Now is the time to review the 1967 letter, which was published on March 8, 1968. Why until 1968? Because there was a 15-month period ending December 30, 1967, due to a change in fiscal year-end accounting practices.
TL; DR
Sales fell to $39 million due to decreased demand and price drops. The Home Fabrics Division showed resilience, while the King Philip D Division struggled and was subsequently closed.
Production was reduced by 15% to manage inventory levels, which led to a loss of skilled labor and anticipated higher training costs.
Efforts to diversify included expanding the Home Fabrics line and launching an Apparel Fabrics Division.
BRK acquired National Indemnity and National Fire and Marine Insurance, marking a significant diversification into insurance. These subsidiaries performed well, showing a profit in underwriting and increased investment income.
Management remains focused on diversifying earnings and improving profitability, leveraging assets for acquisitions or enhanced operations in existing businesses.
Textile Operations
Sales declined from $49.4 million in fiscal 1966 to $39 million in fiscal 1967, primarily due to decreased yardage demand across all divisions and a significant drop in prices, except for the Home Fabrics Division which showed the most resilience amidst the industry's depressed conditions.
Although sales and profits of our Home Fabrics Division were down substantially, this área demonstrated the greatest resistance to the depressed conditions of the textile markets in which we operate. Berkshire Hathaway does not produce coarse goods such as heavy ducks, which is the segment of the textile business that was the strongest in 1967.
— WARREN BUFFETT
In response to declining demand, production was curtailed by approximately 15% to avoid inventory buildup. This decision led to a loss of skilled labor, which is anticipated to increase training costs to return to full production capacity.
We curtailed our production about 15 per cent in an attempt to avoid building inventories. We maintained satisfactory inventory levels but our curtailment resulted in the loss of certain categories of skilled help which will be required if we are to fully utilize our plant capacity. Therefore, abnormally high training costs will be incurred before we again run full.
— WARREN BUFFETT
There was a noted shift in market preferences from cotton lawn fabrics to polyester blends, negatively impacting demand for products from the King Philip D Division. Efforts to diversify product lines and expand into less competitive markets included enhancing the Home Fabrics product line and initiating an Apparel Fabrics Division.
A market survey indicated that the demand for cotton lawn fabrics was gradually being displaced by a demand for polyester blend fabrics.
On the positive side, we expanded our Home Fabrics products line into a wider variety of fabrics and also expanded our sales force in this area. In addition to this, we started an Apparel Fabrics Division, selling finished yarn-dyed box loom goods into the women’s apparel market. Both of these moves were part of our general policy of attempting to establish producto lines away from areas of direct competition with staple fabric producers.
— WARREN BUFFETT
Due to smaller order sizes and frequent loom shifts, manufacturing costs rose.
Because of reduced levels of production, smaller individual orders, and more frequent loom shifts, manufacturing costs were materially higher than in the last several years. A return to full operation should correct this situation to a great extent. Although product development and diversification of fabrics will result in higher manufacturing costs, these higher costs should be more than offset by higher prices for the fabrics and result in greater profits.
— WARREN BUFFETT
Three Months Ended December 30, 1967
The quarter saw a definitive increase in demand across all divisions, except for the King Philip D Division. The company operated close to normal levels during this period, with only some equipment remaining idle due to challenges in quickly hiring and training enough staff to meet the increased production demands.
The newly established Apparel Fabrics Division had a positive start and contributed to the overall growth during the quarter.
The Home Fabrics Division, which had historically shown strong growth, returned to its growth pattern after a period of decline.
BRK expected a significant improvement in textile operating profits for the upcoming year 1968.
Closure of King Philip D Division
Due to continued poor demand and depressed prices for the cotton lawn fabrics produced by the King Philip D Division, a decision was made to close this division. The plant was deemed efficient for its specific product but lacked versatility for producing other types of fabrics, making a pivot to other products uneconomical. The closure was expected to incur losses, but the estimated pre-tax loss was not expected to exceed $1 million.
