Shaw Industries

•     In June, Bob Shaw, CEO of Shaw Industries, the world’s largest carpet manufacturer, came to see me with his partner, Julian Saul, and the CEO of a second company with which Shaw was mulling a merger. The potential partner, however, faced huge asbestos liabilities from past activities, and any deal depended on these being eliminated through insurance.

Pre-Tax Earnings (in $ millions) 2004 2003 Building Products $ 643 $ 559 Shaw Industries 466 436 Apparel & Footwear 325 289 Retailing of Jewelry, Home Furnishings and Candy 215 224 Flight Services 191 72 McLane 228 150* Other businesses 413 427 $2,481 $2,157 * From date of acquisition, May 23, 2003.

Pre-Tax Earnings (in $ millions) 2005 2004 Building Products $ 751 $ 643 Shaw Industries 485 466 Apparel & Footwear 348 325 Retailing of Jewelry, Home Furnishings and Candy 257 215 Flight Services 120 191 McLane 217 228 Other businesses 445 413 $2,623 $2,481

WARREN BUFFETT: Well, it’s a great question. I would say that that would depend very much on the industry you’re talking about. But, in our carpet business [Shaw Industries], for example, we’ve just been hit time after time, as I mentioned in the annual report, with raw material increases, because there’s a big petroleum derivative factor there. And we have lagged in terms of being able to put through those increases to our customers, simply because we want to protect the Nebraska Furniture Marts, or those that have ordered, for a reasonable period of time. And that squeezed margins in carpet. We use lots of natural gas at Johns Manville, use lots of natural gas at Acme Brick, and that’s tended to squeeze margins some. I think, over time — I think there has been a lot more inflation in these basic materials. Steel has been off the chart. I think, over time the businesses with strong competitive positions manage to pass through increases in raw material costs, just as they passed through increases in labor costs. But you get these temporary situations where, sometimes, the costs are increasing faster.

Near the end of 2016, Shaw Industries, our floor coverings business, acquired U.S. Floors (“USF”), a rapidly growing distributor of luxury vinyl tile. USF’s managers, Piet Dossche and Philippe Erramuzpe, came out of the gate fast, delivering a 40% increase in sales in 2017, during which their operation was integrated with Shaw’s. It’s clear that we acquired both great human assets and business assets in making the USF purchase.