Warren Buffett's company reported a 14% jump in second-quarter profit as the improving stock market boosted the value of Berkshire Hathaway's derivative contracts but the recession continued to weigh on its operating businesses.
On Friday, Berkshire brka/brkb reported $3.3 billion in net income, or $2,123 a share, for the quarter ending June 30. That's up from $2.88 billion, or $1,859 a share, in the same period a year ago.
Excluding investments, operating profit fell 22% to $1.78 billion, or $1,147 a share, from $2.27 billion, or $1,465. Revenue fell 2% to $29.61 billion.
The value of Berkshire's derivative contracts tied to equity indexes soared during the second quarter, and Berkshire recorded a mostly unrealized $1.5 billion gain on its derivatives. That result contrasts with the unrealized $986 million derivative loss Berkshire recorded in the first quarter, and it reinforces Buffett's warning that the derivatives will vary widely quarter-to-quarter.
On average, Berkshire's derivative contracts won't expire for another 12 years, but the company is required to estimate their value every time it reports earnings. The true value of the derivatives won't be clear for several years, but Buffett has predicted they will ultimately be profitable because Berkshire is investing the premiums.
During the second quarter, Berkshire agreed to renegotiate six of the equity-based derivatives to reduce the length of the contracts. As part of that, Berkshire reduced its potential liability on derivatives by about $1.1 billion.
Berkshire said net income plummeted 67% at its manufacturing, retail and service businesses to $239 million from $719 million, which include many businesses tied to the housing market such as Shaw Carpeting and Acme Brick. The division also includes luxury businesses like jewelry stores and NetJets corporate jets.
In Friday trading, Berkshire Class A shares closed up $1,150, or 1.1%, at $108,100, while its Class B shares rose $22.69, or 0.65%, to $3,540. Both remain more than one-fourth below their record highs set in December 2007.
Buffett's company owns more than 60 subsidiaries, including insurance, furniture, clothing, jewelry and candy companies, restaurants, and natural gas firms, and it has major investments in such companies as Coca-Cola and Wells Fargo.