BERKSHIRE HATHAWAY INC – 10-Q – 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).
First Quarter
2022 2021
Insurance - underwriting $ 47 $ 764
Insurance - investment income 1,170 1,208
Railroad 1,371 1,251
Utilities and energy 750 703
Manufacturing, service and retailing 3,025 2,619
Investment and derivative contract gains
(losses) (1,580 ) 4,693
Other 677 473
Net earnings attributable to Berkshire
Hathaway shareholders $ 5,460 $ 11,711
Through our subsidiaries, we engage in numerous diverse business activities. We
manage our operating businesses on an unusually decentralized basis. There are
few centralized or integrated business functions. Our senior corporate
management team participates in and is ultimately responsible for significant
capital allocation decisions, investment activities and the selection of the
Chief Executive to head each of the operating businesses. The business segment
data (Note 23 to the accompanying Consolidated Financial Statements) should be
read in conjunction with this discussion.
The COVID-19 pandemic continues to affect most of our operating businesses.
Significant government and private sector actions have been taken since 2020 and
likely will continue to be taken to control the spread and mitigate the economic
effects of the virus. Actions in the latter part of 2021 and early 2022 included
periodic temporary business closures or restrictions of business activities in
various parts of the world in response to the emergence of variants of the
virus. Notwithstanding these efforts, significant disruptions of supply chains
and higher costs have persisted. Further, the development of geopolitical
conflicts in 2022 have contributed to the disruptions of supply chains,
resulting in cost increases for goods and services in many parts of the world.
We cannot reliably predict future economic effects of these events on our
businesses or when our operations will normalize. Nor can we reliably predict
how these events will alter the future consumption patterns of consumers and
businesses we serve.
Insurance underwriting produced after-tax earnings of
quarter of 2022 versus
quarter of 2022 were negatively impacted by ongoing increases in claims
severities at GEICO. Underwriting earnings in 2021 reflected the effects of the
premium reductions from the GEICO Giveback program and the favorable impact of
lower claims frequencies for private passenger automobile coverages, which were
partially offset by higher claims severities. After-tax earnings from insurance
investment income decreased 3.1% in the first quarter of 2022 compared to 2021,
attributable to lower dividend income.
After-tax earnings of our railroad business increased 9.6% in the first quarter
of 2022 compared to 2021. The increase reflected higher revenue per car/unit,
partly offset by lower overall freight volumes and higher average fuel costs.
After-tax earnings of our utilities and energy business increased 6.7% in the
first quarter of 2022 compared to 2021. The increase reflected higher earnings
from the regulated utilities businesses, including increased production tax
credits for renewable energy, and from higher earnings from tax equity
investments, partly offset by lower earnings from the natural gas pipelines and
real estate brokerage businesses. After-tax earnings from our manufacturing,
service and retailing businesses increased 15.5% in the first quarter of 2022
versus 2021. While customer demand for products and services was relatively good
in the first quarter of 2022, we continue to experience the effects of higher
materials, freight, labor and other input costs attributable to ongoing
disruptions in global supply chains.
Investment and derivative contract gains and losses in 2022 and 2021
predominantly derived from our investments in equity securities and includes
unrealized gains and losses from market price changes. 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 quarterly or annual 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.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting
Our management views our insurance businesses as possessing two distinct
activities - underwriting and investing. Underwriting decisions are the
responsibility of the unit managers, while investing decisions are the
responsibility of Berkshire's Chairman and CEO,
Berkshire's corporate investment managers. Accordingly, we evaluate performance
of underwriting operations without any allocation of investment income or
investment gains and losses. We consider investment income as an integral
component of our aggregate insurance operating results. However, we consider
investment gains and losses, whether realized or unrealized, as non-operating.
We believe that such gains and losses are not meaningful in understanding the
quarterly or annual operating results of our insurance businesses.
The timing and magnitude of catastrophe losses can produce significant
volatility in our periodic underwriting results, particularly with respect to
our reinsurance businesses. Generally, we consider incurred losses exceeding
Significant catastrophe events in the first quarters included floods in
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
billion
significant foreign currency transaction gains and losses arising from the
changes in the valuation of non-
based insurance subsidiaries due to foreign currency exchange rate fluctuations.
Underwriting results of certain of our commercial insurance and reinsurance
businesses have been affected by estimated losses and costs associated with the
COVID-19 pandemic, including incremental provisions for claims. The effects of
the pandemic on future periods may be affected by judicial rulings and
regulatory and legislative actions pertaining to insurance coverage and claims
and by its effects on general economic activity, which we cannot reasonably
estimate at this time.
We provide primary insurance and reinsurance products covering property and
casualty risks, as well as life and health risks. Our insurance and reinsurance
businesses are GEICO,
Reinsurance Group
summarized below (dollars in millions).
First Quarter
2022 2021
Pre-tax underwriting earnings (loss):
GEICO $ (178 ) $ 1,023
Berkshire Hathaway Primary Group 92 206
Berkshire Hathaway Reinsurance Group 156 (263 )
Pre-tax underwriting earnings 70 966
Income taxes and noncontrolling interests 23 202
Net underwriting earnings $ 47 $ 764
Effective income tax rate 34.4 % 20.9 %
GEICO
GEICO writes private passenger automobile insurance, offering coverages to
insureds in all 50 states and the
policies mainly by direct response methods where most customers apply for
coverage directly to the company via the Internet or over the telephone. A
summary of GEICO's underwriting results follows (dollars in millions).
First Quarter
2022 2021
Amount % Amount %
Premiums written $ 10,265 $ 10,006
Premiums earned $ 9,554 100.0 $ 8,923 100.0
Losses and loss adjustment expenses 8,544 89.4 6,463 72.4
Underwriting expenses 1,188 12.5 1,437 16.1
Total losses and expenses 9,732 101.9 7,900 88.5
Pre-tax underwriting earnings (loss) $ (178 ) $ 1,023
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
GEICO (Continued)
GEICO's pre-tax underwriting loss in the first quarter of 2022 reflected
increased claims severity, primarily due to significant cost inflation in
automobile markets, which accelerated in the second half of 2021. Increases in
used car prices are producing increased claims severities on total losses and
shortages of car parts are contributing to increased claims severity on partial
losses. In addition, injury claims severities continue to trend higher than
general inflation rates.
Premiums written in the first quarter of 2022 increased
compared to 2021. The increase was primarily attributable to an increase in
average premiums per auto policy due to rate increases, as average policies
in-force were relatively unchanged. Premiums earned in the first quarter of 2022
increased
a reduction of approximately
of the GEICO Giveback program that provided a 15% premium credit to new and
renewing voluntary auto and motorcycle policies written between
and
Losses and loss adjustment expenses in the first quarter of 2022 increased
billion
expenses to premiums earned in the first quarter of 2022 was 89.4%, an increase
of 17.0 percentage points compared to 2021, which reflected increases in claims
frequencies and severities.
