filings.toolsBerkshire Hathaway 10-K 2018-12-31
Filed 2019-02-25. 16 sections, 579K characters. Original on sec.gov · Markdown · JSON
Cover and table of contents
10-K 1 d678758d10k.htm 10-K
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
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 incorporation or organization | (I.R.S. Employer Identification Number) | |
| 3555 Farnam Street, Omaha, Nebraska | 68131 | |
| (Address of principal executive office) | (Zip Code) |
Registrant’s telephone number, including area code (402) 346-1400
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Class A common stock, $5.00 Par Value | New York Stock Exchange | |
| Class B common stock, $0.0033 Par Value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2018: $367,009,000,000*
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock:
| February 14, 2019—Class A common stock, $5 par value | 725,807 shares | |
| February 14, 2019—Class B common stock, $0.0033 par value | 1,372,751,831 shares |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant’s Annual Meeting to be held May 4, 2019 are incorporated in Part III.
| * | This aggregate value is computed at the last sale price of the common stock as reported on the New York Stock Exchange on June 30, 2018. It does not include the value of Class A common stock (294,660 shares) and Class B common stock (57,946,850 shares) held by Directors and Executive Officers of the Registrant and members of their immediate families, some of whom may not constitute “affiliates” for purpose of the Securities Exchange Act of 1934. |
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Table of Contents
Table of Contents
Table of Contents
Part I
Item 1. Business Description
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Berkshire Hathaway Inc. (“Berkshire,” “Company” or “Registrant”) is a holding company owning subsidiaries engaged in a number of diverse business activities. The most important of these are insurance businesses conducted on both a primary basis and a reinsurance basis, a freight rail transportation business and a group of utility and energy generation and distribution businesses. Berkshire also owns and operates a large number of other businesses engaged in a variety of activities, as identified herein. Berkshire is domiciled in the state of Delaware, and its corporate headquarters are located in Omaha, Nebraska.
Berkshire’s operating businesses are managed on an unusually decentralized basis. There are essentially no centralized or integrated business functions (such as sales, marketing, purchasing, legal or human resources) and there is minimal involvement by Berkshire’s corporate headquarters in the day-to-day business activities of the operating businesses. Berkshire’s corporate senior management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. It also is responsible for establishing and monitoring Berkshire’s corporate governance practices, including, but not limited to, communicating the appropriate “tone at the top” messages to its employees and associates, monitoring governance efforts, including those at the operating businesses, and participating in the resolution of governance-related issues as needed.
Berkshire and its consolidated subsidiaries employ approximately 389,000 people worldwide.
Insurance and Reinsurance Businesses
Berkshire’s insurance and reinsurance business activities are conducted through numerous domestic and foreign-based insurance entities. Berkshire’s insurance businesses provide insurance and reinsurance of property and casualty and life, accident and health risks worldwide.
In direct or primary insurance activities, the insurer assumes the risk of loss from persons or organizations that are directly subject to the risks. Such risks may relate to property, casualty (or liability), life, accident, health, financial or other perils that may arise from an insurable event. In reinsurance activities, the reinsurer assumes defined portions of risks that other direct insurers or reinsurers assumed in their own insuring activities.
Reinsurance contracts are normally classified as treaty or facultative contracts. Treaty reinsurance refers to reinsurance coverage for all or a portion of a specified group or class of risks ceded by the direct insurer, while facultative reinsurance involves coverage of specific individual underlying risks. Reinsurance contracts are further classified as quota-share or excess. Under quota-share (proportional or pro-rata) reinsurance, the reinsurer shares proportionally in the original premiums and losses of the direct insurer or reinsurer. Excess (or non-proportional) reinsurance provides for the indemnification of the direct insurer or reinsurer for all or a portion of the loss in excess of an agreed upon amount or “retention.” Both quota-share and excess reinsurance contracts may provide for aggregate limits of indemnification.
Insurance and reinsurance are generally subject to regulatory oversight throughout the world. Except for regulatory considerations, there are virtually no barriers to entry into the insurance and reinsurance industry. Competitors may be domestic or foreign, as well as licensed or unlicensed. The number of competitors within the industry is not known. Insurers and reinsurers compete on the basis of reliability, financial strength and stability, financial ratings, underwriting consistency, service, business ethics, price, performance, capacity, policy terms and coverage conditions.
Insurers based in the United States (“U.S.”) are subject to regulation by their states of domicile and by those states in which they are licensed to write policies on an admitted basis. The primary focus of regulation is to assure that insurers are financially solvent and that policyholder interests are otherwise protected. States establish minimum capital levels for insurance companies and establish guidelines for permissible business and investment activities. States have the authority to suspend or revoke a company’s authority to do business as conditions warrant. States regulate the payment of dividends by insurance companies to their shareholders and other transactions with affiliates. Dividends, capital distributions and other transactions of extraordinary amounts are subject to prior regulatory approval.
Insurers may market, sell and service insurance policies in the states where they are licensed. These insurers are referred to as admitted insurers. Admitted insurers are generally required to obtain regulatory approval of their policy forms and premium rates. Non-admitted insurance markets have developed to provide insurance that is otherwise unavailable through admitted insurers. Non-admitted insurance, often referred to as “excess and surplus” lines, is procured by either state-licensed surplus lines brokers who place risks with insurers not licensed in that state or by the insured party’s direct procurement from non-admitted insurers. Non-admitted insurance is subject to considerably less regulation with respect to policy rates and forms. Reinsurers are normally not required to obtain regulatory approval of premium rates or reinsurance contracts.
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The insurance regulators of every state participate in the National Association of Insurance Commissioners (“NAIC”). The NAIC adopts forms, instructions and accounting procedures for use by U.S. insurers and reinsurers in preparing and filing annual statutory financial statements. However, an insurer’s state of domicile has ultimate authority over these matters. In addition to its activities relating to the annual statement, the NAIC develops or adopts statutory accounting principles, model laws, regulations and programs for use by its members. Such matters deal with regulatory oversight of solvency, risk management, compliance with financial regulation standards and risk-based capital reporting requirements.
Berkshire’s insurance companies maintain capital strength at exceptionally high levels, which differentiates them from their competitors. Collectively, the combined statutory surplus of Berkshire’s U.S. based insurers was approximately $162 billion at December 31, 2018. Berkshire’s major insurance subsidiaries are rated AA+ by Standard & Poor’s and A++ (superior) by A.M. Best with respect to their financial condition and claims paying ability.
The Terrorism Risk Insurance Act of 2002 established within the Department of the Treasury a Terrorism Insurance Program (“Program”) for commercial property and casualty insurers by providing federal reinsurance of insured terrorism losses. The Program currently extends to December 31, 2020 through other Acts, most recently the Terrorism Risk Insurance Program Reauthorization Act of 2015 (the “2015 TRIA Reauthorization”). Hereinafter these Acts are collectively referred to as TRIA. Under TRIA, the Department of the Treasury is charged with certifying “acts of terrorism.” Coverage under TRIA occurs if the industry insured loss for certified events occurring during the calendar year exceeds $180 million in 2019 and $200 million in 2020, or any calendar year thereafter.
To be eligible for federal reinsurance, insurers must make available insurance coverage for acts of terrorism, by providing policyholders with clear and conspicuous notice of the amount of premium that will be charged for this coverage and of the federal share of any insured losses resulting from any act of terrorism. Assumed reinsurance is specifically excluded from TRIA participation. TRIA currently also excludes
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Item 1A. Risk Factors
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Berkshire and its subsidiaries (referred to herein as “we,” “us,” “our” or similar expressions) are subject to certain risks and uncertainties in its business operations which are described below. The risks and uncertainties described below are not the only risks we face. Additional risks and uncertainties that are presently unknown or are currently deemed immaterial may also impair our business operations.
