Berkshire Hathaway 2007 Annual Report Download - page 15

At NetJets, the inventor of fractional-ownership of jets, we also remain the unchallenged leader.
We now operate 487 planes in the U.S. and 135 in Europe, a fleet more than twice the size of that
operated by our three major competitors combined. Because our share of the large-cabin market is
near 90%, our lead in value terms is far greater.
The NetJets brand – with its promise of safety, service and security – grows stronger every year.
Behind this is the passion of one man, Richard Santulli. If you were to pick someone to join you
in a foxhole, you couldn’ t do better than Rich. No matter what the obstacles, he just doesn’ t stop.
Europe is the best example of how Rich’ s tenacity leads to success. For the first ten years we
made little financial progress there, actually running up cumulative losses of $212 million. After
Rich brought Mark Booth on board to run Europe, however, we began to gain traction. Now we
have real momentum, and last year earnings tripled.
In November, our directors met at NetJets headquarters in Columbus and got a look at the
sophisticated operation there. It is responsible for 1,000 or so flights a day in all kinds of weather,
with customers expecting top-notch service. Our directors came away impressed by the facility
and its capabilities – but even more impressed by Rich and his associates.
Finance and Finance Products
Our major operation in this category is Clayton Homes, the largest U.S. manufacturer and
marketer of manufactured homes. Clayton’ s market share hit a record 31% last year. But industry volume
continues to shrink: Last year, manufactured home sales were 96,000, down from 131,000 in 2003, the
year we bought Clayton. (At the time, it should be remembered, some commentators criticized its directors
for selling at a cyclical bottom.)
Though Clayton earns money from both manufacturing and retailing its homes, most of its
earnings come from an $11 billion loan portfolio, covering 300,000 borrowers. That’ s why we include
Clayton’ s operation in this finance section. Despite the many problems that surfaced during 2007 in real
estate finance, the Clayton portfolio is performing well. Delinquencies, foreclosures and losses during the
year were at rates similar to those we experienced in our previous years of ownership.
Clayton’ s loan portfolio is financed by Berkshire. For this funding, we charge Clayton one
percentage point over Berkshire’ s borrowing cost – a fee that amounted to $85 million last year. Clayton’ s
2007 pre-tax earnings of $526 million are after its paying this fee. The flip side of this transaction is that
Berkshire recorded $85 million as income, which is included in “other” in the following table.
Pre-Tax Earnings
(in millions)
2007 2006
Trading – ordinary income............................. $ 272 $ 274
Life and annuity operation ............................ (60) 29
Leasing operations ........................................ 111 182
Manufactured-housing finance (Clayton)....... 526 513
Other............................................................... 157 159
Income before capital gains............................ 1,006 1,157
Trading – capital gains .................................. 105 938
$1,111 $2,095
The leasing operations tabulated are XTRA, which rents trailers, and CORT, which rents furniture.
Utilization of trailers was down considerably in 2007 and that led to a drop in earnings at XTRA. That
company also borrowed $400 million last year and distributed the proceeds to Berkshire. The resulting
higher interest it is now paying further reduced XTRA’ s earnings.
14