10-Q 1 d370289d10q.htm 10-Q 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended June 30, 2018

OR

 

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

For the transition period from                  to                 

Commission file number 001-14905

 

 

BERKSHIRE HATHAWAY INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-0813844

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

3555 Farnam Street, Omaha, Nebraska 68131

(Address of principal executive office)

(Zip Code)

(402) 346-1400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-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 Rule 12b-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 Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Number of shares of common stock outstanding as of July 26, 2018:

 

Class A —

     734,527  

Class B —

     1,365,840,748  

 

 

 


BERKSHIRE HATHAWAY INC.

 

       Page No.    

Part I – Financial Information

  

Item 1. Financial Statements

  
 

Consolidated Balance Sheets—June 30, 2018 and December 31, 2017

     2-3  
 

Consolidated Statements of Earnings—Second Quarter and First Six Months 2018 and 2017

     4  
 

Consolidated Statements of Comprehensive Income— Second Quarter and First Six Months 2018 and 2017

     5  
 

Consolidated Statements of Changes in Shareholders’ Equity—First Six Months 2018 and 2017

     5  
 

Consolidated Statements of Cash Flows—First Six Months 2018 and 2017

     6  
 

Notes to Consolidated Financial Statements

     7-25  

Item 2.

 

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

     26-44  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     45  

Item 4.

 

Controls and Procedures

     45  

Part II – Other Information

     45  

Item 1.

 

Legal Proceedings

     45  

Item 1A.

 

Risk Factors

     45  

Item 2.

 

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

     45  

Item 3.

 

Defaults Upon Senior Securities

     45  

Item 4.

 

Mine Safety Disclosures

     45  

Item 5.

 

Other Information

     45  

Item 6.

 

Exhibits

     46  

Signature

     46  

 

1


Part I Financial Information

Item 1. Financial Statements

BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

        June 30,    
2018
    December 31,    
2017
    (Unaudited)    

ASSETS

   

Insurance and Other:

   

Cash and cash equivalents*

   $ 57,918      $ 25,460  

Short-term investments in U.S. Treasury Bills

    45,243       78,515  

Investments in fixed maturity securities

    18,524       21,353  

Investments in equity securities

    174,033       164,026  

Investment in The Kraft Heinz Company

    17,530       17,635  

Receivables

    31,280       28,578  

Inventories

    16,194       16,187  

Property, plant and equipment

    23,948       20,104  

Goodwill

    54,955       54,985  

Other intangible assets

    31,925       32,518  

Deferred charges under retroactive reinsurance contracts

    14,730       15,278  

Other

    11,619       11,158  
 

 

 

 

 

 

 

 

    497,899       485,797  
 

 

 

 

 

 

 

 

Railroad, Utilities and Energy:

   

Cash and cash equivalents*

    3,363       2,910  

Property, plant and equipment

    129,216       128,184  

Goodwill

    24,772       24,780  

Regulatory assets

    2,929       2,950  

Other

    15,590       15,589  
 

 

 

 

 

 

 

 

    175,870       174,413  
 

 

 

 

 

 

 

 

Finance and Financial Products:

   

Cash and cash equivalents*

    3,280       3,213  

Short-term investments in U.S. Treasury Bills

    1,295       5,856  

Loans and finance receivables

    14,211       13,748  

Property, plant and equipment and assets held for lease

    10,065       9,931  

Goodwill

    1,523       1,493  

Other

    7,789       7,644  
 

 

 

 

 

 

 

 

    38,163       41,885  
 

 

 

 

 

 

 

 

   $     711,932      $ 702,095  
 

 

 

 

 

 

 

 

 

  *

Cash and cash equivalents includes U.S. Treasury Bills with maturities of three months or less when purchased of $41.6 billion at June 30, 2018 and $5.7 billion at December 31, 2017.

See accompanying Notes to Consolidated Financial Statements

 

2


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(dollars in millions)

 

        June 30,    
2018
        December 31,    
2017
 
        (Unaudited)            

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

Insurance and Other:

   

Unpaid losses and loss adjustment expenses

   $ 62,737       $ 61,122   

Unpaid losses and loss adjustment expenses under retroactive reinsurance contracts

    42,115        42,937   

Unearned premiums

    18,292        16,040   

Life, annuity and health insurance benefits

    18,061        17,608   

Other policyholder liabilities

    6,900        7,654   

Accounts payable, accruals and other liabilities

    26,384        23,099   

Notes payable and other borrowings

    25,158        27,324   
 

 

 

   

 

 

 
    199,647        195,784   
 

 

 

   

 

 

 

Railroad, Utilities and Energy:

   

Accounts payable, accruals and other liabilities

    10,986        11,334   

Regulatory liabilities

    7,744        7,511   

Notes payable and other borrowings

    62,664        62,178   
 

 

 

   

 

 

 
    81,394        81,023   
 

 

 

   

 

 

 

Finance and Financial Products:

   

Accounts payable, accruals and other liabilities

    1,662        1,470   

Derivative contract liabilities

    2,006        2,172   

Notes payable and other borrowings

    8,951        13,085   
 

 

 

   

 

 

 
    12,619        16,727   
 

 

 

   

 

 

 

Income taxes, principally deferred

    56,514        56,607   
 

 

 

   

 

 

 

Total liabilities

    350,174        350,141   
 

 

 

   

 

 

 

Shareholders’ equity:

   

Common stock

           

Capital in excess of par value

    35,694        35,694   

Accumulated other comprehensive income

    (3,808)       58,571   

Retained earnings

    327,963        255,786   

Treasury stock, at cost

    (1,763)       (1,763)  
 

 

 

   

 

 

 

Berkshire Hathaway shareholders’ equity

    358,094        348,296   

Noncontrolling interests

    3,664        3,658   
 

 

 

   

 

 

 

Total shareholders’ equity

    361,758        351,954   
 

 

 

   

 

 

 
   $     711,932       $ 702,095   
 

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

3


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(dollars in millions except per share amounts)

 

    Second Quarter     First Six Months  
    2018     2017     2018     2017  
    (Unaudited)     (Unaudited)  

Revenues:

       

Insurance and Other:

       

Insurance premiums earned

  $ 14,149      $ 12,367    $ 27,522      $ 34,120  

Sales and service revenues

    33,256        31,733      64,879        61,962  

Interest, dividend and other investment income

    1,534        1,322      2,849        2,484  
 

 

 

   

 

 

   

 

 

   

 

 

 
    48,939        45,422      95,250        98,566  
 

 

 

   

 

 

   

 

 

   

 

 

 

Railroad, Utilities and Energy operating and other revenues

    10,895        9,822      20,997        19,200  
 

 

 

   

 

 

   

 

 

   

 

 

 

Finance and Financial Products:

       

Sales and service revenues

    1,992        1,648      3,685        3,146  

Interest, dividend and other investment income

    374        364      741        714  
 

 

 

   

 

 

   

 

 

   

 

 

 
    2,366        2,012      4,426        3,860  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    62,200        57,256      120,673        121,626  
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment and derivative contract gains/losses:

       

Investments gains (losses)

    5,990        290      (1,819)       605  

Derivative contract gains (losses)

    372        (65)       166        395  
 

 

 

   

 

 

   

 

 

   

 

 

 
    6,362        225      (1,653)       1,000  
 

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

       

Insurance and Other:

       

Insurance losses and loss adjustment expenses

    9,401        8,747      18,364        27,313  

Life, annuity and health insurance benefits

    1,418        1,263      2,705        2,490  

Insurance underwriting expenses

    2,123        2,378      4,727        4,717  

Cost of sales and services

    26,480        25,419      51,895        49,779  

Selling, general and administrative expenses

    4,150        4,020      8,174        8,136  

Interest expense

    (260)       700      130        970  
 

 

 

   

 

 

   

 

 

   

 

 

 
    43,312        42,527      85,995        93,405  
 

 

 

   

 

 

   

 

 

   

 

 

 

Railroad, Utilities and Energy:

       

Cost of sales and operating expenses

    7,963        6,940      15,364        13,694  

Interest expense

    702        697      1,412        1,390  
 

 

 

   

 

 

   

 

 

   

 

 

 
    8,665        7,637      16,776        15,084  
 

 

 

   

 

 

   

 

 

   

 

 

 

Finance and Financial Products:

       

Cost of sales and services

    1,217        962      2,246        1,829  

Selling, general and administrative expenses

    518        469      985        911  

Interest expense

    79        103      171        207  
 

 

 

   

 

 

   

 

 

   

 

 

 
    1,814        1,534      3,402        2,947  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    53,791        51,698      106,173        111,436  
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes and equity method earnings

    14,771        5,783      12,847        11,190  

Equity method earnings

    327        346      728        627  
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings before income taxes

    15,098        6,129      13,575        11,817  

Income tax expense

    3,021        1,774      2,569        3,323  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings

    12,077        4,355      11,006        8,494  

Earnings attributable to noncontrolling interests

    66        93      133        172  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

   $ 12,011       $ 4,262     $ 10,873       $ 8,322  
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings per average equivalent Class A share

   $ 7,301       $ 2,592     $ 6,610       $ 5,060  

Net earnings per average equivalent Class B share*

   $ 4.87       $ 1.73     $ 4.41       $ 3.37  

Average equivalent Class A shares outstanding

    1,645,057        1,644,580      1,645,008        1,644,503  

Average equivalent Class B shares outstanding

    2,467,585,853        2,466,870,080      2,467,511,782        2,466,754,153  

 

*  Net earnings per average equivalent Class B share outstanding are one-fifteen-hundredth of the equivalent Class A amount.

See accompanying Notes to Consolidated Financial Statements

 

4


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(dollars in millions)

 

     Second Quarter      First Six Months  
     2018      2017      2018      2017  
     (Unaudited)      (Unaudited)  

Net earnings

    $     12,077       $     4,355        $     11,006       $     8,494   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income:

           

Net change in unrealized appreciation of investments

     (92)        4,711         (137)        13,088   

Applicable income taxes

     22         (1,659)        20         (4,531)  

Reclassification of investment appreciation in net earnings

     (44)        (284)        (265)        (589)  

Applicable income taxes

     10         99         56         206   

Foreign currency translation

     (1,364)        798         (763)        1,356   

Applicable income taxes

     43         (23)        37         (92)  

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

     87         (44)        63         (54)  

Applicable income taxes

     (20)        18         (3)        25   

Other, net

     (5)               (36)         
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income, net

     (1,363)        3,619         (1,028)        9,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     10,714         7,974         9,978         17,909   

Comprehensive income attributable to noncontrolling interests

     34         130         109         233   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Berkshire Hathaway shareholders

    $     10,680       $     7,844        $     9,869       $     17,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(dollars in millions)

 

   

Berkshire Hathaway shareholders’ equity

        Total  
   

Common stock
and capital in
excess of par
value

  Accumulated
other
comprehensive
income
    Retained
earnings
    Treasury
stock
    Non-
controlling
  interests  
 

Balance at December 31, 2016

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

Net earnings

  —      —        8,322        —        172        8,494   

Other comprehensive income, net

  —      9,354        —        —        61        9,415   

Issuance of common stock

  40      —        —        —        —        40   

Transactions with noncontrolling interests

  (58)     —        —        —        (157)       (215)  
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

   $    35,671     $ 46,652       $     219,168       $     (1,763)      $ 3,434       $     303,162   
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

  —      —        10,873        —        133        11,006   

Other comprehensive income, net

  —      (1,004)       —        —        (24)       (1,028)  

Issuance of common stock

  32      —        —        —        —        32   

Transactions with noncontrolling interests

  (32)     —        —        —        (103)       (135)  
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

   $    35,702     $ (3,808)      $     327,963       $     (1,763)      $ 3,664       $     361,758   
 

 

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

5


BERKSHIRE HATHAWAY INC.

and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in millions)

 

     First Six Months
     2018    2017
     (Unaudited)

Cash flows from operating activities:

     

Net earnings

    $     11,006        $     8,494   

Adjustments to reconcile net earnings to operating cash flows:

     

Investment gains/losses

     1,819         (605)  

Depreciation and amortization

     4,774         4,539   

Other

     (421)        403   

Changes in operating assets and liabilities:

     

Losses and loss adjustment expenses

     924         18,075   

Deferred charges reinsurance assumed

     549         (5,550)  

Unearned premiums

     2,253         1,830   

Receivables and originated loans

     (3,413)        (1,608)  

Other assets

     (1,367)        (960)  

Other liabilities

     (45)        111   

Income taxes

     12         1,893   
  

 

 

 

  

 

 

 

Net cash flows from operating activities

     16,091         26,622   
  

 

 

 

  

 

 

 

Cash flows from investing activities:

     

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

     (50,227)        (68,547)  

Purchases of equity securities

     (20,845)        (13,628)  

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

     19,374         20,164   

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

     71,486         34,164   

Sales and redemptions of equity securities

     9,011         7,815   

Purchases of loans and finance receivables

     (81)        (1,350)  

Collections of loans and finance receivables

     188         393   

Acquisitions of businesses, net of cash acquired

     (373)        (1,721)  

Purchases of property, plant and equipment

     (6,329)        (5,149)  

Other

     226         (138)  
  

 

 

 

  

 

