine months was $1,052 million in 2018 and $1,108 million in 2017. Intangible assets with indefinite lives were approximately $18.9 billion as of September 30, 2018 and December 31, 2017.

Notes to Consolidated Financial Statements(Continued)

 

Note 13. Derivative contracts15. Supplemental cash flow information

We are party to derivative contracts primarily through our financeA summary of supplemental cash flow information for the first quarter of 2019 and financial products and our utilities and energy businesses. Currently,2018 is presented in 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 followsfollowing table (in millions).

 

   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) 
   2019  2018

Cash paid during the period for:

    

Income taxes

   $    464    $    289 

Interest:

    

Insurance and other

   395    421 

Railroad, utilities and energy

   683    747 

Non-cash investing and financing activities:

    

Liabilities assumed in connection with business acquisitions

   61    4 

Right-of-use assets obtained in exchange for new operating lease liabilities

   170     

Note 16. Unpaid losses and loss adjustment expenses

(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 equity index put option contractOur liabilities at fair valuefor unpaid losses and include the changes in the fair values of such contracts in earningsloss adjustment expenses (also referred to as derivative contract gains/losses. A summary of derivative contract gains/losses included in our Consolidated Statements of Earnings follows (in millions).

   Third Quarter   First Nine Months 
       2018           2017           2018           2017     

Equity index put options

   $137     $308     $303     $703  

The equity index put option“claim liabilities”) under short-duration property and casualty insurance and reinsurance contracts are European style options written prior to March 2008 on four major equity indexes. The remaining contracts expire between April 2019 and January 2026. At September 30, 2018,based upon estimates of 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 expiredultimate claim costs associated 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 approximately $4.1 billion on the 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 ratesclaim occurrences as of the balance sheet date) was $919 million at September 30, 2018date and $789 million at December 31, 2017. These contracts may not be unilaterally terminated or fully settled beforeinclude estimates forincurred-but-not-reported (“IBNR”) claims. Reconciliations of 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.

A limited number of our equity index put option contracts contain collateral posting requirements with respect to changes in the fair value or intrinsic valueclaim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 17), for each of the contracts and/or a downgrade of Berkshire’s credit ratings. As of September 30,three months ending March 31, 2019 and 2018 we did not have any collateral posting requirements. If Berkshire’s credit ratings (currently AA from Standard & Poor’sfollow (in millions).

   2019 2018

Balances – beginning of year:

   

Gross liabilities

   $ 68,458   $ 61,122 

Reinsurance recoverable on unpaid losses

   (3,060  (3,201
  

 

 

 

 

 

 

 

Net liabilities

   65,398   57,921 
  

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses:

   

Current accident year events

   9,787   9,475 

Prior accident years’ events

   112   (753
  

 

 

 

 

 

 

 

Total incurred losses and loss adjustment expenses

   9,899   8,722 
  

 

 

 

 

 

 

 

Paid losses and loss adjustment expenses:

   

Current accident year events

   (3,123  (3,091

Prior accident years’ events

   (5,884  (4,759
  

 

 

 

 

 

 

 

Total payments

   (9,007  (7,850
  

 

 

 

 

 

 

 

Foreign currency translation adjustment

   81   253 

Balances – March 31:

   

Net liabilities

   66,371   59,046 

Reinsurance recoverable on unpaid losses

   3,164   3,048 
  

 

 

 

 

 

 

 

Gross liabilities

   $      69,535   $      62,094 
  

 

 

 

 

 

 

 

Incurred losses 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 variationsloss adjustment expenses in the pricesfirst quarter of fuel required2019 included a net increase of estimated ultimate liabilities for prior accident years of $112 million compared to generate electricity, wholesale electricity purchaseda net decrease of $753 million in the first quarter of 2018. Increases and solddecreases in estimated ultimate liabilities produce corresponding decreases and natural gas supplied for customers. We may use forward purchases and sales, futures, swaps and optionsincreases to manage a portionpre-tax earnings. Such amounts as percentages of these price risks. Mostnet liabilities at the beginning of the net derivative contract assets or liabilities of our regulated utilities are probable of recovery through ratesyear were 0.2% in 2019 and are offset by regulatory liabilities or assets. Derivative contract assets are included1.3% in other assets and were $154 million as of September 30, 2018 and $142 million as of December 31, 2017. Derivative contract liabilities are included in other liabilities and were $80 million as of September 30, 2018 and $82 million as of December 31, 2017.

2018.

Notes to Consolidated Financial Statements(Continued)

 

Note 14. Supplemental cash flow information

Supplemental cash flow information follows (in millions).16. Unpaid losses and loss adjustment expenses(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  

In the first quarter of 2019, we reduced estimated ultimate liabilities of primary insurance for prior years’ events by $100 million, compared to a reduction of $571 million in 2018. In each period, these liability reductions primarily derived from private passenger automobile, medical malpractice and workers’ compensation insurance, although the liability reductions in the first quarter of 2019 were lower than in the first quarter of 2018 for private passenger automobile and medical malpractice. In addition, we increased estimated liabilities in the first quarter of 2019 for legacy casualty exposures and other commercial insurance business.

In the first quarter of 2019, we increased estimated ultimate property and casualty reinsurance liabilities for prior years’ events by $212 million, compared to a decrease of $182 million in the first quarter of 2018. The losses in 2019 derived primarily from casualty claims.

Note 15. Unpaid losses and loss adjustment expenses

Our liabilities for unpaid losses and loss adjustment expenses (also referred to as “claim liabilities”) under short-duration property and casualty insurance and reinsurance contracts are based upon estimates of the ultimate claim costs associated with claim occurrences as of the balance sheet date and include estimates forincurred-but-not-reported (“IBNR”) claims. Reconciliations of the changes in claim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 16), for the nine months ending September 30, 2018 and 2017 follow (in millions).

   2018   2017 

Balances – beginning of year:

    

Gross liabilities

   $61,122     $53,379  

Reinsurance recoverable on unpaid losses

   (3,201)    (3,338) 
  

 

 

   

 

 

 

Net liabilities

   57,921     50,041  
  

 

 

   

 

 

 

Incurred losses and loss adjustment expenses:

    

Current accident year events

   29,071     28,632  

Prior accident years’ events

   (1,566)    (461) 
  

 

 

   

 

 

 

Total incurred losses and loss adjustment expenses

   27,505     28,171  
  

 

 

   

 

 

 

Paid losses and loss adjustment expenses:

    

Current accident year events

   (12,474)    (11,539) 

Prior accident years’ events

   (11,516)    (9,952) 
  

 

 

   

 

 

 

Total payments

   (23,990)    (21,491) 
  

 

 

   

 

 

 

Foreign currency translation adjustment

   (117)    603  
  

 

 

   

 

 

 

Balances – September 30:

    

Net liabilities

   61,319     57,324  

Reinsurance recoverable on unpaid losses

   2,944     3,254  
  

 

 

   

 

 

 

Gross liabilities

   $    64,263     $    60,578  
  

 

 

   

 

 

 

Incurred losses and loss adjustment expenses in the first nine months of 2018 and 2017 included net reductions of estimated ultimate claim liabilities for prior accident years of $1,566 million and $461 million, respectively. We reduced estimated ultimate claim liabilities for prior accident years related to primary 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 $37 million in 2017 related to private passenger automobile insurance coverages. We also reduced estimated ultimate claim liabilities with respect to prior accident years for property and casualty reinsurance by $581 million in the first nine months of 2018, compared to an increase of $108 million in the first nine months of 2017.

Notes to Consolidated Financial Statements(Continued)

Note 16.17. 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 ninethree months ending September 30,March 31, 2019 and 2018 and 2017 follows (in millions).

 

  2018   2017   2019 2018
  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)   $ 41,834  $ (14,104)  $ 42,937  $ (15,278
  

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

             

Current year contracts

   —     —     17,213    (6,170)              

Prior years’ contracts

   (36)    827    (409)    645    2 273 (30 271
  

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

Total

   (36)    827    16,804    (5,525)    2 273 (30 271
  

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

Paid losses and loss adjustment expenses

   (966)    —     (783)    —     (203    (563   
  

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

Balances – September 30:

   $    41,935    $    (14,451)   $    40,993    $    (13,572)

Balances – March 31:

   $ 41,633  $ (13,831)  $42,344  $ (15,007
  

 

   

 

   

 

   

 

   

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses, net of deferred charges

   $791      $11,279      $275      $241    
  

 

     

 

     

 

  

 

 

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 ofIncurred 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.

Inloss adjustment expenses in the first quarter related to contracts written in prior years were $275 million in 2019 and $241 million in 2018. Such losses reflected the periodic amortization of deferred charge assets and the effects of changes in the timing and amount of ultimate claim liabilities.

In 2017, National Indemnity Company (“NICO”), a wholly-owned subsidiary, entered into an agreementa contract 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 and losses incurred of $10.2 billion, which consisted of liabilities for unpaid losses and loss adjustment expenses of $16.4 billion and deferred charge reinsurance assumed assets 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 September 30, 2018March 31, 2019 and at December 31, 20172018 were $18.2 billion, which reflected an increase of $1.8 billion in estimated ultimate claim liabilities recorded in the fourth quarter of 2017.billion. Deferred charge assets related to the AIG contract were approximately $7.1$6.8 billion at September 30, 2018March 31, 2019 and $7.5$6.9 billion at December 31, 2017, which included an additional $1.7 billion2018.

Notes to Consolidated Financial Statements(Continued)

Note 18. Notes payable and other borrowings

Notes payable and other borrowings are summarized below (in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of March 31, 2019.

   Weighted
Average
Interest Rate
 March 31,
2019
  December 31,
2018

Insurance and other:

     

Berkshire Hathaway Inc. (“Berkshire”):

     

U.S. Dollar denominated due 2019-2047

   3.1  $ 9,066    $9,065 

Euro denominated due 2020-2035

   1.1  7,638    7,806 

Berkshire Hathaway Finance Corporation (“BHFC”) due 2019-2049

   3.8  9,928    10,650 

Other subsidiary borrowings due 2019-2045

   4.0  5,519    5,597 

Subsidiary short-term borrowings

   4.4  1,696    1,857 
   

 

 

 

  

 

 

 

    $  33,847    $  34,975 
   

 

 

 

  

 

 

 

The carrying value of Berkshire’s Euro denominated senior notes reflects the Euro/U.S. Dollar exchange rate as of the balance sheet date. The gains or losses arising from the aforementioned increase to ultimate claim liabilitieschanges in the fourth quarter.

Incurred lossesEuro/U.S. Dollar exchange rate during the period are recorded in earnings as a component of selling, general and loss adjustment expenses related to contracts writtenadministrative expenses. Changes in prior years were $791the Euro/U.S. Dollar exchange rate resulted inpre-tax gains of $170 million in the first nine monthsquarter of 2018 and $2362019 compared topre-tax losses of $217 million in the first nine monthsquarter of 2017.2018. The carrying values of the Euro denominated senior notes reflected corresponding decreases with respect to the gains and increases with respect to the losses in those periods.

Borrowings of BHFC, a wholly owned finance subsidiary of Berkshire, consist of senior unsecured notes used to fund manufactured housing loans originated or acquired and equipment held for lease of certain finance subsidiaries. In the first quarter of 2019, BHFC issued $2.0 billion of 4.25% senior notes due in 2049 and repaid $2.7 billion of maturing notes. Such lossesborrowings are fully and unconditionally guaranteed by Berkshire. In addition to BHFC’s borrowings, Berkshire guaranteed approximately $1.6 billion of other subsidiary borrowings at March 31, 2019. 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.

   Weighted
Average
Interest Rate
 March 31,
2019
  December 31,
2018

Railroad, utilities and energy:

     

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

     

BHE senior unsecured debt due 2020-2049

   4.6  $8,578    $8,577 

Subsidiary and other debt due 2019-2064

   4.5  29,337    28,196 

Short-term borrowings

   3.2  2,214    2,516 

Burlington Northern Santa Fe and subsidiaries due 2019-2097

   4.7  23,217    23,226 
   

 

 

 

  

 

 

 

    $  63,346    $  62,515 
   

 

 

 

  

 

 

 

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 covenants which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios. During the first quarter of 2019, BHE and its subsidiaries issued approximately $3.0 billion of long-term debt. The debt issued in 2019 has maturity dates ranging from 2029 to 2050 and a weighted average interest rate of 3.9%. Proceeds from these debt issuances were used to repay debt, to fund capital expenditures and for general corporate purposes.

BNSF’s borrowings are primarily senior unsecured debentures. As of March 31, 2019, 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.

As of March 31, 2019, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $7.3 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included recurring amortization of deferred charge assetsapproximately $5.8 billion related to BHE and net gains from reductions of estimated ultimate claim liabilities.its subsidiaries.

Notes to Consolidated Financial Statements(Continued)

Note 17. Notes payable and other borrowings

Notes payable and other borrowings are summarized below (dollars in millions). The weighted average interest rates and maturity date ranges shown in the following tables are based on borrowings as of September 30, 2018.

   Weighted
Average
Interest Rate
 September 30,
2018
   December 31,
2017
 
Insurance and other:     

Issued by Berkshire:

        

U.S. Dollar denominated borrowings due 2018-2047

   3.1  $9,058     $10,603  

Euro denominated borrowings due 2020-2035

   1.1  7,897     8,164  

Short-term subsidiary borrowings

   4.1  1,733     1,832  

Other subsidiary borrowings due 2018-2045

   4.0  5,583     6,725  
   

 

 

   

 

 

 
    $24,271     $27,324  
   

 

 

   

 

 

 

Notes to Consolidated Financial Statements(Continued)

Note 17. Notes payable and other borrowings(Continued)

The carrying value of Berkshire’s Euro denominated senior notes reflects 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 rate during the period are recorded in earnings as a component of interest expense. The change in the Euro/U.S. Dollar exchange rate in the first nine months of 2018 resulted in reductions of $273 million in interest expense and to the carrying value of the Euro denominated senior notes 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 
    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 2018-2049

   4.5%      $8,970     $6,452 

Subsidiary and other debt due 2019-2064

   4.7%     28,588     28,739 

Short-term debt

   3.0%     1,784     4,488 

Issued by BNSF due 2018-2097

   4.7%     23,257     22,499 
    

 

 

   

 

 

 

      $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, which pertain to leverage ratios, interest coverage ratios and/or debt service coverage ratios, among other covenants. During the first nine months of 2018, BHE and its subsidiaries issued approximately $5.5 billion of long-term debt, including $2.05 billion in the third quarter. The debt issued in 2018 has maturity dates ranging from 2020 to 2049 and a weighted average interest rate of 3.6%. Proceeds from these debt issuances were used to repay debt, to fund capital expenditures and for general corporate purposes.

BNSF’s borrowings are primarily senior unsecured debentures. In the first nine months of 2018, BNSF issued $1.5 billion of senior unsecured debentures due in 2048, including $750 million in the third quarter. These debentures have a weighted average interest rate of 4.1%. In 2018, BNSF repaid $650 million of maturing debentures. As of 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 
    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 
    

 

 

   

 

 

 

     $10,770     $13,085 
    

 

 

   

 

 

 

Borrowings of BHFC, a 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. In August 2018, BHFC issued $2.35 billion of 4.2% senior notes due in 2048. Such borrowings are fully and unconditionally guaranteed by Berkshire. During the first nine months of 2018, BHFC repaid $4.6 billion of maturing senior notes.

