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Goldman Sachs Group 8-K 2007

Documents found in this filing:

  1. 8-K
  2. Ex-99.1
  3. Graphic
  4. Graphic
FORM 8-K
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
June 14, 2007
THE GOLDMAN SACHS GROUP, INC.
(Exact name of registrant as specified in its charter)
         
Delaware   No. 001-14965   No. 13-4019460
         
(State or other jurisdiction   (Commission   (IRS Employer
of incorporation)   File Number)   Identification No.)
     
85 Broad Street    
New York, New York   10004
     
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (212) 902-1000
N/A
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
 
 

 


TABLE OF CONTENTS

Item 2.02 Results of Operations and Financial Condition.
Item 8.01 Other Events.
Item 9.01 Financial Statements and Exhibits.
SIGNATURE
EX-99.1: PRESS RELEASE


Table of Contents

Item 2.02 Results of Operations and Financial Condition.
On June 14, 2007, The Goldman Sachs Group, Inc. (the Registrant) reported its earnings for its fiscal second quarter ended May 25, 2007. A copy of the Registrant’s press release containing this information is being furnished as Exhibit 99.1 to this Report on Form 8-K and is incorporated herein by reference.
The information furnished pursuant to this Item 2.02, including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the Exchange Act) or otherwise subject to the liabilities under that Section and shall not be deemed to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Exchange Act.
Item 8.01 Other Events.
On June 14, 2007, the Registrant reported net revenues of $10.18 billion and net earnings of $2.33 billion for its second quarter ended May 25, 2007. Diluted earnings per common share were $4.93 compared with $4.78 for the second quarter of 2006 and $6.67 for the first quarter of 2007. Annualized return on average tangible common shareholders’ equity (1) was 31.2% for the second quarter of 2007 and 37.8% for the first half of 2007. Annualized return on average common shareholders’ equity was 26.7% for the second quarter of 2007 and 32.3% for the first half of 2007.
Net Revenues
Investment Banking
Net revenues in Investment Banking were $1.72 billion, 13% higher than the second quarter of 2006 and slightly higher than the first quarter of 2007, as mergers and acquisitions and financing activity remained strong. Net revenues in Financial Advisory were $709 million, 17% higher than the second quarter of 2006, reflecting increased client activity. Net revenues in the firm’s Underwriting business were $1.01 billion, 10% higher than the second quarter of 2006, reflecting significantly higher net revenues in debt underwriting, primarily due to an increase in leveraged finance activity, partially offset by lower net revenues in equity underwriting. The firm’s investment banking transaction backlog ended the quarter at a record level. (2)
Trading and Principal Investments
Net revenues in Trading and Principal Investments were $6.65 billion, 6% lower than the second quarter of 2006 and 29% lower than the first quarter of 2007.
Net revenues in Fixed Income, Currency and Commodities (FICC) were $3.37 billion, 24% lower than the second quarter of 2006, primarily reflecting lower net revenues in commodities and weak results in mortgages, principally attributable to continued weakness in the subprime

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Table of Contents

sector. The decrease in commodities was primarily attributable to a $700 million gain in the second quarter of 2006 related to the sale of East Coast Power, L.L.C. Net revenues in interest rate products were strong but lower compared with the same prior year period. Net revenues in credit products and currencies were also strong and were higher compared with the second quarter of 2006. During the quarter, FICC operated in an environment characterized by solid customer-driven activity, generally low volatility levels and strength in the broader credit markets.
Net revenues in Equities were $2.50 billion, 6% higher than the second quarter of 2006, due to higher net revenues in principal strategies as well as higher net revenues in the shares business, primarily in Europe. These increases were partially offset by strong but lower net revenues in derivatives compared with the second quarter of 2006. Following challenging market conditions early in the quarter, Equities operated in a favorable environment characterized by generally rising equity prices and strong customer-driven activity.
Principal Investments recorded net revenues of $784 million, primarily reflecting gains and overrides from corporate principal investments. These results included a $125 million loss related to the firm’s investment in the ordinary shares of Industrial and Commercial Bank of China Limited (ICBC) and a $64 million loss related to the firm’s investment in the convertible preferred stock of Sumitomo Mitsui Financial Group, Inc. (SMFG).
Asset Management and Securities Services
Net revenues in Asset Management and Securities Services were $1.81 billion, 13% higher than both the second quarter of 2006 and the first quarter of 2007.
Asset Management net revenues were $1.06 billion, 11% higher than the second quarter of 2006, reflecting a 22% increase in management and other fees, partially offset by lower incentive fees. During the quarter, assets under management increased $39 billion to $758 billion, reflecting non-money market net asset inflows of $14 billion in equity and fixed income assets, money market net asset inflows of $4 billion and market appreciation of $21 billion, primarily in equity assets.
Securities Services net revenues were $757 million, 15% higher than the second quarter of 2006, as the firm’s prime brokerage business continued to generate strong results, reflecting significantly higher customer balances in securities lending and margin lending and higher seasonal activity levels in Europe.
Expenses
Operating expenses were $6.75 billion, essentially unchanged from the second quarter of 2006 and 14% lower than the first quarter of 2007.