 

 

Net cash flows from investing activities

     22,430         (27,997)  
  

 

 

 

  

 

 

 

Cash flows from financing activities:

     

Proceeds from borrowings of insurance and other businesses

     28         1,295   

Proceeds from borrowings of railroad, utilities and energy businesses

     4,239         2,413   

Proceeds from borrowings of finance businesses

     21         1,298   

Repayments of borrowings of insurance and other businesses

     (1,882)        (1,180)  

Repayments of borrowings of railroad, utilities and energy businesses

     (2,428)        (1,768)  

Repayments of borrowings of finance businesses

     (4,161)        (2,897)  

Changes in short term borrowings, net

     (1,080)        462   

Other

     (253)        (92)  
  

 

 

 

  

 

 

 

Net cash flows from financing activities

     (5,516)        (469)  
  

 

 

 

  

 

 

 

Effects of foreign currency exchange rate changes

     (41)        183   
  

 

 

 

  

 

 

 

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

     32,964         (1,661)  

Cash and cash equivalents and restricted cash at beginning of year

     32,212         28,643   
  

 

 

 

  

 

 

 

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

    $ 65,176        $ 26,982   
  

 

 

 

  

 

 

 

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

     

Beginning of year—

     

Insurance and Other

    $ 25,460       $ 23,581   

Railroad, Utilities and Energy

     2,910         3,939   

Finance and Financial Products

     3,213         528   

Restricted cash, included in other assets

     629         595   
  

 

 

 

  

 

 

 

    $ 32,212        $ 28,643   
  

 

 

 

  

 

 

 

End of second quarter—

     

Insurance and Other

    $ 57,918        $ 20,142   

Railroad, Utilities and Energy

     3,363         4,962   

Finance and Financial Products

     3,280         1,314   

Restricted cash, included in other assets

     615         564   
  

 

 

 

  

 

 

 

    $ 65,176        $ 26,982   
  

 

 

 

  

 

 

 

See accompanying Notes to Consolidated Financial Statements

 

6


BERKSHIRE HATHAWAY INC.

and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2018

Note 1. General

The accompanying unaudited Consolidated Financial Statements include the accounts of Berkshire Hathaway Inc. (“Berkshire” or “Company”) consolidated with the accounts of all its subsidiaries and affiliates in which Berkshire holds controlling financial interests as of the financial statement date. In these notes, the terms “us,” “we” or “our” refer to Berkshire and its consolidated subsidiaries. Reference is made to Berkshire’s most recently issued Annual Report on Form 10-K (“Annual Report”), which includes information necessary or useful to understanding Berkshire’s businesses and financial statement presentations. Our significant accounting policies and practices were presented as Note 1 to the Consolidated Financial Statements included in the Annual Report. Changes to those policies due to the adoption of new accounting standards effective January 1, 2018 are described in Note 2. Certain immaterial amounts related to equity method earnings were reclassified in the accompanying 2017 Consolidated Financial Statements to conform to current presentations.

Financial information in this Quarterly Report reflects all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary to a fair statement of results for the interim periods in accordance with accounting principles generally accepted in the United States (“GAAP”). For a number of reasons, our results for interim periods are not normally indicative of results to be expected for the year. The timing and magnitude of catastrophe losses incurred by insurance subsidiaries and the estimation error inherent to the process of determining liabilities for unpaid losses of insurance subsidiaries can be more significant to results of interim periods than to results for a full year. Changes in market prices of the equity securities we own can produce significant effects on our consolidated shareholders’ equity. Beginning in 2018, those effects are included in our Consolidated Statements of Earnings, whereas in pre-2018 periods, such effects were included in other comprehensive income. In addition, changes in the fair values of certain derivative contract liabilities and gains and losses from the periodic revaluation of certain assets and liabilities denominated in foreign currencies can cause significant variations in our periodic net earnings.

Note 2. New Accounting Pronouncements

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) 2016-01 “Financial Instruments—Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), ASU 2018-02 “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) and Accounting Standards Codification (“ASC”) 606 – “Revenues from Contracts with Customers” (“ASC 606”). A summary of the effects of the initial adoption of ASU 2016-01, ASU 2018-02 and ASC 606 follows (in millions).

 

      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)  

Retained earnings

    61,459        (84)       (71)       61,304   

Shareholders’ equity

    —        —        (71)       (71)  

With respect to ASU 2016-01, we reclassified net after-tax unrealized gains on equity securities as of January 1, 2018 from accumulated other comprehensive income to retained earnings. 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 that we would have otherwise recorded. Beginning in 2018, we are including unrealized gains and losses arising from the changes in the fair values of our equity securities during the period as a component of investment gains in the Consolidated Statements of Earnings. ASU 2016-01 prohibited the restatement of prior year financial statements. For periods ending prior to January 1, 2018, gains and losses were recognized in earnings when we sold equity securities, based on the cost of the equity securities, or for an other-than-temporary impairment loss and unrealized gains and losses from the changes in fair value of available-for-sale equity securities were recorded in other comprehensive income.

 

7


Notes to Consolidated Financial Statements (Continued)

Note 2. New Accounting Pronouncements (Continued)

 

We also reclassified the stranded deferred income taxes in accumulated other comprehensive income as of January 1, 2018 to retained earnings in connection with our adoption of ASU 2018-02. These stranded deferred income tax effects arose from the reduction in the U.S. statutory income tax rate under the U.S. Tax Cuts and Jobs Act enacted on December 22, 2017. Prior year financial statements were not restated. The effect of the reduction in the statutory income tax rate on accumulated other comprehensive income items was recorded in earnings in December 2017.

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 resulted in an increase to both assets (primarily property, plant and equipment) and other liabilities and a relatively minor reduction in retained earnings as of the beginning of 2018. ASC 606 also provides for certain other disclosures which are included in Note 3.

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

In June 2016, the FASB issued ASU 2016-13 “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 available-for-sale debt securities. Currently, credit losses are recognized and measured when such losses become probable based on the prevailing facts and circumstances. ASU 2016-13 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 ASU 2017-04 “Simplifying the Test for Goodwill Impairment.” ASU 2017-04 eliminates the requirement to determine the implied value of goodwill in measuring an impairment loss. Upon adoption of ASU 2017-04, the measurement of a goodwill impairment will represent the excess of the reporting unit’s carrying value over fair value, limited to the carrying value of goodwill. ASU 2017-04 is effective for goodwill impairment tests in fiscal years beginning after December 15, 2019, with early adoption permitted.

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.” Our revenue recognition practices under ASC 606 do not differ materially 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 manufactured products and goods acquired for resale through wholesale and retail channels in exchange for consideration specified under the contracts. Contracts generally represent customer orders for individual products at stated prices. Sales contracts may contain either single or multiple performance obligations. In instances where contracts contain multiple performance obligations, we allocate the expected consideration to each obligation based on the relative stand-alone selling prices of each product or service.

Expected consideration (and therefore 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, consideration includes certain state and local excise taxes billed to customers on specified products when those taxes are levied directly upon us by the taxing authorities. Expected consideration excludes sales and value-added taxes collected on behalf of taxing authorities. Revenue includes consideration for shipping and other fulfillment activities performed prior to the customer obtaining control of the goods. We also elect to treat consideration for such services performed after control has passed to the customer as fulfillment activities.

 

8


Notes to Consolidated Financial Statements (Continued)

Note 3. Revenues from contracts with customers (Continued)

 

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 June 30, 2018 and December 31, 2017, trade receivables were approximately $2.0 billion and were included in other assets of our railroad, utilities and energy businesses on the Consolidated Balance Sheets. Such amounts relate substantially to customer revenue, and included unbilled revenue of $722 million as of June 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 for its customers. 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 $1.2 billion at both June 30, 2018 and 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 a pro-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.

Prior to January 1, 2018, we recognized revenues from the sales of fractional ownership interests in aircraft over the terms of the related management services agreements, as the transfers of the ownership interests were inseparable from the management services agreements. These agreements also include provisions that require us to repurchase the fractional interest at fair market value at contract termination or upon the customer’s request following the minimum commitment period. ASC 606 provides that such contracts are subject to accounting guidance for lease contracts and not ASC 606. The principal effects of this re-characterization were to increase both assets (primarily property, plant and equipment) and other liabilities by approximately $3.5 billion with a small reduction to retained earnings as of January 1, 2018. The re-categorization of these contracts as operating leases did not have a significant effect on our consolidated revenues or earnings for the first six months of 2018.

 

9


Notes to Consolidated Financial Statements (Continued)

Note 3. Revenues from contracts with customers (Continued)

 

The following table summarizes customer contract revenues disaggregated by reportable segment and the source of the revenue for the six months ended June 30, 2018 (in millions). Other revenues included in our consolidated revenues were primarily insurance premiums earned, interest, dividend and other investment income and lease income which are not within the scope of ASC 606.

 

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

 

Manufactured products:

                

Industrial and commercial products

   $ 12,922       $      $ 108      $      $      $ 421      $      $ 13,451  

Building products

    6,344                                7             6,351  

Consumer products

    5,896                                1,954             7,850  

Grocery and convenience store distribution

           16,419                                     16,419  

Food and beverage distribution

           8,124                                     8,124  

Auto sales

                 4,004                               4,004  

Other retail and wholesale distribution

    1,012              5,617                   42             6,671  

Service

    497        37       1,947       11,411       1,886       26             15,804  

Electricity and natural gas

                             7,090                   7,090  
 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

    26,671        24,580       11,676       11,411       8,976       2,450             85,764  

Other revenue

    81        36       1,921       24       586       1,976       30,285       34,909  
 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   $ 26,752       $    24,616      $   13,597      $   11,435      $   9,562      $     4,426      $   30,285      $   120,673  
 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 June 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

   $ 59      $       2,970      $       3,029  

Electricity and natural gas

    1,160       5,955       7,115  

Note 4. Investments in fixed maturity securities

Investments in securities with fixed maturities as of June 30, 2018 and December 31, 2017 are summarized by type below (in millions).

 

     Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

 

June 30, 2018

           

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

    $ 3,463       $ 10       $ (35)       $ 3,438  

U.S. states, municipalities and political subdivisions

     452        17        (5)        464  

Foreign governments

     7,551        56        (42)        7,565  

Corporate bonds

     5,968        453        (8)        6,413  

Mortgage-backed securities

     585        62        (3)        644  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

    $ 18,019       $ 598       $ (93)       $ 18,524  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

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  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

 

10


Notes to Consolidated Financial Statements (Continued)

Note 4. Investments in fixed maturity securities (Continued)

 

Investments in foreign government securities include securities issued by national and provincial government entities as well as instruments that are unconditionally guaranteed by such entities. As of June 30, 2018, approximately 92% 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 June 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

   $         6,863      $         9,439      $         399      $         733      $         585      $         18,019  

Fair value

    6,876       9,507       448       1,049       644       18,524  

Note 5. Investments in equity securities

Investments in equity securities as of June 30, 2018 and December 31, 2017 are summarized based on the primary industry of the investee in the table below (in millions).

 

     Cost Basis    Net Unrealized
Gains
  

Fair
Value

June 30, 2018 *

        

Banks, insurance and finance

    $     27,003       $       50,770       $            77,773

Consumer products

     40,199        28,502      68,701

Commercial, industrial and other

     20,256        12,999      33,255
  

 

 

 

  

 

 

 

  

 

    $ 87,458       $ 92,271       $          179,729
  

 

 

 

  

 

 

 

  

 

 

*    Approximately 70% of the aggregate fair value was concentrated in five companies (American Express Company – $14.9 billion; Apple Inc. – $47.2 billion; Bank of America Corporation – $19.7 billion; The Coca-Cola Company – $17.5 billion and Wells Fargo & Company – $26.4 billion).

 

     Cost Basis    Net Unrealized
Gains
  

Fair
Value

December 31, 2017 *

        

Banks, insurance and finance

    $     25,783       $     55,026       $            80,809

Consumer products

     25,177        25,698      50,875

Commercial, industrial and other

     23,716        15,140      38,856
  

 

 

 

  

 

 

 

  

 

    $     74,676       $     95,864       $          170,540
  

 

 

 

  

 

 

 

  

 

 

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

 

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

 

          June 30,
2018
  

December 31,
2017

 

Insurance and other

     

 

 $

 

      174,033

 

 

  

 

 $          164,026

Railroad, utilities and energy *

        1,364      1,961

Finance and financial products *

        4,332      4,553
     

 

 

 

  

 

       $ 179,729       $          170,540
     

 

 

 

  

 

 

  *

Included in other assets.

 

11


Notes to Consolidated Financial Statements (Continued)

 

Note 6. Equity Method Investments

Berkshire holds investments in certain businesses that are accounted for pursuant to the equity method. Currently, the most significant of these is our investment in the common stock of The Kraft Heinz Company (“Kraft Heinz”). Kraft Heinz is one of the world’s largest manufacturers and marketers of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. Berkshire currently owns 325,442,152 shares of Kraft Heinz common stock representing 26.7% of the outstanding shares. The carrying value and fair value of this investment at June 30, 2018 was approximately $17.5 billion and $20.4 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 six months of 2018 and 2017 were $467 million and $548 million, respectively. We received dividends on the common stock of $407 million in the first six months of 2018 and $391 million in the first six months of 2017, which we recorded as reductions of our investment.