As of September 30, 2018, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $8.4 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included approximately $6.8 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, Berkshire guaranteed approximately $1.7 billion of other subsidiary 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.

Notes to Consolidated Financial Statements(Continued)

 

Note 18.19. Fair value measurements

Our financial assets and liabilities are summarized below as of September 30, 2018March 31, 2019 and December 31, 20172018, with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.

 

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

September 30, 2018

             

March 31, 2019

          

Investments in fixed maturity securities:

                       

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

  $3,599    $3,599    $2,378    $1,221    $—      $3,918    $3,918    $2,846    $1,072    $ 

U.S. states, municipalities and political subdivisions

   290     290     —       290     —    

States, municipalities and political subdivisions

   151    151        151     

Foreign governments

   7,370     7,370     5,162     2,208     —       8,091    8,091    5,840    2,251     

Corporate bonds

   6,458     6,458     —       6,453         6,724    6,724        6,720    4 

Mortgage-backed securities

   554     554     —       554     —       531    531        531     

Investments in equity securities

   207,332     207,332     206,985     47     300     191,771    191,771    191,420    50    301 

Investment in Kraft Heinz common stock

   17,453     17,935     17,935     —       —       13,686    10,626    10,626         

Loans and finance receivables

   14,477     14,735     —       59     14,676     16,432    16,459        1,641    14,818 

Derivative contract assets(1)

   154     154         41     110     171    171        52    119 

Derivative contract liabilities:

                             

Railroad, utilities and energy(1)

   80     80         63     16     99    99    1    83    15 

Equity index put options

   1,869     1,869     —       —       1,869     1,682    1,682            1,682 

Notes payable and other borrowings:

                             

Insurance and other

   24,271     24,422     —       24,422     —       33,847    35,242        35,216    26 

Railroad, utilities and energy

   62,599     66,823     —       66,823     —       63,346    69,937        69,937     

Finance and financial products

   10,770     10,979     —       10,953     26  

December 31, 2017

                

December 31, 2018

          

Investments in fixed maturity securities:

                       

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

  $3,953     $3,953    $2,360    $1,593    $—      $4,223    $4,223    $2,933    $1,290    $

U.S. states, municipalities and political subdivisions

   854     854     —       854     —    

States, municipalities and political subdivisions

   189    189        189     

Foreign governments

   8,822     8,822     6,946     1,876     —       7,502    7,502    5,417    2,085     

Corporate bonds

   6,862     6,862     —       6,856         7,440    7,440        7,434    6 

Mortgage-backed securities

   862     862     —       862     —       544    544        544     

Investments in equity securities

   170,540     170,540     170,494     46     —       172,757    172,757    172,253    203    301 

Investment in Kraft Heinz common stock

   17,635     25,306     25,306     —       —       13,813    14,007    14,007         

Loans and finance receivables

   13,748     14,136     —       17     14,119     16,280    16,377        1,531    14,846 

Derivative contract assets(1)

   142     142         28     113     172    172    2    52    118 

Derivative contract liabilities:

                          

Railroad, utilities and energy(1)

   82     82         69     10     111    111    1    101    9 

Equity index put options

   2,172     2,172     —       —       2,172     2,452    2,452            2,452 

Notes payable and other borrowings:

                                   

Insurance and other

   27,324     28,180     —       28,180     —       34,975    35,361        35,335    26 

Railroad, utilities and energy

   62,178     70,538     —       70,538     —       62,515    66,422        66,422     

Finance and financial products

   13,085     13,582     —       13,577      

 

(1)

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

Notes to Consolidated Financial Statements(Continued)

Note 18. 19. 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 ormarkets; quoted prices for identical assets or liabilities exchanged in inactive markets. In addition,markets; other inputs that may be considered in fair value determinations may includeof the assets or liabilities, such as 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 significant assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the ninethree months ending September 30,ended March 31, 2019 and 2018 and 2017 follow (in millions).

 

     Investments  
in equity
and fixed
maturity
securities
   Net
    derivative    
contract
liabilities
 

Nine months ending September 30, 2018

    

Balance at December 31, 2017

   $   $(2,069) 

Gains (losses) included in:

    

Earnings

   —     446  

Regulatory assets and liabilities

   —     (11) 

Acquisitions, dispositions and settlements

   (1)    (141) 
  

 

 

   

 

 

 

Balance at September 30, 2018

   $   $(1,775) 
  

 

 

   

 

 

 

Nine months ending September 30, 2017

    

Balance at December 31, 2016

   $17,321    $(2,824) 

Gains (losses) included in:

    

Earnings

   —     822  

Other comprehensive income

   1,157     (3) 

Regulatory assets and liabilities

   —     (5) 

Acquisitions, dispositions and settlements

   (58)    (78) 

Transfers into/out of Level 3

   (18,413)    —  
  

 

 

   

 

 

 

Balance at September 30, 2017

   $   $(2,088) 
  

 

 

   

 

 

 
Net
    derivative    
contract
liabilities

Three months ending March 31, 2019

Balance at December 31, 2018

 $ (2,343

Gains (losses) included in:

Earnings

820

Other comprehensive income

Regulatory assets and liabilities

(11

Acquisitions, dispositions and settlements

(44

Transfers into/out of Level 3

Balance at March 31, 2019

 $ (1,578

Three months ending March 31, 2018

Balance at December 31, 2017

 $ (2,069

Gains (losses) included in:

Earnings

(176

Other comprehensive income

(1

Regulatory assets and liabilities

(9

Acquisitions, dispositions and settlements

(26

Balance at March 31, 2018

 $ (2,281

Gains and losses included in earnings are reported as components of investment gains/losses, derivative gains/losses and other revenues, as appropriate. In 2017, gains and losses included in other comprehensive income were primarily the net change in unrealized appreciation of investments and the reclassification of investment appreciation in net earnings 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.

Notes to Consolidated Financial Statements(Continued)

Note 18. 19. Fair value measurements(Continued)

 

Quantitative information as of September 30, 2018,March 31, 2019, 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 contract liabilities – Equity index put options   $  1,869     Option pricing model     Volatility    16% 
   Fair
Value
  Principal Valuation
Techniques
  Unobservable Inputs  Weighted
Average

Derivative contract liabilities – Equity index put options

   $     1,682   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 measurements. The methods we use to measure fair valuesvalue these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

We value equity index put option contracts based on the Black-Scholes option valuation model. Inputs to this model include index price, contract duration and dividend and interest rate inputs (including a Berkshirenon-performance input) which are observable. However, we believe that the valuation of our longer duration contractslong-duration options using any model is inherently subjective and, given the lack of observable transactions and prices, acceptable values may be subject to wide ranges. Volatility inputs represent our expectations, which consider the remaining duration of each contract and assume that the contracts will remain outstanding until the expiration dates. Increases or decreases in the volatility inputs will produce increases or decreases in the fair values of the liabilities.

Note 19.20. Common stock

Changes in Berkshire’s issued, treasury and outstanding common stock during the nine months ending September 30, 2018first quarter of 2019 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)
 
         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  

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

   (16,850)    —     (16,850)    25,886,063     —     25,886,063  

Treasury stock acquired

   —     (225)    (225)    —     (4,139,192)    (4,139,192) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

   745,905     (11,905)    734,000     1,367,952,812     (5,548,954)    1,362,403,858  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

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

Balance December 31, 2018

   742,213    (12,897   729,316    1,373,558,983    (6,138,909  1,367,420,074 

Conversions of Class A common stock to Class B common stock and exercises of replacement stock options

   (4,303       (4,303   6,616,673       6,616,673 

Treasury stock acquired

       (1,258   (1,258       (6,519,830  (6,519,830
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

Balance at March 31, 2019

   737,910    (14,155   723,755    1,380,175,656    (12,658,739  1,367,516,917 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

 

 

 

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 1,642,2691,635,433 shares outstanding as of September 30, 2018March 31, 2019 and 1,644,8461,640,929 shares outstanding as of December 31, 2017.2018.

Since we have two classes of common stock, we 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 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.

Notes to Consolidated Financial Statements(Continued)

Note 20. Common stock(Continued)

For several years, Berkshire had a common stock repurchase program, which 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-ChairmanVice Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. The program continues 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.

Note 21. 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 three months ending March 31, 2019 and 2018 follows (in millions).

   Unrealized
appreciation of
investments, net
 Foreign
currency
translation
 Defined benefit
pension plans
 Other Accumulated
other
comprehensive
income

2019

      

Balance at December 31, 2018

   $370   $     (4,603  $         (816  $34   $       (5,015

Other comprehensive income, net before reclassifications

   89   157   38   (13  271 

Reclassifications into net earnings:

      

Reclassifications before income taxes

   5      16   2   23 

Applicable income taxes

   (1     (4  (1  (6
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2019

   $463   $ (4,446  $ (766  $       22   $ (4,727
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

      

Balance at December 31, 2017

   $     62,093   $ (3,114  $ (420  $12   $58,571 

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 

Reclassifications into net earnings:

      

Reclassifications before income taxes

   (221     10   (5  (216

Applicable income taxes

   46      (1  2   47 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

   $504   $ (2,594  $ (392  $5   $ (2,477
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 22. Income taxes

Our consolidated effective income tax rates for the first quarter of 2019 and 2018 were 21.4% and 29.7%, respectively. Our effective income tax rate normally reflects recurring benefits from dividends-received deductions applicable to investments in equity securities and production tax credits related to wind-powered electricity generation placed in service in the U.S. Our periodic effective income tax rate will also vary due to the changes in mix ofpre-tax earnings and underlying income tax rates applicable in the various taxing jurisdictions. In the first quarter of 2019, we recorded income tax expense of $377 million for uncertain tax positions related to investments in certain tax equity investment funds that generated income tax benefits from 2015 through 2018. We now believe that it is more likely than not those income tax benefits are not valid.

Notes to Consolidated Financial Statements(Continued)

 

Note 20. Accumulated23. Revenues from contracts with customers

On January 1, 2018, we adopted ASC 606 “Revenues from Contracts with Customers.” 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.

The following tables summarize customer contract revenues disaggregated by reportable segment and the source of the revenue for the first quarters of 2019 and 2018 (in millions). Other revenues included in consolidated revenues were primarily insurance premiums earned, interest, dividend and other comprehensiveinvestment income and leasing revenues which are not within the scope of ASC 606.

   Manufacturing  McLane
Company
  Service and
Retail
  BNSF  Berkshire
Hathaway
Energy
  Insurance,
Corporate
and other
  Total

Three months ending March 31, 2019

              

Manufactured products:

              

Industrial and commercial products

   $6,459   $    $46   $    $    $   $6,505

Building products

   3,552                       3,552

Consumer products

   3,290                       3,290

Grocery and convenience store distribution

       8,035                    8,035

Food and beverage distribution

       4,125                    4,125

Auto sales

           1,937               1,937

Other retail and wholesale distribution

   544       2,921               3,465

Service

   348   20    990   5,713    725        7,796

Electricity and natural gas

                   3,687        3,687
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

   14,193   12,180    5,894   5,713    4,412        42,392

Other revenue

   865   19    1,110   12    260    16,020   18,286
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $15,058   $12,199    $7,004   $5,725    $4,672    $16,020   $60,678
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   Manufacturing  McLane
Company
  Service and
Retail
  BNSF  Berkshire
Hathaway
Energy
  Insurance,
Corporate
and other
  Total

Three months ending March 31, 2018

              

Manufactured products:

              

Industrial and commercial products

   $6,554   $    $54    $    $    $    $6,608 

Building products

   2,920                       2,920 

Consumer products

   3,696                       3,696 

Grocery and convenience store distribution

       8,158                    8,158 

Food and beverage distribution

       3,997                    3,997 

Auto sales

           1,931                1,931 

Other retail and wholesale distribution

   498       2,712                3,210 

Service

   218   17    950    5,580    700        7,465 

Electricity and natural gas

                   3,524        3,524 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total

   13,886   12,172    5,647    5,580    4,224        41,509 

Other revenue

   812   17    1,140    10    288    14,697    16,964 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $      14,698   $  12,189    $    6,787    $   5,590    $    4,512    $   14,697    $   58,473 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Notes to Consolidated Financial Statements(Continued)

Note 23. Revenues from contracts with customers(Continued)

A summary of the net changestransaction price allocated to the significant unsatisfied remaining performance obligations relating to contracts with expected durations inafter-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and amounts reclassified out excess of accumulated other comprehensive income for the nine months ending September 30, 2018 and 2017one year as of March 31, 2019 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
 

2018

          

Balance at December 31, 2017

   $62,093     $(3,114)    $(420)    $12     $58,571  

Reclassifications to retained earnings upon adoption of new accounting standards

   (61,340)    (65)    36     (6)    (61,375) 

Other comprehensive income, net before reclassifications

   (142)    (776)    (33)    (19)    (970) 

Reclassifications into net earnings

   (236)    —     76         (153) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2018

   $375     $(3,955)    $(341)    $(6)    $(3,927) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications into net earnings:

          

Reclassifications before income taxes

   $(299)    $—     $101     $10     $(188) 

Applicable income taxes

   (63)    —     25         (35) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $(236)    $—     $76     $    $(153) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2017

          

Balance at December 31, 2016

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

Other comprehensive income, net before reclassifications

   11,734     1,946     (90)    19     13,609  

Reclassifications into net earnings

   (803)    —     61     18     (724) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

   $54,107     $(3,322)    $(622)    $20     $50,183  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications into net earnings:

          

Reclassifications before income taxes

   $(1,235)    $—    $82     $32     $(1,121) 

Applicable income taxes

   (432)    —     21     14     (397) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $(803)    $—    $61     $18     $(724) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Performance obligations
expected to be satisfied:
   
   Less than
12 months
  Greater than
12 months
  Total

Electricity and natural gas

   $918    $5,796    $6,714 

Other sales and service contracts

         1,278          1,750              3,028 

Note 21.24. Contingencies and Subsequent EventCommitments

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 intoOn April 30, 2019, Berkshire committed to invest a definitive agreementtotal of $10 billion in Occidental Petroleum Corporation (“Occidental”) in connection with Occidental’s proposal to acquire Medical Liability Mutual Insurance Company,Anadarko Petroleum Corporation (“Medical Liability Mutual”Anadarko”),. The investment is contingent upon Occidental entering into and completing its proposed acquisition of Anadarko. If completed, Berkshire’s investment would include newly issued Occidental Cumulative Perpetual Preferred Stock with an aggregate liquidation value of $10 billion, together with warrants to purchase up to 80.0 million shares of Occidental common stock at an exercise price of $62.50 per share. The preferred stock will accrue dividends at 8% per annum and will be redeemable at the option of Occidental commencing on the tenth anniversary of issuance at a writer of medical professional liability insurance domiciled in New York. The acquisitionredemption price was approximately $2.5 billion. The acquisition involved the conversion of Medical Liability Mutual from a mutual companyequal to a stock company. The closing105% of the transaction was subject to various regulatory approvals, customary closing conditionsliquidation preference plus any accumulated and unpaid dividends, or mandatorily under certain specified capital return events. Dividends will be paid in cash or, at Occidental’s option, in shares of Occidental common stock. The warrants issued with the approvalpreferred stock may be exercised in whole or in part until one year after the redemption of the Medical 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 believe goodwill arising from this acquisition will be insignificant. MLMIC’s premiums earned for the first nine months of 2018 were approximately $300 million.preferred stock.