Claims frequencies in the first quarter of 2022 were higher for all coverages,
including property damage (ten to eleven percent range), collision (fifteen to
sixteen percent range), bodily injury (twelve to thirteen percent range) and
personal injury (fourteen to fifteen percent range). Average claims severities
in the first quarter of 2022 were higher for property damage coverage (six to
seven percent range), collision coverage (twenty to twenty-two percent range)
and bodily injury coverage (nine to eleven percent range). GEICO's losses and
loss adjustment expenses in the first quarter included reductions in the
ultimate claim loss estimates for prior years' loss events of
2022 and
events in 2022 reflected decreases for bodily and personal injury coverages and
increases for collision and property damage coverages.
Underwriting expenses in the first quarter of 2022 were
of
advertising expenses. GEICO's expense ratio (underwriting expense to premiums
earned) in the first quarter of 2022 was 12.5% compared to 16.1% in 2021,
attributable to both the decrease in expenses as well as the increase in earned
premiums.
commercial insurance solutions, including healthcare professional liability,
workers' compensation, automobile, general liability, property and specialty
coverages for small, medium and large clients. BH Primary's larger insurers
include
Hathaway Homestate Companies ("BHHC"),
Insurance Companies ("GUARD"),
results follows (dollars in millions).
First Quarter
2022 2021
Amount % Amount %
Premiums written $ 3,392 $ 2,908
Premiums earned $ 3,118 100.0 $ 2,654 100.0
Losses and loss adjustment expenses 2,274 72.9 1,849 69.7
Underwriting expenses 752 24.1 599 22.5
Total losses and expenses 3,026 97.0 2,448 92.2
Pre-tax underwriting earnings $ 92 $ 206
Premiums written increased
compared to 2021, reflecting increases at nearly all of our larger insurance
units, including BH Specialty (28%), BHHC (12%) and USLI (17%). The increases
were across multiple coverages and occurred in several markets.
25
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
BH Primary's loss ratio was 72.9% in the first quarter of 2022, an increase of
3.2 percentage points compared to 2021. Losses and loss adjustment expenses
attributable to significant catastrophe events were
quarter of 2022 and
were reduced
for net reductions in estimated ultimate liabilities for prior years' loss
events. BH Primary insurers also write significant levels of workers'
compensation, commercial and professional liability insurance and the related
claim costs may be subject to high severity and long claim-tails. We could
experience significant increases in claims liabilities in the future
attributable to higher-than-expected claim settlements, adverse litigation
outcomes or judicial rulings and other factors not currently anticipated.
Underwriting expenses in the first quarter of 2022 increased
(25.5%) compared to 2021. Our expense ratio also increased 1.6 percentage points
compared to 2021. These increases reflected costs associated with new business
development and changes in business mix.
quota-share reinsurance coverages on property and casualty risks to insurers and
reinsurers worldwide through several subsidiaries, led by
Company
also write life and health reinsurance coverages through
Corporation
Company of Nebraska
under retroactive reinsurance contracts written through NICO. In addition, we
write periodic payment annuity contracts through BHLN.
Generally, we strive to generate underwriting profits. However,
time-value-of-money concepts are important elements in establishing prices for
retroactive reinsurance and periodic payment annuity businesses due to the
expected long durations of the claim liabilities. We expect to incur pre-tax
underwriting losses from such businesses, primarily through deferred charge
amortization and discount accretion charges. We receive premiums at the
inception of these contracts, which are then available for investment. A summary
of BHRG's premiums and pre-tax underwriting results follows (dollars in
millions).
First Quarter
Pre-tax underwriting
Premiums earned earnings (loss)
2022 2021 2022 2021
Property/casualty $ 3,399 $ 3,394 $ 405 $ 166
Life/health 1,248 1,305 (12 ) (172 )
Retroactive reinsurance - - (190 ) (242 )
Periodic payment annuity 169 144 (103 ) (136 )
Variable annuity 4 4 56 121
$ 4,820 $ 4,847 $ 156 $ (263 )
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars
in millions).
First Quarter
2022 2021
Amount % Amount %
Premiums written $ 4,386 $ 4,383
Premiums earned $ 3,399 100.0 $ 3,394 100.0
Losses and loss adjustment expenses 2,307 67.9 2,407 70.9
Underwriting expenses 687 20.2 821 24.2
Total losses and expenses 2,994 88.1 3,228 95.1
Pre-tax underwriting earnings $ 405 $ 166
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
Property/casualty (Continued)
Premiums written in the first quarter of 2022 were relatively unchanged from
2021, reflecting a modest net increase from volumes and rates, offset by
unfavorable foreign currency translation effects. Losses and loss adjustment
expenses decreased
percentage points in the first quarter of 2022 compared to 2021. Losses incurred
arising from significant catastrophe events in the first quarter of 2022 were
liabilities for losses occurring in prior years of
in the first quarter of 2021 included
events and an increase in estimated ultimate liabilities for losses occurring in
prior years of
brokerage costs. The expense ratio decreased 4.0 percentage points in the first
quarter of 2022 compared to 2021, attributable to changes in business mix and
foreign currency effects.
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars
in millions).
First Quarter
2022 2021
Amount % Amount %
Premiums written $ 1,243 $ 1,301
Premiums earned $ 1,248 100.0 $ 1,305 100.0
Life and health insurance benefits 1,051 84.2 1,251 95.9
Underwriting expenses 209 16.8 226 17.3
Total benefits and expenses 1,260 101.0 1,477 113.2
Pre-tax underwriting earnings (loss) $ (12 ) $ (172 )
Life/health premiums written decreased
of 2022 compared to 2021, primarily due to lower volumes in the
Life and health benefits in the first quarter of 2022 declined
(16.0%) compared to 2021, attributable to lower mortality. Underwriting results
in 2021 were affected by significant, pandemic-related increases in mortality in
the
underwriting expenses, due mainly to lower average commission rates in the
international life business.
Retroactive reinsurance
Pre-tax underwriting losses in each period derived from the amortization of
deferred charges and changes in the estimated timing and amounts of future claim
payments. Underwriting results also include foreign currency exchange gains and
losses from the effects of changes in foreign currency exchange rates on
non-
currency exchange gains and losses in the first quarter of 2022 and 2021 were
insignificant. Pre-tax underwriting losses in the first quarter before foreign
currency exchange effects were
Unpaid losses assumed under retroactive reinsurance contracts were
at
to loss payments. Unamortized deferred charges related to retroactive
reinsurance contracts were
million
amortization. Deferred charge amortization will be included in underwriting
earnings over the expected remaining claims settlement periods.
