FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-14905
BERKSHIRE HATHAWAY INC.
-----------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0813844
------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
1440 Kiewit Plaza, Omaha, Nebraska 68131
----------------------------------------
(Address of principal executive office)
(Zip Code)
(402) 346-1400
----------------------------------------------------
(Registrant's telephone number, including area code)
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Number of shares of common stock outstanding as of April 30, 2002:
Class A -- 1,321,380
Class B -- 6,364,718
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
PART I - FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets --
March 31, 2002 and December 31, 2001 2
Consolidated Statements of Earnings --
First Quarter 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows --
First Quarter 2002 and 2001 4
Notes to Interim Consolidated Financial Statements 5 - 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12 - 21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
1
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
March 31, December 31,
2002 2001
-------- ------------
ASSETS
Cash and cash equivalents ................................. $ 7,374 $ 5,313
Investments:
Securities with fixed maturities ........................ 35,877 36,509
Equity securities ....................................... 31,239 28,675
Other ................................................... 1,987 1,974
Receivables ............................................... 11,374 11,926
Inventories ............................................... 2,360 2,213
Investments in MidAmerican Energy Holdings Company ........ 2,569 1,826
Assets of finance and financial products businesses ....... 37,938 41,591
Property, plant and equipment ............................. 4,880 4,776
Goodwill of acquired businesses ........................... 22,035 21,407
Other assets .............................................. 6,991 6,542
-------- --------
$164,624 $162,752
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses ....................... $ 41,267 $ 40,716
Unearned premiums ......................................... 5,642 4,814
Accounts payable, accruals and other liabilities .......... 9,894 9,626
Income taxes, principally deferred ........................ 8,165 7,021
Borrowings under investment agreements and other debt ..... 3,724 3,485
Liabilities of finance and financial products businesses .. 34,157 37,791
-------- --------
102,849 103,453
-------- --------
Minority shareholders' interests .......................... 1,277 1,349
-------- --------
Shareholders' equity:
Common Stock:*
Class A Common Stock, $5 par value
and Class B Common Stock, $0.1667 par value .......... 8 8
Capital in excess of par value .......................... 25,958 25,607
Accumulated other comprehensive income .................. 14,172 12,891
Retained earnings ....................................... 20,360 19,444
-------- --------
Total shareholders' equity ........................... 60,498 57,950
-------- --------
$164,624 $162,752
======== ========
* Class B Common Stock has economic rights equal to one-thirtieth
(1/30) of the economic rights of Class A Common Stock.
Accordingly, on an equivalent Class A Common Stock basis, there
are 1,533,467 shares outstanding at March 31, 2002 versus
1,528,217 shares outstanding at December 31, 2001.
See accompanying Notes to Interim Consolidated Financial Statements
2
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
First Quarter
----------------------------
2002 2001
---------- ----------
REVENUES:
Insurance premiums earned ............................ $ 4,438 $ 3,726
Sales and service revenues ........................... 3,734 3,278
Interest, dividend and other investment income ....... 688 678
Income from MidAmerican Energy Holdings Company ...... 69 47
Income from finance and financial products businesses 164 171
Realized investment gain ............................. 162 242
---------- ----------
9,255 8,142
---------- ----------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses ........ 3,474 3,025
Insurance underwriting expenses ...................... 944 927
Cost of products and services sold ................... 2,643 2,301
Selling, general and administrative expenses ......... 758 730
Goodwill amortization ................................ -- 142
Interest expense ..................................... 46 60
---------- ----------
7,865 7,185
---------- ----------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST ..... 1,390 957
Income taxes ......................................... 460 339
Minority interest .................................... 14 12
---------- ----------
NET EARNINGS ........................................... $ 916 $ 606
========== ==========
Average common shares outstanding * .................. 1,530,961 1,526,540
NET EARNINGS PER COMMON SHARE * ........................ $ 598 $ 397
========== ==========
* Average shares outstanding include average Class A Common shares and
average Class B Common shares determined on an equivalent Class A Common
Stock basis. Net earnings per share shown above represents net earnings
per equivalent Class A Common share. Net earnings per Class B Common
share is equal to one-thirtieth (1/30) of such amount.
See accompanying Notes to Interim Consolidated Financial Statements
3
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
First Quarter
-----------------------
2002 2001
------- -------
Net cash flows from operating activities ............................. $ 3,427 $ 733
------- -------
Cash flows from investing activities:
Purchases of investments ........................................... (3,948) (906)
Proceeds from sales and maturities of investments .................. 3,214 4,911
Loans and investments originated in finance businesses ............. (834) (910)
Principal collection on loans and investments
originated in finance businesses .................................. 1,449 99
Acquisitions of businesses, net of cash acquired ................... (357) (3,736)
Other .............................................................. (254) (197)
------- -------
Net cash flows from investing activities .......................... (730) (739)
------- -------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses ..................... -- 166
Proceeds from other borrowings ..................................... 193 162
Repayments of borrowings of finance businesses ..................... (1,371) (1)
Repayments of other borrowings ..................................... (213) (167)
Change in short term borrowings of finance businesses .............. 686 650
Changes in other short term borrowings ............................. 92 46
Other .............................................................. (37) (14)
------- -------
Net cash flows from financing activities .......................... (650) 842
------- -------
Increase in cash and cash equivalents ............................. 2,047 836
Cash and cash equivalents at beginning of year ....................... 6,498 5,604
------- -------
Cash and cash equivalents at end of first quarter * .................. $ 8,545 $ 6,440
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Income taxes ...................................................... $ 27 $ 461
Interest of finance and financial products businesses ............. 149 137
Other interest .................................................... 78 71
Non-cash investing activity:
Liabilities assumed in connection with acquisitions of businesses .. 217 2,249
Common stock issued in connection with acquisition of business ..... 324 --
Contingent value of Exchange Notes recognized in earnings .......... -- 24
Value of equity securities used to redeem Exchange Notes ........... -- 45
* Cash and cash equivalents are comprised of the following:
Beginning of year --
Finance and financial products businesses ......................... $ 1,185 $ 341
Other ............................................................. 5,313 5,263
------- -------
$ 6,498 $ 5,604
======= =======
End of first quarter --
Finance and financial products businesses ......................... $ 1,171 $ 595
Other ............................................................. 7,374 5,845
------- -------
$ 8,545 $ 6,440
======= =======
See accompanying Notes to Interim Consolidated Financial Statements
4
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
The accompanying unaudited Consolidated Financial Statements include the
accounts of Berkshire Hathaway Inc. ("Berkshire" or "Company") consolidated with
the accounts of all its subsidiaries. Reference is made to Berkshire's most
recently issued Annual Report that included information necessary or useful to
understanding Berkshire's businesses and financial statement presentations. In
particular, Berkshire's significant accounting policies and practices were
presented as Note 1 to the Consolidated Financial Statements included in that
Report. Certain amounts in 2001 have been reclassified to conform with current
year presentation.
Financial information in this Report reflects any adjustments
(consisting only of normal recurring adjustments) that are, in the opinion of
management, necessary to a fair statement of results for the interim periods in
accordance with generally accepted accounting principles ("GAAP").
For a number of reasons, Berkshire's results for interim periods are not
normally indicative of results to be expected for the year. The timing and
magnitude of catastrophe losses incurred by insurance subsidiaries and the
estimation error inherent to the process of determining liabilities for unpaid
losses of insurance subsidiaries can be relatively more significant to results
of interim periods than to results for a full year. Realized investment
gains/losses are recorded when investments are sold, other-than-temporarily
impaired or in certain situations, as required by GAAP, when investments are
marked-to-market. Variations in amount and timing of realized investment
gains/losses can cause significant variations in periodic net earnings.