Notes to Consolidated Financial Statements(Continued)

Note 22.25. Business segment data

Our operating businesses include a large and diverse group of insurance, railroad, utilities and energy, finance, manufacturing, service and retailing businesses. OurWe organize our reportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses have beenare 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. The accompanying business segment information for the first quarter of 2018 reflects certain reclassifications to conform to presentations as of December 31, 2018. Specifically, business units that previously were reported as the finance and financial products segment in the first quarter of 2018 were reclassified to manufacturing (Clayton Homes and UTLX), services and retailing (CORT and XTRA leasing) and corporate and other (principally investment income).

Notes to Consolidated Financial Statements(Continued)

Note 25. Business segment data(Continued)

Revenues and earnings or loss before income taxes by segment for the thirdfirst quarter of 2019 and first nine months of 2018 and 2017 were as follows (in millions).

 

  Third Quarter   First Nine Months   First Quarter
  2018   2017   2018   2017   2019 2018

Operating Businesses:

        

Revenues of Operating Businesses:

   

Insurance:

           

Underwriting:

           

GEICO

    $      8,506      $      7,543   $      24,705   $      21,632    $8,622  $7,915

Berkshire Hathaway Reinsurance Group

   3,777     3,954    11,229    20,550    3,546 3,540

Berkshire Hathaway Primary Group

   2,050     1,852    5,921    5,287    2,151 1,918

Investment income

   1,446     1,248    4,058    3,664    1,487 1,213
  

 

   

 

   

 

   

 

   

 

 

 

Total insurance

   15,779     14,597    45,913    51,133    15,806 14,586

BNSF

   6,147     5,314    17,649    15,749    5,762 5,624

Berkshire Hathaway Energy

   5,706     5,351    15,268    14,184    4,672 4,512

Manufacturing

   13,552     12,819    40,339    37,654    15,070 14,722

McLane Company

   12,822     12,798    37,438    37,480    12,199 12,189

Service and retailing

   6,974     6,527    20,623    19,170    7,025 6,815

Finance and financial products

   2,432     2,153    6,861    6,019 
  

 

 

 

  

 

   

 

   

 

   

 

    60,534 58,448
   63,412     59,559    184,091    181,389 

Reconciliation of segments to consolidated amount:

           

Corporate, eliminations and other

   38     (52)    32    (256)    144 25
  

 

   

 

   

 

   

 

   

 

 

 

    $63,450      $59,507   $184,123   $181,133    $        60,678  $        58,473
  

 

   

 

   

 

   

 

   

 

 

 

  First Quarter
  2019 2018

Earnings (Loss) Before Income Taxes of Operating Businesses:

   

Insurance:

   

Underwriting:

   

GEICO

   $770  $677

Berkshire Hathaway Reinsurance Group

   (253 (258

Berkshire Hathaway Primary Group

   (30 99

Investment income

   1,485 1,205
  

 

 

 

Total insurance

   1,972 1,723

BNSF

   1,665 1,513

Berkshire Hathaway Energy

   540 487

Manufacturing

   2,194 2,207

McLane Company

   111 60

Service and retailing

   621 573
  

 

 

 

   7,103 6,563

Reconciliation of segments to consolidated amount:

   

Investment and derivative gains (losses)

   20,322 (8,015

Interest expense, not allocated to segments

   (109 (120

Equity method investments

   168 401

Corporate, eliminations and other

   163 (352
  

 

 

 

   $27,647  $(1,523)
  

 

 

 

Earnings before income taxes by segment for the third quarter and first nine months of 2018 and 2017 were as follows (in millions).

   Third Quarter   First Nine Months 
   2018   2017   2018   2017 

Operating Businesses:

        

Insurance:

        

Underwriting:

        

GEICO

    $        627      $(416)   $        1,977      $(122) 

Berkshire Hathaway Reinsurance Group

   (163)    (1,845)    (124)    (2,963) 

Berkshire Hathaway Primary Group

   135     52    468          473 

Investment income

   1,455         1,246    4,052    3,658 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total insurance

   2,054     (963)    6,373    1,046 

BNSF

   1,879     1,710    5,047    4,592 

Berkshire Hathaway Energy

   1,165     1,243    2,238    2,481 

Manufacturing

   2,012     2,002    6,002    5,428 

McLane Company

   44     45    171    202 

Service and retailing

   628     491    1,840    1,439 

Finance and financial products

   530     496    1,589    1,438 
  

 

 

   

 

 

   

 

 

   

 

 

 
   8,312     5,024    23,260    16,626 

Reconciliation of segments to consolidated amount:

        

Investment and derivative contract gains/losses

   14,706     965    13,053    1,965 

Interest expense, not allocated to segments

   (60)    (386)    (77)    (1,243) 

Equity method investments

   316     305    1,044    932 

Corporate, eliminations and other

   (127)    (278)    (558)    (833) 
  

 

 

   

 

 

   

 

 

   

 

 

 
    $      23,147    $5,630   $36,722     $17,447 
  

 

 

   

 

 

   

 

 

   

 

 

 

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).

 

  Third Quarter   First Nine Months   First Quarter
  2018   2017   2018   2017   2019 2018

Insurance – underwriting

  $441    $(1,439)   $1,791     $(1,728)    $389   $407 

Insurance – investment income

   1,239         1,044     3,393     2,917     1,237  1,012 

Railroad

   1,393     1,042     3,847     2,838     1,253  1,145 

Utilities and energy

   1,091     952     2,257     1,941     605  585 

Manufacturing, service and retailing

   2,097     1,694     6,060     4,673     2,200      2,127 

Finance and financial products

   390     319     1,193     933  

Investment and derivative gains/losses

   11,660     623    ��10,352     1,270           16,106  (6,426

Other

   229     (168)    520     (455)    (129 12 
  

 

   

 

   

 

   

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

  $    18,540    $4,067    $   29,413     $   12,389  

Net earnings (loss) attributable to Berkshire Hathaway shareholders

   $21,661   $(1,138
  

 

   

 

   

 

   

 

   

 

 

 

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. The business segment data (Note 25 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses are likely to be very significantexceptionally large given the size of our current holdings and the inherent volatility in securities prices. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. Thus, the new accounting treatment has no effect on consolidated shareholders’ 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 nine 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, income tax credits and the varying effects of state and local income taxes.

Our insurance businesses generatedafter-tax earnings from underwriting of $441$389 million and $1.8 billion in the thirdfirst quarter of 2019 and first nine months of$407 million in 2018. Results in 2019 and 2018 respectively, compared toincluded net underwriting gains from primary insurance and net underwriting losses of $1.4 billion and $1.7 billion, respectively,from reinsurance.After-tax earnings in the corresponding 2017 periods. Results in 2018 included reductions of estimated 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 a lower effective income tax rate. Underwriting results in the thirdfirst 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.2019 from insurance investments increased 22.2% over 2018, reflecting increased short-term interest rates and Puerto Rico and an earthquake in Mexico. Underwriting results in 2017 also included foreign currency exchange rate losses from the revaluation of certainnon-U.S. Dollar denominated liabilities.dividend income.

Our railroad business generated increased a 9.4% increase inafter-tax earnings in the thirdfirst quarter and first nine months of 20182019 compared to 2017, reflecting an increase2018. Results in unit volume,2019 benefited from higher average revenuerates per car/unit and a lower effective income tax rate,curtailment gain related to an amendment to a retirement plan, partly offset by increased fuellower unit volume. Severe winter weather and otherflooding across themid-U.S. in the first quarter of 2019 had a significant negative impact on freight volumes and operating costs. results.

Our utilities and energy businessesbusiness produced highera 3.4% increase inafter-tax earnings in the thirdfirst quarter and first nine months of 20182019 compared to 2017, primarily due to a lower overall effective income tax rate and increasedpre-tax earnings from renewables and natural gas pipelines. After-tax earnings2018. Earnings from our manufacturing, service and retailing businesses in the thirdfirst quarter andof 2019 increased 3.4% over 2018. First quarter 2019 results of our underlying business operations were mixed, with several of these businesses experiencing lower first nine monthsquarter earnings from a variety of 2018 increased 24% and 30%, respectively, over 2017, due to lower effective income tax rates and a 13% increase inyear-to-datepre-tax earnings.factors.

After-tax investment and derivative gains in the thirdfirst quarter and first nine months of 2018 from investments2019 were $16.1 billion compared toafter-tax losses of $6.4 billion in 2018. In the table above, investment and derivative contracts were $11.7gains/losses include a gain of approximately $15.1 billion in 2019 and $10.4a loss of approximately $7.0 billion respectively. Investment gains/losses includedin 2018 due to changes during the first quarters of 2019 and 2018 in the amount of unrealized gains that existed in our equity security investment holdings and also includeafter-tax realized gains on sales of approximately $11.4 billion in the third quarterequity and $9.6 billion infixed maturity securities of $392 million and $747 million during the first nine months from changes in market valuesquarters of our investments in equity securities held at September 30, 2018. In 2017,after-tax investment gains on equity securities arose from the disposition or exchange of securities during the period based on the cost of the disposed security. In the first nine months of 2017, we recordedafter-tax unrealized gains on our investments in equity securities of approximately $10.9 billion in other comprehensive income.2019 and 2018, respectively. We believe that investment and derivative gains/losses, whether realized from dispositions or settlements or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating theour economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

Item 2. Management’s Discussion and Analysis of Financial Condition and 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 our insurance businesses as possessing two distinct operationsactivities – 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.operations.

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$111 billion as of September 30, 2018.March 31, 2019. 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.

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.

Underwriting results of our insurance businesses are summarized below (in(dollars in millions).

 

 Third Quarter First Nine Months   First Quarter
 2018 2017 2018 2017   2019 2018

Underwriting gain (loss):

       

GEICO

  $627     $(416)    $1,977     $(122)     $770  $677

Berkshire Hathaway Reinsurance Group

 (163)   (1,845)   (124)   (2,963)     (253 (258

Berkshire Hathaway Primary Group

 135    52    468    473      (30 99
 

 

  

 

  

 

  

 

   

 

 

 

Pre-tax underwriting gain (loss)

 599    (2,209)   2,321    (2,612)  

Pre-tax underwriting gain

                 487               518

Income taxes and noncontrolling interests

 158    (770)   530    (884)     98 111
 

 

  

 

  

 

  

 

   

 

 

 

Net underwriting gain (loss)

  $        441     $(1,439)    $        1,791     $(1,728)  

Net underwriting gain

   $389  $407
 

 

  

 

  

 

  

 

   

 

 

 

Effective income tax rate

 25.9%          35.1%  22.6%          34.4%    22.5% 21.4%
 

 

  

 

  

 

  

 

   

 

 

 

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).

 

  Third Quarter   First Nine Months   First Quarter
  2018   2017   2018   2017   2019  2018
  Amount   %   Amount   %   Amount   %   Amount   %   Amount  %  Amount  %

Premiums written

   $8,952       $    8,130       $  25,878      $   22,987       $      9,263      $8,689   
  

 

     

 

     

 

     

 

     

 

    

 

  

Premiums earned

   $8,506         100.0     $7,543         100.0      $24,705        100.0     $21,632         100.0     $8,622          100.0    $    7,915          100.0 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

Losses and loss adjustment expenses

   6,725     79.1      6,933     91.9      19,305    78.1     18,631     86.1     6,556    76.1    6,075    76.7 

Underwriting expenses

   1,154     13.5      1,026     13.6      3,423    13.9     3,123     14.5     1,296    15.0    1,163    14.7 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

Total losses and expenses

   7,879     92.6      7,959     105.5      22,728    92.0     21,754     100.6     7,852    91.1    7,238    91.4 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

Pre-tax underwriting gain (loss)

   $        627       $(416)      $1,977      $(122)   

Pre-tax underwriting gain

   $770      $677   
  

 

     

 

     

 

     

 

     

 

    

 

  

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

Insurance—Insurance—Underwriting(Continued)

GEICO (Continued)

 

Premiums written and earned in the thirdfirst quarter of 2019 increased 6.6% and first nine months of 2018 were approximately $9.0 billion and $25.9 billion, respectively, representing increases of 10.1% and 12.6%8.9%, respectively, compared to 2017.2018. These increases reflected increases in voluntary autopolicies-in-forcepolicy-in-force growth of 3.7%3.6% and increased premiums per auto policy of approximately 7.8%4.0% over the past twelve months. The increase in premiums per policy was attributable to rate increases from 2018, coverage changes and changes in state and risk mix. The rate increases in rates were in response to accelerating claim costs in recent years. Althoughpolicies-in-force increased 461,000 during the first nine months of 2018, the rate of increase slowed, as voluntarylosses. Voluntary auto new business sales decreased 6.6%in the first quarter of 2019 increased 6.2% compared to 2017.the first quarter of 2018, while our voluntary autopolicies-in-force increased approximately 342,000 during the first quarter of 2019.

Losses and loss adjustment expenses decreased $208 million (3.0%) in the third quarter and increased $674 million (3.6%) in the first nine monthsquarter of 20182019 were approximately $6.6 billion, an increase of $481 million (7.9%) compared to 2017. Our ratios2018. GEICO’s ratio of losses and loss adjustment expenses to premiums earned (the “loss ratio”) forin the thirdfirst quarter and first nine months of 2018 were 79.1% and 78.1%2019 was 76.1%, respectively, declinesa decline of 12.8 and 8.00.6 percentage points compared to the third quarter and first nine months of 2017, respectively. In the third quarter of 2018, 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).2018.

Our losses and loss adjustment expenses incurred in the first nine months of 2018 also included reductions of $478 million with respect toGEICO reduced ultimate claim loss estimates for prior years’ loss events whichby $83 million in the first quarter of 2019 and $407 million in 2018. These reductions produced a corresponding increase inpre-tax underwriting gains. By comparison, we increased loss estimates for prior years’ eventsThe gains in 2019 were primarily due to lower losses from collision, property damage and bodily injury claims, partially offset by $37 million in the first nine months of 2017.higher losses from personal injury protection claims. Claims frequencies in the first nine monthsquarter of 20182019 for property damage and collision and bodilycoverages and personal injury protection coverages declinedcoverage were down (two to threefour percent range) compared to 2017.2018 and were flat for bodily injury coverage. Average claims severities in the first nine monthsquarter of 2018 increased2019 were higher for property damage and collision coverages (four to six percent range) and bodily injury coverage (five(six to seveneight percent range).