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

 

                June 30,
2018
    December 30,
2017
 

Assets

       $       121,896       $       120,232   

Liabilities

        56,024        53,985   
    Second Quarter     First Six Months  
    2018     2017     2018     2017  

Sales

  $         6,686       $         6,637       $ 12,990       $ 12,961   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net earnings attributable to Kraft Heinz common shareholders

  $         756       $         1,159       $ 1,749       $ 2,052   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other investments accounted for pursuant to the equity method include our investments in Berkadia Commercial Mortgage LLC (“Berkadia”), Pilot Travel Centers LLC, d/b/a Pilot Flying J (“Pilot Flying J”), and Electric Transmission Texas, LLC (“ETT”). Our investments in these entities were approximately $3.5 billion as of June 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 six months were $261 million in 2018 and $79 million in 2017. 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. We support the commercial paper with a surety policy issued by a Berkshire insurance subsidiary. Jefferies is obligated to indemnify us for one-half of any losses incurred under the policy. In addition, a Berkshire Hathaway Energy Company subsidiary owns a 50% ownership 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 27,000 team members, 750 locations across the U.S. and Canada, and approximately $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 second quarter and first six months of 2018 were 20.0% and 18.9%, respectively, and 28.9% and 28.1%, respectively, in the second quarter and first six months of 2017. 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%. In addition, the relative mix of pre-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.

 

12


Notes to Consolidated Financial Statements (Continued)

Note 7. Income taxes (Continued)

 

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 consider our estimate of the tax on accumulated undistributed earnings of foreign subsidiaries to be provisional and subject to remeasurement when we obtain the necessary additional information to complete the accounting. While we believe our estimate is reasonable, it will take additional time to validate the inputs to the foreign earnings and profits calculations, the basis on which the repatriation tax is determined, and how the applicable states will address the U.S. repatriation tax. We currently expect that our accounting for the repatriation tax under the TCJA will be completed by the end of 2018.

Note 8. Investment gains/losses

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

 

    Second Quarter   First Six Months
    2018   2017   2018   2017

Equity securities:

               

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

     $ 5,585       $ —       $ (2,146)      $ — 

Investment gains/losses during 2018 on securities sold in 2018

      357        —        41        — 

Gross realized gains

      —        359        —        784 

Gross realized losses

      —        (82)       —        (207)
   

 

 

     

 

 

     

 

 

     

 

 

 
      5,942        277        (2,105)       577 
   

 

 

     

 

 

     

 

 

     

 

 

 

Fixed maturity securities:

               

Gross realized gains

      48        15        407        26 

Gross realized losses

      (4)       (8)       (142)         (14)

Other

                  21        16 
   

 

 

     

 

 

     

 

 

     

 

 

 
     $    5,990       $      290       $    (1,819)        $      605 
   

 

 

     

 

 

     

 

 

     

 

 

 

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 or 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. See Note 2. Prior to 2018, we recorded the changes in unrealized gains and losses on our investments in equity securities in other comprehensive income.

During the first six months of 2018, as reflected on the Consolidated Statement of Cash Flows, we received proceeds of approximately $9.0 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 second quarter and first six months of 2018, which are generally the difference between the proceeds from sales and our original cost, were $629 million and $1,359 million, respectively.

Note 9. Receivables

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

 

     June 30,
2018
     December 31,
2017
 

Insurance premiums receivable

    $ 12,638       $ 11,058  

Reinsurance recoverable on unpaid losses

     2,989        3,201  

Trade receivables

     12,945        11,756  

Other

     3,074        2,925  

Allowances for uncollectible accounts

     (366)         (362)   
  

 

 

    

 

 

 
    $       31,280       $       28,578  
  

 

 

    

 

 

 

 

13


Notes to Consolidated Financial Statements (Continued)

Note 9. Receivables (Continued)

 

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

 

     June 30,
2018
    December 31,
2017
 

Loans and finance receivables before allowances and discounts

    $ 14,564     $ 14,126 

Allowances for uncollectible loans

     (180)       (180)  

Unamortized acquisition discounts

     (173)       (198)  
  

 

 

   

 

 

 
    $      14,211     $      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 six months of 2018 and 2017 were $70 million and $78 million, respectively. Loan charge-offs, net of recoveries, in the first six months were $70 million in 2018 and $83 million in 2017. At June 30, 2018, approximately 98% of the loan balances were evaluated collectively for impairment. As part of the evaluation process, credit quality indicators are reviewed and loans are designated as performing or non-performing. At June 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. In June 2017, we agreed to provide a Canada-based financial institution with a C$2 billion one-year secured revolving credit facility. The agreement expired on June 29, 2018.

Note 10. Inventories

Inventories are comprised of the following (in millions).

 

     June 30,
2018
    December 31,
2017
 

Raw materials

    $ 3,172       $ 2,997   

Work in process and other

     2,213        2,315   

Finished manufactured goods

     4,117        4,179   

Goods acquired for resale

     6,692        6,696   
  

 

 

   

 

 

 
    $      16,194       $      16,187   
  

 

 

   

 

 

 

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). In conjunction with the adoption of ASC 606, we recorded a net asset of approximately $3.5 billion in 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 repurchase obligations and unearned lease revenues, substantially offsetting the amount recorded in machinery and equipment. See Note 2.

 

     June 30,
2018
    December 31,
2017
 

Land

    $ 2,289       $ 2,292   

Buildings and improvements

     9,041        8,810   

Machinery and equipment

     27,932        21,935   

Furniture, fixtures and other

     4,695        4,387   
  

 

 

   

 

 

 
     43,957        37,424   

Accumulated depreciation

     (20,009)       (17,320)  
  

 

 

   

 

 

 
    $      23,948       $      20,104   
  

 

 

   

 

 

 

 

14


Notes to Consolidated Financial Statements (Continued)

Note 11. Property, plant and equipment and assets held for lease (Continued)

 

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.

 

    June 30,
2018
   

December 31,
2017

Railroad:

   

Land

   $ 6,093       $        6,088 

Track structure and other roadway

    51,994      51,320 

Locomotives, freight cars and other equipment

    12,640      12,543 

Construction in progress

    1,039      989 
 

 

 

   

 

    71,766      70,940 

Accumulated depreciation

    (9,259)     (8,627)
 

 

 

   

 

    62,507      62,313 
 

 

 

   

 

Utilities and energy:

   

Utility generation, transmission and distribution systems

    74,975      74,660 

Interstate natural gas pipeline assets

    7,240      7,176 

Independent power plants and other assets

    8,142      7,499 

Construction in progress

    3,204      2,556 
 

 

 

   

 

    93,561      91,891 

Accumulated depreciation

    (26,852)     (26,020)
 

 

 

   

 

    66,709      65,871 
 

 

 

   

 

   $     129,216       $    128,184 
 

 

 

   

 

 

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

 

    June 30,
2018
   

December 31,
2017

Assets held for lease

   $ 12,507       $      12,318 

Land

    234      231 

Buildings, machinery and other

    1,489      1,444 
 

 

 

   

 

    14,230      13,993 

Accumulated depreciation

    (4,165)     (4,062)
 

 

 

   

 

   $       10,065       $        9,931 
 

 

 

   

 

 

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

 

    First Six Months
    2018    

2017

Insurance and other

   $ 1,302       $        1,089 

Railroad, utilities and energy

    2,444      2,389 

Finance and financial products

    321      321 
 

 

 

   

 

   $       4,067       $        3,799 
 

 

 

   

 

 

15


Notes to Consolidated Financial Statements (Continued)

 

Note 12. Goodwill and other intangible assets

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

 

              June 30,
2018
 

December 31,
2017

Balance at beginning of year

       $ 81,258       $        79,486 

Acquisitions of businesses

        177      1,545 

Other, including foreign currency translation

        (185)     227 
     

 

 

 

 

 

Balance at end of period

       $         81,250       $        81,258 
     

 

 

 

 

 

 

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

 

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

Accumulated
amortization

Insurance and other

   $ 40,267    $ 8,342      $ 40,225      $          7,707 

Railroad, utilities and energy

    1,018     349     988   324 
 

 

 

   

 

 

 

 

 

 

 

 

 

   $ 41,285    $ 8,691    $ 41,213    $          8,031 
 

 

 

   

 

 

 

 

 

 

 

 

 

Trademarks and trade names

   $ 5,398    $ 729    $ 5,381   $             692 

Patents and technology

    4,380     2,635     4,341   2,493 

Customer relationships

    28,335     4,140     28,322   3,722 

Other

    3,172     1,187     3,169   1,124 
 

 

 

   

 

 

 

 

 

 

 

 

 

   $         41,285    $         8,691    $ 41,213    $          8,031 
 

 

 

   

 

 

 

 

 

 

 

 

 

Amortization expense in the first six months was $707 million in 2018 and $740 million in 2017. Intangible assets with indefinite lives were approximately $18.9 billion as of June 30, 2018 and December 31, 2017.

Note 13. Derivative contracts

We are party to derivative contracts primarily through our finance and financial products and our utilities and energy businesses. Currently, the derivative contracts of our finance and financial products businesses consist of equity index put option contracts written between 2004 and 2008. The liabilities and related notional values of such contracts follows (in millions).

 

    June 30, 2018     December 31, 2017  
    Liabilities    

 

Notional
Value

    Liabilities    

 

Notional
Value

 

Equity index put options

   $       2,006          $    27,658(1)        $      2,172          $    28,753(1)  

 

(1) 

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

We record derivative contract liabilities at fair value and include the changes in the fair values of such contracts in earnings as derivative contract gains/losses. A summary of derivative contract gains/losses included in our Consolidated Statements of Earnings follows (in millions).

 

    Second Quarter     First Six Months  
   

 

2018

   

 

2017

   

 

2018

   

 

2017

 

Equity index put options

  $       372      $       (65)      $       166       $       395   

 

16


Notes to Consolidated Financial Statements (Continued)

Note 13. Derivative contracts (Continued)

 

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 January 2026. The remaining weighted average life of all contracts was approximately 2.5 years at June 30, 2018. In the second quarter of 2018, one equity index put option contract expired with no payment due 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 rates as of the balance sheet date) was $930 million at June 30, 2018 and $789 million at December 31, 2017. These contracts may not be unilaterally terminated or fully settled before the expiration dates and the ultimate amount of cash basis gains or losses on these contracts will not be determined until the contract expiration dates.

A limited number of our equity index put option contracts contain collateral posting requirements with respect to changes in the fair value or intrinsic value of the contracts and/or a downgrade of Berkshire’s credit ratings. As of June 30, 2018, we did not have any collateral posting requirements. If Berkshire’s credit ratings (currently AA from Standard & Poor’s and Aa2 from Moody’s) are downgraded below either A- 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 $149 million as of June 30, 2018 and $142 million as of December 31, 2017. Derivative contract liabilities are included in other liabilities and were $93 million as of June 30, 2018 and $82 million as of December 31, 2017.

Note 14. Supplemental cash flow information

Supplemental cash flow information follows (in millions).

 

     First Six Months  
    

 

2018

    

 

2017

 

Cash paid during the period for:

     

Income taxes

    $     2,358        $     1,082   

Interest:

     

Insurance and other businesses

     464         390   

Railroad, utilities and energy businesses

     1,402         1,410   

Finance and financial products businesses

     182         211   

Non-cash investing and financing activities:

     

Liabilities assumed in connection with business acquisitions

     76         167   

 

17


Notes to Consolidated Financial Statements (Continued)

 

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 for incurred-but-not-reported (“IBNR”) claims. Reconciliations of the changes in claim liabilities, excluding liabilities under retroactive reinsurance contracts (see Note 16), for the six months ending June 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

     18,905         16,980   

Prior accident years’ events

     (1,054)        (166)  
  

 

 

    

 

 

 

Total incurred losses and loss adjustment expenses

     17,851        16,814   
  

 

 

    

 

 

 

Paid losses and loss adjustment expenses:

     

Current accident year events

     (7,332)        (6,656)  

Prior accident years’ events

     (8,581)        (7,253)  
  

 

 

    

 

 

 

Total payments

     (15,913)        (13,909)  
  

 

 

    

 

 

 

Foreign currency translation adjustment

     (111)        327   

Balances – June 30:

     

Net liabilities

     59,748         53,273   

Reinsurance recoverable on unpaid losses

     2,989         3,076   
  

 

 

    

 

 

 

Gross liabilities

    $    62,737        $    56,349   
  

 

 

    

 

 

 

Incurred losses and loss adjustment expenses in the first six months of 2018 included net reductions of estimated ultimate liabilities for prior accident years of $1,054 million compared to $166 million in 2017. We reduced estimated ultimate liabilities for prior accident years related to primary insurance by $768 million in the first six months of 2018 compared to $532 million in the first six months of 2017. In the first six months of 2018, estimated liabilities for prior accident years for private passenger automobile insurance coverages were reduced $430 million compared to $106 million in 2017. In each period, we also reduced prior years’ claim liabilities for medical professional liability and workers’ compensation insurance coverages.