We are dependent on a few key people for our major investment and capital allocation decisions.
Major investment decisions and all major capital allocation decisions are made by Warren E. Buffett, Chairman of the Board of Directors and Chief Executive Officer, age 88, in consultation with Charles T. Munger, Vice Chairman of the Board of Directors, age 95. If for any reason the services of our key personnel, particularly Mr. Buffett, were to become unavailable, there could be a material adverse effect on our operations. However, Berkshire’s Board of Directors has identified certain current Berkshire subsidiary managers who, in their judgment, are capable of succeeding Mr. Buffett and has agreed on a replacement for Mr. Buffett should a replacement be needed currently. The Board continually monitors this risk and could alter its current view regarding a replacement for Mr. Buffett in the future. We believe that the Board’s succession plan, together with the outstanding managers running our numerous and highly diversified operating units helps to mitigate this risk. In 2018, Berkshire’s Board of Directors appointed Mr. Gregory Abel as Vice Chairman of Berkshire’s non-insurance operations and Mr. Ajit Jain as Vice Chairman of Berkshire’s insurance operations. Mr. Abel and Mr. Jain each report directly to Mr. Buffett and Mr. Buffett continues to be responsible for major capital allocation and investment decisions.
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We need qualified personnel to manage and operate our various businesses.
In our decentralized business model, we need qualified and competent management to direct day-to-day business activities of our operating subsidiaries and to manage changes in future business operations due to changing business or regulatory environments. Our operating subsidiaries also need qualified and competent personnel in executing their business plans and serving their customers, suppliers and other stakeholders. Our inability to recruit and retain qualified and competent managers and personnel could negatively affect the operating results, financial condition and liquidity of our subsidiaries and Berkshire as a whole.
Investments are unusually concentrated and fair values are subject to loss in value.
We concentrate a high percentage of the investments of our insurance subsidiaries in a relatively small number of equity securities and diversify our investment portfolios far less than is conventional in the insurance industry. A significant decline in the fair values of our larger investments in equity securities may produce a material decline in our consolidated shareholders’ equity and our consolidated statement of earnings.
Since a large percentage of our equity securities are held by our insurance subsidiaries, significant decreases in the fair values of these investments will produce significant declines in their statutory surplus. Our large statutory surplus is a competitive advantage, and a long-term material decline could have an adverse effect on our claims-paying ability ratings and our ability to write new insurance business thus potentially reducing our future underwriting profits.
Competition and technology may erode our business franchises and result in lower earnings.
Each of our operating businesses face intense competition within markets in which they operate. While we manage our businesses with the objective of achieving long-term sustainable growth by developing and strengthening competitive advantages, many factors, including technological changes, may erode or prevent the strengthening of competitive advantages. Accordingly, our future operating results will depend to some degree on our operating units successfully protecting and enhancing their competitive advantages. If our operating businesses are unsuccessful in these efforts, our periodic operating results in the future may decline.
Deterioration of general economic conditions may significantly reduce our operating earnings and impair our ability to access capital markets at a reasonable cost.
Our operating businesses are subject to normal economic cycles, which affect the general economy or the specific industries in which they operate. Significant deteriorations of economic conditions over a prolonged period could produce a material adverse effect on one or more of our significant operations. In addition, our utilities and energy businesses and our railroad business regularly utilize debt as a component of their capital structures, and depend on having access to borrowed funds through the capital markets at reasonable rates. To the extent that access to the capital markets is restricted or the cost of funding increases, these operations could be adversely affected.
Terrorist acts could hurt our operating businesses.
A successful (as defined by the aggressor) cyber, biological, nuclear or chemical attack could produce significant losses to our worldwide operations. Our business operations could be adversely affected from such acts through the loss of human resources or destruction of production facilities and information systems. We share the risk with all businesses.
Regulatory changes may adversely impact our future operating results.
Over time, in response to financial markets crises, global economic recessions, and social and environmental issues, regulatory initiatives were adopted in the United States and elsewhere. Such initiatives addressed for example, the regulation of banks and other major financial institutions and environmental and global-warming matters. These initiatives impact all of our businesses, albeit in varying ways. Increased regulatory compliance costs could have a significant negative impact on our operating businesses, as well as on the businesses in which we have a significant, but not controlling economic interests. We cannot predict whether such initiatives will have a material adverse impact on our consolidated financial position, results of operations or cash flows.
Data privacy regulations have recently been enacted in various jurisdictions in the U.S. and throughout the world. These regulations address numerous aspects related to the security of personal information that is stored in our information systems, networks and facilities. Failure to comply with these regulations could result in reputational damage and significant penalties.
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Cyber security risks
We rely on technology in virtually all aspects of our business. Like those of many large businesses, certain of our information systems have been subject to computer viruses, malicious codes, unauthorized access, phishing efforts, denial-of-service attacks and other cyber attacks and we expect to be subject to similar attacks in the future as such attacks become more sophisticated and frequent. A significant disruption or failure of our technology systems could result in service interruptions, safety failures, security events, regulatory compliance failures, an inability to protect information and assets against unauthorized users, and other operational difficulties. Attacks perpetrated against our systems could result in loss of assets and critical information and expose us to remediation costs and reputational damage.
Although we have taken steps intended to mitigate these risks, including business continuity planning, disaster recovery planning and business impact analysis, a significant disruption or cyber intrusion could adversely affect our results of operations, financial condition and liquidity. Additionally, if we are unable to acquire, develop, implement, adopt or protect rights around new technology, we may suffer a competitive disadvantage, which could also have an adverse effect on our results of operations, financial condition and liquidity.
Cyber attacks could further adversely affect our ability to operate facilities, information technology and business systems, or compromise confidential customer and employee information. Political, economic, social or financial market instability or damage to or interference with our operating assets, customers or suppliers from cyber attacks may result in business interruptions, lost revenues, higher commodity prices, disruption in fuel supplies, lower energy consumption, unstable markets, increased security, repair or other costs, or may materially adversely affect us in ways that cannot be predicted at this time. Any of these risks could materially affect our consolidated financial results. Furthermore, instability in the financial markets resulting from terrorism, sustained or significant cyber attacks, or war could also have a material adverse effect on our ability to raise capital. We share these risks with all businesses.
Derivative contracts may require significant cash settlement payments and result in significant losses in the future.
Over ten years ago, we assumed the risk of potentially significant losses under a number of equity index put option contracts. The contracts remaining at year end 2018 will expire from 2019 through 2025. Risks of losses under these contracts are based on declines in equity prices of stocks comprising certain major U.S. and international stock indexes. We received considerable cash premiums as compensation for accepting these risks. Absent major reductions in future equity securities prices, our ultimate payment obligations are not likely to be significant. Nevertheless, there can be no assurance that equity securities prices will not decline significantly resulting in settlement payments that significantly exceed the year end 2018 intrinsic value of the contracts ($1.7 billion), recorded fair value ($2.45 billion) or the premiums we received at inception ($4.0 billion).
Risks unique to our regulated businesses
Our tolerance for risk in our insurance businesses may result in significant underwriting losses.
When properly paid for the risk assumed, we have been and will continue to be willing to assume more risk from a single event than any other insurer has knowingly assumed. Accordingly, we could incur a significant loss from a single event. We may also write coverages for losses arising from acts of terrorism. We attempt to take into account all possible correlations and avoid writing groups of policies from which pre-tax losses from a single event might aggregate above $10 billion. Currently, we estimate that our aggregate exposure from a single event under outstanding policies is significantly below $10 billion. However, despite our efforts, losses may aggregate in unanticipated ways. Our tolerance for significant insurance losses may result in lower reported earnings in a future period.
