filings.toolsItem 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 Reinsurance Group (Continued)
Property/casualty
A summary of property/casualty reinsurance underwriting results follows (dollars in millions).
| Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Premiums written | $ | 5,441 | $ | 4,574 | $ | 17,575 | $ | 13,119 | |||||||||||||||||||||||
| Premiums earned | $ | 5,739 | 100.0 | $ | 4,013 | 100.0 | $ | 16,213 | 100.0 | $ | 10,943 | 100.0 | |||||||||||||||||||
| Losses and loss adjustment expenses | 2,918 | 50.8 | 3,451 | 86.0 | 9,098 | 56.1 | 7,825 | 71.5 | |||||||||||||||||||||||
| Underwriting expenses | 1,333 | 23.3 | 539 | 13.4 | 4,113 | 25.4 | 1,714 | 15.7 | |||||||||||||||||||||||
| Total losses and expenses | 4,251 | 74.1 | 3,990 | 99.4 | 13,211 | 81.5 | 9,539 | 87.2 | |||||||||||||||||||||||
| Pre-tax underwriting earnings | $ | 1,488 | $ | 23 | $ | 3,002 | $ | 1,404 |
Premiums written in the third quarter and first nine months of 2023 included $1.4 billion and $4.0 billion, respectively, written by TransRe Group. Otherwise, premiums written in the first nine months of 2023 increased $497 million (3.8%) compared to 2022. We have written considerable levels of property business in recent years and we generally do not retrocede the risks we assume. Consequently, our periodic underwriting earnings are subject to considerable volatility from significant catastrophe loss events.
Losses and loss adjustment expenses were $2.9 billion in the third quarter and $9.1 billion in the first nine months of 2023, and included $881 million and $2.4 billion, respectively, from TransRe Group. Excluding TransRe Group, losses and loss adjustment expenses decreased $1.4 billion (41.0%) in the third quarter and $1.1 billion (14.0%) in the first nine months of 2023 compared to 2022. Losses incurred from significant catastrophes in the first nine months were $552 million in 2023 and $2.5 billion in 2022, including $1.9 billion in the third quarter primarily from Hurricane Ian. Reductions in estimated ultimate liabilities for losses occurring in prior accident years were $1.5 billion in the first nine months of 2023 and $1.4 billion in the first nine months of 2022. Overall, the loss ratio decreased 15.4 percentage points in the first nine months of 2023 compared to 2022.
Underwriting expenses in 2023 increased $794 million in the third quarter and $2.4 billion in the first nine months compared to 2022. The expense ratio increased 9.9 percentage points in the third quarter and 9.7 percentage points in the first nine months of 2023 compared to 2022. The increases were primarily attributable to changes in foreign currency exchange rates related to the remeasurement of certain non-U.S. Dollar denominated liabilities of our U.S. subsidiaries and changes in business mix, including the impact of TransRe Group. Underwriting expenses included foreign currency exchange gains of $114 million in the third quarter and losses of $78 million in the first nine months of 2023 compared to gains of $315 million in the third quarter and $704 million in the first nine months of 2022. Underwriting expenses included $452 million in the third quarter and $1.2 billion in the first nine months of 2023 from TransRe Group.
Life/health
A summary of our life/health reinsurance underwriting results follows (dollars in millions).
| Third Quarter | First Nine Months | ||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||||||||
| Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||
| Premiums written | $ | 1,332 | $ | 1,251 | $ | 3,685 | $ | 3,743 | |||||||||||||||||||||||
| Premiums earned | $ | 1,328 | 100.0 | $ | 1,256 | 100.0 | $ | 3,677 | 100.0 | $ | 3,766 | 100.0 | |||||||||||||||||||
| Life and health insurance benefits | 1,034 | 77.9 | 1,000 | 79.6 | 2,732 | 74.3 | 2,973 | 78.9 | |||||||||||||||||||||||
| Underwriting expenses | 244 | 18.3 | 238 | 19.0 | 711 | 19.3 | 677 | 18.0 | |||||||||||||||||||||||
| Total benefits and expenses | 1,278 | 96.2 | 1,238 | 98.6 | 3,443 | 93.6 | 3,650 | 96.9 | |||||||||||||||||||||||
| Pre-tax underwriting earnings | $ | 50 | $ | 18 | $ | 234 | $ | 116 |
Premiums earned increased $72 million (5.7%) in the third quarter and decreased $89 million (2.4%) in the first nine months of 2023 compared to 2022. In the first quarter of 2023, several U.S. life reinsurance contracts were commuted, which reduced premiums earned by $161 million and life reinsurance benefits incurred by $304 million. Excluding these effects, premiums earned increased 1.9% in the first nine months of 2023, and life reinsurance benefits incurred increased 2.1% in the first nine months of 2023 versus 2022. The 1.3 percentage point increase in the underwriting expense ratio in the first nine 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 gains were $38 million in the first nine months of 2023 compared to $289 million in the first nine months of 2022. Before foreign currency exchange effects, pre-tax underwriting losses were $622 million in the first nine months of 2023 and $614 million in 2022.
Unpaid losses assumed under retroactive reinsurance contracts were $33.9 billion at September 30, 2023, a decline of $1.5 billion since December 31, 2022, primarily attributable to claim payments. Unamortized deferred charges related to retroactive reinsurance contracts were $9.3 billion at September 30, 2023, a decline of $605 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 since 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 gains of $56 million in the third quarter and losses of $27 million in the first nine months of 2023 compared to gains of $18 million in the third quarter and $127 million in the first nine months of 2022.
Pre-tax underwriting losses before foreign currency exchange effects were $147 million in the third quarter and $439 million in the first nine months of 2023 and $272 million in the third quarter and $554 million in the first nine months of 2022. Pre-tax losses in the third quarter and first nine months of 2022 included approximately $130 million attributable to an agreement to terminate an existing reinsurance contract, in which the settlement payable exceeded the carrying value of the liabilities. Discounted liabilities were $13.9 billion at September 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 $116 million in the third quarter and $309 million in the first nine months of 2023 and $45 million in the third quarter and $423 million in the first nine 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 $895 million as of September 30, 2023.
