Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Underwriting (Continued)

Berkshire Hathaway Primary Group (Continued)

A summary of BH Primary’s underwriting results follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Amount%Amount%Amount%Amount%
Premiums written$4,757$3,504$8,915$6,896
Premiums earned$4,233100.0$3,313100.0$8,194100.0$6,431100.0
Losses and loss adjustment expenses2,86167.62,24367.75,51767.34,51770.2
Underwriting expenses1,10026.082825.02,13726.11,58024.6
Total losses and expenses3,96193.63,07192.77,65493.46,09794.8
Pre-tax underwriting earnings$272$242$540$334

Premiums written increased $1.3 billion (35.8%) in the second quarter and $2.0 billion (29.3%) in the first six months of 2023 compared to 2022. The increases were primarily due to the inclusion of Alleghany Insurance ($746 million in the second quarter and $1.3 billion in the first six months), as well as comparative increases from BH Specialty and BH Direct.

Losses and loss adjustment expenses increased $618 million (27.6%) in the second quarter and $1.0 billion (22.1%) in the first six months of 2023 compared to 2022. The loss ratio decreased 0.1 percentage points in the second quarter and 2.9 percentage points in the first six months of 2023 compared to 2022, reflecting changes in business mix (including the impact of Alleghany Insurance), lower incurred losses from current year catastrophes and increased reductions in loss estimates for prior years’ events.

Incurred losses from significant catastrophes occurring in the first six months were $36 million in 2023 and $75 million in 2022. Incurred losses and loss adjustment expenses in the first six months reflected net reductions in estimated ultimate liabilities for prior accident years’ claims of $177 million in 2023 and $106 million in 2022. BH Primary insurers write significant levels of workers’ compensation, commercial and professional liability insurance and the related claim costs may be subject to high severity and long claim-tails. Ultimate claims liabilities could be greater than anticipated due to a variety of factors, including from adverse legal and judicial rulings.

Underwriting expenses increased $272 million (32.9%) in the second quarter and $557 million (35.3%) in the first six months of 2023 compared to 2022. The expense ratio increased 1.0 percentage points in the second quarter and 1.5 percentage points in the first six months of 2023 compared to 2022. The increases were primarily attributable to changes in business mix, including the effects of the Alleghany Insurance acquisition.

Berkshire Hathaway Reinsurance Group

The Berkshire Hathaway Reinsurance Group (“BHRG”) offers excess-of-loss and quota-share reinsurance coverages on property and casualty risks to insurers and reinsurers worldwide through several subsidiaries, led by National Indemnity Company (“NICO”), General Reinsurance Corporation, General Reinsurance AG and, beginning October 19, 2022, TransRe Group. We also write life and health reinsurance coverages through General Re Life Corporation, General Reinsurance AG and Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN”). We assume property and casualty risks under retroactive reinsurance contracts written through NICO and we write periodic payment annuity contracts through BHLN.

A summary of BHRG’s premiums and pre-tax underwriting results follows (in millions). The retrospective adoption of ASU 2018-12 resulted in increases in pre-tax earnings of $174 million in the second quarter and $319 million in the first six months of 2022 from the previously reported amounts. These increases derived primarily from reductions in certain variable annuity guarantee liabilities.

Second QuarterFirst Six Months
Premiums earnedPre-tax underwriting earnings (loss)Premiums earnedPre-tax underwriting earnings (loss)
20232022202320222023202220232022
Property/casualty$5,325$3,531$1,124$976$10,474$6,930$1,514$1,381
Life/health1,2891,262471242,3492,51018498
Retroactive reinsurance——(263)(52)——(458)(242)
Periodic payment annuity—168(211)(54)—337(375)(173)
Variable annuity——130147——193378
$6,614$4,961$827$1,141$12,823$9,777$1,058$1,442

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Underwriting (Continued)

Berkshire Hathaway Reinsurance Group (Continued)

Property/casualty

A summary of property/casualty reinsurance underwriting results follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Amount%Amount%Amount%Amount%
Premiums written$5,866$4,159$12,134$8,545
Premiums earned$5,325100.0$3,531100.0$10,474100.0$6,930100.0
Losses and loss adjustment expenses2,79352.52,06758.56,18059.04,37463.1
Underwriting expenses1,40826.448813.92,78026.51,17517.0
Total losses and expenses4,20178.92,55572.48,96085.55,54980.1
Pre-tax underwriting earnings$1,124$976$1,514$1,381

Premiums written in the second quarter and first six months of 2023 included $1.2 billion and $2.6 billion, respectively, by TransRe Group. Otherwise, premiums written in the first six months of 2023 increased $1.0 billion (11.9%) compared to 2022, primarily due to increases in property business and higher rates. Given the levels of property lines written and that we generally do not retrocede the risks we assume, our periodic underwriting earnings are subject to considerable volatility from significant catastrophe events.

Losses and loss adjustment expenses increased $726 million (35.1%) in the second quarter and $1.8 billion (41.3%) in the first six months of 2023 compared to 2022, primarily from the inclusion of TransRe Group ($785 million in the second quarter and $1.5 billion in the first six months of 2023). Overall, the loss ratio decreased 4.1 percentage points in the first six months of 2023 compared to 2022. Losses incurred from significant catastrophes in the first six months were $528 million in 2023 and $629 million in 2022. Losses and loss adjustment expenses incurred reflected reductions in estimated ultimate liabilities for prior accident years’ claims of $883 million in the first six months of 2023 and $574 million in the first six months of 2022.

Underwriting expenses in 2023 increased $920 million in the second quarter and $1.6 billion in the first six months compared to 2022. The expense ratio increased 12.5 percentage points in the second quarter and 9.5 percentage points in the first six months of 2023 compared to 2022. The increases were primarily attributable to changes in foreign currency exchange rates and changes in business mix, including the impact of TransRe Group. Foreign currency exchange losses were $118 million in the second quarter and $192 million in the first six months of 2023 compared to gains of $308 million in the second quarter and $389 million in the first six months of 2022 and related to the remeasurement of certain non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Underwriting expenses included $385 million in the second quarter and $770 million in the first six months of 2023 related to TransRe Group.

Life/health

A summary of our life/health reinsurance underwriting results follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Amount%Amount%Amount%Amount%
Premiums written$1,292$1,249$2,353$2,492
Premiums earned$1,289100.0$1,262100.0$2,349100.0$2,510100.0
Life and health insurance benefits1,02079.191272.31,69872.31,97378.6
Underwriting expenses22217.322617.946719.943917.5
Total benefits and expenses1,24296.41,13890.22,16592.22,41296.1
Pre-tax underwriting earnings$47$124$184$98

Premiums earned increased $27 million (2.1%) in the second quarter and decreased $161 million (6.4%) in the first six months of 2023 compared to 2022. In the first quarter of 2023, several of General Re’s life reinsurance contracts were commuted, which reduced premiums earned by $161 million and life benefits incurred by $304 million. Excluding these effects, premiums earned increased slightly in the second quarter and were substantially unchanged in the first six months of 2023, and life benefits incurred increased 11.8% in the second quarter and 1.5% in the first six months of 2023 versus 2022. The increase in the expense ratio in the first six months of 2023 versus 2022 was primarily attributable to the impact of the life reinsurance contract commutations and increased underwriting expenses.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Underwriting (Continued)

Berkshire Hathaway Reinsurance Group (Continued)

Retroactive reinsurance

Pre-tax underwriting losses from retroactive reinsurance in each period derived from the amortization of deferred charges and the effects of changes in the estimated timing and amounts of future claim payments. Underwriting results also include foreign currency exchange gains and losses from the effects of changes in foreign currency exchange rates on non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Pre-tax foreign currency exchange losses were $18 million in the second quarter and $24 million in the first six months of 2023 compared to pre-tax gains of $152 million in the second quarter and $157 million in the first six months of 2022. Before foreign currency exchange effects, pre-tax underwriting losses were $245 million in the second quarter and $434 million in the first six months of 2023 and $204 million in the second quarter and $399 million in the first six months of 2022.