In the first six months of 2018, we reduced estimated ultimate liabilities with respect to prior accident years for property and casualty reinsurance by $286 million, compared to an increase of $366 million in the first six months of 2017. The comparative change reflected the impact in the 2017 period of unanticipated property claims and increases in estimated liabilities for certain U.K. personal injury claims resulting from the U.K. Ministry of Justice’s decision to reduce the fixed discount rate to be used by insurers in lump sum settlement calculations.

 

18


Notes to Consolidated Financial Statements (Continued)

 

Note 16. Retroactive reinsurance contracts

Retroactive reinsurance policies provide indemnification of losses and loss adjustment expenses of short-duration insurance contracts with respect to underlying loss events that occurred prior to the contract inception date. Claims payments may commence immediately after the contract date or, if applicable, once a contractual retention amount has been reached. Reconciliations of the changes in estimated liabilities for retroactive reinsurance unpaid losses and loss adjustment expenses (“claim liabilities”) and related deferred charge reinsurance assumed assets for the six months ending June 30, 2018 and 2017 follows (in millions).

 

     2018      2017  
    

 

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)
  

 

 

    

 

 

    

 

 

    

 

 

 

Incurred losses and loss adjustment expenses

           

Current year contracts

     —          —          16,448       (6,078)  

Prior years’ contracts

     (35)        548       (399)        528 
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     (35)        548       16,049       (5,550)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Paid losses and loss adjustment expenses

     (787)        —          (630)        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balances – June 30:

    $    42,115       $    (14,730)    $    40,391     $    (13,597)
  

 

 

    

 

 

    

 

 

    

 

 

 

Incurred losses and loss adjustment expenses, net of deferred charges

    $    513        $    10,499    
  

 

 

       

 

 

    

In the preceding table, classifications of incurred losses and loss adjustment expenses are based on the inception dates of the contracts. We do not believe that analysis of losses incurred and paid by accident year of the underlying event is relevant or meaningful given that our exposure to losses incepts when the contract incepts. Further, we believe the classifications of reported claims and case development liabilities has little or no practical analytical value.

In the first quarter of 2017, National Indemnity Company (“NICO”), a wholly-owned subsidiary, entered into an agreement with various subsidiaries of American International Group, Inc. (collectively, “AIG”), which became effective on February 2, 2017. Under this agreement, NICO agreed to indemnify AIG for 80% of up to $25 billion of losses and allocated loss adjustment expenses in excess of $25 billion retained by AIG, with respect to certain commercial insurance loss events occurring prior to 2016. As of the effective date, we recorded premiums earned of $10.2 billion, a liability for unpaid losses and loss adjustment expenses of $16.4 billion and a deferred charge reinsurance assumed asset 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 June 30, 2018 and at December 31, 2017 were $18.2 billion, which reflected an increase of $1.8 billion in estimated ultimate liabilities recorded in the fourth quarter of 2017. Deferred charge assets related to the AIG contract were approximately $7.2 billion at June 30, 2018 and $7.5 billion at December 31, 2017.

Incurred losses and loss adjustment expenses related to contracts written in prior years were $513 million in the first six months of 2018 and $129 million in the first six months of 2017. Such losses included recurring amortization of deferred charge assets and net gains from reductions of estimated ultimate claim liabilities.

Note 17. Notes payable and other borrowings

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

 

     Weighted
Average
Interest Rate
   June 30,
2018
   December 31,
2017

Insurance and other:

        

Issued by Berkshire:

        

U.S. Dollar denominated borrowings due 2018-2047

     3.0%       $    9,809       $    10,603  

Euro denominated borrowings due 2020-2035

     1.1%        7,950        8,164  

Short-term subsidiary borrowings

     3.9%        1,795        1,832  

Other subsidiary borrowings due 2018-2045

     4.0%        5,604        6,725  
     

 

 

 

  

 

 

 

       $    25,158       $    27,324  
     

 

 

 

  

 

 

 

 

19


Notes to Consolidated Financial Statements (Continued)

Note 17. Notes payable and other borrowings (Continued)

 

In the first six months of 2018, the carrying value of Berkshire’s Euro denominated senior notes decreased $219 million due to changes in the Euro/U.S. Dollar exchange rates, which produced a corresponding increase to pre-tax earnings of $219 million as a reduction of interest expense. During the first six months of 2018, $800 million of Berkshire U.S. Dollar denominated notes matured.

 

     Weighted
Average
Interest Rate
     June 30,
2018
   December 31,
2017

Railroad, utilities and energy:

        

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

        

BHE senior unsecured debt due 2018-2048

     4.5%       $    7,979       $    6,452  

Subsidiary and other debt due 2018-2064

     4.7%        28,727        28,739  

Short-term debt

     2.7%        3,424        4,488  

Issued by BNSF due 2018-2097

     4.7%        22,534        22,499  
     

 

 

 

  

 

 

 

       $    62,664       $    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 six months of 2018, BHE and its subsidiaries issued $3.5 billion of long-term debt with maturity dates ranging from 2020 to 2048 with a weighted average interest rate of 3.2%. In July 2018, BHE and subsidiaries issued an additional $2.05 billion of debt with maturities in 2049 with a weighted average interest rate of 4.3%. 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 quarter of 2018, BNSF issued $750 million of 4.05% senior unsecured debentures due in 2048 and $650 million of debentures matured. In August 2018, BNSF issued $750 million of 4.15% debentures due in 2048. As of June 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
     June 30,
2018
   December 31,
2017

Finance and financial products:

        

Issued by Berkshire Hathaway Finance Corporation (“BHFC”) due 2018-2043

     3.0%       $    8,829       $    12,926  

Issued by other subsidiaries due 2018-2028

     3.6%        122        159  
     

 

 

 

  

 

 

 

       $      8,951       $    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. Such borrowings are fully and unconditionally guaranteed by Berkshire. During the first six months of 2018, $4.1 billion of BHFC senior notes matured.

As of June 30, 2018, our subsidiaries had unused lines of credit and commercial paper capacity aggregating approximately $6.6 billion to support short-term borrowing programs and provide additional liquidity. Such unused lines of credit included about $5.1 billion related to BHE and its subsidiaries. In addition to BHFC’s borrowings, Berkshire guaranteed approximately $1.8 billion of other subsidiary borrowings at June 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.

 

20


Notes to Consolidated Financial Statements (Continued)

 

Note 18. Fair value measurements

Our financial assets and liabilities are summarized below as of June 30, 2018 and December 31, 2017 with fair values shown according to the fair value hierarchy (in millions). The carrying values of cash and cash equivalents, U.S. Treasury Bills, receivables and accounts payable, accruals and other liabilities are considered to be reasonable estimates of their fair values.

 

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

June 30, 2018

              

Investments in fixed maturity securities:

              

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

    $ 3,438       $ 3,438       $ 2,413       $ 1,025       $ —    

U.S. states, municipalities and political subdivisions

     464        464        —          464        —    

Foreign governments

  

 

7,565

 

     7,565        5,715        1,850        —    

Corporate bonds

     6,413        6,413        —          6,408        5  

Mortgage-backed securities

     644        644        —          644        —    

Investments in equity securities

     179,729        179,729        179,681        48        —    

Investment in Kraft Heinz common stock

     17,530        20,444        20,444        —          —    

Loans and finance receivables

     14,211        14,485        —          87        14,398  

Derivative contract assets (1)

     149        149               30        118  

Derivative contract liabilities:

              

Railroad, utilities and energy (1)

     93        93        —          75        18  

Equity index put options

     2,006        2,006        —          —          2,006  

Notes payable and other borrowings:

              

Insurance and other

     25,158        25,422        —          25,422        —    

Railroad, utilities and energy

     62,664        67,284        —          67,284        —    

Finance and financial products

     8,951        9,148        —          9,121        27  

December 31, 2017

              

Investments in fixed maturity securities:

              

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

    $ 3,953       $ 3,953       $ 2,360       $ 1,593       $ —    

U.S. states, municipalities and political subdivisions

     854        854        —          854        —    

Foreign governments

     8,822        8,822        6,946        1,876        —    

Corporate bonds

     6,862        6,862        —          6,856        6  

Mortgage-backed securities

     862        862        —          862        —    

Investments in equity securities

     170,540        170,540        170,494        46        —    

Investment in Kraft Heinz common stock

     17,635        25,306        25,306        —          —    

Loans and finance receivables

     13,748        14,136        —          17        14,119  

Derivative contract assets (1)

     142        142        1        28        113  

Derivative contract liabilities:

              

Railroad, utilities and energy (1)

     82        82        3        69        10  

Equity index put options

     2,172        2,172        —          —          2,172  

Notes payable and other borrowings:

              

Insurance and other

     27,324        28,180        —          28,180        —    

Railroad, utilities and energy

     62,178        70,538        —          70,538        —    

Finance and financial products

     13,085        13,582        —          13,577        5  

 

  (1)

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

 

21


Notes to Consolidated Financial Statements (Continued)

Note 18. Fair value measurements (Continued)

 

The fair values of substantially all of our financial instruments were measured using market or income approaches. The hierarchy for measuring fair value consists of Levels 1 through 3, which are described below.

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

Level 2 – Inputs include directly or indirectly observable inputs (other than Level 1 inputs) such as quoted prices for similar assets or liabilities exchanged in active or inactive markets; quoted prices for identical assets or liabilities exchanged in inactive markets; other inputs that may be considered in fair value determinations of the assets or liabilities, such as interest rates and yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Pricing evaluations generally reflect discounted expected future cash flows, which incorporate yield curves for instruments with similar characteristics, such as credit ratings, estimated durations and yields for other instruments of the issuer or entities in the same industry sector.

Level 3 – Inputs include unobservable inputs used in the measurement of assets and liabilities. Management is required to use its own assumptions regarding unobservable inputs because there is little, if any, market activity in the assets or liabilities and it may be unable to corroborate the related observable inputs. Unobservable inputs require management to make certain projections and assumptions about the information that would be used by market participants in valuing assets or liabilities.

Reconciliations of assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) for the six months ending June 30, 2018 and 2017 follow (in millions).

 

     Investments
in equity
and fixed
maturity
    securities  
     Net
derivative 
contract
liabilities
 

Six months ending June 30, 2018

     

Balance at December 31, 2017

    $       $ (2,069)  

Gains (losses) included in:

     

Earnings

     —         256   

Regulatory assets and liabilities

     —         (14)  

Acquisitions, dispositions and settlements

     (1)        (79)  
  

 

 

    

 

 

 

Balance at June 30, 2018

    $       $ (1,906)  
  

 

 

    

 

 

 

Six months ending June 30, 2017

     

Balance at December 31, 2016

    $ 17,321        $ (2,824)  

Gains (losses) included in:

     

Earnings

     —         473   

Other comprehensive income

     1,157         (2)  

Regulatory assets and liabilities

     —         (2)  

Acquisitions, dispositions and settlements

     (58)        (50)  

Transfers into/out of Level 3

     (18,412)        —   
  

 

 

    

 

 

 

Balance at June 30, 2017

    $     8        $     (2,405)  
  

 

 

    

 

 

 

Gains and losses included in earnings are included 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, as appropriate in our Consolidated Statements of Comprehensive Income.

On June 30, 2017, we announced our intention to exercise our investment in Bank of America Corporation Warrants (“BAC Warrants”) for common stock in the third quarter of 2017 and that we expected to use our investment in Bank of America Corporation Preferred Stock as consideration. In the second quarter of 2017, Restaurant Brands International, Inc. (“RBI”) announced its intention to redeem our investment in RBI Preferred Shares in the fourth quarter of 2017. As of June 30, 2017, we based our valuations of these investments on such expectations and we significantly reduced expected durations and effectively eliminated the discounts for transferability and other restrictions. As a result, we concluded the Level 3 inputs used in the previous fair value determinations of our investments in BAC Warrants and RBI Preferred Shares were not significant and that the valuations of such investments were deemed Level 2 measurements.

 

22


Notes to Consolidated Financial Statements (Continued)

Note 18. Fair value measurements (Continued)

 

Quantitative information as of June 30, 2018, with respect to assets and liabilities measured and carried at fair value on a recurring basis with the use of significant unobservable inputs (Level 3) follows (in millions).

 

     Fair
Value
     Principal Valuation
Technique
    Unobservable Input    Weighted
  Average  
 

Derivative liabilities:

          

Equity index put options

   $   2,006      Option pricing model   Volatility      17%  

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. The methods we use to value these contracts are those that we believe market participants would use in determining exchange prices with respect to our contracts.

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

Note 19. Common stock

Changes in Berkshire’s issued, treasury and outstanding common stock during the six months ending June 30, 2018 are shown in the table below.

 

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

Balance at December 31, 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

     (4,560)        —         (4,560)        7,181,203         —         7,181,203   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance at June 30, 2018

             758,195                 (11,680)                746,515          1,349,247,952           (1,409,762)         1,347,838,190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Each Class A common share is entitled to one vote per share. Class B common stock possesses dividend and distribution rights equal to one-fifteen-hundredth (1/1,500) of such rights of Class A common stock. Each Class B common share possesses voting rights equivalent to one-ten-thousandth (1/10,000) of the voting rights of a Class A share. Unless otherwise required under Delaware General Corporation Law, Class A and Class B common shares vote as a single class. Each share of Class A common stock is convertible, at the option of the holder, into 1,500 shares of Class B common stock. Class B common stock is not convertible into Class A common stock. On an equivalent Class A common stock basis, there were 1,645,074 shares outstanding as of June 30, 2018 and 1,644,846 shares outstanding as of December 31, 2017. In addition to our common stock, 1,000,000 shares of preferred stock are authorized, but none are issued.