Insurance—Investment Income
A summary of net investment income attributable to our insurance operations follows (dollars in millions).
| Third Quarter | First Nine Months | Percentage Change | |||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Third Quarter | First Nine Months | ||||||||||||||||||
| Dividend income | $ | 1,223 | $ | 1,281 | $ | 3,989 | $ | 4,533 | (4.5 | )% | (12.0 | )% | |||||||||||
| Interest and other investment income | 1,710 | 397 | 4,241 | 789 | 330.7 | 437.5 | |||||||||||||||||
| Pre-tax net investment income | 2,933 | 1,678 | 8,230 | 5,322 | 74.8 | 54.6 | |||||||||||||||||
| Income taxes and noncontrolling interests | 463 | 270 | 1,422 | 838 | |||||||||||||||||||
| Net investment income | $ | 2,470 | $ | 1,408 | $ | 6,808 | $ | 4,484 | |||||||||||||||
| Effective income tax rate | 15.8 | % | 16.1 | % | 17.3 | % | 15.7 | % |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Insurance—Investment Income (Continued)
Dividend income declined 4.5% in the third quarter and 12.0% in the first nine months of 2023 compared to 2022. These reductions reflected net dispositions of investments since the end of the third quarter of 2022. Income in the first nine months included $25 million in 2023 and $37 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 $1.3 billion in the third quarter and $3.5 billion in the first nine months of 2023 compared to 2022. The increases were primarily due to increases in short-term interest rates. We continue to hold substantial balances of cash, cash equivalents, U.S. Treasury Bills and other investments with relatively short maturities. 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. The effect of discount rate changes recorded in accumulated other comprehensive income in the Consolidated Balance Sheets for long-duration insurance contracts are excluded from float, as such amounts are not included in underwriting earnings in the Consolidated Statements of Earnings. Float was approximately $167 billion at September 30, 2023 and $164 billion at December 31, 2022. Our combined insurance operations generated pre-tax underwriting gains in the first nine 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 September 30, 2023 and December 31, 2022 follows (in millions).
| September 30, 2023 | December 31, 2022 | |||||||
| Cash, cash equivalents and U.S. Treasury Bills | $ | 117,041 | $ | 86,816 | ||||
| Equity securities | 310,706 | 298,934 | ||||||
| Fixed maturity securities | 22,296 | 24,998 | ||||||
| Other | 2,067 | 3,417 | ||||||
| $ | 452,110 | $ | 414,165 |
Fixed maturity securities as of September 30, 2023 were as follows (in millions).
| Amortized Cost | Unrealized Gains (Losses) | Carrying Value | ||||||||||
| U.S. Treasury, U.S. government corporations and agencies | $ | 9,654 | $ | (130 | ) | $ | 9,524 | |||||
| Foreign governments | 11,248 | (87 | ) | 11,161 | ||||||||
| Corporate bonds | 1,224 | 179 | 1,403 | |||||||||
| Other | 197 | 11 | 208 | |||||||||
| $ | 22,323 | $ | (27 | ) | $ | 22,296 |
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 September 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).
| Third Quarter | First Nine Months | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Railroad operating revenues | $ | 5,719 | $ | 6,530 | $ | 17,311 | $ | 18,761 | ||||||||
| Railroad operating expenses: | ||||||||||||||||
| Compensation and benefits | 1,392 | 1,479 | 4,083 | 3,916 | ||||||||||||
| Fuel | 863 | 1,272 | 2,660 | 3,409 | ||||||||||||
| Purchased services | 503 | 530 | 1,503 | 1,538 | ||||||||||||
| Depreciation and amortization | 655 | 633 | 1,950 | 1,875 | ||||||||||||
| Equipment rents, materials and other | 497 | 508 | 1,630 | 1,494 | ||||||||||||
| Total | 3,910 | 4,422 | 11,826 | 12,232 | ||||||||||||
| Railroad operating earnings | 1,809 | 2,108 | 5,485 | 6,529 | ||||||||||||
| Other revenues (expenses): | ||||||||||||||||
| Other revenues | 128 | 163 | 383 | 540 | ||||||||||||
| Other expenses, net | (60 | ) | (129 | ) | (214 | ) | (458 | ) | ||||||||
| Interest expense | (269 | ) | (258 | ) | (782 | ) | (767 | ) | ||||||||
| Pre-tax earnings | 1,608 | 1,884 | 4,872 | 5,844 | ||||||||||||
| Income taxes | 387 | 442 | 1,140 | 1,367 | ||||||||||||
| Net earnings | $ | 1,221 | $ | 1,442 | $ | 3,732 | $ | 4,477 | ||||||||
| Effective income tax rate | 24.1 | % | 23.5 | % | 23.4 | % | 23.4 | % |
The following table summarizes BNSF’s railroad freight volumes by business group (cars/units in thousands).
| Cars/Units | Percentage Change | |||||||||||||||||||||||
| Third Quarter | First Nine Months | Third | First Nine | |||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Quarter | Months | |||||||||||||||||||
| Consumer products | 1,236 | 1,323 | 3,459 | 3,977 | (6.6 | )% | (13.0 | )% | ||||||||||||||||
| Industrial products | 416 | 413 | 1,212 | 1,237 | 0.7 | (2.0 | ) | |||||||||||||||||
| Agricultural products | 268 | 276 | 846 | 884 | (2.9 | ) | (4.3 | ) | ||||||||||||||||
| Coal | 376 | 399 | 1,105 | 1,158 | (5.8 | ) | (4.6 | ) | ||||||||||||||||
| 2,296 | 2,411 | 6,622 | 7,256 | (4.8 | ) | (8.7 | ) |
Railroad operating revenues declined 12.4% in the third quarter and 7.7% in the first nine months of 2023 compared to 2022, reflecting lower volumes of 4.8% in the third quarter and 8.7% in the first nine months. Average revenue per car/unit decreased 7.1% in the third quarter due to decreased rates per car/unit and lower fuel surcharge revenue, partially offset by favorable changes in business mix. Average revenue per car/unit increased 1.6% in the first nine months of 2023, resulting from higher yield. BNSF’s pre-tax earnings were $1.6 billion in the third quarter and $4.9 billion in the first nine months of 2023, declines of 14.6% and 16.6%, respectively, compared to 2022.
