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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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 13, 2006
THE GOLDMAN SACHS GROUP, INC.
Delaware | No. 001-14965 | No. 13-4019460 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (IRS Employer 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
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))
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 |
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Item 2.02 Results of Operations and Financial Condition.
On June 13, 2006, The Goldman Sachs Group, Inc. (the Registrant) reported its earnings for its fiscal second quarter ended May 26, 2006. A copy of the Registrant’s press release containing this information is being furnished as Exhibit 99.1 to this Report onForm 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 13, 2006, the Registrant reported net revenues of $10.10 billion for its second quarter ended May 26, 2006. Net earnings for the quarter were $2.40 billion(1) and diluted earnings per common share were $4.97(1), in each case excluding incremental non-cash expenses of $138 million related to the accounting for certain share-based awards under SFAS No. 123-R(1). Including these non-cash expenses, net earnings were $2.31 billion and diluted earnings per common share were $4.78 for the second quarter. These results compare with $1.71 for the second quarter of 2005 and $5.41(1), excluding incremental non-cash expenses of $237 million related to SFAS No. 123-R(1), for the first quarter of 2006. Including these non-cash expenses, diluted earnings per common share were $5.08 for the first quarter of 2006.
Excluding the non-cash expenses of $138 million, annualized return on average tangible common shareholders’ equity(2)was 40.8%(1)and annualized return on average common shareholders’ equity was 33.9%(1) for the second quarter. Including these non-cash expenses, annualized return on average tangible common shareholders’ equity(2)was 39.0% and annualized return on average common shareholders’ equity was 32.5% for the second quarter.
Net Revenues
Investment Banking
Net revenues in Investment Banking were $1.53 billion, 87% higher than the second quarter of 2005, reflecting growth across all regions, and 4% higher than the first quarter of 2006. Net revenues in Financial Advisory were $608 million, 58% higher than the second quarter of 2005, primarily reflecting strong growth in industry-wide completed mergers and acquisitions. Net revenues in the firm’s Underwriting business were $918 million, 114% higher than the second quarter of 2005. Net revenues were significantly higher in equity underwriting, primarily reflecting an increase in industry-wide equity and equity-related offerings, and in debt underwriting, primarily due to an increase in leveraged finance activity. The firm’s investment banking backlog increased during the quarter.
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Trading and Principal Investments
Net revenues in Trading and Principal Investments were $6.96 billion, up from $2.81 billion in the second quarter of 2005 and essentially unchanged from the first quarter of 2006.
Net revenues in Fixed Income, Currency and Commodities (FICC) were $4.32 billion compared with $1.52 billion in the second quarter of 2005, reflecting significantly higher net revenues in commodities, credit products and interest rate products. The increase in commodities reflected a $700 million gain related to the sale of East Coast Power, L.L.C., one of the firm’s power generation facilities, as well as strong results across the business. In addition, net revenues were higher in currencies and mortgages. During the quarter, FICC operated in a favorable environment generally characterized by strong customer-driven activity, favorable market opportunities, tight credit spreads and volatile markets.
Net revenues in Equities were $2.35 billion compared with $1.11 billion in the second quarter of 2005, reflecting significantly higher net revenues across all regions in shares and derivatives. In addition, net revenues in the firm’s principal strategies business improved compared with the second quarter of 2005. During the quarter, the business operated in an environment characterized by strong customer-driven activity and generally favorable market opportunities, although conditions became more challenging in May.
Principal Investments recorded net revenues of $293 million, reflecting $354 million in gains and overrides from corporate and real estate principal investments, partially offset by a $61 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 $1.61 billion, 37% higher than the second quarter of 2005. Net revenues decreased 19% compared with the first quarter of 2006, reflecting lower incentive fees in Asset Management.
Asset Management net revenues were $954 million, 38% higher than the second quarter of 2005. The increase was driven by significantly higher management and other fees, primarily due to growth in assets under management, as well as higher incentive fees. During the quarter, assets under management increased 4% to $593 billion, reflecting net asset inflows of $15 billion, spread across all asset classes, as well as market appreciation of $7 billion, primarily in alternative investment and fixed income assets.
Securities Services net revenues were $656 million, 34% higher than the second quarter of 2005, as the firm’s prime brokerage business continued to generate strong results, reflecting significantly higher global customer balances in securities lending and margin lending as well as higher seasonal activity levels in Europe.