NOTE 2. SIGNIFICANT BUSINESS ACQUISITIONS
During 2001, Berkshire completed four significant business acquisitions
and completed an additional acquisition during the first quarter of 2002.
Information concerning these acquisitions follows.
Shaw Industries, Inc. ("Shaw")
On January 8, 2001, Berkshire acquired approximately 87.3% of the common
stock of Shaw for $19 per share, or $2.1 billion in total. Robert E. Shaw,
Chairman and CEO of Shaw, Julian D. Saul, President of Shaw, certain family
members and related family interests of Messrs. Shaw and Saul, and certain other
Shaw directors and members of management acquired the remaining 12.7% of Shaw.
In January 2002, Berkshire acquired their shares in exchange for 4,505 shares of
Berkshire Class A common stock and 7,063 shares of Class B common stock. The
aggregate value of Berkshire stock issued was approximately $324 million.
Shaw is the world's largest manufacturer of tufted broadloom carpet and
rugs for residential and commercial applications throughout the U.S. and exports
to most markets worldwide. Shaw markets its residential and commercial products
under a variety of brand names.
Johns Manville Corporation ("Johns Manville")
On February 27, 2001, Berkshire acquired Johns Manville. Berkshire
purchased all of the outstanding shares of Johns Manville common stock for $13
per share, or $1.8 billion in total. Johns Manville is a leading manufacturer of
insulation and building products. Johns Manville manufactures and markets
products for building and equipment insulation, commercial and industrial
roofing systems, high-efficiency filtration media, and fibers and non-woven mats
used as reinforcements in building and industrial applications.
MiTek Inc. ("MiTek")
On July 31, 2001, Berkshire acquired a 90% equity interest in MiTek from
Rexam PLC for approximately $400 million. Existing MiTek management acquired the
remaining 10% interest. MiTek, headquartered in Chesterfield, Missouri, produces
steel connector products, design engineering software and ancillary services for
the building components market.
XTRA Corporation ("XTRA")
On September 20, 2001, Berkshire acquired XTRA through a cash tender
offer and subsequent statutory merger for all of the outstanding shares. Holders
of XTRA common stock received aggregate consideration of approximately $578
million. XTRA, headquartered in Westport, Connecticut, is a leading operating
lessor of transportation equipment, including over-the-road trailers, marine
containers and intermodal equipment.
5
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SIGNIFICANT BUSINESS ACQUISITIONS (CONTINUED)
Albecca Inc. ("Albecca")
Effective February 8, 2002, Berkshire acquired all of the outstanding
shares of Albecca for approximately $225 million in cash. Albecca designs,
manufactures and distributes a complete line of high-quality custom picture
framing products primarily under the Larson-Juhl name.
The results of operations for each of these entities are included in
Berkshire's consolidated results of operations from the effective date of each
merger. The following table sets forth certain unaudited consolidated earnings
data for the first quarter of 2001, as if each of the acquisitions discussed
above were consummated on the same terms at the beginning of 2001. Pro forma
results for the first quarter of 2002 were not materially different from
reported results. Dollars are in millions except per share amount.
2001
------
Total revenues ................................... $8,589
Net earnings ..................................... 618
Earnings per equivalent Class A Common Share ..... 403
Fruit of the Loom ("FOL")
On April 30, 2002, Berkshire acquired for cash the basic apparel
business of Fruit of the Loom, LTD ("FOL entities"). Prior to the acquisition,
the FOL entities operated as debtors-in-possession pursuant to its filing under
Chapter 11 of the U.S. Bankruptcy Code. On April 19, 2002, the U.S. Bankruptcy
Court for the District of Delaware confirmed the FOL reorganization plan, which
provided for the sale of the basic apparel business to Berkshire.
The FOL apparel business is a leading vertically integrated basic
apparel company manufacturing and marketing underwear, activewear, casualwear
and childrenswear. The FOL apparel business operates on a worldwide basis and
sells its products principally in North America under the Fruit of the Loom and
BVD brand names.
NOTE 3. INVESTMENTS IN MIDAMERICAN ENERGY HOLDINGS COMPANY
In March 2000, Berkshire invested approximately $1.24 billion in common
stock and a non-dividend paying convertible preferred stock of MidAmerican
Energy Holdings Company ("MidAmerican"). In March 2002, Berkshire acquired
additional convertible preferred stock of MidAmerican for $402 million. Such
investments represent a 9.7% voting interest and a 80.2% economic interest in
MidAmerican on a fully-diluted basis. Berkshire and its subsidiaries also hold
$778 million of 11% non-transferable trust preferred securities of MidAmerican,
of which $455 million were acquired in March 2000 and an additional $323 million
were acquired in March 2002. Mr. Walter Scott, Jr., a member of Berkshire's
Board of Directors, controls approximately 86% of the voting interest in
MidAmerican.
MidAmerican is a global leader in the production of energy from
diversified fuel sources including geothermal, natural gas, hydroelectric,
nuclear and coal. MidAmerican also is a leader in the supply and distribution of
energy in the U.S. and U.K. consumer markets.
Berkshire's aggregate investments in MidAmerican are included in the
Consolidated Balance Sheets as Investments in MidAmerican Energy Holdings
Company. Berkshire is accounting for its investments in the common and
non-dividend paying convertible preferred stock pursuant to the equity method.
The carrying value of these equity method investments totaled $1,791 million at
March 31, 2002 and $1,371 million at December 31, 2001. The 11% non-transferable
trust preferred securities are classified as held-to-maturity, and are carried
at cost.
The Consolidated Statements of Earnings reflect, as Income from
MidAmerican Energy Holdings Company, Berkshire's proportionate share of
MidAmerican's net income with respect to the investments accounted for pursuant
to the equity method, as well as interest earned on the 11% trust preferred
securities. Income derived from equity method investments in the first quarter
totaled $54 million in 2002 and $35 million in 2001.
6
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. INVESTMENTS IN MIDAMERICAN ENERGY HOLDINGS COMPANY (CONTINUED)
Condensed consolidated balance sheets of MidAmerican are as follows.
Amounts are in millions.
March 31, December 31,
2002 2001
--------- ------------
Assets:
Properties, plants, contracts and equipment, net ... $ 7,311 $ 6,533
Goodwill ........................................... 3,769 3,639
Other assets ....................................... 3,307 2,443
------- -------
$14,387 $12,615
======= =======
Liabilities and shareholders' equity:
Term debt .......................................... $ 8,097 $ 7,163
Redeemable preferred securities .................... 1,233 1,009
Other liabilities and minority interests ........... 2,922 2,735
------- -------
12,252 10,907
Shareholders' equity ............................... 2,135 1,708
------- -------
$14,387 $12,615
======= =======
Condensed consolidated statements of earnings of MidAmerican for the
first quarter of 2002 and 2001 are as follows. Amounts are in millions.
2002 2001
------ ------
Revenues .................................... $1,108 $1,613
------ ------
Costs and expenses:
Cost of sales and operating expenses ........ 727 1,297
Depreciation and amortization ............... 126 116
Interest expense and minority interest ...... 161 118
------ ------
1,014 1,531
------ ------
Income before taxes ......................... $ 94 $ 82
====== ======
Net income .................................. $ 65 $ 43
====== ======
NOTE 4. INVESTMENTS IN SECURITIES WITH FIXED MATURITIES
Data with respect to investments in securities with fixed maturities
(other than securities with fixed maturities held by finance and financial
products businesses -- See Note 9) are shown in the tabulation below (in
millions).