The degree of estimation error inherent in the process of estimating property and casualty insurance loss reserves may result in significant underwriting losses.
The principal cost associated with the property and casualty insurance business is claims. In writing property and casualty insurance policies, we receive premiums today and promise to pay covered losses in the future. However, it will take decades before all claims that have occurred as of any given balance sheet date will be reported and settled. Although we believe that liabilities for unpaid losses are adequate, we will not know whether these liabilities or the premiums charged for the coverages provided were sufficient until well after the balance sheet date. Estimating insurance claim costs is inherently imprecise. Our estimated unpaid losses arising under contracts covering property and casualty insurance risks are large ($110 billion at December 31, 2018), and a small percentage increase to those liabilities can result in materially lower reported earnings.
Changes in regulations and regulatory actions can adversely affect our operating results and our ability to allocate capital.
Our insurance businesses are subject to regulation in the jurisdictions in which we operate. Such regulations may relate to among other things, the types of business that can be written, the rates that can be charged for coverage, the level of capital that must be maintained, and restrictions on the types and size of investments that can be made. Regulations may also restrict the timing and amount of dividend payments to Berkshire by these businesses. Accordingly, changes in regulations related to these or other matters or regulatory actions imposing restrictions on our insurance companies may adversely impact our results of operations and restrict our ability to allocate capital.
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Our railroad business conducted through BNSF is also subject to a significant number of laws and regulations with respect to rates and practices, taxes, railroad operations and a variety of health, safety, labor, environmental and other matters. Failure to comply with applicable laws and regulations could have a material adverse effect on BNSF’s business. Governments may change the legislative and/or regulatory framework within which BNSF operates, without providing any recourse for any adverse effects that the change may have on the business. For example, enacted federal legislation mandated the implementation of positive train control (“PTC”) technology by December 31, 2018, on certain mainline track where inter-city and commuter passenger railroads operate and where toxic-by-inhalation (“TIH”) hazardous materials are transported. Due to the Federal Railroad Administration’s (“FRA”) interpretation of the PTC mandate as requiring all railroads that run on our tracks to be compliant before we can be deemed compliant, the FRA has confirmed an extension of the deadline for the Company to December 31, 2020. Complying with legislative and regulatory changes may pose significant operating and implementation risks and require significant capital expenditures.
BNSF derives significant amounts of revenue from the transportation of energy-related commodities, particularly coal. To the extent that changes in government policies limit or restrict the usage of coal as a source of fuel in generating electricity or alternate fuels, such as natural gas, displace coal on a competitive basis, revenues and earnings could be adversely affected. As a common carrier, BNSF is also required to transport TIH chemicals and other hazardous materials. A release of hazardous materials could expose BNSF to significant claims, losses, penalties and environmental remediation obligations. Changes in the regulation of the rail industry could negatively impact BNSF’s ability to determine prices for rail services and to make capital improvements to its rail network, resulting in an adverse effect on our results of operations, financial condition or liquidity.
Our utilities and energy businesses operated under BHE are highly regulated by numerous federal, state, local and foreign governmental authorities in the jurisdictions in which they operate. These laws and regulations are complex, dynamic and subject to new interpretations or change. Regulations affect almost every aspect of our utilities and energy businesses. Regulations broadly apply and may limit management’s ability to independently make and implement decisions regarding numerous matters including: acquiring businesses; constructing, acquiring or disposing of operating assets; operating and maintaining generating facilities and transmission and distribution system assets; complying with pipeline safety and integrity and environmental requirements; setting rates charged to customers; establishing capital structures and issuing debt or equity securities; transacting between our domestic utilities and our other subsidiaries and affiliates; and paying dividends or similar distributions. Failure to comply with or reinterpretations of existing regulations and new legislation or regulations, such as those relating to air and water quality, renewable portfolio standards, emissions performance standards, climate change, coal combustion byproduct disposal, hazardous and solid waste disposal, protected species and other environmental matters, or changes in the nature of the regulatory process may have a significant adverse impact on our financial results.
Our railroad business requires significant ongoing capital investment to improve and maintain its railroad network so that transportation services can be safely and reliably provided to customers on a timely basis. Our utilities and energy businesses also require significant amounts of capital to construct, operate and maintain generation, transmission and distribution systems to meet their customers’ needs and reliability criteria. Additionally, system assets may need to be operational for long periods of time in order to justify the financial investment. The risk of operational or financial failure of capital projects is not necessarily recoverable through rates that are charged to customers. Further, a significant portion of costs of capital improvements are funded through debt issued by BNSF and BHE and their subsidiaries. Disruptions in debt capital markets that restrict access to funding when needed could adversely affect the results of operations, liquidity and capital resources of these businesses.
Item 1B. Unresolved Staff Comments
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None.
Item 2. Description of Properties
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The properties used by Berkshire’s business segments are summarized in this section. Berkshire’s railroad and utilities and energy businesses, in particular, utilize considerable physical assets in their businesses.
Railroad Business—Burlington Northern Santa Fe
Through BNSF Railway, BNSF operates approximately 32,500 route miles of track (excluding multiple main tracks, yard tracks and sidings) in 28 states, and also operates in three Canadian provinces. BNSF owns over 23,000 route miles, including easements, and operates over 9,000 route miles of trackage rights that permit BNSF to operate its trains with its crews over other railroads’ tracks. The total BNSF system, including single and multiple main tracks, yard tracks and sidings, consists of over 50,000 operated miles of track, all of which are owned by or held under easement by BNSF except for over 10,000 miles operated under trackage rights.
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BNSF operates various facilities and equipment to support its transportation system, including its infrastructure, locomotives and freight cars. It also owns or leases other equipment to support rail operations, such as vehicles. Support facilities for rail operations include yards and terminals throughout its rail network, system locomotive shops to perform locomotive servicing and maintenance, a centralized network operations center for train dispatching and network operations monitoring and management in Fort Worth, Texas, regional dispatching centers, computers, telecommunications equipment, signal systems and other support systems. Transfer facilities are maintained for rail-to-rail as well as intermodal transfer of containers, trailers and other freight traffic and include approximately 25 intermodal hubs located across the system. BNSF owns or holds under non-cancelable leases exceeding one year approximately 8,000 locomotives and 70,000 freight cars, in addition to maintenance of way and other equipment.
In the ordinary course of business, BNSF makes significant capital investments to expand and improve its railroad network. BNSF incurs significant costs in repairing and maintaining its properties. In 2018, BNSF recorded approximately $2 billion in repairs and maintenance expense.