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Expenses
Operating expenses were $6.57 billion, 85% higher than the second quarter of 2005 and essentially unchanged from the first quarter of 2006.
Compensation and Benefits
Compensation and benefits expenses were $5.09 billion compared with $2.40 billion in the second quarter of 2005, primarily reflecting higher net revenues. Employment levels increased 2% during the quarter.
In the first quarter of 2006, the firm adopted SFAS No. 123-R, which requires that share-based awards granted to retirement-eligible employees, including those subject to non-compete agreements, be expensed in the year of grant. In addition to expensing current year awards, prior year awards must continue to be amortized over the relevant service period. Therefore, although there is no incremental economic cost to the firm, compensation and benefits in 2006 will include both amortization of prior year awards as well as new awards granted to retirement-eligible employees for services rendered in 2006.
The majority of the expense related to the continued amortization of prior year awards will be recognized in 2006. The estimated annual expense for 2006 is approximately $650 million, of which $375 million was recognized in the first half of 2006. The ratio of compensation and benefits to net revenues, excluding the non-cash expenses of $375 million, was 49.0%(1) for the first half of 2006, compared with 50.0% for the first half of 2005. Including the non-cash expenses of $375 million, the ratio of compensation and benefits to net revenues was 50.8% for the first half of 2006.
Non-Compensation Expenses
Non-compensation expenses were $1.49 billion, 28% higher than the second quarter of 2005. Excluding non-compensation expenses related to consolidated investment entities held for investment purposes(3), non-compensation expenses were 23% higher than the second quarter of 2005. One-half of this increase was attributable to higher brokerage, clearing and exchange fees, primarily in Equities. Other expenses were higher primarily due to costs related to the firm’s insurance business, which was acquired in the first quarter of 2006, and net provisions for litigation and regulatory proceedings of $19 million.
Provision For Taxes
The effective income tax rate for the first half of 2006 was 33.6%, up from 32.8% for the first quarter of 2006 and 32.0% for the fiscal year 2005. The increase in the effective tax rate for the first half of 2006 compared with the first quarter of 2006 was primarily due to the effect of lower estimated tax credits. The increase in the effective tax rate for the first half of 2006 compared with the fiscal year 2005 was primarily due to the impact of audit settlements in 2005 and lower estimated tax credits in 2006.
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Capital
As of May 26, 2006, total capital was $157.39 billion, consisting of $31.80 billion in total shareholders’ equity (common equity of $29.20 billion and preferred stock of $2.60 billion) and $125.59 billion in long-term borrowings.(4) Book value per common share was $64.92 based on common shares outstanding, including restricted stock units granted to employees with no future service requirements, of 449.8 million at period end. Tangible book value per common share was $54.36.(2)
On May 24, 2006, The Goldman Sachs Group, Inc. issued $850 million of perpetual Floating Rate Non-Cumulative Preferred Stock, Series D (Series D Preferred Stock).
The firm repurchased 6.5 million shares of its common stock at an average price of $156.59 per share, for a total cost of $1.02 billion during the quarter. The remaining share authorization under the firm’s existing common stock repurchase program is 17.2 million shares.
Dividends
The Board of Directors of The Goldman Sachs Group, Inc. (the Board) declared a dividend of $0.35 per common share to be paid on August 24, 2006 to common shareholders of record on July 25, 2006. The Board also declared dividends of $377.58, $387.50, $377.58 and $318.36 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, 2006 to preferred shareholders of record on July 26, 2006.
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 firm’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside of the firm’s control. It is possible that the firm’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 firm’s future results, see “Risk Factors” in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005.
Statements about the firm’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 that the firm expects to earn 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, 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 firm’s investment banking transactions, see “Risk Factors” in Part I, Item 1A of the firm’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005.
