<PAGE> 1
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 September 30, 1997
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 1-10125
BERKSHIRE HATHAWAY INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 04 2254452
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification number)
incorporation or organization)
</TABLE>
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.
X
----- -----
YES NO
Number of shares of common stock outstanding as of October 31, 1997:
Class A -- 1,198,481
Class B -- 1,069,274
<PAGE> 2
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets-- 3
September 30, 1997 and December 31, 1996
Consolidated Statements of Earnings-- 4
Third Quarter and First Nine Months 1997 and 1996
Condensed Consolidated Statements of Cash Flows-- 5
First Nine Months 1997 and 1996
Notes to Interim Consolidated Financial Statements 6-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 11-14
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 15
</TABLE>
2
<PAGE> 3
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents...................................................... $ 520.9 $ 1,339.8
Investments:
Securities with fixed maturities............................................ 9,320.8 6,446.9
Equity securities........................................................... 32,175.5 27,750.6
Receivables.................................................................... 1,696.5 1,523.2
Inventories.................................................................... 666.8 619.6
Assets of finance businesses................................................... 1,153.9 968.8
Property, plant and equipment.................................................. 1,189.6 1,034.2
Goodwill of acquired businesses................................................ 3,087.2 3,110.3
Other assets................................................................... 802.2 616.0
--------- ---------
$50,613.4 $43,409.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses............................................ $ 6,991.6 $ 6,274.4
Unearned premiums.............................................................. 1,670.9 1,183.5
Accounts payable, accruals and other liabilities............................... 1,847.9 2,556.8
Income taxes, principally deferred............................................. 8,851.9 6,837.6
Borrowings under investment agreements and other debt.......................... 1,832.2 1,944.4
Liabilities of finance businesses.............................................. 1,010.5 851.3
--------- ---------
22,205.0 19,648.0
--------- ---------
Minority shareholders' interests............................................... 401.4 335.1
--------- ---------
Shareholders' equity:
Common Stock: *
Class A Common Stock, $5 par value, 1,367,038 and 1,376,188
shares issued; 1,198,835 and 1,206,120 shares outstanding ............ 6.8 6.9
Class B Common Stock, $0.1667 par value, 1,058,650 and 783,755
shares issued and outstanding......................................... 0.2 0.1
Capital in excess of par value.............................................. 2,347.0 2,274.1
Unrealized appreciation of investments...................................... 15,722.6 12,143.9
Retained earnings........................................................... 9,961.5 9,032.7
--------- ---------
28,038.1 23,457.7
Less: Cost of 168,203 and 170,068 Class A common shares in treasury 31.1 31.4
--------- ---------
Total shareholders' equity.............................................. 28,007.0 23,426.3
--------- ---------
$50,613.4 $43,409.4
========= =========
</TABLE>
* 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 1,234,123 shares outstanding at September 30,
1997 and 1,232,245 at December 31, 1996. Net book value per equivalent Class
A Common share is $22,694 at September 30, 1997.
See accompanying Notes to Interim Consolidated Financial Statements
3
<PAGE> 4
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Third Quarter First Nine Months
--------------------- ----------------------
1997 1996 1997 1996
--------- --------- ---------- --------
<S> <C> <C> <C> <C>
REVENUES:
Insurance premiums earned.............................. $1,088.8 $ 971.2 $3,331.9 $2,904.8
Sales and service revenues............................. 855.2 721.8 2,493.2 2,137.0
Interest and dividend income........................... 237.5 220.3 686.2 582.5
Income from finance businesses......................... 8.7 5.9 23.7 16.9
Realized investment gain............................... 182.5 96.1 250.7 2,428.6
-------- -------- -------- --------
2,372.7 2,015.3 6,785.7 8,069.8
-------- -------- -------- --------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses.......... 822.6 769.1 2,539.7 2,291.1
Insurance underwriting expenses........................ 197.2 172.3 559.4 506.0
Cost of products and services sold..................... 487.5 469.4 1,396.0 1,349.9
Selling, general and administrative expenses........... 276.1 196.9 809.1 611.5
Goodwill amortization.................................. 21.0 15.1 62.4 45.7
Interest expense 28.6 26.5 84.0 79.7
-------- -------- -------- --------
1,833.0 1,649.3 5,450.6 4,883.9
-------- -------- -------- --------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST........ 539.7 366.0 1,335.1 3,185.9
Income taxes........................................... 169.3 98.2 395.0 1,045.4