Utilities and Energy Businesses—Berkshire Hathaway Energy
BHE’s energy properties consist of the physical assets necessary to support its electricity and natural gas businesses. Properties of BHE’s electricity businesses include electric generation, transmission and distribution facilities, as well as coal mining assets that support certain of BHE’s electric generating facilities. Properties of BHE’s natural gas businesses include natural gas distribution facilities, interstate pipelines, storage facilities, compressor stations and meter stations. The transmission and distribution assets are primarily within each of BHE’s utility service territories. In addition to these physical assets, BHE has rights-of-way, mineral rights and water rights that enable BHE to utilize its facilities. Pursuant to separate financing agreements, a majority of these properties are pledged or encumbered to support or otherwise provide the security for the related subsidiary debt. BHE or its affiliates own or have interests in the following types of electric generating facilities at December 31, 2018:
| Energy Source | Entity | Location by Significance | Facility Net Capacity (MW) (1) | Net Owned Capacity (MW) (1) | ||||||||
| Natural gas | PacifiCorp, MEC, NV Energy and BHE Renewables | Nevada, Utah, Iowa, Illinois, Washington, Oregon, Texas, New York, and Arizona | 10,920 | 10,641 | ||||||||
| Coal | PacifiCorp, MEC and NV Energy | Wyoming, Iowa, Utah, Arizona, Nevada, Colorado and Montana | 16,181 | 9,138 | ||||||||
| Wind | PacifiCorp, MEC and BHE Renewables | Iowa, Wyoming, Texas, Nebraska, Washington, California, Illinois, Oregon and Kansas | 7,862 | 7,853 | ||||||||
| Solar | BHE Renewables and NV Energy | California, Texas, Arizona, Minnesota and Nevada | 1,699 | 1,551 | ||||||||
| Hydroelectric | PacifiCorp, MEC and BHE Renewables | Washington, Oregon, The Philippines, Idaho, California, Utah, Hawaii, Montana, Illinois and Wyoming | 1,299 | 1,277 | ||||||||
| Nuclear | MEC | Illinois | 1,823 | 456 | ||||||||
| Geothermal | PacifiCorp and BHE Renewables | California and Utah | 370 | 370 | ||||||||
| Total | 40,154 | 31,286 | ||||||||||
| (1) | Facility Net Capacity (MW) represents the lesser of nominal ratings or any limitations under applicable interconnection, power purchase, or other agreements for intermittent resources and the total net dependable capability available during summer conditions for all other units. An intermittent resource’s nominal rating is the manufacturer’s contractually specified capability (in MW) under specified conditions. Net Owned Capacity indicates BHE’s ownership of Facility Net Capacity. |
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As of December 31, 2018, BHE’s subsidiaries also have electric generating facilities that are under construction in Iowa and Wyoming having total Facility Net Capacity and Net Owned Capacity of 2,390 MW.
PacifiCorp, MEC and NV Energy own electric transmission and distribution systems, including approximately 24,800 miles of transmission lines and approximately 1,690 substations, gas distribution facilities, including approximately 27,400 miles of gas mains and service lines, and an estimated 25 million tons of recoverable coal reserves in mines owned or leased in Wyoming and Colorado.
The electricity distribution network of Northern Powergrid (Northeast) and Northern Powergrid (Yorkshire) includes approximately 17,400 miles of overhead lines, approximately 42,300 miles of underground cables and approximately 780 major substations. AltaLink’s electricity transmission system includes approximately 8,200 miles of transmission lines and approximately 310 substations.
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Northern Natural’s pipeline system consists of approximately 14,700 miles of natural gas pipelines, including approximately 6,300 miles of mainline transmission pipelines and approximately 8,400 miles of branch and lateral pipelines. Northern Natural’s end-use and distribution market area includes points in Iowa, Nebraska, Minnesota, Wisconsin, South Dakota, Michigan and Illinois and its natural gas supply and delivery service area includes points in Kansas, Texas, Oklahoma and New Mexico. Storage services are provided through the operation of one underground natural gas storage field in Iowa, two underground natural gas storage facilities in Kansas and two liquefied natural gas storage peaking units, one in Iowa and one in Minnesota.
Kern River’s system consists of approximately 1,700 miles of natural gas pipelines, including approximately 1,400 miles of mainline section, including 100 miles of lateral pipelines, and approximately 300 miles of common facilities. Kern River owns the entire mainline section, which extends from the system’s point of origination in Wyoming through the Central Rocky Mountains into California.
Other Segments
The physical properties used by Berkshire’s other significant business segments are summarized below:
| Number of Properties | ||||||||||||||
| Business | Country | Locations | Property/Facility type | Owned | Leased | |||||||||
| Insurance: | ||||||||||||||
| GEICO | U.S. | Locations in 39 states | Offices and claims centers | 12 | 108 | |||||||||
| Non-U.S. | Locations in one country | Offices | — | 2 | ||||||||||
| BHRG | U.S. | Locations in 15 states | Offices | 1 | 28 | |||||||||
| Non-U.S. | Locations in 23 countries | Offices | 1 | 35 | ||||||||||
| BH Primary | U.S. | Locations in 23 states | Offices | 9 | 79 | |||||||||
| Non-U.S. | Locations in 8 countries | Offices | — | 12 | ||||||||||
| Manufacturing | U.S. | Locations in 48 states | Manufacturing facility | 543 | 167 | |||||||||
| Offices/Warehouses | 240 | 443 | ||||||||||||
| Retail/Showroom | 225 | 226 | ||||||||||||
| Housing communities | 280 | — | ||||||||||||
| Non-U.S. | Locations in 65 countries | Manufacturing facility | 241 | 172 | ||||||||||
| Offices/Warehouses | 59 | 540 | ||||||||||||
| Retail/Showroom | — | 5 | ||||||||||||
| Service | U.S. | Locations in 38 states | Training facilities/Hangars | 19 | 130 | |||||||||
| Offices/Distribution | 52 | 207 | ||||||||||||
| Production facilities | 24 | 3 | ||||||||||||
| Leasing/Showroom/Retail | 40 | 91 | ||||||||||||
| Non-U.S. | Locations in 34 countries | Training facilities/Hangars | 18 | 35 | ||||||||||
| Offices/Distribution | — | 115 | ||||||||||||
| Leasing/Showroom/Retail | — | 1 | ||||||||||||
| McLane Company | U.S. | Locations in 28 states | Distribution centers/Offices | 57 | 33 | |||||||||
| Retailing | U.S. | Locations in 42 states | Offices/Warehouses | 32 | 27 | |||||||||
| Retail/Showroom | 143 | 564 | ||||||||||||
| Non-U.S. | Locations in 6 countries | Offices/Warehouses | 1 | 12 | ||||||||||
| Retail/Offices | — | 87 |
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Item 3. Legal Proceedings
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Berkshire and its subsidiaries are parties in a variety of legal actions that routinely arise out of the normal course of business, including legal actions seeking to establish liability directly through insurance contracts or indirectly through reinsurance contracts issued by Berkshire subsidiaries. Plaintiffs occasionally seek punitive or exemplary damages. We do not believe that such normal and routine litigation will have a material effect on our financial condition or results of operations. Berkshire and certain of its subsidiaries are also involved in other kinds of legal actions, some of which assert or may assert claims or seek to impose fines and penalties. We believe that any liability that may arise as a result of other pending legal actions will not have a material effect on our consolidated financial condition or results of operations.
Item 4. Mine Safety Disclosures
| --- | --- |
Information regarding the Company’s mine safety violations and other legal matters disclosed in accordance with Section 1503 (a) of the Dodd-Frank Reform Act is included in Exhibit 95 to this Form 10-K.
Executive Officers of the Registrant
Following is a list of the Registrant’s named executive officers:
| Name | Age | Position with Registrant | Since | |||
| Warren E. Buffett | 88 | Chairman and Chief Executive Officer | 1970 | |||
| Charles T. Munger | 95 | Vice Chairman | 1978 | |||
| Gregory E. Abel | 56 | Vice Chairman – Non-Insurance Operations | 2018 | |||
| Ajit Jain | 67 | Vice Chairman – Insurance Operations | 2018 | |||
| Marc D. Hamburg | 69 | Senior Vice-President – Chief Financial Officer | 1992 |
Each executive officer serves, in accordance with the by-laws of the Registrant, until the first meeting of the Board of Directors following the next annual meeting of shareholders and until a successor is chosen and qualified or until such executive officer sooner dies, resigns, is removed or becomes disqualified.
FORWARD-LOOKING STATEMENTS
Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have no specific intention to update these statements.
Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities, losses realized from derivative contracts, the occurrence of one or more catastrophic events, such as an earthquake, hurricane, act of terrorism or cyber attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations, changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries, changes in federal income tax laws, and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.