Our underwritingUnderwriting expenses in the first nine monthsquarter of 20182019 were approximately $3.4$1.3 billion, an increase of $300$133 million (9.6%(11.4%) over 2017. Our2018. GEICO’s expense ratio (underwriting expenses to premiums earned) forin the first nine monthsquarter of 2018 decreased 0.62019 was 15.0%, an increase of 0.3 percentage points compared to 2017.2018. The increases in underwriting expenses wereexpense increase was primarily attributable to increases in advertising expenses, insurance premium taxes and employee-related costs, which includedreflected 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,subsidiaries, led by National Indemnity Company (“NICO Group”NICO”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN Group”BHLN”), and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, “General Re Group”Re”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, the BHLN Group writeswe write periodic payment annuity contracts.contracts predominantly through BHLN.

With the exception of our retroactive reinsurance and periodic payment annuity businesses,product lines, 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 businessespremiums due to the expected long durations of the liabilities. We expect to incurpre-tax underwriting losses from such businesses, primarilythese products through deferred charge amortization and discount accretion charges. We receive premiums at the inception of these contracts, which are then available for investment. A summary of theBHRG’s premiums andpre-tax underwriting results of our reinsurance business follows (in(dollars in millions).

 

 Premiums earned Pre-tax underwriting gain (loss)   First Quarter
 Third Quarter First Nine Months Third Quarter First Nine Months   Premiums earned  Pre-tax underwriting gain (loss)
 2018 2017 2018 2017 2018 2017 2018 2017   2019  2018  2019 2018

Property/casualty

  $2,157    $2,061    $6,479   $5,763   $67    $(1,486)  $535    $(1,856)    $2,322    $2,026    $(40)  $130

Retroactive reinsurance

   550    10,736   (246)  (287)  (704)  (881)    3        (323 (311
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 
 2,158   2,611   6,480  16,499   (179)  (1,773)  (169)  (2,737) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

Life/health

 1,307   1,146   3,855  3,404   108   113   324           302     1,027    1,234    280 96

Periodic payment annuity

 312   197   894  647   (92)  (185)  (279)  (528)    194    280    (170 (173
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

 

 

 1,619   1,343   4,749  4,051               16   (72)              45   (226)    $        3,546    $        3,540    $      (253)  $      (258)
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

 

 

  $        3,777    $      3,954    $      11,229   $  20,550   $(163)   $    (1,845)  $(124)   $(2,963) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

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

Insurance—Underwriting(Continued)

Berkshire Hathaway Reinsurance Group (Continued)

 

Property/casualty

A summary of premiums andproperty/casualty reinsurance underwriting results of our property/casualty reinsurance businesses follows (in(dollars in millions).

 

   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         

NICO Group

  $1,077     $1,217     $3,394     $3,488     $(29)    $(927)    $272     $(1,144) 

General Re Group

   1,080     844     3,085     2,275     96     (559)    263     (712) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $        2,157     $        2,061     $        6,479     $        5,763     $          67     $(1,486)    $          535     $(1,856) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   First Quarter
   2019  2018
   Amount  %  Amount  %

Premiums written

   $    3,542      $    3,346  
  

 

 

 

    

 

 

 

  

Premiums earned

   $2,322    100.0    $2,026   100.0 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Losses and loss adjustment expenses

   1,774    76.4    1,391   68.7 

Underwriting expenses

   588    25.3    505   24.9 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total losses and expenses

   2,362    101.7    1,896   93.6 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Pre-tax underwriting gain (loss)

   $(40)      $130  
  

 

 

 

    

 

 

 

  

NICO Group’sProperty/casualty premiums earned in the thirdfirst quarter and first nine months of 2018 decreased 11.5% and 2.7%, respectively,2019 were approximately $2.3 billion, an increase of $296 million (14.6%) compared to 2017. 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.2018. 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 expires in 2025. General Re Group’s premiums earned in the third quarter and first nine months of 2018 increased $236 million (28.0%) and $810 million (35.6%), respectively, compared to 2017. The increasesincrease primarily reflected higher direct and broker markets business and derived primarily from new business and increased participations for renewal business in both property and casualty lines.

On a combined basis, our property/casualty reinsurance business generatedpre-tax underwriting gains of $67 million and $535 million in the third quarter and first nine months of 2018, respectively, andpre-tax losses of approximately $1.5 billion in the third quarter and $1.9 billion in the first nine months of 2017. We incurred estimated losses of approximately $267 million in the third 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 significant catastrophe events were approximately $2.45 billion for the first nine months of 2017.

In addition, we reduced 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 $108 million in the first nine months of 2017, which 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.

Retroactive reinsurance

Premiums earned in the first nine months of 2017quarter included $10.2 billion$432 million in 2019 and $448 million in 2018 from an aggregateaexcess-of-loss10-year, retroactive reinsurance agreement20% quota-share contract entered into by NICO with various subsidiaries of American InternationalInsurance Australia Group Inc. (the “AIG Agreement”),Limited, which became effective on February 2, 2017. We also recorded lossesexpires in 2025.

Losses and loss adjustment expenses incurredin 2019 were approximately $1.8 billion, an increase of $10.2 billion at the inception of the AIG Agreement, representing our initial estimate of the unpaid losses$383 million (27.5%) compared to 2018. Losses and loss adjustment expenses assumedin the first quarter of $16.4 billion, partly offset by an initial deferred charge asset2019 included increases in estimated ultimate claim liabilities attributable to prior years’ loss events of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on our$212 million compared to decreases of $182 million in 2018, which produced corresponding decreases and increases inpre-tax underwriting results.gains. Such gains and losses were less than 1% of the unpaid claim liabilities as of the beginning of the applicable year. Losses and loss adjustment expenses in 2019 also reflected a decline in the overall loss ratio for current accident year business as compared to the first quarter of 2018. There were no significant catastrophe loss events in the first quarter of 2019 or 2018.

Retroactive reinsurance

There were no new retroactive reinsurance contracts written in the first quarter of 2019 or 2018.Pre-tax underwriting losses from retroactive reinsurance contracts in the thirdfirst quarter were $323 million in 2019 and first nine months of 2018 were $246$311 million and $704 million, respectively, compared to $287 million and $881 million, respectively, in the same periods in 2017.2018. Certain liabilities relatingrelated to retroactive reinsurance contracts written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results include gainsin the first quarter includedpre-tax losses of $52 million in 2019 and losses from$60 million in 2018 associated with 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 nine monthsquarter were $271 million in 2019 and $251 million in 2018, which derived from deferred charge amortization and changes in the estimated timing and amount of 2018future claim payments. Deferred charge amortization in the first quarter included approximately $156 million in 2019 and 2017 were $803$147 million and $630 million, respectively. The increase inpre-tax losses was primarily due to amortization charges 2018 related to the AIG Agreement, which included the effectsan aggregateexcess-of-loss retroactive reinsurance agreement with various subsidiaries of increases to our ultimate claim liability estimates (approximately $1.8 billion) and related deferred charge asset (approximately $1.7 billion) in the fourth quarter of 2017.American International Group, Inc.

Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $41.9$41.6 billion at September 30, 2018March 31, 2019 and $42.9$41.8 billion at December 31, 2017.2018. Unamortized deferred charge assets related to such reinsurance contracts were approximately $14.5$13.8 billion at September 30, 2018March 31, 2019 and $15.3$14.1 billion at December 31, 2017.2018. Deferred charge asset balancesassets will be amortized as chargescharged topre-tax earnings over the expected remaining claims settlement periods.

periods through periodic amortization.

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

Insurance—Underwriting(Continued)

Berkshire Hathaway Reinsurance Group (Continued)

 

Life/health

Premiums earned andpre-tax underwriting resultsA summary of our life/health reinsurance businesses are further summarized asunderwriting results follows (in(dollars in millions).

 

   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 

General Re Group

  $964    $786    $2,819    $2,324    $38     $57    $152     $96  

BHLN Group

   343     360     1,036     1,080     70     56     172     206  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $      1,307    $      1,146    $      3,855    $      3,404    $          108     $        113    $        324     $         302  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   First Quarter
   2019  2018
   Amount  %  Amount  %

Premiums written

   $1,027      $1,237   
  

 

 

 

    

 

 

 

  

Premiums earned

   $  1,027    100.0    $  1,234    100.0 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Life and health insurance benefits

   598    58.2    936    75.9 

Underwriting expenses

   149    14.5    202    16.4 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total benefits and expenses

   747    72.7    1,138    92.3 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Pre-tax underwriting gain (loss)

   $280      $96   
  

 

 

 

    

 

 

 

  

General Re Group’sLife/health premiums earned in the thirdfirst quarter and first nine months of 2018 increased $1782019 were approximately $1.0 billion, a decrease of $207 million (22.6%(16.8%) and $495 million (21.3%), respectively, compared to 2017.2018. The increases weredecrease was primarily attributable to the effects of an amendment in the first quarter of 2019 to a reinsurance contract, partially offset by growth in the Asia life markets. In the first quarter of 2019, BHLN amended its yearly renewable term life insurance contract with a major U.S. reinsurer. The amendment effectively eliminates BHLN’s exposure under the contract in the future. BHLN recorded a reduction in earned premiums on this contract of $49 million in the first quarter of 2019, largely attributable to the contract amendment. Premiums earned from this contract were $189 million in the first quarter of 2018 and Australia markets and foreign currency translation effects of a comparatively weaker U.S. Dollar. approximately $1 billion for the year ending December 31, 2018.

The General Re Grouplife/health business producedpre-tax underwriting gains of $280 million in the first nine monthsquarter of $152 million in 2018 and2019 compared to $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 2017.

BHLN Group’spre-tax underwriting2018. Underwriting results in the first nine monthsquarter of 20182019 included aone-timepre-tax gain of approximately $160 million attributable to the BHLN contract amendment, which resulted in reductions of benefits incurred and 2017premiums earned. First quarter underwriting results in 2019 also includedpre-tax increased gains of $166 million and $197 million, respectively, from therun-off of variable annuity contracts, partially offset by increased losses from U.S. individual life business and therun-off of U.S. long-term care business. Variable annuity guarantee reinsurance contracts that provide guarantees on closed blocksproducedpre-tax underwriting gains of variable annuity business. Periodic underwriting$89 million in the first quarter of 2019 versus $45 million in 2018. 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. Underwriting results from variable annuity contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. Estimated variable annuity guarantee liabilities were approximately $1.6 billion at September 30, 2018 and $1.8 billion at December 31, 2017.

Periodic payment annuity

Periodic payment annuity premiums earned in the thirdfirst quarter and first nine months of 2018 increased $1152019 were $194 million, (58.4%) and $247a decrease of $86 million (38.2%(30.7%), respectively, compared to 2017. 2018. Periodic payment business is price sensitive. The volumes written can change rapidly due to changes in prices, which are affected by prevailing interest rates, the perceived risks and durations associated with the expected annuity payments, and the level of competition.

Periodic payment annuity contracts producedpre-tax losses in the first quarter of $92 million and $279$170 million in the third quarter2019 and first nine months of 2018, respectively, compared topre-tax losses of $185$173 million and $528 million, respectively, for the same periods in 2017.2018. Certain contracts written by our U.S. subsidiaries are denominated in foreign currencies, primarily the Great Britain Pound Sterling.currencies. First quarterPre-taxpre-tax underwriting results in 2018 includedpre-tax gainslosses of $21$28 million in the third quarter2019 and $57$70 million in the first nine months from2018 associated with there-measurement of such liabilities due to changes in exchange rates compared torates.

Before foreign currency gains and losses,pre-tax underwriting losses of $63 million in the third quarter and $173were $142 million in the first nine monthsquarter of 2017. Before the effect of foreign currency gains2019 and losses, this business generatedpre-tax underwriting losses of $336$103 million in the first nine monthsquarter of 2018 and $355 million in the first nine months of 2017.2018. These losses werederived primarily attributable tofrom the recurring discount accretion of annuity liabilities.liabilities, as well as the impact of mortality and interest rate changes. Discounted annuity liabilities approximated $12.2$12.7 billion at September 30, 2018March 31, 2019 and $11.2$12.5 billion at December 31, 2017,2018, reflecting a weighted average discount rate of 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 provideprovides 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 includeare 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.Company and MLMIC Insurance Company, acquired October 1, 2018.

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

Insurance—Underwriting(Continued)

Berkshire Hathaway Primary Group (Continued)

A summary of BH Primary underwriting results follows (dollars in millions).

 

  Third Quarter   First Nine Months   First Quarter
  2018   2017   2018   2017   2019  2018
      Amount         %         Amount         %             Amount         %           Amount         %         Amount %  Amount  %

Premiums written

   $2,227       $1,995       $6,498       $5,645       $2,341     $2,161   
  

 

     

 

     

 

     

 

     

 

   

 

  

Premiums earned

   $2,050         100.0     $1,852         100.0     $5,921         100.0     $5,287         100.0     $      2,151      100.0    $      1,918        100.0 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  

 

  

 

Losses and loss adjustment expenses

   1,419     69.2     1,342     72.5     3,884     65.6     3,426     64.8     1,570  73.0    1,251    65.2 

Underwriting expenses

   496     24.2     458     24.7     1,569     26.5     1,388     26.3     611  28.4    568    29.6 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  

 

  

 

Total losses and expenses

   1,915     93.4     1,800     97.2     5,453     92.1     4,814     91.1     2,181  101.4    1,819    94.8 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

  

 

  

 

Pre-tax underwriting gain

   $135       $52       $468       $473    

Pre-tax underwriting gain (loss)

   $(30    $99   
  

 

     

 

     

 

     

 

     

 

   

 

  

Premiums written and earned in the thirdfirst quarter of 2019 increased 8.3% and first nine months of 2018 increased 11.6% and 15.1%12.1%, respectively, compared to the corresponding 2017 periods. These2018. The increases in premiums written were primarily attributable to BH Specialty MedPro Group,(19.6%), GUARD (19.0%) and BHHC. PremiumsNICO Primary (11.9%). The increase in premiums earned in the first nine monthsquarter of 2018 increased $634 million (12.0%) compared to2019 also reflected the first nine monthsimpact of 2017, reflecting the written premium increases of these businesses.MLMIC acquisition.

BH Primary producedpre-tax underwriting gainslosses of $135 million and $468$30 million in the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to $52 million and $473pre-tax gains of $99 million in 2018. BH Primary’s aggregate loss ratios for the thirdfirst quarter were 73.0% in 2019 and first nine months of 2017, respectively. Underwriting results65.2% in the third quarter included estimated losses of approximately $75 million in 2018 from Hurricane Florence and $225 million in 2017 from Hurricanes Harvey, Irma and Maria.

2018. Losses and loss adjustment expenses incurred in the first nine months also included net reductions of estimated ultimate liabilitiesquarter for prior years’ loss events included reductions of $507$17 million in 20182019 and $606$164 million in 2017, which produced corresponding increases2018. In the first quarter of 2019, we recorded additional estimated claim liabilities for legacy casualty exposures. In addition, the net gains from the reductions of prior accident years’ liabilities inpre-tax underwriting gains. The liability reductions in each year primarily related 2019 were lower as compared to healthcare malpractice and workers’ compensation business. 2018.

BH Primary writesunits write 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, whichclaim-tails. Accordingly, we could give rise toexperience significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation outcomes or judicial rulings and other factors not currently anticipated.