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-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.

 

23


Notes to Consolidated Financial Statements (Continued)

 

Note 20. Accumulated other comprehensive income

A summary of the net changes in after-tax accumulated other comprehensive income attributable to Berkshire Hathaway shareholders and amounts reclassified out of accumulated other comprehensive income for the six months ending June 30, 2018 and 2017 follows (in millions).

 

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

2018

         

Balance at December 31, 2017

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

Reclassifications to retained earnings

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

Other comprehensive income, net before reclassifications

    (144)       (705)       (8)             (852)  

Reclassifications into net earnings

    (209)       —        62        (5)       (152)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2018

   $ 400       $     (3,884)      $ (330)      $      $ (3,808)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications into net earnings:

         

Reclassifications before income taxes

   $ (265)      $ —       $ 84       $ (8)      $ (189)  

Applicable income taxes

    (56)       —        22        (3)       (37)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (209)      $ —       $ 62       $ (5)      $ (152)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2017

         

Balance at December 31, 2016

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

Other comprehensive income, net before reclassifications

    8,540        1,221        (64)       (7)       9,690   

Reclassifications into net earnings

    (383)       —          34        13        (336)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2017

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reclassifications into net earnings:

         

Reclassifications before income taxes

   $ (589)      $ —         $ 45       $ 24       $ (520)  

Applicable income taxes

    (206)       —          11        11        (184)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ (383)      $  —         $ 34       $ 13       $ (336)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Note 21. Contingencies and Commitments

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

In 2016, NICO entered into a definitive agreement to acquire Medical Liability Mutual Insurance Company (“MLMIC”), a writer of medical professional liability insurance domiciled in New York. The acquisition price will be approximately $2.5 billion. The acquisition will involve the conversion of MLMIC from a mutual company to a stock company. The closing of the transaction is subject to various regulatory approvals, customary closing conditions and the approval of the MLMIC policyholders eligible to vote on the proposed demutualization and sale. We currently expect this acquisition will be completed in the third quarter of 2018.

 

24


Notes to Consolidated Financial Statements (Continued)

 

Note 22. Business segment data

Our operating businesses include a large and diverse group of insurance, railroad, utilities and energy, finance, manufacturing, service and retailing businesses. Our reportable business segments are organized in a manner that reflects how management views those business activities. Certain businesses have been grouped together for segment reporting based upon similar products or product lines, marketing, selling and distribution characteristics, even though those business units are operated under separate local management. Revenues by segment for the second quarter and first six months of 2018 and 2017 were as follows (in millions).

 

    Second Quarter     First Six Months
    2018     2017     2018    

2017

Operating Businesses:

       

Insurance:

       

Underwriting:

       

GEICO

   $ 8,284       $ 7,244     $ 16,199    $         14,089 

Berkshire Hathaway Reinsurance Group

    3,912        3,364      7,452    16,596 

Berkshire Hathaway Primary Group

    1,953        1,759      3,871    3,435 

Investment income

    1,399        1,284      2,612    2,416 
 

 

 

   

 

 

   

 

 

   

 

Total insurance

    15,548        13,651      30,134    36,536 

BNSF

    5,878        5,250      11,502    10,435 

Berkshire Hathaway Energy

    5,050        4,602      9,562    8,833 

Manufacturing

    13,853        12,738      26,787    24,835 

McLane Company

    12,427        12,581      24,616    24,682 

Service and retailing

    7,062        6,550      13,649    12,643 

Finance and financial products

    2,366        2,017      4,429    3,866 
 

 

 

   

 

 

   

 

 

   

 

    62,184        57,389      120,679    121,830 

Reconciliation of segments to consolidated amount:

       

Corporate, eliminations and other

    16        (133)       (6)     (204)
 

 

 

   

 

 

   

 

 

   

 

   $     62,200       $     57,256     $     120,673    $       121,626 
 

 

 

   

 

 

   

 

 

   

 

 

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

 

    Second Quarter     First Six Months
    2018     2017     2018    

2017

Operating Businesses:

       

Insurance:

       

Underwriting:

       

GEICO

   $           673       $           119     $           1,350     $             294 

Berkshire Hathaway Reinsurance Group

    297        (375)       39    (1,118)

Berkshire Hathaway Primary Group

    234        232      333    421 

Investment income

    1,392        1,283      2,597    2,412 
 

 

 

   

 

 

   

 

 

   

 

Total insurance

    2,596        1,259      4,319    2,009 

BNSF

    1,655        1,537      3,168    2,882 

Berkshire Hathaway Energy

    586        649      1,073    1,238 

Manufacturing

    2,135        1,939      3,990    3,426 

McLane Company

    67        69      127    157 

Service and retailing

    697        555      1,212    948 

Finance and financial products

    565        492      1,059    942 
 

 

 

   

 

 

   

 

 

   

 

    8,301        6,500      14,948    11,602 

Reconciliation of segments to consolidated amount:

       

Investment and derivative contract gains/losses

    6,362        225      (1,653)     1,000 

Interest expense, not allocated to segments

    320        (646)       (17)     (857)

Equity method investments

    327        346      728    627 

Corporate, eliminations and other

    (212)       (296)       (431)     (555)
 

 

 

   

 

 

   

 

 

   

 

    $         15,098        $         6,129     $         13,575     $      11,817  
 

 

 

   

 

 

   

 

 

   

 

 

25


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

Results of Operations

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

 

     Second Quarter      First Six Months  
     2018      2017      2018      2017  

Insurance – underwriting

    $ 943        $ (22)       $ 1,350        $ (289)  

Insurance – investment income

     1,142         965         2,154         1,873   

Railroad

     1,309         958         2,454         1,796   

Utilities and energy

     581         509         1,166         989   

Manufacturing, service and retailing

     2,141         1,662         3,963         2,979   

Finance and financial products

     429         323         803         614   

Investment and derivative gains/losses

     5,118         143         (1,308)        647   

Other

     348         (276)        291         (287)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

    $     12,011        $     4,262        $     10,873        $     8,322   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses are likely to be very significant given the size of our current holdings and the volatility inherent in securities prices. Prior to 2018, these gains and losses were recorded in other comprehensive income. Thus, the new accounting treatment has no effect on the consolidated shareholders’ equity we would have otherwise reported. The business segment data (Note 22 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

Our after-tax earnings in the second quarter and first six 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 comparative after-tax earnings of our various business operations, although the effects varied, reflecting the differences in the mix of earnings subject to tax in the U.S. and internationally and the varying effects of U.S. state and local income taxes. Further, the effective U.S. income tax rates on dividend income under the TCJA are not significantly different from the prior income tax law.

Our insurance businesses generated after-tax earnings from underwriting of $943 million and $1,350 million in the second quarter and first six months of 2018, respectively, compared to losses of $22 million and $289 million, respectively, in 2017. Results in 2018 included reductions of estimated ultimate liabilities for prior years’ property/casualty loss events, the favorable effects of foreign currency exchange rate changes on certain non-U.S. denominated liabilities of U.S subsidiaries and a lower effective income tax rate.

Our railroad business generated increased earnings in the second quarter and first six months of 2018 compared to 2017, reflecting an increase in unit volume, higher average revenue per car/unit and a lower effective income tax rate, partly offset by increased fuel and other operating costs. Our utilities and energy businesses produced higher after-tax earnings in the second quarter and first six months of 2018 compared to 2017, primarily due to a lower overall effective income tax rate and increased pre-tax earnings from renewables and natural gas pipelines. Earnings from our manufacturing, service and retailing businesses in the second quarter and first six months of 2018 increased 29% and 33%, respectively, over 2017, due to lower effective income tax rates and an 18% increase in year-to-date pre-tax earnings.

In the second quarter of 2018, after-tax gains from investments and derivative contracts were $5.1 billion, while in the first six months of 2018, we incurred after-tax losses of $1.3 billion. Investment gains/losses included after-tax gains of approximately $4.5 billion in the second quarter and after-tax losses of approximately $1.7 billion in the first six months from changes in market values on our investments in equity securities held at June 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 six months of 2017, we also recorded after-tax unrealized gains on our investments in equity securities of approximately $8.2 billion in other comprehensive income. We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnings.

 

26


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 insurance businesses as possessing two distinct operations – underwriting and investing. Underwriting decisions are the responsibility of the unit managers, while investing decisions are the responsibility of Berkshire’s Chairman and CEO, Warren E. Buffett and Berkshire’s corporate investment managers. Accordingly, we evaluate performance of underwriting operations without any allocation of investment income or investment gains/losses. We consider investment income as a component of our aggregate insurance operating results. However, we consider investment gains and losses, whether realized or unrealized, as non-operating based on our long-held philosophy of acquiring securities and holding those securities for long periods. Accordingly, we believe that such gains and losses are not predictable or necessarily meaningful in understanding the operating results of our insurance businesses.

The timing and amount of catastrophe losses can produce significant volatility in our periodic underwriting results, particularly with respect to our reinsurance businesses. Generally, we consider catastrophe losses in excess of $100 million from a current year event as significant. 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 $105 billion as of June 30, 2018. Our periodic underwriting results may also include significant foreign currency transaction gains and losses arising from the changes in the valuation of non-U.S. Dollar denominated reinsurance liabilities of our U.S. based insurance subsidiaries due to foreign currency exchange rate fluctuations.

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

 

     Second Quarter      First Six Months  
     2018      2017      2018      2017  

Underwriting gain (loss):

           

GEICO

    $ 673        $         119      $ 1,350        $         294   

Berkshire Hathaway Reinsurance Group

     297         (375)        39         (1,118)  

Berkshire Hathaway Primary Group

     234         232       333         421   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain (loss)

     1,204         (24)        1,722         (403)  

Income taxes and noncontrolling interests

     261         (2)        372         (114)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net underwriting gain (loss)

    $             943        $ (22)       $             1,350        $ (289)  
  

 

 

    

 

 

    

 

 

    

 

 

 

Effective income tax rate

     21.4%         34.4%        21.4%         30.8%   
  

 

 

    

 

 

    

 

 

    

 

 

 

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).

 

     Second Quarter    First Six Months  
     2018    2017      2018      2017  
         Amount        %        Amount          %        Amount          %          Amount          %

Premiums written

    $     8,237          $     7,270           $ 16,926          $ 14,857      
  

 

 

 

     

 

 

       

 

 

       

 

 

    

Premiums earned

    $ 8,284              100.0       $ 7,244         100.0       $ 16,199              100.0        $ 14,089               100.0   
  

 

 

 

  

 

 

 

  

 

 

    

 

 

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Losses and loss adjustment expenses

     6,505        78.5        6,108         84.3        12,580        77.7         11,698         83.0   

Underwriting expenses

     1,106        13.4        1,017         14.1        2,269        14.0         2,097         14.9   
  

 

 

 

  

 

 

 

  

 

 

    

 

 

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Total losses and expenses

     7,611        91.9        7,125               98.4        14,849        91.7         13,795         97.9   
  

 

 

 

  

 

 

 

  

 

 

    

 

 

 

  

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain

    $ 673          $ 119           $ 1,350          $ 294      
  

 

 

 

     

 

 

       

 

 

       

 

 

    

 

27


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

Insurance—Underwriting (Continued)

GEICO (Continued)

 

Premiums written in the second quarter and first six months of 2018 were approximately $8.2 billion and $16.9 billion, respectively, representing increases of 13.3% and 13.9%, respectively, compared to 2017. These increases reflected voluntary auto policy-in-force growth of 4.9% and increased premiums per auto policy of approximately 8.7% over the past twelve months. The increase in premiums per policy was attributable to rate increases, coverage changes and changes in state and risk mix. The rate increases were in response to accelerating losses in recent years. Voluntary auto new business sales in the first six months of 2018 decreased 9.3% compared to our record growth over the first half of 2017, while our voluntary auto policies-in-force increased approximately 369,000 during the first six months of 2018.

Losses and loss adjustment expenses increased $397 million (6.5%) in the second quarter and $882 million (7.5%) in the first six months of 2018 compared to 2017. Our ratio of losses and loss adjustment expenses to premiums earned (the “loss ratio”) in the first six months of 2018 was 77.7%, a decline of 5.3 percentage points compared to 2017. The decline in the loss ratio reflected the effects of premium rate increases and comparatively lower storm-related losses.

We also reduced ultimate claim loss estimates for prior years’ loss events by $430 million in the first six months of 2018 and $106 million in the first six months of 2017. These reductions produced corresponding increases in pre-tax underwriting gains. The comparative increase in gains relating to prior years’ claims was primarily related to collision and property damage losses, which usually have short claim-tails. Claims frequencies in the first six months of 2018 for property damage, collision and personal injury protection coverages declined approximately two percent compared to 2017, and decreased approximately three percent for bodily injury coverage. Average claims severities in the first six months of 2018 were higher for property damage and collision coverages (four to six percent range) and bodily injury coverage (five to seven percent range).

