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
2023 2022
Insurance - underwriting $ 911 $ 167
Insurance - investment income 1,969 1,170
BNSF 1,247 1,371
Berkshire Hathaway Energy ("BHE") 416 775
Pilot Travel Centers ("Pilot") 83 -
Manufacturing, service and retailing 2,982 3,025
Non-controlled businesses* 568 282
Investment and derivative contract gains
(losses) 27,439 (1,580 )
Other (111 ) 370
Net earnings attributable to Berkshire
Hathaway shareholders $ 35,504 $ 5,580
------
* Includes certain businesses in which Berkshire had between a 20% and 50%
ownership interest.
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 25 to the accompanying Consolidated Financial Statements) should be
read in conjunction with this discussion.
To varying degrees the consequences of the COVID-19 pandemic continue to affect
our operating businesses. Government and private sector actions were taken
beginning in 2020 intended to control the spread and mitigate the adverse
economic effects of the virus and its variants. The development of global
geopolitical conflicts, supply chain disruptions and government actions to slow
inflation in recent years has produced varying economic effects on our operating
businesses. We cannot reliably predict the future economic effects of these
events on our businesses.
Insurance underwriting generated after-tax earnings of
quarter of 2023 and
from the previously reported amount of
of ASU 2018-12 on
Financial Statements. After-tax earnings from insurance investment income
increased
attributable to increases in short-term interest rates.
After-tax earnings of BNSF decreased 9.0% in the first quarter of 2023 compared
to 2022. The comparative decrease was primarily attributable to lower overall
freight volumes and higher fuel and other operating costs. After-tax earnings of
BHE decreased 46.3% in the first quarter of 2023 compared to 2022. The decrease
reflected lower earnings from the
businesses and real estate brokerage businesses.
As disclosed in Note 3 to the accompanying Consolidated Financial Statements, we
increased our ownership in Pilot from 38.6% to 80% on
are consolidating Pilot's results beginning
through
determined under the equity method and are included in non-controlled businesses
in the preceding table.
After-tax earnings from our manufacturing, service and retailing businesses
decreased 1.4% in the first quarter of 2023 versus 2022. Earnings in the first
quarter of 2023 were mixed among our various businesses. While results for
certain industrial products manufacturers and services businesses improved
versus 2022, the results of the building and consumer products businesses
generally deteriorated.
Investment and derivative contract gains (losses) in the first quarters of 2023
and 2022 predominantly derived from our investments in equity securities and
included significant net unrealized gains and losses from market price changes.
We believe that investment gains and losses on investments in equity securities,
whether realized from dispositions or unrealized from changes in market prices,
are generally meaningless in understanding our reported quarterly or annual
results or evaluating the economic performance of our operating businesses.
These gains and losses have caused and will continue to cause significant
volatility in our periodic earnings. Investment and derivative contract gains
(losses) also included an after-tax non-cash remeasurement gain of
in the first quarter of 2023 related to our previously held 38.6% interest in
Pilot through the application of the acquisition accounting method.
28
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations (Continued)
Other earnings included after-tax foreign exchange rate losses of
the first quarter of 2023 and after-tax gains of
quarter of 2022 related to the non-
Berkshire and its
Corporation
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. We currently consider pre-tax incurred losses
exceeding
Significant catastrophes in the first quarter were Cyclone Gabrielle and 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-
fluctuations.
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,
Corporation
Alleghany operates property and casualty insurance and reinsurance businesses,
which are included in the BH Primary and BHRG underwriting results.
We strive to produce pre-tax underwriting earnings (premiums earned less
insurance losses/benefits incurred and underwriting expenses) over the long term
in all business categories, except for BHRG's retroactive reinsurance and
periodic payment annuity contracts. Time-value-of-money is an important element
in establishing prices for these contracts. We normally receive all premiums at
the contract inception date, which are immediately available for investment.
Ultimate claim payments can extend for decades and are expected to exceed
premiums, producing underwriting losses over the claim settlement periods,
primarily through deferred charge asset amortization and discounted liability
accretion charges.
Underwriting results of our insurance businesses are summarized below (dollars
in millions). BHRG's pre-tax underwriting earnings for the first quarter of 2022
were
million
respect to our long duration insurance contracts.
First Quarter
2023 2022
Pre-tax underwriting earnings (loss):
GEICO $ 703 $ (178 )
Berkshire Hathaway Primary Group 268 92
Berkshire Hathaway Reinsurance Group 231 301
Pre-tax underwriting earnings 1,202 215
Income taxes and noncontrolling interests 291 48
Net underwriting earnings $ 911 $ 167
Effective income tax rate 24.3 % 22.8 %
29
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
GEICO
GEICO primarily writes private passenger automobile insurance, offering coverages to insureds in all 50 states and theDistrict of Columbia . GEICO markets its policies mainly by direct response methods where most customers apply for coverage directly to the company via the Internet or over the telephone. A summary of GEICO's underwriting results follows (dollars in millions). First Quarter 2023 2022 Amount % Amount % Premiums written$ 10,060 $ 10,265 Premiums earned$ 9,626 100.0$ 9,554 100.0 Losses and loss adjustment expenses 7,992 83.0 8,544 89.4 Underwriting expenses 931 9.7 1,188 12.5 Total losses and expenses 8,923 92.7 9,732 101.9 Pre-tax underwriting earnings (loss)$ 703 $ (178 )
GEICO's pre-tax underwriting earnings in the first quarter of 2023 reflected
higher average premiums per auto policy, a reduction in advertising costs, as
well as favorable prior accident year development. Premiums written in the first
quarter of 2023 decreased
2022. Premiums earned increased
policy increased 15.2% due to rate increases, offset by a decrease in
policies-in-force of 2.4 million (13.0%) since
significantly reduced advertising over that period, which contributed to the
reduction in policies-in-force.