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SEGMENT NET REVENUES
(UNAUDITED)
$ in millions
Three Months Ended | % Change From | |||||||||||||||||||
May 26, | Feb. 24, | May 27, | Feb. 24, | May 27, | ||||||||||||||||
2006 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
Investment Banking | ||||||||||||||||||||
Financial Advisory | $ | 608 | $ | 736 | $ | 386 | (17 | )% | 58 | % | ||||||||||
Equity underwriting | 482 | 283 | 114 | 70 | N.M. | |||||||||||||||
Debt underwriting | 436 | 452 | 315 | (4 | ) | 38 | ||||||||||||||
Total Underwriting | 918 | 735 | 429 | 25 | 114 | |||||||||||||||
Total Investment Banking | 1,526 | 1,471 | 815 | 4 | 87 | |||||||||||||||
Trading and Principal Investments | ||||||||||||||||||||
FICC | 4,316 | 3,740 | 1,519 | 15 | 184 | |||||||||||||||
Equities trading | 1,416 | 1,607 | 372 | (12 | ) | N.M. | ||||||||||||||
Equities commissions | 936 | 842 | 733 | 11 | 28 | |||||||||||||||
Total Equities | 2,352 | 2,449 | 1,105 | (4 | ) | 113 | ||||||||||||||
SMFG | (61 | ) | 405 | 73 | N.M. | N.M. | ||||||||||||||
Other corporate and real estate gains and losses | 280 | 200 | 107 | 40 | 162 | |||||||||||||||
Overrides | 74 | 90 | 9 | (18 | ) | N.M. | ||||||||||||||
Total Principal Investments | 293 | 695 | 189 | (58 | ) | 55 | ||||||||||||||
Total Trading and Principal Investments | 6,961 | 6,884 | 2,813 | 1 | 147 | |||||||||||||||
Asset Management and Securities Services | ||||||||||||||||||||
Management and other fees | 850 | 750 | 657 | 13 | 29 | |||||||||||||||
Incentive fees | 104 | 739 | 32 | (86 | ) | N.M. | ||||||||||||||
Total Asset Management | 954 | 1,489 | 689 | (36 | ) | 38 | ||||||||||||||
Securities Services | 656 | 491 | 489 | 34 | 34 | |||||||||||||||
Total Asset Management and Securities Services | 1,610 | 1,980 | 1,178 | (19 | ) | 37 | ||||||||||||||
Total net revenues | $ | 10,097 | $ | 10,335 | $ | 4,806 | (2 | ) | 110 | |||||||||||
Six Months Ended | % Change From | |||||||||||||||||||
May 26, | May 27, | May 27, | ||||||||||||||||||
2006 | 2005 | 2005 | ||||||||||||||||||
Investment Banking | ||||||||||||||||||||
Financial Advisory | $ | 1,344 | $ | 800 | 68 | % | ||||||||||||||
Equity underwriting | 765 | 300 | 155 | |||||||||||||||||
Debt underwriting | 888 | 608 | 46 | |||||||||||||||||
Total Underwriting | 1,653 | 908 | 82 | |||||||||||||||||
Total Investment Banking | 2,997 | 1,708 | 75 | |||||||||||||||||
Trading and Principal Investments | ||||||||||||||||||||
FICC | 8,056 | 4,008 | 101 | |||||||||||||||||
Equities trading | 3,023 | 1,201 | 152 | |||||||||||||||||
Equities commissions | 1,778 | 1,454 | 22 | |||||||||||||||||
Total Equities | 4,801 | 2,655 | 81 | |||||||||||||||||
SMFG | 344 | 254 | 35 | |||||||||||||||||
Other corporate and real estate gains and losses | 480 | 255 | 88 | |||||||||||||||||
Overrides | 164 | 24 | N.M. | |||||||||||||||||
Total Principal Investments | 988 | 533 | 85 | |||||||||||||||||
Total Trading and Principal Investments | 13,845 | 7,196 | 92 | |||||||||||||||||
Asset Management and Securities Services | ||||||||||||||||||||
Management and other fees | 1,600 | 1,275 | 25 | |||||||||||||||||
Incentive fees | 843 | 163 | N.M. | |||||||||||||||||
Total Asset Management | 2,443 | 1,438 | 70 | |||||||||||||||||
Securities Services | 1,147 | 869 | 32 | |||||||||||||||||
Total Asset Management and Securities Services | 3,590 | 2,307 | 56 | |||||||||||||||||
Total net revenues | $ | 20,432 | $ | 11,211 | 82 | |||||||||||||||
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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 26, | Feb. 24, | May 27, | Feb. 24, | May 27, | ||||||||||||||||
2006 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
Revenues | ||||||||||||||||||||
Investment banking | $ | 1,521 | $ | 1,470 | $ | 796 | 3 | % | 91 | % | ||||||||||