Operating revenues from consumer products were $2.0 billion in the third quarter and $5.7 billion in the first nine months of 2023, decreases of 18.0% and 17.4%, respectively, from 2022. The revenue declines were attributable to volume decreases of 6.6% in the third quarter and 13.0% in the first nine 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 reduced 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 $1.5 billion in the third quarter and $4.3 billion in the first nine months of 2023, a decrease of 0.7% and an increase of 1.5%, respectively, from 2022. The decline in the third quarter was due to lower revenue per car/unit, partially offset by 0.7% volume growth, primarily due to increased demand for construction products from infrastructure demand, partially offset by lower demand for plastics, chemicals and sand. The increase in the first nine months was primarily due to higher average revenue per car/unit, partially offset by a 2.0% volume decline. The volume decline was primarily due to lower demand for plastics, chemicals and lumber, partially offset by gains in construction products from infrastructure demand.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BNSF (Continued)
Operating revenues from agricultural products were $1.2 billion in the third quarter and $4.0 billion in the first nine months of 2023, decreases of 8.7% in the third quarter and 2.3% in the first nine months compared to 2022. The third quarter revenue decline was attributable to lower average revenue per car/unit and a volume decline of 2.9%. The revenue decline in the first nine months was primarily due to a volume decrease of 4.3%, partially offset by higher average revenue per car/unit. The volume decreases were mainly due to lower grain exports, partially offset by higher volumes of domestic grains, renewable diesel, feedstocks and oilseeds and meals.
Operating revenues from coal were $932 million in the third quarter and $2.9 billion in the first nine months of 2023, decreases of 15.3% in the third quarter and 3.1% in the first nine months versus 2022. The revenue decline in the third quarter was attributable to lower volumes of 5.8% and lower average revenue per car/unit. The revenue decrease in the first nine months was driven by reduced volumes of 4.6%, partially offset by higher average revenue per car/unit. 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 third quarter and $11.8 billion in the first nine months of 2023, decreases of $512 million (11.6%) in the third quarter and $406 million (3.3%) in the first nine months compared to 2022. The decline in the third quarter reflected lower fuel costs and lower compensation and benefits expenses. The decrease during the first nine months was primarily attributable to a decrease in fuel costs, partially offset by increases in compensation and benefits expenses and equipment rents, materials and other expenses. The ratio of railroad operating expenses to railroad operating revenues increased 0.7 percentage points to 68.4% in the third quarter and 3.1 percentage points to 68.3% in the first nine months of 2023 versus the comparable 2022 periods.
Fuel expenses decreased $409 million (32.2%) in the third quarter and $749 million (22.0%) in the first nine months of 2023 compared to 2022, reflecting lower average fuel prices, lower volumes and improved efficiency. Compensation and benefits expenses decreased $87 million (5.9%) in the third quarter and increased $167 million (4.3%) in the first nine months of 2023 compared to 2022. The comparative decline in the third quarter was primarily due to the impact of retroactive wage increases in the third quarter of 2022 relating to the ratified union labor agreements. The changes in compensation and benefits expenses in both periods also reflect increased headcount, wage inflation and lower productivity in 2023. Equipment rents, materials and other expenses decreased $11 million (2.2%) in the third quarter and increased $136 million (9.1%) in the first nine months of 2023 compared to 2022. The increase during the first nine months of 2023 was primarily due to general inflation, increased casualty and litigation costs, higher property and other taxes and lower gains from land and easement sales. Purchased services expenses decreased $27 million (5.1%) in the third quarter and $35 million (2.3%) in the first nine months of 2023 compared to 2022, primarily due to a reduction in drayage costs, partially offset by general inflation.
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 75% interest in a liquefied natural gas export, import and storage facility. 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).
| Third Quarter | First Nine Months | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenues: | ||||||||||||||||
| Energy operating revenue | $ | 5,958 | $ | 6,095 | $ | 16,362 | $ | 15,858 | ||||||||
| Real estate operating revenue | 1,212 | 1,405 | 3,383 | 4,284 | ||||||||||||
| Other income (loss) | 111 | 57 | 349 | (20 | ) | |||||||||||
| Total revenue | 7,281 | 7,557 | 20,094 | 20,122 | ||||||||||||
| Costs and expenses: | ||||||||||||||||
| Energy cost of sales | 2,009 | 1,959 | 5,530 | 4,944 | ||||||||||||
| Energy operating expenses | 3,671 | 2,362 | 8,818 | 6,858 | ||||||||||||
| Real estate operating costs and expenses | 1,181 | 1,352 | 3,351 | 4,086 | ||||||||||||
| Interest expense | 567 | 537 | 1,695 | 1,583 | ||||||||||||
| Total costs and expenses | 7,428 | 6,210 | 19,394 | 17,471 | ||||||||||||
| Pre-tax earnings (loss) | (147 | ) | 1,347 | 700 | 2,651 | |||||||||||
| Income tax benefit* | (783 | ) | (561 | ) | (1,525 | ) | (1,254 | ) | ||||||||
| Net earnings after income taxes | 636 | 1,908 | 2,225 | 3,905 | ||||||||||||
| Noncontrolling interests of BHE subsidiaries | 77 | 147 | 321 | 376 | ||||||||||||
| Net earnings attributable to BHE | 559 | 1,761 | 1,904 | 3,529 | ||||||||||||
| Noncontrolling interests and preferred stock dividends | 61 | 160 | 205 | 364 | ||||||||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 498 | $ | 1,601 | $ | 1,699 | $ | 3,165 | ||||||||
| Effective income tax rate | ** | (41.6 | )% | (217.9 | )% | (47.3 | )% |
——————
** Includes significant production tax credits from wind-powered electricity generation.*
*** Not meaningful.*
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).