Minority interest...................................... 3.8 3.8 11.3 16.6
-------- -------- -------- --------
NET EARNINGS.............................................. $ 366.6 $ 264.0 $ 928.8 $2,123.9
======== ======= ======== ========
Average shares outstanding *........................... 1,234,121 1,210,762 1,232,878 1,202,704
NET EARNINGS PER SHARE *.................................. $297 $218 $753 $1,766
==== ==== ==== ======
</TABLE>
* Class B Common Stock has economic rights equal to one-thirtieth (1/30) of the
economic rights of Class A Common Stock. 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
4
<PAGE> 5
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
First Nine Months
-----------------------
1997 1996
---- ----
<S> <C> <C>
Net cash flows from operating activities.................................... $1,854.7 $ 842.4
-------- ---------
Cash flows from investing activities:
Purchases of investments............................................. (6,784.2) (3,104.8)
Proceeds on sales and maturities of investments...................... 5,383.9 2,132.8
Loans and investments originated in finance businesses............... (352.0) (425.6)
Principal collections on loans and investments originated
in finance businesses............................................. 214.2 287.2
Acquisitions of businesses........................................... (774.9) (2,024.9)
Other................................................................ (147.5) (25.2)
-------- ---------
Net cash flows from investing activities.................................... (2,460.5) (3,160.5)
-------- ---------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses....................... 76.5 234.2
Proceeds from other borrowings....................................... 778.3 881.5
Repayments of borrowings of finance businesses....................... (155.9) (368.6)
Repayments of other borrowings....................................... (905.8) (916.7)
Net proceeds from issuance of Class B Common Stock................... -- 565.0
Other................................................................ (1.1) (2.9)
-------- ---------
Net cash flows from financing activities.................................... (208.0) 392.5
-------- ---------
Decrease in cash and cash equivalents....................................... (813.8) (1,925.6)
Cash and cash equivalents at beginning of year*............................. 1,350.3 2,744.5
-------- ---------
Cash and cash equivalents at end of first nine months*...................... $ 536.5 $ 818.9
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes......................................................... $337.6 $745.6
Interest............................................................. 98.2 103.0
Non-cash investing activities:
Liabilities assumed in connection with acquisitions of businesses........ 25.4 3,920.3
Common shares issued in connection with acquisitions of businesses....... 73.0 --
* Cash and cash equivalents are comprised of the following:
Beginning of year --
Finance businesses................................................... $ 10.5 $ 40.7
Other................................................................ 1,339.8 2,703.8
-------- ---------
$1,350.3 $2,744.5
======== ========
End of first nine months --
Finance businesses................................................... $ 15.6 $ 8.2
Other................................................................ 520.9 810.7
-------- ---------
$ 536.5 $ 818.9
========= =========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements
5
<PAGE> 6
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL
Reference is made to Berkshire's most recently issued Annual Report that
included information necessary or useful to understanding of 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.
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 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 with the corresponding gain or loss
included in earnings. Variations in amount and timing of realized investment
gains/losses can cause significant variations in periodic net earnings. In March
1996, The Walt Disney Company ("Disney") completed its acquisition of Capital
Cities/ABC, Inc. Subsidiaries of Berkshire received aggregate consideration of
$2.5 billion, which included cash of $1.2 billion and common shares of Disney
with a value of $1.3 billion. The Consolidated Statement of Earnings for the
first nine months of 1996 includes a pre-tax realized investment gain of $2.2
billion from the Disney transaction.
NOTE 2. BUSINESS ACQUISITIONS
On December 23, 1996, FlightSafety International, Inc. ("FlightSafety")
became a wholly-owned subsidiary as a result of the merger of FlightSafety with
and into a subsidiary of Berkshire. FlightSafety provides high technology
training to operators of aircraft and ships throughout the world.
The merger was consummated pursuant to an Agreement and Plan of Merger
dated October 14, 1996 (the "FlightSafety Agreement") between Berkshire and
FlightSafety. Pursuant to the FlightSafety Agreement, aggregate consideration of
approximately $1.5 billion was paid to FlightSafety shareholders consisting of
$769.0 million in cash, 17,728 shares of Berkshire's Class A common stock and
112,655 shares of Berkshire's Class B common stock.