March 31, December 31,
2002 2001
-------- ------------
Available for sale, carried at fair value:
Amortized cost ................................... $ 35,905 $ 36,093
Gross unrealized gains ........................... 517 900
Gross unrealized losses .......................... (837) (774)
-------- --------
Estimated fair value ............................. $ 35,585 $ 36,219
======== ========
Held to maturity, carried at amortized cost:
Amortized cost ................................... $ 292 $ 290
Gross unrealized gains ........................... 88 94
-------- --------
Estimated fair value ............................. $ 380 $ 384
======== ========
7
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. INVESTMENTS IN EQUITY SECURITIES
Data with respect to investments in equity securities are shown in the
tabulation below (in millions).
March 31, December 31,
2002 2001
--------- ------------
Total cost ................... $ 8,678 $ 8,543
Gross unrealized gains ....... 22,716 20,275
Gross unrealized losses ...... (155) (143)
-------- --------
Total fair value ............. $ 31,239 $ 28,675
======== ========
Fair value:
American Express Company ..... $ 6,210 $ 5,410
The Coca-Cola Company ........ 10,452 9,430
The Gillette Company ......... 3,265 3,206
Wells Fargo & Company ........ 2,631 2,315
Other equity securities ...... 8,681 8,314
-------- --------
Total ........................ $ 31,239 $ 28,675
======== ========
NOTE 6. DEFERRED INCOME TAX LIABILITIES
The tax effects of significant items comprising Berkshire's net deferred
tax liabilities as of March 31, 2002 and December 31, 2001 are as follows (in
millions).
March 31, December 31,
2002 2001
-------- ------------
Deferred tax liabilities:
Relating to unrealized appreciation of investments .. $ 7,777 $ 7,078
Deferred charges reinsurance assumed ................ 1,209 1,131
Investments ......................................... 379 382
Other ............................................... 1,609 1,552
-------- --------
10,974 10,143
-------- --------
Deferred tax assets:
Unpaid losses and loss adjustment expenses .......... (795) (752)
Unearned premiums ................................... (342) (294)
Other ............................................... (1,806) (1,804)
-------- --------
(2,943) (2,850)
-------- --------
Net deferred tax liability ............................ $ 8,031 $ 7,293
======== ========
NOTE 7. COMMON STOCK
The following table summarizes Berkshire's common stock activity during
the first quarter of 2002.
Class A Common Stock Class B Common Stock
(1,650,000 shares (55,000,000 shares
authorized) authorized)
Issued and Outstanding Issued and Outstanding
---------------------- ----------------------
Balance at December 31, 2001 ..................... 1,323,410 6,144,222
Conversions of Class A Common Stock
to Class B Common Stock and other .............. (5,895) 192,135
Common stock issued in business acquisition ...... 4,505 7,063
---------- ---------
Balance at March 31, 2002 ........................ 1,322,020 6,343,420
========== =========
8
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMMON STOCK (CONTINUED)
Each share of Class A Common Stock is convertible, at the option of the
holder, into thirty shares of Class B Common Stock. Class B Common Stock is not
convertible into Class A Common Stock. Class B Common Stock has economic rights
equal to one-thirtieth (1/30) of the economic rights of Class A Common Stock.
Accordingly, on an equivalent Class A Common Stock basis, there are 1,533,467
shares outstanding at March 31, 2002 and 1,528,217 shares outstanding at
December 31, 2001.
Each Class A Common share is entitled to one vote per share. Each Class
B Common share possesses the voting rights of one-two-hundredth (1/200) of the
voting rights of a Class A share. Class A and Class B Common shares vote
together as a single class.
NOTE 8. COMPREHENSIVE INCOME
Berkshire's comprehensive income for the first quarter of 2002 and 2001
is shown in the table below (in millions). Other comprehensive income consists
of unrealized gains and losses on investments and foreign currency translation
adjustments associated with foreign-based business operations.
2002 2001
------- -------
Net earnings .................................................... $ 916 $ 606
------- -------
Other comprehensive income:
Increase (decrease) in unrealized appreciation of investments ... 1,998 (6,048)
Applicable income taxes and minority interests ................ (703) 2,152
Other, principally foreign currency translation losses .......... (15) (78)
Applicable income taxes and minority interests ................ 1 13
------- -------
1,281 (3,961)
------- -------
Comprehensive income ............................................ $ 2,197 $(3,355)
======= =======
NOTE 9. FINANCE AND FINANCIAL PRODUCTS BUSINESSES
Assets and liabilities of Berkshire's finance and financial products
businesses are summarized below (in millions).
March 31, December 31,
2002 2001
--------- ------------
ASSETS
Cash and cash equivalents ............................ $ 1,171 $ 1,185
Investments in securities with fixed maturities:
Held-to-maturity, at cost .......................... 1,557 1,813
Available-for-sale, at fair value .................. 18,927 21,061
Trading, at fair value ............................. 1,266 2,252
Trading account assets ............................... 5,482 5,561
Loans and other receivables * ........................ 5,302 6,262
Other ................................................ 4,233 3,457
------- -------
$37,938 $41,591
======= =======
LIABILITIES
Securities sold under agreements to repurchase ....... $15,903 $21,465
Trading account liabilities .......................... 4,494 4,803
Notes payable and other borrowings * ................. 8,354 9,019
Other ................................................ 5,406 2,504
------- -------
$34,157 $37,791
======= =======
* Loans and other receivables include Berkadia LLC's loan to Finova
Capital Corporation ("FNV"), which totaled $3.9 billion at March 31,
2002 and $4.9 billion at December 31, 2001. FNV prepaid an additional
$700 million principal amount in April 2002. Berkadia's outstanding bank
borrowing totaled $3.9 billion at March 31, 2002, of which $700 million
was prepaid in April 2002.
9
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. FINANCE AND FINANCIAL PRODUCTS BUSINESSES (CONTINUED)
Income of Berkshire's finance and financial products businesses for the
first quarter of 2002 and 2001 is shown below (in millions).
2002 2001
---- ----
REVENUES
Interest income ............................. $423 $244
Realized and unrealized investment gain ..... 4 49
Other ....................................... 57 75
---- ----
484 368
---- ----
COST AND EXPENSES
Interest expense ............................ 148 149
General administrative and other expenses ... 172 48
---- ----
320 197
---- ----
EARNINGS BEFORE INCOME TAXES ................ $164 $171
==== ====
NOTE 10. BUSINESS SEGMENT DATA
A disaggregation of Berkshire's consolidated data for the first quarter
of each of the two most recent years is as follows. Amounts are in millions.
REVENUES
-----------------------
2002 2001
------- -------
OPERATING BUSINESSES:
Insurance group:
Premiums earned:
GEICO ........................................... $ 1,562 $ 1,462
General Re ...................................... 1,970 1,998
Berkshire Hathaway Reinsurance Group ............ 755 160
Berkshire Hathaway Primary Insurance Group ...... 151 106
Investment income ................................... 721 690
------- -------
Total insurance group ................................. 5,159 4,416
Building products ..................................... 850 466
Finance and financial products ........................ 150 159
Flight services ....................................... 655 647
Retail ................................................ 468 437
Scott Fetzer Companies ................................ 219 246
Shaw Industries ....................................... 981 967
Other businesses ...................................... 632 566
------- -------
9,114 7,904
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ............................ 162 242
Other revenues ...................................... 5 12
Purchase-accounting adjustments ..................... (26) (16)
------- -------
$ 9,255 $ 8,142
======= =======
10
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. BUSINESS SEGMENT DATA (CONTINUED)
OPERATING BUSINESSES: OPERATING PROFIT BEFORE TAXES
-----------------------------
2002 2001
------- -----
Insurance group operating profit: ....................................
