<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 June 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 August 1, 1997:
<TABLE>
<S> <C>
Class A -- 1,199,938
Class B -- 1,025,446
</TABLE>
<PAGE> 2
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets-- 2
June 30, 1997 and December 31, 1996
Consolidated Statements of Earnings -- 3
Second Quarter and First Half, 1997 and 1996
Condensed Consolidated Statements of Cash Flows -- 4
First Half, 1997 and 1996
Notes to Interim Consolidated Financial Statements 5-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9-12
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 12-13
</TABLE>
1
<PAGE> 3
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ...................................... $ 1,050.9 $ 1,339.8
Investments:
Securities with fixed maturities ............................. 7,343.0 6,446.9
Equity securities ............................................ 33,771.2 27,750.6
Receivables .................................................... 1,716.2 1,523.2
Inventories .................................................... 638.1 619.6
Assets of finance businesses ................................... 1,075.6 968.8
Property, plant and equipment .................................. 1,066.3 1,034.2
Goodwill of acquired businesses ................................ 3,072.4 3,110.3
Other assets ................................................... 820.1 616.0
--------- ---------
$50,553.8 $43,409.4
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Losses and loss adjustment expenses ............................ $ 6,840.7 $ 6,274.4
Unearned premiums .............................................. 1,539.2 1,183.5
Accounts payable, accruals and other liabilities ............... 1,880.7 2,556.8
Income taxes, principally deferred ............................. 9,063.3 6,837.6
Borrowings under investment agreements and other debt .......... 1,883.5 1,944.4
Liabilities of finance businesses .............................. 937.0 851.3
--------- ---------
22,144.4 19,648.0
--------- ---------
Minority shareholders' interests ............................... 397.8 335.1
--------- ---------
Shareholders' equity:
Common Stock: *
Class A Common Stock, $5 par value, 1,369,474 and 1,376,188
shares issued; 1,199,406 and 1,206,120 shares outstanding 6.8 6.9
Class B Common Stock, $0.1667 par value, 985,253 and 783,755
shares issued and outstanding ............................ 0.2 0.1
Capital in excess of par value ............................... 2,274.2 2,274.1
Unrealized appreciation of investments ....................... 16,166.9 12,143.9
Retained earnings ............................................ 9,594.9 9,032.7
--------- ---------
28,043.0 23,457.7
Less: Cost of 170,068 Class A common shares in treasury ...... 31.4 31.4
--------- ---------
Total shareholders' equity ........................... 28,011.6 23,426.3
--------- ---------
$50,553.8 $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 1,232,248 shares outstanding at June
30, 1997 and 1,232,245 at December 31, 1996. Net book value per equivalent
Class A Common share is $22,732 at June 30, 1997.
See accompanying Notes to Interim Consolidated Financial Statements
2
<PAGE> 4
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Second Quarter First Half
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Insurance premiums earned ...................... $ 1,260.1 $ 1,011.7 $ 2,243.1 $ 1,933.6
Sales and service revenues ..................... 820.5 715.1 1,638.0 1,415.2
Interest and dividend income ................... 213.9 190.0 448.7 362.2
Income from finance businesses ................. 8.2 5.2 15.0 11.0
Realized investment gain (loss) ................ 35.5 (7.2) 68.2 2,332.5
------------ ------------ ------------ ------------
2,338.2 1,914.8 4,413.0 6,054.5
------------ ------------ ------------ ------------
COST AND EXPENSES:
Insurance losses and loss adjustment expenses .. 964.5 784.1 1,717.1 1,522.0
Insurance underwriting expenses ................ 202.4 172.2 362.2 333.7
Cost of products and services sold ............. 458.8 449.0 908.5 880.5
Selling, general and administrative expenses ... 266.9 203.7 533.0 414.6
Goodwill amortization .......................... 20.7 15.5 41.4 30.6
Interest expense ............................... 27.3 26.9 55.4 53.2
------------ ------------ ------------ ------------
1,940.6 1,651.4 3,617.6 3,234.6
------------ ------------ ------------ ------------
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST 397.6 263.4 795.4 2,819.9
Income taxes ................................... 116.1 69.1 225.7 947.2
Minority interest .............................. 3.7 3.1 7.5 12.8
------------ ------------ ------------ ------------
NET EARNINGS ..................................... $ 277.8 $ 191.2 $ 562.2 $ 1,859.9
============ ============ ============ ============
Average shares outstanding * ................... 1,232,246 1,203,748 1,232,246 1,198,630
NET EARNINGS PER SHARE * ......................... $ 225 $ 159 $ 456 $ 1,552
============ ============ ============ ============
</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, if
any, 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
<PAGE> 5
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
<TABLE>
<CAPTION>
First Half
---------------------
1997 1996
-------- --------
<S> <C> <C>
Net cash flows from operating activities ........................... $1,166.7 $ 346.1
-------- --------
Cash flows from investing activities:
Purchases of investments ................................... (2,826.3) (2,430.8)
Proceeds on sales and maturities of investments ............ 2,447.2 1,759.3
Loans and investments originated in finance businesses ..... (226.2) (332.5)
Principal collections on loans and investments originated
in finance businesses .................................... 141.8 189.9
Acquisitions of businesses ................................. (774.9) (1,946.2)
Other ...................................................... (81.7) (18.6)
-------- --------
Net cash flows from investing activities ........................... (1,320.1) (2,778.9)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings of finance businesses ............. 45.0 115.3