Our underwriting expenses in the first six months of 2018 were approximately $2.3 billion, an increase of $172 million (8.2%) over 2017. Our expense ratio (underwriting expenses to premiums earned) for the first six months of 2018 decreased 0.9 percentage points compared to 2017. The largest components of underwriting expenses are employee-related expenses (salaries and benefits) and advertising costs. The increase in underwriting expenses reflects the increase in policies-in-force.

Berkshire Hathaway Reinsurance Group

We offer excess-of-loss and quota-share reinsurance coverages on property and casualty risks and life and health reinsurance to insurers and reinsurers worldwide through several legal entities, led by National Indemnity Company (“NICO Group”), Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN Group”), and General Reinsurance Corporation, General Reinsurance AG and General Re Life Corporation (collectively, “General Re Group”). We also periodically assume property and casualty risks under retroactive reinsurance contracts written through NICO. In addition, the BHLN Group writes periodic payment annuity contracts.

With the exception of our retroactive reinsurance and periodic payment annuity businesses, we strive to generate pre-tax underwriting profits. Time-value-of-money concepts are important elements in establishing prices for our retroactive reinsurance and periodic payment annuity businesses due to the expected long durations of the liabilities. We expect to incur pre-tax underwriting losses from such businesses, primarily through deferred charge amortization and discount accretion charges. Premiums received at inception under these contracts are often large, which are then available for investment. A summary of the premiums and pre-tax underwriting results of our reinsurance business follows (in millions).

 

    Premiums earned     Pre-tax underwriting gain (loss)  
   

 

    Second Quarter    

        First Six Months             Second Quarter             First Six Months      
   

 

2018

    2017     2018     2017     2018     2017     2018     2017  

Property/casualty

   $ 2,296       $ 1,960       $ 4,322     $ 3,702      $ 338       $ 40       $ 468       $ (370)  

Retroactive reinsurance

    —              —        10,186        (147)       (333)       (458)       (594)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    2,296        1,961        4,322      13,888        191        (293)       10        (964)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Life/health

    1,314        1,173        2,548      2,258        120                116        216                189   

Periodic payment annuity

    302        230        582      450        (14)       (198)       (187)       (343)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    1,616        1,403        3,130      2,708        106        (82)       29        (154)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $       3,912       $       3,364       $       7,452     $     16,596      $         297       $ (375)      $         39       $ (1,118)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


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

Insurance—Underwriting (Continued)

 

Property/casualty

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

 

     Premiums earned      Pre-tax underwriting gain (loss)  
    

 

Second Quarter

     First Six Months      Second Quarter      First Six Months  
    

 

2018

     2017      2018      2017      2018      2017      2018      2017  

NICO Group

   $ 1,263        $ 1,183        $ 2,317        $ 2,271        $ 278        $ 52        $ 301         $        (217)  

General Re Group

     1,033         777         2,005         1,431         60         (12)        167        (153)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $         2,296        $       1,960        $       4,322        $       3,702        $         338        $         40        $         468         $        (370)  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

NICO Group’s premiums earned in the second quarter and first six months of 2018 increased 7% and 2%, respectively, compared to 2017. For the first six months of 2018, nearly half of NICO Group’s premiums written and earned derived from two contracts, which included a 10-year, 20% quota-share contract with Insurance Australia Group Ltd. that incepted in July 2015. General Re Group’s premiums earned in the second quarter and first six months of 2018 increased $256 million (33%) and $574 million (40%), respectively, compared to 2017. The increases reflected higher direct and broker markets business, derived primarily from new business and increased participations for renewal business. Industry capacity dedicated to property and casualty markets remains high and price competition in most reinsurance markets persists. We continue to decline business when we believe prices are inadequate.

On a combined basis, our property/casualty reinsurance business generated pre-tax underwriting gains of $338 million and $468 million in the second quarter and first six months of 2018, respectively, compared to pre-tax gains of $40 million in the second quarter and pre-tax losses of $370 million in the first six months of 2017. There were no significant catastrophe loss events in 2018. In the first six months of 2017, we incurred estimated losses of $165 million from a cyclone in Australia.

In the first six months of 2018, we also decreased estimated ultimate claims liabilities for prior years’ loss events by $286 million, compared to an increase of $366 million in the first six months of 2017. The increase in prior years’ losses in 2017 was driven by 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 by unanticipated property claims from events in 2016.

Retroactive reinsurance

Premiums earned in the first six months of 2017 included $10.2 billion from an aggregate excess-of-loss retroactive reinsurance agreement with various subsidiaries of American International Group, Inc. (the “AIG Agreement”), which became effective on February 2, 2017. At the inception of the AIG Agreement, we also recorded losses and loss adjustment expenses incurred of $10.2 billion, representing our initial estimate of the unpaid losses and loss adjustment expenses assumed of $16.4 billion, partly offset by an initial deferred charge asset of $6.2 billion. Thus, on the effective date, the AIG Agreement had no effect on our pre-tax underwriting results.

Pre-tax underwriting losses from retroactive reinsurance contracts in the second quarter and first six months of 2018 were $147 million and $458 million, respectively, compared to $333 million and $594 million, respectively, in the same periods in 2017. Certain liabilities relating to retroactive reinsurance contracts written by our U.S. subsidiaries are denominated in foreign currencies. Underwriting results include gains and losses from the re-measurement of such liabilities from changes in foreign currency exchange rates. Changes in exchange rates generated pre-tax gains of $124 million and $64 million in the second quarter and first six months of 2018, respectively, compared to pre-tax losses in the second quarter and first six months of $102 million and $191 million, respectively, in 2017.

Pre-tax underwriting losses before foreign currency gains/losses in the first six months of 2018 and 2017 were $522 million and $403 million, respectively. The increase in pre-tax losses was primarily due to amortization charges related to the AIG Agreement, which included the effects of a previously reported increase to our ultimate claim liability estimates of approximately $1.8 billion and an increase in the related deferred charge asset of $1.7 billion in the fourth quarter of 2017.

Gross unpaid losses assumed under retroactive reinsurance contracts were approximately $42.1 billion at June 30, 2018 and $42.9 billion at December 31, 2017. Unamortized deferred charge assets related to such reinsurance contracts were approximately $14.7 billion at June 30, 2018 and $15.3 billion at December 31, 2017. Deferred charge asset balances will be amortized as charges to pre-tax earnings over the expected remaining claims settlement periods.

 

29


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

Insurance—Underwriting (Continued)

 

Life/health

Premiums earned and pre-tax underwriting results of our life/health reinsurance businesses are further summarized as follows (in millions).

 

     Premiums earned      Pre-tax underwriting gain  
    

 

Second Quarter

     First Six Months      Second Quarter      First Six Months  
    

 

      2018      

           2017                  2018                  2017                  2018                  2017                  2018                  2017        

General Re Group

   $ 936        $ 801        $ 1,855       $ 1,538       $ 67        $ 39       $ 114        $ 39   

BHLN Group

     378         372         693         720         53         77         102         150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,314        $ 1,173        $ 2,548       $ 2,258       $ 120        $ 116       $ 216        $ 189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

General Re Group’s premiums earned in the second quarter and first six months of 2018 increased $135 million (17%) and $317 million (21%), respectively, compared to 2017. The increases were primarily attributable to growth in Asia and Australia markets and foreign currency translation effects of a comparatively weaker U.S. Dollar. The General Re Group produced pre-tax underwriting gains in the first six months of $114 million in 2018 and $39 million in 2017. Underwriting results in 2018 reflected increased pre-tax gains from international life business, attributable to increased volumes and foreign currency translation effects, and lower claim losses from run-off and life business in North America.

BHLN Group’s pre-tax underwriting results in the first six months of 2018 and 2017 included pre-tax gains of $100 million and $152 million, respectively, from the run-off of variable annuity reinsurance contracts that provide guarantees on closed blocks of variable annuity business. Periodic underwriting results from this business reflect changes in estimated liabilities for guaranteed benefits, which result from changes in securities markets and interest rates and from the periodic amortization of expected profit margins. Underwriting results from variable annuity contracts can be volatile, reflecting the volatility of securities markets, interest rates and foreign currency exchange rates. Estimated liabilities for variable annuity guarantees were approximately $1.7 billion at June 30, 2018 and $1.8 billion at December 31, 2017.

BHLN Group’s life reinsurance premiums earned in the second quarter and first six months of 2018 were $374 million and $685 million, respectively, compared to $368 million and $712 million, respectively, in the corresponding 2017 periods. This business produced near break-even pre-tax underwriting results in each period.

Periodic payment annuity

Periodic payment annuity premiums earned in the second quarter and first six months of 2018 increased $72 million (31%) and $132 million (29%), respectively, compared to 2017. Periodic payment annuity contracts produced pre-tax losses of $14 million and $187 million in the second quarter and first six months of 2018, respectively, compared to pre-tax losses of $198 million and $343 million, respectively, for the same periods in 2017. Certain periodic payment annuity contracts written by our U.S. subsidiaries are denominated in foreign currencies, primarily the Great Britain Pound Sterling. Pre-tax underwriting results in 2018 included pre-tax gains of $106 million in the second quarter and $36 million in the first six months from the re-measurement of such liabilities due to changes in exchange rates compared to pre-tax losses of $86 million in the second quarter and $110 million in the first six months of 2017.

Before the effect of foreign currency gains and losses, this business had pre-tax underwriting losses of $223 million in the first six months of 2018 and $233 million in the first six months of 2017. These losses were primarily attributable to the recurring discount accretion of annuity liabilities. Discounted annuity liabilities approximated $11.8 billion at June 30, 2018 and $11.2 billion at December 31, 2017, reflecting a weighted average discount rate of approximately 4.1%.

 

30


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

Insurance—Underwriting (Continued)

 

Berkshire Hathaway Primary Group

The Berkshire Hathaway Primary Group (“BH Primary”) consists of a wide variety of independently managed insurance underwriting businesses that primarily provide a variety of commercial insurance solutions, including healthcare malpractice, workers’ compensation, automobile, general liability, property and various specialty coverages for small, medium and large clients. The largest of these insurers include Berkshire Hathaway Specialty Insurance (“BH Specialty”), Berkshire Hathaway Homestate Companies (“BHHC”), MedPro Group, Berkshire Hathaway GUARD Insurance Companies (“GUARD”) and National Indemnity Company (“NICO Primary”). Other BH Primary insurers include U.S. Liability Insurance Company, Applied Underwriters and Central States Indemnity Company.

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

 

     Second Quarter      First Six Months  
    

 

2018

     2017      2018      2017  
    

 

  Amount  

         %            Amount            %              Amount            %              Amount            %        

Premiums written

   $ 2,110          $ 1,801          $ 4,271          $ 3,650      
  

 

 

       

 

 

       

 

 

       

 

 

    

Premiums earned

   $ 1,953            100.0       $ 1,759             100.0       $ 3,871             100.0       $ 3,435             100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Losses and loss adjustment expenses

     1,214         62.2         1,047         59.5         2,465         63.7         2,084         60.7   

Underwriting expenses

     505         25.9         480         27.3         1,073         27.7         930         27.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total losses and expenses

     1,719         88.1         1,527         86.8         3,538         91.4         3,014         87.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Pre-tax underwriting gain

   $ 234          $ 232          $ 333          $ 421      
  

 

 

       

 

 

       

 

 

       

 

 

    

Premiums written in both the second quarter and first six months of 2018 increased 17% compared to the corresponding 2017 periods. These increases were primarily attributable to BH Specialty, MedPro Group, and GUARD. Premiums earned in the first six months of 2018 increased $436 million (13%) compared to the first six months of 2017, reflecting the growth of written premiums of these businesses over the past year.

BH Primary produced pre-tax underwriting gains of $234 million and $333 million in the second quarter and first six months of 2018, respectively, compared to $232 million and $421 million in the second quarter and first six months of 2017, respectively. Losses and loss adjustment expenses in the first six months included net reductions of estimated ultimate liabilities for prior years’ loss events of $338 million in 2018 and $426 million in 2017, which produced corresponding increases in pre-tax underwriting gains. The liability reductions in each year primarily related to healthcare malpractice and workers’ compensation business. BH Primary writes significant levels of commercial liability and workers’ compensation insurance and the related claim costs may be subject to higher severity and longer claim-tails, which could give rise to significant increases in claims liabilities in the future attributable to higher than expected claim settlements, adverse litigation or judicial rulings and other factors not currently anticipated.

Insurance—Investment Income

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

 

    Second Quarter     First Six Months  
   

 

       2018       

           2017                   2018                   2017         

Interest and other investment income

   $ 399       $ 280      $ 851      $ 526   

Dividend income

    993        1,003        1,746        1,886   
 

 

 

   

 

 

   

 

 

   

 

 

 

Investment income before income taxes and noncontrolling interests

    1,392        1,283        2,597        2,412   

Income taxes and noncontrolling interests

    250        318        443        539   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net investment income

   $ 1,142       $ 965      $ 2,154      $ 1,873   
 

 

 

   

 

 

   

 

 

   

 

 

 

Effective income tax rate

    17.9%        24.7%        17.0%        22.3%   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

31


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

Insurance—Investment Income (Continued)

 

Pre-tax interest and other investment income increased $119 million (43%) in the second quarter and $325 million (62%) in the first six months of 2018 compared to the same periods in 2017. The increases reflected higher short-term interest rates and fair value adjustments related to a limited partnership investment in the first quarter, partly offset by lower interest from reduced investments in fixed maturity securities. Dividend income declined $10 million (1%) in the second quarter and $140 million (7%) in the first six 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 other changes in our portfolio of equity securities. Our invested assets continue to include significant levels of short-term investments. We believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to such investments.