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Compensation and Benefits
Compensation and benefits expenses were $4.89 billion, 4% lower than the second quarter of 2006, primarily reflecting the impact of a lower ratio of compensation and benefits to net revenues. The ratio of compensation and benefits to net revenues was 48.0% for the first half of 2007 compared with 50.4% for the first half of 2006. Employment levels increased 4% during the quarter.
Non-Compensation Expenses
Non-compensation expenses were $1.86 billion, 16% higher than the second quarter of 2006 and 6% higher than the first quarter of 2007. The increase compared with the second quarter of 2006 was primarily attributable to the impact of higher levels of business activity and continued geographic expansion. The majority of this increase was in brokerage, clearing, exchange and distribution fees, which principally reflected higher transaction volumes in Equities.
Provision For Taxes
The effective income tax rate for the first half of 2007 was 33.3%, down from 34.2% for the first quarter of 2007 and 34.5% for fiscal year 2006. The decreases in the effective tax rate were primarily due to changes in the geographic earnings mix and, to a lesser extent, an increase in tax credits.
Capital
As of May 25, 2007, total capital was $179.94 billion, consisting of $38.46 billion in total shareholders’ equity (common shareholders’ equity of $35.36 billion and preferred stock of $3.10 billion) and $141.48 billion in unsecured long-term borrowings. Book value per common share was $81.30 and tangible book value per common share was $69.99 (1), an increase of 5% and 6%, respectively, compared with the end of the first quarter of 2007. Book value and tangible book value per common share are based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 434.9 million at period end.
On May 15, 2007, two trusts created by The Goldman Sachs Group, Inc. (Group Inc.) issued $2.25 billion of Automatic Preferred Enhanced Capital Securities (APEX). The assets held by the trusts in support of the APEX initially consist of remarketable junior subordinated notes and preferred stock purchase contracts issued by Group Inc. and will ultimately consist of $1.75 billion of perpetual Non-Cumulative Series E Preferred Stock and $500 million of perpetual Non-Cumulative Series F Preferred Stock, that Group Inc. will issue to the trusts no later than June 1, 2013 and September 1, 2013, respectively.
The firm repurchased 5.4 million shares of its common stock at an average cost per share of $208.41, for a total cost of $1.13 billion during the quarter. The remaining authorization under the firm’s existing share repurchase program is 34.2 million shares.

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Dividends
The Board of Directors of Group Inc. (the Board) declared a dividend of $0.35 per common share to be paid on August 30, 2007 to common shareholders of record on July 31, 2007. The Board also declared dividends of $390.16, $387.50, $390.16 and $385.05 per share of Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock, respectively (represented by depositary shares, each representing a 1/1000th interest in a share of preferred stock), to be paid on August 10, 2007 to preferred shareholders of record on July 26, 2007.
Cautionary Note Regarding Forward-Looking Statements
This Report on Form 8-K contains “forward-looking statements.” These statements are not historical facts but instead represent only the Registrant’s beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Registrant’s control. It is possible that the Registrant’s actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. For a discussion of some of the risks and important factors that could affect the Registrant’s future results, see “Risk Factors” in Part I, Item 1A of the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006.
Statements about the Registrant’s investment banking transaction backlog also may constitute forward-looking statements. Such statements are subject to the risk that the terms of these transactions may be modified or that they may not be completed at all; therefore, the net revenues, if any, that the Registrant actually earns from these transactions may differ, possibly materially, from those currently expected. Important factors that could result in a modification of the terms of a transaction or a transaction not being completed include, in the case of underwriting transactions, a decline in general economic conditions, outbreak of hostilities, volatility in the securities markets generally or an adverse development with respect to the issuer of the securities and, in the case of financial advisory transactions, a decline in the securities markets, an adverse development with respect to a party to the transaction or a failure to obtain a required regulatory approval. For a discussion of other important factors that could adversely affect the Registrant’s investment banking transactions, see “Risk Factors” in Part I, Item 1A of the Registrant’s Annual Report on Form 10-K for the fiscal year ended November 24, 2006.