Underwriting profit (loss):
GEICO ............................................................ $ 109 $ (21)
General Re ....................................................... (88) (133)
Berkshire Hathaway Reinsurance Group ............................. (8) (78)
Berkshire Hathaway Primary Insurance Group ....................... 7 6
Net investment income .............................................. 716 685
------- -----
Total insurance group operating profit ............................... 736 459
Building products .................................................... 114 52
Finance and financial products ....................................... 150 159
Flight services ...................................................... 30 49
Retail ............................................................... 30 26
Scott Fetzer Companies ............................................... 28 30
Shaw Industries ...................................................... 73 51
Other businesses ..................................................... 127 89
------- -----
1,288 915
RECONCILIATION OF SEGMENTS TO CONSOLIDATED AMOUNT:
Realized investment gain ........................................... 151 213
Interest expense * ................................................. (23) (22)
Corporate and other ................................................ 4 9
Goodwill amortization and other purchase-accounting adjustments .... (30) (158)
------- -----
$ 1,390 $ 957
======= =====
* Amounts of interest expense represent interest on borrowings under
investment agreements and other debt exclusive of that of finance
businesses and interest allocated to certain businesses.
NOTE 11. GOODWILL AMORTIZATION
Effective January 1, 2002, Berkshire adopted Statement of Financial
Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets".
SFAS No. 142 changed the accounting for goodwill from a model that required
amortization of goodwill, supplemented by impairment tests, to an accounting
model that is based solely upon impairment tests. Thus, Berkshire's Consolidated
Statement of Earnings for the quarter ending March 31, 2002 includes no periodic
amortization of goodwill.
SFAS No. 142 requires Berkshire to make an initial assessment of
goodwill for impairment for each of its reporting units within six months after
adoption of the standard. Berkshire will complete this initial assessment of
goodwill during the second quarter of 2002. Management currently believes no
transitional impairment charges will be recorded. Impairments, if any, recorded
as a result of the adoption of SFAS No. 142 are to be reported as a cumulative
change in accounting principle. Subsequently, goodwill must be reviewed for
impairment at least annually. Any impairment recorded after initial assessment
would be charged to operating earnings.
As required under SFAS No. 142, a reconciliation of Berkshire's
Consolidated Statements of Earnings for the first quarter of 2002 and 2001 from
amounts reported to amounts exclusive of goodwill amortization, including $20
million related to Berkshire's equity method investment in MidAmerican, is shown
below. Dollar amounts are in millions, except per share amounts.
2002 2001
---- ----
Net income as reported ..................................... $916 $606
Goodwill amortization, after tax ........................... -- 160
---- ----
Net income as adjusted ..................................... $916 $766
==== ====
Earnings per equivalent share of Class A Common Stock:
As reported ................................................ $598 $397
Goodwill amortization ...................................... -- 105
---- ----
Earnings per share as adjusted ............................. $598 $502
==== ====
11
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the first quarter of 2002 and 2001 are disaggregated in
the table that follows. Amounts are after deducting minority interests and
income taxes. Dollar amounts are in millions.
2002 2001
----- -----
Insurance -- underwriting .................... $ 13 $(145)
Insurance -- investment income ............... 489 475
Non-insurance businesses ..................... 347 290
Interest expense ............................. (15) (16)
Purchase-accounting adjustments .............. (19) (150)
Other ........................................ 3 8
----- -----
Earnings before realized investment gain ... 818 462
Realized investment gain ..................... 98 144
----- -----
Net earnings ............................... $ 916 $ 606
===== =====
INSURANCE -- UNDERWRITING
A summary follows of underwriting results from Berkshire's insurance
businesses for the first quarter of 2002 and 2001. Dollar amounts are in
millions.
2002 2001
----- -----
Underwriting gain (loss) attributable to:
GEICO ............................................ $ 109 $ (21)
General Re ....................................... (88) (133)
Berkshire Hathaway Reinsurance Group ............. (8) (78)
Berkshire Hathaway Primary Insurance Group ....... 7 6
----- -----
Pre-tax underwriting gain (loss) ................. 20 (226)
Income taxes and minority interest ............... 7 (81)
----- -----
Net underwriting gain (loss) ................... $ 13 $(145)
===== =====
Berkshire engages in both primary insurance and reinsurance of property
and casualty risks. Through General Re, Berkshire also reinsures life and health
risks. In primary insurance activities, Berkshire subsidiaries assume defined
portions of the risks of loss from persons or organizations that are directly
subject to the risks. In reinsurance activities, Berkshire subsidiaries assume
defined portions of similar or dissimilar risks that other insurers or
reinsurers have subjected themselves to in their own insuring activities.
Berkshire's principal insurance businesses are: (1) GEICO, the sixth largest
auto insurer in the United States, (2) General Re, one of the four largest
reinsurers in the world, (3) Berkshire Hathaway Reinsurance Group ("BHRG") and
(4) Berkshire Hathaway Primary Insurance Group.
GEICO
GEICO Corporation through its affiliates ("GEICO") provides private
passenger auto insurance to customers in 48 states and the District of Columbia.
GEICO policies are marketed mainly through direct response methods, in which
insureds apply directly to the company for insurance coverage over the
telephone, through the mail or via the Internet. This is a significant element
in GEICO's strategy to be a low cost insurer and, yet, provide high value to
policyholders.
GEICO's pre-tax underwriting results for the first quarter of 2002 and
2001 are summarized in the table below. Dollar amounts are in millions.
2002 2001
-------------------- --------------------
Amount % Amount %
------ ------ ------ ------
Premiums earned ................... $1,562 100.0 $1,462 100.0
------ ------ ------ ------
Losses and loss expenses .......... 1,176 75.3 1,236 84.5
Underwriting expenses ............. 277 17.7 247 16.9
------ ------ ------ ------
Total losses and expenses ......... 1,453 93.0 1,483 101.4
------ ====== ------ ======
Net underwriting gain (loss) ...... $ 109 $ (21)
====== ======
12
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INSURANCE -- UNDERWRITING (CONTINUED)
GEICO (CONTINUED)
Premiums earned in the first quarter of 2002 were $1,562 million, an
increase of 6.8% from $1,462 million in 2001. The growth in premiums earned for
voluntary auto was 6.6% and reflects increased rates and a 1.3% increase in
policies-in-force during the past year.
Policies-in-force over the last twelve months increased 2.5% in the
preferred risk auto market and decreased 3.6% in the standard and nonstandard
auto lines. Voluntary auto new business sales in the first quarter of 2002
increased 14.4% compared to 2001. The sales closure ratio and the policy
retention rate both improved in the first quarter of 2002, which management
believes was aided by recent premium rate increases taken by competitors.
Voluntary auto policies-in-force increased 92 thousand over the first three
months of 2002, reflecting strong growth in the standard and nonstandard lines.
GEICO's losses and loss adjustment expenses incurred decreased 4.9% to
$1,176 million in the first quarter of 2002. The loss ratio for property and
casualty insurance, which measures the portion of premiums earned that is paid
or reserved for losses and related claims handling expenses, was 75.3% in the
first quarter of 2002 compared to 84.5% a year ago. The improvement reflects the
effect of premium rate increases taken in 2000 and 2001 and reduced losses.
Claim frequency decreased in 2002 for most coverages, reflecting mild winter
weather in the Northeast. Claim severity continued to increase in 2002, but at a
slower rate than last year. Losses incurred from catastrophe events for the
first quarter of 2002 totaled approximately $1.7 million compared to $0.4
million last year.