Proceeds from other borrowings ............................. 514.1 610.6
Repayments of borrowings of finance businesses ............. (109.0) (129.5)
Repayments of other borrowings ............................. (578.9) (580.8)
Net proceeds from issuance of Class B Common Stock ......... -- 565.0
Other ...................................................... (0.8) (1.2)
-------- --------
Net cash flows from financing activities ........................... (129.6) 579.4
-------- --------
Decrease in cash and cash equivalents .............................. (283.0) (1,853.4)
Cash and cash equivalents at beginning of year* .................... 1,350.3 2,744.5
-------- --------
Cash and cash equivalents at end of second quarter* ................ $1,067.3 $ 891.1
======== ========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes ............................................... $ 195.6 $ 524.6
Interest ................................................... 59.5 62.8
Non-cash investing activity:
Liabilities assumed in connection with acquisition of business -- 3,901.5
* 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 second quarter --
Finance businesses ........................................... $ 16.4 $ 24.7
Other ........................................................ 1,050.9 866.4
-------- --------
$1,067.3 $ 891.1
======== ========
</TABLE>
See accompanying Notes to Interim Consolidated Financial Statements
4
<PAGE> 6
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
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.
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 half 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 half 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............................... $ 1,933.6
Sales and service revenues.............................. 1,595.1
Total revenues.......................................... 6,215.4
Net income.............................................. 1,876.4
Earnings per equivalent Class A common share............ 1,538
</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.
5
<PAGE> 7
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
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. 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 half 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........... (6,714) -- (6,714) 201,498
--------- -------- --------- -------
Balance at June 30, 1997........................ 1,369,474 (170,068) 1,199,406 985,253
========= ======== ========= =======
</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>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Amortized cost........................................... $6,942.3 $6,142.3
Gross unrealized gains................................... 411.9 318.4
Gross unrealized losses.................................. (11.2) (13.8)
-------- --------
Estimated fair value..................................... $7,343.0 $6,446.9
======== ========
</TABLE>
6
<PAGE> 8
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
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 June 30, 1997 and December
31, 1996 are listed separately.
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Total cost...................................................... $ 8,988.9 $ 9,152.0
Gross unrealized gains.......................................... 24,805.5 18,621.0
Gross unrealized losses......................................... (23.2) (22.4)
--------- ---------
Total fair value................................................ $33,771.2 $27,750.6
========= =========
Fair value:
American Express Company...................................... $ 3,684.5 $ 2,794.3
The Coca-Cola Company......................................... 13,600.0 10,525.0
The Gillette Company.......................................... 4,548.0 3,732.0
All others.................................................... 11,938.7 10,699.3
--------- ---------
Total......................................................... $33,771.2 $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 June 30, 1997 and December 31, 1996 are as follows (in
millions):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Deferred tax liabilities:
Relating to unrealized appreciation of investments.............. $ 8,818.9 $ 6,620.6
Other........................................................... 828.4 860.9
---------- ----------
9,647.3 7,481.5
Deferred tax assets................................................. (661.8) (602.8)
--------- ----------
Net deferred tax liability...................................... $ 8,985.5 $ 6,878.7
========= =========
</TABLE>
NOTE 7. FINANCE BUSINESSES
Assets and liabilities of Berkshire's finance businesses are summarized
below (in millions):
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Assets
Cash and cash equivalents....................................... $ 16.4 $ 10.5
Installment loans and other receivables......................... 226.6 215.9
Fixed maturity investments...................................... 832.6 742.4
---------- ---------
$ 1,075.6 $ 968.8
========= =========
Liabilities
Borrowings under investment agreements and other debt........... $ 317.3 $ 381.3
Annuity reserves and policyholder liabilities................... 576.9 434.8
Other........................................................... 42.8 35.2
---------- ----------
$ 937.0 $ 851.3
========= =========
</TABLE>
7
<PAGE> 9
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
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>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 12.7 $ 6.4
Installment loans and other receivables *................... 193.4 233.0
Mortgage-backed securities, at cost ........................ 101.3 145.5
----- ------
$307.4 $384.9
====== ======
LIABILITIES
Borrowings under investment agreements and other debt....... $244.6 $320.8
Other....................................................... 28.3 29.7
------ ------
$272.9 $350.5
====== ======
</TABLE>
* Includes receivables from affiliated companies of $52.2 million and $85.1
million at June 30, 1997 and December 31, 1996, respectively.