Trading and principal investments | 6,921 | 6,687 | 2,562 | 3 | 170 | |||||||||||||||
Asset management and securities services | 1,016 | 1,554 | 724 | (35 | ) | 40 | ||||||||||||||
Interest income | 8,544 | 7,535 | 4,867 | 13 | 76 | |||||||||||||||
Total revenues | 18,002 | 17,246 | 8,949 | 4 | 101 | |||||||||||||||
Interest expense | 7,761 | 6,813 | 4,022 | 14 | 93 | |||||||||||||||
Cost of power generation(5) | 144 | 98 | 121 | 47 | 19 | |||||||||||||||
Revenues, net of interest expense and cost of power generation | 10,097 | 10,335 | 4,806 | (2 | ) | 110 | ||||||||||||||
Operating expenses | ||||||||||||||||||||
Compensation and benefits | 5,086 | 5,301 | 2,403 | (4 | ) | 112 | ||||||||||||||
Brokerage, clearing and exchange fees | 403 | 351 | 274 | 15 | 47 | |||||||||||||||
Market development | 121 | 100 | 94 | 21 | 29 | |||||||||||||||
Communications and technology | 131 | 124 | 123 | 6 | 7 | |||||||||||||||
Depreciation and amortization | 127 | 125 | 128 | 2 | (1 | ) | ||||||||||||||
Amortization of identifiable intangible assets | 44 | 34 | 31 | 29 | 42 | |||||||||||||||
Occupancy | 199 | 193 | 186 | 3 | 7 | |||||||||||||||
Professional fees | 123 | 109 | 109 | 13 | 13 | |||||||||||||||
Other expenses | 339 | 309 | 214 | 10 | 58 | |||||||||||||||
Total non-compensation expenses | 1,487 | 1,345 | 1,159 | 11 | 28 | |||||||||||||||
Total operating expenses | 6,573 | 6,646 | 3,562 | (1 | ) | 85 | ||||||||||||||
Pre-tax earnings | 3,524 | 3,689 | 1,244 | (4 | ) | 183 | ||||||||||||||
Provision for taxes | 1,212 | 1,210 | 379 | — | N.M. | |||||||||||||||
Net earnings | 2,312 | 2,479 | 865 | (7 | ) | 167 | ||||||||||||||
Preferred stock dividends | 26 | 26 | — | — | N.M. | |||||||||||||||
Net earnings applicable to common shareholders | $ | 2,286 | $ | 2,453 | $ | 865 | (7 | ) | 164 | |||||||||||
Earnings per common share | ||||||||||||||||||||
Basic | $ | 5.08 | $ | 5.36 | $ | 1.78 | (5 | )% | 185 | % | ||||||||||
Diluted | 4.78 | 5.08 | 1.71 | (6 | ) | 180 | ||||||||||||||
Diluted, excluding the impact of the continued amortization of prior year share-based awards in 2006(1) | 4.97 | 5.41 | 1.71 | (8 | ) | 191 | ||||||||||||||
Average common shares outstanding | ||||||||||||||||||||
Basic | 449.7 | 457.3 | 485.4 | (2 | ) | (7 | ) | |||||||||||||
Diluted | 478.3 | 483.3 | 506.2 | (1 | ) | (6 | ) | |||||||||||||
Selected Data | ||||||||||||||||||||
Employees at period end (6) (7) | 24,013 | 23,641 | 21,800 | 2 | 10 | |||||||||||||||
Ratio of compensation and benefits to net revenues | 50.4 | % | 51.3 | % | 50.0 | % | ||||||||||||||
Ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards in 2006(1) | 49.0 | 49.0 | 50.0 |
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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 26, | May 27, | May 27, | ||||||||||
2006 | 2005 | 2005 | ||||||||||
Revenues | ||||||||||||
Investment banking | $ | 2,991 | $ | 1,669 | 79 | % | ||||||
Trading and principal investments | 13,608 | 6,703 | 103 | |||||||||
Asset management and securities services | 2,570 | 1,498 | 72 | |||||||||
Interest income | 16,079 | 9,043 | 78 | |||||||||
Total revenues | 35,248 | 18,913 | 86 | |||||||||
Interest expense | 14,574 | 7,471 | 95 | |||||||||
Cost of power generation(5) | 242 | 231 | 5 | |||||||||
Revenues, net of interest expense and cost of power generation | 20,432 | 11,211 | 82 | |||||||||
Operating expenses | ||||||||||||
Compensation and benefits | 10,387 | 5,606 | 85 | |||||||||
Brokerage, clearing and exchange fees | 754 | 526 | 43 | |||||||||
Market development | 221 | 176 | 26 | |||||||||
Communications and technology | 255 | 241 | 6 | |||||||||
Depreciation and amortization | 252 | 246 | 2 | |||||||||
Amortization of identifiable intangible assets | 78 | 62 | 26 | |||||||||
Occupancy | 392 | 334 | 17 | |||||||||