Losses and loss adjustment expenses in the first quarter of 2023 decreased
million
and loss adjustment expenses to premiums earned in the first quarter of 2023 was
83.0%, a decrease of 6.4 percentage points compared to the first quarter of
2022, which reflected the impact of higher average premiums per auto policy,
favorable reserve development for prior accident years, the reduction in
policies-in-force, and lower claims frequencies. Somewhat offsetting the
favorable impact of these items were increases in claims severities. GEICO's
reductions in the ultimate claim loss estimates for prior years' loss events
were
quarter of 2022. The reduction in loss estimates for prior years' events in 2023
reflected decreased estimates across several coverages.
Claims frequencies in the first quarter of 2023 were lower for property damage
(five to six percent range) and collision (six to seven percent range), while
claims frequencies increased for bodily injury (four to five percent range) and
personal injury (three to four percent range). Average claims severities in the
first quarter of 2023 were higher for property damage coverage (twenty-one to
twenty-two percent range), collision coverage (seven to eight percent range) and
bodily injury coverage (eight to ten percent range).
Underwriting expenses in the first quarter of 2023 were
of
expenses to premiums earned) in the first quarter of 2023 was 9.7% compared to
12.5% in 2022. These decreases were driven by the reduction in advertising
expenses.
businesses that provide a variety of primarily 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
Insurance
Indemnity Company
("BH Direct") and
includes Alleghany's
Insurance
30
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
A summary of BH Primary underwriting results follows (dollars in millions).
First Quarter
2023 2022
Amount % Amount %
Premiums written $ 4,158 $ 3,392
Premiums earned $ 3,961 100.0 $ 3,118 100.0
Losses and loss adjustment expenses 2,656 67.1 2,274 72.9
Underwriting expenses 1,037 26.1 752 24.1
Total losses and expenses 3,693 93.2 3,026 97.0
Pre-tax underwriting earnings $ 268 $ 92
Premiums written increased
compared to 2022. The increase was primarily due to the inclusion of
Insurance
Direct and USLI.
Losses and loss adjustment expenses increased
quarter of 2023 compared to 2022, primarily due to the impact of
Insurance
points in the first quarter of 2023 compared to 2022, reflecting changes in
business mix (including the impact of
losses from current year catastrophes and increased reductions in loss estimates
for prior years' events. Incurred losses from significant catastrophes during
the first quarter were
losses and loss adjustment expenses reflected net reductions in estimated
ultimate liabilities for prior years' loss events of
quarter of 2023 and
insurers 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. Claims liabilities could be greater than
anticipated due to a variety of factors.
Underwriting expenses increased
2023 compared to 2022.
quarter of 2023 were
premiums earned increased 2.0 percentage points in the first quarter of 2023
compared to 2022. The increase was primarily attributable to changes in business
mix.
quota-share reinsurance coverages on property and casualty risks to insurers and
reinsurers worldwide through several subsidiaries, led by
Company
beginning
affiliates ("
coverages through
property and casualty risks under retroactive reinsurance contracts written
through NICO and we write periodic payment annuity contracts through BHLN.
A summary of BHRG's premiums and pre-tax underwriting results follows (in
millions). Pre-tax underwriting losses in the first quarter of 2022 were
increased
periodic payment annuity business, while earnings from the variable annuity
business were increased
the retrospective adoption of ASU 2018-12.
First Quarter
Pre-tax underwriting
Premiums earned earnings (loss)
2023 2022 2023 2022
Property/casualty $ 5,149 $ 3,399 $ 390 $ 405
Life/health 1,060 1,248 137 (26 )
Retroactive reinsurance - - (195 ) (190 )
Periodic payment annuity - 169 (164 ) (119 )
Variable annuity - - 63 231
$ 6,209 $ 4,816 $ 231 $ 301
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars
in millions).
First Quarter
2023 2022
Amount % Amount %
Premiums written $ 6,268 $ 4,386
Premiums earned $ 5,149 100.0 $ 3,399 100.0
Losses and loss adjustment expenses 3,387 65.8 2,307 67.9
Underwriting expenses 1,372 26.6 687 20.2
Total losses and expenses 4,759 92.4 2,994 88.1
Pre-tax underwriting earnings $ 390 $ 405
Premiums written in the first quarter of 2023 included
inclusion of
(12.4%) in the first quarter of 2023 compared to 2022, primarily due to net
increases in new and renewal property business and higher rates, partially
offset by unfavorable foreign currency translation effects.
Losses and loss adjustment expenses increased
quarter of 2023 compared to 2022, primarily from the inclusion of
(
quarter of 2023 compared to 2022. Losses incurred from significant catastrophes
during the first quarter were
Losses and loss adjustment expenses included reductions in estimated ultimate
liabilities for prior years' events of
and
The expense ratio increased 6.4 percentage points in the first quarter of 2023
compared to 2022, primarily attributable to foreign currency exchange rate
effects and changes in business mix, including the impact of
Underwriting expenses in the first quarter of 2023 included
to
losses of
million
non-
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars
in millions).