K-28
Table of Contents
Part II
Item 5. Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities
| --- | --- |
Market Information
Berkshire’s Class A and Class B common stock are listed for trading on the New York Stock Exchange, trading symbol: BRK.A and BRK.B, respectively.
Shareholders
Berkshire had approximately 2,000 record holders of its Class A common stock and 19,500 record holders of its Class B common stock at February 15, 2019. Record owners included nominees holding at least 417,000 shares of Class A common stock and 1,374,000,000 shares of Class B common stock on behalf of beneficial-but-not-of-record owners.
Dividends
Berkshire has not declared a cash dividend since 1967.
Common Stock Repurchase Program
For several years, Berkshire had a common stock repurchase program, which permitted Berkshire to repurchase its Class A and Class B shares at prices no higher than a 20% premium over the book value of the shares. On July 17, 2018, Berkshire’s Board of Directors authorized an amendment to the program, permitting Berkshire to repurchase shares any time that Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charles Munger, Vice Chairman of the Board, believe that the repurchase price is below Berkshire’s intrinsic value, conservatively determined. Repurchases may be in the open market or through privately negotiated transactions. Information with respect to Berkshire’s Class A and Class B common stock repurchased during the fourth quarter of 2018 follows.
| Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced program | Maximum number or value of shares that yet may be repurchased under the program | ||||||||||
| October 11 through October 18: | ||||||||||||||
| Class A common stock | 202 | $ | 310,762.79 | 202 | * | |||||||||
| Class B common stock | 589,955 | $ | 205.09 | 589,955 | * | |||||||||
| December 13 through December 24: | ||||||||||||||
| Class A common stock | 790 | $ | 295,953.99 | 790 | * |
| * | The program does not specify a maximum number of shares to be repurchased or obligate Berkshire to repurchase any specific dollar amount or number of Class A or Class B shares and there is no expiration date to the repurchase program. Berkshire will not repurchase its common stock if the repurchases reduce the total value of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings to less than $20 billion. |
|---|
K-29
Table of Contents
Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities (Continued)
Stock Performance Graph
The following chart compares the subsequent value of $100 invested in Berkshire common stock on December 31, 2013 with a similar investment in the Standard & Poor’s 500 Stock Index and in the Standard & Poor’s Property – Casualty Insurance Index.**
| * | Cumulative return for the Standard & Poor’s indices based on reinvestment of dividends. |
|---|
| ** | It would be difficult to develop a peer group of companies similar to Berkshire. The Corporation owns subsidiaries engaged in a number of diverse business activities of which the most important is the property and casualty insurance business and, accordingly, management has used the Standard & Poor’s Property—Casualty Insurance Index for comparative purposes. |
|---|
K-30
Table of Contents
Item 6. Selected Financial Data
| --- | --- |
Selected Financial Data for the Past Five Years
(dollars in millions except per-share data)
| 2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Insurance premiums earned | $ | 57,418 | $ | 60,597 | $ | 45,881 | $ | 41,294 | $ | 41,253 | ||||||||||
| Sales and service revenues | 133,336 | 130,243 | 123,053 | 110,811 | 100,606 | |||||||||||||||
| Leasing revenue | 5,732 | 2,552 | 2,553 | 1,546 | 1,463 | |||||||||||||||
| Railroad, utilities and energy revenues | 43,673 | 40,005 | 37,447 | 39,923 | 40,610 | |||||||||||||||
| Interest, dividend and other investment income | 7,678 | 6,536 | 6,180 | 6,867 | 6,484 | |||||||||||||||
| Total revenues | $ | 247,837 | $ | 239,933 | $ | 215,114 | $ | 200,441 | $ | 190,416 | ||||||||||
| Investment and derivative gains/losses | $ | (22,455 | ) | $ | 2,128 | $ | 8,304 | $ | 10,347 | $ | 4,081 | |||||||||
| Earnings: | ||||||||||||||||||||
| Net earnings attributable to Berkshire Hathaway (1) | $ | 4,021 | $ | 44,940 | $ | 24,074 | $ | 24,083 | $ | 19,872 | ||||||||||
| Net earnings per share attributable to Berkshire Hathaway shareholders (2) | $ | 2,446 | $ | 27,326 | $ | 14,645 | $ | 14,656 | $ | 12,092 | ||||||||||
| Year-end data: | ||||||||||||||||||||
| Total assets | $ | 707,794 | $ | 702,095 | $ | 620,854 | $ | 552,257 | $ | 525,867 | ||||||||||
| Notes payable and other borrowings: | ||||||||||||||||||||
| Insurance and other | 34,975 | 40,409 | 42,559 | 26,550 | 24,584 | |||||||||||||||
| Railroad, utilities and energy | 62,515 | 62,178 | 59,085 | 57,739 | 55,306 | |||||||||||||||
| Berkshire Hathaway shareholders’ equity | 348,703 | 348,296 | 282,070 | 254,619 | 239,239 | |||||||||||||||
| Class A equivalent common shares outstanding, in thousands | 1,641 | 1,645 | 1,644 | 1,643 | 1,643 | |||||||||||||||
| Berkshire Hathaway shareholders’ equity per outstanding Class A equivalent common share | $ | 212,503 | $ | 211,750 | $ | 171,542 | $ | 154,935 | $ | 145,619 |
| (1) | Includes after-tax investment and derivative gains/losses of $(17.7) billion in 2018, $1.4 billion in 2017, $6.5 billion in 2016, $6.7 billion in 2015 and $3.3 billion in 2014. Beginning in 2018, investment gains/losses include the changes in fair values of equity securities during the period. Previously, investment gains/losses of equity securities were recognized in earnings when securities were sold or were other-than-temporarily impaired. Net earnings in 2017 includes a one-time net benefit of $29.1 billion attributable to the enactment of the Tax Cuts and Jobs Act of 2017. |
|---|
| (2) | Represents net earnings per average equivalent Class A share outstanding. Net earnings per average equivalent Class B common share outstanding is equal to 1/1,500 of such amount. |
|---|
K-31
Table of Contents
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Net earnings attributable to Berkshire Hathaway shareholders for each of the past three years are disaggregated in the table that follows. Amounts are after deducting income taxes and exclude earnings attributable to noncontrolling interests (in millions).
| 2018 | 2017 | 2016 | ||||||||||
| Insurance – underwriting | $ | 1,566 | $ | (2,219 | ) | $ | 1,370 | |||||
| Insurance – investment income | 4,554 | 3,887 | 3,636 | |||||||||
| Railroad | 5,219 | 3,959 | 3,569 | |||||||||
| Utilities and energy | 2,621 | 2,033 | 2,230 | |||||||||
| Manufacturing, service and retailing | 9,364 | 7,282 | 6,803 | |||||||||
| Investment and derivative gains/losses | (17,737 | ) | 1,377 | 6,497 | ||||||||
| Other | (1,566 | ) | (485 | ) | (31 | ) | ||||||
| Tax Cuts and Jobs Act of 2017 | — | 29,106 | — | |||||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 4,021 | $ | 44,940 | $ | 24,074 | ||||||
Through our subsidiaries, we engage in a number of diverse business activities. We manage our operating businesses on an unusually decentralized basis. There are essentially no centralized or integrated business functions and there is minimal involvement by our corporate headquarters in the day-to-day business activities of the operating businesses. Our senior corporate management team participates in and is ultimately responsible for significant capital allocation decisions, investment activities and the selection of the Chief Executive to head each of the operating businesses. The business segment data (Note 26 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.