Periodic payment annuity
Periodic payment annuity premiums earned increased
first quarter of 2022 compared to 2021. Periodic payment annuity business is
both price and demand sensitive and the supply of available business is affected
by the timing of underlying legal claim settlements. Our volumes written may
change rapidly due to changes in prices, which are affected by prevailing
interest rates, the perceived risks and durations associated with the expected
annuity payments, as well as the level of competition.
27
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
Periodic payment annuity (Continued)
Periodic payment annuity contracts normally produce pre-tax underwriting losses
deriving from the recurring discount accretion of annuity liabilities.
Underwriting results also include gains or losses from the effects of changes in
mortality and interest rates and from foreign currency exchange rate changes on
non-
underwriting results in the first quarter included foreign currency gains of
million
Excluding foreign currency exchange gains/losses, pre-tax underwriting losses in
the first quarter were
The increase in pre-tax losses reflected the effects of new business and lower
mortality. Discounted annuity liabilities were
and had a weighted average discount rate of approximately 3.9%.
Variable annuity
Variable annuity guarantee reinsurance contracts produced pre-tax earnings in
the first quarter of
from these contracts are affected by changes in securities markets, interest
rates and foreign currency exchange rates, which can be volatile, and from the
periodic amortization of expected profit margins. Underwriting earnings in each
period were primarily attributable to the net effects of interest rate changes
and in 2022 were partly offset by unfavorable changes in securities markets.
Insurance-Investment Income
A summary of net investment income attributable to our insurance operations
follows (dollars in millions).
First Quarter Percentage
2022 2021 Change
Interest and other investment income $ 164 $ 159 3.1 %
Dividend income 1,197 1,253 (4.5 )
Pre-tax net investment income 1,361 1,412 (3.6 )
Income taxes and noncontrolling interests 191 204
Net investment income $ 1,170 $ 1,208
Effective income tax rate 14.1 % 14.4 %
Interest and other investment income increased 3.1% in the first quarter of 2022
compared to 2021. We continue to hold substantial balances of cash, cash
equivalents and short-term
rates prevailed in recent years, rates began to increase in the first quarter of
2022. The effects of such increases are expected to be reflected in our earnings
as maturing investments are replaced by new investments. We continue to believe
that maintaining ample liquidity is paramount and we insist on safety over yield
with respect to short-term investments.
Dividend income in the first quarter of 2022 decreased 4.5% compared to 2021.
Dividend income may vary from period to period due to changes in the investment
portfolio and the frequency and timing of dividends from certain investees.
Dividend income in the first quarter included
million
Energy
segment.
Invested assets of our insurance businesses derive from shareholder capital 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, which are reduced by insurance premiums receivable, reinsurance
receivables, deferred charges assumed under retroactive reinsurance contracts
and deferred policy acquisition costs. Float approximated
31, 2022
operations generated pre-tax underwriting earnings in the first quarter of 2022
and 2021, and consequently, the average cost of float for each period was
negative.
28
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Investment Income (Continued)
A summary of cash and investments held in our insurance businesses as of
31, 2022
March 31, December 31,
2022 2021
Cash, cash equivalents and U.S. Treasury Bills $ 57,427 $ 90,688
Equity securities 376,501 334,907
Fixed maturity securities 21,672 16,386
Other 4,227 4,296
$ 459,827 $ 446,277
Fixed maturity securities as of
Amortized Unrealized Carrying
Cost Gains (Losses) Value
U.S. Treasury , U.S. government corporations
and agencies $ 8,785 $ (85 ) $ 8,700
Foreign governments 11,115 (36 ) 11,079
Corporate bonds 1,256 322 1,578
Other 282 33 315
$ 21,438 $ 234 $ 21,672
Approximately 94% of all foreign government obligations were rated AA or higher
by at least one of the major rating agencies. Foreign government securities
include obligations issued or unconditionally guaranteed by national or
provincial government entities.
Railroad
systems in
BNSF also operates in three Canadian provinces. BNSF classifies its major
business groups by type of product shipped including consumer products,
industrial products, agricultural products and coal. A summary of BNSF's
earnings follows (dollars in millions).
First Quarter
2022 2021
Railroad operating revenues $ 5,777 $ 5,221
Railroad operating expenses:
Compensation and benefits 1,224 1,164
Fuel 861 550
Purchased services 499 505
Depreciation and amortization 624 616
Equipment rents, materials and other 526 491
Total 3,734 3,326
Railroad operating earnings 2,043 1,895
Other revenues (expenses):
Other revenues 191 180
Other expenses, net (170 ) (158 )
Interest expense (255 ) (258 )
Pre-tax earnings 1,809 1,659
Income taxes 438 408
Net earnings $ 1,371 $ 1,251
Effective income tax rate 24.2 % 24.6 %
29
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Railroad (Continued)
The following table summarizes BNSF's railroad freight volumes by business group
(cars/units in thousands).
Cars/Units
First Quarter Percentage
2022 2021 Change
Consumer products 1,275 1,393 (8.5 )%
Industrial products 404 399 1.3
Agricultural products 305 318 (4.1 )
Coal 385 339 13.6
2,369 2,449 (3.3 )
Railroad operating revenues increased 10.6% in the first quarter of 2022
compared to 2021 primarily due to a 13.8% increase in average revenue per
car/unit resulting from higher fuel surcharge revenue driven by higher fuel
prices, along with increased rates per car/unit, partially offset by a 3.3%
decrease in unit volume. Pre-tax earnings were
of 2022, an increase of 9.0% compared to 2021.
Operating revenues from consumer products were
of 2022, an increase of 10.3% from 2021. The increase reflected higher average
revenue per car/unit, partially offset by lower volumes of 8.5%. The volume
decrease was mainly from lower international intermodal shipments resulting from
supply chain challenges and lower automotive shipments due to production impacts
from a global microchip shortage, partially offset by an increase in domestic
intermodal volumes.
Operating revenues from industrial products were
quarter of 2022, an increase of 5.8% from 2021. Volumes increased 1.3% in the
first quarter along with higher average revenue per car/unit. The volume
increase was primarily due to improvement in the
Operating revenues from agricultural products were
quarter of 2022, an increase of 3.7% compared to 2021, reflecting higher average
revenue per car/unit, partially offset by decreased volumes of 4.1%. The volume
decrease was primarily due to lower grain exports, partially offset by higher
volumes of ethanol and related commodities.