First Quarter
2023 2022
Amount % Amount %
Premiums written $ 1,061 $ 1,243
Premiums earned $ 1,060 100.0 $ 1,248 100.0
Life and health insurance benefits 678 64.0 1,061 85.0
Underwriting expenses 245 23.1 213 17.1
Total benefits and expenses 923 87.1 1,274 102.1
Pre-tax underwriting earnings (loss) $ 137 $ (26 )
Pre-tax underwriting earnings in the first quarter of 2023 reflected the impact
of life insurance contract commutations in 2023, as well as lower claims
incurred compared to the first quarter of 2022. The life insurance contract
commutations drove most of the comparative decreases in premiums earned and life
and health benefits incurred.
Retroactive reinsurance
Retroactive reinsurance underwriting results primarily derive from the runoff of
contracts written several years ago. 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-
our
first quarter of 2023 and
related to deferred charge amortization. The effects of foreign currency
exchange were relatively insignificant in the first quarter of 2023 and 2022.
32
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Underwriting (Continued)
Retroactive reinsurance (Continued)
Gross unpaid losses assumed under retroactive reinsurance contracts were
billion
primarily attributable to paid claims. Unamortized deferred charges related to
retroactive reinsurance contracts were
of
included in underwriting earnings over the expected remaining claims settlement
periods.
Periodic payment annuity
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.
Our periodic payment annuity contracts normally produce pre-tax underwriting
losses from the recurring accretion of time-value discounted annuity
liabilities, which includes discount accruals on liabilities of contracts
without life contingencies. Underwriting results also include gains or losses
from foreign currency exchange rate changes on non-
liabilities of our
foreign currency losses of
Pre-tax underwriting losses before foreign currency exchange effects were
million
2022. Discounted liabilities were
included
2018-12 on
contracts with life-contingent liabilities be adjusted quarterly based upon
prevailing interest rates. The effects of discount rate changes are reflected in
other comprehensive income.
Variable annuity
The run-off of our variable annuity guarantee reinsurance contracts produced
pre-tax gains of
the first quarter of 2022. The results 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.
Insurance-Investment Income
A summary of net investment income attributable to our insurance operations
follows (dollars in millions).
First Quarter Percentage
2023 2022 Change
Dividend income $ 1,244 $ 1,197 3.9 %
Interest and other investment income 1,141 164 595.7
Pre-tax net investment income 2,385 1,361 75.2
Income taxes and noncontrolling interests 416 191
Net investment income $ 1,969 $ 1,170
Effective income tax rate 17.4 % 14.1 %
Dividend income increased 3.9% in the first quarter of 2023 compared to 2022.
Income in the first quarter included
from BHE preferred stock. Such amounts were deducted from earnings of the BHE
segment. Dividend income varies from period to period due to changes in the
investment portfolio and the frequency and timing of dividends from certain
investees.
Interest and other investment income increased
of 2023 compared to the same period in 2022. The increase was primarily due to
increases in short-term interest rates. We continue to hold substantial balances
of cash, cash equivalents and short-term
believe that maintaining ample liquidity is paramount and we insist on safety
over yield with respect to short-term investments.
33
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Insurance-Investment Income (Continued)
Invested assets of our insurance businesses derive from shareholder capital and
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, 2023
operations generated pre-tax underwriting gains of
quarter of 2023 and, consequently, the average cost of float was negative. A
summary of cash and investments held in our insurance businesses as of
2023
March 31, December 31,
2023 2022
Cash, cash equivalents and U.S. Treasury Bills $ 93,627 $ 86,816
Equity securities 319,466 298,934
Fixed maturity securities 22,438 24,998
Other 2,501 3,417
$ 438,032 $ 414,165
Fixed maturity securities as of
Amortized Unrealized Carrying
Cost Gains (Losses) Value
U.S. Treasury , U.S. government corporations
and agencies $ 9,578 $ (182 ) $ 9,396
Foreign governments 11,106 (95 ) 11,011
Corporate bonds 1,525 259 1,784
Other 228 19 247
$ 22,437 $ 1 $ 22,438
Approximately 93% of all foreign government obligations were rated AA or higher
by at least one of the major rating agencies as of
BNSF
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
2023 2022
Railroad operating revenues $ 5,888 $ 5,777
Railroad operating expenses:
Compensation and benefits 1,313 1,224
Fuel 964 861
Purchased services 511 499
Depreciation and amortization 645 624
Equipment rents, materials and other 593 526
Total 4,026 3,734
Railroad operating earnings 1,862 2,043
Other revenues (expenses):
Other revenues 131 191
Other expenses, net (87 ) (170 )
Interest expense (257 ) (255 )
Pre-tax earnings 1,649 1,809
Income taxes 402 438
Net earnings $ 1,247 $ 1,371
Effective income tax rate 24.4 % 24.2 %
34
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BNSF (Continued)
The following table summarizes BNSF's railroad freight volumes by business group
(cars/units in thousands).