Gross unpaid losses assumed under retroactive reinsurance contracts were $34.4 billion at June 30, 2023, a decline of $1.0 billion since December 31, 2022, primarily attributable to claim payments. Unamortized deferred charges related to retroactive reinsurance contracts were $9.5 billion at June 30, 2023, a decline of $416 million since December 31, 2022. Deferred charge amortization will be included in underwriting earnings over the expected remaining claims settlement periods.

Periodic payment annuity

Periodic payment annuity business is price and demand sensitive and the supply of available business is affected by the timing of underlying legal claim settlements. Our volumes written may change rapidly due to changes in prices, as well as the level of competition. Beginning in the latter part of 2022, prices for new business have declined to unacceptable levels and we have restricted writing new business.

Our periodic payment annuity contracts normally produce pre-tax underwriting losses from the recurring accretion of time-value discounted liabilities, which includes liabilities for contracts without life contingencies. Underwriting results also include gains or losses from foreign currency exchange rate changes on non-U.S. Dollar denominated liabilities of our U.S. subsidiaries. Pre-tax underwriting results included foreign currency exchange losses of $64 million in the second quarter and $83 million in the first six months of 2023 compared to gains of $86 million in the second quarter and $109 million in the first six months of 2022.

Pre-tax underwriting losses before foreign currency exchange effects were $147 million in the second quarter and $292 million in the first six months of 2023 and $140 million in the second quarter and $282 million in the first six months of 2022. Discounted liabilities were $14.8 billion at June 30, 2023, which included $4.0 billion for contracts without life contingencies. We adopted ASU 2018-12 on January 1, 2023, which requires that the discount rates on contracts with life-contingent liabilities be adjusted quarterly based upon prevailing interest rates with the effects of discount rate changes included in other comprehensive income.

Variable annuity

Our variable annuity guarantee reinsurance contracts produced pre-tax gains of $130 million in the second quarter and $193 million in the first six months of 2023 and $147 million in the second quarter and $378 million in the first six months of 2022. The results from these contracts are affected by changes in securities markets, interest rates and foreign currency exchange rates, which can be volatile. Our estimated liabilities associated with these contracts, which are in run-off, were approximately $1.0 billion as of June 30, 2023.

Insurance—Investment Income

A summary of net investment income attributable to our insurance operations follows (dollars in millions).

Second QuarterFirst Six MonthsPercentage Change
2023202220232022Second QuarterFirst Six Months
Dividend income$1,522$2,055$2,766$3,252(25.9)%(14.9)%
Interest and other investment income1,3902282,531392509.6545.7
Pre-tax net investment income2,9122,2835,2973,64427.645.4
Income taxes and noncontrolling interests543377959568
Net investment income$2,369$1,906$4,338$3,076
Effective income tax rate18.6%16.5%18.1%15.6%

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Insurance—Investment Income (Continued)

Dividend income declined 25.9% in the second quarter and 14.9% in the first six months of 2023 compared to 2022. These reductions reflected net dispositions of investments since the end of the second quarter of 2022. Income in the first six months included $17 million in 2023 and $29 million in 2022 from BHE preferred stock. Such amounts were deducted from earnings of the BHE segment. Dividend income varies from period to period due to changes in the investment portfolio and the frequency and timing of dividends from certain investees.

Interest and other investment income increased $1.2 billion in the second quarter and $2.1 billion in the first six months of 2023 compared to the same periods in 2022. The increases were primarily due to increases in short-term interest rates. We continue to hold substantial balances of cash, cash equivalents and short-term U.S. Treasury Bills. We continue to believe that maintaining ample liquidity is paramount and we insist on safety over yield with respect to short-term investments.

Invested assets of our insurance businesses derive from shareholder capital and net liabilities under insurance and reinsurance contracts or “float.” The major components of float are unpaid losses and loss adjustment expenses, including liabilities under retroactive reinsurance contracts, life, annuity and health benefit liabilities, unearned premiums and other liabilities due to policyholders, which are reduced by insurance premiums receivable, reinsurance receivables, deferred charges assumed under retroactive reinsurance contracts and deferred policy acquisition costs. Float approximated $166 billion at June 30, 2023 and $164 billion at December 31, 2022. Our combined insurance operations generated pre-tax underwriting gains in the first six months of 2023 and, consequently, the average cost of float was negative. A summary of cash and investments held in our insurance businesses as of June 30, 2023 and December 31, 2022 follows (in millions).

June 30, 2023December 31, 2022
Cash, cash equivalents and U.S. Treasury Bills$105,747$86,816
Equity securities344,821298,934
Fixed maturity securities22,22324,998
Other2,2143,417
$475,005$414,165

Fixed maturity securities as of June 30, 2023 were as follows (in millions).

Amortized CostUnrealized Gains (Losses)Carrying Value
U.S. Treasury, U.S. government corporations and agencies$9,233$(190)$9,043
Foreign governments11,495(91)11,404
Corporate bonds1,3222221,544
Other21814232
$22,268$(45)$22,223

U.S. government obligations are rated AA+ or Aaa by the major rating agencies. Approximately 94% of all foreign government obligations were rated AA or higher by at least one of the major rating agencies as of June 30, 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BNSF

Burlington Northern Santa Fe, LLC (“BNSF”) operates one of the largest railroad systems in North America, with over 32,500 route miles of track in 28 states. BNSF also operates in three Canadian provinces. BNSF classifies its major business groups by type of product shipped including consumer products, industrial products, agricultural products and coal. A summary of BNSF’s earnings follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Railroad operating revenues$5,704$6,454$11,592$12,231
Railroad operating expenses:
Compensation and benefits1,3781,2132,6912,437
Fuel8331,2761,7972,137
Purchased services4895091,0001,008
Depreciation and amortization6506181,2951,242
Equipment rents, materials and other5404601,133986
Total3,8904,0767,9167,810
Railroad operating earnings1,8142,3783,6764,421
Other revenues (expenses):
Other revenues124186255377
Other expenses, net(67)(159)(154)(329)
Interest expense(256)(254)(513)(509)
Pre-tax earnings1,6152,1513,2643,960
Income taxes351487753925
Net earnings$1,264$1,664$2,511$3,035
Effective income tax rate21.7%22.6%23.1%23.4%

The following table summarizes BNSF’s railroad freight volumes by business group (cars/units in thousands).

Cars/UnitsPercentage Change
Second QuarterFirst Six MonthsSecondFirst Six
2023202220232022QuarterMonths
Consumer products1,1571,3792,2232,654(16.1)%(16.2)%
Industrial products407421796824(3.3)(3.4)
Agricultural products278303578608(8.3)(4.9)
Coal360373729759(3.5)(4.0)
2,2022,4764,3264,845(11.1)(10.7)

Railroad operating revenues declined 11.6% in the second quarter and 5.2% in the first six months of 2023 compared to 2022, reflecting lower volumes of 11.1% in the second quarter and 10.7% in the first six months of 2023 compared to 2022. Average revenue per car/unit decreased slightly in the second quarter, while average revenue per car/unit increased 6.4% in the first six months of 2023 resulting from higher yield. BNSF’s pre-tax earnings were $1.6 billion in the second quarter and $3.3 billion the first six months of 2023, declines of 24.9% and 17.6%, respectively, compared to 2022.

Operating revenues from consumer products were $1.9 billion in the second quarter and $3.8 billion in the first six months of 2023, decreases of 22.7% and 17.0%, respectively, from 2022. The revenue declines were attributable to volume decreases of 16.1% in the second quarter and 16.2% in the first six months of 2023 compared to 2022 and lower average revenue per car/unit. The volume decreases were primarily due to lower intermodal shipments resulting from lower west coast imports, the loss of an intermodal customer and competition from lower spot rates in the trucking market which has impacted our domestic intermodal demand. These decreases were partially offset by an increase in automotive volume from higher vehicle production.