Insurance—Investment Income

A summary of net investment income generated from investments held byattributable to our insurance operations follows (in(dollars in millions).

 

   Third Quarter   First Nine Months 
   2018   2017   2018   2017 

Interest and other investment income

   $495     $344     $1,346     $870  

Dividend income

   960     902     2,706     2,788  
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment income before income taxes and noncontrolling interests

   1,455     1,246     4,052     3,658  

Income taxes and noncontrolling interests

   216     202     659     741  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $    1,239     $    1,044     $    3,393     $    2,917  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

   14.7%    16.2%    16.2%    20.2% 
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Insurance—Investment Income(Continued)

   First Quarter
   2019  2018

Interest and other investment income

   $513    $452 

Dividend income

   972    753 
  

 

 

 

  

 

 

 

Investment income before income taxes and noncontrolling interests

   1,485    1,205 

Income taxes and noncontrolling interests

   248    193 
  

 

 

 

  

 

 

 

Net investment income

   $        1,237    $        1,012 
  

 

 

 

  

 

 

 

Effective income tax rate

   16.6%    15.9% 
  

 

 

 

  

 

 

 

Pre-tax interest and other investment income in the thirdfirst quarter and first nine months of 20182019 increased $151$61 million (43.9%(13.5%) and $476 million (54.7%), respectively, compared to the same periods2018, attributable to an increase in 2017. The increases reflected the effect ofinterest income, primarily due to higher short-term interest rates in 2018 andon short-term investments, partially offset by lower income from a limited partnership investmentinvestments. Dividend income in the first quarter partly offset by lower interest from reduced investmentsof 2019 increased $219 million (29.1%) compared to the first quarter of 2018. The increase in fixed maturity securities. Our invested assetsdividend income was attributable to an overall increase in investment levels over the past year and higher dividend rates. We continue to include significant levelshold large balances of short-term investments.cash, cash equivalents and U.S. Treasury Bills. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to suchshort-term investments.

Dividend income increased $58 million (6.4%) in the third quarter and decreased $82 million (2.9%) in the first nine months of 2018 as compared to the same periods in 2017. The comparative 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 increases in our portfolio of marketable equity securities.

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 $118$124 billion at September 30, 2018March 31, 2019 and $114$123 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 for that period was negative.2018. Our average cost of float forwas negative in the year ending December 31, 2017 was approximately 3%, reflectingfirst quarter of 2019 as our underwriting operations generatedpre-tax underwriting lossesearnings of approximately $3.2 billion, most$487 million.

Item 2. Management’s Discussion and Analysis of which was incurred in the second halfFinancial Condition and Results of the year.Operations

Insurance—Investment Income(Continued)

A summary of cash and investments held in our insurance businesses as of September 30, 2018March 31, 2019 and December 31, 20172018 follows (in millions).

 

  September 30, 
2018
   December 31, 
2017
   March 31,
2019
  December 31,
2018

Cash, cash equivalents and U.S. Treasury Bills

   $59,292     $73,285     $66,969    $64,548 

Equity securities

   199,860     163,134     184,953    166,385 

Fixed maturity securities

   18,057     21,092     19,226    19,690 
  

 

   

 

   

 

  

 

   $    277,209     $    257,511     $     271,148    $     250,623 
  

 

   

 

   

 

  

 

Fixed maturity investmentssecurities as of September 30, 2018March 31, 2019 were as follows (in millions).

 

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

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

   $3,618     $(26)    $3,592     $3,893    $17    $3,910 

States, municipalities and political subdivisions

   259     14     273     141    6    147 

Foreign governments

   7,360         7,368     8,045    44    8,089 

Corporate bonds, investment grade

   5,321     388     5,709     5,627    435    6,062 

Corporate bonds,non-investment grade

   563     42     605     498    29    527 

Mortgage-backed securities

   457     53     510     429    62    491 
  

 

   

 

   

 

   

 

  

 

  

 

   $    17,578     $    479     $    18,057     $     18,633    $     593    $     19,226 
  

 

   

 

   

 

   

 

  

 

  

 

U.S. government obligationssecurities are rated AA+ or Aaa by the major rating agencies. Approximately 88% of all state, municipal and political subdivisions, foreign government obligationssecurities 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 operatesAmerica, with approximately 32,500 route miles of track in 28 states, as well asstates. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped whichand include consumer products, coal, industrial products and agricultural products. A summary of BNSF’s earnings follows (in(dollars in millions).

 

   First Quarter
   2019   2018  

Revenues

   $5,762   $5,624 
  

 

 

 

 

 

 

 

Operating expenses:

   

Compensation and benefits

   1,400   1,315 

Fuel

   711   767 

Purchased services

   713   692 

Depreciation and amortization

   591   571 

Equipment rents, materials and other

   414   510 
  

 

 

 

 

 

 

 

Total operating expenses

   3,829   3,855 

Interest expense

   268   256 
  

 

 

 

 

 

 

 

   4,097   4,111 
  

 

 

 

 

 

 

 

Pre-tax earnings

   1,665   1,513 

Income taxes

   412   368 
  

 

 

 

 

 

 

 

Net earnings

   $     1,253   $     1,145 
  

 

 

 

 

 

 

 

Effective income tax rate

   24.7  24.3
  

 

 

 

 

 

 

 

   Third Quarter   First Nine Months 
   2018   2017   2018   2017 

Revenues

   $    6,147     $    5,314     $    17,649     $    15,749  
  

 

 

   

 

 

   

 

 

   

 

 

 

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  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

   4,006     3,351     11,828     10,396  

Interest expense

   262     253     774     761  
  

 

 

   

 

 

   

 

 

   

 

 

 
   4,268     3,604     12,602     11,157  
  

 

 

   

 

 

   

 

 

   

 

 

 

Pre-tax earnings

   1,879     1,710     5,047     4,592  

Income taxes

   486     668     1,200     1,754  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

   $1,393     $1,042     $3,847     $2,838  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

   25.9%     39.1%    23.8%    38.2% 
  

 

 

   

 

 

   

 

 

   

 

 

 

BNSF’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 consumer products were $2.0 billion in the third quarter and $5.8 billion in the first nine months of 2018, representing increases of 11.7% and 12.0%, respectively, from 2017. The increases reflected higher average revenue per unit and volume increases of 0.9% in the third quarter and 3.9% in the first nine months. The volume increases were attributable to the intermodal business, due to general economic growth and tight truck capacity leading to conversion from highway to rail, as well as growth in imports and containerized agricultural product exports, partially offset by a sizable contract loss.

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 approximately $5.8 billion in the first quarter of 2019, an increase of $138 million (2.5%) versus 2018. During the first quarter of 2019, BNSF’s revenues reflected an 8.5% comparative increase in average revenue per car/unit, driven by increased rates per car/unit and higher fuel surcharge revenue. Aggregate volumes in the first quarter of 2019 were approximately 2.5 million cars, a decrease of 5.4% from 2.6 million cars in the first quarter of 2018.Pre-tax earnings were approximately $1.7 billion in the first quarter of 2019, an increase of 10.0% compared to 2018. BNSF experienced severe winter weather and flooding on parts of the network in the first quarter of 2019, which negatively affected revenues, expenses and service levels. BNSF’s first quarter results also included a revenue increase related to the favorable outcome of an arbitration hearing and a reduction to expense for a curtailment gain arising from an amendment to a retirement plan.

Revenues from consumer products were $2.0 billion in the first quarter of 2019, representing an increase of 7.6% compared to 2018. The increase reflected higher average revenue per car/unit, partially offset by volume decreases of 5.7%. The volume decrease was attributable to lower international intermodal market share, increased truck competition, and the adverse weather conditions.

Revenues from industrial products were $1.5 billion in the first quarter of 2019, an increase of 8.4% from 2018. The increase was attributable to higher average revenue per car/unit and a volume increase of 1.3%. Volumes in the first quarter of 2019 were higher primarily due to strength in the energy and industrial sectors, which drove higher demand for petroleum products, liquefied petroleum gas, and aggregates, partially offset by lower sand and taconite volumes as well as the aforementioned weather conditions.

Revenues from agricultural products in the first quarter of 2019 were $1.1 billion, a decrease of 3.4% compared to 2018. The revenue decline reflected lower volumes of 7.4%, partially offset by higher average revenue per car/unit. Volumes decreased primarily due to the weather conditions, partially offset by higher soybean exports.

Revenues from coal in the first quarter of 2019 were $869 million, a decrease of 8.3% compared to 2018. This decrease reflected lower volumes of 10.3%, partially offset by higher average revenue per car/unit. The volume decrease in the first quarter of 2019 was primarily attributable to the weather conditions, partially offset by higher market share.

BNSF’s operating expenses were $3.8 billion in the first quarter of 2019, a decrease of $26 million (0.7%) compared to 2018. The ratio of operating expenses to revenues in the first quarter of 2019 decreased 2.0 percentage points to 66.5% versus 2018. BNSF’s expenses reflected lower volume-related costs and the aforementioned retirement plan curtailment gain, substantially offset by the impact of the adverse weather conditions. Compensation and benefits expenses increased $205$85 million (17.5%(6.5%) for the third quarter of 2018 and $296 million (7.9%) for the first nine months of 2018,compared to 2018. The increase was primarily due to wage inflation including a change in estimate of the effect of a pending labor agreement recorded in 2017, increased headcount and higher employee counts and related training costs. Fuel expenses increased $264decreased $56 million (44.4%(7.3%) for the third quarter and $679 million (38.2%) for the first nine months ofcompared to 2018, primarily due to higherlower average fuel prices and increased volumes.

Purchased services expenses increased $110 million (18.1%) in the third quarter and $281 million (15.2%) in the first nine months of 2018 as compared to 2017. The increases were due to higher purchased transportation costs of our logistics services business, as well as increased intermodal ramping, drayage and other volume-related costs.

In the third quarter and first nine months of 2018, equipmentlower fuel volumes, partially offset by unfavorable efficiency. Equipment rents, materials and other expense increased $87decreased $96 million (22.7%(18.8%) and $206 million (15.9%), respectively, compared to 2017. These increases resulted from2018. The decrease was primarily attributable to the retirement plan curtailment gain, partially offset by higher locomotive materials, personal injury expenses and property taxes. The first nine months also included higher derailment-relatedcasualty-related costs.

BNSF’s effective income tax rate was 25.9% and 23.8% for the third quarter and first nine months of 2018, respectively, as compared to 39.1% and 38.2%, respectively, in the corresponding periods in 2017. 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%90.9% 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-largestlargest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.

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

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 operationssuch costs are not allowed to include such costs in the approved rates, operating results will be adversely affected. Among its provisions,The legislation known as the TCJATax Cuts and Jobs Act of 2017 (“TCJA”) was enacted in December 2017, which reduced the U.S. federal statutory corporate income tax rate of our domestic regulated utilities from 35% to 21%. In 2018, BHE’s regulated subsidiaries anticipatebegan passing the benefits of lower income tax expense attributable to the TCJA to customers through various regulatory mechanisms, including lower rates, higher depreciation 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 in 2018 and 2019.base. Revenues and earnings of BHE are summarized below (in(dollars in millions).

 

   Third Quarter   First Nine Months 
   Revenues   Earnings   Revenues   Earnings 
   2018   2017   2018   2017   2018   2017   2018   2017 

PacifiCorp

   $1,386     $1,443     $319     $389     $3,786     $3,991     $704     $912  

MidAmerican Energy Company

   857     832     251     250     2,354     2,209     347     402  

NV Energy

   1,071     1,057     268     347     2,456     2,412     403     539  

Northern Powergrid

   233     220     58     48     756     685     217     215  

Natural gas pipelines

   268     198     104     60     889     706     376     303  

Other energy businesses

   669     636     184     179     1,764     1,670     318     245  

Real estate brokerage

   1,222     965     83     81     3,263     2,511     180     197  

Corporate interest

   —     —     (102)    (111)    —     —     (307)    (332) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $    5,706     $    5,351         $    15,268    $    14,184      
  

 

 

   

 

 

       

 

 

   

 

 

     

Pre-tax earnings

 

   1,165     1,243         2,238     2,481  

Income taxes

 

   (49)    177         (279)    296  
  

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings

 

   1,214     1,066         2,517     2,185  

Noncontrolling interests

 

   123     114         260     244  
  

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

 

   $1,091     $952         $    2,257     $    1,941  
  

 

 

   

 

 

       

 

 

   

 

 

 

Effective income tax rate

 

   (4.2)%    14.2%        (12.5)%    11.9% 
  

 

 

   

 

 

       

 

 

   

 

 

 

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

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

   First Quarter
   Revenues  Earnings
   2019  2018  2019  2018

PacifiCorp

   $ 1,281    $ 1,202    $    222    $    173 

MidAmerican Energy Company

   872    767    84    40 

NV Energy

   628    625    36    40 

Northern Powergrid

   263    275    99    109 

Natural gas pipelines

   376    379    238    219 

Other energy businesses

   464    500    (7)    20 

Real estate brokerage

   788    764    (24)    (10) 

Corporate interest

           (108)    (104) 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $     4,672    $     4,512     
  

 

 

 

  

 

 

 

    

Pre-tax earnings

 

   540    487 

Income tax benefit

 

   (130)    (167) 
  

 

 

 

  

 

 

 

Net earnings

 

   $670    $654 

Noncontrolling interests

 

   65    69 
  

 

 

 

  

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

 

   $       605    $       585 
  

 

 

 

  

 

 

 

Effective income tax rate

 

   (24.1)%    (34.3)% 
  

 

 

 

  

 

 

 

PacifiCorp

PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in the thirdfirst quarter and first nine months of 2018 decreased 4% and 5%, respectively,2019 were $1.3 billion, an increase of $79 million (7%) compared to the same periodsperiod in 2017.2018. Retail revenues in the thirdfirst quarter of 2018 decreased $402019 increased $95 million and $218 million in the first nine months, compared to 2017. The declines reflected the effects of lower average rates ($185 millionyear-to-date), including the impact of the TCJA ($53 million2018, reflecting a 4.3% increase in the third quarter and $159 million in the first nine months), and ayear-to-date reduction in volumes (0.9%), largely attributable to weather and higher average rates ($39 million) due to lower net tax deferrals related to the impacts of weather.TCJA and to business mix changes. Wholesale and other revenues decreased $20 million due to lower volumes and rates.

Pre-tax earnings decreased $70increased $49 million (18%) in the third quarter and $208 million (23%(28%) in the first nine monthsquarter of 20182019 as compared to the same periodsperiod in 2017.2018. Utility margin (operating revenues less cost of fuel and purchased energy costs)energy) in the thirdfirst quarter and first nine months of 2018 were $9042019 was $794 million, and $2,446 million, respectively, representing decreasesan increase of $61$43 million (6%) and $205 million (8%), respectively, versus the comparable periods2018. The increase in 2017. These decreases were primarilyutility margin was due to the declinesincrease in revenues, which included the effects of the TCJA.partially offset by higher energy costs. PacifiCorp’safter-tax earnings in the thirdfirst quarter and first nine months of 20182019 were $270$180 million, and $603 million, respectively, representing an increase of $7$32 million (3%(22%) in the third quarter and a decrease of $15 million (2%) from the first nine months of 2017.compared to 2018.