The results of operations for FlightSafety are included in Berkshire's
consolidated results of operations beginning on the effective date of the merger
- -- December 23, 1996. The following table sets forth certain consolidated
statement of earnings data for the first nine months of 1996, as if the
FlightSafety merger had been consummated on the same terms at the beginning of
1996. Dollar amounts are in millions, except per share amounts.
<TABLE>
<CAPTION>
1996
---------
<S> <C>
Insurance premiums earned............................. $ 2,904.8
Sales and service revenues............................ 2,403.9
Total revenues........................................ 8,308.5
Net income............................................ 2,146.4
Earnings per equivalent Class A common share.......... 1,753
</TABLE>
On January 2, 1996, GEICO Corporation ("GEICO") became a wholly-owned
subsidiary as a result of the merger of an indirect wholly-owned subsidiary of
Berkshire with and into GEICO. GEICO, through its subsidiaries, is a multiple
line property and casualty insurer, the principal business of which is
underwriting private passenger automobile insurance.
6
<PAGE> 7
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. BUSINESS ACQUISITIONS (CONTINUED)
The merger was consummated pursuant to an Agreement and Plan of Merger (the
"GEICO Agreement") dated August 25, 1995. Pursuant to the GEICO Agreement, each
issued and outstanding common share of GEICO, except shares held by Berkshire
subsidiaries and GEICO, was converted into the right to receive $70 per share,
or an aggregate amount of $2.3 billion. The amount of the merger consideration
was based upon 33,284,733 outstanding shares held by the public on the merger
date. Since January 2, 1996, the accounts of GEICO have been included in
Berkshire's consolidated financial statements.
As of the merger date, subsidiaries of Berkshire owned 34,250,000 common
shares of GEICO, which were acquired in years prior to 1981 at an aggregate cost
of $45.7 million. Up to the merger date, neither Berkshire nor its subsidiaries
had acquired any shares of GEICO common stock since 1980. However, Berkshire's
ownership percentage, due to intervening stock repurchases by GEICO, gradually
increased from about 33% in 1980 to almost 51% immediately prior to the merger
date.
Each of the mergers described above was accounted for by the purchase
method. The excess of the purchase cost over the fair value of net assets
acquired is recorded as goodwill of acquired businesses and is being amortized
over forty years.
NOTE 3. RECAPITALIZATION AND COMMON STOCK
On May 6, 1996, Berkshire shareholders approved a recapitalization plan
which created a new class of common stock, designated as Class B Common Stock.
In connection therewith, Berkshire's existing common stock was redesignated as
Class A Common Stock. 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 possesses one-thirtieth (1/30) of the economic rights and
one-two-hundredth (1/200) of the voting rights of Class A Common Stock. Class B
Common Stock is not convertible into Class A Common Stock. On May 8, 1996,
Berkshire completed an initial public offering of 517,500 shares of Class B
Common Stock. Berkshire received net proceeds from the offering of $565.0
million.
The following table summarizes Berkshire's common stock activity during the
first nine months of 1997:
<TABLE>
<CAPTION>
Shares of Shares of
Class A Common Stock Class B Common Stock
---------------------------------------------- ----------------------
Issued Held in Treasury Outstanding Issued and Outstanding
------------ ---------------- ----------- ----------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 .................. 1,376,188 (170,068) 1,206,120 783,755
Conversions of Class A Common Stock
to Class B Common Stock and other ......... (9,150) -- (9,150) 274,700
Common stock issued in connection with
acquisition of business ................... -- 1,865 1,865 195
--------- -------- --------- ---------
Balance at September 30, 1997 ................. 1,367,038 (168,203) 1,198,835 1,058,650
========= ======== ========= =========
</TABLE>
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 businesses -- See Note 7)
are shown in the tabulation below (in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- -----------
<S> <C> <C>
Amortized cost.......................................... $8,478.5 $6,142.3
Gross unrealized gains.................................. 845.5 318.4
Gross unrealized losses................................. (3.2) (13.8)
-------- --------
Estimated fair value.................................... $9,320.8 $6,446.9
======== ========
</TABLE>
7
<PAGE> 8
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
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). Individual investments whose fair values exceed
ten percent of consolidated shareholders' equity at September 30, 1997 and
December 31, 1996 are listed separately.