| Third Quarter | First Nine Months | Percentage Change | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Third Quarter | First Nine Months | |||||||||||||||||||
| U.S. utilities | $ | (53 | ) | $ | 979 | $ | 540 | $ | 1,759 | (105.4 | )% | (69.3 | )% | |||||||||||
| Natural gas pipelines | 175 | 234 | 731 | 755 | (25.2 | ) | (3.2 | ) | ||||||||||||||||
| Other energy businesses | 296 | 361 | 868 | 1,111 | (18.0 | ) | (21.9 | ) | ||||||||||||||||
| Real estate brokerage | 25 | 29 | 25 | 134 | (13.8 | ) | (81.3 | ) | ||||||||||||||||
| Corporate interest and other | 116 | 158 | (260 | ) | (230 | ) | (26.6 | ) | (13.0 | ) | ||||||||||||||
| $ | 559 | $ | 1,761 | $ | 1,904 | $ | 3,529 | (68.3 | ) | (46.0 | ) |
Our U.S. utilities operate independently in several states, including Utah, Oregon and Wyoming (PacifiCorp), Iowa and Illinois (MEC) and Nevada (NV Energy). After-tax earnings decreased $1.0 billion in the third quarter and $1.2 billion (69.3%) in the first nine months of 2023 compared to 2022. The declines reflected increases in energy operating expenses, including increases in estimated pre-tax loss accruals by PacifiCorp for the Wildfires, net of expected insurance recoveries, of $1.3 billion in the third quarter and $1.6 billion in the first nine months of 2023. See Note 23 to the Consolidated Financial Statements for additional information on the Wildfires. The declines in earnings also reflected higher interest expense and lower electric utility margin (operating revenue less cost of sales). These items were partially offset by increases in interest and other income and lower depreciation and amortization expense.
The U.S. utilities’ electric utility margin was $2.3 billion in the third quarter and $5.8 billion in the first nine months of 2023, decreases of $110 million (4.5%) and $50 million (0.8%) versus 2022. The declines reflected changes in operating revenues attributable to rates and volumes and in thermal generation and purchased power costs. Retail customer volumes decreased 0.6% overall (down 0.5% at PacifiCorp and 2.3% at NV Energy and up 1.1% at MEC) in the first nine months of 2023 compared to 2022, primarily due to the unfavorable impact of weather, partially offset by an overall increase in the average number of customers and in customer usage.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
BHE (Continued)
After-tax earnings of natural gas pipelines decreased $59 million (25.2%) in the third quarter and $24 million (3.2%) in the first nine months of 2023 compared to 2022. The declines reflected higher operating expenses in 2023 and the impact of favorable income tax adjustments in 2022, partially offset by higher regulated transportation and storage services revenues from certain general rate cases and favorable interest and other income.
After-tax earnings of other energy businesses decreased $65 million (18.0%) in the third quarter and $243 million (21.9%) in the first nine months of 2023 compared to 2022. These declines reflected unfavorable operating performance at a natural gas exploration project and lower earnings from renewable energy and retail services businesses, primarily attributable to lower income tax benefits, higher operating expenses, lower solar and wind generation at owned projects and the impact of unfavorable changes in valuations of derivatives contracts, partially offset by debt extinguishment gains. Earnings in the first nine months of 2023 also included deferred income tax expense related to the enactment of the new Energy Profits Levy income tax in the United Kingdom.
After-tax earnings of real estate brokerage decreased $4 million (13.8%) in the third quarter and $109 million (81.3%) in the first nine months of 2023 compared to 2022. The decreases reflected lower brokerage services revenues and margins, primarily due to a 22% year-to-date reduction in closed brokerage transaction volumes, as well as lower mortgage services revenues and margins from a 33% 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 earnings decreased $42 million in the third quarter and $30 million in the first nine months of 2023 compared to 2022, reflecting lower federal income tax credits recognized and higher BHE corporate interest expense from an April 2022 debt issuance, partially offset by higher interest and other income.
Pilot Travel Centers, LLC (“PTC”)
PTC is headquartered in Knoxville, Tennessee and operates travel centers in North America (primarily under the names Pilot or Flying J) with more than 750 travel center locations across 44 states and six Canadian provinces. PTC also operates large wholesale fuel and fuel marketing platforms in the U.S. A substantial portion of PTC’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 PTC, which we accounted for under the equity method. Our proportionate share of PTC’s net earnings for the month ending January 31, 2023 and first nine 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 PTC, and we currently own an 80% controlling interest. Thus, we began consolidating PTC’s results of operations in our Consolidated Statements of Earnings on February 1, 2023. PTC’s earnings for the third quarter of 2023 and the eight months ending September 30, 2023 are summarized below (in millions).
| Third Quarter | Eight Months Ending | |||||||
| 2023 | September 30, 2023 | |||||||
| Revenues | $ | 13,166 | $ | 37,428 | ||||
| Cost of sales | 11,980 | 34,385 | ||||||
| Operating and other expenses | 782 | 2,133 | ||||||
| Interest expense | 113 | 297 | ||||||
| Pre-tax earnings | 291 | 613 | ||||||
| Income taxes and noncontrolling interests | 108 | 233 | ||||||
| Net earnings attributable to Berkshire Hathaway shareholders | $ | 183 | $ | 380 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Pilot Travel Centers, LLC (“PTC”) (Continued)
PTC’s revenues and earnings are highly dependent on diesel fuel and gasoline volumes, prices and margins. Revenues for the third quarter of 2023 and the eight months ending September 30, 2023 were $13.2 billion and $37.4 billion, respectively. PTC’s pre-tax earnings for the third quarter of 2023 and the eight months ending September 30, 2023 were $291 million and $613 million, respectively. Operating and other expenses included depreciation and amortization expense of $250 million in the third quarter of 2023 and $661 million in the eight months ending September 30, 2023.