MidAmerican Energy Company

MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the thirdfirst quarter and first nine months of 2018 increased $252019 were $872 million, (3%) and $145an increase of $105 million (7%(14%), respectively, as compared to the same periods in 2017. Electric operating revenues in 2018 increased $20 million in the third quarter and $108 million in the first nine months versus 2017. The third quarter increase was due to higher wholesale and other revenues due to increases in volumes and average prices. The increase in the first nine months was primarily attributable to higher retail revenues of $96 million, reflecting higher recoveries through bill riders (substantially offset in cost of sales, operating expenses and income tax expense) and volumes, partially offset by lower average rates, predominantly from the impact of the TCJA.2018. In the first nine monthsquarter of 2018,2019, electric operating revenues increased $73 million and natural gas revenues increased $20 million versus 2018. The increase in electric revenues was attributable to higher retail revenues ($55 million), reflecting increases in aggregate volumes and average rates from higher recoveries through bill riders, including a favorable ratemaking outcome in 2018 related to 2017 tax reform, and increased wholesale and other revenue ($18 million). The increase in natural gas revenues was primarily due to increased volumes, partially offset by a lower averageper-unit pricevolumes.

Item 2. Management’s Discussion and the effectsAnalysis of the TCJA.Financial Condition and Results of Operations

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

MidAmerican Energy Company (“Continued”)

Pre-tax earnings in the thirdfirst quarter of 2018 were relatively unchanged and in the first nine months decreased $552019 increased $44 million (14%) compared to the same periodsperiod in 2017.2018. Electric utility margin in the thirdfirst quarter and first nine months of 20182019 was $587$428 million, and $1,419an increase of $67 million respectively, increases of $10 million and $84 million, respectively, over the corresponding 2017 periods, which were primarily duecompared to the net increase in retail revenues in the first nine months. However, theyear-to-date2018. The increase in electric utility margin was more thanpartially offset by increased depreciation ($19 million) and maintenance and other operating expenses.expenses ($17 million). Theyear-to-date depreciation increase reflected increases in depreciation expense included $83 million from Iowa revenue sharing and $47 million from additional windnew wind-powered generation and other plant placedin-service.

additions. MEC’safter-tax earnings in 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 significantlyare greater than itspre-tax earnings due to the significant production income tax credits received relatingrelated to its wind-powered generating facilities. MEC’safter-tax earnings in the first quarter of 2019 were $190 million, an increase of $87 million (84%) compared to 2018.

NV Energy

NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues in the thirdfirst quarter and first nine months of 2018 increased 1% and 2%, respectively,2019 were $628 million, an increase of $3 million compared to the same periods in 2017. Electric2018, reflecting increased other income partly offset by lower operating revenues increased $12 million in the third quarter and $34revenues. Natural gas operating revenue decreased $4 million in the first nine monthsquarter of 2018, reflecting increased pass-through cost adjustments and higher volumes largely attributable2019, primarily due to the impacts of weather and retail customer growth, partlylower rates, partially offset by reductions from the impact of the TCJA andhigher customer usage. Retail electric operating revenues were relatively unchanged as lower retail rates resulting from a 2017 regulatory rate review. Natural gas operating revenue increased $8 million inreductions effective April 1, 2018 related to the first nine months of 2018, primarily due to a higher averageper-unit price, partiallyTCJA were largely offset by lowerhigher retail customer usage.

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

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

NV Energy (Continued)

wholesale revenue.

Pre-tax earnings in the thirdfirst quarter and first nine months of 20182019 decreased $79$4 million (23%(10%) and $136 million (25%), respectively, compared to the same periods in 2017. The decreases were primarily due to lower electric utility margin and increased depreciation, maintenance and other operating costs.2018. Electric utility margin in the thirdfirst quarter and first nine months of 20182019 was $623$321 million, and $1,366a decrease of $7 million respectively, representing decreases of $17 million (3%) and $38 million (3%) versus the comparable periods in 2017.compared to 2018. The decreases weredecrease was primarily due to the effects of the TCJA offset by the higher sales volumes.lower retail operating revenues. NV Energy’safter-tax earnings in the thirdfirst quarter and first nine months of 20182019 were $201$29 million, and $311a decrease of $4 million respectively, declines of 10% from each of the corresponding 2017 periods.(12%) compared to 2018.

Northern Powergrid

Revenues increased $13 million and $71decreased $12 million in the thirdfirst quarter and first nine months of 20182019 compared to same periods in 2017,2018, primarily due to the favorableunfavorable foreign currency translation effects of a weakerstronger average U.S. Dollar in the first nine months of 2018 and increased smart meter and distribution revenues.2019.Pre-tax earnings in the thirdfirst quarter of 2018 increased2019 decreased $10 million (21%(9%) and $2 million (1%) in the first nine months of 2018 compared to 2017,2018, primarily due to favorable foreign currency translation effects and the increases in revenues, partly offset by higher depreciation and other operating expenses, including higher pension settlement losses in 2018.lower revenues.

Natural gas pipelines

Revenues increased $70 million (35%) in the third quarter and $183 million (26%) in the first nine monthsquarter of 20182019 declined $3 million (1%) compared to 2017,2018. The decline was primarily due to higherlower transportation revenues of $58$19 million at Kern River (largely offset by lower depreciation) and $102 million, respectively, from higher volumes and rates due to unique market opportunities and increasedlower gas sales volumes related to system balancing activities at Northern Natural Gas, which were largely offset in cost of sales.sales, partially offset by higher transportation revenues at Northern Natural Gas of $20 million.Pre-tax earnings increased $44$19 million (73%) and $73 million (24%(9%) in the thirdfirst quarter and first nine months of 2018, respectively,2019 compared to 2017.2018. The increases wereincrease was primarily due to the increasesincrease in transportation revenues and lower depreciation expense,at Northern Natural Gas, partly offset by a comparative increasesincrease in operations and maintenanceoperating expenses.

Other energy businesses

Revenues increased $33 million (5%) in the third quarter and $94 million (6%)Other energy revenues in the first nine monthsquarter of 20182019 declined $36 million (7%) compared to the same periodsperiod in 2017, reflecting2018. The decline included comparativeyear-to-date increases decreases of 17% from renewable energy and a comparative decline of 10% and from7% at AltaLink, L.P. of 4%.Pre-tax earnings in the thirdfirst quarter and first nine months of 2018 increased $52019 decreased $27 million and $73 million, respectively, compared to the same periodsperiod in 2017. The increases were primarily attributable to the2018, which reflected increased revenuespre-tax losses from tax equity renewable energy and AltaLink, L.P., partlyinvestments. Thepre-tax losses from these investments were substantially offset by increased depreciation expense and higherincome tax benefits.After-tax earnings from other operating expenses.energy activities in the first quarter of 2019 were $104 million versus $110 million in 2018.

Real estate brokerage

Revenues in the thirdfirst quarter and first nine months of 20182019 increased 27% and 30%, respectively,3% as compared to the same periodsperiod in 2017, primarily2018 due to recent business acquisitions.acquisitions, partially offset by an 11% decrease in closed units at existing brokerage businesses.Pre-tax earnings decreased $17losses increased $14 million in the first nine monthsquarter of 20182019 as compared to 2017,2018, primarily due to lower net revenues at existing brokerage businesses and higher operating costs and interest expense, partially offset by higher margin.lower operating expenses.

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. The borrowings from Berkshire insurance subsidiaries were repaid in the third quarter of 2017.company. Corporate interest declined 7.5% in the first ninethree months of 20182019 increased 4% as compared to 2017,2018, primarily due to lowerhigher average borrowings.

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

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

Income taxes

BHE’s consolidated effective income tax raterates for the first nine monthsquarter of 2019 and 2018 were approximately (24.1%) and 2017 was (12.5)% and 11.9%(34.3%), 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 nine monthsquarter of 2018 decreased2019 increased primarily due to benefits recognized in 2018 related to foreign earnings and the reductionaccrued repatriation tax on undistributed foreign earnings in connection with the U.S. federal corporate income tax rate, as well as from lower state income tax expense,TCJA, partially offset by an increase in recognized production tax credits lower U.S. income taxes on foreign earnings and favorable impacts of rate making.

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(dollars in millions).

 

  Third Quarter   First Nine Months   First Quarter
  Revenues   Earnings *   Revenues   Earnings *   Revenues  Earnings *
  2018   2017   2018   2017   2018   2017   2018   2017   2019  2018  2019  2018

Manufacturing

   $13,552     $12,819     $    2,012     $    2,002     $  40,339     $37,654     $6,002     $5,428     $     15,070    $     14,722    $       2,194    $       2,207 

Service and retailing

   19,796     19,325     672     536     58,061     56,650     2,011     1,641     19,224    19,004    732    633 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

   $    33,348     $    32,144         $  98,400     $    94,304         $34,294    $33,726     
  

 

   

 

       

 

   

 

       

 

  

 

    

Pre-tax earnings

Pre-tax earnings

 

     2,684     2,538         8,013     7,069         2,926    2,840 

Income taxes and noncontrolling interests

Income taxes and noncontrolling interests

 

     587     844         1,953     2,396         726    713 
    

 

   

 

       

 

   

 

       

 

  

 

     $2,097     $1,694         $     6,060     $    4,673         $      2,200    $      2,127 
    

 

   

 

       

 

   

 

       

 

  

 

Effective income tax rate

Effective income tax rate

 

     21.3%     32.7%         23.8%     33.3%         24.5%    24.5% 
    

 

   

 

       

 

   

 

       

 

  

 

 

*

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 $192 million in 2019 and $614$218 million in the third quarter and first nine months of 2018, respectively, compared to $184 million and $485 million in the third quarter and first nine months of 2017, respectively.2018. These expenses are included in “Other” in the summary of earnings on page 2625 and in the “Other” earnings section on page 42.39.

Manufacturing

Our manufacturing group includes a variety of businesses that produce and distribute industrial, building and consumer products. Industrial products businesses includebusinesses. The industrial products group includes 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 industrial products for diverse markets (Marmon, Scott Fetzer and LiquidPower Specialty Products (“LSPI”)). Marmon includes UTLX Company (“UTLX”), which provides various products and services (including equipment leasing) for the rail and mobile crane industries.

OurThe building products businesses includegroup includes homebuilding and manufactured housing finance (Clayton Homes), 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). OurThe consumer products businesses includegroup includes 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 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(dollars in millions).

 

  Third Quarter   First Nine Months   First Quarter
  Revenues   Pre-tax earnings   Revenues   Pre-tax earnings   Revenues  Pre-tax earnings
  2018   2017   2018   2017   2018   2017   2018   2017   2019�� 2018  2019  2018

Industrial products

   $7,119     $6,657     $1,297     $1,247     $21,483     $19,802     $4,012     $3,508     $ 7,677    $ 7,619    $ 1,431    $ 1,467 

Building products

   3,389     3,124     375     407     9,563     8,983     1,042     1,057     4,562    4,080    482    447 

Consumer products

   3,044     3,038     340     348     9,293     8,869     948     863     2,831    3,023    281    293 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

   $    13,552     $    12,819     $    2,012     $    2,002     $  40,339     $    37,654     $    6,002     $    5,428     $     15,070    $     14,722    $     2,194    $     2,207 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

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

Manufacturing, Service and Retailing(Continued)

Manufacturing (Continued)

Aggregate revenues of our manufacturing businesses in the thirdfirst quarter and first nine months of 20182019 were approximately $13.6$15.1 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 approximately $2.0 billion, relatively unchanged from 2017, and $6.0 billion in the first nine months of 2018, an increase of $574$348 million (10.6%(2.4%) compared to 2017.2018.Pre-tax earnings in the first nine monthsquarter of 2017 includedpre-tax losses2019 were approximately $2.2 billion, a decrease of approximately $190$13 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 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.(0.6%) from 2018.

Industrial products

Revenues fromof the industrial products businessesgroup in the first quarter of 2019 were approximately $7.1$7.7 billion, inan increase of $58 million (0.8%) versus 2018.Pre-tax earnings of the third quarter and $21.5group were approximately $1.4 billion in the first nine monthsquarter of 2018, or increases2019, a decrease of $462$36 million (6.9%(2.5%) and $1.7 billion (8.5%), respectively, compared to 2017. 2018.Pre-tax earnings of the group as a percentage of revenues for the first quarter were 18.6% in 2019 and 19.3% in 2018.

PCC’s revenues in the thirdfirst quarter and first nine months of 2018 increased2019 were approximately 5.9% and 6.3%, respectively,$2.6 billion, an increase of 3.1% over the same periods in 2017.2018. The increasesincrease reflected increasedhigher demand in aerospace markets in connection with new aircraft programs, partly offset by lower demand for industrial gas turbine products.

products sales and lower sales of certain pipe products, primarily attributable to U.S tariffs.

PCC’spre-tax earnings increased 3.4% in the first quarter of 2019 compared to 2018. Results in 2019 reflected higher earnings from aerospace products, partially offset by lower earnings from industrial gas turbine business. While demand for aerospace products has been increasing, we have incurred incremental production and other costs to meet required deliveries to customers, which has negatively affected margins and earnings. However, we expect costs will decline as we increase production capacity where needed and further improve processes and reduce inefficiencies.

Lubrizol’s revenues in the first quarter of 2019 were approximately $1.7 billion, a decrease of 3.6% compared to 2018. The decline was primarily due to lower volumes and unfavorable foreign currency translation effects, partly offset by higher average selling prices. Lubrizol continued to experience increases in average material unit costs, necessitating increases in sales prices. Lubrizol’s consolidated volume in the first quarter of 2019 declined 4% from 2018, reflecting reduced volumes in the Additives product lines, partially offset by volume increases in the Advanced Materials product lines.

Lubrizol’spre-tax earnings decreased 5.2% in the first quarter of 2019 compared to 2018. Results in the first quarter of 2019 were negatively affected by the reduction in sales volume, unfavorable foreign currency translation effects, increased operating expenses and raw materials costs.

Marmon’s revenues in the first quarter of 2019 were approximately $2.0 billion, an increase of 1.2% as compared to 2018. First quarter revenues were higher in the Transportation Products (heavy-duty trucks and trailers), Retail Solutions and Crane Services sectors, partially offset by decreases across the other sectors. The comparative first quarter revenue declines were primarily in the Food & Beverage Equipment and Plumbing & Refrigeration sectors, which included the effects of a 2018 divestiture of a beverage equipment parts business, lower metals prices and volumes and unfavorable foreign currency translation effects of a stronger U.S Dollar.

Marmon’spre-tax earnings in the first quarter of 2019 decreased 3.1% compared to 2018.Pre-tax earnings as a percentage of sales fell to 14.9% in the first quarter of 2019 as compared to 15.5% in 2018.Pre-tax earnings in the first quarter of 2019 of the Rail Products & Leasing sector declined $10 million, which was attributable to lower average railcar lease rates. In addition, we experienced lower earnings from sales volume declines in the Metal Services and Plumbing & Refrigeration sectors, and depressed margins in the Retail Solutions and Industrial Products sectors, with the latter negatively affected by U.S. tariffs. These earnings declines were partially offset by increased earnings in the Transportation Products and Electrical Products sectors and from the effects of 2018 business acquisitions.