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SEGMENT NET REVENUES
(UNAUDITED)
$ in millions
                                         
   
Three Months Ended
   
% Change From
 
    May 25,     Feb. 23,     May 26,           Feb. 23,                 May 26,        
    2007     2007     2006     2007     2006  
Investment Banking
                                       
Financial Advisory
  $ 709     $ 861     $ 608       (18 )%     17 %
                                         
Equity underwriting
    358       266       482       35       (26 )
Debt underwriting
    654       589       436       11       50  
 
                             
Total Underwriting
    1,012       855       918       18       10  
                                         
 
                             
Total Investment Banking
    1,721       1,716       1,526             13  
 
                             
                                         
Trading and Principal Investments
                                       
FICC
    3,368       4,604       4,460       (27 )     (24 )
                                         
Equities trading
    1,415       2,163       1,416       (35 )      
Equities commissions
    1,082       924       936       17       16  
 
                             
Total Equities
    2,497       3,087       2,352       (19 )     6  
                                         
SMFG
    (64 )     161       (61 )     N.M.       N.M.  
ICBC
    (125 )     227       (4 )     N.M.       N.M.  
Other corporate and real estate gains and losses
    909       1,123       284       (19 )     N.M.  
Overrides
    64       215       74       (70 )     (14 )
 
                             
Total Principal Investments
    784       1,726       293       (55 )     168  
                                         
 
                             
Total Trading and Principal Investments
    6,649       9,417       7,105       (29 )     (6 )
 
                             
                                         
Asset Management and Securities Services
                                       
Management and other fees
    1,035       982       850       5       22  
Incentive fees
    20       90       104       (78 )     (81 )
 
                             
Total Asset Management
    1,055       1,072       954       (2 )     11  
                                         
Securities Services
    757       525       656       44       15  
                                         
 
                             
Total Asset Management and Securities Services
    1,812       1,597       1,610       13       13  
 
                             
 
                                       
 
                             
Total net revenues
  $ 10,182     $ 12,730     $ 10,241       (20 )     (1 )
 
                             
 
   
Six Months Ended
   
% Change From
                 
    May 25,     May 26,     May 26,                  
    2007     2006     2006                  
Investment Banking
                                       
Financial Advisory
  $ 1,570     $ 1,344       17 %                
                                         
Equity underwriting
    624       765       (18 )                
Debt underwriting
    1,243       888       40                  
 
                                 
Total Underwriting
    1,867       1,653       13                  
                                         
 
                                 
Total Investment Banking
    3,437       2,997       15                  
 
                                 
                                         
Trading and Principal Investments
                                       
FICC
    7,972       8,298       (4 )                
                                         
Equities trading
    3,578       3,023       18                  
Equities commissions
    2,006       1,778       13                  
 
                                 
Total Equities
    5,584       4,801       16                  
                                         
SMFG
    97       344       (72 )                
ICBC
    102       (4 )     N.M.                  
Other corporate and real estate gains and losses
    2,032       484       N.M.                  
Overrides
    279       164       70                  
 
                                 
Total Principal Investments
    2,510       988       154                  
                                         
 
                                 
Total Trading and Principal Investments
    16,066       14,087       14                  
 
                                 
                                         
Asset Management and Securities Services
                                       
Management and other fees
    2,017       1,600       26                  
Incentive fees
    110       843       (87 )                
 
                                 
Total Asset Management
    2,127       2,443       (13 )                
                                         
Securities Services
    1,282       1,147       12                  
                                         
 
                                 
Total Asset Management and Securities Services
    3,409       3,590       (5 )                
 
                                 
 
                                       
 
                                 
Total net revenues
  $              22,912     $              20,674       11                  
 
                                 

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

In millions, except per share amounts and employees
                                         
   
Three Months Ended
   
% Change From
 
    May 25,     Feb. 23,     May 26,     Feb. 23,     May 26,  
    2007     2007     2006     2007     2006  
Revenues
                                       
Investment banking
  $ 1,720     $ 1,716     $ 1,521       %     13 %
Trading and principal investments
    6,242       9,073       6,921       (31 )     (10 )
Asset management and securities services
    1,107       1,133       1,016       (2 )     9  
Interest income
    11,282       10,358       8,544       9       32  
 
                             
Total revenues
    20,351       22,280       18,002       (9 )     13  
 
                                       
Interest expense
    10,169       9,550       7,761       6       31  
 
                             
 
                                       
Revenues, net of interest expense
    10,182       12,730       10,241       (20 )     (1 )
 
                             
 
                                       
Operating expenses
                                       
Compensation and benefits
    4,887       6,111       5,108       (20 )     (4 )
 
                                       
Brokerage, clearing, exchange and distribution fees
    638       551       473       16       35  
Market development
    144       132       121       9       19  
Communications and technology
    161       151       131       7       23  
Depreciation and amortization
    140       132       127       6       10  
Amortization of identifiable intangible assets
    50       51       44       (2 )     14  
Occupancy
    210       204       199       3       6  
Professional fees
    161       161       123             31  
Cost of power generation
    81       84       122       (4 )     (34 )
Other expenses
    279       294       269       (5 )     4  
 
                             
Total non-compensation expenses
    1,864       1,760       1,609       6       16  
 
                                       
 
                             
Total operating expenses
    6,751       7,871       6,717       (14 )     1  
 
                             
 
                                       
Pre-tax earnings
    3,431       4,859       3,524       (29 )     (3 )
Provision for taxes
    1,098       1,662       1,212       (34 )     (9 )
 
                             
Net earnings
    2,333       3,197       2,312       (27 )     1  
 
                                       
Preferred stock dividends
    46       49       26       N.M.       N.M.  
 