GEICO is a defendant in several class action lawsuits related to the use
of collision repair parts not produced by the original auto manufacturers, the
calculation of "total loss" value and whether to pay diminished value as part of
the settlement of certain claims. Management intends to vigorously defend the
corporation's position on these claim settlement procedures. However, these
lawsuits are in various stages of development and the ultimate outcome cannot be
reasonably determined at this time.
Underwriting expenses for the first quarter of 2002 increased $30
million (12.1%) over the first quarter of 2001. The increase in underwriting
expense was principally due to higher employee benefit costs, including profit
sharing accruals, partially offset by a decline in advertising expense.
GENERAL RE
General Re conducts a global reinsurance business, which provides
reinsurance coverage in the United States and 135 other countries around the
world. General Re's principal reinsurance operations are: (1) North American
property/casualty, (2) international property/casualty, which is comprised of
direct reinsurance business and broker-market business, and (3) global
life/health. The direct international property/casualty and global life/health
reinsurance operations are conducted primarily through Germany-based Cologne Re.
Broker-market business is conducted through the U.K.-based Faraday operations.
At March 31, 2002, General Re held an 89% economic ownership interest in Cologne
Re.
General Re's consolidated first quarter 2002 underwriting loss of $88
million improved over the $133 million loss in 2001. Improvements occurred in
the North American property/casualty, global life/health and international
property/casualty broker-market businesses. General Re's estimate of net losses
of $1.9 billion arising from the September 11th terrorist attack was unchanged
during the first quarter of 2002.
Although the improvement in first quarter results is encouraging,
General Re's management believes additional underwriting actions are needed to
better align premium rates with coverage terms to achieve targeted long-term
underwriting profitability. Information with respect to each of General Re's
underwriting units is presented below.
North American property/casualty
General Re's North American property/casualty pre-tax underwriting
results for the first quarter of 2002 and 2001 are shown below. Dollar amounts
are in millions.
2002 2001
----------------------- ----------------------
Amount % Amount %
------- ------- ------- -------
Premiums earned .............. $ 975 100.0 $ 905 100.0
------- ------- ------- -------
Losses and loss expenses ..... 740 75.9 688 76.0
Underwriting expenses ........ 267 27.4 272 30.1
------- ------- ------- -------
Total losses and expenses .... 1,007 103.3 960 106.1
------- ======= ------- =======
Net underwriting loss ........ $ (32) $ (55)
======= =======
13
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INSURANCE -- UNDERWRITING (CONTINUED)
North American property/casualty (continued)
North American property/casualty operations underwrite predominantly
excess reinsurance and insurance across multiple lines of business. Policies are
written on both a treaty (groups of risks) and facultative (individual risk)
basis. North American property/casualty earned premiums increased $70 million or
7.7% for the first three months of 2002 over the comparable 2001 period. The
growth in earned premiums was primarily due to rate increases and new business
(net of non-renewal of unprofitable business) in the property reinsurance,
casualty program, excess and surplus lines and alternative markets businesses.
First quarter 2001 earned premiums included approximately $85 million of
premiums from a large excess treaty, which was not renewed in 2002.
Underwriting results for the first quarter of 2002 of the North American
property/casualty operations improved slightly over the comparable 2001 period.
Results for the first three months of 2002 benefited from significant premium
rate increases and improved policy terms and conditions. For the first quarter
of 2002, the North American property/casualty business generated overall
favorable results in property lines arising from rate increases and lower than
expected losses. First quarter underwriting results in both 2002 and 2001
reflect no large losses arising from catastrophes and other large individual
property losses ($20 million or greater). Property business is expected to
produce volatile results from period to period, depending on the timing and
magnitude of major loss events. Changes to unpaid loss and loss adjustment
expenses for estimates for prior years' loss events were not significant in the
first quarter of 2002 and 2001.
Underwriting losses for the first quarter of 2002 and 2001 included
approximately $20 million of accretion on discounted workers' compensation
reserves. In addition, results for 2002 included $3 million of amortization from
deferred charges on retroactive reinsurance contracts written in prior years.
International property/casualty
General Re's international property/casualty pre-tax underwriting
results for the first quarter of 2002 and 2001 are shown below. Dollar amounts
are in millions.
2002 2001
--------------------- --------------------
Amount % Amount %
------ ------ ------ ------
Premiums earned .............. $ 550 100.0 $ 588 100.0
------ ------ ------ ------
Losses and loss expenses ..... 435 79.1 443 75.4
Underwriting expenses ........ 160 29.1 190 32.3
------ ------ ------ ------
Total losses and expenses .... 595 108.2 633 107.7
------ ====== ------ ======
Net underwriting loss ........ $ (45) $ (45)
====== ======
The international property/casualty operations write quota-share and
excess reinsurance on risks around the world. In recent years, the largest
international markets have been in Germany and other parts of Western Europe.
For the first quarter of 2002, international property/casualty earned premiums
decreased $38 million or 6.5% from the comparable 2001 levels. The decline in
earned premiums was primarily attributable to decreased premiums in Latin
America, including the effect of devaluation of the Argentine peso, and
non-renewal of under-performing treaty business at Cologne Re. Partially
offsetting these declines were increases in premiums from General Re's
participation in Lloyd's Syndicate 435 and growth in the U.K. casualty treaty
and property facultative businesses. General Re's share of the premiums, claims
and expenses of Lloyd's Syndicate 435 is 96.7% in 2002 compared to 60.6% in
2001.
Underwriting losses in the international property/casualty operations
were unchanged from the first quarter of 2001, as improvement in the
broker-market operations was offset by increased losses in direct operations.
The direct property/casualty reinsurance operations incurred a net underwriting
loss of $42 million in the first quarter of 2002, compared with an underwriting
loss of $10 million in the same period of 2001. The direct property/casualty
reinsurance results were adversely affected by one large property loss ($29
million) in the United Kingdom. In addition, first quarter 2002 results of the
international credit and surety bond business, which has been placed in run-off,
included $14 million of net losses arising from two bankruptcies.
For the broker-market operations, a net underwriting loss of $3 million
was incurred in the first quarter of 2002 as compared to a $35 million net
underwriting loss in the comparable 2001 period. First quarter 2002 results
benefited from lower-than-expected property loss activity and improvements in
overall market conditions. Broker-market results in the first quarter of 2001
were adversely affected by several large losses, including claims from the
sinking of an oil rig off South America and the Seattle earthquake.
14
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INSURANCE -- UNDERWRITING (CONTINUED)
International property/casualty (continued)
General Re conducts a portion of its reinsurance business in Argentina,
a country that is currently in the midst of an economic and political crisis.
Since the beginning of 2002, the Argentine peso has been significantly devalued
relative to the U.S. dollar. It remains uncertain as to what effect this and
other actions that may be taken will have on the international property/casualty
business. In response to this uncertainty, General Re has reduced the volume of
business being written in Argentina.
Global life/health
General Re's global life/health pre-tax underwriting results for the
first quarter of 2002 and 2001 are shown below. Dollar amounts are in millions.
2002 2001
--------------------- --------------------
Amount % Amount %
------ ------ ------ ------
Premiums earned ................... $ 445 100.0 $ 505 100.0
------ ------ ------ ------
Losses and loss expenses .......... 348 78.2 426 84.4
Underwriting expenses ............. 108 24.3 112 22.1
------ ------ ------ ------
Total losses and expenses ......... 456 102.5 538 106.5
------ ====== ------ ======
Net underwriting loss ............. $ (11) $ (33)
====== ======
General Re's global life/health affiliates reinsure such risks
worldwide. Earned premiums in the U.S. life/health business decreased $18
million or 6.0% from the same period in 2001. The decline in earned premiums
occurred principally due to the run-off of the special risk business.