IMC’s revenues in the first quarter of 2019 were relatively unchanged from the first quarter of 2018, reflecting increased revenues from recent business acquisitions, offset by unfavorable foreign currency translation effects from a stronger U.S. Dollar. IMC’spre-tax earnings declined in the first quarter of 2019 versus 2018, reflecting increased average raw material costs, unfavorable foreign currency translation effects and changes in business mix.

CTB’s revenues increased 3.9% in the first quarter of 2019 versus 2018, primarily due to increased revenues from grain systems and processing equipment, partially offset by lower protein production revenues and the unfavorable foreign currency translation effects of a stronger U.S. Dollar. CTB’spre-tax earnings in the first quarter of 2019 increased 16.3% versus 2018, primarily due to the increase in revenues, moderation of average costs of certain raw materials, pricing efficiency and ongoing efforts to control operating expenses.

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

Manufacturing, Service and Retailing ( (Continued)

Industrial products (Continued)Continued)

 

Lubrizol’s revenues in the third quarter and first nine months of 2018 increased 7.3% and 7.6%, respectively, compared to 2017, primarily due to higher prices, changes in product mix and favorable foreign currency translation. Lubrizol experienced a significant increase in average material unit costs during 2018 and 2017, necessitating increases in sales prices. Lubrizol’s consolidated sales volumes increased 6% and 3%, respectively, in the third quarter and first nine months of 2018, as compared to 2017. IMC’s revenues increased 11.7% in the third quarter and 20.0% in the first nine 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 4.0% 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 retail products businesses and lower steel distribution volume. CTB’s revenues 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, related to Lubrizol’s disposition of an underperformingbolt-on business and related intangible asset impairments and restructuring charges. Excluding the effects of these losses,pre-tax earnings of the industrial products group increased 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 nine 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.

Lubrizol’spre-tax earnings, excluding the effects of the losses on the disposition of a bolt-on business in 2017, increased approximately 16% in the first nine months of 2018 compared to 2017. 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, somewhat offset by higher raw material costs and operating expenses. IMC’spre-tax earnings increased significantly in the first nine months of 2018 compared 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.

Marmon’spre-tax earnings in 2018 increased 3.2% in the third quarter and 12.3% in the first nine months compared to the same periods in 2017. The increase in the first nine months was primarily due to anon-recurring gain of $43 million from the sale of certain assets of its beverage products business in the second quarter.

Building products

Revenues of the building products group in the thirdfirst quarter and first nine months of 20182019 were approximately $3.4$4.6 billion, an increase of $482 million (11.8%) compared to 2018.Pre-tax earnings of the group in the first quarter of 2019 were $482 million, an increase of 7.8% versus 2018.Pre-tax earnings represented 10.6% and $9.6 billion, respectively, increases11.0% of $265revenues in the first quarter of 2019 and 2018, respectively.

Clayton Homes produced revenues of $1,554 million (8.5%in the first quarter of 2019, an increase of $307 million (25%) over 2018. The comparative increase was primarily due to increased home sales of $281 million (33%) and $580 million (6.5%), respectively,increased interest income from lending activities. The sales increase reflected changes in sales mix. Unit sales of site built homes in the first quarter of 2019 increased 157% over 2018, primarily due to business acquisitions completed during 2018, while manufactured homes sold at retail and wholesale declined 10%. The increase in income from lending activities was primarily due to increased average outstanding loan balances. As of March 31, 2019, aggregate loan balances outstanding were approximately $14.8 billion, compared to $13.8 billion as of March 31, 2018.

Pre-tax earnings of Clayton Homes for the corresponding 2017 periods. Forfirst quarter of 2019 were $216 million, an increase of $21 million (11%) compared to 2018. The increase was primarily attributable to home building activities, which reflected the thirdincrease in home sales. A significant part of Clayton Homes’ earnings derives from manufactured housing lending activities.Pre-tax earnings from lending activities in 2019 were relatively unchanged compared to 2018, as the increase in income from lending activities was substantially offset by higher interest expense, attributable to higher average outstanding debt and interest rates and to higher operating costs.

In the first quarter of 2019, our other building products businesses generated a comparative increase in revenues of 6%, primarily attributable to higher hard surface flooring products and first nine months of 2018, the increases reflected higherroofing systems volumes, partly offset by lower carpet volumes. Additionally, average selling prices product mix changes and unit increases with respectof these businesses were generally higher in the first quarter of 2019 as compared to certain flooring and insulation products. The selling price increases in 2018, which were in response to significantrising raw material cost increasesand other production costs over the past two years.year.

Pre-tax earnings of the other building products groupbusinesses in the thirdfirst quarter andof 2019 were $266 million, an increase of 6% over 2018. The ratio ofpre-tax earnings to revenues was relatively unchanged from the first nine monthsquarter of 2018 were $375 million and $1,042 million, respectively, decreases of 7.9% and 1.4%, respectively, versus the corresponding 2017 periods. Raw2018. As previously noted, rising raw material and production costs rosecost increases prevailed over the first nine months of 2018, which together with increased facilities closure costs, more than offset most of the increases in revenues.past year. In particular, coststhe cost increases for steel, titanium dioxide, and certain petrochemicals were substantially higher in 2018 than in 2017. Thesignificant. In the first quarter of 2019, these cost increases in selling prices have lagged the increases in raw materials costs and, consequently, gross margin rates have deteriorated.

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

Manufacturing, Service and Retailing (Continued)

moderated.

Consumer products

Revenues of the consumerConsumer products grouprevenues were approximately $2.8 billion in the thirdfirst quarter of 2018 were approximately $3.0 billion, essentially unchanged2019, a decrease of $192 million (6.4%) versus 2018. The first quarter revenue decline was primarily attributable to decreases at Forest River and Duracell, partly offset by higher revenues from 2017. Our apparel and footwear businesses generated a comparative thirdbusinesses. First quarter revenue increase2019 revenues 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%declined 16% versus 2018, reflecting an 18% decline in third quarter unit sales. Revenues of Duracell declined 6% in the first nine monthsquarter of 2018 were approximately $9.3 billion, an increase of $424 million (4.8%)2019 compared to the first nine monthsprior year period due to lower sales in foreign markets and the unfavorable effects of 2017. Theyear-to-date increase included increases from Forest River (5%) and our apparelforeign currency translation. Apparel and footwear businesses (6%)revenues in the first quarter of 2019 increased 6%, which weredue primarily due to increased volume fromincreases of 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%(22%) and the apparel group (5%).

Consumer productspre-tax earnings were $281 million in the first quarter of 2019, a decrease of $12 million (4.1%) compared to 2018.Pre-tax earnings as a percentage of revenues were 9.9% in 2019 and footwear businesses (9%),9.7% in 2018. The decrease inpre-tax earnings reflected a 24% comparative decline at Forest River, 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 offrom Brooks Sports, the apparel businesses 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.Richline.

Service and retailing

A summary of revenues andpre-tax earnings of our service and retailing businesses follows (in millions).

 

  Third Quarter   First Nine Months   First Quarter
  Revenues       Pre-tax earnings       Revenues       Pre-tax earnings       Revenues  Pre-tax earnings
  2018   2017   2018   2017   2018   2017   2018   2017   2019  2018  2019  2018

Service

   $3,141     $2,775     $444     $315    $9,219     $8,184     $1,268    $926     $3,418    $3,173    $472    $415 

Retailing

   3,833     3,752     184     176     11,404     10,986     572     513     3,607    3,642    149    158 

McLane Company

   12,822     12,798     44     45     37,438     37,480     171     202     12,199    12,189    111    60 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

   $ 19,796     $ 19,325     $    672     $    536    $ 58,061     $ 56,650     $  2,011    $    1,641     $    19,224     $    19,004     $    732     $    633  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

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

Manufacturing, Service and Retailing(Continued)

Service

Our service businesses offerbusiness group offers 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). ServiceOther service businesses also include thetransportation equipment leasing (XTRA) and furniture leasing (CORT), electronic news 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 nine monthsquarter of 2018, representing increases2019 were approximately $3.4 billion, an increase of $366$245 million (13.2%(7.7%) and $1.0 billion (12.6%), respectively, as compared to the same periods in 2017. TTI’s2018. The increase was primarily attributable to TTI and NetJets. First quarter 2019 revenues in the third quarter and first nine months of 2018TTI increased approximately 35%15% compared to the same periods in 2017. The increases reflected an2018, reflecting industry-wide increase inincreased demand throughout 2018 for electronic components in many geographic markets around the world that began in 2017, and from the effects of business acquisitions, andpartly offset by foreign currency translation due toeffects of a weakerstronger average U.S. Dollar. While TTI’s revenue increases were significant, weWe believe thatthe strong growth in electronic components demand experienced recently is beginning to moderate. Otherwise, Charter Brokerage, FlightSafety and WPLG generated comparativeNetJets revenue increased 5% in the first quarter of 2019, due to increases in the first nine monthsnumber of 2018, while the revenues from most of our other service businesses declined from 2017.aircraft on lease and in flight hours.

Pre-tax earnings of the service group in the thirdfirst quarter and first nine months of 20182019 were $444$472 million, and $1.3 billion, respectively, increasesan increase of $129$57 million (41.0%(13.7%) and $342 million (36.9%), respectively, compared to 2018.Pre-tax earnings of the same periodsgroup were 13.8% of first quarter revenues in 2017.2019 compared to 13.1% in 2018. The increase in comparative increases infirst quarter earnings in 2018 were driven by the aforementioned revenue increases atwas primarily attributable to TTI which accounted for almost 70% of these increases, as well as from earnings increases at Charter Brokerage and 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 otherOther 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.

Revenues of the retailing businessgroup in the thirdfirst quarter and first nine months of 20182019 were $3.8approximately $3.6 billion, and $11.4 billion, respectively, increasesa decrease of $81$35 million (2.2%(1.0%) and $418 million (3.8%), respectively, compared to the same periods in 2017.2018. BHA’s revenues, which represented approximately 64%65% of theyear-to-dateour aggregate retailing revenues, in 2018, increased 2.1% in the third quarter and 4.0%1.3% in the first nine monthsquarter of 2018 as2019 compared to 2017.2018. The increases derivedincrease was primarily from increaseda 7% increase inpre-owned vehicle sales and higher revenues from finance and service contract activities, partly offset by a 4% reduction in new auto sales. Revenues from new vehicle sales were down 2.3% in the third quarterof See’s Candies and relatively unchanged for the first nine months. In addition, Louis revenues increased 9.1%Oriental Trading declined 19% and 11%, respectively, in the first nine monthsquarter of 2019 compared to 2018, due primarily attributable to foreign currency translationthe seasonal effects and comparatively higher sales.of the timing of the Easter holiday. Revenues of our home furnishings businesses increased 5.4%declined 4% in the first nine monthsquarter of 2019 versus 2018 comparedattributable to 2017, due to higher volumesslowing consumer demand and unfavorable weather in certain geographic markets and the effect of a new store, which opened in 2018.regions.

Pre-tax earnings of the retailing group in the thirdfirst quarter of 2019 were $149 million, a decrease of $9 million (5.7%) from 2018. Our home furnishings retailers experienced a 42% decline in comparative first quarter earnings, reflecting lower revenues and generally higher operating expenses.Pre-tax earnings of See’s Candies and Oriental Trading also declined in the first nine monthsquarter of 2019 compared to 2018, from retailing were $184 million and $572 million, respectively, increases of $8 million (4.5%) and $59 million (11.5%), respectively, over 2017. The increases were primarily attributable to BHA and Louis. Thethe lower revenues previously noted. These earnings increasesdeclines were partly offset by increased earnings of BHA, were primarilydue to increased earnings from finance and insuranceservice contract activities, while the increases at Louis were primarily attributable to the revenue increases.partly offset by higher floorplan interest expense.

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 unitsbusinesses generate high sales volumes and very low operating margins andprofit margins. These businesses have several significant customers, including Walmart,Wal-Mart,7-Eleven7-Eleven, Yum! Brands and Yum! Brands.others. Grocery sales comprise approximatelytwo-thirds of McLane’s consolidated sales with food service comprising most of the remainder. 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 thirdfirst quarter andof 2019 were $12.2 billion, relatively unchanged from the first nine monthsquarter of 2018, were $12.8 billion and $37.4 billion, respectively, relatively unchanged compared to the same periodsreflecting a 1.5% decrease in 2017. On ayear-to-date basis, grocery sales increased 0.8% and foodservice sales declined 2.4%, compared to 2017. The declinea 2.7% increase in foodservice revenues was primarily due to a net loss of customers.

sales.Pre-tax earnings in the thirdfirst quarter of 20182019 were $44$111 million, essentially unchangedan increase of $51 million (85%) compared to 2018. The comparative improvement in first quarter earnings was primarily due to the effects of lower LIFO inventory valuation allowances from 2017, whilepre-tax earningslower inventory levels and gains from increased prices related to certain inventory items. Otherwise, pretax-earnings in the first nine monthsquarter of 2018 of $171 million declined $31 million (15.3%), compared to 2017. McLane’s grocery and foodservice businesses continue2019 were substantially unchanged from 2018. McLane continues to operate in a highlyan intensely competitive business environment, which is negatively affecting its current operating results. Gross margin rates increased slightly over the first nine months of 2018, but were more than offset by increases in fuel, depreciationresults and certain other operating expenses, producing a decline in itscontributing to low operating margin rate compared to 2017.rates. We expect the currentthese unfavorable operating conditions will continue intoin 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).

   Third Quarter   First Nine Months 
   Revenues   Earnings   Revenues   Earnings 
   2018   2017   2018   2017   2018   2017   2018   2017 

Manufactured housing and finance

   $1,580    $1,318    $205     $173     $4,336     $3,591    $634     $546  

Transportation equipment leasing

   674     652     209     219     2,000     1,928     624     649  

Other

   178     183     116     104     525     500     331     243  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $    2,432    $    2,153         $    6,861     $    6,019      
  

 

 

   

 

 

       

 

 

   

 

 

     

Pre-tax earnings

       530     496         1,589     1,438  

Income taxes and noncontrolling interests

       140     177         396     505  
      

 

 

   

 

 

       

 

 

   

 

 

 
      $        390     $      319        $    1,193     $    933  
      

 

 

   

 

 

       

 

 

   

 

 

 

Effective income tax rate

       26.6%     35.6%         25.0%     35.1%  
      

 

 

   

 

 

       

 

 

   

 

 

 

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 nine months of 2018 were approximately $1.6 billion and $4.3 billion, respectively, increases of $262 million (19.9%) and $745 million (20.7%), respectively, over the corresponding 2017 periods. The increases reflectedyear-to-date increases in home sales of 29% and in financial services revenue of approximately 4%. The increase in home sales was primarily due to a 104%year-to-date increase in unit sales of site built homes attributable to business acquisitions during the last two years, and to 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 comparative increase in average loan balances of approximately 5% over the first nine months of 2018 as compared to 2017. As of September 30, 2018, Clayton Homes’ loan balances were approximately $14.4 billion.