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Total cost........................................................... $ 8,515.2 $ 9,152.0
Gross unrealized gains............................................... 23,684.4 18,621.0
Gross unrealized losses.............................................. (24.1) (22.4)
--------- ---------
Total fair value..................................................... $32,175.5 $27,750.6
========= =========
Fair value:
American Express Company........................................... $ 4,049.3 $ 2,794.3
The Coca-Cola Company.............................................. 12,200.0 10,525.0
The Gillette Company............................................... 4,143.0 3,732.0
All others......................................................... 11,783.2 10,699.3
---------- ---------
Total.............................................................. $32,175.5 $27,750.6
========= =========
</TABLE>
NOTE 6. DEFERRED INCOME TAX LIABILITY
The tax effects of significant items comprising the Company's net deferred
tax liability as of September 30, 1997 and December 31, 1996 are as follows (in
millions):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Deferred tax liabilities:
Relating to unrealized appreciation of investments..................... $8,582.8 $6,620.6
Other ................................................................. 830.1 860.9
-------- --------
9,412.9 7,481.5
Deferred tax assets........................................................ (655.2) (602.8)
-------- --------
Net deferred tax liability............................................. $8,757.7 $6,878.7
========= ========
</TABLE>
NOTE 7. FINANCE BUSINESSES
Assets and liabilities of Berkshire's finance businesses are summarized
below (in millions):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents.............................................. $ 15.6 $ 10.5
Installment loans and other receivables................................ 221.9 215.9
Fixed maturity investments............................................. 916.4 742.4
---------- ---------
$1,153.9 $ 968.8
======== =========
Liabilities
Borrowings under investment agreements and other debt.................. $ 301.9 $ 381.3
Annuity reserves and policyholder liabilities.......................... 640.6 434.8
Other ................................................................. 68.0 35.2
--------- ---------
$1,010.5 $ 851.3
======== =========
</TABLE>
8
<PAGE> 9
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. FINANCE BUSINESSES (CONTINUED)
The preceding summarized financial data includes the commercial and consumer
finance activities conducted by the Scott Fetzer Financial Group and its
subsidiaries. Assets and liabilities of these businesses are summarized below
(in millions).
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents........................................ $ 11.3 $ 6.4
Installment loans and other receivables *........................ 188.7 233.0
Mortgage-backed securities, at cost ............................. 72.2 145.5
------- ------
$272.2 $384.9
======= ======
Liabilities
Borrowings under investment agreements and other debt............ $212.2 $320.8
Other............................................................ 23.2 29.7
------- ------
$235.4 $350.5
======= ======
</TABLE>
* Includes receivables from affiliated companies of $47.3 million and $85.1
million at September 30, 1997 and December 31, 1996, respectively.
Net income from Scott Fetzer Financial Group businesses for the third
quarter and first nine months of 1997 and 1996 is summarized below (in
millions).
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------ ------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues........................................ $11.8 $14.1 $36.5 $45.3
Costs and expenses.............................. 8.6 12.1 27.5 38.0
----- ----- ----- -----
Income before income taxes...................... 3.2 2.0 9.0 7.3
Income taxes.................................... 1.2 0.7 3.2 2.5
------ ----- ----- -----
Net income...................................... $ 2.0 $ 1.3 $ 5.8 $ 4.8
====== ===== ===== =====
</TABLE>
NOTE 8. UNREALIZED APPRECIATION OF INVESTMENTS
Changes in "Unrealized appreciation of investments", the balance of which is
carried in shareholders' equity, were as follows during the third quarter and
first nine months of 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
Third Quarter First Nine Months
----------------------- ----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Increase (decrease) in unrealized appreciation $ (680.3) $ 1,434.1 $ 5,599.4 $ 2,783.7
(Increase) decrease in deemed applicable
income taxes................................... 236.1 (502.2) (1,964.0) (990.9)
Increase in minority shareholders' interest. (0.1) (18.2) (56.7) (31.7)
--------- --------- --------- ---------
Net increase (decrease)....................... (444.3) 913.7 3,578.7 1,761.1
Balance at beginning of period................... 16,166.9 10,068.1 12,143.9 9,220.7
--------- --------- --------- ---------
Balance at end of third quarter.................. $15,722.6 $10,981.8 $15,722.6 $10,981.8
========= ========= ========= =========
</TABLE>
9
<PAGE> 10
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. SUBSEQUENT EVENT
On October 21, 1997, Berkshire and International Dairy Queen, Inc. ("IDQ")
executed a definitive Merger Agreement pursuant to which Berkshire will acquire
IDQ through the merger of IDQ with and into a wholly-owned subsidiary of
Berkshire. The Merger Agreement provides that, subject to certain limitations
and conditions, the holders of IDQ Class A and Class B common stock may elect to
receive either $27.00 cash or $26.00 of Berkshire Class A or Class B common
stock for each IDQ share. The total merger consideration will be approximately
$585 million. The merger, which is subject to approval by IDQ Class B
shareholders and other customary closing conditions, is expected to be completed
in late 1997.