Cars/Units
First Quarter Percentage
2023 2022 Change
Consumer products 1,066 1,275 (16.4 )%
Industrial products 389 404 (3.7 )
Agricultural products 300 305 (1.6 )
Coal 369 385 (4.2 )
2,124 2,369 (10.3 )
Railroad operating revenues increased 1.9% in the first quarter of 2023 compared
to 2022, primarily attributable to a 14.0% increase in average revenue per
car/unit resulting from higher fuel surcharge revenue driven by higher fuel
prices and increased rates per car/unit, partially offset by a 10.3% decrease in
unit volume. BNSF's pre-tax earnings were
2023, an 8.8% decrease compared to 2022.
Operating revenues from consumer products were
quarter, a 10.4% decrease from 2022, attributable to 16.4% lower volumes,
partially offset by higher average revenue per car/unit. The volume decrease was
primarily due to lower intermodal shipments resulting from lower west coast
imports and the loss of an intermodal customer, partially offset by an increase
in automotive volume from higher vehicle production.
Operating revenues from industrial products were
quarter of 2023, a 6.4% increase from 2022, primarily due to higher average
revenue per car/unit, partially offset by a 3.7% decrease in volumes. The volume
decrease was primarily due to lower demand for chemicals and plastics, lumber
and paper shipments.
Operating revenues from agricultural products were
quarter of 2023, an 8.8% increase compared to 2022, reflecting higher average
revenue per car/unit, partially offset by a 1.6% decrease in volumes. The volume
decrease was primarily due to lower grain exports, partially offset by higher
volumes of domestic grains, renewable diesel and feedstocks.
Operating revenues from coal were
15.7% increase from 2022. The increase was attributable to higher average
revenue per car/unit, partially offset by lower volumes of 4.2%. The volume
decrease derived from weather related impacts and moderating demand due to lower
natural gas prices.
Railroad operating expenses were
increase of
to increases in the cost of fuel, as well as higher compensation and benefits
expenses. Our ratio of railroad operating expenses to railroad operating
revenues in the first quarter of 2023 increased 3.8 percentage points to 68.4%
versus 2022.
Compensation and benefits expenses increased
quarter of 2023 compared to 2022, primarily due to increased headcount, wage
inflation, and lower productivity. Fuel expenses increased
in the first quarter of 2023 compared to 2022, primarily due to higher average
fuel prices, partially offset by lower volumes. Purchased services expenses
increased
primarily due to general inflation. Equipment rents, materials and other
expenses increased
2022. The increase was primarily due to general inflation, increased casualty
and litigation costs and higher property and other miscellaneous taxes.
35
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BHE
We currently own 92% of
operates a global energy business. BHE's domestic regulated utility interests
include PacifiCorp,
natural gas 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 two regulated
electricity distribution businesses operated by BHE subsidiaries (referred to as
business in
mostly renewable independent power projects and investments and an unregulated
retail energy services company. BHE also operates a residential real estate
brokerage business and a large network of real estate brokerage franchises in
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
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
2023 2022
Revenues:
Energy operating revenue $ 5,471 $ 4,823
Real estate operating revenue 875 1,207
Other income (loss) 105 (10 )
Total revenue 6,451 6,020
Costs and expense:
Energy cost of sales 1,955 1,460
Energy operating expense 2,790 2,153
Real estate operating costs and expense 920 1,179
Interest expense 563 515
Total costs and expense 6,228 5,307
Pre-tax earnings 223 713
Income tax expense (benefit)* (363 ) (273 )
Net earnings after income taxes 586 986
Noncontrolling interests of BHE
subsidiaries 114 109
Net earnings attributable to BHE 472 877
Noncontrolling interests and preferred
stock dividends 56 102
Net earnings attributable to Berkshire
Hathaway shareholders $ 416 $ 775
Effective income tax rate (162.8 )% (38.3 )%
* 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
2023 2022 Change
U.S. utilities $ 163 $ 400 (59.3 )%
Natural gas pipelines 369 322 14.6
Other energy businesses 183 339 (46.0 )
Real estate brokerage (34 ) 21 (261.9 )
Corporate interest and other (209 ) (205 ) 2.0
$ 472 $ 877 (46.2 )
36
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
BHE (Continued)
Our
(PacifiCorp),
decreased
earnings decrease reflected higher operating expenses, partially offset by
higher electric utility margin (operating revenue less cost of sales), higher
other income and lower state income taxes. Operating expenses increased
primarily due to a pre-tax increase of
expected insurance recoveries) associated with the 2020 wildfires, as well as
from increases in general and plant maintenance costs.
The
quarter of 2023, an increase of
of 2022. The increase reflected higher operating revenue from favorable retail
and wholesale pricing and increases in retail customer volumes, partially offset
by increases in thermal generation and purchased power costs and lower wholesale
volumes. Retail customer volumes increased 2.6% (3.3% at PacifiCorp, 1.0% at MEC
and 2.9% at NV Energy) in the first quarter of 2023 compared to the first
quarter of 2022, primarily due to increases in customer usage and in the average
number of customers.
After-tax earnings of natural gas pipelines increased
quarter of 2023 compared to the first quarter of 2022. The increase was
primarily due to higher regulated transportation and storage services revenues
from certain general rate cases.
