Berkshire Hathaway 2005 Annual Report Download - page 64

63
Non-Insurance Businesses (Continued)
Finance and financial products
A summary of revenues and pre-tax earnings from Berkshire’ s finance and financial products businesses follows.
Dollar amounts are in millions.
Revenues Pre-tax earnings
2005 2004 2003 2005 2004 2003
Manufactured housing and finance............................. $3,175 $2,024 $ 512 $ 416 $ 192 $ 34
Furniture/transportation equipment leasing................ 856 789 750 173 92 34
Other........................................................................... 528 961 1,783 233 300 551
$4,559 $3,774 $3,045 $ 822 $ 584 $ 619
The increase in revenues in 2005 from manufactured housing and finance activities of Clayton Homes (“Clayton”) was
primarily attributed to increased sales of manufactured homes ($491 million) and increased interest income ($583 million) from
comparatively higher installment loan balances. Installment loan balances have increased approximately $8.5 billion from the
date of Berkshire’ s acquisition on August 7, 2003 to $9.6 billion as of December 31, 2005, reflecting the impact of several loan
portfolio acquisitions as well as loan originations. Clayton’ s results are included in Berkshire’ s consolidated financial statements
beginning as of the acquisition date.
Pre-tax earnings from Clayton’ s manufactured housing and finance activities totaled $416 million in 2005, an increase
of $224 million (117%) over 2004. The significant increase in pre-tax earnings is primarily due to higher interest income from
the increase in acquired loan portfolios during 2004 and 2005, partially offset by higher interest expense derived from Berkshire
Hathaway Finance Corporation, an affiliate that has issued approximately $8.8 billion par of medium term notes to finance the
aforementioned increase in installment loans. In addition, improved comparative results in the manufacturing and retail
segments of Clayton’ s business contributed to the overall earnings growth.
Furniture and transportation equipment leasing revenues in 2005 primarily reflect increased rental income. Pre-tax
earnings from furniture and transportation equipment leasing activities in 2005 increased $81 million over 2004, reflecting higher
rental income and lower administrative and interest expenses.
Other finance revenues in 2005 and 2004 are primarily derived from interest income from other loans and fixed income
investments and the operations of General Re Securities (“GRS”) which is being run-off. In 2003, other finance revenues
included life insurance annuity premiums of $700 million arising from a few sizable transactions. Annuity premiums generated
in 2005 and 2004 were nominal. Other finance revenues in 2004 also included $282 million from the consolidation of Value
Capital L.P. (“VC”) during the first six months. As a result of a significant decline in the percentage of Berkshire’ s economic
interest in VC, Berkshire ceased consolidation of VC effective July 1, 2004 and thereafter accounted for its investment in VC
pursuant to the equity method.
Pre-tax earnings from other finance activities in 2005 were $233 million, a decrease of $67 million from 2004.
Berkshire’ s investment in VC produced a pre-tax loss in 2005 of $33 million compared to a pre-tax gain of $30 million in 2004.
GRS generated pre-tax losses of $104 million in 2005 and $44 million in 2004. The increase in GRS losses was due to higher
losses from unwinding derivative positions. In 2005, pre-tax earnings attributed to the life insurance/annuity business exceeded
2004 by $68 million as a result of higher short-term interest rates and the absence of adverse effects from changes to mortality
estimates pertaining to annuity contracts.
Pre-tax earnings from other finance activities in 2004 declined approximately $251 million from 2003 primarily as a
result of comparatively lower amounts of invested assets. In addition, pre-tax earnings for 2004 were negatively impacted by
higher allocations of investments in low-yielding cash and cash equivalents, a significant reduction in the early redemptions of
fixed-income securities purchased at a discount and adverse effects from changes in mortality assumptions.
Flight services
Flight service revenues in 2005 increased $416 million (13%) over 2004, which, in turn, increased $813 million (33%)
over 2003. In 2005, revenues of the training business (FlightSafety) and the fractional ownership business (NetJets) each
increased 13% over revenues in 2004. In 2005, the increase in training revenue was primarily due to increased simulator usage
and increased demand, primarily in the corporate aviation and regional airline markets. The fractional ownership program
revenue increase in 2005 over 2004 reflected an 18% increase in flight operations and management service fees. The increase in
flight operations revenue primarily resulted from a 7% increase in occupied flight hours, rate increases and a higher mix of larger
cabin aircraft usage, which generate higher revenues. Over 90% of the revenue increase in 2004 over 2003 resulted from the
NetJets business where flight operations revenue increased just under $400 million and revenues from aircraft sales increased
about $360 million. NetJets and FlightSafety continue to be leaders in the aircraft fractional ownership and training markets.
Pre-tax earnings of the flight services businesses totaled $120 million in 2005, a decrease of $71 million as compared
to 2004. In 2005, pre-tax earnings from the FlightSafety training business, increased approximately 10% over 2004 to
approximately $200 million, due primarily to the impact of increased training revenues and simulator sales. NetJets incurred a
pre-tax loss of about $80 million in 2005 compared to pre-tax income of about $10 million in 2004. Several factors contributed
to the loss in 2005. Throughout 2005, NetJets experienced unusually high shortages of available aircraft due to increases in