Berkshire Hathaway 2017 Annual Meeting Audience Question # 30

Why Berkshire acquired Precision Castparts

Warren Buffett:

Jonathan.

Jonathan Brandt:

Precision Castparts represents the second largest acquisition Berkshire has ever made. There wasn’t much qualitative or quantitative information about it in the 2016 annual.

Would you be willing to update us here with how it is doing currently, what excites you about its prospects, and what worries you most about it?

I’m also curious if there were any meaningful purchase price adjustments beyond intangible amortization that negatively impacted Precision’s earnings in 2016, as was the case with Van Tuyl in 2015?

And finally, are there any opportunities in sight for bolt-on acquisitions?

Warren Buffett:

Yeah, we’ve actually made acquisitions, and we will make more that fit there, because we’ve got an extraordinary manager. And we’ve got a terrific position in the aircraft field.

So there will be sensible… there will be the chance for sensible acquisitions. And we’ve already made two, anyway. And we will make more over time. The… it’s…

The amortization of intangibles is the only big purchase price adjustment. That’s something over $400 million a year, nondeductible. In my mind, that’s 400-and-some million of earnings.

I do not regard the economic goodwill of Precision Castparts being diminished at that rate annually. That is a… and, you know, I’ve explained that in some degree. The…

As a very long-term business, you can worry about 3-D printing. I don’t think you have to worry about aircrafts being manufactured. But aircraft deliveries can be substantially altered in relation to any given backlog in most cases.

So the deliveries can be fairly volatile, but I don’t think the long-term demand is anything I worry about.

And the question is, whether anybody can do it better or cheaper, or like I say, whether 3-D printing at least takes away part of the field in some respects.

But overall, I would tell you I feel very good about Precision Castparts. It is a very long-term business. I mean, we have contracts that run for a very long time, and like I say, the initiation of a new plane may be delayed or something of the sort.

But if you take a look at the engine that’s in the other adjoining room here and in our exhibition hall, you would, if you were putting that engine together for the 20 or 25-year life or whatever it may have, carrying hundreds of people, you would care very much about your supplier.

And you’d care not only in the quality, you know… which would be, absolutely you’d care… of the work being done. But you also, if you were an engine manufacturer or an aircraft manufacturer further down the line, you would care very much about the reliability of delivery on something.

Because you do not want a plane that… or an engine… that’s 99 percent complete while somebody’s dealing with a problem of faulty parts or anything else that would delay delivery.

So, the reliability is incredibly important. And I don’t think anybody has a reputation better than Mark Donegan for… and the company… for delivery.

So I love the fact we bought Precision Castparts.

Charlie?

Charlie Munger:

Yeah, well, what’s interesting about them, too, is that it’s a very good business purchased at a fair price under… but this is no screaming bargain like the old days.

Warren Buffett:

No.

Charlie Munger:

For quality businesses, you pay up now a lot more than we used to.

Warren Buffett:

Yeah, that’s absolutely true, and we… you don’t get a bargain price.

The 400-plus million incidentally, you know, goes on for quite a while, too.

And we’ll explain it in the report just like… just as we’ll explain that the depreciation charge at a railroad would not be adequate. I mean, it’s the way accounting works.

And starting… I don’t even want to tell you about this one… but starting the first of next year, accounting is going to become sort of a nightmare in terms of Berkshire and other companies because they’re going to have us mark our equities to market just like we were a Wall Street trading firm or something.

And those changes in the value of Coca-Cola, or American Express, or everything, are going to run through the income account every quarter. In fact, they run through it every day in this theory, so that it really will get confusing.

Now, it’s our job to explain things so that you aren’t confused when we report GAAP earnings, but GAAP earnings, as reported, will become even more meaningless, if looking only at the bottom line, than they are now, and…

Charlie Munger:

That was not necessarily a good idea.

Warren Buffett:

No, I think it’s a terrible idea, but we’ll deal with it. And we’ll… and, I mean, it’s my job to explain to what extent GAAP accounting is useful to you in evaluating Berkshire, and the times when it actually distorts things.

Accounting isn’t supposed to… it’s not supposed to describe value.

On the other hand, it’s a terribly useful tool, if understood, in order to estimate value if you’re analyzing businesses. And so, you know, certainly, you can’t blame the auditing profession for doing what they think is their job, which is not to present value. Although, by using these market values…

Charlie Munger:

But you can blame the audit…

Warren Buffett:

What’s that?

Charlie Munger:

You can blame the audit profession for that one.

Warren Buffett:

OK, well.

Charlie Munger:

That was really stupid.

Warren Buffett:

Well, I agree with that actually.

But we will do our best to give you… we’re always going to give you the audited figures.

And then we’re going to explain their shortcomings in either direction and how they… how what you should use and what you probably should ignore in looking at those numbers and using them to come to a judgment as to the value of your holdings.

And I’ll explain it to you the same way I would explain it to my sisters or anybody else that… you know, we want you to understand what you own. And we try to cover the details that are really important in that respect.

I mean, there’s a million things you can talk about that are just of minor importance when you’re talking about a $400 billion market value.

But they’re the things that, if Charlie and I were talking about the company, that they’d be the figures or the interpretations or anything that we would regard as important in sort of coming to an estimate of the value of the business. But it’s going to be…

You can’t knock the media. I mean, they’ve only got a few paragraphs to describe the earnings at Berkshire every quarter. But if they simply look at bottom line numbers, what can be silly this
year will become absolutely ludicrous next year because of the new rule that comes into effect for 2018.

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