Beginning in 2018, our periodic net earnings include changes in unrealized gains and losses on our investments in equity securities. These gains and losses are likely to be very significant given the size of our current holdings and the inherent volatility in securities prices. Prior to 2018, the changes in unrealized gains and losses pertaining to such investments were recorded in other comprehensive income. The new accounting treatment has no effect on our consolidated shareholders’ equity.
After-tax earnings of our business operations in 2018 were favorably affected by lower U.S. income tax expense, primarily attributable to a reduction in the statutory U.S. corporate income tax rate from 35% to 21%. The effect of the lower U.S. statutory income tax rate in 2018 on the comparative after-tax earnings of our various business operations varied, reflecting the differences in the mix of earnings subject to income tax, income tax credits and the effects of state and local income taxes.
Net earnings in 2017 included approximately $29.1 billion attributable to a one-time net benefit from the enactment of the Tax Cuts and Jobs Act of 2017 (“TCJA”) on December 22, 2017. See Note 18 to the Consolidated Financial Statements. This benefit included approximately $29.6 billion related to a one-time non-cash reduction of net deferred income tax liabilities from the reduction in the statutory U.S. corporate income tax rate from 35% to 21%, and a net benefit of approximately $900 million primarily attributable to our earnings from Kraft Heinz, partly offset by a one-time income tax expense of approximately $1.4 billion on the deemed repatriation of certain accumulated undistributed earnings of foreign subsidiaries. Due to their significance, we presented these one-time effects as a distinct item in the preceding table. Accordingly, the after-tax figures presented for 2017 in the discussion of our various operating businesses and other activities exclude the one-time effects of the TCJA.
After-tax earnings from insurance underwriting were approximately $1.6 billion in 2018 compared to after-tax losses of approximately $2.2 billion in 2017. Results in 2018 included reductions of estimated ultimate liabilities for prior years’ property/casualty loss events, gains from foreign currency exchange rate changes on certain non-U.S. Dollar denominated liabilities of U.S subsidiaries of $207 million and a lower effective income tax rate, partly offset by losses from significant catastrophe events of approximately $1.6 billion ($1.3 billion after-tax). After-tax losses from insurance underwriting in 2017 included estimated pre-tax losses of approximately $3.0 billion ($1.95 billion after-tax) from significant catastrophe events. Underwriting results in 2017 also included after-tax foreign currency exchange rate losses of $295 million.
Our railroad business generated a 31.8% increase in after-tax earnings in 2018 compared to 2017, reflecting an increase in unit volume, higher average revenue per car/unit and a lower effective income tax rate, partly offset by increased fuel and other operating costs. After-tax earnings of our railroad business in 2017 were $4.0 billion, an increase of 10.9% compared to 2016, reflecting increased unit volume.
Our utilities and energy businesses produced higher after-tax earnings in 2018 compared to 2017, primarily due to a lower overall effective income tax rate and the effects of losses incurred in 2017 in connection with the prepayment of certain long-term debt, partially offset by lower pre-tax earnings in certain of the regulated utilities. After-tax earnings of our utility and energy businesses in 2017 declined $197 million compared to 2016, reflecting the debt prepayment losses in 2017.
K-32
Table of Contents
Management’s Discussion and Analysis (Continued)
Results of Operations (Continued)
After-tax earnings in 2018 of our manufacturing, service and retailing businesses increased 29% over 2017, due to lower effective income tax rates and a 13% increase in pre-tax earnings. After-tax earnings in 2017 of our manufacturing, service and retailing businesses were $7.3 billion, an increase of 7.0% compared to 2016, reflecting comparatively higher earnings from several of our larger operations and the impact of businesses acquired in 2016 and 2017.
After-tax losses from investments and derivative contracts were $17.7 billion in 2018, which included after-tax losses of approximately $18 billion from changes in market values of our investments in equity securities held at December 31, 2018. Prior to 2018, after-tax investment gains or losses on equity securities arose from the sale of securities during the period based on the cost of the disposed security or through the recording of other-than-temporary impairment losses. In 2017, we recorded after-tax unrealized gains on our investments in equity securities of approximately $19 billion in other comprehensive income.
After-tax investment and derivative gains were approximately $1.4 billion in 2017 and $6.5 billion in 2016. Investment gains in 2016 included approximately $2.7 billion from the redemptions of our Wrigley and Kraft Heinz preferred stock investments, and sales of Dow Chemical common stock we received in the conversion of the Dow Chemical preferred stock investment. Investment gains in 2016 also included a non-cash after-tax gain of approximately $1.9 billion related to the exchange of Procter & Gamble (“P&G”) common stock for 100% of the common stock of Duracell.
We believe that investment and derivative gains/losses, whether realized from dispositions or unrealized from changes in market prices of equity securities, are generally meaningless in understanding our reported results or evaluating the economic performance of our businesses. These gains and losses have caused and will continue to cause significant volatility in our periodic earnin
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See “Market Risk Disclosures” contained in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Management’s Report on Internal Control Over Financial Reporting
Management of Berkshire Hathaway Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2018 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears on page K-62.
Berkshire Hathaway Inc.
February 23, 2019
K-61
Table of Contents
Item 8. Financial Statements and Supplementary Data
| --- | --- |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Berkshire Hathaway Inc.
Omaha, Nebraska
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of earnings, comprehensive income, changes in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for investments in equity securities (excluding equity method investments) in 2018 due to the adoption of ASU 2016-01 “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.”
Basis for Opinions
The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
K-62
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (Continued)
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 23, 2019
We have served as the Company’s auditor since 1985.
K-63
Table of Contents
BERKSHIRE HATHAWAY INC.
and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(dollars in millions)
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| ASSETS | ||||||||
| Insurance and Other: | ||||||||
| Cash and cash equivalents* | $ | 27,749 | $ | 28,673 | ||||
| Short-term investments in U.S. Treasury Bills | 81,506 | 84,371 | ||||||
| Investments in fixed maturity securities | 19,898 | 21,353 | ||||||
| Investments in equity securities | 172,757 | 170,540 | ||||||
| Equity method investments | 17,325 | 21,024 | ||||||
| Loans and finance receivables | 16,280 | 13,748 | ||||||
| Other receivables | 31,564 | 29,392 | ||||||
| Inventories | 19,069 | 17,366 | ||||||
| Property, plant and equipment | 20,628 | 19,868 | ||||||
| Equipment held for lease | 14,298 | 10,167 | ||||||
| Goodwill | 56,323 | 56,478 | ||||||
| Other intangible assets | 31,499 | 32,518 | ||||||
| Deferred charges under retroactive reinsurance contracts | 14,104 | 15,278 | ||||||
| Other | 9,307 | 9,391 | ||||||
| 532,307 | 530,167 | |||||||
| Railroad, Utilities and Energy: | ||||||||
| Cash and cash equivalents* | 2,612 | 2,910 | ||||||
| Receivables | 3,666 | 3,531 | ||||||
| Property, plant and equipment | 131,780 | 128,184 | ||||||
| Goodwill | 24,702 | 24,780 | ||||||
| Regulatory assets | 3,067 | 2,950 | ||||||
| Other | 9,660 | 9,573 | ||||||
| 175,487 | 171,928 | |||||||
| $ | 707,794 | $ | 702,095 | |||||
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
| --- | --- |
None
Item 9A. Controls and Procedures
| --- | --- |
At the end of the period covered by this Annual Report on Form 10-K, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer), of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chairman (Chief Executive Officer) and the Senior Vice President (Chief Financial Officer) concluded that the Corporation’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation’s periodic SEC filings. The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Management’s Report on Internal Control Over Financial Reporting, included on page K-61 of this report. The attestation report called for by Item 308(b) of Regulation S-K is incorporated herein by reference to Report of Independent Registered Public Accounting Firm, included on page K-62 of this report. There has been no change in the Corporation’s internal control over financial reporting during the quarter ended December 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Item 9B. Other Information
| --- | --- |
None
Part III
Except for the information set forth under the caption “Executive Officers of the Registrant” in Part I hereof, information required by this Part (Items 10, 11, 12, 13 and 14) is incorporated by reference from the Registrant’s definitive proxy statement, filed pursuant to Regulation 14A, for the Annual Meeting of Shareholders of the Registrant to be held on May 4, 2019, which meeting will involve the election of directors.