Operating revenues from industrial products were $1.4 billion in the second quarter and $2.8 billion in the first six months of 2023, a decrease of 0.8% and an increase of 2.6%, respectively, from 2022. The decline in the second quarter was primarily due to a volume decrease of 3.3%, partially offset by higher average revenue per car/unit. The increase in the first six months was primarily due to higher average revenue per car/unit, partially offset by a 3.4% volume decline. The volume declines were primarily due to lower demand for chemicals, plastics and lumber, as well as lower shipments of petroleum products resulting from refinery outages.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BNSF (Continued)

Operating revenues from agricultural products were $1.3 billion in the second quarter and $2.8 billion in the first six months of 2023, a decrease of 6.9% in the second quarter and an increase of 0.8% in the first six months compared to 2022. The second quarter revenue change was attributable to an 8.3% decline in volume, partially offset by higher average revenue per car/unit. The revenue increase in the first six months was primarily due to higher average revenue per car/unit, partially offset by a volume decrease of 4.9%. The volume decreases were mainly due to lower grain exports, partially offset by higher volumes of domestic grains, renewable diesel and feedstocks.

Operating revenues from coal were $936 million in the second quarter and $2.0 billion in the first six months of 2023, a decrease of 6.3% in the second quarter and an increase of 4.1% in the first six months versus 2022. The revenue decline in the second quarter was attributable to lower volumes of 3.5% and lower average revenue per car/unit. The revenue increase in the first six months was driven by higher average revenue per car/unit, partially offset by a volume decrease of 4.0%. The volume decreases derived from moderating demand attributable to lower natural gas prices and weather related impacts.

Railroad operating expenses were $3.9 billion in the second quarter and $7.9 billion in the first six months of 2023, a decrease of $186 million (4.6%) in the second quarter and an increase of $106 million (1.4%) in the first six months compared to 2022. The decline in the second quarter of 2023 reflected lower fuel costs, partially offset by higher compensation and benefits expenses and general inflation. The increase during the first six months of 2023 reflected increases in all operating expenses, with the exception of fuel costs and purchased services. The ratio of railroad operating expenses to railroad operating revenues increased 5.0 percentage points to 68.2% in the second quarter and 4.4 percentage points to 68.3% in the first six months of 2023 versus the comparable 2022 periods.

Compensation and benefits expenses increased $165 million (13.6%) in the second quarter and $254 million (10.4%) in the first six months of 2023 compared to 2022, primarily due to increased headcount, wage inflation and lower productivity. Fuel expenses decreased $443 million (34.7%) in the second quarter and $340 million (15.9%) in the first six months of 2023 compared to 2022, primarily due to lower average fuel prices and lower volumes, as well as improved efficiency. Depreciation expense increased $32 million (5.2%) in the second quarter and $53 million (4.3%) in the first six months of 2023 compared to 2022, primarily due to higher capital expenditures. Equipment rents, materials and other expenses increased $80 million (17.4%) in the second quarter and $147 million (14.9%) in the first six months of 2023 compared to 2022. The increases were primarily due to general inflation, increased casualty and litigation costs, higher property and other taxes and lower gains from land and easement sales.

BHE

We currently own 92% of Berkshire Hathaway Energy Company (“BHE”), which operates a global energy business. BHE’s domestic regulated utility interests include PacifiCorp, MidAmerican Energy Company (“MEC”) and NV Energy. BHE’s natural gas pipelines consist of five domestic regulated interstate natural gas pipeline systems and a 25% interest in a liquefied natural gas export, import and storage facility (“LNG interest”), which BHE consolidates for financial reporting purposes. Other energy businesses include two regulated electricity distribution businesses operated by BHE subsidiaries (referred to as Northern Powergrid) in Great Britain, a regulated electricity transmission-only business in Alberta, Canada (“AltaLink, L.P.”), a diversified portfolio of mostly renewable independent power projects and investments and an unregulated retail energy services company. BHE also operates a residential real estate brokerage business and a large network of real estate brokerage franchises in the United States.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BHE (Continued)

The rates our regulated businesses charge customers for energy and services are largely based on the costs of business operations, including income taxes and a return on capital, and are subject to regulatory approval. To the extent such costs are not allowed in the approved rates, operating results will be adversely affected. A summary of BHE’s net earnings follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Revenues:
Energy operating revenue$4,933$4,940$10,404$9,763
Real estate operating revenue1,2961,6722,1712,879
Other income (loss)133(67)238(77)
Total revenue6,3626,54512,81312,565
Costs and expenses:
Energy cost of sales1,5661,5253,5212,985
Energy operating expenses2,3572,3435,1474,496
Real estate operating costs and expenses1,2501,5552,1702,734
Interest expense5655311,1281,046
Total costs and expenses5,7385,95411,96611,261
Pre-tax earnings6245918471,304
Income tax expense (benefit)*(379)(420)(742)(693)
Net earnings after income taxes1,0031,0111,5891,997
Noncontrolling interests of BHE subsidiaries130120244229
Net earnings attributable to BHE8738911,3451,768
Noncontrolling interests and preferred stock dividends88102144204
Net earnings attributable to Berkshire Hathaway shareholders$785$789$1,201$1,564
Effective income tax rate(60.7)%(71.1)%(87.6)%(53.1)%
  • Includes significant production tax credits from wind-powered electricity generation.

The discussion of BHE’s operating results that follows is based on after-tax earnings, reflecting how the energy businesses are managed and evaluated. A summary of net earnings attributable to BHE follows (dollars in millions).

Second QuarterFirst Six MonthsPercentage Change
2023202220232022Second QuarterFirst Six Months
U.S. utilities$430$380$593$78013.2%(24.0)%
Natural gas pipelines187199556521(6.0)6.7
Other energy businesses389411572750(5.4)(23.7)
Real estate brokerage3484—105(59.5)(100.0)
Corporate interest and other(167)(183)(376)(388)(8.7)(3.1)
$873$891$1,345$1,768(2.0)(23.9)

Our U.S. utilities operate in several states, including Utah, Oregon and Wyoming (PacifiCorp), Iowa and Illinois (MEC) and Nevada (NV Energy). After-tax earnings increased $50 million (13.2%) in the second quarter and declined $187 million (24.0%) in the first six months of 2023 compared to 2022. The earnings increase for the second quarter was primarily attributable to higher interest and other income, lower depreciation and amortization expense and increased income tax benefits, partly offset by increases in operations and maintenance expense and interest expense. The earnings decrease in the first six months reflected an increase in operations and maintenance expense of $519 million, including a pre-tax increase in loss accruals, net of expected insurance recoveries, of $344 million associated with the 2020 wildfires, and an increase in interest expense. These items were partially offset by increases in interest and other income, lower depreciation and amortization expense and higher electric utility margin (operating revenue less cost of sales), as well as higher income tax benefits.

The U.S. utilities’ electric utility margin was $1.8 billion in the second quarter of 2023, relatively unchanged from 2022. Electric utility margin was $3.5 billion in the first six months of 2023, an increase of $60 million (1.7%) versus 2022. The year-to-date increase reflected a variety of changes in operating revenues attributable to rates and volumes and in power generation and purchased costs. Electric retail customer volumes increased 0.1% (up 0.6% at PacifiCorp and 1.3% at MEC and down 1.7% at NV Energy) in the first six months of 2023 compared to 2022, primarily due to an overall increase in customer usage and in the average number of customers, partially offset by the unfavorable impact of weather at MEC and NV Energy.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BHE (Continued)

After-tax earnings of natural gas pipelines decreased $12 million (6.0%) in the second quarter and increased $35 million (6.7%) in the first six months of 2023 compared to 2022. The increase in earnings for the first six months reflected higher regulated transportation and storage services revenues from certain general rate cases and favorable interest and other income, partially offset by higher operations and maintenance expenses and the impact of state income tax reductions in the second quarter of 2022.

After-tax earnings of other energy businesses decreased $22 million (5.4%) in the second quarter and $178 million (23.7%) in the first six months of 2023 compared to 2022. The declines in earnings reflected lower earnings from renewable energy and retail services businesses, primarily attributable to lower income tax benefits and higher operating expenses and the impact of unfavorable changes in valuations of derivatives contracts, partially offset by debt extinguishment gains. Earnings in the first six months of 2023 also included a deferred income tax charge of $82 million recognized in the first quarter related to the enactment of the new Energy Profits Levy income tax in the United Kingdom.