After-tax earnings of other energy businesses decreased
first quarter of 2023 compared to the first quarter of 2022. The decrease was
primarily due to a deferred income tax charge of
2023
derivative contracts and unfavorable results from natural gas, solar and
geothermal generating facilities due to increased maintenance costs and lower
solar generation due to weather events in
earnings decreases were increased wind tax equity investment earnings of
million
After-tax earnings of real estate brokerage decreased
quarter of 2023 compared to the first quarter of 2022. The decrease reflected
lower brokerage services revenues and margins, primarily due to a 29% reduction
in closed brokerage transaction volumes, as well as lower mortgage services
revenues and margins from a 41% decrease in closed transaction volumes,
attributable to the impact of rising interest rates and a corresponding slowdown
in home sales.
Pilot
On
Centers, LLC
we began consolidating Pilot's results of operations in our Consolidated
Statements of Earnings on
38.6% interest in Pilot, which we accounted for under the equity method. Our
proportionate share of Pilot's net earnings for the month ending
2023
accompanying Consolidated Statements of Earnings.
Pilot is headquartered in
travel center locations across the
also has over 150 retail locations in the
fuel through various arrangements with third party travel centers. A substantial
portion of Pilot's revenues and earnings derive from marketing fuel on a
wholesale and retail basis and from other energy-related activities.
Our earnings from Pilot for the two months endingMarch 31, 2023 are summarized below (in millions). Two months ending March 31, 2023 Revenues $ 9,508 Cost of sales 8,805 Operating and other expenses 496 Interest expense 71 Pre-tax earnings 136 Income taxes and noncontrolling interests 53 Net earnings attributable to Berkshire Hathaway shareholders $ 83 37
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pilot (Continued)
Pilot's revenues and earnings are highly dependent on fuel, prices and margins.
Revenues for the two months ending
for the first three months of 2023 and 2022 were approximately
approximately 4.7 billion gallons of diesel fuel, gasoline and other
fuel-related products.
Pilot's pre-tax earnings for the two months ending
million
expense of
depreciation of property, plant and equipment assets and amortization of
intangible assets that were remeasured to fair value in connection with the
application of the acquisition accounting method in 2023. Fuel prices and
margins were elevated in 2022 and remained elevated during the first quarter of
2023.
Pilot's consolidated pre-tax earnings for the three months ending
and 2022 are summarized below. Revenues, costs and expenses for the first
quarter of 2022 and first month of 2023 are based on Pilot's historical
accounting and are not included in our Consolidated Financial Statements,
whereas such information for the two months ending
in our Consolidated Financial Statements. Dollars are in millions.
First Quarter Percentage
2023 2022 Change
Revenues $ 14,528 $ 13,910 4.4 %
Cost of sales 13,499 12,962 4.1
Operating and other expenses 709 605 17.2
Interest expense 95 42 126.2
Earnings before income taxes and
noncontrolling interests $ 225 $ 301 (25.2 )
Manufacturing, Service and Retailing
A summary of revenues and earnings of our manufacturing, service and retailing
businesses follows (dollars in millions).
First Quarter Percentage
2023 2022 Change
Revenues
Manufacturing $ 18,289 $ 18,421 (0.7 )%
Service and retailing 22,990 21,630 6.3
$ 41,279 $ 40,051
Pre-tax earnings
Manufacturing $ 2,611 $ 2,824 (7.5 )%
Service and retailing 1,334 1,217 9.6
3,945 4,041
Income taxes and noncontrolling interests 963 1,016
Net earnings* $ 2,982 $ 3,025
Effective income tax rate 23.7 % 24.6 %
Pre-tax earnings as a percentage of revenues 9.6 % 10.1 %
* Excludes certain acquisition accounting expenses, 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
the first quarter of 2022. These expenses are included in "Other" in the summary
of earnings on page 28 and in the "Other" earnings section on page 44.
38
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
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
2023 2022
Revenues
Industrial products $ 8,863 $ 7,475
Building products 6,010 6,712
Consumer products 3,416 4,234
$ 18,289 $ 18,421
Pre-tax earnings
Industrial products $ 1,441 $ 1,216
Building products 895 1,144
Consumer products 275 464
$ 2,611 $ 2,824
Pre-tax earnings as a percentage of revenues
Industrial products 16.3 % 16.3 %
Building products 14.9 % 17.0 %
Consumer products 8.1 % 11.0 %
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
(
(
this group also includes businesses acquired in connection with Alleghany
consisting of the structural steel fabrication products business conducted
through W&W|AFCO Steel, as well as other businesses that became part of Marmon.
Revenues of the industrial products group increased
first quarter of 2023 compared to 2022 and pre-tax earnings increased
million
16.3% for the first quarters of 2023 and 2022. Operating results of the group in
the first quarter of 2023 reflected the impact of business acquisitions and
overall improved operating results at our pre-existing businesses.
PCC's revenues were
28.1% compared to 2022. PCC derives significant revenues and earnings from sales
of aerospace products. The revenue increase in 2023 was primarily attributable
to higher demand for aerospace products, while power/energy and general and
industrial products also contributed to the overall revenue increase. Long-term
industry forecasts continue to show growth and strong demand for air travel and
aerospace products.
PCC's pre-tax earnings increased 23.0% in the first quarter of 2023 compared to
2022. Results in 2023 reflected improving manufacturing and operating
efficiencies. We are continuing to strive to improve manufacturing efficiencies,
maintain safety and prepare for increasing demand for PCC's products. Continued
growth in PCC's revenues and earnings will be predicated on the ability to
successfully increase production levels to match the expected growth in
aerospace products demand.