Operating revenues from coal were
increase of 29.6% from 2021, attributable to higher volumes of 13.6%, as well as
from higher average revenue per car/unit. The volume increase in 2022 derived
from increased electricity generation, higher natural gas prices and improved
export demand.
Railroad operating expenses were
increase of
compensation and benefits and fuel expenses. Our ratio of railroad operating
expenses to railroad operating revenues in the first quarter of 2022 increased
0.9 percentage points to 64.6% versus 2021.
Compensation and benefits expenses increased
quarter of 2022 compared to 2021, primarily due to wage inflation, health and
welfare costs and lower productivity. Fuel expenses increased
(56.5%) in the first quarter of 2022 compared to 2021, primarily due to higher
average fuel prices. Equipment rents, materials and other expenses increased
million
increased general inflation and higher casualty costs.
30
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Utilities and Energy
We currently own 91.1% ownership interest in
("BHE"), which operates a global energy business. BHE's domestic regulated
utility interests include PacifiCorp,
Energy. BHE subsidiaries also operate two regulated electricity distribution
businesses referred to as
pipelines consist of five domestic regulated interstate natural gas pipeline
systems and a 25% interest in a liquefied natural gas export, import and storage
facility ("LNG interest"), which BHE operates and consolidates for financial
reporting purposes. Other energy businesses include a regulated electricity
transmission-only business in
diversified portfolio of mostly renewable independent power projects and
investments. BHE also operates a residential real estate brokerage business and
a large network of residential real estate brokerage franchises in
States
The rates our regulated businesses charge customers for energy and services are
largely based on the costs of business operations, including income taxes and a
return on capital, and are subject to regulatory approval. To the extent such
costs are not allowed in the approved rates, operating results will be adversely
affected. A summary of BHE's net earnings follows (dollars in millions).
First Quarter
2022 2021
Revenues:
Energy operating revenue $ 4,823 $ 4,849
Real estate operating revenue 1,207 1,232
Other income (loss) (47 ) (157 )
Total revenue 5,983 5,924
Costs and expense:
Energy cost of sales 1,460 1,569
Energy operating expense 2,153 2,036
Real estate operating costs and expense 1,179 1,120
Interest expense 515 516
Total costs and expense 5,307 5,241
Pre-tax earnings 676 683
Income tax expense (benefit)* (283 ) (232 )
Net earnings after income taxes 959 915
Noncontrolling interests of BHE
subsidiaries 109 106
Net earnings attributable to BHE 850 809
Noncontrolling interests and preferred
stock dividends 100 106
Net earnings attributable to Berkshire
Hathaway shareholders $ 750 $ 703
Effective income tax rate (41.9 )% (34.0 )%
* Includes significant production tax credits from wind-powered electricity
generation.
The discussion of BHE's operating results that follows is based on after-tax
earnings, reflecting how the energy businesses are managed and evaluated. A
summary of net earnings attributable to BHE follows (dollars in millions).
First Quarter Percentage
2022 2021 Change
PacifiCorp $ 130 $ 169 (23.1 )%
MidAmerican Energy Company 241 144 67.4
NV Energy 29 34 (14.7 )
Northern Powergrid 111 104 6.7
Natural gas pipelines 309 383 (19.3 )
Other energy businesses 173 62 179.0
Real estate brokerage 21 84 (75.0 )
Corporate interest and other (164 ) (171 ) (4.1 )
$ 850 $ 809 5.1
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Utilities and Energy (Continued)
PacifiCorp operates a regulated electric utility in portions of several Western
states, including
million
higher operating expenses, partially offset by higher utility margin (operating
revenue less cost of sales). The increase in operating expenses reflected
incremental costs from additional assets placed in-service as well as higher
thermal plant maintenance costs.
PacifiCorp's utility margin was
increase of
from increases in customer volumes and favorable price impacts, and higher
wholesale and other revenue, partially offset by higher purchased power and
thermal generation costs. Retail customer volumes increased 1.9% in the first
quarter of 2022 as compared to 2021, primarily due to an increase in the average
number of customers, the favorable impact of weather and higher customer usage.
MEC operates a regulated electric and natural gas utility primarily in
compared to 2021. The increase reflected higher electric utility margin and
increased income tax benefits, partly offset by higher operating expenses. The
increase in operating expenses included incremental costs associated with
additional wind-powered generating facilities placed in-service. The income tax
benefit increase was mainly due to higher production tax credits recognized on
new wind-powered generating facilities placed in-service and the impacts of
ratemaking.
MEC's electric utility margin was
increase of 23% versus 2021. The increase was attributable to higher operating
revenue from favorable retail and wholesale customer volumes and lower purchased
power costs. Electric retail customer volumes increased 5.6% in the first
quarter of 2022 as compared to 2021, primarily due to an increase in the average
number of customers, higher customer usage and the favorable impact of weather.
NV Energy operates regulated electric and natural gas utilities in
After-tax earnings decreased
2021. The decrease reflected higher operating expenses from increased plant
operations and maintenance expenses and a higher comparative accrual for
earnings sharing.
NV Energy's electric utility margin was
2022, relatively unchanged compared to 2021. Electric retail customer volumes
increased 4.0% in the first quarter of 2022 compared to 2021, primarily due to
an increase in the average number of customers and higher customer usage,
partially offset by the unfavorable impact of weather.
quarter of 2022 as compared to 2021. The increase reflected the impacts of
higher distribution revenue, mainly from increased tariff rates, partially
offset by unfavorable foreign currency exchange rate movements in 2022.
Natural gas pipelines' after-tax earnings decreased
quarter of 2022 compared to 2021. The decrease was largely due to higher margins
on natural gas sales and higher transportation revenue in the first quarter of
2021 due to an increase in demand as a result of the
storms.
Other energy businesses' after-tax earnings increased
quarter of 2022 compared to 2021. The increase in earnings was primarily due to
improved wind tax equity investment earnings of
wind tax equity investment earnings was primarily due to losses on pre-existing
tax equity investments in the first quarter of 2021 due to the
winter storms, as well as from increased income tax benefits from projects
reaching commercial operation over the past twelve months.
Real estate brokerage after-tax earnings decreased
quarter of 2022 compared to 2021. The decrease in earnings was primarily
attributable to lower earnings from mortgage services due to a decrease in
funded volume and in refinancing activity, and to a lesser extent lower earnings
from brokerage and settlement services from a decrease in closed units at
existing companies.
32
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing
businesses follows (dollars in millions).