PTC’s consolidated pre-tax earnings for the third quarter and first nine months of 2023 and 2022 are summarized below. Revenues, costs and expenses for the first nine months of 2022 and first month of 2023 are not included in our Consolidated Financial Statements, whereas such information for the eight months ending September 30, 2023 are included in our Consolidated Financial Statements (dollars in millions).
| Third Quarter | First Nine Months | Percentage Change | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Third Quarter | First Nine Months | |||||||||||||||||||
| Revenues | $ | 13,166 | $ | 19,197 | $ | 42,448 | $ | 55,198 | (31.4 | )% | (23.1 | )% | ||||||||||||
| Cost of sales | 11,980 | 17,763 | 39,079 | 51,891 | (32.6 | ) | (24.7 | ) | ||||||||||||||||
| Operating and other expenses | 782 | 654 | 2,346 | 1,892 | 19.6 | 24.0 | ||||||||||||||||||
| Interest expense | 113 | 61 | 321 | 154 | 85.2 | 108.4 | ||||||||||||||||||
| Pre-tax earnings | $ | 291 | $ | 719 | $ | 702 | $ | 1,261 | (59.5 | ) | (44.3 | ) |
Revenues for the first nine months of 2023 and 2022 were approximately $42.5 billion and $55.2 billion, respectively. Revenues were lower in 2023, primarily due to significantly lower fuel prices, as well as from lower fuel sales volumes. For the first nine months of 2023, PTC sold approximately 12.2 billion gallons of diesel fuel, gasoline and other fuel-related products compared to 13.6 billion gallons in 2022. 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 $51 million in the third quarter and $166 million in the first nine 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).
| Third Quarter | First Nine Months | Percentage Change | ||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | Third Quarter | First Nine Months | |||||||||||||||
| Revenues | ||||||||||||||||||||
| Manufacturing | $ | 19,174 | $ | 19,000 | $ | 56,565 | $ | 57,193 | 0.9 | % | (1.1 | )% | ||||||||
| Service and retailing | 23,423 | 23,136 | 69,437 | 67,645 | 1.2 | 2.6 | ||||||||||||||
| $ | 42,597 | $ | 42,136 | $ | 126,002 | $ | 124,838 | |||||||||||||
| Pre-tax earnings | ||||||||||||||||||||
| Manufacturing | $ | 3,077 | $ | 2,883 | $ | 8,791 | $ | 8,735 | 6.7 | % | 0.6 | % | ||||||||
| Service and retailing | 1,302 | 1,314 | 4,027 | 3,806 | (0.9 | ) | 5.8 | |||||||||||||
| 4,379 | 4,197 | 12,818 | 12,541 | |||||||||||||||||
| Income taxes and noncontrolling interests | 1,038 | 950 | 3,106 | 3,020 | ||||||||||||||||
| Net earnings* | $ | 3,341 | $ | 3,247 | $ | 9,712 | $ | 9,521 | ||||||||||||
| Effective income tax rate | 22.9 | % | 22.1 | % | 23.5 | % | 23.6 | % | ||||||||||||
| Pre-tax earnings as a percentage of revenues | 10.3 | % | 10.0 | % | 10.2 | % | 10.0 | % |
——————
** 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 $173 million in the third quarter and $525 million in the first nine months of 2023 and $161 million in the third quarter and $484 million in the first nine months of 2022. These expenses are included in “Other” in the summary of earnings on page 30 and in the “Other” earnings section on page 47.*
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).
| Third Quarter | First Nine Months | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Revenues | |||||||||||||||
| Industrial products | $ | 8,667 | $ | 7,723 | $ | 26,406 | $ | 22,912 | |||||||
| Building products | 6,739 | 7,589 | 19,442 | 22,011 | |||||||||||
| Consumer products | 3,768 | 3,688 | 10,717 | 12,270 | |||||||||||
| $ | 19,174 | $ | 19,000 | $ | 56,565 | $ | 57,193 | ||||||||
| Pre-tax earnings | |||||||||||||||
| Industrial products | $ | 1,427 | $ | 1,375 | $ | 4,388 | $ | 3,861 | |||||||
| Building products | 1,167 | 1,236 | 3,289 | 3,687 | |||||||||||
| Consumer products | 483 | 272 | 1,114 | 1,187 | |||||||||||
| $ | 3,077 | $ | 2,883 | $ | 8,791 | $ | 8,735 | ||||||||
| Pre-tax earnings as a percentage of revenues | |||||||||||||||
| Industrial products | 16.5 | % | 17.8 | % | 16.6 | % | 16.9 | % | |||||||
| Building products | 17.3 | 16.3 | 16.9 | 16.8 | |||||||||||
| Consumer products | 12.8 | 7.4 | 10.4 | 9.7 |
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). The industrial products group also includes certain non-insurance businesses acquired in connection with the Alleghany acquisition including W&W|AFCO Steel, a structural steel fabrication products business, and certain other businesses that were combined into Marmon.
Revenues of the industrial products group increased $944 million (12.2%) in the third quarter and $3.5 billion (15.2%) in the first nine months of 2023 compared to 2022. Pre-tax earnings increased $52 million (3.8%) in the third quarter and $527 million (13.6%) in the first nine months of 2023. Pre-tax earnings as a percentage of revenues for the group were 16.6% for the first nine months of 2023, a decrease of 0.3 percentage points compared to the first nine months of 2022. Operating results of the group in the first nine months of 2023 reflected the impact of business acquisitions and overall improved operating results at certain of our pre-existing businesses.
PCC’s revenues were $2.3 billion in the third quarter and $6.9 billion in the first nine months of 2023, increases of 21.4% in the third quarter and 26.0% in the first nine 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 43.1% in the third quarter and 32.5% in the first nine 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 product demand.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Industrial products (Continued)
Lubrizol’s revenues were $1.6 billion in the third quarter and $4.9 billion in the first nine months of 2023, decreases of 10.0% in the third quarter and 3.6% in the first nine months compared to 2022. The revenue declines were primarily due to lower volumes of approximately 10% in both periods. Revenues in the first nine months of 2023 also reflected unfavorable foreign currency translation effects in the first six months partially offset by higher average selling prices. Lower sales volumes in 2023 were attributable to general market weakness, resulting in lower demand in most product lines. Sales volumes through the first nine months of 2022 were restricted by raw material supply constraints, which limited Lubrizol’s production capabilities.