Lubrizol's revenues were approximately
2023, an increase of 5.2% compared to 2022. The revenue increase reflected
higher average selling prices, partially offset by lower volumes and unfavorable
foreign currency translation effects from the stronger
volumes in the first quarter of 2023 were attributable to general market
weakness in the global economy, resulting in lower demand in certain product
lines.
Lubrizol's pre-tax earnings increased 34.7% in the first quarter of 2023
compared to 2022. Earnings in 2023 were favorably impacted by higher selling
prices and favorable product mix, partially offset by the continued rise of raw
material costs, lower sales volumes, higher operating expenses, and unfavorable
foreign currency translation effects.
39
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
Marmon's revenues were
16.4% compared to 2022. Business acquisitions including
Technologies
Funeral Services, Inc.
of the growth. Nearly all of Marmon's business groups generated higher revenues
in 2023, led by significant increases in the Rail & Leasing, Transportation,
Metal Services and Crane groups, due to higher volumes and pricing improvements.
Our Electrical, Metal Services and Plumbing & Refrigeration groups faced
headwinds in revenue in 2023 attributed to lower steel and copper prices and
slowing residential construction activity. Our international businesses were
challenged by foreign currency translations as a result of the stronger
Dollar.
Marmon's pre-tax earnings in the first quarter of 2023 increased 13.5% compared
to 2022, with business acquisitions accounting for 27% of the increase. Most of
Marmon's business groups generated higher comparative first quarter earnings in
2023, led by the Transportation group, as well as from the Water Technologies,
Retail Solutions, Metals Services and Crane Services groups, primarily
attributable to revenue growth. The first quarter earnings increase was partly
offset by lower earnings in the Electrical group driven by falling demand and
compressing margins in the building wire business and the Rail & Leasing group
attributable to higher repair costs and lower railcar disposal gains.
IMC's revenues were
5.2% compared to 2022. Revenues in 2023 reflected increased organic sales in
in
and the impact of the
3.5% in the first quarter of 2023 compared to 2022. The impact of higher
revenues was partially offset by higher raw material costs, changes in sales mix
and the impact of the
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).
Revenues of the building products group decreased
first quarter of 2023 and pre-tax earnings decreased
compared to 2022. Our building products businesses have benefited in recent
years from the low interest rate environment and strong residential and
commercial construction markets. The effects of significant increases in
interest rates, including home mortgage interest rates in the
year, has slowed demand for our home building businesses and certain of our
other building products businesses. As such, our businesses are likely to
experience declines in comparative revenues and earnings over the remainder of
2023.
2023 compared to 2022. Revenues from home sales decreased
in the first quarter of 2023, reflecting lower unit sales partially offset by
higher average selling prices. New home unit sales decreased 18.0% in the first
quarter of 2023, including a 16.9% decrease in factory-built manufactured homes
and a 23.1% decrease in site-built home unit sales. We expect unit sales will
continue to remain below 2022 in the near term. Financial services revenues,
which include mortgage origination and services, insurance and interest income
from lending activities, increased 8.8% in the first quarter of 2023 compared to
2022. Loan balances, net of allowances for credit losses, were approximately
Pre-tax earnings of
quarter 2023 compared to 2022, primarily attributable to lower sales volumes.
Earnings from financial services declined 9.3% in the first quarter of 2023
versus 2022, reflecting increased expected loan loss provisions and higher
operating and interest expenses.
Aggregate revenues of our other building products businesses were approximately
versus 2022. Comparative revenues were lower at all our other building products
businesses, generally due to lower sales volumes, partly offset by higher
average prices.
Pre-tax earnings of our other building products businesses decreased
million
percentage of revenues in the first quarter of 2023 decreased 2.9 percentage
points versus 2022. Earnings in 2023 at certain of our businesses were
negatively impacted by lower sales and reduced gross sales margins. Earnings in
2022 benefitted from higher selling prices and strong demand in certain product
categories, as well as a pre-tax gain from a business divestiture of
million
40
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
Consumer products
The consumer products group includes recreational vehicles (
several apparel and footwear operations (including Fruit of the Loom, Garan,
batteries (Duracell). This group also includes custom picture framing products
(Larson-Juhl), jewelry products (
Alleghany acquisition.
Consumer products group revenues decreased
quarter of 2023 compared to 2022. The decline reflected lower revenues at
River
the impact of the
2022, reflecting an overall 44% decline in unit sales.
strong unit sales in recent years and through the first half of 2022. Since
then, volumes have declined, attributable in part to the impact of rising
interest rates, inflation and other macroeconomic conditions.
Revenues of our apparel and footwear businesses declined
the first quarter of 2023 compared to 2022, reflecting lower revenues from
apparel (12.1%), partly offset by higher revenues from footwear. The decline in
apparel revenue was driven by lower volume, as order delays and cancellations
persisted in response to the elevated inventory levels of retail business
customers. Duracell's revenues in first quarter of 2023 declined 4.5% versus
2022, primarily due to lower volume and unfavorable foreign currency translation
effects of the stronger
Pre-tax earnings of our consumer products group declined
the first quarter of 2023 versus 2022, primarily attributable to lower earnings
from
percentage of revenues decreased 2.9 percentage points in the first quarter of
2023 compared to 2022.
Apparel and footwear earnings declined 18% in the first quarter of 2023 compared
to 2022. Our apparel businesses continue to be negatively affected by lower
sales volumes, reduced manufacturing efficiencies and higher manufacturing
costs. We expect that comparative operating earnings of these businesses will be
lower in the near term.