International life/health earned premiums decreased $42 million or 20.2% from
the comparable 2001 period. The decrease was primarily due to a 2002 change in
reporting Cologne Re's modified coinsurance business. This change had a minimal
impact on net underwriting results, but did reduce premiums earned. Excluding
the effect of this change, international life/health earned premiums increased
approximately 4.0%.
The U.S. life/health operations produced an underwriting loss of $12
million for the first three months of 2002, compared with a loss of $24 million
in the same period of 2001. The improvement was primarily due to lower losses in
the individual health operations and decreased mortality in the life segment.
The Medicare supplement business in the U.S. individual health operations
normally generates losses in the first part of the calendar year, as insureds
recover their annual Medicare deductibles covered under the policies. For the
first quarter of 2002, Medicare supplement business had an underwriting loss of
$11 million, compared with a loss of $16 million in the first quarter of 2001.
Results of this business are expected to improve over the remainder of 2002, as
was the case in 2001. International life/health results for the first quarter of
2002 produced an underwriting gain of $1 million.
BERKSHIRE HATHAWAY REINSURANCE GROUP
Premiums earned in the first quarter by BHRG operations totaled $755
million in 2002, an increase of $595 million over 2001. The increase in premiums
earned in 2002 was primarily due to increased amounts earned from retroactive
reinsurance ($388 million), catastrophe reinsurance ($85 million) and special
risk business ($77 million). The special risk business is primarily commercial
property and liability coverages for large or unusual individual risks.
Underwriting losses of BHRG for the first quarter of 2002 were $8
million compared to $78 million in 2001. The comparative improvement in results
reflects increased underwriting gains from catastrophe reinsurance and specialty
risk business. For the first quarter of both 2002 and 2001, relatively
insignificant amounts of property catastrophe losses were incurred and, as a
result, these businesses generated underwriting gains of $157 million in 2002
and $51 million in 2001. Berkshire management believes and accepts that large
losses will eventually occur in the property catastrophe business. The timing
and magnitude of catastrophe losses can cause periodic underwriting results to
be exceptionally volatile.
Underwriting losses of BHRG for the first quarter include losses from
the amortization of deferred charges on retroactive reinsurance policies
totaling $109 million in 2002 and $94 million in 2001. These charges reflect the
systematic recognition of time-value-of-money concepts that are factored into
the premiums established for retroactive policies, primarily because the claims
are expected to be settled over extended time periods. Deferred charges are
established at the inception of the contracts representing the difference
between the estimated ultimate losses and the consideration received. Deferred
charges are then amortized over the expected claims settlement period using the
interest method. Significant changes in the amount of the estimated ultimate
liabilities or the timing of payments may produce significant changes in the
periodic amortization.
15
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
INSURANCE -- UNDERWRITING (CONTINUED)
BERKSHIRE HATHAWAY REINSURANCE GROUP (CONTINUED)
In recent years, BHRG has written several large retroactive contracts
and the unamortized balance has grown to approximately $3.3 billion at March 31,
2002. Based upon current estimates, deferred charge amortization is expected to
approximate $415 million for the 2002 calendar year and is expected to exceed
$300 million in each of the next two years. BHRG anticipates that these charges
will be reasonable relative to the large amounts of float generated from these
policies.
BERKSHIRE HATHAWAY PRIMARY INSURANCE
Berkshire's other primary insurers consist of several businesses,
including the National Indemnity ("NICO") Primary group, U.S. Investment
Corporation ("USIC"), the Homestate group, Central States Indemnity and Kansas
Banker's Surety. Collectively, premiums earned by these businesses in the first
quarter of 2002 were $151 million, an increase of $45 million (42.5%) over 2001.
The increases in premiums were principally attributed to increased volume by the
NICO Primary group, USIC and the Homestate group.
Berkshire's other primary insurers generated first quarter underwriting
gains of $7 million in 2002 and $6 million in 2001. Underwriting gains were
achieved in each year by USIC, Kansas Banker's and the NICO Primary group, and
were partially offset by small underwriting losses from the Homestate
operations.
INSURANCE -- INVESTMENT INCOME
After-tax net investment income produced by Berkshire's insurance and
reinsurance businesses for the first quarter of 2002 and 2001 is summarized in
the table below. Dollars are in millions.
2002 2001
---- ----
Net investment income before income taxes and minority interests ..... $716 $685
Income taxes and minority interests .................................. 227 210
---- ----
Net investment income ................................................ $489 $475
==== ====
Pre-tax net investment income from Berkshire's insurance operations for
the first quarter of 2002 was $716 million, an increase of $31 million (4.5%)
over the first quarter of 2001. The increase in investment income in 2002
reflects an increase in invested assets, partially offset by the effects of
comparatively lower interest rates. Invested assets held by the insurance
businesses totaled $75 billion at March 31, 2002 compared to $67 billion at
March 31, 2001.
Invested assets derive from shareholder capital as well as policyholder
float. "Float" is an approximation of the net amount of liabilities due to
policyholders that are temporarily available for investment. Float represents
the sum of unpaid losses and loss adjustment expenses, unearned premiums and
other policyholder liabilities less the aggregate of premiums and reinsurance
balances receivable, deferred policy acquisition costs, and deferred charges on
retroactive reinsurance contracts. Consolidated float at March 31, 2002 was
approximately $37.3 billion, compared to $35.5 billion at December 31, 2001 and
$29.2 billion at March 31, 2001.
The large increase in float over the past year principally derives from
retroactive reinsurance written over the past year by BHRG, and from
exceptionally high levels of losses incurred by the reinsurance operations
during the second half of 2001. Consequently, the cost of float, as measured by
the ratio of net pre-tax underwriting losses to average float was very high for
the year ending December 31, 2001 at 12.8%. During the first quarter of 2002,
the cost of float was less than zero, as Berkshire's consolidated insurance and
reinsurance businesses produced a net underwriting gain of approximately $20
million.
NON-INSURANCE BUSINESSES
Results of operations of Berkshire's diverse non-insurance businesses
for the first quarter of 2002 and 2001 are shown in the following table. Dollar
amounts are in millions.
2002 2001
-------------------- --------------------
Amount % Amount %
------ ------ ------ ------
Revenues .............................................. $3,955 100.0 $3,488 100.0
Costs and expenses .................................... 3,403 86.0 3,032 86.9
------ ------ ------ ------
Earnings before income taxes and minority interest .... 552 14.0 456 13.1
Applicable income taxes and minority interest ......... 205 5.2 166 4.8
------ ------ ------ ------
Net earnings .......................................... $ 347 8.8 $ 290 8.3
====== ====== ====== ======
A discussion regarding the results of Berkshire's non-insurance
businesses follows.
16
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NON-INSURANCE BUSINESSES (CONTINUED)
BUILDING PRODUCTS
This group of businesses includes Johns Manville, Benjamin Moore, Acme
Building Products, and MiTek Inc. Revenues of the building products group for
the first quarter of 2002 were $850 million, an increase of $384 million (82.4%)
over 2001. Pre-tax income for the first quarter of 2002 was $114 million, an
increase of $62 million (119.2%) over 2001.
Much of the comparative increases in revenues and pre-tax earnings in
2002 were due to the inclusion of three full months of Johns Manville, acquired
February 27, 2001, and from the inclusion of MiTek, acquired July 31, 2001. On a
comparative full quarter basis however, Johns Manville's sales in 2002 declined
about 7.5% from 2001, while sales at MiTek increased 25.2%. The decline at Johns
Manville was primarily attributed to lower selling prices for building
insulation products and volume declines for roofing products.