IDQ develops, licenses and services a system of approximately 5,800 Dairy
Queen stores located throughout the United States, Canada and other foreign
countries, which feature hamburgers, hot dogs, various dairy desserts and
beverages. IDQ also develops, licenses and services other stores and shops
operating under the names of Orange Julius and Karmelkorn, which feature blended
fruit drinks, popcorn and other snacks.
NOTE 10. RECENT ACCOUNTING PRONOUNCEMENTS
During 1997, the Financial Accounting Standards Board issued the following
Statements of Financial Accounting Standards:
(1) No. 128 -- "Earnings per Share", which establishes new standards for
computing and presenting earnings per share.
(2) No. 129 -- "Disclosure of Information about Capital Structure", which
establishes standards for disclosing information about an entity's capital
structure.
(3) No. 130 -- "Reporting Comprehensive Income", which establishes
standards for the reporting and display of comprehensive income and its
components.
(4) No. 131 -- "Disclosures about Segments of an Enterprise and Related
Information", which establishes new standards for reporting information about
operating segments in interim and annual financial statements.
Standards described in (1) and (2) above are effective for periods ending
after December 15, 1997 and will be adopted by Berkshire at the end of 1997.
Standards described in (3) and (4) above are effective for periods beginning
after December 15, 1997 and will be adopted by the Company in 1998. The Company
does not expect that adoption of these Standards will have a material effect on
its financial position, results of operations or on disclosures within the
financial statements.
10
<PAGE> 11
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the third quarter and first nine months of the current and
prior year are summarized in the following table. Amounts are in millions and
each figure is income tax effected.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
---------------- --------------------
1997 1996 1997 1996
------ ------ ------ --------
<S> <C> <C> <C> <C>
Insurance, except realized investment gain.......... $201.5 $165.4 $619.8 $ 454.5
Manufacturing, merchandising and services........... 58.1 40.0 178.8 123.2
Unallocated income/expense, net..................... 5.4 8.9 17.5 22.7
Interest expense *.................................. (16.9) (12.9) (50.0) (45.1)
------ ------ ------ --------
Earnings before realized investment gain........ 248.1 201.4 766.1 555.3
Realized investment gain............................ 118.5 62.6 162.7 1,568.6
------ ------ ------ --------
Net earnings.................................... $366.6 $264.0 $928.8 $2,123.9
====== ====== ====== ========
</TABLE>
* For purposes of the above table, interest expense of finance businesses is
netted against the directly related service activity revenues.
INSURANCE GROUP
The after tax figures shown above for Insurance Group earnings, except
realized investment gain, are aggregated in the following table. Dollar amounts
are in millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
------------------ ---------------------
1997 1996 1997 1996
-------- ------ -------- --------
<S> <C> <C> <C> <C>
Premiums earned from:
Direct insurance............................. $ 967.8 $854.3 $2,785.6 $2,483.7
Reinsurance assumed.......................... 121.0 116.9 546.3 421.1
-------- ------ -------- --------
$1,088.8 $971.2 $3,331.9 $2,904.8
========= ====== ======== ========
Underwriting gain (loss) attributable to:
Direct insurance............................. $ 112.2 $ 65.1 $ 246.7 $ 155.3
Reinsurance assumed.......................... (43.2) (35.3) (13.9) (47.6)
-------- ------ -------- --------
Total underwriting gain.................... 69.0 29.8 232.8 107.7
Net investment income............................ 218.5 191.4 631.7 510.3
Goodwill amortization *.......................... (10.8) (10.5) (32.3) (31.9)
-------- ------ -------- --------
Earnings before income taxes............... 276.7 210.7 832.2 586.1
Income tax expense............................... 73.2 43.4 206.2 126.1
Minority interest................................ 2.0 1.9 6.2 5.5
-------- ------ -------- --------
Net earnings from Insurance,
except realized investment gain........ $ 201.5 $165.4 $ 619.8 $ 454.5
======== ====== ======== ========
</TABLE>
* Principally related to the GEICO merger.
In direct insurance activities, Insurance Group members assume risks of loss
from parties who are directly subject to the risks. In reinsurance activities,
the members assume defined portions of similar or dissimilar risks to which
other insurers or reinsurers have subjected themselves in their own insuring
activities.