Earnings from
sales, which reduced manufacturing efficiencies, and from unfavorable changes in
product mix. We currently expect demand for recreational vehicles will remain
relatively low and
2022.
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing
businesses follows (dollars in millions).
First Quarter
2023 2022
Revenues
Service $ 5,319 $ 4,523
Retailing 4,612 4,592
McLane 13,059 12,515
$ 22,990 $ 21,630
Pre-tax earnings
Service $ 837 $ 724
Retailing 384 411
McLane 113 82
$ 1,334 $ 1,217
Pre-tax earnings as a percentage of revenues
Service 15.7 % 16.0 %
Retailing 8.3 % 9.0 %
McLane 0.9 % 0.7 %
41
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
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
services and products 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
2022
of various services in facilities construction management.
Service group revenues increased
2023 compared to 2022. The increase was primarily due to increased revenues from
aviation services, the impact of the IPS acquisition (
increased revenues from TTI. Revenues of TTI increased 5.8% in the first quarter
of 2023 compared to 2022. TTI sales levels during 2022 were relatively strong.
However, beginning in the third quarter of 2022, new orders slowed in certain
regions and markets, in part attributable to elevated inventory levels within
the supply chain. These conditions are expected to continue in 2023 and we may
experience comparative revenue declines in future periods. Revenues from
aviation services increased 18.8% in the first quarter of 2023 compared to 2022.
The revenue increase was primarily due to increases in the number of aircraft in
shared aircraft ownership programs and in flight hours across NetJets' various
programs, as well as higher average rates.
Pre-tax earnings of the service group increased
first quarter of 2023 compared to 2022. Pre-tax earnings as a percentage of
revenues decreased 0.3 percentage points in the first quarter of 2023 compared
to 2022. The earnings increase was primarily attributable to higher overall
margin rates in aviation services businesses, primarily due to changes in
business mix, and to the impact of the IPS acquisition.
Retailing
Our largest retailing business is
representing 67% of our combined retailing revenue in the first quarter of 2023.
BHA consists of over 80 auto dealerships that sell new and pre-owned automobiles
and offer repair services and related products. BHA also offers vehicle service
contracts and operates two insurance businesses. Our retailing businesses also
include four home furnishings retailing businesses (
flooring and electronics. The home furnishings group represented 18% of the
combined retailing revenues in the first quarter of 2023.
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
Retailing group revenues were relatively unchanged in the first quarter of 2023
compared to 2022, reflecting an increase at BHA, offset by lower revenues from
our other retailers. BHA's revenues in the first quarter of 2023 increased 3.6%
compared to 2022. Revenues from new vehicle sales increased 6.9% in the first
quarter of 2023 compared to 2022 while revenues from pre-owned vehicle sales
declined 4.0%. Unit sales in the first quarter of 2023 increased 0.9%, primarily
from new vehicles. While new vehicle levels remain well below historical levels,
supplies continue to gradually increase. Revenues from BHA's service/repair
operations in the first quarter of 2023 increased 11.1% versus 2022. Other
retailing revenues declined 5.5% in the first quarter of 2023 versus 2022,
primarily due to lower sales volumes at our home furnishings businesses.
Retailing group pre-tax earnings decreased
quarter of 2023 compared to 2022. BHA's pre-tax earnings increased 30.9% in the
first quarter of 2023 compared to 2022. BHA's earnings increase reflected higher
earnings from service/repair and finance/service contract operations and lower
operating expenses, partially offset by lower vehicle sales margins and higher
floor plan interest expense. BHA's comparative vehicle gross profit margin
rates, before the effects of LIFO, peaked in the first half of 2022 and have
since declined. Aggregate pre-tax earnings for the remainder of our retailing
group decreased
2022, primarily due to a 49.6% decrease in earnings from the home furnishings
businesses, and the impact of a gain in 2022 related to the divestiture of
certain jewelry stores.
42
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Manufacturing, Service and Retailing (Continued)
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 and operate in a highly competitive environment. These businesses have
several significant customers, including Walmart,
others. Grocery sales comprised 61% of McLane's consolidated sales in the first
quarter of 2023, with foodservice representing most of the remainder. A
curtailment of purchasing by any of its significant customers could have an
adverse impact on McLane's periodic revenues and earnings.
Revenues increased
2022, reflecting an increase of 3.5% from the grocery business and 5.7% from the
foodservice business. Pre-tax earnings increased
first quarter of 2023 compared to 2022. The increase in earnings reflected a
slight increase in the gross sales margin rate, partly offset by higher
personnel expenses.
Non-Controlled Businesses
After-tax earnings of our non-controlled businesses include our proportionate
share of earnings attributable to our investments in Kraft Heinz, Occidental
Petroleum, Pilot and Berkadia. Earnings attributable to these businesses
increased
to earnings from the inclusion of Occidental Petroleum in 2023. As of
31, 2023
equity method through the end of
and began consolidating Pilot's financial statements in our Consolidated
Financial Statements on
Financial Statements.
Investment and Derivative Contract Gains (Losses)
A summary of investment and derivative contract gains (losses) follows (dollars
in millions).