First Quarter Percentage
2022 2021 Change
Revenues
Manufacturing $ 18,421 $ 15,913 15.8 %
Service and retailing 21,630 19,580 10.5
$ 40,051 $ 35,493
Pre-tax earnings
Manufacturing $ 2,824 $ 2,436 15.9 %
Service and retailing 1,217 1,041 16.9
4,041 3,477
Income taxes and noncontrolling interests 1,016 858
Net earnings* $ 3,025 $ 2,619
Effective income tax rate 24.6 % 24.2 %
Pre-tax earnings as a percentage of revenues 10.1 % 9.8 %
* Excludes certain acquisition accounting expenses, which primarily related to
the amortization of identifiable intangible assets recorded in connection
with our business acquisitions. The after-tax acquisition accounting expenses
excluded from earnings were $161 million in the first quarter of 2022 and
$180 million in the first quarter of 2021. These expenses are included in
"Other" in the summary of earnings on page 23 and in the "Other" earnings
section on page 38.
Manufacturing
Our manufacturing group includes a variety of industrial, building and consumer
products businesses. A summary of revenues and pre-tax earnings of these
operations follows (dollars in millions).
First Quarter
2022 2021
Revenues
Industrial products $ 7,475 $ 6,672
Building products 6,712 5,628
Consumer products 4,234 3,613
$ 18,421 $ 15,913
Pre-tax earnings
Industrial products $ 1,216 $ 1,142
Building products 1,144 770
Consumer products 464 524
$ 2,824 $ 2,436
Pre-tax earnings as a percentage of revenues
Industrial products 16.3 % 17.1 %
Building products 17.0 % 13.7 %
Consumer products 11.0 % 14.5 %
Industrial products
The industrial products group includes metal products for aerospace, power and
general industrial markets (
chemicals (
(IMC International Metalworking Companies ("IMC")) and Marmon, which consists of
more than 100 autonomous manufacturing and service businesses, internally
aggregated into eleven groups, and includes leasing for the rail, intermodal
tank container and mobile crane industries. The industrial products group also
includes equipment and systems for the livestock and agricultural industries
(
(
33
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
Revenues of the industrial products group in the first quarter of 2022 increased
million
16.3% for the first quarter of 2022, a decrease of 0.8 percentage points
compared to 2021.
PCC's revenues were
12.7% over the first quarter of 2021. PCC derives significant revenues and
earnings from sales of aerospace products. The revenue increase in 2022
reflected higher aerospace product revenues and relatively unchanged revenues
from power and other industrial products. While commercial air travel continues
to increase in both the
pre-COVID-19 pandemic levels, especially for international routes. Long-term
industry forecasts continue to show growth and strong demand for air travel.
However, further recovery likely will continue to be uneven, attributable in
part to travel restrictions imposed from time-to-time to control the spread of
variants of the virus. Commercial aircraft delivery rates by original equipment
manufacturers appear to be increasing, most notably for narrow-body aircraft,
although Boeing's growth is constrained by the lack of certification of the
Boeing 737 MAX in
due to production quality issues further impacts aerospace growth.
PCC's pre-tax earnings increased
compared to 2021, reflecting the impact of increased revenues, partially offset
by a
results also reflects the continual actions taken by management to improve
operations and to prepare for more normalized demand for PCC's products. We do
not currently expect PCC's aerospace revenues or earnings will increase
significantly in the near term, primarily due to the expected lag in recovery of
PCC's manufacturing levels as a result of inventory levels within the supply
chain for Boeing, and the potential for delays with the certification of the
Boeing 737 MAX in
Lubrizol's revenues were approximately
2022, a decrease of 2.5% compared to 2021. The decrease reflects lower sales
volumes, partially offset by higher average selling prices. Sales volumes in the
first quarter of 2022 were restricted by raw material supply constraints and
unplanned temporary maintenance shutdowns, which limited Lubrizol's production
capabilities. The increase in average selling prices was due to escalating
prices for raw materials, including oil feedstocks, as well as for utilities,
packaging, shipping and freight costs.
Lubrizol's pre-tax earnings decreased 39.8% in the first quarter of 2022
compared to 2021. Earnings in 2022 were negatively impacted by rising raw
material costs and lower sales volumes and higher expenses arising from the
unplanned temporary shutdowns. Earnings in the first quarter of 2021 were
negatively impacted by the weather-related temporary shutdown of Additives
facilities in the
operating costs and lost sales margins.
Marmon's revenues were
26.2% compared to 2021, with nearly all business groups generating meaningful
revenue increases. In particular, aggregate revenues in the first quarter of
2022 from the Electrical, Metal Services and Transportation groups increased 39%
compared to 2021, attributable to higher average metals prices and sales
volumes. These groups contributed over half of Marmon's revenue increase.
Marmon's pre-tax earnings increased 43.8% in the first quarter of 2022 compared
to 2021, reflecting higher earnings from most business groups, partially offset
by lower earnings from the Rail & Leasing and Medical groups. The Electrical,
Transportation and Plumbing & Refrigeration groups generated the largest
increases in earnings in the first quarter of 2022, primarily due to higher
sales volumes and improved operating margins.
IMC's revenues were
8.5% compared to 2021. Revenues in the first quarter of 2022 reflected increased
sales in most geographic regions, partially offset by unfavorable foreign
currency translation effects. IMC's pre-tax earnings increased 8.3% in the first
quarter of 2022 compared to the first quarter of 2021, attributable to higher
customer demand, partially offset by higher raw material costs and other
operating expenses and unfavorable foreign currency translation effects.
Building products
The building products group includes manufactured and site-built home
construction and related lending and financial services (
flooring (Shaw), insulation, roofing and engineered products (
bricks and masonry products (Acme
Moore
systems (MiTek).
34
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Building products (Continued)
Revenues of the building products group increased
first quarter of 2022 and pre-tax earnings increased
compared to 2021. Residential housing construction demand in the
to be relatively strong in the first quarter of 2022. We continue to be
negatively affected by persistent supply chain disruptions, which limited our
sales and contributed to production delays in some areas and contributed to
significant cost increases for many raw materials and other inputs, including
energy, freight and labor. These effects necessitated sales price increases. In
the first quarter of 2022, interest rates in the
compared to the previous low-rate environment. Significant increases in mortgage
interest rates will likely slow demand for new housing construction, which could
adversely impact our businesses.
first quarter of 2022 compared to 2021. Revenues from home sales increased
million
sales mix. New home unit sales increased 4.3% in the first quarter of 2022,
reflecting higher factory-built manufactured home unit and essentially unchanged
site-built home unit sales. Financial services revenues, which include mortgage
origination and services, insurance and interest income from lending activities,
increased 3.8% in the first quarter of 2022 compared to 2021. Loan balances, net
of allowances for credit losses, were approximately
31, 2022
Pre-tax earnings of
quarter of 2022 compared to 2021. Earnings in 2022 reflected higher home sales,
gross margins and net interest income and relatively low credit losses,
partially offset by the impact of rising manufacturing and supply chain costs.