Lubrizol’s pre-tax earnings declined 41.2% in the third quarter and 19.8% in the first nine months of 2023 compared to 2022. Earnings in 2022 included insurance recoveries of $142 million in the third quarter and $242 million in the first nine months in connection with fires at certain production facilities in 2021 and 2020. Fire insurance recoveries in the first nine months of 2023 were $11 million. Excluding insurance recoveries, earnings in the third quarter of 2023 were higher due to lower raw material costs partially offset by the impact of lower sales volumes, while the first nine months of 2023 were higher due to the favorable impacts of higher selling prices, changes in product mix and lower raw material costs, partially offset by the impact of lower sales volumes, higher operating expenses and unfavorable foreign currency translation effects.
Marmon’s revenues were $3.0 billion in the third quarter and $9.2 billion in the first nine months of 2023, increases of 10.4% in the third quarter and 13.0% in the first nine 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 $291 million and $886 million of comparative revenue increases in the third quarter and first nine months of 2023, respectively. In addition, the Rail & Leasing, Water Technologies, Medical, Metal Services and Crane Services groups generated higher revenues in 2023, primarily due to higher volumes and pricing improvements. The Electrical, Transportation Products, Metal Services and Plumbing & Refrigeration group’s revenues in the first nine months of 2023 were negatively impacted by lower steel and copper prices.
Marmon’s pre-tax earnings were essentially unchanged in the third quarter and increased 13.9% in the first nine months of 2023 compared to 2022. Earnings increases attributable to business acquisitions were $31 million in the third quarter and $72 million in the first nine months of 2023. Earnings in the first nine months 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 the first nine months of 2023 were mixed, reflecting earnings increases in the Rail & Leasing, Transportation Products, Water Technologies and Crane Services groups, 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 third quarter and $3.0 billion in the first nine months of 2023, increases of 8.2% in the third quarter and 7.9% in the first nine months compared to 2022. The revenue increases in 2023 reflected increased organic sales in North America, the impact of business acquisitions and higher interest income due to higher rates, partially offset by lower revenues in Asia, unfavorable foreign currency translation from a stronger U.S. Dollar and the impact of geopolitical conflicts. IMC’s pre-tax earnings were relatively flat in the third quarter and increased 6.4% in the first nine months of 2023 compared to 2022. In the first nine months of 2023, the impact of revenue increases was partially offset by higher raw material costs, changes in sales mix and the adverse effects of geopolitical conflicts. A large portion of IMC’s products are manufactured in Israel. To date, IMC’s operations in Israel have not been significantly impacted by the terrorist attack on Israel on October 7, 2023 and the ongoing 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 declined $850 million (11.2%) in the third quarter and $2.6 billion (11.7%) in the first nine months of 2023 compared to 2022. Pre-tax earnings declined $69 million (5.6%) in the third quarter and $398 million (10.8%) in the first nine months of 2023 compared to 2022. Our building products businesses 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 certain of our businesses will experience weakening demand and declines in revenues and earnings into 2024.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Building products (Continued)
Clayton Homes’ revenues declined 8.8% to $3.0 billion in the third quarter and 12.0% to $8.4 billion in the first nine months of 2023 compared to 2022. Revenues from home sales decreased $1.3 billion (17.1%) in the first nine months of 2023, primarily due to lower unit sales and changes in product mix. New home unit sales declined 17.5% in the first nine months of 2023, reflecting lower overall unit sales for factory-built and site-built homes. Financial services revenues, which include mortgage origination and services, insurance and interest income from lending activities, increased 11.3% in the first nine 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 $23.1 billion as of September 30, 2023, an increase of 13.2% since September 30, 2022.
Pre-tax earnings of Clayton Homes declined $89 million (14.0%) in the third quarter and $239 million (13.7%) in the first nine months of 2023 compared to 2022, primarily attributable to lower earnings from the home building businesses, partially offset by increased earnings from financial services. The increases in financial services earnings were primarily attributable to increased net interest income, partially offset by increased expected loan loss provisions and higher insurance claims.
Aggregate revenues of our other building products businesses were approximately $3.8 billion in the third quarter and $11.1 billion in the first nine months of 2023, decreases of $563 million (13.1%) in the third quarter and $1.4 billion (11.4%) in the first nine months versus 2022. The comparative revenue declines reflected overall lower sales volumes and changes in product mix, partly offset by higher average selling prices.
Pre-tax earnings of our other building products businesses increased $19 million (3.2%) in the third quarter and declined $160 million (8.2%) in the first nine months of 2023 compared to 2022. Earnings as a percentage of revenues in the first nine months of 2023 increased 0.5 percentage points versus 2022. The earnings of our other building products businesses in 2023 benefited from lower average prices for certain raw materials and energy and reduced freight, shipping and utilities expenses and were negatively impacted by lower sales volumes and reduced manufacturing efficiencies. 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 $58 million in the third quarter and $169 million in the first nine months.
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), Jazwares, LLC (Jazwares), a global toy company acquired in connection with the Alleghany acquisition. Jazwares revenues and earnings tend to be seasonally higher in the second half of the year.
Consumer products group revenues decreased $80 million (2.2%) in the third quarter and $1.6 billion (12.7%) in the first nine months of 2023 compared to 2022. The declines reflected lower revenues at Forest River and nearly all of our apparel and footwear operations, partially offset by the impact of the Jazwares acquisition, which contributed revenues of $847 million in the first nine months of 2023.
Forest River’s revenues declined 17.1% in the third quarter and 31.5% in the first nine months of 2023 compared to 2022, reflecting an overall 34.5% decline in unit sales in the first nine 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, sales 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 sales by the bus and commercial business.
Revenues of our apparel and footwear businesses declined $148 million (11.2%) in the third quarter and $370 million (9.9%) in the first nine months of 2023 compared to 2022, primarily due to reduced apparel sales. Apparel business revenues declined 15.1% for the first nine months of 2023 attributable to lower volumes from declining customer demand, partially offset by higher average selling prices and sales mix changes. Duracell’s revenues increased 7.9% in the third quarter and declined 2.4% in the first nine months of 2023 versus 2022.