Net income from Scott Fetzer Financial Group businesses for the second
quarter and first half of 1997 and 1996 is summarized below (in millions).
<TABLE>
<CAPTION>
Second Quarter First Half
----------------- ------------------
1997 1996 1997 1996
----- ----- ----- -----
<S> <C> <C> <C> <C>
Revenues ................. $12.2 $15.3 $24.7 $31.2
Costs and expenses ....... 8.7 12.8 18.9 25.9
----- ----- ----- -----
Income before income taxes 3.5 2.5 5.8 5.3
Income taxes ............. 1.2 0.9 2.0 1.8
----- ----- ----- -----
Net income ............... $ 2.3 $ 1.6 $ 3.8 $ 3.5
===== ===== ===== =====
</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 second quarter and
first half of 1997 and 1996 (in millions):
<TABLE>
<CAPTION>
Second Quarter First Half
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Increase in unrealized appreciation ....... $ 5,540.0 $ 1,764.8 $ 6,279.7 $ 1,349.6
Increase in deemed applicable
income taxes ............................ (1,940.6) (617.4) (2,200.1) (488.7)
Increase in minority shareholders' interest (55.4) (10.6) (56.6) (13.5)
--------- --------- --------- ---------
Net increase ........................... 3,544.0 1,136.8 4,023.0 847.4
Balance at beginning of period ........... 12,622.9 8,931.3 12,143.9 9,220.7
--------- --------- --------- ---------
Balance at end of second quarter ......... $16,166.9 $10,068.1 $16,166.9 $10,068.1
========= ========= ========= =========
</TABLE>
8
<PAGE> 10
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Net earnings for the second quarter and first half 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>
Second Quarter First Half
------------------- --------------------
1997 1996 1997 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
Insurance, except realized investment gain/loss . $ 207.1 $ 160.5 $ 418.3 $ 289.1
Manufacturing, merchandising and services ....... 59.1 43.3 120.7 83.2
Unallocated income/expense, net ................. 6.0 6.7 12.1 13.8
Interest expense * .............................. (17.3) (16.8) (33.1) (32.2)
------- ------- ------- --------
Earnings before realized investment gain/loss 254.9 193.7 518.0 353.9
Realized investment gain (loss) ................. 22.9 (2.5) 44.2 1,506.0
------- ------- ------- --------
Net earnings ................................ $ 277.8 $ 191.2 $ 562.2 $1,859.9
======= ======= ======= ========
</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/loss, are aggregated in the following table. Dollar
amounts are in millions.
<TABLE>
<CAPTION>
Second Quarter First Half
-------------------- --------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Premiums earned from:
Direct insurance ........................ $ 933.3 $ 823.6 $1,817.8 $1,629.4
Reinsurance assumed ..................... 326.8 188.1 425.3 304.2
-------- -------- -------- --------
$1,260.1 $1,011.7 $2,243.1 $1,933.6
======== ======== ======== ========
Underwriting gain (loss) attributable to:
Direct insurance ........................ $ 57.1 $ 50.1 $ 134.5 $ 90.2
Reinsurance assumed ..................... 36.1 5.5 29.3 (12.3)
-------- -------- -------- --------
Total underwriting gain ............... 93.2 55.6 163.8 77.9
Net investment income ....................... 196.3 165.9 413.2 318.9
Goodwill amortization * ..................... (11.0) (10.6) (21.5) (21.4)
-------- -------- -------- --------
Earnings before income taxes .......... 278.5 210.9 555.5 375.4
Income tax expense .......................... 69.4 48.8 133.0 82.7
Minority interest ........................... 2.0 1.6 4.2 3.6
-------- -------- -------- --------
Net earnings from Insurance,
except realized investment gain/loss $ 207.1 $ 160.5 $ 418.3 $ 289.1
======== ======== ======== ========
</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.
