Warren Buffett's Berkshire Hathaway Inc said on Friday second-quarter profit fell 40 percent, as declining stock prices depressed the value of his derivative contracts.

Operating profit nevertheless soared 73 percent, helped by the February takeover of railroad operator Burlington Northern Santa Fe Corp, improved insurance underwriting including a tripling of pretax profit at the Geico Corp auto insurer, and a turnaround at the NetJets corporate plane unit.

Net income fell to $1.97 billion, or $1,195 per Class A share, from $3.3 billion, or $2,123, a year earlier.

Excluding investments, however, operating profit surged to $3.07 billion, or $1,866 per share, from $1.78 billion, or $1,147. On that basis, analysts on average expected profit of $1,360 per share, according to Thomson Reuters I/B/E/S.

The numbers look good, said Michael Yoshikami, president of YCMNET Advisors in Walnut Creek, California, which invests $1 billion and owns Berkshire stock. What people often miss about Berkshire is that, while it is perceived as an acquirer of staid companies, it is a very good operator that extracts as much free cash flow as possible.

Revenue rose 7 percent to $31.71 billion.

Buffett turns 80 on August 30. He has run Omaha, Nebraska-based Berkshire since 1965, turning it into a roughly $199 billion conglomerate owning some 80 businesses and tens of billions of dollars of stocks.

DERIVATIVES

Book value per Class A share, Buffett's preferred measure for performance, fell 3 percent to $86,661 as of June 30 from $89,374 as of March 31.

This is in part because Berkshire recorded $1.41 billion of losses on derivatives, compared with a year-earlier $1.53 billion profit, mainly because of long-term contracts tied to equity indexes.

Buffett has said these indexes are the Standard & Poor's 500 <.SPX>, the FTSE 100 <.FTSE>, the Euro Stoxx 50 <.STOXX50E> and the Nikkei 225 <.N225>, which fell between 11.9 percent 15.4 percent in the quarter.

While derivative gains and losses must be reported each quarter with earnings, the contracts expire between 2018 and 2028, making them long-term bets on stocks. Buffett also gets billions of dollars of upfront premiums to invest.

While Buffett has questioned other derivatives he considers risky, he has said he expects his contracts to be profitable.

In a regulatory filing, Berkshire said it has posted just $173 million of collateral on its equity index and credit default derivative contracts.

It added that it does not believe the financial regulatory overhaul signed into law last month by President Barack Obama will materially affect results, or force it to post extra collateral on these contracts.

OPERATING BUSINESSES IMPROVE

Results included $603 million of profit from Burlington Northern, in the first full quarter since Berkshire paid $26.5 billion for the 77.5 percent it did not already own of the second-largest U.S. railroad company.

Insurance, Berkshire's biggest business, saw operating profit jump 23 percent to $1.55 billion as a sevenfold increase in underwriting profit to $462 million offset a 9 percent drop in investment income to $1.09 billion.

Pretax profit at Geico, the third-largest U.S. auto insurer, rose to $329 million from $111 million.

Berkshire said NetJets posted a $57.5 million pretax profit, compared with a year-earlier $252.5 million loss, after Buffett installed David Sokol, who chairs Berkshire's MidAmerican Energy Holdings unit, to slash capacity and debt.

NetJets continues to own more aircraft than is required for present operations and we expect to continue to dispose selected aircraft, Berkshire said. NetJets' operating cost structure has been reduced to better match customer demand, and we believe that NetJets will continue to operate profitably.

Profit from utilities and energy fell 8 percent to $233 million, while manufacturing, service and retailing businesses such as the Forest River RV unit and the Fruit of the Loom clothing unit saw profit nearly triple to $671 million.

Berkshire said it bought a net $1.21 billion of stocks in the quarter, after selling $639 million in the first quarter. Still, it cash stake rose to $27.95 billion as of June 30 from $25.67 billion as of March 31.

Berkshire Class A shares closed down $785 at $120,600, and its Class B shares closed down 36 cents at $80.47 in Friday trading on the New York Stock Exchange.

(Reporting by Jonathan Stempel in New York; additional reporting by Maria Aspan; editing by Gary Hill, Andre Grenon and Bernard Orr)

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