After-tax earnings of real estate brokerage decreased $50 million in the second quarter and $105 million in the first six months of 2023 compared to 2022. The decreases reflected lower brokerage services revenues and margins, primarily due to a 26% year-to-date reduction in closed brokerage transaction volumes, as well as lower mortgage services revenues and margins from a 38% year-to-date decrease in closed transaction volumes. These declines were attributable to the impact of rising interest rates, including lower existing home sales and mortgage refinancing demand.

Corporate interest and other after-tax losses decreased $16 million in the second quarter and $12 million in the first six months of 2023 compared to 2022, reflecting higher other income, partially offset by lower federal income tax credits recognized and higher BHE corporate interest expense from an April 2022 debt issuance.

Pilot

Pilot is headquartered in Knoxville, Tennessee and operates travel centers in North America (primarily under the names Pilot or Flying J) with more than 650 travel center locations across the U.S. and in six Canadian provinces. Pilot also has over 150 retail locations in the U.S. and Canada where it sells diesel fuel through various arrangements with third party travel centers. A substantial portion of Pilot’s revenues and earnings derive from marketing fuel on a wholesale and retail basis and from other energy-related activities.

Through January 31, 2023, we owned a 38.6% interest in Pilot, which we accounted for under the equity method. Our proportionate share of Pilot’s net earnings for the month ending January 31, 2023 and first six months of 2022 are included in equity method earnings in the accompanying Consolidated Statements of Earnings. On January 31, 2023, we acquired an additional 41.4% interest in Pilot, and we currently own an 80% controlling interest. Thus, we began consolidating Pilot’s results of operations in our Consolidated Statements of Earnings on February 1, 2023. Pilot’s earnings for the second quarter of 2023 and the five months ending June 30, 2023 are summarized below (in millions).

Second QuarterFive Months Ending
2023June 30, 2023
Revenues$14,754$24,262
Cost of sales13,60022,405
Operating and other expenses8551,351
Interest expense113184
Pre-tax earnings186322
Income taxes and noncontrolling interests72125
Net earnings attributable to Berkshire Hathaway shareholders$114$197

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Pilot (Continued)

Pilot’s revenues and earnings are highly dependent on fuel volumes, prices and margins. Revenues for the second quarter of 2023 and the five months ending June 30, 2023 were $14.8 billion and $24.3 billion, respectively.

Pilot’s pre-tax earnings for the second quarter of 2023 and the five months ending June 30, 2023 were $186 million and $322 million, respectively. Operating and other expenses include depreciation and amortization expense of $243 million in the second quarter of 2023 and $411 million in the five months ending June 30, 2023, a significant portion of which derives from property, plant and equipment and finite-lived intangible asset fair value remeasurements in connection with our application of the acquisition accounting method in 2023.

Pilot’s consolidated pre-tax earnings for the second quarter and the first six months of 2023 and 2022 are summarized below. Revenues, costs and expenses for the first six months of 2022 and first month of 2023 are based on Pilot’s historical accounting and are not included in our Consolidated Financial Statements, whereas such information for the five months ending June 30, 2023 was included in our Consolidated Financial Statements (dollars in millions).

Second QuarterFirst Six MonthsPercentage Change
2023202220232022Second QuarterFirst Six Months
Revenues$14,754$21,534$29,282$36,001(31.5)%(18.7)%
Cost of sales13,60020,60927,09934,128(34.0)(20.6)
Operating and other expenses8556331,5641,23835.126.3
Interest expense1135120893121.6123.7
Pre-tax earnings$186$241$411$542(22.8)(24.2)

Revenues for the first six months of 2023 and 2022 were approximately $29.3 billion and $36.0 billion, respectively. For the first six months of 2023, Pilot sold approximately 9.25 billion gallons of diesel fuel, gasoline and other fuel-related products. Revenues during the first six months of 2023 have been lower than in the corresponding 2022 periods, primarily due to significantly lower fuel prices, as well as from lower fuel sales volumes. Cost of sales in 2022 included significantly higher LIFO inventory charges than in 2023, attributable to the significant increases in fuel prices during the first half of 2022. Interest expense increased $62 million in the second quarter and $115 million in the first six months of 2023 compared to 2022, due to higher interest rates.

Manufacturing, Service and Retailing

A summary of revenues and earnings of our manufacturing, service and retailing businesses follows (dollars in millions).

Second QuarterFirst Six MonthsPercentage Change
2023202220232022Second QuarterFirst Six Months
Revenues
Manufacturing$19,102$19,772$37,391$38,193(3.4)%(2.1)%
Service and retailing23,02422,87946,01444,5090.63.4
$42,126$42,651$83,405$82,702
Pre-tax earnings
Manufacturing$3,103$3,028$5,714$5,8522.5%(2.4)%
Service and retailing1,3911,2752,7252,4929.19.3
4,4944,3038,4398,344
Income taxes and noncontrolling interests1,1051,0542,0682,070
Net earnings*$3,389$3,249$6,371$6,274
Effective income tax rate23.9%24.0%23.8%24.3%
Pre-tax earnings as a percentage of revenues10.7%10.1%10.1%10.1%

** Excludes certain acquisition accounting expenses, primarily related to the amortization of identifiable intangible assets recorded in connection with our business acquisitions. The after-tax acquisition accounting expenses excluded from earnings were $174 million in the second quarter and $352 million in the first six months of 2023 and $162 million in the second quarter and $323 million in the first six months of 2022. These expenses are included in “Other” in the summary of earnings on page 31 and in the “Other” earnings section on page 48.*

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Manufacturing

Our manufacturing group includes a variety of industrial, building and consumer products businesses. A summary of revenues and pre-tax earnings of these operations follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Revenues
Industrial products$8,876$7,714$17,739$15,189
Building products6,6937,71012,70314,422
Consumer products3,5334,3486,9498,582
$19,102$19,772$37,391$38,193
Pre-tax earnings
Industrial products$1,520$1,270$2,961$2,486
Building products1,2271,3072,1222,451
Consumer products356451631915
$3,103$3,028$5,714$5,852
Pre-tax earnings as a percentage of revenues
Industrial products17.1%16.5%16.7%16.4%
Building products18.3%17.0%16.7%17.0%
Consumer products10.1%10.4%9.1%10.7%

Industrial products

The industrial products group includes metal products for aerospace, power and general industrial markets (Precision Castparts Corp. (“PCC”)), specialty chemicals (The Lubrizol Corporation (“Lubrizol”)), metal cutting tools/systems (IMC International Metalworking Companies (“IMC”)) and Marmon, which consists of more than 100 autonomous manufacturing and service businesses, internally aggregated into eleven groups, and includes leasing for the rail, intermodal tank container and mobile crane industries. The industrial products group also includes equipment and systems for the livestock and agricultural industries (CTB International) and a variety of industrial products for diverse markets (Scott Fetzer and LiquidPower Specialty Products). Beginning October 19, 2022, this group also includes certain of Alleghany’s businesses consisting of W&W|AFCO Steel, a structural steel fabrication products business, as well as other businesses that were combined into Marmon.

Revenues of the industrial products group increased $1.2 billion (15.1%) in the second quarter and $2.6 billion (16.8%) in the first six months of 2023 compared to 2022. Pre-tax earnings increased $250 million (19.7%) in the second quarter and $475 million (19.1%) in the first six months of 2023. Pre-tax earnings as a percentage of revenues for the group were 16.7% for the first six months of 2023, an increase of 0.3% compared to the first six months of 2022. Operating results of the group in the first six months of 2023 reflected the impact of business acquisitions and overall improved operating results at our pre-existing businesses. Operating results in 2022 were negatively affected by a combination of higher materials and energy costs, manufacturing inefficiencies attributable to supply chain disruptions and labor shortages and asset impairment charges, which largely offset the impacts of increased average selling prices and increased demand for certain product categories.

PCC’s revenues were $2.3 billion in the second quarter and $4.6 billion in the first six months of 2023, increases of 28.7% in the second quarter and 28.4% in the first six months compared to 2022. PCC derives significant revenues and earnings from sales of aerospace products. The revenue increases in 2023 were primarily attributable to higher demand for aerospace products, while power/energy and general and industrial products also contributed to the overall revenue increases. Long-term industry forecasts continue to show growth and strong demand for air travel and aerospace products.