9
<PAGE> 11
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INSURANCE GROUP (Continued)
Insurance premiums earned during the second quarter by GEICO were $855.6
million in 1997 and $757.4 million in 1996. For the first half, premiums earned
by GEICO were $1.67 billion in 1997 and $1.50 billion in 1996. Premiums earned
during the first half of 1997 from voluntary auto business exceeded 1996 by
17.7%, reflecting primarily increased numbers of policies-in-force. In-force
policy growth over the last twelve months was 10.7% in GEICO's preferred-risk
auto business and 38.1% 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 half of 1997 increased 58.3% over 1996. The growth in
voluntary auto business was partially offset by declines in premiums generated
from non-auto and residual auto insurance coverages. Increased premium volume is
expected to continue for the remainder of 1997 with respect to GEICO's private
passenger automobile insurance businesses.
The net underwriting gains produced by GEICO for the second quarter of 1997
and 1996 were $48.1 million and $37.7 million, respectively. For the first half,
underwriting gains totaled $118.1 million in 1997 and $67.5 million in 1996.
GEICO's first half underwriting results included charges for catastrophe losses
of approximately $6 million in 1997 and $36 million in 1996. Catastrophe losses
of about $24 million in 1996 resulted from homeowner losses primarily associated
with the January 1996 east coast blizzard. First half underwriting results in
1997 also benefitted from relatively mild winter weather conditions that
resulted in a reduced frequency of automobile physical damage claims.
Second quarter premiums earned from the various other direct insurance
businesses were $77.7 million and $66.2 million in 1997 and 1996, respectively.
First half premiums earned totaled $147.7 million and $131.8 million in 1997 and
1996, respectively. Collectively, the various other direct insurance businesses
generated second quarter underwriting gains of $9.0 million in 1997 and $12.4
million in 1996. For the first six months of 1997 and 1996, the non-GEICO direct
insurance businesses produced net underwriting gains of $16.4 million and $22.7
million, respectively.
Reinsurance premiums earned during the second quarter from catastrophe
excess-of-loss contracts were $92.1 million in 1997 and $94.1 million in 1996.
For the first half of 1997 catastrophe reinsurance premiums earned were $100.6
million compared to $126.9 million in the comparable prior year period. Price
competition for catastrophe reinsurance business continues to intensify in 1997.
As a result, the number of acceptably priced offerings to the Insurance Group
declined. However, the Group's extraordinary financial strength permits it to
occasionally write exceptionally large catastrophe polices. For example, a
policy with the California Earthquake Authority ("CEA") became effective on
April 1, 1997. The CEA policy provides aggregate protection of about $1 billion
and will be called upon if the CEA incurs aggregate earthquake losses in excess
of about $5 billion during the four year period ending March 31, 2001.
The property catastrophe reinsurance business contributed second quarter
underwriting gains of $81.7 million in 1997 and $58.3 million in 1996. First
half underwriting gains from catastrophe policies totaled $97.2 million in 1997
and $72.7 million in 1996. Lower amounts of catastrophe losses and expenses
incurred in 1997 periods more than offset the comparative decline in premiums
earned. The magnitude of underwriting gains achieved from 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.
Reinsurance premiums earned during the second quarter and first half of 1997
include $140.1 million attributable to the Insurance Group's "retroactive"
reinsurance business. A retroactive reinsurance policy covers certain past loss
occurrences of the ceding company. There were no premiums earned from
retroactive reinsurance policies in the corresponding 1996 periods.
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 second quarter of 1997 and 1996 were $18.7 million and $17.0
million, respectively. For the first half, such charges totaled $39.7 million in
1997 and $36.7 million in 1996.
10
<PAGE> 12
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
INSURANCE GROUP (Continued)
Premiums earned in 1997 periods from the other non-catastrophe reinsurance
contracts were basically unchanged from corresponding 1996 periods. In both 1997
and 1996, other non-catastrophe reinsurance business derived principally from a
few sizable excess-of-loss contracts. These contracts generated net underwriting
losses of $26.9 million and $35.8 million in the second quarter of 1997 and
1996, respectively. First half underwriting losses from these contracts were
$28.2 million in 1997 and $48.3 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.