Pre-tax earnings of our consumer products group increased $211 million (77.6%) in the third quarter and declined $73 million (6.1%) in the first nine months of 2023 versus 2022. Pre-tax earnings in 2023 reflected increases due to the Jazwares acquisition and improved earnings of the apparel and footwear businesses and lower earnings from Forest River. Pre-tax earnings as a percentage of revenues for the group increased 0.7 percentage points in the first nine months of 2023 compared to 2022.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Consumer products (Continued)
Earnings from Forest River declined 34.8% in the first nine months of 2023 compared to 2022, primarily due to the decrease in unit sales and product mix changes, partially offset by lower selling, general and administrative expenses. Apparel and footwear earnings increased 27.3% in the first nine months of 2023 compared to earnings in 2022, which were negatively impacted by a combination of low sales volumes and rising raw materials, freight, labor and other operating costs. Our apparel businesses continued to be negatively affected by lower sales volumes and reduced manufacturing efficiencies in 2023, which were partially offset by increased selling prices and reduced markdowns.
Service and retailing
A summary of revenues and pre-tax earnings of our service and retailing businesses follows (dollars in millions).
| Third Quarter | First Nine Months | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||
| Revenues | |||||||||||||
| Service | $ | 5,100 | $ | 4,771 | $ | 15,600 | $ | 14,031 | |||||
| Retailing | 4,846 | 4,796 | 14,418 | 14,268 | |||||||||
| McLane | 13,477 | 13,569 | 39,419 | 39,346 | |||||||||
| $ | 23,423 | $ | 23,136 | $ | 69,437 | $ | 67,645 | ||||||
| Pre-tax earnings | |||||||||||||
| Service | $ | 772 | $ | 806 | $ | 2,433 | $ | 2,286 | |||||
| Retailing | 414 | 396 | 1,236 | 1,250 | |||||||||
| McLane | 116 | 112 | 358 | 270 | |||||||||
| $ | 1,302 | $ | 1,314 | $ | 4,027 | $ | 3,806 | ||||||
| Pre-tax earnings as a percentage of revenues | |||||||||||||
| Service | 15.1 | % | 16.9 | % | 15.6 | % | 16.3 | % | |||||
| Retailing | 8.5 | 8.3 | 8.6 | 8.8 | |||||||||
| McLane | 0.9 | 0.8 | 0.9 | 0.7 |
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). This group also includes IPS-Integrated Project Services, LLC (IPS), a provider of various services in facilities construction management that was acquired in connection with the Alleghany acquisition.
Service group revenues increased $329 million (6.9%) in the third quarter and $1.6 billion (11.2%) in the first nine months of 2023 compared to 2022. IPS contributed revenues of $343 million in the third quarter and $947 million in the first nine months of 2023. Revenues from aviation services increased 8.3% in the third quarter and 11.5% in the first nine 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 a year-to-date increase in flight hours across NetJets’ various programs, as well as higher average rates.
Revenues from TTI declined 7.2% in the third quarter and 0.8% in the first nine months of 2023 compared to 2022. Excluding the effects of business acquisitions in 2022 and 2023 and the unfavorable foreign currency translation effects, third quarter and year-to-date sales declined 10.7% and 3.0%, respectively, 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, particularly in the Asia Pacific region, in part attributable to elevated customer inventory levels and increasing price competition. We currently expect these conditions will persist over the remainder of 2023 and into 2024.
Pre-tax earnings of the service group declined $34 million (4.2%) in the third quarter and increased $147 million (6.4%) in the first nine months of 2023 compared to 2022. Pre-tax earnings as a percentage of revenues declined 0.7 percentage points in the first nine months of 2023 compared to 2022. The changes in comparative earnings in 2023 reflected increases from aviation services businesses, primarily attributable to higher overall margin rates due to a 15.4% year-to-date increase in average aircraft in the NetJets programs, the impact of the IPS acquisition and lower earnings from TTI. Year-to-date earnings from TTI declined 10.3%, attributable to reduced sales and gross margin rates, and higher operating expenses, partly offset by the impact of lower foreign currency exchange losses in 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Manufacturing, Service and Retailing (Continued)
Retailing
Our largest retailing business is Berkshire Hathaway Automotive, Inc. (“BHA”), representing 68% of our combined retailing revenues in the first nine 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% of the combined retailing revenues in the first nine months of 2023.
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 1.0% in the third quarter and 1.1% in the first nine months of 2023 compared to 2022, reflecting increases at BHA, partially offset by lower revenues from our other retailers. BHA’s revenues in the third quarter and first nine months of 2023 increased 3.9% and 4.3%, respectively, compared to 2022. Revenues from new vehicle sales increased 13.7% in the first nine months of 2023 compared to 2022, while revenues from pre-owned vehicle retail sales declined 9.3%. Unit sales in the first nine months of 2023 increased 2.6%, reflecting an 11.5% increase in new vehicle sales and a 4.6% decrease in pre-owned vehicles sold. Although 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 nine months of 2023 increased 8.2% versus 2022. Other retailing revenues in the aggregate declined 5.2% in the first nine months of 2023 versus 2022, due to an 8.7% decline in revenues at our home furnishings businesses, primarily attributable to lower customer traffic.
Retailing group pre-tax earnings increased $18 million (4.5%) in the third quarter and decreased $14 million (1.1%) in the first nine months of 2023 compared to 2022. BHA’s pre-tax earnings increased 14.2% in the third quarter and 18.6% in the first nine months of 2023 compared to 2022. BHA’s earnings increases reflected higher earnings from parts/service/repair and finance/service contract operations and lower operating expenses, partially offset by lower vehicle gross profit margin rates 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 $146 million (26.9%) in the first nine months of 2023 compared to 2022, primarily due to a 31.1% decrease in home furnishings businesses earnings and the impact of a gain in 2022 from 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 0.7% in the third quarter and increased 0.2% in the first nine 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 62% of McLane’s consolidated sales in the first nine months of 2023, with foodservice representing most of the remainder. Pre-tax earnings increased $4 million (3.6%) in the third quarter and $88 million (32.6%) in the first nine months of 2023 compared to 2022. The year-to-date increases in earnings reflected a slight increase in the overall gross sales margin rate 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, PTC (through January 31, 2023) and Berkadia. After-tax earnings attributable to these businesses decreased $120 million in the third quarter and increased $519 million in the first nine months of 2023 versus 2022. We adopted the equity method of accounting for our investment in Occidental Petroleum common stock on August 4, 2022. As of January 31, 2023, we discontinued using the equity method for our pre-existing 38.6% interest in PTC upon acquiring a controlling interest in PTC. We began consolidating PTC’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).