PCC’s pre-tax earnings increased 31.5% in the second quarter and 27.3% in the first six months of 2023 compared to 2022. The improved results in 2023 reflect the increases in sales and improving manufacturing and operating efficiencies. We continue to strive to improve manufacturing efficiencies, maintain safety and prepare for increasing demand for PCC’s products. Continued growth in PCC’s revenues and earnings will be predicated on the ability to successfully increase production levels to match the expected growth in aerospace products demand.

Lubrizol’s revenues were $1.6 billion in the second quarter and $3.4 billion in the first six months of 2023, a decrease of 5.5% in the second quarter and unchanged in the first six months compared to 2022. Revenues in the first six months of 2023 reflected lower volumes and unfavorable foreign currency translation effects from the stronger U.S. Dollar, offset by higher average selling prices. Lower sales volumes in 2023 were attributable to general market weakness in the global economy, resulting in lower demand in certain product lines. Sales volumes through the first half of 2022 were restricted by raw material supply constraints and unplanned temporary maintenance shutdowns, which limited Lubrizol’s production capabilities.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Industrial products (Continued)

Lubrizol’s pre-tax earnings declined 24.6% in the second quarter and 2.8% in the first six months of 2023 compared to 2022. Earnings in the second quarter and first six months of 2023 reflect lower insurance recoveries ($89 million) in connection with fires at certain production facilities in 2021 and 2020. Excluding insurance recoveries, earnings were higher due to the favorable impacts of higher selling prices and changes in product mix, partially offset by lower sales volumes, higher raw material costs (primarily in the first quarter), higher operating expenses and unfavorable foreign currency translation effects.

Marmon’s revenues were $3.1 billion in the second quarter and $6.2 billion in the first six months of 2023, increases of 12.2% in the second quarter and 14.3% in the first six months compared to 2022. Business acquisitions, including AP Emissions Technologies and three former Alleghany businesses: Kentucky Trailer, Wilbert Funeral Services, Inc. and Wilbert Plastics Services, accounted for $301 million and $595 million of comparative revenue increases in the second quarter and first six months of 2023, respectively. In addition, the Rail & Leasing and Crane Services groups generated higher revenues in 2023, due to higher volumes and pricing improvements. The Electrical, Metal Services and Plumbing & Refrigeration group revenues in 2023 were negatively impacted by lower steel and copper prices.

Marmon’s pre-tax earnings increased 30.6% in the second quarter and 21.8% in the first six months of 2023 compared to 2022. Earnings increases attributable to business acquisitions were $26 million in the second quarter and $42 million in the first six months of 2023. Earnings in the second quarter of 2022 included losses of approximately $90 million in the Rail & Leasing group related to the shutdown of its business in Russia. Otherwise, comparative earnings from Marmon’s other business groups in 2023 were mixed, reflecting earnings increases in the Transportation, Water Technologies, and Crane Services groups, which were primarily attributable to revenue growth, and lower earnings in the Electrical group, driven by lower margins in the building wire business.

IMC’s revenues were $1.0 billion in the second quarter and $2.0 billion in the first six months of 2023, increases of 10.2% in the second quarter and 7.7% in the first six months compared to 2022. The revenue increases in 2023 reflect increased organic sales in North America, the impact of business acquisitions and higher interest income, partially offset by lower revenues in Asia, unfavorable foreign currency translation from a stronger U.S. Dollar and the impact of the Russia-Ukraine conflict. IMC’s pre-tax earnings increased 15.1% in the second quarter and 9.0% in the first six months of 2023 compared to 2022. In 2023, the impact of revenue increases was partially offset by higher raw material costs, changes in sales mix and the adverse effects of the Russia-Ukraine conflict.

Building products

The building products group includes manufactured and site-built home construction and related lending and financial services (Clayton Homes), flooring (Shaw), insulation, roofing and engineered products (Johns Manville), bricks and masonry products (Acme Building Brands), paint and coatings (Benjamin Moore) and residential and commercial construction and engineering products and systems (MiTek).

Revenues of the building products group decreased $1.0 billion (13.2%) in the second quarter and $1.7 billion (11.9%) in the first six months of 2023 compared to 2022. Pre-tax earnings decreased $80 million (6.1%) in the second quarter and $329 million (13.4%) in the first six months of 2023 compared to 2022. Our building products businesses have benefited in recent years from the low interest rate environment and strong residential and commercial construction markets. The effects of significant increases in home mortgage interest rates in the U.S. over the past year has slowed demand for our home building businesses and our other building products businesses. Such effects have been partially mitigated by new construction activity, resulting from low supplies of pre-existing homes for sale. We continue to anticipate some of our businesses will experience comparative declines in revenues and earnings over the remainder of 2023.

Clayton Homes’ revenues declined 16.3% to $2.9 billion in the second quarter and 13.8% to $5.4 billion in the first six months of 2023 compared to 2022. Revenues from home sales decreased $971 million (19.0%) in the first six months of 2023, reflecting lower unit sales, partially offset by slightly higher average selling prices. New home unit sales declined 19.5% in the first six months of 2023, reflecting lower unit sales for factory-built homes (19.2%) and site-built homes (21.1%). We expect unit sales over the remainder of 2023 to be below 2022 levels. Financial services revenues, which include mortgage origination and services, insurance and interest income from lending activities, increased 9.9% in the first six months of 2023 compared to 2022, primarily due to increased interest income on higher average loan balances. Loan balances, net of allowances for credit losses, were approximately $22.5 billion as of June 30, 2023, an increase of 12.4% since June 30, 2022.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Building products (Continued)

Pre-tax earnings of Clayton Homes declined $72 million (11.5%) in the second quarter and $150 million (13.5%) in the first six months of 2023 compared to 2022, primarily attributable to lower earnings from the home building businesses. Earnings from financial services also declined in the first six months of 2023 versus 2022, which were negatively affected by increased expected loan loss provisions and higher insurance claims, partially offset by higher net interest income.

Aggregate revenues of our other building products businesses were approximately $3.8 billion in the second quarter and $7.3 billion in the first six months of 2023, decreases of $459 million (10.7%) in the second quarter and $860 million (10.5%) in the first six months versus 2022. Comparative revenues were lower at all of our other building products businesses, generally due to lower sales volumes and changes in product mix, partly offset by higher average selling prices.

Pre-tax earnings of our other building products businesses declined slightly (1.2%) in the second quarter and $179 million (13.3%) in the first six months of 2023 compared to 2022. Earnings as a percentage of revenues in the second quarter increased 1.7 percentage points and in the first six months of 2023 decreased 0.5 percentage points versus 2022. The earnings of our other building products businesses in 2023 were negatively impacted by lower sales volumes and reduced manufacturing efficiencies and benefited from lower average prices for certain raw materials and energy, as well as reduced freight and shipping expenses. The earnings in 2022 benefited from higher selling prices and strong demand in certain product categories and an increase in the gains from a business divestiture and asset sales of $111 million.

Consumer products

The consumer products group includes recreational vehicles (Forest River), several apparel and footwear operations (including Fruit of the Loom, Garan, Fechheimer, H.H. Brown Shoe Group and Brooks Sports) and high-performance batteries (Duracell). This group also includes custom picture framing products (Larson-Juhl), jewelry products (Richline) and beginning October 19, 2022, Jazwares, LLC (Jazwares), a global toy company acquired in connection with the Alleghany acquisition.

Consumer products group revenues decreased $815 million (18.7%) in the second quarter and $1.6 billion (19.0%) in the first six months of 2023 compared to 2022. The declines reflected lower revenues at Forest River and nearly all of our other consumer products operations, partially offset by the impact of the Jazwares acquisition, which contributed revenues of $378 million in the first six months of 2023.

Forest River’s revenues declined 34.2% in the second quarter and 36.4% in the first six months of 2023 compared to 2022, reflecting an overall 40.1% decline in unit sales in the first six months and changes in sales mix. Forest River experienced strong recreational vehicle unit sales in recent years and through the first half of 2022. Since then, volumes have declined significantly, attributable in part to the impact of rising interest rates, inflation and other macroeconomic conditions. The sales volume declines for recreational vehicles in 2023 were partially offset by increased bus and commercial business.