In January 1996, GEICO became a wholly-owned subsidiary of Berkshire. (See
Notes to Interim Consolidated Financial Statements for additional information
regarding this acquisition.) GEICO, through its subsidiaries, provides primarily
private passenger automobile coverages to insureds in 48 states and the District
of Columbia. GEICO policies are marketed mainly by direct response methods, in
which customers apply for coverage directly to the company over the telephone or
through the mail. This is a significant element in GEICO's strategy to be a low
cost provider of such coverages. Since 1995, GEICO has substantially reduced the
amounts of homeowners and boat insurance offered and plans to fully exit those
lines of business by 1999.
11
<PAGE> 12
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INSURANCE GROUP (Continued)
Insurance premiums earned during the third quarter by GEICO were $886.6
million in 1997 and $780.5 million in 1996. For the first nine months, premiums
earned by GEICO were approximately $2.6 billion in 1997 and $2.3 billion in
1996. Premiums earned during the first nine months of 1997 from voluntary auto
business exceeded 1996 by 17.6%, reflecting primarily increased numbers of
policies-in-force. In-force policy growth over the last twelve months was 12.3%
in GEICO's preferred-risk auto business and 39.3% in the standard and
non-standard auto lines as efforts have been expanded to offer rate quotes to
potential customers who do not meet GEICO's preferred-risk underwriting
guidelines. Voluntary auto new business sales during the first nine months of
1997 increased 54.7% over 1996. The growth in voluntary auto business was
partially offset by declines in premiums generated from non-auto and involuntary
residual auto insurance coverages. Increases in premium volume are anticipated
for the remainder of 1997 and into 1998 with respect to GEICO's private
passenger automobile insurance businesses.
The net underwriting gains produced by GEICO for the third quarter of 1997
and 1996 were $101.7 million and $54.2 million, respectively. For the first nine
months, underwriting gains totaled $219.8 million in 1997 and $121.7 million in
1996. GEICO's first nine months underwriting results included charges for
catastrophe losses of approximately $8.7 million in 1997 and $48.0 million in
1996. Catastrophe losses of about $33.0 million in 1996 resulted from homeowner
losses primarily associated with the east coast blizzard in January 1996 and
Hurricane Fran in September 1996. Third quarter and first nine months
underwriting results in 1997 continue to benefit from mild weather conditions
and stable claim severities for liability coverages. The relatively lower claim
costs were partially offset by higher advertising and administrative costs
associated with generating the aforementioned increases in voluntary private
passenger auto business.
Third quarter premiums earned from the various other direct insurance
businesses were $81.2 million and $73.8 million in 1997 and 1996, respectively.
For the first nine months, premiums earned totaled $228.9 million and $205.6
million in 1997 and 1996, respectively. Collectively, the various other direct
insurance businesses generated third quarter underwriting gains of $10.5 million
in 1997 and $10.9 million in 1996. For the first nine months of 1997 and 1996,
the non-GEICO direct insurance businesses produced net underwriting gains of
$26.9 million and $33.6 million, respectively.
Reinsurance premiums earned during the first nine months of 1997 and 1996
from catastrophe-excess-of-loss contracts were $112.7 million and $145.4
million, respectively. Catastrophe premiums earned during the third quarter 1997
were basically unchanged from the third quarter of 1996. Price competition for
catastrophe business remains intense. The result is fewer acceptably priced
offerings to the Insurance Group.
Catastrophe reinsurance policies produced net underwriting gains of $107.5
million during the first nine months of 1997 and $80.6 million during the
corresponding prior year period. This business contributed minor amounts of net
underwriting gains during the third quarter of 1997 and 1996. The catastrophe
reinsurance business in 1997 periods benefitted from lower amounts of
catastrophe losses and underwriting expenses when compared to corresponding 1996
periods. During the fourth quarter of 1997, the Insurance Group is expected to
earn a considerable amount of catastrophe reinsurance premiums and, absent any
catastrophic loss events, a sizable underwriting gain will result. The
underwriting gains achieved in recent years by the catastrophe reinsurance
business should not be viewed as predictive of future profitability. The timing
and magnitude of catastrophic loss events can cause extreme volatility in
periodic underwriting results. Berkshire management is willing to accept such
volatility provided that the prospect of long term profitability appears
favorable.
Premiums earned during the first nine months of 1997 include approximately
$140.1 million related to a single retroactive reinsurance contract that became
effective in the second quarter of 1997. A retroactive reinsurance policy
indemnifies the ceding party with respect to insurance risks related to certain
past loss events. There were no premiums earned from retroactive reinsurance
policies in 1996 periods.
