Berkshire Hathaway 2007 Annual Report Download - page 58

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Manufacturing, Service and Retailing
Revenues and pre-tax earnings of the manufacturing, service and retailing businesses for each of the past three years
follows. Amounts are in millions.
Revenues Earnings
2007 2006 2005 2007 2006 2005
McLane Company.......................................................... $28,079 $25,693 $24,074 $ 232 $ 229 $ 217
Shaw Industries .............................................................. 5,373 5,834 5,723 436 594 485
Other manufacturing ...................................................... 14,459 11,988 9,260 2,037 1,756 1,335
Other service * ............................................................... 7,792 5,811 4,728 968 658 329
Retailing......................................................................... 3,397 3,334 3,111 274 289 257
$59,100 $52,660 $46,896
Pre-tax earnings.............................................................. $3,947 $3,526 $2,623
Income taxes and minority interests............................... 1,594 1,395 977
$2,353 $2,131 $1,646
* Management evaluates the results of NetJets using accounting standards for recognition of revenue and planned major
maintenance expenses that were generally accepted when Berkshire acquired NetJets but are no longer acceptable due to
subsequent changes in accounting standards adopted by the FASB. Revenues and pre-tax earnings for the other services
businesses shown above reflect these prior revenue and expense recognition methods. Revenues shown in this table are greater
than the amounts reported in Berkshire’s consolidated financial statements by $709 million in 2007, $781 million in 2006 and
$704 million in 2005. Pre-tax earnings included in this table for 2007, 2006 and 2005 exceed the amounts included in the
consolidated financial statements by $48 million, $79 million and $63 million, respectively.
McLane Company
McLane Company, Inc., (“McLane”) is a wholesale distributor of grocery and non-food products to retailers,
convenience stores and restaurants. McLane’ s business is marked by high sales volume and very low profit margins. McLane’ s
revenues in 2007 increased $2,386 million (9%) as compared to 2006 which increased $1,619 million (7%) as compared to 2005.
The comparative revenue increases reflect additional grocery and foodservice customers as well as manufacturer price increases
and state excise tax increases which are passed on to customers.
Pre-tax earnings in 2007 increased $3 million over 2006 which increased $12 million over 2005. The increases reflect
the increase in sales volume, partially offset by lower gross margins. The gross margin rate in 2007 was 5.79% versus 5.85% in
2006 and 5.98% in 2005. In 2007, the gross margin rate was negatively impacted by excise tax increases as well as the effects of
increased competition. The impact of the reduced gross margin rate was partially offset by a decline in other operating expenses
as a percentage of revenues. Pre-tax earnings in 2007 also included a $10 million gain from a litigation settlement, which was
offset by an asset write down at a small novelty items distribution subsidiary. Approximately 33% of McLane’ s annual revenues
are from sales to Wal-Mart. A curtailment of purchasing by Wal-Mart could have a material adverse impact on the earnings of
McLane.
Shaw Industries
Shaw Industries (“Shaw”) is the world’ s largest manufacturer of tufted broadloom carpets and is a full-service flooring
company. Revenues of $5,373 million in 2007 declined $461 million (8%) from 2006. In 2007, carpet volume decreased 10%
versus 2006 due to lower sales in residential markets, partially offset by a modest increase in commercial market volume. The
continued slowdown in new housing construction is the primary driver behind lower residential market sales. In 2007, pre-tax
earnings decreased $158 million (27%) compared to 2006. The decline reflects the aforementioned lower sales volume and
higher product costs due primarily to comparatively higher raw material prices and lower manufacturing efficiencies as a result
of decreased production. These factors combined to produce declines in gross margin dollars in 2007 of approximately 17%
versus 2006. Selling, general and administrative costs in 2007 declined approximately 6% compared with 2006, reflecting lower
sales volume and expense control efforts. Residential housing construction activity is expected to remain slow during 2008 and
as a result, revenues and earnings will likely decline further.
In 2006, revenues increased $111 million (2%) and pre-tax earnings of $594 million increased $109 million (22%) as
compared to 2005. The increase in revenues reflected a 7% increase in the average square yard selling price for carpet, partially
offset by a 6% reduction in square yards sold. The comparative decline in 2006 square yards sold versus 2005 accelerated
during the third and fourth quarters which was attributable to the slowing of single-family housing construction and the effects of
accelerated customer purchases during the second half of 2005 in anticipation of price increases. The increase in pre-tax
earnings in 2006 over 2005 was primarily generated in the first six months of the year and was mainly attributable to a reduction
in manufacturing cost per unit deriving from the integration of carpet backing and nylon-fiber manufacturing operations acquired
by Shaw in the fourth quarter of 2005.
Other manufacturing
Berkshire’ s other manufacturing businesses include a wide array of businesses. Included in this group are several
manufacturers of building products (Acme Building Brands, Benjamin Moore, Johns Manville and MiTek) and apparel (Fruit of
the Loom (includes the Russell athletic apparel and sporting goods business acquired in August 2006 and the women’ s intimate
apparel business acquired from VF Corporation in April 2007), Garan, Fechheimers, Justin Brands and the H.H. Brown Shoe
Group). Also included in this group are Forest River, a leading manufacturer of leisure vehicles and the ISCAR Metalworking