Revenues of our apparel and footwear businesses declined $155 million (12.8%) in the second quarter and $222 million (9.2%) in the first six months of 2023 compared to 2022. Revenues from apparel for the first six months of 2023 declined 13.5% from 2022, while revenues from footwear declined 1.8%. The decline in apparel revenue was attributable to continuing sluggish customer demand, partially offset by higher average selling prices and sales mix changes. Duracell’s revenues in first six months of 2023 declined 7.8% versus 2022, primarily due to lower sales volume and unfavorable foreign currency translation effects of the stronger U.S. Dollar.

Pre-tax earnings of our consumer products group declined $95 million (21.1%) in the second quarter and $284 million (31.0%) in the first six months of 2023 versus 2022, primarily attributable to lower earnings from Forest River and Duracell. Pre-tax earnings as a percentage of revenues for the group decreased 1.6 percentage points in the first six months of 2023 compared to 2022.

Earnings from Forest River declined 39.2% in the first six months of 2023 compared to 2022, primarily due to the decrease in unit sales, which reduced manufacturing efficiencies, partially offset by lower selling, general and administrative expenses. Apparel and footwear earnings declined 10.7% in the first six months of 2023 compared to 2022. Our apparel businesses were negatively affected by lower sales volumes and reduced manufacturing efficiencies. Earnings from Duracell declined in the second quarter and first six months of 2023 compared to 2022, due to reduced consumer consumption and market share losses in North America to lower priced brands and to the non-recurring cost and expense reductions in the second quarter of 2022.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Service and retailing

A summary of revenues and pre-tax earnings of our service and retailing businesses follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Revenues
Service$5,181$4,737$10,500$9,260
Retailing4,9604,8809,5729,472
McLane12,88313,26225,94225,777
$23,024$22,879$46,014$44,509
Pre-tax earnings
Service$824$756$1,661$1,480
Retailing438443822854
McLane12976242158
$1,391$1,275$2,725$2,492
Pre-tax earnings as a percentage of revenues
Service15.9%16.0%15.8%16.0%
Retailing8.8%9.1%8.6%9.0%
McLane1.0%0.6%0.9%0.6%

Service

Our service group consists of several businesses. The largest of these businesses are NetJets and FlightSafety (aviation services), which offer shared ownership programs for general aviation aircraft and high technology training services and products to operators of aircraft, and TTI, a distributor of electronics components. Our other service businesses franchise and service a network of quick service restaurants (Dairy Queen), lease transportation equipment (XTRA) and furniture (CORT), provide third party logistics services that primarily serve the petroleum and chemical industries (Charter Brokerage), distribute electronic news, multimedia and regulatory filings (Business Wire) and operate a television station in Miami, Florida (WPLG). Beginning October 19, 2022, this group includes IPS-Integrated Project Services, LLC (IPS), a provider of various services in facilities construction management.

Service group revenues increased $444 million (9.4%) in the second quarter and $1.2 billion (13.4%) in the first six months of 2023 compared to 2022. IPS had revenues of $302 million in the second quarter and $604 million in the first six months of 2023. Revenues from aviation services increased 8.2% in the second quarter and 13.2% in the first six months of 2023 compared to 2022. The revenue increases were primarily due to increases in the number of aircraft in shared aircraft ownership programs and in-flight hours across NetJets’ various programs, as well as higher average rates.

Revenues from TTI declined 1.0% in the second quarter and increased 2.4% in the first six months of 2023 compared to 2022. Excluding the effects of business acquisitions in 2022 and 2023 and the unfavorable foreign currency translation effects, year-to-date revenues increased 1.0% in 2023 versus 2022. TTI experienced significant revenue growth in 2021 and much of 2022. Since the third quarter of 2022, new orders have slowed in several regions and markets, in part attributable to elevated customer inventory levels. These conditions are expected to continue and TTI may experience comparative revenue declines over the remainder of 2023.

Pre-tax earnings of the service group increased $68 million (9.0%) in the second quarter and $181 million (12.2%) in the first six months of 2023 compared to 2022. Pre-tax earnings as a percentage of revenues declined 0.2 percentage points in the first six months of 2023 compared to 2022. The earnings increases were primarily attributable to higher overall margin rates in aviation services businesses, primarily due to a 17% year-to-date increase in average aircraft in the NetJets programs, changes in business mix and the impact of the IPS acquisition. These increases were partially offset by lower earnings from TTI (6.4% year-to-date), attributable to lower gross margin rates, higher operating expenses and unfavorable foreign currency effects.

Retailing

Our largest retailing business is Berkshire Hathaway Automotive, Inc. (“BHA”), representing 67.6% of our combined retailing revenue in the first six months of 2023. BHA consists of over 80 auto dealerships that sell new and pre-owned automobiles and offer repair services and related products. BHA also offers vehicle service contracts and operates two insurance businesses. Our retailing businesses also include four home furnishings retailing businesses (Nebraska Furniture Mart, R.C. Willey, Star Furniture and Jordan’s), which sell furniture, appliances, flooring and electronics. The home furnishings group represented 18.3% of the combined retailing revenues in the first six months of 2023.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Manufacturing, Service and Retailing (Continued)

Retailing (Continued)

Other retailing businesses include three jewelry retailers (Borsheims, Helzberg and Ben Bridge), See’s Candies (confectionery products), Pampered Chef (high-quality kitchen tools), Oriental Trading Company (party supplies, school supplies and toys and novelties) and Detlev Louis Motorrad (“Louis”), a retailer of motorcycle accessories based in Germany.

Retailing group revenues increased 1.6% in the second quarter and 1.1% in the first six months of 2023 compared to 2022, reflecting increases at BHA, partially offset by lower revenues from our other retailers. BHA’s revenues in the second quarter and first six months of 2023 increased 5.3% and 4.5%, respectively, compared to the same periods in 2022. Revenues from new vehicle sales increased 12.8% in the first six months of 2023 compared to 2022 while revenues from pre-owned vehicle retail sales declined 8.4%. Unit sales in the first six months of 2023 increased 1.5%, reflecting an 8.9% increase in new vehicle sales, partly offset by lower pre-owned vehicles sold. While new vehicle inventory levels remain well below historical levels, vehicle supply continues to gradually rise. Revenues from BHA’s parts/service/repair operations in the first six months of 2023 increased 8.8% versus 2022. Other retailing revenues in the aggregate declined 5.4% in the first six months of 2023 versus 2022, primarily due to lower sales at our home furnishings businesses.

Retailing group pre-tax earnings declined $5 million (1.1%) in the second quarter and $32 million (3.7%) in the first six months of 2023 compared to 2022. BHA’s pre-tax earnings increased 12.7% in the second quarter and 21.1% in the first six months of 2023 compared to 2022. BHA’s earnings increase reflects higher earnings from parts/service/repair and finance/service contract operations and lower operating expenses, partially offset by lower vehicle sales margins and higher floor plan interest expense. BHA’s comparative vehicle gross profit margin rates, before the effects of LIFO, peaked in the first half of 2022 and have since been reverting to historical levels. Aggregate pre-tax earnings for the remainder of our retailing group declined $36 million (18.2%) in the second quarter and $127 million (31.8%) in the first six months of 2023 compared to 2022, primarily due to a 33.8% decrease in the first six months earnings from the home furnishings businesses, and the impact of a gain in the first quarter of 2022 related to the divestiture of certain jewelry stores.

McLane Company

McLane operates a wholesale distribution business that provides grocery and non-food consumer products to retailers and convenience stores (“grocery”) and to restaurants (“foodservice”). McLane also operates wholesale distributors of distilled spirits, wine and beer (“beverage”). The grocery and foodservice distribution businesses generate high sales and very low profit margins and operate in a highly competitive environment. These businesses have several significant customers, including Walmart, 7-Eleven, Yum! Brands and others. A curtailment of purchasing by any of its significant customers could have an adverse impact on McLane’s periodic revenues and earnings.

