Flying High: A Look at Berkshire Hathaway's Service Sector 2022

Flying High: A Look at Berkshire Hathaway's Service Sector Performance in 2022

Berkshire Hathaway's service sector consists of multiple businesses, including NetJets, FlightSafety, TTI, Dairy Queen, XTRA, CORT, Charter Brokerage, BusinessWire, and WPLG. These businesses offer a diverse range of services, from aviation and transportation to food and media. As a shareholder of Berkshire Hathaway, it is important to analyze the performance of the service sector to understand the company's overall financial health and future prospects.

In 2022, the service group made headlines with the acquisition of IPS Integrated Project Services. This acquisition is expected to have a significant impact on the service sector's performance in the coming years. However, before delving into the details of the acquisition, let's first take a look at the service sector's revenue growth in 2022 based on Berkshire Hathaway's 2022 Annual Report.

IPS Integrated Project Services Acquisition

In October 2022, Berkshire Hathaway completed the acquisition of IPS Integrated Project Services, a leading provider of engineering, procurement, construction management, and validation services for the pharmaceutical and biotech industries. The acquisition is expected to expand Berkshire Hathaway's presence in the life sciences sector and provide new growth opportunities for the service sector.

According to Warren Buffett, the acquisition was a strategic move to diversify the service sector's revenue streams and reduce its reliance on aviation services. He stated, "We have a lot of faith in IPS, and we think it's going to be a very important part of Berkshire Hathaway's future."

Revenue Growth in 2022

In 2022, the service group's revenues increased by $3.1 billion (19.7%) compared to 2021. This growth was driven by TTI and aviation services businesses, as well as the IPS acquisition. TTI, a leading provider of electronic components and solutions, saw its revenues increase by 17.4% in 2022 compared to 2021. However, new orders started to slow in Q3 and Q4, which may impact TTI's performance in the future.

Aviation services, including NetJets and FlightSafety, also saw significant revenue growth in 2022. Revenues from aviation services increased by 18.2% compared to 2021, due to increased training and customer flight hours, fuel surcharges, and sales mix changes. The IPS acquisition also contributed to the service group's revenue growth in 2022.

TTI Business Performance

TTI has been a significant contributor to the service sector's revenue growth in recent years. In 2022, TTI's revenue growth continued, increasing by 17.4% compared to 2021. This growth was driven by higher volumes, prices, and sales mix changes. However, new orders started to slow in Q3 and Q4, which may impact TTI's future performance.

Despite the slowdown in new orders, TTI remains a strong performer in the service sector. Its focus on innovation and customer service has helped it maintain its position as a leader in the electronic components industry. As Warren Buffett stated in his 2022 letter to shareholders, "TTI continues to be a standout performer in the service group."

Aviation Services Business Performance

Aviation services, including NetJets and FlightSafety, also saw significant revenue growth in 2022. Revenues from aviation services increased by 18.2% compared to 2021, due to increased training and customer flight hours, fuel surcharges, and sales mix changes.

Fuel surcharges have been a significant driver of revenue growth for aviation services. The increase in fuel prices has led to higher surcharges, which have helped offset the impact of rising fuel costs on the business. Sales mix changes have also contributed to revenue growth, as customers have shifted towards longer-term contracts.

Pre-Tax Earnings in 2022

In 2022, the service group's pre-tax earnings increased by $375 million (14.0%) to $3.0 billion. This growth was driven by TTI, aviation services, and smaller services businesses. However, pre-tax earnings as a percentage of revenues decreased by 0.8 percentage points to 16.0% in 2022 compared to 2021. This decrease was due to higher costs associated with the IPS acquisition and increased compensation expenses.

Despite the decrease in pre-tax earnings as a percentage of revenues, the service group's overall performance in 2022 was strong. The revenue growth and pre-tax earnings growth demonstrate the service sector's ability to adapt to changing market conditions and capitalize on new growth opportunities.

Revenue Growth in 2021

The service group's revenue growth in 2021 was even more impressive than in 2022. Revenues increased by $3.5 billion (28.6%) compared to 2020, driven by TTI and aviation services businesses. TTI's revenues increased by 37.4% in 2021 compared to 2020, due to higher volumes, prices, and sales mix changes. Aviation services also saw significant revenue growth in 2021, increasing by 27.5% compared to low 2020 levels, driven by higher training and customer flight hours.

Pre-Tax Earnings in 2021

The service group's pre-tax earnings in 2021 increased by $1.1 billion (67.0%) to $2.7 billion compared to 2020. This growth was driven by TTI, aviation services, and XTRA leasing business. Pre-tax earnings as a percentage of revenues increased by 3.8 percentage points to 16.8% in 2021 compared to 2020. This increase was due to higher operating margins and lower compensation expenses.

Conclusion

In conclusion, Berkshire Hathaway's service sector had a strong performance in 2022, driven by revenue growth in TTI, aviation services, and the IPS acquisition. While new orders for TTI started to slow in Q3 and Q4, the company remains a strong performer in the electronic components industry. Aviation services also saw significant revenue growth in 2022, due to increased training and customer flight hours, fuel surcharges, and sales mix changes.

The service group's pre-tax earnings increased in 2022 compared to 2021, but pre-tax earnings as a percentage of revenues decreased due to higher costs associated with the IPS acquisition and increased compensation expenses. However, the service sector's overall performance in 2022 demonstrates its ability to adapt to changing market conditions and capitalize on new growth opportunities.

As a shareholder of Berkshire Hathaway, it is important to continue monitoring the service sector's performance and future prospects. The IPS acquisition is expected to provide new growth opportunities for the service sector, but it will also bring new challenges and risks. By staying informed and engaged, shareholders can make informed decisions about their investments in Berkshire Hathaway.