Revenues and earnings of Benjamin Moore for the first quarter of 2002
exceeded 2001 due to increased gallons of paint sold. Revenues and earnings of
Acme for the first quarter of 2002 also increased due to higher brick and
manufactured block shipments. Both Benjamin Moore and Acme benefited from
favorable housing markets and comparatively mild winter weather conditions in
2002.
FINANCE AND FINANCIAL PRODUCTS
Berkshire's finance and financial products businesses produced pre-tax
income of $150 million for the first quarter of 2002 compared to $159 million
for the first quarter of 2001. Results for the first quarter of 2002 included
significant increases in net interest income of BH Finance and from Berkshire's
interests in Berkadia LLC. Offsetting these increases were first quarter losses
in 2002 from General Re Securities ("GRS") and lower earnings from Berkshire's
interest in Value Capital LP. During the first quarter of 2002, General Re
announced that the operations of GRS would be run-off in an orderly manner. GRS
generated a pre-tax loss of $89 million, which includes a charge of $31 million
for employee severance and other run-off related costs. During the first quarter
of 2002, GRS also incurred trading losses in restructuring certain positions in
connection with the run-off, with the objective of reducing the number of
trading positions and related risks. Additional losses may be incurred in future
periods as additional restructuring transactions take place.
FLIGHT SERVICES
Revenues from flight services for the first quarter of 2002 totaled $655
million, an increase of $8 million (1.2%) over the first quarter of 2001. First
quarter revenues reflect an increase in flight operations management revenue,
offset by declines in training revenues and aircraft and flight simulator sales.
Pre-tax earnings from flight services during the first quarter of 2002 were $30
million, a decline of $19 million (38.8%) from the first quarter of 2001.
Berkshire's flight services operations have been negatively affected by the
September 11th terrorist activity and the slowing U.S. economy. As a result,
NetJets (formerly known as Executive Jet) incurred first quarter operating
losses in both the U.S. and Europe and FlightSafety's operating profits were
lower.
RETAIL
Berkshire's home furnishing and jewelry retail businesses generated
first quarter 2002 revenues of $468 million, a $31 million (7.1%) increase over
the first quarter of 2001. Most of the revenue increase was generated by
Nebraska Furniture Mart and R.C. Willey. Pre-tax earnings of Berkshire's retail
businesses for the first quarter of 2002 were $30 million, a $4 million (15.4%)
increase over the first quarter of 2001. Increased earnings were generated by
R.C. Willey, the Nebraska Furniture Mart and Jordan's Furniture, partially
offset by comparatively lower earnings at Helzberg Diamond Shops.
SCOTT FETZER
Revenues for the first quarter of 2002 totaled $219 million which
represents a decline of $27 million (11.0%) from 2001. The decline in revenues
occurred in several product lines, most notably in Campbell Hausfeld's pressure
washers and air compressors, Kirby's cleaning systems and Wayne's water systems.
For the first quarter of 2002, pre-tax earnings of $28 million were $2 million
(6.7%) below 2001. The decline in earnings was due to the aforementioned lower
sales, partially offset by the favorable effects of cost cutting measures.
17
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
NON-INSURANCE BUSINESSES (CONTINUED)
SHAW INDUSTRIES
Shaw is a leading manufacturer and distributor of carpet, rugs and
hardfloor surfaces. First quarter revenues were $981 million in 2002 and $967
million in 2001. The increase in sales was attributed primarily to a small
increase in volume offset by slightly lower average selling prices. Commercial
carpet sales remain slow, due to the overall weakness in the economy and the
lingering effects of the September 11th terrorist attack.
Pre-tax income generated by Shaw for the first quarter of 2002 increased
$22 million (43.1%) over the first quarter of 2001. Comparatively lower material
costs, increased plant operating levels and lower interest charges accounted for
most of the improvement in comparative operating results.
In January 2002, Berkshire acquired the remaining shares of Shaw that
were previously held by a group of investors that included Robert Shaw, CEO of
Shaw, Julian Saul, President of Shaw, and other managers and former directors of
Shaw.
OTHER NON-INSURANCE BUSINESSES
Berkshire's other non-insurance businesses include the results of
several smaller businesses, as well as income from investments in MidAmerican.
These businesses generated aggregate pre-tax income of $127 million in 2002
versus $89 million in the comparable prior year period. Income from MidAmerican
totaled $69 million in 2002 and $47 million in 2001. In March 2002, Berkshire
acquired additional shares in MidAmerican non-dividend paying convertible
preferred shares, such that Berkshire's fully-diluted interest in MidAmerican
increased to 80.2%. In addition, Berkshire acquired an additional $323 million
of MidAmerican 11% trust preferred securities.
PURCHASE ACCOUNTING ADJUSTMENTS
Purchase accounting adjustments reflect the after-tax effect on net
earnings with respect to the amortization of fair value adjustments to certain
assets and liabilities recorded at various business acquisition dates. Prior to
2002, this amount also included the systematic amortization of goodwill.
Effective January 1, 2002, Berkshire ceased amortizing goodwill of
previously acquired businesses in accordance with the provisions of SFAS No.
142. See Note 11 for additional information related to this new accounting
standard. Purchase accounting adjustments for the first quarter of 2001 included
$140 million of after-tax goodwill amortization, which does not include
Berkshire's share of goodwill amortization of $20 million related to its equity
method investment in MidAmerican Energy.
Other purchase accounting adjustments consist primarily of the
amortization of the excess of market value over historical cost of fixed
maturity investments held by certain businesses at their acquisition dates,
primarily at General Re. Berkshire includes such excess in the cost of the
investments and subsequently amortizes it over the estimated remaining lives of
the investments. The unamortized excess remaining in the cost of fixed maturity
investments approximated $548 million as of March 31, 2002.
REALIZED INVESTMENT GAIN/LOSS
Realized investment gain/loss has been a recurring element in
Berkshire's net earnings for many years. Such amounts -- recorded (1) when
investments are sold; (2) other-than-temporarily impaired; and (3) in certain
situations, as provided under GAAP, when investments are marked-to-market with a
corresponding gain or loss included in earnings -- may fluctuate significantly
from period to period, resulting in a meaningful effect on reported net
earnings. The Consolidated Statements of Earnings include after-tax realized
investment gains of $98 million and $144 million for the first quarter of 2002
and 2001, respectively.
FINANCIAL CONDITION
Berkshire's balance sheet continues to reflect significant liquidity and
a strong capital base. Consolidated shareholders' equity at March 31, 2002
totaled $60.5 billion. Consolidated cash and invested assets, excluding assets
of finance and financial products businesses totaled approximately $76.5 billion
at March 31, 2002 and $72.5 billion at December 31, 2001. During the first
quarter of 2002, Berkshire deployed about $1.1 billion in internally generated
cash for business acquisitions, including $725 million to purchase additional
securities of MidAmerican Energy.
18
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FINANCIAL CONDITION (CONTINUED)
Berkshire's consolidated borrowings under investment agreements and
other debt, excluding borrowings of finance businesses, totaled $3,724 million
at March 31, 2002 and $3,485 million at December 31, 2001. The increase in
borrowings during the first quarter of 2002 relates primarily to pre-acquisition
debt of Albecca Inc., which was acquired in February 2002. Also, short-term
borrowings of Shaw increased during the first quarter of 2002 to fund capital
expenditures.