Revenues declined 2.9% in the second quarter and increased 0.6% in the first six months of 2023 compared to 2022. Revenues in 2023 of the grocery and the foodservice businesses were negatively affected by lower unit volumes. Grocery sales comprised 61% of McLane’s consolidated sales in the first six months of 2023, with foodservice representing most of the remainder. Pre-tax earnings increased $53 million (69.7%) in the second quarter and $84 million (53.2%) in the first six months of 2023 compared to 2022. The increases in earnings reflects increases in the gross margin rates and lower fuel expenses, partly offset by higher personnel expenses.

Non-Controlled Businesses

After-tax earnings of our non-controlled businesses include our proportionate share of earnings attributable to our investments in Kraft Heinz, Occidental Petroleum, Pilot (through January 31, 2023) and Berkadia. After-tax earnings attributable to these businesses increased $353 million in the second quarter and $639 million in the first six months of 2023 versus 2022, primarily due to earnings from Occidental Petroleum and increases in earnings attributable to Kraft Heinz. We adopted the equity method of accounting for our investment in Occidental Petroleum common stock as of August 4, 2022. As of January 31, 2023, Berkshire acquired a controlling interest in Pilot. We applied the equity method through the end of January 2023 on our pre-existing 38.6% interest and began consolidating Pilot’s financial statements in our Consolidated Financial Statements on February 1, 2023. See Notes 3 and 6 to the Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Investment and Derivative Contract Gains (Losses)

A summary of investment and derivative contract gains (losses) follows (dollars in millions).

Second QuarterFirst Six Months
2023202220232022
Investment gains (losses)$33,061$(66,854)$67,819$(68,589)
Derivative contract gains (losses)—(65)—(308)
Gains (losses) before income taxes and noncontrolling interests33,061(66,919)67,819(68,897)
Income taxes and noncontrolling interests7,192(13,881)14,511(14,279)
Net earnings (loss)$25,869$(53,038)$53,308$(54,618)
Effective income tax rate21.7%21.0%21.3%20.8%

Unrealized gains and losses arising from changes in market prices of investments in equity securities are included in our reported earnings, which significantly increases the volatility of our periodic net earnings due to the magnitude of our equity securities portfolio and the inherent volatility of equity securities prices. Unrealized gains and losses recorded in earnings also include the effects of changes in foreign currency exchange rates on investments in equity securities of non-U.S. issuers held by our U.S.-based subsidiaries.

Pre-tax investment gains and losses included net unrealized gains of $33.0 billion in the second quarter and $63.8 billion in the first six months of 2023 and net unrealized losses of $66.9 billion in the second quarter and $68.5 billion in the first six months of 2022 on securities we held at the end of the applicable period. Taxable gains and losses on equity securities sold generally represents the difference between sales proceeds and the original cost of the securities sold. Sales of equity securities produced taxable gains of $2.4 billion in the second quarter and $4.6 billion in the first six months of 2023 compared to taxable gains of $76 million in the second quarter and losses of $663 million in the first six months of 2022. Pre-tax investment gains in the first six months of 2023 included a non-cash gain of approximately $3 billion related to the remeasurement of our pre-existing interest in Pilot to fair value through the application of acquisition accounting upon attaining control of Pilot for financial reporting purposes on January 31.

We believe that investment gains and losses, whether realized from sales or unrealized from changes in market prices, are often meaningless in terms of understanding our reported consolidated earnings or evaluating our periodic economic performance. We also continue to believe the investment gains and losses recorded in earnings in any given period has little analytical or predictive value.

Other

A summary of after-tax other earnings/losses follows (in millions).

Second QuarterFirst Six Months
2023202220232022
Acquisition accounting expenses$(200)$(162)$(402)$(323)
Corporate interest expense, before foreign currency effects(54)(67)(118)(137)
Foreign currency exchange rate gains on Berkshire and BHFC non-U.S. Dollar senior notes4651,0614481,583
Other earnings12980301159
$340$912$229$1,282

After-tax acquisition accounting expenses include charges arising from the application of the acquisition method in connection with certain of Berkshire’s business acquisitions. Such charges arise primarily from the amortization of intangible assets recorded in connection with those business acquisitions.

Foreign currency exchange rate gains pertain to Berkshire’s and BHFC’s Euro, Great Britain Pound and Japanese Yen denominated debt. Changes in foreign currency exchange rates produce unrealized gains and losses from the periodic revaluation of these liabilities into U.S. Dollars. In 2023 and 2022, we recorded foreign currency exchange rate gains on these debt issues due to strengthening of the U.S. Dollar, which reduced the U.S Dollar carrying value of the debt. The gains and losses recorded in any given period can be significant due to the magnitude of the borrowings and the inherent volatility in foreign currency exchange rates. Other earnings consist primarily of Berkshire parent company investment income and corporate expenses, other intercompany interest income where the interest expense is included in earnings of the operating businesses and unallocated income taxes.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition

Our Consolidated Balance Sheet continues to reflect significant liquidity and a very strong capital base. Our Consolidated shareholders’ equity at June 30, 2023 was $539.9 billion, an increase of $66.5 billion since December 31, 2022. Net earnings attributable to Berkshire shareholders was $71.4 billion in the first six months of 2023, which included after-tax gains on our investments of $53.3 billion. Investment gains and losses from changes in the market prices of our investments in equity securities will produce significant volatility in our earnings.

Berkshire’s common stock repurchase program, as amended, permits Berkshire to repurchase its Class A and Class B shares at prices below Berkshire’s intrinsic value, as conservatively determined by Warren Buffett, Berkshire’s Chairman of the Board and Chief Executive Officer, and Charlie Munger, Vice Chairman of the Board. The program does not specify a maximum number of shares to be repurchased and does not require any specified repurchase amount. The program is expected to continue indefinitely. We will not repurchase our stock if it reduces the total amount of Berkshire’s consolidated cash, cash equivalents and U.S. Treasury Bills holdings below $30 billion. Financial strength and redundant liquidity will always be of paramount importance at Berkshire. Berkshire paid $5.8 billion in the first six months of 2023 to repurchase shares of its Class A and B common stock.

At June 30, 2023, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $141.9 billion, which included $120.4 billion invested in U.S. Treasury Bills. Investments in equity and fixed maturity securities (excluding our investments in Kraft Heinz and Occidental common stock) were $375.8 billion. During the first six months of 2023, we paid cash of $7.4 billion to acquire equity securities and we received proceeds of $25.8 billion from sales of equity securities. On January 31, 2023, we acquired an additional 41.4% interest in Pilot for approximately $8.2 billion.

Our consolidated borrowings at June 30, 2023 were $125.3 billion, of which over 95% were by the Berkshire parent company, BHFC, BNSF, BHE and its subsidiaries and Pilot. During the first six months of 2023, we issued new term debt of approximately $4.0 billion and repaid $7.6 billion on maturing term debt.

Berkshire parent company outstanding debt at June 30, 2023 was $17.7 billion, a decrease of $3.7 billion since December 31, 2022. Berkshire repaid $4.3 billion of maturing debt in the first six months of 2023. In April 2023, Berkshire issued ¥164.4 billion (approximately $1.2 billion) of senior notes.

Senior note borrowings of BHFC, a wholly-owned financing subsidiary, were approximately $18.0 billion at June 30, 2023, substantially unchanged from December 31, 2022. BHFC’s borrowings are used to fund a portion of loans originated and acquired by Clayton Homes and equipment held for lease by our railcar leasing business. Berkshire guarantees BHFC’s senior notes for the full and timely payment of principal and interest.

BNSF’s outstanding debt was $24.3 billion as of June 30, 2023, an increase of $854 million from December 31, 2022. In June 2023, BNSF issued $1.6 billion of 5.2% debentures due in 2054. During the first six months of 2023, BNSF repaid approximately $700 million of term debt. Outstanding borrowings of BHE and its subsidiaries were $53.9 billion at June 30, 2023, an increase of $1.1 billion from December 31, 2022. In May 2023, a BHE subsidiary issued $1.2 billion of 5.5% first mortgage bonds due in 2054. During the first six months of 2023, BHE and its subsidiaries repaid approximately $1.4 billion of term debt. Aggregate debt maturities for BHE and BNSF over the next twelve months approximate $4.5 billion. Borrowings of Pilot were $5.9 billion as of the January 31, 2023 acquisition date and were $5.8 billion at June 30, 2023. Berkshire does not guarantee the repayment of debt or other borrowings issued by BNSF, BHE, Pilot or any of their subsidiaries or affiliates.