Net investment income for the second quarter of 1997 exceeded amounts earned
during the second quarter of 1996 by $30.4 million. For the first half of 1997,
net investment income exceeded amounts earned during the first half of 1996 by
$94.3 million. During 1997, Insurance Group members received dividends
(including all amounts previously in arrears) totaling $8.1 million for the
second quarter and $62.3 million for the first half from its investment in US
Airways Cumulative Convertible Preferred Shares. Net investment income for the
corresponding 1996 periods include no dividends with respect to the US Airways
Preferred Shares.
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
policyholder funds ("float") generated from insurance and reinsurance
underwriting activities. As of June 30, 1997, "float", the approximate level of
invested policyholder funds, was about $7.4 billion.
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>
Second Quarter First Half
------------------------------- -----------------------------------
1997 1996 1997 1996
-------------- -------------- ---------------- ----------------
Amount % Amount % Amount % Amount %
------ ----- ------ ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................................... $837.2 100.0 $721.8 100.0 $1,669.7 100.0 $1,428.7 100.0
Costs and expenses ................................ 734.9 87.8 648.0 89.8 1,463.6 87.7 1,286.9 90.1
------ ----- ------ ----- -------- ----- -------- -----
Earnings before income taxes ...................... 102.3 12.2 73.8 10.2 206.1 12.3 141.8 9.9
Applicable income taxes ........................... 41.8 5.0 29.3 4.0 82.9 5.0 56.6 4.0
Applicable minority interest ...................... 1.4 0.1 1.2 0.2 2.5 0.1 2.0 0.1
------ ----- ------ ----- -------- ----- -------- -----
Net earnings ...................................... $ 59.1 7.1 $ 43.3 6.0 $ 120.7 7.2 $ 83.2 5.8
====== ===== ====== ===== ======== ===== ======== =====
</TABLE>
Revenues from these several and diverse business activities during 1997's
second quarter and first half were greater by $115.4 million (16.0%) and $241.0
million (16.9%) 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.
Net earnings from this group of businesses were greater by $15.8 million
(36.5%) during 1997's second quarter and $37.5 million (45.1%) during 1997's
first half 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.
11
<PAGE> 13
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. (CONTINUED)
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 half of 1996 reflects a
pre-tax realized investment gain of $2.3 billion ($1.5 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.
FINANCIAL CONDITION
Berkshire's balance sheet continues to reflect significant liquidity and
above average capital strength. Shareholders' equity at June 30, 1997, was $28.0
billion or $22,732 per equivalent share of Class A Common Stock.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of shareholders of Berkshire Hathaway Inc.
("Berkshire"), held May 5, 1997, Berkshire's shareholders reelected Berkshire's
Directors in an uncontested election. Proxies for the meeting had previously
been solicited pursuant to Regulation 14A under the Securities Exchange Act of
1934.
Following are the votes cast in favor and against each Director. There
were no votes withheld, abstentions or broker non-votes.
<TABLE>
<CAPTION>
Directors For Against
--------- --------- -------
<S> <C> <C>
Warren E. Buffett 1,015,858 541
Howard G. Buffett 1,015,855 544
Susan T. Buffett 1,015,817 582
Malcolm G. Chace 1,015,914 485
Charles T. Munger 1,015,887 513
Walter Scott, Jr. 1,015,835 564
</TABLE>
12
<PAGE> 14
FORM 10-Q
BERKSHIRE HATHAWAY INC. Q/E 6/30/97
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 August 13, 1997 /s/ Marc D. Hamburg
---------------------------------
(Signature)
Marc D. Hamburg, Vice President
and Principal Financial Officer
13
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,051
<SECURITIES> 41,114
<RECEIVABLES> 1,716
<ALLOWANCES> 0
<INVENTORY> 638
<CURRENT-ASSETS> 0
<PP&E> 1,066
<DEPRECIATION> 0
<TOTAL-ASSETS> 50,554
<CURRENT-LIABILITIES> 0
<BONDS> 1,884
0
0
<COMMON> 7
<OTHER-SE> 28,005
<TOTAL-LIABILITY-AND-EQUITY> 50,554
<SALES> 1,638
<TOTAL-REVENUES> 3,896
<CGS> 909
<TOTAL-COSTS> 2,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55
<INCOME-PRETAX> 795
<INCOME-TAX> 226
<INCOME-CONTINUING> 562
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 562
<EPS-PRIMARY> 456
<EPS-DILUTED> 456
</TABLE>
