Berkshire Hathaway 1999 Annual Report Download - page 52

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Non-Insurance Business Segments (continued)
1998 compared to 1997
Revenues from the non-insurance business segments increased $1,034 million (30.4%) in 1998 as compared
to 1997. Operating profits of $635 million during 1998 increased $123 million (24.0%) from the comparable 1997
amount. The most significant factor which gave rise to the increase in both revenues and operating profits were the
acquisitions of Dairy Queen at the beginning of 1998 and Executive Jet during August, 1998. With the exception of
the shoe group, all other reportable segments reported excellent results in 1998 as compared to 1997.
Realized Investment Gain
Realized investment gain has been a recurring element in Berkshire's net earnings for many years. The amount
— recorded when investments are sold, other-than-temporarily impaired or in certain situations, as required by GAAP,
when investments are marked-to-market with the corresponding gain or loss included in earnings — may fluctuate
significantly from period to period, with a meaningful effect upon Berkshire's consolidated net earnings. However, the
amount of realized investment gain or loss for any given period has no predictive value, and variations in amount from
period to period have no practical analytical value, particularly in view of the net unrealized price appreciation now
existing in Berkshire's consolidated investment portfolio.
While the effects of realized gains are often material to the Consolidated Statements of Earnings, such gains
often produce a minimal impact on Berkshire's total shareholders' equity. This is due to the fact that Berkshire's
investments are carried in prior periods' consolidated financial statements at market value with unrealized gains, net
of tax, reported as a separate component of shareholders' equity.
Goodwill amortization and other purchase-accounting-adjustments
Goodwill amortization and other purchase-accounting-adjustments reflect the after-tax effect on net earnings
with respect to the amortization of goodwill of acquired businesses and the amortization of fair value adjustments to
certain assets and liabilities which were recorded at the acquisition dates of certain businesses (principally General Re
and GEICO). The significant increase in such charges during 1999 as compared to 1998 periods is primarily due to
the acquisition of General Re on December 21, 1998.
Market Risk Disclosures
Berkshire's Consolidated Balance Sheet includes a substantial amount of assets and liabilities whose fair values
are subject to market risks. Berkshire’s sig nificant market risks are primarily associated with equity prices and interest
rates and to a lesser degree financial products. The following sections address the significant market risks associated
with Berkshire's business activities.
Equity Price Risk
Strategically, Berkshire strives to invest in businesses that possess excellent economics, with able and honest
management and at sensible prices. Berkshire's management prefers to invest a meaningful amount in each investee.
Accordingly, Berkshire's equity investments are concentrated in relatively few investees. At year-end 1999 and 1998,
approximately 60% of the total fair value of investments in equity securities was concentrated in three investees.
Berkshire's preferred investment strategy contemplates that equity investments will be held for very long
periods of time. Thus, Berkshire management is not necessarily troubled by short term price volatility with respect to
its investments provided that the underlying business, economic and management characteristics of the investees remain
favorable. Berkshire strives to maintain above average levels of shareholder capital to provide a margin of safety against
short term equity price volatility.
The carrying values of investments subject to equity price risks are based on quoted market prices or
management's estimates of fair value as of the balance sheet dates. Market prices are subject to fluctuation and,
consequently, the amount realized in the subsequent sale of an investment may significantly differ from the reported
market value. Fluctuation in the market price of a security may result from perceived changes in the underlying
economic characteristics of the investee, the relative price of alternative investments and general market conditions.
Furthermore, amounts realized in the sale of a particular security may be affected by the relative quantity of the security
being sold.