Invested assets of our insurance businesses derive from shareholder capital, including reinvested earnings, and from net liabilities under insurance and reinsurance contracts or “float.” The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health benefit liabilities, unearned premiums and other liabilities due to policyholders, less premium and reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $116 billion at June 30, 2018 and $114 billion at December 31, 2017. Our average cost of float in the first six months of 2018 was negative, as our underwriting operations generated pre-tax earnings of $1.7 billion. Our average cost of float for the year ending December 31, 2017 was approximately 3%, reflecting pre-tax underwriting losses of approximately $3.2 billion, most of which was incurred in the last half of the year.

A summary of cash and investments held in our insurance businesses as of June 30, 2018 and December 31, 2017 follows (in millions).

 

    June 30,
2018
    December 31,
2017
 

Cash, cash equivalents and U.S. Treasury Bills

   $        69,279       $        73,285   

Equity securities

    173,154        163,134   

Fixed maturity securities

    18,298        21,092   
 

 

 

   

 

 

 
   $ 260,731       $ 257,511   
 

 

 

   

 

 

 

Fixed maturity investments as of June 30, 2018 were as follows (in millions).

 

    Amortized
cost
    Unrealized
gains/losses
    Carrying
value
 

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

   $        3,456       $         (25)      $        3,431   

States, municipalities and political subdivisions

    445        12        457   

Foreign governments

    7,549        14        7,563   

Corporate bonds, investment grade

    5,127        296        5,423   

Corporate bonds, non-investment grade

    680        150        830   

Mortgage-backed securities

    535        59        594   
 

 

 

   

 

 

   

 

 

 
   $ 17,792       $ 506       $ 18,298   
 

 

 

   

 

 

   

 

 

 

U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 89% of all state, municipal and political subdivisions, foreign government obligations and mortgage-backed securities were rated AA or higher. Non-investment grade securities represent securities rated below BBB- or Baa3. Foreign government securities include obligations issued or unconditionally guaranteed by national or provincial government entities.

 

32


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

 

Railroad (“Burlington Northern Santa Fe”)

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

 

     Second Quarter     First Six Months  
    

 

2018

     2017     2018     2017  

Revenues

    $      5,878        $      5,250       $     11,502       $    10,435   
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Compensation and benefits

     1,328         1,255        2,643        2,552   

Fuel

     830         577        1,597        1,182   

Purchased services

     714         609        1,406        1,235   

Depreciation and amortization

     575         592        1,146        1,165   

Equipment rents, materials and other

     520         424        1,030        911   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total operating expenses

     3,967         3,457        7,822        7,045   

Interest expense

     256         256        512        508   
  

 

 

    

 

 

   

 

 

   

 

 

 
     4,223         3,713        8,334        7,553   
  

 

 

    

 

 

   

 

 

   

 

 

 

Pre-tax earnings

     1,655         1,537        3,168        2,882   

Income taxes

     346         579        714        1,086   
  

 

 

    

 

 

   

 

 

   

 

 

 

Net earnings

    $ 1,309        $ 958       $ 2,454       $ 1,796   
  

 

 

    

 

 

   

 

 

   

 

 

 

Effective income tax rate

     20.9%         37.7%       22.5%       37.7%  
  

 

 

    

 

 

   

 

 

   

 

 

 

BNSF’s revenues in the second quarter and first six months of 2018 were $5.9 billion and $11.5 billion, respectively, representing increases of $628 million (12.0%) and $1,067 million (10.2%), respectively, versus the corresponding periods in 2017. During the first six months of 2018, revenues reflected a 3.6% comparative increase in aggregate average revenue per car/unit and a 5.2% increase in volume. Our year-to-date volume was approximately 5.3 million cars/units compared to 5.0 million in 2017. The increase in average revenue per car/unit was attributable to higher fuel surcharge revenue driven primarily by higher fuel prices, increased rates per car/unit, and business mix changes. Pre-tax earnings were approximately $1.7 billion and $3.2 billion in the second quarter and first six months of 2018, respectively, increases of 7.7% and 9.9%, respectively, compared to the corresponding periods in 2017.

Revenues from consumer products were $2.0 billion in the second quarter and $3.8 billion in the first six months of 2018, representing increases of 13.6% and 12.2%, respectively, from 2017. The increases reflected higher average revenue per unit and volume increases of 4.7% in the second quarter and 5.4% in the first six months. The increases were attributable to higher intermodal volumes due to general economic growth and tight truck capacity leading to conversion from highway to rail, as well as strength in imports and containerized agricultural product exports, partly offset by a sizable contract loss.

Revenues from industrial products in 2018 were $1.5 billion in the second quarter and $2.8 billion for the first six months, or increases of 16.3% and 13.7%, respectively, from the comparable 2017 periods. The increases were attributable to volume increases of 10.4% in the second quarter and 9.8% in the first six months as well as higher average revenue per car/unit. Volumes in 2018 were higher primarily due to the energy and industrial sectors which drove demand for sand, petroleum products, steel, and plastics. The first six months of 2018 also included higher taconite volume.

Revenues from agricultural products in 2018 increased 10.1% in the second quarter to $1.2 billion and increased 7.0% to $2.3 billion for the first six months when compared to the same periods in 2017. The second quarter increase reflected higher volumes of 9.1% and higher average revenue per car/unit. In the first six months, higher volumes of 7.8% were partially offset by slightly lower average revenue per car/unit. Volumes increased due to strong export and domestic grain shipments, as well as higher fertilizer and other grain products volumes.

Revenues from coal in 2018 decreased 0.1% in the second quarter to $911 million and 0.7% in the first six months to $1.9 billion compared to 2017. The decline reflected lower volumes of 0.5% in the second quarter and 1.4% year-to-date partially offset by slightly higher average revenue per car/unit. The volume decreases in 2018 were due mainly to utility plant retirements, partially offset by market share gains and increased export volumes.

 

33


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

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

 

Operating expenses in the second quarter and first six months of 2018 were $4.0 billion and $7.8 billion, respectively, increases of $510 million (14.8%) and $777 million (11.0%), respectively, compared to the same periods in 2017. Our ratios of operating expenses to revenues increased 1.7 percentage points to 67.5% in the second quarter and 0.5 percentage points to 68.0% for the first six months of 2018 versus the corresponding prior year periods.

Compensation and benefits expenses increased $73 million (5.8%) for the second quarter and increased $91 million (3.6%) for the first six months of 2018, primarily due to wage inflation, volume-related increases, and higher training costs. Fuel expenses increased $253 million (43.8%) for the second quarter and increased $415 million (35.1%) for the first six months of 2018 primarily due to higher average fuel prices and increased volumes.

Purchased services expenses increased $105 million (17.2%) in the second quarter and $171 million (13.8%) in the first six months of 2018 as compared to 2017. The increases are 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 second quarter and first six months of 2018, equipment rents, materials and other expense increased $96 million (22.6%) and $119 million (13.1%), respectively, compared to 2017. These increases resulted from higher locomotive materials, derailment-related costs, property taxes and personal injury expenses.

BNSF’s effective income tax rate was 20.9% and 22.5% for the second quarter and first six months of 2018, respectively, as compared to 37.7% in both corresponding periods in 2017. The decrease was driven by the reduction in the U.S. statutory income tax rate under the TCJA, effective January 1, 2018, as well as various state income tax rate reductions enacted in 2018.

Utilities and Energy (“Berkshire Hathaway Energy Company”)

We currently own 90.4% of the outstanding common stock of Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests are comprised of PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. In Great Britain, BHE subsidiaries operate two regulated electricity distribution businesses referred to as Northern Powergrid. BHE also owns two domestic regulated interstate natural gas pipeline companies. Other energy businesses include a regulated electricity transmission-only business in Alberta, Canada (“AltaLink, L.P.”) and a diversified portfolio of independent power projects. In addition, BHE also operates the second-largest residential real estate brokerage firm and one of the largest residential real estate brokerage franchise networks in the United States.

The rates our regulated businesses charge customers for energy and services are based, in large part, on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent these regulated operations are not allowed to include such costs in the approved rates, operating results will be adversely affected. The Tax Cuts and Jobs Act of 2017 reduced the U.S. federal statutory income tax rate of our domestic regulated utilities from 35% to 21%. The resulting effects of the lower U.S. income tax expense of those regulated utilities are expected to be substantially offset over time by lower revenues and pre-tax earnings. Revenues and earnings of BHE are summarized below (in millions).

 

    Second Quarter     First Six Months  
    Revenues    

 

Earnings

    Revenues     Earnings  
    2018     2017    

 

2018

    2017     2018     2017     2018     2017  

PacifiCorp

   $      1,198       $      1,256      $         212       $         258       $     2,400       $    2,548       $       385       $       523   

MidAmerican Energy Company

    730        669        56        90        1,497        1,377        96        152   

NV Energy

    760        761        95        141        1,385        1,355        135        192   

Northern Powergrid

    248        220        50        64        523        465        159        167   

Natural gas pipelines

    242        190        53        43        621        508        272        243   

Other energy businesses

    595        547        114        51        1,095        1,034        134        66   

Real estate brokerage

    1,277        959        107        113        2,041        1,546        97        116   

Corporate interest

    —         —        (101)       (111)       —        —        (205)       (221)  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 5,050       $ 4,602           $ 9,562       $ 8,833       
 

 

 

   

 

 

       

 

 

   

 

 

     

Pre-tax earnings

 

    586        649            1,073        1,238   

Income taxes

 

    (63)       72            (230)       119   
 

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings

 

    649        577            1,303        1,119   

Noncontrolling interests

 

    68        68            137        130   
 

 

 

   

 

 

       

 

 

   

 

 

 

Net earnings attributable to Berkshire Hathaway shareholders

 

   $ 581       $ 509           $ 1,166       $ 989   
 

 

 

   

 

 

       

 

 

   

 

 

 

Effective income tax rate

 

    (10.7)%       11.1%            (21.4)%        9.6%   
 

 

 

   

 

 

       

 

 

   

 

 

 

 

34


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

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

 

PacifiCorp

PacifiCorp operates a regulated electric utility in portions of several Western states, including Utah, Oregon and Wyoming. Revenues in the second quarter and first six months of 2018 decreased 5% and 6%, respectively, compared to the same periods in 2017. Retail revenues in the second quarter of 2018 decreased $67 million and $178 million in the first six months, compared to 2017. The declines reflected the effects of lower average rates ($125 million year-to-date), primarily due to refund accruals related to 2017 tax reform ($53 million in the second quarter and $106 million in the first six months), and a year-to-date reduction in volumes (2.3%), largely attributable to the impacts of weather. Wholesale and other revenues increased due to higher volumes partially offset by lower market rates.

Pre-tax earnings decreased $46 million (18%) in the second quarter and $138 million (26%) in the first six months of 2018 as compared to the same periods in 2017. Utility margins (operating revenues less fuel and purchased energy costs) in the second quarter and first six months of 2018 were $791 million and $1,542 million, respectively, representing decreases of $55 million (7%) and $144 million (9%) versus the comparable periods in 2017. These decreases were primarily due to the declines in revenues, which included the refund accruals relating to 2017 tax reform. PacifiCorp’s after-tax earnings in the second quarter and first six months of 2018 were $185 million and $333 million, respectively, representing an increase of $9 million (5%) in the second quarter and a decrease of $22 million (6%) from the first six months of 2017.

MidAmerican Energy Company

MEC operates a regulated electric and natural gas utility primarily in Iowa and Illinois. Revenues in the second quarter of 2018 were $730 million, an increase of $61 million (9%) as compared to the same period in 2017. Electric operating revenues increased $52 million compared to 2017. The increase in electric revenues was attributable to higher retail revenues ($62 million), reflecting comparative increases from 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 due to refund accruals related to 2017 tax reform. Pre-tax earnings in the second quarter of 2018 decreased $34 million (38%) compared to the same period in 2017. Electric utility margins in the second quarter of 2018 were $471 million, an increase of $44 million compared to 2017, which was primarily due to the net increase in retail revenues. However, this increase was more than offset by increased depreciation, maintenance and other operating expenses. The increase in depreciation included $51 million from Iowa revenue sharing and $15 million from wind generation and other plant placed in-service.

Revenues in the first six months of 2018 increased $120 million (9%) compared to 2017. The increase reflected increases in electric operating revenues ($88 million) and natural gas operating revenues ($20 million). The increase in electric revenues was attributable to higher retail revenues ($94 million), reflecting comparative increases from higher recoveries through bill riders and volumes, partially offset by refund accruals related to 2017 tax reform. The increase in natural gas revenues was primarily due to increased volumes, partially offset by a lower average per-unit price and refund accruals related to 2017 tax reform. Pre-tax earnings in the first six months of 2018 decreased $56 million (37%) compared to the same period in 2017. Electric utility margins in the first six months of 2018 were $832 million, an increase of $74 million compared to 2017, which was primarily due to the net increase in retail revenues. However, this increase was more than offset by increased depreciation, maintenance and other operating expenses. The increase in depreciation included $79 million from Iowa revenue sharing and $29 million from wind generation and other plant placed in-service.