Professional fees | 232 | 205 | 13 | |||||||||
Other expenses | 648 | 426 | 52 | |||||||||
Total non-compensation expenses | 2,832 | 2,216 | 28 | |||||||||
Total operating expenses | 13,219 | 7,822 | 69 | |||||||||
Pre-tax earnings | 7,213 | 3,389 | 113 | |||||||||
Provision for taxes | 2,422 | 1,012 | 139 | |||||||||
Net earnings | 4,791 | 2,377 | 102 | |||||||||
Preferred stock dividends | 52 | — | N.M. | |||||||||
Net earnings applicable to common shareholders | $ | 4,739 | $ | 2,377 | 99 | |||||||
Earnings per common share | ||||||||||||
Basic | $ | 10.45 | $ | 4.85 | 115 | % | ||||||
Diluted | 9.86 | 4.65 | 112 | |||||||||
Diluted, excluding the impact of the continued amortization of prior year share-based awards in 2006(1) | 10.38 | 4.65 | 123 | |||||||||
Average common shares outstanding | ||||||||||||
Basic | 453.5 | 489.8 | (7 | ) | ||||||||
Diluted | 480.8 | 510.7 | (6 | ) | ||||||||
Selected Data | ||||||||||||
Ratio of compensation and benefits to net revenues | 50.8 | % | 50.0 | % | ||||||||
Ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards in 2006(1) | 49.0 | 50.0 | ||||||||||
Annualized return on average tangible common shareholders’ equity(2) | 41.4 | 22.6 | ||||||||||
Annualized return on average tangible common shareholders’ equity, excluding the impact of the continued amortization of prior year share-based awards in 2006(1) | 43.7 | 22.6 | ||||||||||
Annualized return on average common shareholders’ equity | 34.3 | 18.5 | ||||||||||
Annualized return on average common shareholders’ equity, excluding the impact of the continued amortization of prior year share-based awards in 2006(1) | 36.2 | 18.5 |
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NON-COMPENSATION EXPENSES
(UNAUDITED)
$ in millions
Three Months Ended | % Change From | |||||||||||||||||||
May 26, | Feb. 24, | May 27, | Feb. 24, | May 27, | ||||||||||||||||
2006 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
Non-compensation expenses of consolidated investments(3) | $ | 119 | $ | 99 | $ | 49 | 20 | % | 143 | % | ||||||||||
Non-compensation expenses excluding consolidated investments | ||||||||||||||||||||
Brokerage, clearing and exchange fees | 403 | 351 | 274 | 15 | 47 | |||||||||||||||
Market development | 113 | 92 | 90 | 23 | 26 | |||||||||||||||
Communications and technology | 129 | 123 | 123 | 5 | 5 | |||||||||||||||
Depreciation and amortization | 110 | 112 | 124 | (2 | ) | (11 | ) | |||||||||||||
Amortization of identifiable intangible assets | 44 | 34 | 31 | 29 | 42 | |||||||||||||||
Occupancy | 171 | 169 | 174 | 1 | (2 | ) | ||||||||||||||
Professional fees | 121 | 105 | 108 | 15 | 12 | |||||||||||||||
Other expenses | 277 | 260 | 186 | 7 | 49 | |||||||||||||||
Subtotal | 1,368 | 1,246 | 1,110 | 10 | 23 | |||||||||||||||
Total non-compensation expenses, as reported | $ | 1,487 | $ | 1,345 | $ | 1,159 | 11 | 28 | ||||||||||||
Six Months Ended | % Change From | |||||||||||||||||||
May 26, | May 27, | May 27, | ||||||||||||||||||
2006 | 2005 | 2005 | ||||||||||||||||||
Non-compensation expenses of consolidated investments(3) | $ | 218 | $ | 64 | N.M. | % | ||||||||||||||
Non-compensation expenses excluding consolidated investments | ||||||||||||||||||||
Brokerage, clearing and exchange fees | 754 | 526 | 43 | |||||||||||||||||
Market development | 205 | 172 | 19 | |||||||||||||||||
Communications and technology | 252 | 241 | 5 | |||||||||||||||||
Depreciation and amortization | 222 | 240 | (8 | ) | ||||||||||||||||
Amortization of identifiable intangible assets | 78 | 62 | 26 | |||||||||||||||||
Occupancy | 340 | 322 | 6 | |||||||||||||||||
Professional fees | 226 | 204 | 11 | |||||||||||||||||
Other expenses | 537 | 385 | 39 | |||||||||||||||||
Subtotal | 2,614 | 2,152 | 21 | |||||||||||||||||
Total non-compensation expenses, as reported | $ | 2,832 | $ | 2,216 | 28 | |||||||||||||||