Pre-tax earnings in the third quarter and first nine months of 2018 were $205 million and $634 million, respectively, increases of $32 million (18.5%) and $88 million (16.1%), respectively, compared to the same periods in 2017. The increases in earnings reflected increased manufactured and site built home sales and financial services interest income, lower corporate overhead costs and credit losses, partly offset by increased interest expense and the effects of an $11 million gain from a legal settlement in 2017.

Transportation equipment leasing

Transportation equipment leasing revenues in 2018 were $674 million 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 and 13% in the first nine months over the same periods in 2017, primarily due to increased units on lease. Revenues in the third quarter of 2018 of our railcar and crane services businesses were relatively unchanged compared to 2017, while revenues in the first nine months increased $32 million (2%) compared to 2017. The increase 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 of ourover-the-road trailer and crane services businesses. Significant components of the operating costs of these businesses, such as depreciation, interest and certain other operating costs, do not vary proportionately to revenue changes. Thus, changes in revenues can disproportionately affect earnings.

Other

Other earnings from our finance activities include CORT furniture leasing and other investment income. Other earnings also include interest income on loans to finance Clayton Homes’ loan portfolio and transportation equipment held for lease (charged as interest expense in the results of those 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 gains/losses follows (in(dollars in millions).

 

   Third Quarter   First Nine Months 
   2018   2017   2018   2017 

Investment gains/losses

   $14,569     $657    $12,750     $1,262 

Derivative gains/losses

   137     308     303     703  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gains/losses before income taxes and noncontrolling interests

   14,706     965     13,053     1,965  

Income taxes and noncontrolling interests

   3,046     342     2,701     695  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net gains/losses

   $      11,660     $623    $      10,352     $1,270  
  

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

   20.5%           35.3%     20.8%           35.3%  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Investment and Derivative Gains/Losses(Continued)

   First Quarter
   2019  2018

Investment gains (losses)

   $    19,552    $    (7,809) 

Derivative gains (losses)

   770    (206) 
  

 

 

 

  

 

 

 

Gains (losses) before income taxes and noncontrolling interests

   20,322    (8,015) 

Income taxes and noncontrolling interests

   4,216    (1,589) 
  

 

 

 

  

 

 

 

Net gains (losses)

   $16,106    $    (6,426) 
  

 

 

 

  

 

 

 

Effective income tax rate

   20.7%    19.6% 
  

 

 

 

  

 

 

 

Investment gains/losses

As discussed in Note 2Due to the accompanying Consolidated Financial Statements, on January 1, 2018, we adopted a new accounting pronouncement (“ASUadopted as of January 1, 2018,2016-01”),pre-tax which requiresinvestment gains/losses reported in earnings in the recognition offirst quarter included net unrealized gains of approximately $19.4 billion in 2019 and net unrealized losses arisingof approximately $7.8 billion in 2018 from changes in market values ofour investments in equity securities instill held the Consolidated Statementsend of Earnings.each period. Prior to 2018, investment gains/losses related toon equity securities were generally recorded aswhen the securities were sold redeemed or exchanged and were based on the cost of the disposed securities. While ASU2016-01the new accounting standard does not change the affect on our consolidated shareholders’ equity or total comprehensive income, it is expected tohas significantly increaseincreased the volatility of our periodic net earnings givendue to the magnitude of our existing equity securities portfolio and the inherent volatility of equity securities prices. Investment gains and gains/losses have caused andfrom periodic changes in securities prices will continue to cause significant volatility in earnings reported in our Consolidated Statements of Earnings.

Pre-tax investment gains/losses reflected in earnings in 2018 included net unrealized gains of approximately $14.3 billion in the third quarter and $12.1 billion for the first nine months from investments in equity securities still held at 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 ofconsolidated earnings.

We believe that investment gains/losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported resultsconsolidated earnings 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 ofincluding the changes in market prices for equity securities now reported in earnings are unpredictable over any quarterlygiven period, has little analytical or annual period.predictive value.

Derivative gains/losses

Derivative contract gains/losses representinclude the changes in fair value of our equity index put option contract liabilities. These liabilities relate to contracts entered into before March 2008 and that2008. Substantially all of these contracts will expire between April 2019 and January 2026.February 2023. The periodic changes in the fair values of these liabilities 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 September 30, 2018,March 31, 2019, the intrinsic value of our equity index put option contracts was approximately $919 million$1.0 billion and our recorded liabilities at fair value were approximately $1.9$1.7 billion. Our ultimate payment obligations, if any, under our 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 gains inContracts with an aggregate notional value of approximately $12.2 billion will expire over the first nine monthsremainder of 2018 of $303 million, which were primarily due to foreign currency exchange rate changes and the effects of shorter average contract durations, partially offset by lower values on certain indexes. 2019.

Derivative contracts producedpre-tax gains of $703$770 million in the first nine monthsquarter of 2017, which2019 compared topre-tax losses of $206 million in 2018. The gains in 2019 were primarily attributabledue to higher equity index values, and shorter contract durations, partly offset by unfavorablechanges in foreign currency exchange rate changes.rates and shorter average contract durations.

Other

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

 

  Third Quarter   First Nine Months   First Quarter
  2018   2017   2018   2017   2019  2018

Equity method earnings

  $269    $248    $894    $807     $    166    $      340 

Acquisition accounting expenses

   (199)    (196)            (637)    (518)    (192)    (218) 

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) 

Corporate interest expense, before foreign currency effects

   (74)    (77) 

Corporate interest expense, Euro note foreign exchange rate effects

   134    (163) 

Income tax expense adjustment

   (377)     

Other

   180     18     283     25     214    130 
  

 

   

 

   

 

   

 

   

 

  

 

Net earnings (losses) attributable to Berkshire Hathaway shareholders

  $        229    $        (168)   $520    $        (455)    $    (129)    $      12 
  

 

   

 

   

 

   

 

   

 

  

 

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

Other (Continued)

After-tax equity method earnings includesinclude Berkshire’s share of earnings attributable to Kraft Heinz, Pilot Flying J, Berkadia and Electric Transmission of Texas. As discussed in Note 5 to the accompanying unaudited interim Consolidated Financial Statements, financial statements of Kraft Heinz for the first quarter of 2019 were not made available to us. Accordingly, our consolidated financial statements do not include our share of Kraft Heinz’s earnings for that period.After-tax otherequity method earnings (losses) alsofrom Kraft Heniz were $234 million in the first quarter of 2018. We will include our share of Kraft Heinz’s first quarter 2019 earnings in our earnings in the period such information is made available to Berkshire.

After-tax acquisition accounting expenses include charges arising from the application of the acquisition method in connection with certain of Berkshire’s past business acquisitions. Such charges were primarily from the amortization or impairment of intangible assets recorded in connection with those business acquisitions. Berkshire issued

The aggregate par amount of Berkshire’s outstanding Euro denominated debt in 2015, 2016 and 2017 and at September 30, 2018, the aggregate par amount outstanding was €6.85 billion.billion during the first quarter of 2019 and 2018. Changes in foreign currency exchange rates in 2018 and 2017 produced sizablenon-cash unrealized gains in the first quarter of 2019 and losses in the first quarter of 2018 from the periodic revaluation of these liabilities into U.S. Dollars.

Item 2. Management’s DiscussionThe income tax expense adjustment relates to investments that we made between 2015 and Analysis2018 in certain tax equity investment funds. Our investments in these funds aggregated approximately $340 million. In December 2018 and during the first quarter of Financial Condition and Results2019, we learned of Operations(Continued)

allegations by federal authorities of fraudulent income conduct by the sponsor of these funds. As a result of our investigation into these allegations, we now believe that it is more likely than not that the income tax benefits that we recognized are not valid.

Financial Condition

Our consolidated balance sheet continues to reflect significant liquidity and a strong capital base. Our consolidatedConsolidated shareholders’ equity at September 30, 2018March 31, 2019 was $375.6approximately $369 billion, increasesan increase of $17.5 billion since June 30, 2018 and $27.3$20.2 billion since December 31, 2017.2018. Net earnings attributable to Berkshire shareholders in the first nine monthsquarter of 20182019 were $29.4$21.7 billion, which includedafter-tax gains on our investments of approximately $10.1 billion. Most of these gains derived from changes$15.5 billion, which was primarily due to increases during the first quarter in market prices forof the equity securities we owned at September 30, 2018.March 31, 2019.

At September 30, 2018,March 31, 2019, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of approximately $96.5$110.5 billion, which included $74.5$89.9 billion in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investment in Kraft Heinz) were $219.5approximately $211.2 billion.

Berkshire parent company debt outstanding at September 30, 2018March 31, 2019 was approximately $17.0$16.7 billion, a decrease of $1.8 billion from$167 million since December 31, 2017, reflecting maturities of $1.55 billion in term debt and a $273 millionyear-to-date decrease2018, which was attributable to foreign currency exchange rate changes applicable to the €6.85 billion par amount of Euro denominated senior notes. The next maturity of Berkshire parent company debt isof $750 million matures in August 2019.

Berkshire’s insurance and other subsidiary outstanding borrowings declined approximately $1 billion in the first quarter of 2019 to approximately $17.1 billion at March 31, 2019, primarily attributable to a net decrease in borrowings of Berkshire Hathaway Finance Corporation (“BHFC”), a wholly-owned financing subsidiary. 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. In the first quarter of 2019, BHFC repaid $2.7 billion of maturing senior notes and issued $2.0 billion of 4.25% senior notes due in 2049. An additional $1.25 billion of BHFC senior notes will mature in August 2019. Berkshire guarantees the full and timely payment of principal and interest with respect to BHFC’s senior notes.

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 capitalCapital expenditures of these two operations will approximate $9.8 billion for the year ending December 31, 2018, of which approximately $6.4 billion was expended duringin the first nine months.quarter of 2019 were $2.0 billion and we forecast additional capital expenditures of approximately $9.0 billion over the remainder of 2019.

BNSF’s outstanding debt approximated $23.3$23.2 billion as of September 30, 2018, an increase of $758 millionMarch 31, 2019, which was substantially unchanged since December 31, 2017. In August 2018,2018. BNSF issueddebentures of $750 million of 4.15% senior unsecured debentures duewill mature in 2048.2019. Outstanding borrowings of BHE and its subsidiaries were approximately $39.3$40.1 billion at September 30, 2018, a decreaseMarch 31, 2019, an increase of $337$840 million since December 31, 2017.2018. In July 2018,the first quarter of 2019, BHE and its subsidiaries issued $1.0debt aggregating $3.0 billion with maturity dates ranging from 2029 to 2050 and repaid approximately $1.4 billion of 4.45% senior unsecured debt that matures in 2049. BHE subsidiaries also issued debt in July 2018, aggregating $1.05 billion and due in 2049.maturing term debt. The proceeds from these financings were used to repay borrowings, to fund capital expenditures and for other general corporate purposes. Approximately $500 million of BHE subsidiary term debt of $666 million will mature inover the fourth quarter of 2018, and another $1.4 billion will mature in the first quarterremainder 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.

Finance

Item 2. Management’s Discussion and financial products assets were approximately $38.3 billion asAnalysis of September 30, 2018, a decreaseFinancial Condition and Results of $3.6 billion since 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 $2.3 billion in the first nine months of 2018 to approximately $14.4 billion at September 30, 2018, primarily attributable to a net decrease in borrowings of a wholly-owned financing subsidiary, Berkshire Hathaway Finance Corporation (“BHFC”). During 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 $2.7 billion of BHFC senior notes will 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.Operations

Berkshire has a

Financial Condition(Continued)

Berkshire’s common stock repurchase program which, aswas amended on July 17, 2018, permitspermitting Berkshire to repurchase its Class A and Class B shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, a Vice-ChairmanVice 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. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. In the thirdfirst quarter of 2018,2019, Berkshire paid $928 million to repurchaserepurchased shares of Class A and B common stock under the program.for an aggregate cost of approximately $1.7 billion.

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 pertaining to the acquisition of goods or services in the future such as minimum rentals under operating leases and certain purchase obligationsare not currently reflected in the financial statements, and will be recognized in future periods as the goods are delivered or services are provided. Beginning in 2019, operating lease obligations are included in the consolidated balance sheet as a result of the adoption of a new accounting pronouncement. 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.events. Actual payments will likely vary, perhaps materially, from the estimated liabilities currently recorded in our Consolidated Balance Sheet.

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

Contractual Obligations(Continued)

OurExcept as otherwise disclosed in this Quarterly Report, our contractual obligations as of DecemberMarch 31, 20172019 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.2018.

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, 2017.2018.

Our Consolidated Balance Sheet as of September 30, 2018March 31, 2019 includes estimated liabilities for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts of approximately $106$111 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 September 30, 2018March 31, 2019 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 2017.2018. Although we believe that the goodwill reflected in the accompanying Consolidated Balance Sheet is not impaired, goodwill may subsequently become impaired as a result ofdue to 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 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.

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

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 thatwhich are predictive in nature, which depend upon or refer to future events or conditions, and maywhich 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 importantprincipal 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 September 30, 2018,March 31, 2019, there were no material changes in the market risks described in Berkshire’s Annual Report on Form10-K for the year ended December 31, 2017.2018.

Item 4. Controls and Procedures

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

Part II Other Information

Item 1. Legal Proceedings

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.

Item 1A. Risk Factors

Our significant business risks are described in Item 1A to Form10-K for the year ended December 31, 20172018 to which reference is made herein.

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

For several years, Berkshire had a common stock repurchase program, which 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 Charles Munger, a Vice-ChairmanVice 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 transactions. Information with respect to Berkshire’s Class A and Class B common stock repurchased during the thirdfirst quarter of 20182019 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

  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:

        

February 26 through February 28:

        

Class A common stock

   225        $312,806.74    225       *   293    $302,622.16    293    * 

Class B common stock

   595,412    $201.73    595,412    * 

March 1 through March 29:

        

Class A common stock

   965    $    304,175.15    965    * 

Class B common stock

   4,139,192        $207.09    4,139,192       *   5,924,418    $200.63    5,924,418    * 

 

*

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.

Item 5. Other Information

None

Item 6. Exhibits

 

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.

12Calculation 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 September 30, 2018,March 31, 2019, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of September 30, 2018March 31, 2019 and December 31, 2017,2018, (ii) the Consolidated Statements of Earnings for each of the three-month and nine-month periods ended September 30,March 31, 2019 and 2018, and 2017, (iii) the Consolidated Statements of Comprehensive Income for each of the three-month and nine-month periods ended September 30,March 31, 2019 and 2018, and 2017, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for each of the nine-monththree-month periods ended September 30,March 31, 2019 and 2018, and 2017, (v) the Consolidated Statements of Cash Flows for each of the nine-monththree-month periods ended September 30,March 31, 2019 and 2018, and 2017, and (vi) the Notes to Consolidated Financial Statements, tagged in summary and detail.

SIGNATURE

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

 

BERKSHIRE HATHAWAY INC.
 

BERKSHIRE HATHAWAY INC.

(Registrant)

Date: November 3, 2018May 4, 2019

 

/S/ MARC D. HAMBURG

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

 

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