| Third Quarter | First Nine Months | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Investment gains (losses) | $ | (29,778 | ) | $ | (13,500 | ) | $ | 38,041 | $ | (82,089 | ) | |||||
| Derivative contract gains (losses) | — | 35 | — | (273 | ) | |||||||||||
| Gains (losses) before income taxes and noncontrolling interests | (29,778 | ) | (13,465 | ) | 38,041 | (82,362 | ) | |||||||||
| Income taxes and noncontrolling interests | (6,250 | ) | (3,016 | ) | 8,261 | (17,295 | ) | |||||||||
| Net earnings (loss) | $ | (23,528 | ) | $ | (10,449 | ) | $ | 29,780 | $ | (65,067 | ) | |||||
| Effective income tax rate | 20.9 | % | 20.9 | % | 21.6 | % | 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 losses of $30.4 billion in the third quarter and net unrealized gains of $33.3 billion in the first nine months of 2023. Net unrealized losses were $12.9 billion in the third quarter and $80.5 billion in the first nine months of 2022. Such amounts related to securities we held at the end of the applicable period. Taxable gains and losses on equity securities sold generally represent the difference between sales proceeds and the original cost of the securities sold. Sales of equity securities produced taxable gains of $759 million in the third quarter and $5.4 billion in the first nine months of 2023 compared to taxable gains of $3 million in the third quarter and losses of $660 million in the first nine months of 2022. Pre-tax investment gains in the first nine months of 2023 included a non-cash gain of approximately $3.0 billion related to the remeasurement of our pre-existing interest in PTC to fair value through the application of acquisition accounting upon attaining control of PTC for financial reporting purposes.
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).
| Third Quarter | First Nine Months | ||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||
| Acquisition accounting expenses | $ | (194 | ) | $ | (161 | ) | $ | (596 | ) | $ | (484 | ) | |||
| Corporate interest expense, before foreign currency effects | (53 | ) | (66 | ) | (171 | ) | (203 | ) | |||||||
| Foreign currency exchange rate gains on Berkshire and BHFC non-U.S. Dollar senior notes | 447 | 858 | 895 | 2,441 | |||||||||||
| Other earnings | 200 | 48 | 501 | 207 | |||||||||||
| $ | 400 | $ | 679 | $ | 629 | $ | 1,961 |
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 September 30, 2023 was $525.3 billion, a decrease of $14.6 billion during the third quarter and an increase of $51.9 billion during the first nine months of 2023. Net earnings attributable to Berkshire shareholders included after-tax losses of $23.5 billion in the third quarter of 2023 on our investments compared to after-tax gains of $29.8 billion in the first nine months. 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 $7.0 billion in the first nine months of 2023 to repurchase shares of its Class A and B common stock.
At September 30, 2023, our insurance and other businesses held cash, cash equivalents and U.S. Treasury Bills of $152.0 billion, which included $127.6 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 $341.1 billion. During the first nine months of 2023, we paid cash of $9.1 billion to acquire equity securities and we received proceeds of $32.8 billion from sales of equity securities. On January 31, 2023, we acquired an additional 41.4% interest in PTC for approximately $8.2 billion.
Our consolidated borrowings at September 30, 2023 were $124.8 billion, of which over 95% were by the Berkshire parent company, BHFC, BNSF, BHE and its subsidiaries and PTC. During the first nine months of 2023, we issued term debt of approximately $6.3 billion and repaid $9.6 billion on maturing term debt.
Berkshire parent company outstanding debt at September 30, 2023 was $17.2 billion, a decrease of $4.2 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 $17.9 billion at September 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 $23.5 billion as of September 30, 2023, substantially unchanged from December 31, 2022. In June 2023, BNSF issued $1.6 billion of 5.2% debentures due in 2054. During the first nine months of 2023, BNSF repaid approximately $1.5 billion of term debt. Outstanding borrowings of BHE and its subsidiaries were $54.3 billion at September 30, 2023, an increase of $1.6 billion from December 31, 2022. In the first nine months of 2023, BHE and its subsidiaries issued $3.5 billion of term debt with a weighted average interest rate of 5.7% and maturity dates ranging from 2034 to 2054 and repaid approximately $2.3 billion of term debt. Aggregate debt maturities for BHE and BNSF over the next twelve months are approximately $3.5 billion. Borrowings of PTC were $5.9 billion as of the January 31, 2023 acquisition date and were $6.0 billion at September 30, 2023. Berkshire does not guarantee the repayment of debt or other borrowings issued by BNSF, BHE, PTC or any of their subsidiaries or affiliates.
In the first nine months of 2023, our diverse group of businesses generated net operating cash flows of $34.8 billion. Our consolidated capital expenditures for property, plant and equipment and equipment held for lease were $13.7 billion in the first nine months of 2023, which included capital expenditures by BNSF and BHE of $9.4 billion. BNSF and BHE maintain very large investments in capital assets (property, plant and equipment) and regularly make significant capital expenditures in the normal course of business. We forecast capital expenditures for BHE and BNSF in the fourth quarter of 2023 of approximately $4.2 billion. On September 1, 2023, a BHE subsidiary acquired an additional 50% limited partnership interest in its Cove Point LNG, LP subsidiary for $3.3 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 (“CAMT”) 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. The extent to which the Company incurs CAMT will depend on the facts and circumstances of the given tax year. We do not expect to incur a CAMT liability in 2023. The Internal Revenue Service and the U.S. 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.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 $143.7 billion at September 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 September 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 September 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 September 30, 2023 includes estimated liabilities of $143.7 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 September 30, 2023 included goodwill of acquired businesses of approximately $85.7 billion 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 September 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, an 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; geopolitical conflicts or events and changes in general economic and market factors that negatively affect the prices of securities or the industries in which we do business.
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