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THE GOLDMAN SACHS GROUP, INC. AND SUBSIDIARIES
SELECTED FINANCIAL DATA
(UNAUDITED)
Average Daily VaR(8)
$ in millions
Three Months Ended | ||||||||||||||||||||
May 26, | Feb. 24, | May 27, | ||||||||||||||||||
2006 | 2006 | 2005 | ||||||||||||||||||
Risk Categories | ||||||||||||||||||||
Interest rates | $ | 49 | $ | 40 | $ | 33 | ||||||||||||||
Equity prices | 83 | 69 | 26 | |||||||||||||||||
Currency rates | 29 | 18 | 19 | |||||||||||||||||
Commodity prices | 31 | 30 | 24 | |||||||||||||||||
Diversification effect(9) | (80 | ) | (65 | ) | (42 | ) | ||||||||||||||
Total | $ | 112 | $ | 92 | $ | 60 | ||||||||||||||
Assets Under Management(10)
$ in billions
As of | % Change From | |||||||||||||||||||
May 31, | Feb. 28, | May 31, | Feb. 28, | May 31, | ||||||||||||||||
2006 | 2006 | 2005 | 2006 | 2005 | ||||||||||||||||
Money markets | $ | 108 | $ | 106 | $ | 98 | 2 | % | 10 | % | ||||||||||
Fixed income | 172 | 165 | 147 | 4 | 17 | |||||||||||||||
Equity | 185 | 181 | 142 | 2 | 30 | |||||||||||||||
Alternative investments | 128 | 119 | 103 | 8 | 24 | |||||||||||||||
Total | $ | 593 | $ | 571 | (11) | $ | 490 | 4 | 21 | |||||||||||
Three Months Ended | ||||||||||||||||||||
May 31, | Feb. 28, | May 31, | ||||||||||||||||||
2006 | 2006 | 2005 | ||||||||||||||||||
Balance, beginning of period | $ | 571 | $ | 532 | $ | 482 | ||||||||||||||
Net asset inflows / (outflows) | ||||||||||||||||||||
Money markets | 2 | 5 | (1 | ) | ||||||||||||||||
Fixed income | 4 | 8 | 5 | |||||||||||||||||
Equity | 3 | 5 | 2 | |||||||||||||||||
Alternative investments | 6 | 7 | 4 | |||||||||||||||||
Total net asset inflows / (outflows) | 15 | 25 | (11) | 10 | ||||||||||||||||
Net market appreciation / (depreciation) | 7 | 14 | (2 | ) | ||||||||||||||||
Balance, end of period | $ | 593 | $ | 571 | $ | 490 | ||||||||||||||
Principal Investments
$ in millions
As of May 26, 2006 | ||||||||||||||||||||
Corporate | Real Estate | Total | ||||||||||||||||||
Private | $ | 2,291 | $ | 609 | $ | 2,900 | ||||||||||||||
Public | 826 | 3 | 829 | |||||||||||||||||
Subtotal | 3,117 | 612 | 3,729 | |||||||||||||||||
SMFG convertible preferred stock(12) | 4,617 | — | 4,617 | |||||||||||||||||
Industrial and Commercial Bank of China Limited(13) | 2,591 | — | 2,591 | |||||||||||||||||
Total | $ | 10,325 | $ | 612 | $ | 10,937 | ||||||||||||||
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Footnotes
(1) | Statement of Financial Accounting Standards (SFAS) No. 123-R, “Share-Based Payment,” focuses primarily on accounting for transactions in which an entity obtains employee services in exchange for share-based payments. In the first quarter of 2006, the firm adopted SFAS No. 123-R, which requires that share-based awards granted to retirement-eligible employees, including those subject to non-compete agreements, be expensed in the year of grant. In addition to expensing current year awards, prior year awards must continue to be amortized over the relevant service period. Therefore, although there is no incremental economic cost to the firm, compensation and benefits expenses in fiscal 2006 will include both amortization of prior year awards and new awards granted to retirement-eligible employees for services rendered in fiscal 2006. Management believes that presenting the firm’s results excluding the impact of the continued amortization of prior year share-based awards granted to retirement-eligible employees increases the comparability of period-to-period operating results and allows for a more meaningful representation of the relationship of current period compensation to net revenues. | |