Aggregate revenues of our other building products businesses were approximately
versus 2021. The increase was primarily due to higher average selling prices
driven by higher input and transportation costs, and to a lesser extent, from
higher unit volumes and product mix changes for paint and coatings and
commercial flooring, and strength in residential and retail insulation,
commercial roofing systems and engineered products. These volume increases were
partially offset by lower residential flooring products volumes.
Pre-tax earnings of our other building products businesses increased
million
2021. Earnings as a percentage of revenues in the first quarter of 2022
increased 5.4 percentage points versus 2021. Earnings in 2022 benefitted from a
pre-tax gain of
earnings in 2022 also reflected the impact of severe winter storms in the first
quarter of 2021, which reduced sales and produced incremental production and
other operating costs. Customer demand was generally strong in 2022. However,
earnings were negatively impacted from the lack of availability of certain
materials and other product inputs from supply chain disruptions.
Consumer products
The consumer products group includes leisure vehicles (
apparel and footwear operations (including Fruit of the Loom, Garan,
(Duracell). This group also includes custom picture framing products
(Larson-Juhl) and jewelry products (
Consumer products revenues increased approximately
first quarter of 2022 compared to 2021. Revenues from
40.1% in the first quarter of 2022 compared to 2021, driven by higher average
selling prices and a 6.5% increase in unit sales. Revenues of our other consumer
products businesses in 2022 were generally lower than the first quarter of 2021,
including a 3.5% decrease from apparel and footwear, as well as lower revenues
from Duracell. These decreases reflected lower sales volumes, partly
attributable to reduced inventory availability arising from production slowdowns
in
offset by higher average selling prices.
Pre-tax earnings of our consumer products group declined
the first quarter of 2022 versus 2021 and pre-tax earnings as a percentage of
revenues decreased 3.5 percentage points in 2022 compared to 2021. The decline
in earnings reflected lower earnings from the apparel and footwear businesses
and Duracell, partially offset by higher earnings from
earnings from Duracell and the apparel and footwear businesses declined about
50% in the first quarter of 2022 compared to 2021. These declines were
attributable to significant increases in raw material, freight, labor and other
operating costs and the impact of reduced sales volumes.
35
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing
businesses follows (dollars in millions).
First Quarter
2022 2021
Revenues
Service $ 4,523 $ 3,605
Retailing 4,592 4,353
McLane 12,515 11,622
$ 21,630 $ 19,580
Pre-tax earnings
Service $ 724 $ 590
Retailing 411 348
McLane 82 103
$ 1,217 $ 1,041
Pre-tax earnings as a percentage of revenues
Service 16.0 % 16.4 %
Retailing 9.0 % 8.0 %
McLane 0.7 % 0.9 %
Service
Our service group consists of several businesses. The largest of these
businesses are NetJets and FlightSafety (aviation services), which offer shared
ownership programs for general aviation aircraft and high technology training
products and services to operators of aircraft, and TTI, a distributor of
electronics components. Our other service businesses franchise and service a
network of quick service restaurants (Dairy Queen), lease transportation
equipment (XTRA) and furniture (CORT), provide third party logistics services
that primarily serve the petroleum and chemical industries (Charter Brokerage),
distribute electronic news, multimedia and regulatory filings (Business Wire)
and operate a television station in
Service group revenues increased
2022 compared to 2021. Revenues from TTI increased 28.9% in the first quarter of
2022 versus the first quarter of 2021, reflecting strong demand in nearly all
significant markets. Revenues from aviation services (NetJets and FlightSafety)
increased 23.5% in the first quarter of 2022 compared to 2021, reflecting
increased training hours (38%), customer flight hours (36%) and fuel surcharges
due to significant increases in fuel prices, partially offset by the effects
from changes in sales mix.
Pre-tax earnings of the service group increased
first quarter of 2022 compared to 2021. Pre-tax earnings as a percentage of
revenues decreased 0.4 percentage points in the first quarter of 2022 compared
to 2021. The earnings increase reflected increases from TTI, partially offset by
lower earnings from aviation services. The earnings increase from TTI was
primarily attributable to the increase in sales and improved operating cost
leverage. The earnings decrease from aviation services was attributable to
higher subcontracted flight, equipment maintenance and other operating costs,
which more than offset the increase in revenues.
Retailing
Our largest retailing business is
representing 65% of our combined retailing revenue in the first quarter of 2022.
BHA consists of over 80 auto dealerships that sell new and pre-owned automobiles
and offer repair services and related products. BHA also operates two insurance
businesses, two auto auctions and an automotive fluid maintenance products
distributor. Our retailing businesses also include four home furnishings
retailing businesses (
furnishings group represented 20% of the combined retailing revenues in the
first quarter of 2022.
Other retailing businesses include three jewelry retailing businesses
(Borsheims, Helzberg and
Pampered Chef (high quality kitchen tools),
supplies, school supplies and toys and novelties) and Detlev Louis Motorrad
("Louis"), a retailer of motorcycle accessories based in
36
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Retailing (Continued)
Retailing group revenues increased approximately
first quarter of 2022 compared to 2021. BHA's revenues in the first quarter of
2022 increased 9.5% over the first quarter of 2021, with vehicle sales, service
and repair, and finance and service contract revenues each increasing versus
2021. The increase in vehicle sales was primarily attributable to higher average
vehicle transaction prices, partly offset by lower unit sales. Unit sales
continue to be constrained by low new vehicle production by original equipment
manufacturers, attributable to the ongoing global computer chip shortages and
other supply chain disruptions. Home furnishings group revenues increased 1.6%
in the first quarter of 2022 compared to 2021, attributable to higher average
selling prices and lower transaction volumes.
Retailing group pre-tax earnings increased
quarter of 2022 compared to 2021. BHA's pre-tax earnings increased 27.4% in the
first quarter of 2022 compared to 2021, primarily due to increases in vehicle
sales margins and finance and service contract earnings per vehicle sold, lower
floorplan interest expense and from operating cost control efforts. Pre-tax
earnings from BHA's dealership operations increased 41.5% in the first quarter
of 2022 compared to 2021. Aggregate pre-tax earnings for the remainder of our
retailing group increased
2021, primarily due to higher earnings from the jewelry retailers, partly offset
by lower earnings from the furniture retailers and Pampered Chef.