First Quarter
2023 2022
Investment gains (losses) $ 34,758 $ (1,735 )
Derivative contract gains (losses) - (243 )
Gains (losses) before income taxes and noncontrolling
interests
34,758 (1,978 ) Income taxes and noncontrolling interests 7,319 (398 ) Net earnings (loss)$ 27,439 $ (1,580 ) Effective income tax rate 20.9 % 16.0 % 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. Unrealized gains and losses also include the effects of changes in
foreign currency exchange rates on investments in non-
by our
Pre-tax investment gains and losses in the first quarter included net unrealized
gains of
in 2022 on securities we held at the end of the applicable period. Taxable
investment gains and losses on equity securities sold is generally the
difference between sales proceeds and the original cost of the securities sold.
Sales of equity securities in the first quarter produced taxable gains of
billion
investment gains in the first quarter of 2023 included a non-cash gain of
billion
fair value through the application of acquisition accounting upon attaining
control of Pilot for financial reporting purposes.
We believe that investment gains and 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 and losses
recorded in earnings in any given period has little analytical or predictive
value.
Derivative contract gains (losses)
Derivative contract gains and losses include the changes in fair value of our
few remaining equity index put option contract liabilities. The periodic changes
in the fair values of these liabilities are recorded in earnings. Substantially
all of our contracts have expired and our exposure to loss in the future is
insignificant.
43
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Other
A summary of after-tax other earnings/losses follows (in millions).
First Quarter
2023 2022
Acquisition accounting expenses $ (202 ) $ (161 )
Corporate interest expense, before foreign currency effects (64 ) (70 )
Foreign currency exchange rate gains (losses) on Berkshire
and BHFC non-U.S. Dollar senior notes (17 ) 522
Other earnings 172 79
$ (111 ) $ 370
After-tax acquisition accounting expenses include charges arising from the
application of the acquisition method in connection with certain of Berkshire's
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 and
BHFC's Euro, Great
foreign currency exchange rates produce unrealized gains and losses from the
periodic revaluation of these liabilities into
recorded significant foreign currency exchange rate gains on these debt issues,
due to strengthening of the
value of the debt. 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. Other earnings 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 significant liquidity and a
very strong capital base. Our Consolidated shareholders' equity at
2023
Net earnings attributable to Berkshire shareholders was
first quarter of 2023, which included after-tax gains on our investments 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 2023 to repurchase shares of its Class A and B common
stock.
At
equivalents and
billion
securities (excluding our investments in Kraft Heinz and Occidental common
stock) were
billion
additional 41.4% interest in Pilot for approximately
Our consolidated borrowings at
95% were by the Berkshire parent company, BHFC, BNSF, BHE and its subsidiaries
and Pilot. In the first quarter of 2023, we paid approximately
maturing term debt and increased short-term borrowings by approximately
billion
44
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition (Continued)
Berkshire parent company outstanding debt at
decrease of
debt during the first quarter. In
(approximately
maturing notes.
Senior note borrowings of BHFC, a wholly-owned financing subsidiary, were
approximately
originated and acquired by
railcar leasing business. Berkshire guarantees BHFC's senior notes for the full
and timely payment of principal and interest.
BNSF's outstanding debt was
subsidiaries were
from
twelve months approximate
of
2023
other borrowings issued by BNSF, BHE, Pilot or any of their subsidiaries or
affiliates.
In the first quarter of 2023, our diverse group of businesses generated net
operating cash flows of
property, plant and equipment and equipment held for lease were
the first quarter of 2023, which included capital expenditures by our railroad,
utilities and energy businesses (BNSF, BHE and Pilot) of
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. Forecasted capital expenditures for BHE and BNSF over
the remainder of 2023 approximate
On
signed into law. The 2022 act contains numerous provisions, including a 15%
corporate alternative minimum income tax on "adjusted financial statement
income", expanded tax credits for clean energy incentives and a 1% excise tax on
corporate stock repurchases. The provisions of the 2022 act become effective for
tax years beginning after
corporate alternative minimum tax. The guidance addresses several, but not all,
issues that needed clarification.
release additional guidance in the future. We will continue to evaluate the
impact of the 2022 act as more guidance becomes available. We currently do not
expect a material impact on our Consolidated Financial Statements.
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
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, aircraft purchase commitments of NetJets and
certain raw materials purchase commitments.
45
--------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Contractual Obligations (Continued)
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
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 approximately
assets of
the Alleghany and Pilot acquisitions. We evaluate these assets for impairment at
least annually and we conducted our most recent annual review during the fourth
quarter of 2022. In connection with the annual goodwill impairment review
conducted in the fourth quarter of 2022, the estimated fair values of six
reporting units did not exceed our carrying values by at least 20%. The most
significant of these reporting units was
estimated fair value of PCC was approximately
carrying value of approximately
included goodwill of approximately
units, our aggregate estimated fair value was approximately
exceeded our aggregate carrying value of approximately
carrying 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 consequences of the COVID-19 pandemic, geopolitical conflicts and
general changes in business conditions 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 are inherently
subjective and will likely continue to be significantly affected by assumptions
on the severity, duration or long-term effects of adverse events on a reporting
unit's business, which we cannot reliably predict. Consequently, any fair value
estimates can be subject to wide variations.
Information concerning new accounting pronouncements is included in Note 2 to
the accompanying Consolidated Financial Statements.
46
--------------------------------------------------------------------------------
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, that negatively affect our
operating results and restrict our access to borrowed funds through the capital
markets at reasonable rates; 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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