The following tables set forth a reconciliation of net earnings, diluted earnings per common share, common shareholders’ equity and the ratio of compensation and benefits to net revenues as reported, to these items excluding the impact of the continued amortization of prior year share-based awards granted to retirement-eligible employees: |
Three Months | Six Months | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
May 26, 2006 | May 26, 2006 | February 24, 2006 | ||||||||||
(unaudited, $ in millions) | ||||||||||||
Net earnings | $ | 2,312 | $ | 4,791 | $ | 2,479 | ||||||
Impact of the continued amortization of prior year share-based awards, net of tax | 91 | 250 | 159 | |||||||||
Net earnings, excluding the impact of the continued amortization of prior year share-based awards | 2,403 | 5,041 | 2,638 | |||||||||
Preferred stock dividends | (26 | ) | (52 | ) | (26 | ) | ||||||
Net earnings applicable to common shareholders, excluding the impact of the continued amortization of prior year share-based awards | $ | 2,377 | $ | 4,989 | $ | 2,612 | ||||||
Three Months | Six Months | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
May 26, 2006 | May 26, 2006 | February 24, 2006 | ||||||||||
(unaudited) | ||||||||||||
Diluted earnings per common share | $ | 4.78 | $ | 9.86 | $ | 5.08 | ||||||
Impact of the continued amortization of prior year share-based awards, net of tax | 0.19 | 0.52 | 0.33 | |||||||||
Diluted earnings per common share, excluding the impact of the continued amortization of prior year share-based awards | $ | 4.97 | $ | 10.38 | $ | 5.41 | ||||||
Average for the | ||||||||||||
Three Months | Six Months | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
May 26, 2006 | May 26, 2006 | February 24, 2006 | ||||||||||
(unaudited, $ in millions) | ||||||||||||
Total shareholders’ equity | $ | 30,082 | $ | 29,473 | $ | 28,724 | ||||||
Preferred stock | (1,963 | ) | (1,871 | ) | (1,750 | ) | ||||||
Common shareholders’ equity | 28,119 | 27,602 | 26,974 | |||||||||
Impact of the continued amortization of prior year share-based awards, net of tax | (105 | ) | (76 | ) | (48 | ) | ||||||
Common shareholders’ equity, excluding the impact of the continued amortization of prior year share-based awards | 28,014 | 27,526 | 26,926 | |||||||||
Goodwill and identifiable intangible assets, excluding power contracts and the value of business acquired (see footnote 2 below) | (4,694 | ) | (4,694 | ) | (4,687 | ) | ||||||
Tangible common shareholders’ equity (see footnote 2 below), excluding the impact of the continued amortization of prior year share-based awards | $ | 23,320 | $ | 22,832 | $ | 22,239 | ||||||
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Footnotes (continued)
Three Months | Six Months | Three Months | ||||||||||
Ended | Ended | Ended | ||||||||||
May 26, 2006 | May 26, 2006 | February 24, 2006 | ||||||||||
(unaudited, $ in millions) | ||||||||||||
Compensation and benefits | $ | 5,086 | $ | 10,387 | $ | 5,301 | ||||||
Impact of the continued amortization of prior year share-based awards | (138 | ) | (375 | ) | (237 | ) | ||||||
Compensation and benefits, excluding the impact of the continued amortization of prior year share-based awards | $ | 4,948 | $ | 10,012 | $ | 5,064 | ||||||
Total net revenues | $ | 10,097 | $ | 20,432 | $ | 10,335 | ||||||
Ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards | 49.0 | % | 49.0 | % | 49.0 | % |
The firm’s ratio of compensation and benefits to net revenues, excluding the impact of the continued amortization of prior year share-based awards, is computed by dividing compensation and benefits, excluding the impact of the continued amortization of prior year share-based awards, by total net revenues. | ||