                             
Net earnings applicable to common shareholders
  $ 2,287     $ 3,148     $ 2,286       (27 )      
 
                             
 
                                       
Earnings per common share
                                       
Basic
  $ 5.25     $ 7.08     $ 5.08       (26 )%     3 %
Diluted
    4.93       6.67       4.78       (26 )     3  
 
                                       
Average common shares outstanding
                                       
Basic
    435.8       444.5       449.7       (2 )     (3 )
Diluted
    464.1       471.9       478.3       (2 )     (3 )
 
                                       
Selected Data
                                       
Employees at period end (3)
    28,012       26,959       24,013       4       17  
Ratio of compensation and benefits to net revenues
    48.0 %     48.0 %     49.9 %                

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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)

In millions, except per share amounts
                         
   
Six Months Ended
   
% Change From
 
    May 25,     May 26,     May 26,  
    2007     2006     2006  
Revenues
                       
Investment banking
  $               3,436     $               2,991       15 %
Trading and principal investments
    15,315       13,608       13  
Asset management and securities services
    2,240       2,570       (13 )
Interest income
    21,640       16,079       35  
 
                 
Total revenues
    42,631       35,248       21  
 
                       
Interest expense
    19,719       14,574       35  
 
                 
 
                       
Revenues, net of interest expense
    22,912       20,674       11  
 
                 
 
                       
Operating expenses
                       
Compensation and benefits
    10,998       10,422       6  
 
                       
Brokerage, clearing, exchange and distribution fees
    1,189       891       33  
Market development
    276       221       25  
Communications and technology
    312       255       22  
Depreciation and amortization
    272       252       8  
Amortization of identifiable intangible assets
    101       78       29  
Occupancy
    414       392       6  
Professional fees
    322       232       39  
Cost of power generation
    165       207       (20 )
Other expenses
    573       511       12  
 
                 
Total non-compensation expenses
    3,624       3,039       19  
 
                       
 
                 
Total operating expenses
    14,622       13,461       9  
 
                 
 
                       
Pre-tax earnings
    8,290       7,213       15  
Provision for taxes
    2,760       2,422       14  
 
                 
Net earnings
    5,530       4,791       15  
 
                       
Preferred stock dividends
    95       52       N.M.  
 
                 
Net earnings applicable to common shareholders
  $ 5,435     $ 4,739       15  
 
                 
 
                       
Earnings per common share
                       
Basic
  $ 12.35     $ 10.45       18 %
Diluted
    11.61       9.86       18  
 
                       
Average common shares outstanding
                       
Basic
    440.2       453.5       (3 )
Diluted
    468.0       480.8       (3 )
 
                       
Selected Data
                       
Ratio of compensation and benefits to net revenues
    48.0 %     50.4 %        

8


Table of Contents

NON-COMPENSATION EXPENSES
(UNAUDITED)

$ in millions
                                         
   
Three Months Ended
   
% Change From
 
    May 25,     Feb. 23,     May 26,     Feb. 23,     May 26,  
    2007     2007     2006     2007     2006  
Non-compensation expenses of consolidated investments (4)
  $              101     $              87     $ 119                    16 %                  (15) %
 
                                       
Non-compensation expenses excluding consolidated investments
                                       
Brokerage, clearing, exchange and distribution fees
    638       551       473       16       35  
Market development
    142       130       113       9       26  
Communications and technology
    161       150       129       7       25  
Depreciation and amortization
    121       118       110       3       10  
Amortization of identifiable intangible assets
    48       50       44       (4 )     9  
Occupancy
    192       189       171       2       12  
Professional fees
    160       160       121             32  
Cost of power generation
    81       84       122       (4 )     (34 )
Other expenses
    220       241       207       (9 )     6  
 
                             
Subtotal
    1,763       1,673       1,490       5       18  
 
                                       
 
                             
Total non-compensation expenses, as reported
  $ 1,864     $ 1,760     $ 1,609       6       16  
 
                             
 
   
Six Months Ended
   
% Change From
                 
    May 25,     May 26,     May 26,                  
    2007     2006     2006                  
Non-compensation expenses of consolidated investments (4)
  $ 188     $ 218       (14 )%                
 
                                       
Non-compensation expenses excluding consolidated investments
                                       
Brokerage, clearing, exchange and distribution fees
    1,189       891       33