OMAHA, Nebraska (AP) - Warren Buffett's company reported a 40 percent drop in second-quarter profit Friday because the improvement at Berkshire Hathaway Inc.'s operating companies could not overcome $1.4 billion in paper losses on derivative contracts.

Berkshire's strong performances from its railroad, insurance and manufacturing businesses was overshadowed by the plummeting value of the Omaha company's derivatives - many of which are tied to the value of four major stock markets.

"To me, the overall picture is strong," said Andy Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett." "I do think the derivatives mask the underlying thing a lot."

Berkshire reported $1.97 billion net income, 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 seven percent to $31.7 billion.

Buffett has said operating earnings are a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses.

Berkshire said its operating earnings soared 73 percent to $3.1 billion, or $1,866 per share, in the quarter, up from $1.8 billion, or $1,147 per share, last year.

Analysts, who excluded investment and derivative gains or losses from their estimates, expected $1,360.44 profit per share on average, according to 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 after he first wrote most of 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. Unrealised 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.