During the second quarter of 2001, Berkshire filed a shelf registration
to issue up to $700 million in new debt securities at a future date. The
intended purpose of the future issuance of debt is to fund the repayment of
currently outstanding borrowings of certain Berkshire subsidiaries. The timing
and amount of the debt to be issued under the shelf registration has not yet
been determined.
Berkshire is contingently liable for the borrowings of Berkadia LLC
through a primary guaranty of 90% of its debt and a secondary guaranty of the
remaining 10% of Berkadia's borrowings through Fleet Bank. At March 31, 2002,
Berkadia's unpaid loan balance was $3.9 billion, of which $700 million was
prepaid in April 2002.
Assets of the finance and financial products businesses totaled $37.9
billion at March 31, 2002 and $41.6 billion at December 31, 2001. The overall
decline reflects a decline in assets of GRS, which commenced running-off its
operations earlier in 2002, lower investments at BH Finance LLC and $1.0 billion
in repayments of Berkadia's loan to FINOVA.
Notes payable and other borrowings of Berkshire's finance and financial
products businesses totaled $8.4 billion at March 31, 2002 and $9.0 billion at
December 31, 2001. These balances include Berkadia's outstanding term loan of
$3.9 billion at March 31, 2002 and $4.9 billion at December 31, 2001. Partially
offsetting the decline in Berkadia borrowings during the first quarter of 2002
was an increase in commercial paper borrowings by GRS to fund short-term
liquidity needs.
Berkshire believes that it currently maintains sufficient liquidity to
cover its existing liquidity requirements and provide for contingent liquidity
needs.
CRITICAL ACCOUNTING POLICIES
In applying certain accounting policies, Berkshire is required to make
estimates and judgments regarding transactions that have occurred and ultimately
will be settled several years in the future. Amounts recognized in the financial
statements from such estimates are necessarily based on assumptions about
numerous factors involving varying, and possibly significant, degrees of
uncertainty. Accordingly, the amounts currently recorded in the financial
statements may prove, with the benefit of hindsight, to be inaccurate.
Berkshire accrues liabilities for unpaid property and casualty insurance
and reinsurance losses based upon estimates of the ultimate amounts payable
under the contracts related to losses occurring on or before the balance sheet
date. As of any balance sheet date, all claims have not yet been reported and
some claims may not be reported for many years. As a result, the liability for
unpaid losses includes significant estimates for incurred-but-not-reported
claims. Additionally, reported claims are in various stages of the settlement
process. Each claim is settled individually based upon its merits and certain
liability or workers' compensation claims may take years to settle, especially
if legal action is involved.
Berkshire uses a variety of techniques to establish the liabilities for
unpaid claims recorded at the balance sheet date. While techniques may vary, all
employ significant judgments and assumptions. Techniques may involve detailed
statistical analysis of past claim reporting, settlement activity, claim
frequency and severity data when sufficient information exists to lend
statistical credibility to the analysis. The analysis may be based upon internal
loss experience, the experience of clients or industry experience. Techniques
may vary depending on the type of claim being estimated. More judgmental
techniques are used in lines when statistical data is insufficient or
unavailable. Liabilities may also reflect implicit or explicit assumptions
regarding the potential effects of future economic and social inflation,
judicial decisions, law changes, and recent trends in such factors.
Receivables recorded with respect to insurance losses ceded to other
reinsurers under reinsurance contracts are similarly subject to estimation
error. In addition to the factors cited above, estimates of reinsurance
recoveries may prove uncollectible if the reinsurer is unable to perform under
the contract. Reinsurance contracts do not relieve the ceding company of its
obligations to indemnify its own policyholders.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
CRITICAL ACCOUNTING POLICIES (CONTINUED)
Berkshire's Consolidated Balance Sheet includes estimated liabilities
for unpaid losses from property and casualty insurance and reinsurance contracts
of $41.3 billion and reinsurance receivables of $2.8 billion at March 31, 2002.
Due to the inherent uncertainties in the process of establishing these amounts,
the actual ultimate claims amounts will likely differ from the currently
recorded amounts. A small percentage change in estimates of this magnitude will
result in a material effect on reported earnings. For instance, a 5% change in
the March 31, 2002 net estimate would produce a $1.9 billion charge to pre-tax
earnings. Future effects from changes in these estimates will be recorded as a
component of losses incurred in the period of the change.
Berkshire records deferred charges as assets on its balance sheet with
respect to liabilities assumed under retroactive reinsurance contracts. At the
inception of these contracts the deferred charges represent the difference
between the consideration received and the estimated ultimate liability for
unpaid losses. The deferred charges are amortized as a component of losses
incurred using the interest method over an estimate of the ultimate claim
payment period. The deferred charge balance may be adjusted periodically to
reflect new projections of the amount and timing of loss payments. Adjustments
to these assumptions are applied retrospectively from the inception of the
contract. Unamortized deferred charges totaled $3,455 million at March 31, 2002.
Significant changes in either the timing or ultimate amount of loss payments may
have a significant effect on unamortized deferred charges and the amount of
periodic amortization.
Berkshire's financial position reflects large amounts of invested
assets, including assets of its finance and financial products businesses. A
substantial portion of these assets are carried at fair values based upon
current market quotations and, when not available, based upon fair value pricing
models. Berkshire's finance businesses maintain significant balances of finance
receivables, which are carried at amortized cost. Considerable judgment is
required in determining the assumptions used in certain pricing models, which
may address interest rates, loan prepayment speeds, and creditworthiness of the
issuer.
Berkshire's Consolidated Balance Sheet as of March 31, 2002 includes
goodwill of acquired businesses of approximately $22 billion. These amounts have
been recorded as a result of Berkshire's numerous prior business acquisitions
accounted for under the purchase method. Prior to 2002, goodwill from each
acquisition was generally amortized as a charge to earnings over periods not
exceeding 40 years. Under SFAS No. 142, which was adopted by Berkshire as of
January 1, 2002, periodic amortization ceased.
A significant amount of judgment is required in performing goodwill
impairment tests. Such tests include periodically determining or reviewing the
estimated fair value of Berkshire's reporting units. Under SFAS No. 142, fair
value refers to the amount for which the entire reporting unit may be bought or
sold. There are several methods of estimating reporting unit values, including
market quotations, asset and liability fair values and other valuation
techniques, such as discounted cash flows and multiples of earnings or revenues.
If the carrying amount of a reporting unit, including goodwill, exceeds the
estimated fair value, then individual assets, including identifiable intangible
assets and liabilities of the reporting unit are estimated at fair value. The
excess of the estimated fair value of the reporting unit over the estimated fair
value of net assets would establish the implied value of goodwill. The excess of
the recorded amount of goodwill over the implied value is charged-off as an
impairment loss.
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, 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, 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, economic and market factors and the industries in which
Berkshire does business, among other things. These statements are not guaranties
of future performance and Berkshire has no specific intention to update these
statements.
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FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 3/31/02
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
FORWARD-LOOKING STATEMENTS (CONTINUED)
Actual events and results may differ materially from those expressed or
forecasted in forward-looking statements due to a number of factors. The
principal important risk factors that could cause Berkshire's 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
Berkshire's significant equity investees, the occurrence of one or more
catastrophic events, such as an earthquake or hurricane that causes losses
insured by Berkshire's insurance subsidiaries, changes in insurance laws or
regulations, 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 Berkshire and its affiliates do business, especially those affecting the
property and casualty insurance industry.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K
None
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BERKSHIRE HATHAWAY INC.
-------------------------------
(Registrant)
Date May 14, 2002 /s/ Marc D. Hamburg
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(Signature)
Marc D. Hamburg, Vice President
and Principal Financial Officer
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