MEC’s after-tax earnings in 2018 and 2017 were significantly greater than pre-tax earnings due to the significant production income tax credits it receives related to its wind-powered generating facilities. MEC’s after-tax earnings in the second quarter and first six months of 2018 were $103 million and $206 million, respectively, declines of $28 million (21%) and $27 million (12%), respectively, as compared to the same periods in 2017.

NV Energy

NV Energy operates regulated electric and natural gas utilities in Nevada. Revenues were unchanged in the second quarter and increased $30 million (2%) in the first six months of 2018 compared to the same periods in 2017. In the first six months of 2018, electric operating revenues increased $21 million, reflecting increased pass-through cost adjustments and retail customer growth, partly offset by reductions due to the effects of 2017 tax reform and lower retail rates attributable to a 2017 regulatory rate review. Natural gas operating revenue increased $9 million in the first six months of 2018, primarily due to higher rates, partially offset by lower customer usage.

 

35


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

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

 

Pre-tax earnings in the second quarter and first six months of 2018 decreased $46 million (33%) and $57 million (30%), respectively, compared to the same periods in 2017. The decreases were primarily due to lower electric utility margins and increased depreciation, maintenance and other operating costs. Electric utility margins in the second quarter and first six months of 2018 were $414 million and $743 million, respectively, representing decreases of $21 million (5%) and $22 million (3%) versus the comparable periods in 2017. The decreases were primarily due to the declines in revenues from the effects of 2017 tax reform. NV Energy’s after-tax earnings in the second quarter and first six months of 2018 were $77 million and $110 million, respectively, declines of 15% and 11%, respectively, from the corresponding 2017 periods.

Northern Powergrid

Revenues increased $28 million and $58 million in the second quarter and first six months of 2018 compared to same periods in 2017, primarily due to the favorable foreign currency translation effects of a weaker U.S. Dollar in 2018 and increased smart meter and distribution revenues. Pre-tax earnings in the second quarter of 2018 decreased $14 million (22%) and $8 million (5%) in the first six months of 2018 compared to 2017, primarily due to higher depreciation and other operating expenses, including pension settlement losses in 2018, partly offset by favorable foreign currency translation effects.

Natural gas pipelines

Revenues increased $52 million (27%) in the second quarter of 2018 and increased $113 million (22%) in the first six months compared to 2017, primarily due to higher transportation revenues and increased gas sales volumes related to system balancing activities, which were largely offset in cost of sales. Pre-tax earnings increased $10 million (23%) and $29 million (12%) in the second quarter and first six months of 2018, respectively, compared to 2017. The increases were primarily due to the increases in transportation revenues, partly offset by comparative increases in operations and maintenance expenses.

Other energy businesses

Revenues increased $48 million (9%) in the second quarter of 2018 and $61 million (6%) in the first six months compared to the same periods in 2017, reflecting comparative increases of 9% and 10%, respectively, from renewable energy and comparative increases of 10% and 9%, respectively, from AltaLink, L.P. Pre-tax earnings in the second quarter and first six months of 2018 increased $63 million and $68 million, respectively, compared to the same periods in 2017. The increases were primarily attributable to the increased revenues from renewable energy and AltaLink, L.P. as well as lower other operating expenses, partly offset by increased depreciation expense.

Real estate brokerage

Revenues in the second quarter and first six months of 2018 increased 33% and 32%, respectively, as compared to the same periods in 2017, primarily due to recent business acquisitions. Pre-tax earnings declined $6 million in the second quarter and $19 million in the first six months of 2018 compared to 2017, primarily due to higher operating costs and interest expense.

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, which were fully repaid in the third quarter of 2017. Corporate interest declined 7% in the first six months of 2018 as compared to 2017, primarily due to lower average borrowings.

Income taxes

BHE’s consolidated effective income tax rates for the first six months of 2018 and 2017 were (21.4)% and 9.6%, 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 six months of 2018 decreased primarily due to the reduction in the U.S. federal corporate income tax rate, as well as from lower state income tax expense, an increase in recognized production tax credits, lower U.S. income taxes on foreign earnings and favorable impacts of rate making.

 

36


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

Manufacturing, Service and Retailing

 

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

 

    Second Quarter      First Six Months
            Revenues                      Earnings *                    Revenues                    Earnings *        
    2018     2017    2018    2017    2018    2017    2018    2017

Manufacturing

   $   13,853       $    12,738       $    2,135       $     1,939       $     26,787       $    24,835       $       3,990       $     3,426  

Service and retailing

    19,489        19,131        764        624        38,265        37,325        1,339        1,105  
 

 

 

   

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

   $   33,342       $     31,869             $   65,052       $   62,160        
 

 

 

   

 

 

 

        

 

 

 

  

 

 

 

     

Pre-tax earnings

 

       2,899        2,563              5,329        4,531  

Income taxes and noncontrolling interests

         758        901              1,366        1,552  
      

 

 

 

  

 

 

 

        

 

 

 

  

 

 

 

        $ 2,141       $     1,662             $ 3,963       $ 2,979  
      

 

 

 

  

 

 

 

        

 

 

 

  

 

 

 

Effective income tax rate

         25.5%        34.5%              25.0%        33.6%  
      

 

 

 

  

 

 

 

        

 

 

 

  

 

 

 

 

*

Excludes certain acquisition accounting expenses, which were primarily from the amortization of identified intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings in the preceding table were $213 million and $422 million in the second quarter and first six months of 2018, respectively, compared to $169 million and $301 million in the second quarter and first six months of 2017, respectively. These expenses are included in “Other” in the summary of earnings on page 26 and in the “Other” earnings section on page 42.

Manufacturing

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

Our building products businesses include flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore), and residential and commercial construction and engineering products and systems (MiTek). Our consumer products businesses include leisure vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, H.H. Brown Shoe Group and Brooks Sports) and the Duracell Company (“Duracell”), a manufacturer of high performance alkaline batteries. This group also includes custom picture framing products (Larson Juhl) and jewelry products (Richline). A summary of revenues and pre-tax earnings of our manufacturing operations follows (in millions).

 

     Second Quarter    First Six Months
         Revenues                    Pre-tax earnings                    Revenues                    Pre-tax earnings      
     2018    2017    2018    2017    2018    2017    2018    2017

Industrial products

    $ 7,287       $ 6,637       $ 1,404       $ 1,267       $ 14,364       $ 13,145       $ 2,715       $ 2,261  

Building products

     3,340        3,125        415        401        6,174        5,859        667        650  

Consumer products

     3,226        2,976        316        271        6,249        5,831        608        515  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

    $     13,853       $     12,738       $     2,135       $   1,939       $   26,787       $   24,835       $   3,990       $   3,426  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Aggregate revenues of our manufacturing businesses in the second quarter and first six months of 2018 were approximately $13.85 billion and $26.8 billion, increases of approximately $1.1 billion (8.8%) and $1.95 billion (7.9%), respectively, compared to the same periods in 2017. Pre-tax earnings in the second quarter and first six months of 2018 were approximately $2.1 billion and $4.0 billion, respectively, representing increases of $196 million (10.1%) and $564 million (16.5%), respectively, over the corresponding 2017 periods. Pre-tax earnings in the first six months of 2017 included pre-tax losses of $193 million (predominantly in the first quarter) in connection with the disposition of an underperforming bolt-on business acquired by Lubrizol in 2014. Excluding these losses, pre-tax earnings in the first six months of 2018 increased 10.3% compared to 2017.

 

37


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

Manufacturing, Service and Retailing (Continued)

 

Industrial products

Revenues from industrial products businesses were approximately $7.3 billion in the second quarter and $14.4 billion in the first six months of 2018, or increases of $650 million (9.8%) and $1.2 billion (9.3%), respectively, versus the same periods in 2017. PCC’s revenues in the second quarter and first six months of 2018 increased approximately 6.5% over the same periods in 2017. The increases reflected increased demand in aerospace markets in connection with new aircraft programs, partly offset by lower industrial gas turbine demand. Lubrizol’s revenues in the second quarter and first six months of 2018 increased 9.5% and 7.8%, respectively, compared to 2017, primarily due to higher prices, changes in product mix and favorable foreign currency translation. Overall, Lubrizol’s sales volumes in 2018 increased 5% in the second quarter and 2% in the first six months compared to 2017.

Marmon’s revenues in the second quarter and first six months of 2018 increased 10.2% and 9.6%, respectively, as compared to 2017. Revenue increases were attributable to higher average copper and steel prices, business acquisitions, growth in heavy-duty transportation and HVAC product lines and favorable foreign currency translation. These increases were partially offset by lower retail food, beverage and store products sales and lower steel distribution volume. IMC’s revenues increased 21.4% in the second quarter and 24.3% in the first six months of 2018 compared to 2017 due to a combination of factors, including increased unit sales, business acquisitions and translation effects from a weaker U.S. Dollar. CTB’s revenues increased 2.2% in the first six months of 2018 versus 2017, due to favorable foreign currency effects, partly offset by lower organic sales.

Pre-tax earnings of the industrial products group were $1.4 billion in the second quarter and $2.7 billion in the first six months of 2018, representing increases of $137 million (10.8%) and $454 million (20.1%), respectively, compared to 2017. The comparative increase in earnings for the first six months of 2018 reflected the effects of pre-tax losses of $193 million recognized by Lubrizol in 2017 in connection with the disposition of an underperforming business and the recognition of intangible asset impairments and restructuring charges. Excluding the effects of these losses, the industrial products group pre-tax earnings increased 10.6% in the first six months of 2018 compared to 2017.

Excluding the effects of the aforementioned losses, Lubrizol’s pre-tax earnings increased 20.7% in the first six months of 2018 compared to 2017, which was primarily due to lower interest expense, the favorable effects of foreign currency translation, past restructuring and ongoing cost containment efforts. Lubrizol experienced a significant increase in year-over-year average material unit costs for the first six months of 2018, necessitating increases in sales prices.

IMC’s pre-tax earnings increased significantly in the second quarter and first six 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. IMC’s raw material costs have risen significantly over the past year, and we anticipate margin pressures will increase over the second half of 2018. PCC’s pre-tax earnings decreased 8.9% in the second quarter and 8.2% in the first six months of 2018 compared to 2017. Results in 2018 were negatively affected by costs associated with temporary unplanned plant shut-downs of certain metals facilities, metal press outages and lower earnings from industrial gas turbine business in 2018. In addition, the aforementioned new aircraft programs involve relatively complex manufacturing processes and manufacturing costs are initially high, but we expect they will decline as processes and efficiencies develop. Marmon’s pre-tax earnings increased 35% in the second quarter and 17% in the first six months of 2018, reflecting a non-recurring gain of $44 million from the sale of certain assets of its beverage products business.

Building products

Revenues of the building products group in the second quarter and first six months of 2018 were approximately $3.3 billion and $6.2 billion, respectively, increases of $215 million (6.9%) and $315 million (5.4%), respectively, compared to the corresponding 2017 periods. For the second quarter and first six months of 2018, the increases reflected cost-driven increases in average selling prices, product mix changes and the favorable effects of foreign currency translation.

Pre-tax earnings of the building products group in the second quarter and first six months of 2018 were $415 million and $667 million, respectively, increases of 3.5% and 2.6%, respectively, over the same periods in 2017. Raw material and production costs continued to rise over the first six months of 2018, which offset most of the increase in revenues and contributed to declines in our overall operating margins. In particular, our costs in 2018 for steel, titanium dioxide and petrochemicals increased substantially compared to 2017.

 

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

Manufacturing, Service and Retailing (Continued)

 

Consumer products

Revenues of the consumer products group were approximately $3.2 billion in the second quarter and $6.25 billion in the first six months of 2018, representing increases of $250 million (8.4%) and $418 million (7.2%), respectively, over the same periods in 2017. The comparative revenue increases in 2018 were primarily due to unit volume increases at Forest River, Brooks Sports, Duracell and Garan and favorable foreign currency translation effects of a weaker U.S. Dollar, partly offset by lower unit sales at Fruit of the Loom.

Pre-tax earnings of the consumer products group were $316 million in the second quarter and $608 million in the first six months of 2018, increases of $45 million (16.6%) and $93 million (18.1%), respectively, over the corresponding periods in 2017. The increases reflected the changes in revenues previously described. Duracell’s increases in earnings in the 2018 periods also reflected the effects of ongoing operational restructuring efforts and comparatively lower restructuring charges.

Service and retailing

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

 

    Second Quarter     First Six Months  
    Revenues     Pre-tax earnings     Revenues     Pre-tax earnings  
    2018     2017     2018     2017     2018     2017     2018     2017  

Service

   $ 3,133      $ 2,792       $ 467       $ 351       $ 6,078       $ 5,409       $ 824       $ 611   

Retailing

    3,929        3,758        230        204        7,571