12
<PAGE> 13
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INSURANCE GROUP (Continued)
Reinsurance underwriting results for 1997 and 1996 periods include net
charges related to the amortization of deferred charges re reinsurance assumed
established with respect to retroactive reinsurance policies and the accretion
of discounted structured settlement liabilities. These recurring charges reflect
the recognition of time-value-of-money concepts. Accretion and amortization
charges for the third quarter of 1997 and 1996 were $18.0 million and $17.8
million, respectively. For the first nine months, such charges totaled $57.7
million in 1997 and $54.5 million in 1996.
During the first nine months of 1997 and 1996, reinsurance premiums earned
from other primarily non-catastrophe excess-of- loss coverages totaled $293.5
million in 1997 and $275.7 million in 1996. For the third quarter, premiums
earned from such contracts were $108.7 million in 1997 and $98.5 million in
1996. In each period, most of the premiums earned were concentrated in a few
sizable contracts. These policies generated net underwriting losses totaling
$63.7 million for the first nine months of 1997 and $73.7 million for the
corresponding 1996 period. For the third quarter , underwriting losses from such
other reinsurance activities were $35.6 million in 1997 and $25.4 million in
1996. Time-value-of-money concepts are important considerations in establishing
premiums for most non-catastrophe reinsurance coverages because claim losses are
expected to be paid over extended time periods. Underwriting losses often occur
as the provisions for estimated claim losses are established for financial
reporting purposes without discounting for time. This business is accepted
because of the large amounts of policyholder funds ("float") produced.
Berkshire's Consolidated Balance Sheet as of September 30, 1997 includes
estimated liabilities for unpaid losses and loss adjustment expenses from
insurance and reinsurance activities aggregating nearly $7.0 billion. Over time,
additional information will become available with respect to the ultimate claim
amounts and the liabilities will be continually re-estimated . The estimation
error will be periodically recognized as a charge or credit to losses incurred
and, therefore, to net underwriting results in the period made. Subsequent
development of a liability of that magnitude could have a significant effect on
periodic underwriting results.
Net investment income for the third quarter of 1997 exceeded amounts earned
during the third quarter of 1996 by 14.2%. For the first nine months of 1997,
net investment income exceeded amounts earned during the first nine months of
1996 by 23.8%. The Insurance Group continues to generate significant levels of
investment income, reflecting large levels of invested assets. Invested assets
derive from shareholder capital and reinvested earnings, as well as substantial
levels of invested policyholder funds ("float") generated from insurance and
reinsurance underwriting activities. As of September 30, 1997, "float" was about
$7.6 billion, an increase of about $1.2 billion since January 1996. Due to the
anticipated termination of several large reinsurance contracts and the
recognition of underwriting gain on others, "float" is expected to decrease in
the fourth quarter. The increase in net investment income for the first nine
months of 1997 over 1996 also reflects the comparative increase in dividends
earned from the Insurance Group's investment in US Airways Convertible Preferred
Shares. For the first nine months of 1997 and 1996, Insurance Group members
received dividends from this investment aggregating $70.4 million and $25.0
million, respectively.
MANUFACTURING, MERCHANDISING AND SERVICES
Results of operations of Berkshire's diverse non-insurance businesses are
aggregated in the following table. Dollar amounts are in millions.
<TABLE>
<CAPTION>
Third Quarter First Nine Months
-------------------------------- -----------------------------------
1997 1996 1997 1996
--------------- -------------- ---------------- ----------------
Amount % Amount % Amount % Amount %
------- ----- ------ ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $871.9 100.0 $728.3 100.0 $2,541.6 100.0 $2,157.0 100.0
Costs and expenses.............. 771.3 88.5 660.7 90.7 2,234.9 87.9 1,947.6 90.3
------ ----- ------ ----- -------- ----- -------- -----
Earnings before income taxes.... 100.6 11.5 67.6 9.3 306.7 12.1 209.4 9.7
Applicable income taxes......... 41.1 4.7 26.5 3.6 124.0 4.9 83.1 3.9
Applicable minority interest.... 1.4 0.1 1.1 0.2 3.9 0.2 3.1 0.1
------ ----- ------ ----- -------- ----- -------- -----
Net earnings.................... $ 58.1 6.7 $ 40.0 5.5 $ 178.8 7.0 $ 123.2 5.7
====== ===== ====== ===== ======== ===== ======== =====
</TABLE>
13
<PAGE> 14
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
MANUFACTURING, MERCHANDISING AND SERVICES (Continued)
Revenues from these several and diverse business activities during 1997's
third quarter and first nine months were greater by $143.6 million (19.7%) and
$384.6 million (17.8%) than revenues recorded during the corresponding 1996
periods. The increases are primarily due to the acquisition at the end of 1996
of FlightSafety International, Inc. ("FlightSafety"). FlightSafety provides high
technology training to operators of aircraft and ships throughout the world. See
Notes to Interim Consolidated Financial Statements for additional information
regarding this acquisition. In addition, third quarter 1997 revenues benefitted
from the acquisition on July 2, 1997 of Star Furniture Company, the dominant
retailer of home furnishings in Houston, Texas.