In the first six months of 2023, our diverse group of businesses generated net operating cash flows of $21.1 billion. Our consolidated capital expenditures for property, plant and equipment and equipment held for lease were $8.4 billion in the first six months of 2023, which included capital expenditures by BNSF and BHE of $5.7 billion. BNSF and BHE maintain very large investments in capital assets (property, plant and equipment) and will regularly make significant capital expenditures in the normal course of business. We forecast capital expenditures for BHE and BNSF over the remainder of 2023 will approximate $8.3 billion.

On August 16, 2022, the Inflation Reduction Act of 2022 (“the 2022 act”) was signed into law. The 2022 act contains numerous provisions, including a 15% corporate alternative minimum income tax on “adjusted financial statement income”, expanded tax credits for clean energy incentives and a 1% excise tax on corporate stock repurchases. The provisions of the 2022 act are effective for tax years beginning after December 31, 2022. On December 27, 2022, the IRS and Department of Treasury issued initial guidance for taxpayers subject to the corporate alternative minimum tax addressing certain, but not all, issues that need clarification. The IRS and Department of Treasury may release additional guidance in the future. We will continue to evaluate the impact of the 2022 act as more guidance becomes available. We currently do not expect that compliance with the provisions of the 2022 act will have a material impact on our Consolidated Financial Statements.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Financial Condition (Continued)

On July 10, 2023, BHE announced that it had executed an agreement to acquire an additional 50% interest in Cove Point LNG, LP, which would increase its ownership interest to 75%. The transaction is valued at $3.3 billion and is subject to applicable regulatory approvals. BHE expects to fund the acquisition with cash on hand.

Contractual Obligations

We are party to other contracts associated with ongoing business activities, which will result in cash payments to counterparties in future periods. Certain obligations are included in our Consolidated Balance Sheets, such as operating lease liabilities and shared aircraft repurchase liabilities of NetJets.

We are also obligated to pay claims arising from property and casualty insurance companies. Such liabilities, including amounts from retroactive reinsurance, were $143.5 billion at June 30, 2023. However, the timing and amount of the payments under insurance and reinsurance contracts are contingent upon the outcome of future events. Actual payments will likely vary, perhaps materially, from any forecasted payments, as well as from the liabilities currently recorded in our Consolidated Balance Sheet. We anticipate that these payments will be funded by operating cash flows.

Other obligations pertaining to the acquisition of goods or services in the future, such as certain purchase obligations, are not currently reflected in the Consolidated Financial Statements and will be recognized in future periods as the goods are delivered or services are provided. As of June 30, 2023, the largest categories of our long-term contractual obligations primarily related to fuel, capacity, transmission and maintenance contracts and capital expenditure commitments of BHE and BNSF, aircraft purchase commitments of NetJets and certain raw materials purchase commitments.

Except as otherwise disclosed in this Quarterly Report, our contractual obligations as of June 30, 2023 were, in the aggregate, not materially different from those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Policies

Certain accounting policies require us to make estimates and judgments that affect the amounts reflected in the Consolidated Financial Statements. Such estimates and judgments necessarily involve varying, and possibly significant, degrees of uncertainty. Accordingly, certain amounts recorded in the financial statements will likely be adjusted in the future based on new available information and changes in other facts and circumstances. Reference is made to “Critical Accounting Policies” discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Berkshire’s Annual Report on Form 10-K for the year ended December 31, 2022.

Our Consolidated Balance Sheet as of June 30, 2023 includes estimated liabilities of $143.5 billion for unpaid losses and loss adjustment expenses from property and casualty insurance and reinsurance contracts. Due to the inherent uncertainties in the processes of establishing these liabilities, the actual ultimate claim amounts will likely differ from the currently recorded amounts. A very small percentage change in estimates of this magnitude can result in a material effect on periodic earnings. The effects from changes in these estimates are recorded as a component of insurance losses and loss adjustment expenses in the period of the change.

Our Consolidated Balance Sheet as of June 30, 2023 included goodwill of acquired businesses of approximately $85.9 billion, which included $10.6 billion of goodwill associated with the Alleghany and Pilot acquisitions, and indefinite-lived intangible assets of $20.5 billion. We evaluate these assets for impairment at least annually and we conducted our most recent annual review during the fourth quarter of 2022. In connection with the annual goodwill impairment review in the fourth quarter of 2022, the estimated fair values of six reporting units did not exceed our carrying values by at least 20%. The most significant of these reporting units was Precision Castparts Corp. (“PCC”). Our estimated fair value of PCC was approximately $31.5 billion, exceeding our carrying value of approximately $30.3 billion by 4.0%. Our carrying value of PCC included goodwill of approximately $7.5 billion. For the five other reporting units, our aggregate estimated fair value was approximately $4.5 billion, which exceeded our aggregate carrying value of approximately $4.1 billion by 9.9%. Our carrying value of these units included goodwill of approximately $1.4 billion.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Critical Accounting Policies (Continued)

Goodwill and indefinite-lived intangible asset impairment reviews include determining the estimated fair values of our reporting units and assets. The key assumptions and inputs used in such determinations may include forecasting revenues and expenses, cash flows and capital expenditures, as well as an appropriate discount rate and other inputs. Significant judgment by management is required in estimating the fair value of a reporting unit and in performing impairment tests. Due to the inherent subjectivity and uncertainty in forecasting future cash flows and earnings over long periods of time, actual results may vary materially from the forecasts.

As of June 30, 2023, we concluded it is more likely than not that goodwill recorded in our Consolidated Balance Sheet was not impaired. The long-term adverse consequences of the COVID-19 pandemic, geopolitical conflicts and general changes in business conditions, as well as other unanticipated events, on certain of our reporting units may prove to be worse than we currently anticipate, and we may need to record goodwill or indefinite-lived intangible asset impairment charges in future periods. Making estimates of the fair value of reporting units are inherently subjective and will likely continue to be significantly affected by assumptions on the severity, duration or long-term effects of adverse events on a reporting unit’s business, which we cannot reliably predict. Consequently, any fair value estimates can be subject to wide variations.

Information concerning new accounting pronouncements is included in Note 2 to the accompanying Consolidated Financial Statements.

Forward-Looking Statements

Investors are cautioned that certain statements contained in this document as well as some statements in periodic press releases and some oral statements of Berkshire officials during presentations about Berkshire or its subsidiaries are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements include statements which are predictive in nature, which depend upon or refer to future events or conditions, or which include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates” or similar expressions. In addition, any statements concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects and possible future Berkshire actions, which may be provided by management, are also forward-looking statements as defined by the Act. Forward-looking statements are based on current expectations and projections about future events and are subject to risks, uncertainties and assumptions about Berkshire and its subsidiaries, economic and market factors and the industries in which we do business, among other things. These statements are not guarantees of future performance and we have no specific intention to update these statements.

Actual events and results may differ materially from those expressed or forecasted in forward-looking statements due to a number of factors. The principal risk factors that could cause our actual performance and future events and actions to differ materially from such forward-looking statements include, but are not limited to, changes in market prices of our investments in fixed maturity and equity securities; losses realized from derivative contracts; the occurrence of one or more catastrophic events, such as an earthquake, hurricane, act of terrorism or cyber-attack that causes losses insured by our insurance subsidiaries and/or losses to our business operations; the frequency and severity of epidemics, pandemics or other outbreaks, that negatively affect our operating results and restrict our access to borrowed funds through the capital markets at reasonable rates; changes in laws or regulations affecting our insurance, railroad, utilities and energy and finance subsidiaries; changes in federal income tax laws; and changes in general economic and market factors that affect the prices of securities or the industries in which we do business.

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