Berkshire Hathaway 2003 Annual Report Download - page 61

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60
Management’s Discussion (Continued)
Non-Insurance Businesses (Continued)
Finance and financial products (Continued)
Revenues of the finance group consist of interest, rentals, and sales of manufactured homes, transportation
equipment and furniture. Revenues in 2003 totaled $3,073 million, an increase of 37.6% over 2002. The increase
in 2003 was primarily due to the inclusion of Clayton (approximately $500 million), revenues from the issuance of
annuity products of approximately $700 million versus none in 2002 and was partially offset by lower interest
income.
Pre-tax earnings of the finance group in 2003, which exclude realized investment gains, declined $107
million (14.7%) from 2002. Much of the comparative decline in pre-tax earnings was due to lower net interest
earned by BH Finance. BH Finance’ s fixed maturity investment portfolio declined about $6 billion during 2003 as
a result of sales and prepayments and was offset by corresponding declines in repurchase agreement obligations.
During 2003, pre-tax earnings included about $101 million from Berkadia as compared to $115 million in
2002. Earnings of Berkadia are directly correlated with the outstanding amount of a term loan to FINOVA, which
totaled $525 million at December 31, 2003 compared to $2.175 billion at December 31, 2002 and $4.9 billion at
December 31, 2001. Most of Berkadia’ s pre-tax earnings in 2003 were represented by the accelerated recognition
in earnings of fees received in 2001 from FINOVA in connection with origination of the loan as a result of loan
repayments being at a much faster rate than originally anticipated. In February 2004, the FINOVA loan was repaid
in full. Thus, earnings from Berkadia in 2004 will be nominal.
GRS had a pre-tax loss in 2003 of $99 million versus a loss of $173 million in 2002. GRS’ s operation has
been in run-off since January 2002. During the run-off period, GRS has limited new business to certain risk
management transactions and is unwinding existing asset and liability positions in an orderly manner. Since the
run-off commenced, approximately two-thirds of GRS’ s open trades have been terminated. It is expected that the
run-off will take at least several more years to complete. The pre-tax losses in the last two years reflect related run-
off costs as well as net transaction and position losses. Additional losses will almost certainly be incurred over time
in connection with the run-off. The timing and amounts of such losses is uncertain.
Flight services
This segment includes FlightSafety, a leading provider of high technology training to operators of aircraft
and ships and NetJets, the world’ s leading provider of fractional ownership programs for general aviation aircraft.
FlightSafety’ s worldwide clients include corporations, regional airlines, the military and government agencies. The
decline in revenues was split between FlightSafety (about $96 million) and NetJets (about $310 million). A decline
in FlightSafety training revenues accounted for most of that businesses revenue decline. The decline in training
revenues was due to a decline in regional airline training somewhat offset by increased U.S. Government training
revenues. The decline in revenues at NetJets was due to a reduction of revenues from sales of aircraft of $514
million partially offset by increased flight services and other revenues of about $204 million. Pre-tax earnings from
these businesses was $72 million in 2003 as compared to $225 million in 2002. The results for 2002 include a gain
of $60 million from the sale of a partnership interest to Boeing and the results for 2003 include the recognition of
pre-tax charges of $69 million related to write downs of certain simulators and aircraft inventory. Excluding the
aforementioned gain and write downs, “normal earnings” from these businesses were $141 million in 2003 versus
$165 million in 2002. The reduction in combined “normal” pre-tax earnings from these businesses is due to
reduced “normal” pre-tax earnings at FlightSafety of $34 million somewhat offset by improved results at NetJets
where its pre-tax loss before write downs was $9 million in 2003 versus about $19 million in 2002. The corporate
aviation business has slowed significantly in the past few years which has hurt FlightSafety’ s results. NetJets
continues to be the leader in the fractional ownership field.
McLane
On May 23, 2003, Berkshire acquired McLane Company, Inc. from Wal-Mart Stores, Inc. Results of
McLane’ s business operations are included in Berkshire’ s consolidated results beginning on that date. McLane’ s
revenues were $13,743 million and pre-tax earnings totaled $150 million for the period from May 23 to December
31. Approximately 35% of McLane’ s revenues derived from sales to Wal-Mart Stores, Inc. McLane’ s business is
marked by high sales volume and low profit margins. For its most recently completed fiscal year prior to the
acquisition, McLane’ s sales and pre-tax earnings totaled approximately $21.9 billion and $220 million, respectively.
See Note 2 to the Consolidated Financial Statements for information regarding the acquisition and McLane’ s
business.