K-109
Table of Contents
Part IV
Item 15. Exhibits and Financial Statement Schedules
| --- | --- |
(a)1. Financial Statements
The following Consolidated Financial Statements, as well as the Report of Independent Registered Public Accounting Firm, are included in Part II Item 8 of this report:
(b) Exhibits
See the “Exhibit Index” at page K-113.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Berkshire Hathaway Inc.
Omaha, Nebraska
Opinion on the Financial Statement Schedule
We have audited the consolidated financial statements of Berkshire Hathaway Inc. and subsidiaries (the “Company”) as of December 31, 2018 and 2017, and for each of the three years in the period ended December 31, 2018, and the Company’s internal control over financial reporting as of December 31, 2018, and have issued our report thereon dated February 23, 2019; such consolidated financial statements and report are included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of the Company listed in the Index at Item 15. This financial statement schedule is the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
Change in Accounting Principle
As discussed in Note 1 to the financial statements of the Company, the Company has changed its method of accounting for investments in equity securities (excluding equity method investments) in 2018 due to the adoption of ASU 2016-01 “Financial Instruments – Recognition and Measurement of Financial Assets and Financial Liabilities.”
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 23, 2019
K-110
Table of Contents
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I
Balance Sheets
| December 31, | ||||||||
| 2018 | 2017 | |||||||
| Assets: | ||||||||
| Cash and cash equivalents | $ | 3,437 | $ | 4,039 | ||||
| Short-term investments in U.S. Treasury Bills | 22,957 | 13,132 | ||||||
| Investments in and advances to/from consolidated subsidiaries | 328,898 | 335,668 | ||||||
| Investment in The Kraft Heinz Company | 13,813 | 17,635 | ||||||
| Other assets | 80 | 79 | ||||||
| $ | 369,185 | $ | 370,553 | |||||
| Liabilities and Shareholders’ Equity: | ||||||||
| Accounts payable, accrued interest and other liabilities | $ | 1,507 | $ | 196 | ||||
| Income taxes, principally deferred | 2,104 | 3,294 | ||||||
| Notes payable and other borrowings | 16,871 | 18,767 | ||||||
| 20,482 | 22,257 | |||||||
| Berkshire Hathaway shareholders’ equity | 348,703 | 348,296 | ||||||
| $ | 369,185 | $ | 370,553 | |||||
Statements of Earnings and Comprehensive Income
| Year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Income items: | ||||||||||||
| From consolidated subsidiaries: | ||||||||||||
| Dividends | $ | 9,658 | $ | 5,367 | $ | 9,862 | ||||||
| Undistributed earnings (losses) | (3,952 | ) | 37,832 | 13,264 | ||||||||
| 5,706 | 43,199 | 23,126 | ||||||||||
| Investment gains (losses) | (4 | ) | (1 | ) | 700 | |||||||
| Equity in net earnings (losses) of The Kraft Heinz Company | (2,730 | ) | 2,938 | 923 | ||||||||
| Other income | 649 | 350 | 262 | |||||||||
| 3,621 | 46,486 | 25,011 | ||||||||||
| Cost and expense items: | ||||||||||||
| General and administrative | 216 | 159 | 80 | |||||||||
| Interest expense | 601 | 522 | 452 | |||||||||
| Foreign exchange (gains) losses Euro-denominated senior notes | (366 | ) | 1,008 | (244 | ) | |||||||
| Income tax expense (benefit) | (851 | ) | (143 | ) | 649 | |||||||
| (400 | ) | 1,546 | 937 | |||||||||
| Net earnings attributable to Berkshire Hathaway shareholders | 4,021 | 44,940 | 24,074 | |||||||||
| Other comprehensive income attributable to Berkshire Hathaway shareholders | (2,211 | ) | 21,273 | 3,316 | ||||||||
| Comprehensive income attributable to Berkshire Hathaway shareholders | $ | 1,810 | $ | 66,213 | $ | 27,390 | ||||||
See Note to Condensed Financial Information
K-111
Table of Contents
BERKSHIRE HATHAWAY INC.
(Parent Company)
Condensed Financial Information
(Dollars in millions)
Schedule I (continued)
Statements of Cash Flows
| Year ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 4,021 | $ | 44,940 | $ | 24,074 | ||||||
| Adjustments to reconcile net earnings to cash flows from operating activities: | ||||||||||||
| Investment gains (losses) | 4 | 1 | (700 | ) | ||||||||
| Undistributed earnings of consolidated subsidiaries | 3,952 | (37,832 | ) | (13,264 | ) | |||||||
| Income taxes payable | (972 | ) | (135 | ) | 629 | |||||||
| Other | 3,062 | (1,234 | ) | (161 | ) | |||||||
| Net cash flows from operating activities | 10,067 | 5,740 | 10,578 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Redemption of Kraft Heinz Company preferred stock | — | — | 8,320 | |||||||||
| Investments in and advances to/from consolidated subsidiaries, net | 460 | (239 | ) | (26,398 | ) | |||||||
| Purchases of U.S. Treasury Bills | (29,740 | ) | (19,663 | ) | (9,350 | ) | ||||||
| Sales and maturities of U.S. Treasury Bills | 21,442 | 14,847 | 1,145 | |||||||||
| Net cash flows from investing activities | (7,838 | ) | (5,055 | ) | (26,283 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from borrowings | 17 | 1,201 | 9,278 | |||||||||
| Repayments of borrowings | (1,563 | ) | (1,145 | ) | (1,125 | ) | ||||||
| Acquisition of treasury stock | (1,346 | ) | — | — | ||||||||
| Other | 61 | 77 | 164 | |||||||||
| Net cash flows from financing activities | (2,831 | ) | 133 | 8,317 | ||||||||
| Increase (decrease) in cash and cash equivalents | (602 | ) | 818 | (7,388 | ) | |||||||
| Cash and cash equivalents at beginning of year | 4,039 | 3,221 | 10,609 | |||||||||
| Cash and cash equivalents at end of year | $ | 3,437 | $ | 4,039 | $ | 3,221 | ||||||
| Other cash flow information: | ||||||||||||
| Income taxes paid | $ | 2,790 | $ | 2,076 | $ | 3,583 | ||||||
| Interest paid | 388 | 386 | 307 |
Note to Condensed Financial Information
Berkshire acquired 50% of the outstanding common stock of Heinz Holding Company in 2013. After a series of transactions in 2015, that interest represented 26.8% of the outstanding common stock of The Kraft Heinz Company (“Kraft Heinz”). Berkshire currently owns 26.7% of the outstanding shares of Kraft Heinz common stock. Reference is made to Note 5 to the Consolidated Financial Statements for additional information concerning Berkshire’s investment in Kraft Heinz.
Prior to 2018, the Parent Company issued Euro-denominated senior notes and the aggregate par amount outstanding of these borrowings was €6.85 billion as of December 31, 2018 and 2017. The gains and losses from the periodic remeasurement of the Euro notes due to changes in foreign currency exchange rates are included in earnings.