McLane operates a wholesale distribution business that provides grocery and
non-food consumer products to retailers and convenience stores ("grocery") and
to restaurants ("foodservice"). McLane also operates businesses that are
wholesale distributors of distilled spirits, wine and beer ("beverage"). The
grocery and foodservice businesses generate high sales and very low profit
margins. These businesses have several significant customers, including Walmart,
consolidated sales in the first quarter of 2022, with foodservice representing
most of the remainder. A curtailment of purchasing by any of its significant
customers could have an adverse impact on periodic revenues and earnings.
Revenues increased
2021, reflecting increases of 3.6% from the grocery business and 15.9% from the
foodservice business. Pre-tax earnings decreased
first quarter of 2022 compared to 2021, which was primarily attributable to
higher personnel costs and fuel expense, partly offset by a slight increase in
the average gross sales margin rate. McLane's grocery and food service operating
results continue to be adversely affected by upstream supply chain constraints,
including the effects of labor and truck driver shortages, higher inventory
costs and disruptions in inventory availability. These upstream supply chain
effects, together with the personnel shortages that we have been experiencing,
adversely affected our customer service levels and reduced our operating
efficiencies. The increase in fuel expense was primarily attributable to
significant increases in petroleum prices. We expect the current difficult
operating environment to continue through 2022.
Investment and Derivative Contract Gains/Losses
A summary of investment and derivative contract gains/losses follows (dollars
in millions).
First Quarter
2022 2021
Investment gains (losses) $ (1,735 ) $ 5,211
Derivative contract gains (losses) (243 ) 489
Gains (losses) before income taxes and noncontrolling
interests
(1,978 ) 5,700 Income taxes and noncontrolling interests (398 ) 1,007 Net earnings (loss)$ (1,580 ) $ 4,693 Effective income tax rate 16.0 % 18.8 % Investment gains/losses
Unrealized gains and losses arising from changes in market prices of investments
in equity securities are included in our reported earnings, which significantly
increases the volatility of our periodic net earnings due to the magnitude of
our equity securities portfolio and the inherent volatility of equity securities
prices. Pre-tax investment gains/losses in the first quarter included net
unrealized losses of
billion
Taxable investment gains/losses on equity securities sold in the first quarter,
which is generally the difference between sales proceeds and the original cost
basis of the securities sold, were losses of
37
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Investment and Derivative Contract Gains/Losses (Continued)
Investment gains/losses (Continued)
We believe that investment gains/losses, whether realized from sales or
unrealized from changes in market prices, are often meaningless in terms of
understanding our reported consolidated earnings or evaluating our periodic
economic performance. We continue to believe the investment gains/losses
recorded in earnings in any given period has little analytical or predictive
value.
Derivative contract gains/losses
Derivative contract gains/losses include the changes in fair value of our equity
index put option contract liabilities, which relate to contracts that were
originated before March of 2008. As of
these contracts have expired. The gains and losses from the changes in the fair
values of these liabilities are recorded in earnings and can be significant due
to the volatility of market prices in the related equity securities markets. As
of
contracts was
million
determined as of the contract expiration dates based on the intrinsic value as
defined in the contracts.
Other
A summary of after-tax other earnings/losses follows (in millions).
First Quarter
2022 2021
Equity method earnings $ 307 $ 214
Acquisition accounting expenses (161 ) (180 )
Corporate interest expense, before foreign currency effects (70 ) (80 )
Foreign currency exchange rate gains (losses) on Berkshire
and BHFC non-U.S. Dollar senior notes 522 525
Other Berkshire corporate 79 (6 )
$ 677 $ 473
After-tax equity method earnings include our proportionate share of earnings
attributable to our investments in Kraft Heinz, Pilot, Berkadia, Electric
Transmission of
first quarter of 2022 increased
earnings attributable to Kraft Heinz and Pilot.
After-tax acquisition accounting expenses include charges arising from the
application of the acquisition method in connection with certain of Berkshire's
past business acquisitions. Such charges arise primarily from the amortization
of intangible assets recorded in connection with those business acquisitions
Foreign currency exchange rate gains and losses pertain to Berkshire's Euro and
Japanese Yen denominated debt and BHFC's Euro and Great
gains and losses from the periodic revaluation of these liabilities into
Dollars. The gains and losses recorded in any given period can be significant
due to the magnitude of the borrowings and the inherent volatility in foreign
currency exchange rates. Berkshire corporate items consist primarily of
Berkshire parent company investment income and corporate expenses, other
intercompany interest income where the interest expense is included in earnings
of the operating businesses and unallocated income taxes.
Financial Condition
Our consolidated balance sheet continues to reflect very significant liquidity
and a very strong capital base. Consolidated shareholders' equity attributable
to Berkshire shareholders at
shareholders was
after-tax losses on our investments of
from changes in the market prices of our investments in equity securities will
produce significant volatility in our earnings.
Berkshire's common stock repurchase program, as amended, permits Berkshire to
repurchase its Class A and Class B shares at prices below Berkshire's intrinsic
value, as conservatively determined by
the Board and Chief Executive Officer, and
Board. The program does not specify a maximum number of shares to be repurchased
and does not require any specified repurchase amount. The program is expected to
continue indefinitely. We will not repurchase our stock if it reduces the total
amount of Berkshire's consolidated cash, cash equivalents and
Bills holdings below
will always be of paramount importance at Berkshire. Berkshire paid
in the first quarter of 2022 to repurchase shares of its Class A and B common
stock.
38
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition (Continued)
At
equivalents and
securities (excluding our investment in Kraft Heinz) were
the first quarter of 2022, we paid cash of
securities and we received proceeds of
securities.
Our consolidated borrowings at
95% were by the Berkshire parent company, BHFC, BNSF and BHE and its
subsidiaries. In the first quarter of 2022, Berkshire and certain of its
subsidiaries issued term debt of approximately
Berkshire parent company outstanding debt outstanding at
2022
billion (approximately
from 2027 to 2052 and a weighted average interest rate of 0.5%. Berkshire's
borrowings decreased
foreign currency exchange rates on its non-
Aggregate maturities of Berkshire parent company debt over the next twelve
months approximates
Berkshire's insurance and other subsidiary outstanding borrowings were
a wholly-owned financing subsidiary, of approximately
borrowings are used to fund a portion of loans originated and acquired by
from 2027 to 2052 and a weighted average interest rate of 3.4% and issued €1.25
billion of senior notes maturing in 2030 and 2034 with a weighted average
interest rate of 1.8%. Aggregate maturities of BHFC debt in the second quarter
of 2022 are
and timely payment of principal and interest.
