Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) reported that operating earnings, a figure which excludes volatile investment gains and derivative fluctuations, declined 11% to $4.1 billion in the second quarter compared to the year-ago period. Net income, which includes investment gains, fell 15% to $4.3 billion. A drop in insurance underwriting profit led the decline in operating earnings and net income.
To really understand Berkshire Hathaway, you have to understand the many business units that flow into its income statement. Below, I'll break the company down into five pieces that flow into its operating earnings line.
Manufacturing, service, and retailing -- $1.7 billion
This bucket is something like Berkshire's hall closet -- stuffed to the brim with items (companies), some of which are pure gold, and some of which are merely collecting dust. Taken as a whole, earnings from this segment tallied to $1.66 billion, an increase of 11% over the year-ago period.
The major needle-moving businesses in this group are industrial manufacturers, which include Precision Castparts, Lubrizol, and IMC International. The industrial manufacturing businesses saw their pre-tax earnings increase approximately 12% from the year-ago period on a 2% increase in revenue.
The retailing category stole the show with pre-tax earnings growth of 27% compared to the year-ago period. Berkshire noted that its auto dealerships and home-furnishing stores, as well as Pampered Chef and See's Candies, were all meaningful contributors to an increase in pre-tax profit in its retail segment.
Railroad -- $958 million
Berkshire's BNSF Railway has generally seen its earnings dip in recent years as lower commodity prices have resulted in less demand for oil, gas, coal, and related shipments. The decline isn't BNSF-specific -- the entire industry suffers from lower demand, and, as a consequence, lower revenue per carload.
BNSF's profitability jumped 24% in the second quarter, contributing $958 million to operating earnings this quarter. Major drivers included a 15% increase in revenue, offset slightly by higher fuel costs, which jumped 34% year over year.
The quarterly filing reveals a notable increase in revenue from coal shipments, which grew by more than 39% this quarter. It saw a smaller 8% increase in revenue from consumer products, which are by far its largest contributor to freight revenue, and thus have an outsize impact on revenue on a nominal basis.
Insurance -- $943 million
Insurers earn money from their underwriting profits and from investment income earned on their stock and bond portfolios. Underwriting profits are earned when premiums exceed insurance losses and expenses. Investment income is earned from interest and dividends.
This quarter brought about a rare loss for Berkshire's insurance companies, which collectively generated an underwriting loss of $22 million. Blame that loss on Berkshire Hathaway Reinsurance, which reported a quarterly underwriting loss of $400 million before tax; most of this was related to foreign currency fluctuations, and an accounting charge related to the company's recent reinsurance deal with AIG.
GEICO's underwriting profit was also lower, due to a 1.5-percentage-point increase in losses as a percentage of premiums earned in the second quarter. GEICO hasn't taken its foot off the growth pedal, however, as voluntary auto new business sales increased 17.8% in the second quarter compared to the same period a year ago.
Investment income easily papered over the small underwriting loss. Collectively, Berkshire's insurance companies generated investment income of $965 million during the quarter, a 1% decline from the same period last year.
Utilities and energy -- $516 million
Berkshire Hathaway Energy rarely surprises, as most of its profit comes from regulated utilities that have local monopolies as sole energy suppliers. Second-quarter earnings increased 7% to $516 million compared to the year-ago period, which was largely driven by a lower tax rate and lower interest expense. Earnings before interest and taxes declined about 1% compared to the year-ago period.
This segment could soon grow if Berkshire Hathaway is successful in its bid for Oncor, one of the largest energy-delivery utilities in the United States. We'll know later this month if Berkshire will fold the $9 billion utility under its umbrella.
Finance and financial products -- $332 million
Berkshire Hathaway's financial businesses include Clayton Homes, which sells and finances manufactured homes; leasing businesses, primarily railcars and furniture; and Berkadia, a commercial mortgage-servicing company.
Clayton Homes has been a big beneficiary of rising home sales. Revenue increased by 13% compared to the year-ago period, helped by a 14% increase in home sales during the first half of the year. The company generated pre-tax earnings of $197 million, compared to $179 million in the first quarter of 2016.
Across the total finance and financial products segment, earnings declined to $332 million from $396 million last year, driven by a decline in interest and dividend income from investments, and lower earnings from CORT, a furniture-leasing business.
About that cash pile...
Berkshire ended the quarter with just under $100 billion of cash at the holding company and across its varied subsidiaries. With so much cash already, one wonders just how much longer Berkshire will continue to let the cash keep piling up. Buffett hinted at the most recent annual meeting that the company may have to reverse course and institute a regular dividend, so as to avoid the cash drag on its balance sheet.
Don't wait near the mailbox for a dividend check, though: Berkshire didn't mention any change in dividend plans this quarter.