Parent Company debt maturities over the next five years are as follows: 2019—$752 million; 2020—$1,149 million; 2021—$2,131 million; 2022—$613 million and 2023—$3,991 million. Berkshire guarantees debt obligations of certain of its subsidiaries, which as of December 31, 2018, totaled approximately $12.4 billion. Such guarantees are an absolute, unconditional and irrevocable guarantee for the full and prompt payment when due of all present and future payment obligations. Berkshire also provides guarantees in connection with equity index put option contracts and certain retroactive reinsurance contracts of subsidiaries. The amounts of subsidiary payments under these contracts, if any, is contingent upon the outcome of future events.
In December 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was enacted, which reduced the Parent Company’s income tax expense in 2017 by $550 million, primarily due to the reduction in deferred tax liabilities attributable to the lower U.S. statutory rate, partly offset by a one-time income tax expense on certain accumulated undistributed earnings of foreign subsidiaries. The effects of the TCJA on income tax expense of consolidated subsidiaries is included in undistributed earnings in consolidated subsidiaries.
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EXHIBIT INDEX
| Exhibit No. | ||
| 2(i) | Agreement and Plan of Merger dated as of June 19, 1998 between Berkshire and General Re Corporation. | |
| Incorporated by reference to Annex I to Registration Statement No. 333-61129 filed on Form S-4. | ||
| 2(ii) | Agreement and Plan of Merger dated as of November 2, 2009 by and among Berkshire, R Acquisition Company, LLC and BNSF. Incorporated by reference to Annex A to Registration Statement No. 333-163343 on Form S-4. | |
| 2(iii) | Agreement and Plan of Merger dated August 8, 2015, by and among Berkshire, NW Merger Sub Inc. and Precision Castparts Corporation (“PCC”) | |
| Incorporated by reference to Exhibit 2.1 to PCC’s Current Report on Form 8-K filed on August 10, 2015 (SEC File No. 001-10348) | ||
| 3(i) | Restated Certificate of Incorporation | |
| Incorporated by reference to Exhibit 3(i) to Form 10-K filed on March 2, 2015. | ||
| 3(ii) | By-Laws | |
| Incorporated by reference to Exhibit 3(ii) to Form 8-K filed on May 4, 2016. | ||
| 4.1 | Indenture, dated as of December 22, 2003, between Berkshire Hathaway Finance Corporation, Berkshire Hathaway Inc. and The Bank of New York Mellon Trust Company, N.A. (as successor to J.P. Morgan Trust Company, National Association), as trustee. | |
| Incorporated by reference to Exhibit 4.1 on Form S-4 of Berkshire Hathaway Finance Corporation and Berkshire Hathaway Inc. filed on February 4, 2004. SEC File No. 333-112486 | ||
| 4.2 | Indenture, dated as of February 1, 2010, among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee. | |
| Incorporated by reference to Exhibit 4.1 to Berkshire’s Registration Statement on Form S-3 filed on February 1, 2010. SEC File No. 333-164611 | ||
| 4.3 | Indenture, dated as of January 26, 2016, by and among Berkshire Hathaway Inc., Berkshire Hathaway Finance Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee. | |
| Incorporated by reference to Exhibit 4.1 to Berkshire’s Registration Statement on Form S-3 filed on January 26, 2016. SEC File No. 333-209122 | ||
| 4.4 | Indenture, dated as of December 1, 1995, between BNSF and The First National Bank of Chicago, as trustee. | |
| Incorporated by reference to Exhibit 4 on Form S-3 of BNSF filed on February 8, 1999. | ||
| 4.5 | Indenture, dated as of October 4, 2002, by and between MidAmerican Energy Holdings Company and The Bank of New York, Trustee. | |
| Incorporated by reference to Exhibit 4.1 to the Berkshire Hathaway Energy Company Registration Statement No. 333-101699 dated December 6, 2002. | ||
| Other instruments defining the rights of holders of long-term debt of Registrant and its subsidiaries are not being filed since the total amount of securities authorized by all other such instruments does not exceed 10% of the total assets of the Registrant and its subsidiaries on a consolidated basis as of December 31, 2018. The Registrant hereby agrees to furnish to the Commission upon request a copy of any such debt instrument to which it is a party. | ||
| 10.1 | Equity Commitment Letter of Berkshire Hathaway Inc. with Hawk Acquisition Holding Corporation dated February 13, 2013. Incorporated by reference to Exhibit 10.1 on Form 8-K of Berkshire Hathaway Inc. filed on February 14, 2013. | |
| 14 | Code of Ethics | |
| Berkshire’s Code of Business Conduct and Ethics is posted on its Internet website at www.berkshirehathaway.com | ||
| 21 | Subsidiaries of Registrant | |
| 23 | Consent of Independent Registered Public Accounting Firm | |
| 31.1 | Rule 13a—14(a)/15d-14(a) Certification | |
| 31.2 | Rule 13a—14(a)/15d-14(a) Certification | |
| 32.1 | Section 1350 Certification | |
| 32.2 | Section 1350 Certification | |
| 95 | Mine Safety Disclosures | |
| 101 | The following financial information from Berkshire Hathaway Inc.’s Annual Report on Form 10-K for the year ended December 31, 2018, formatted in XBRL (Extensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets as of December 31, 2018 and 2017, (ii) the Consolidated Statements of Earnings for each of the three years ended December 31, 2018, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for each of the three years ended December 31, 2018, 2017 and 2016, (iv) the Consolidated Statements of Changes in Shareholders’ Equity for each of the three years ended December 31, 2018, 2017 and 2016, (v) the Consolidated Statements of Cash Flows for each of the three years ended December 31, 2018, 2017 and 2016 and (vi) the Notes to Consolidated Financial Statements and Schedule I, tagged in summary and detail. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. | ||
| Date: February 23, 2019 | /S/ MARC D. HAMBURG | |
| Marc D. Hamburg Senior Vice President and Principal Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| /S/ WARREN E. BUFFETT Warren E. Buffett | Chairman of the Board of Directors—Chief Executive Officer | February 23, 2019 Date | ||
| /S/ GREGORY E. ABEL Gregory E. Abel | Director—Vice Chairman—Non Insurance Operations | February 23, 2019 Date | ||
| /S/ HOWARD G. BUFFETT Howard G. Buffett | Director | February 23, 2019 Date | ||
| /S/ STEPHEN B. BURKE Stephen B. Burke | Director | February 23, 2019 Date | ||
| /S/ SUSAN L. DECKER Susan L. Decker | Director | February 23, 2019 Date | ||
| /S/ WILLIAM H. GATES III William H. Gates III | Director | February 23, 2019 Date | ||
| /S/ DAVID S. GOTTESMAN David S. Gottesman | Director | February 23, 2019 Date | ||
| /S/ CHARLOTTE GUYMAN Charlotte Guyman | Director | February 23, 2019 Date | ||
| /S/ AJIT JAIN Ajit Jain | Director—Vice Chairman—Insurance Operations | February 23, 2019 Date | ||
| /S/ CHARLES T. MUNGER Charles T. Munger | Director—Vice Chairman | February 23, 2019 Date | ||
| /S/ THOMAS S. MURPHY Thomas S. Murphy | Director | February 23, 2019 Date | ||
| /S/ RONALD L. OLSON Ronald L. Olson | Director | February 23, 2019 Date | ||
| /S/ WALTER SCOTT, JR. Walter Scott, Jr. | Director | February 23, 2019 Date | ||
| /S/ MERYL B. WITMER Meryl B. Witmer | Director | February 23, 2019 Date | ||
| /S/ MARC D. HAMBURG Marc D. Hamburg | Senior Vice President—Principal Financial Officer | February 23, 2019 Date | ||
| /S/ DANIEL J. JAKSICH Daniel J. Jaksich | Vice President—Principal Accounting Officer | February 23, 2019 Date |
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