The portion of our business which proved unsatisfactory was the cotton lawn business. As a result of a second market survey, it was decided to close the King Philip D Division in Warren, Rhode Island where these goods were manufactured. The plant was an efficient one for the manufacture of fine combed lawns, which, unfortunately, are no longer in any sort of demand. The equipment at this plant had little adaptability to other end products, thereby making a conversion attempt uneconomical. The decision to terminate operations was hastened by the very large increase in the cost of new crop cotton, which could not be reflected in increased finished producto prices. Any loss from termination of operations at King Philip D will be reflected as incurred in 1968. At this point in time, we can only speculate as to the amount of this loss but we do not envision that it will exceed $1 million pre-tax.
— WARREN BUFFETT
Insurance Subsidiaries
Berkshire's acquisition of National Indemnity Company and National Fire and Marine Insurance Company in March 1967 marked a significant diversification step. Under the management of Jack Ringwalt, these subsidiaries showed only a slight increase in gross premium volume but a substantial rise in net premium volume due to termination of certain reinsurance arrangements. The insurance operations were profitable with increased investment income and underwriting profits.
Earnings from the insurance subsidiaries were retained to build capital strength.
Gross premium volume increased only slightly during 1967, but termination of certain re-insurance arrangements resulted in a substantial gain in net premium volume. Underwriting was conducted at a good profit margin and investment income increased substantially, reflecting both a greater base of assets and the higher yields that prevailed throughout the year in the fixed income sector. All earnings of the insurance subsidiaries are being retained to build additional capital strength.
Our investment in the insurance companies reflects a first major step in our efforts to achieve a more diversified base of earning power. The success of this effort is indicated by the attainment of earnings in the subsidiaries during 1967 which substantially exceeded the earnings attributable to a larger capital investment m the textile business. We expect that there will be years in the future when the order of relative profitability is reversed, reflecting different stages in both the insurance and textile cycles. However, we believe it is an added factor of strength to have these two unrelated sources of earnings rather than to be solely exposed to the conditions of one industry, as heretofore.
— WARREN BUFFETT
Future Objectives
Management expressed a continued interest in expanding Berkshire’s operations within existing sectors or entering new ones. Also, the letter reflects on the historical lack of substantial earnings despite significant capital invested and underscores the intent to leverage current liquid resources for acquisitions or enhancing profitability in existing operations.
Management continues to be alert to opportunities to expand our operations in either the textile business, the insurance business or unrelated area. We feel it is essential that we not repeat the history of the 1956-1966 period, when over-all earnings on average invested capital of over $30 million were something less than zero. Our present liquid resources held in readily marketable common stocks are available for either acquisition of new businesses or for application toward greater profit opportunities in our present operations. In addition, we will not hesitate to borrow money to take advantage of attractive opportunities. Our goal is to obtain a reasonably stable and substantial level of earning power commensurate with the capital employed in the business.
— WARREN BUFFETT
Summary
In his 1967 letter, Warren Buffett outlines a year of strategic adjustments and diversification for Berkshire Hathaway amidst challenging conditions in the textile industry. Despite these challenges, the company took proactive steps by expanding the Home Fabrics line and launching a new Apparel Fabrics Division aimed at diversifying product lines and reducing direct competition with staple fabric producers.
A major highlight of 1967 was Berkshire's foray into the insurance industry with the acquisition of National Indemnity Company and National Fire and Marine Insurance Company. This marked a significant step towards diversifying Berkshire's earnings base. These insurance subsidiaries showed promising results with profitable underwriting and an increase in investment income, reflecting both a larger asset base and the higher yield environment of the time.
Looking ahead, Buffett emphasizes the importance of not repeating the earnings history of 1956-1966, where returns on invested capital were disappointingly low. He highlights the strategic intent to use Berkshire's liquid resources for acquisitions or to enhance profitability in existing operations, underlining a commitment to achieving a stable and substantial level of earnings commensurate with the capital employed.
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