Warren Buffett's company reported a 40 percent drop in second-quarter profit because largely unrealized derivative losses of $1.4 billion outweighed improvements at Berkshire Hathaway Inc.'s operating companies.
Berkshire reported $1.97 billion net income Friday, or $1,195 per Class A share. That's down from $3.3 billion, or $2,123 per share, a year ago. Its revenue grew 7 percent to $31.7 billion.
Those results fell short of the $1,360.44 profit per share expected by the five analysts surveyed by Thomson Reuters. Two analysts submitted revenue estimates that averaged $30.79 billion.
Berkshire executives typically do not comment on quarterly earnings reports, and they did not respond to an interview request on Friday.
Buffett warned when he first wrote the derivatives contracts in 2007 that their value would vary widely quarter to quarter, and his prediction has held true.
For instance, a $1.01 billion derivative loss contributed to a 77 percent drop in net income during 2008's third quarter. Paper derivative losses of $986 million also contributed to a $1.5 billion loss in the first quarter of 2009.
Last year's second-quarter profit was inflated because the value of Berkshire's derivative contracts tied to equity indexes soared as the stock market improved in 2009. Berkshire recorded a mostly unrealized $1.5 billion gain on its derivatives in last year's second quarter.
The true value of the derivatives won't be clear for at least several years because they don't mature until more than a decade from now, but Berkshire is required to estimate their value every time the company reports earnings. Buffett has told investors he believes the contracts will ultimately be profitable because the premiums are being invested.
There were also several bright spots in the report.
Berkshire's insurance unit contributed $462 million in underwriting profit, up from $66 million last year.
Burlington Northern Santa Fe railroad added $603 million in its first full quarter as part of Berkshire.
The freight railroad's profitable quarter was part of a significant improvement in Berkshire's manufacturing, retail and service businesses.
Fractional private jet leasing firm NetJets rebounded from a $348.5 million pretax loss a year ago to produce a $114.5 million pretax profit in this year's second quarter.
And Berkshire also said it saw significant improvement at its Forest River RVs business, Iscar tool makers and Johns Mansville, which makes insulation and roofing products.
Berkshire owns roughly 80 businesses, including clothing, insurance, furniture, utility, jewelry and corporate jet companies. Berkshire also has big investments in companies including Coca-Cola Co. and Wells Fargo & Co.
Berkshire Hathaway Inc.: www.berkshirehathaway.com