Net earnings from this group of businesses were greater by $18.1 million
(45.3%) during 1997's third quarter and $55.6 million (45.1%) during 1997's
first nine months than net earnings reported in the corresponding prior year
periods. The inclusion of FlightSafety's results during 1997 is primarily
responsible for the improved results.
REALIZED INVESTMENT GAIN/LOSS
Realized investment gain/loss has been a recurring element in Berkshire's
net earnings for many years. The amount -- recorded when securities are sold,
other than temporarily impaired or in certain situations, as required by GAAP,
when investments are marked-to-market with a corresponding gain or loss included
in earnings -- may fluctuate significantly from period to period, with a
meaningful effect upon Berkshire's consolidated net earnings. However, the
amount of realized investment gain or loss for any given period has no
predictive value, and variations in amount from period to period have no
practical analytical value, particularly in view of the net unrealized price
appreciation now existing in Berkshire's consolidated investment portfolio.
The Consolidated Statement of Earnings for the first nine months of 1996
reflects a pre-tax realized investment gain of $2.4 billion ($1.6 billion after
tax). Most of this gain resulted from The Walt Disney Company's ("Disney")
acquisition of Capital Cities/ABC, Inc. ("Capital Cities"). Prior to the
acquisition, subsidiaries of Berkshire owned common stock of Capital Cities
which had been acquired in 1986 for an aggregate cost of $345.0 million. In
exchange for the Capital Cities common stock, Berkshire subsidiaries received
cash and Disney common stock having an aggregate value of $2.5 billion.
While the realized gain had a material impact on Berkshire's 1996 reported
earnings, it had a very minor impact on Berkshire's shareholders' equity.
Berkshire records its investments at market value and the appreciation in the
Capital Cities stock had been previously reflected as a component of
shareholders' equity in periods prior to 1996's first quarter.
During the fourth quarter 1997, the recently announced merger of Salomon
Inc ("Salomon") with a subsidiary of Traveler's Group Inc. ("Traveler's") is
expected to be completed. On the merger date, Berkshire subsidiaries will
receive shares of common and preferred stock of Traveler's in exchange for the
common and preferred shares of Salomon currently held. If the merger is
completed as scheduled, and based upon the recent market price for Traveler's
common stock, Berkshire will recognize in its fourth quarter Consolidated
Statement of Earnings a pre-tax gain of approximately $625 million. However,
most of this gain has already been reflected in Berkshire's consolidated
shareholders' equity at September 30, 1997 as a component of "Unrealized
appreciation of investments".
FINANCIAL CONDITION
Berkshire's balance sheet continues to reflect significant liquidity and
above average capital strength. Shareholders' equity at September 30, 1997, was
$28.0 billion or $22,694 per equivalent share of Class A Common Stock.
14
<PAGE> 15
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 9/30/97
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 -- Financial Data Schedule
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 November 13, 1997 /s/ Marc D. Hamburg
------------------- ------------------------------
(Signature)
Marc D. Hamburg, Vice President
and Principal Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED IN FORM 10-Q AS
FILED HEREWITH, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS AND RELATED NOTES.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 521
<SECURITIES> 41,496
<RECEIVABLES> 1,697
<ALLOWANCES> 0
<INVENTORY> 667
<CURRENT-ASSETS> 0
<PP&E> 1,190
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,613
<CURRENT-LIABILITIES> 0
<BONDS> 1,832
0
0
<COMMON> 7
<OTHER-SE> 28,000
<TOTAL-LIABILITY-AND-EQUITY> 50,613
<SALES> 2,493
<TOTAL-REVENUES> 5,849
<CGS> 1,396
<TOTAL-COSTS> 4,495
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 84
<INCOME-PRETAX> 1,335
<INCOME-TAX> 395
<INCOME-CONTINUING> 929
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 929
<EPS-PRIMARY> 753
<EPS-DILUTED> 753
</TABLE>