BNSF's outstanding debt was
subsidiaries were
due in 2053 and a subsidiary issued £350 million of 3.25% notes due in 2052.
Aggregate debt maturities for BHE and BNSF over the next twelve months
approximate
issued by BNSF, BHE or any of their subsidiaries and is not committed to provide
capital to support BNSF, BHE or any of their subsidiaries.
In the first quarter of 2022, our diverse group of businesses generated net
operating cash flows of approximately
expenditures for property, plant and equipment and equipment held for lease were
by our railroad, utilities and energy businesses (BNSF and BHE) of
BNSF and BHE maintain very large investments in capital assets (property, plant
and equipment) and will regularly make significant capital expenditures in the
normal course of business. We forecast additional capital expenditures of
approximately
Contractual Obligations
We are party to other contracts associated with ongoing business activities,
which will result in cash payments to counterparties in future periods. Certain
obligations are included in our Consolidated Balance Sheets, such as operating
lease liabilities and shared aircraft repurchase liabilities of NetJets.
We are also obligated to pay claims arising from property and casualty insurance
companies. Such liabilities, including amounts from retroactive reinsurance,
were approximately
amount of the payments under insurance and reinsurance contracts are contingent
upon the outcome of future events. Actual payments will likely vary, perhaps
materially, from any forecasted payments, as well as from the liabilities
currently recorded in our Consolidated Balance Sheet. We anticipate that these
payments will be funded by operating cash flows.
Other obligations pertaining to the acquisition of goods or services in the
future, such as certain purchase obligations, are not currently reflected in the
Consolidated Financial Statements and will be recognized in future periods as
the goods are delivered or services are provided. As of
largest categories of our long-term contractual obligations primarily related to
fuel, capacity, transmission and maintenance contracts and capital expenditure
commitments of BHE and BNSF and aircraft purchase commitments of NetJets.
39
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Contractual Obligations (Continued)
On
Alleghany Corporation ("Alleghany") common stock for cash consideration of
approximately
receipt of various regulatory approvals. We currently anticipate this
acquisition will close in the fourth quarter of 2022. We also have an agreement
to acquire an additional 41.4% of Pilot in 2023 and agreements to acquire
certain non-controlling interests of consolidated subsidiaries, which are
described in Note 26 to the Consolidated Financial Statements included in Item 8
of Berkshire's Annual Report on Form 10-K for the year ended
Except as otherwise disclosed in this Quarterly Report, our contractual
obligations as of
different from those disclosed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contained in Berkshire's Annual
Report on Form 10-K for the year ended
Critical Accounting Policies
Certain accounting policies require us to make estimates and judgments that
affect the amounts reflected in the Consolidated Financial Statements. Such
estimates and judgments necessarily involve varying, and possibly significant,
degrees of uncertainty. Accordingly, certain amounts recorded in the financial
statements will likely be adjusted in the future based on new available
information and changes in other facts and circumstances. Reference is made to
"Critical Accounting Policies" discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in
Berkshire's Annual Report on Form 10-K for the year ended
Our Consolidated Balance Sheet as of
liabilities of
from property and casualty insurance and reinsurance contracts. Due to the
inherent uncertainties in the processes of establishing these liabilities, the
actual ultimate claim amounts will likely differ from the currently recorded
amounts. A very small percentage change in estimates of this magnitude can
result in a material effect on periodic earnings. The effects from changes in
these estimates are recorded as a component of insurance losses and loss
adjustment expenses in the period of the change.
Our Consolidated Balance Sheet as of
acquired businesses of
conducted our most recent annual review during the fourth quarter of 2021. In
connection with the annual goodwill impairment review conducted in the fourth
quarter of 2021, the estimated fair values of five reporting units did not
exceed our carrying values by at least 20%. The most significant of these
reporting units was
of PCC was approximately
approximately
goodwill of approximately
aggregate estimated fair value was approximately
our aggregate carrying value of approximately
value of these units included goodwill of approximately
determining the estimated fair values of our reporting units and assets. The key
assumptions and inputs used in such determinations may include forecasting
revenues and expenses, cash flows and capital expenditures, as well as an
appropriate discount rate and other inputs. Significant judgment by management
is required in estimating the fair value of a reporting unit and in performing
impairment tests. Due to the inherent subjectivity and uncertainty in
forecasting future cash flows and earnings over long periods of time, actual
results may vary materially from the forecasts.
As of
recorded in our Consolidated Balance Sheet was not impaired. The long-term
adverse effects of the COVID-19 pandemic on certain of our reporting units may
prove to be worse than we currently anticipate, and we may need to record
goodwill or indefinite-lived intangible asset impairment charges in future
periods. Making estimates of the fair value of reporting units and judgments on
goodwill impairments at this time are and will likely be significantly affected
by assumptions on the severity, duration or long-term effects of the pandemic on
a reporting unit's business, which we cannot reliably predict. Consequently, any
fair value estimates in such instances can be subject to wide variations.
Information concerning new accounting pronouncements is included in Note 2 to
the accompanying Consolidated Financial Statements.
40
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
Investors are cautioned that certain statements contained in this document as
well as some statements in periodic press releases and some oral statements of
Berkshire officials during presentations about Berkshire or its subsidiaries are
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include
statements which are predictive in nature, which depend upon or refer to future
events or conditions, or which include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates" or similar expressions. In addition,
any statements concerning future financial performance (including future
revenues, earnings or growth rates), ongoing business strategies or prospects
and possible future Berkshire actions, which may be provided by management, are
also forward-looking statements as defined by the Act. Forward-looking
statements are based on current expectations and projections about future events
and are subject to risks, uncertainties and assumptions about Berkshire and its
subsidiaries, economic and market factors and the industries in which we do
business, among other things. These statements are not guarantees of future
performance and we have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal risk factors that could cause our actual performance and future events
and actions to differ materially from such forward-looking statements include,
but are not limited to, changes in market prices of our investments in fixed
maturity and equity securities; losses realized from derivative contracts; the
occurrence of one or more catastrophic events, such as an earthquake, hurricane,
act of terrorism or cyber-attack that causes losses insured by our insurance
subsidiaries and/or losses to our business operations; the frequency and
severity of epidemics, pandemics or other outbreaks, including COVID-19, that
negatively affect our operating results and restrict our access to borrowed
funds through the capital markets at reasonable rates; the adverse impacts from
geopolitical events; changes in laws or regulations affecting our insurance,
railroad, utilities and energy and finance subsidiaries; changes in federal
income tax laws; and changes in general economic and market factors that affect
the prices of securities or the industries in which we do business.
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