(2) | Tangible common shareholders’ equity equals total shareholders’ equity less preferred stock, goodwill and identifiable intangible assets, excluding power contracts and the value of business acquired (VOBA). VOBA represents the present value of estimated future gross profits of the variable annuity and variable life insurance business acquired in fiscal 2006. In fiscal 2006, management amended its calculation of tangible common shareholders’ equity. Management no longer deducts identifiable intangible assets associated with power contracts from common shareholders’ equity and management does not deduct VOBA. Management does not deduct these assets because, unlike other intangible assets, the firm does not hold material amounts of common shareholders’ equity to support these assets. Prior periods have been restated to conform to the current period presentation. | |
Management believes that annualized return on average tangible common shareholders’ equity is a meaningful measure of performance because it measures the performance of businesses consistently, whether they were acquired or developed internally. Annualized return on average tangible common shareholders’ equity is computed by dividing annualized net earnings applicable to common shareholders by average monthly tangible common shareholders’ equity. The following table sets forth a reconciliation of average total shareholders’ equity to average tangible common shareholders’ equity: |
Average for the | As of | |||||||||||||||
Three Months | Six Months | Six Months | ||||||||||||||
Ended | Ended | Ended | ||||||||||||||
May 26, 2006 | May 26, 2006 | May 27, 2005 | May 26, 2006 | |||||||||||||
(unaudited, $ in millions) | ||||||||||||||||
Total shareholders’ equity | $ | 30,082 | $ | 29,473 | $ | 25,967 | $ | 31,800 | ||||||||
Preferred stock | (1,963 | ) | (1,871 | ) | (214 | ) | (2,600 | ) | ||||||||
Common shareholders’ equity | 28,119 | 27,602 | 25,753 | 29,200 | ||||||||||||
Goodwill and identifiable intangible assets, excluding power contracts and VOBA | (4,694 | ) | (4,694 | ) | (4,764 | ) | (4,749 | ) | ||||||||
Tangible common shareholders’ equity | $ | 23,425 | $ | 22,908 | $ | 20,989 | $ | 24,451 | ||||||||
(3) | Consolidated entities held for investment purposes includes entities that are held strictly for capital appreciation, have a defined exit strategy and are engaged in activities that are not closely related to the firm’s principal businesses. For example, these investments include consolidated entities that hold real estate assets such as golf courses and hotels in Asia, but exclude investments in entities that primarily hold financial assets. Management believes that it is meaningful to review non-compensation expenses excluding expenses related to these consolidated entities in order to evaluate trends in non-compensation expenses related to the firm’s principal business activities. | |
(4) | Long-term borrowings includes nonrecourse debt of $15.49 billion, consisting of $5.23 billion issued by William Street Funding Corporation (a wholly owned subsidiary of The Goldman Sachs Group, Inc. formed to raise funding to support loan commitments to investment-grade clients made by another wholly owned William Street entity) and $10.26 billion issued by other consolidated entities. Nonrecourse debt is debt that only the issuing subsidiary or, if applicable, a subsidiary guaranteeing the debt is obligated to repay. | |
(5) | Cost of power generation includes all of the direct costs of the firm’s consolidated power generation facilities (e.g., fuel, operations and maintenance), as well as the depreciation and amortization associated with the facilities and related contractual assets. Power generation revenues are included in “Trading and principal investments.” |
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Footnotes (continued)
(6) | Excludes 9,369, 8,171 and 6,844 employees as of May 2006, February 2006 and May 2005, respectively, of consolidated entities held for investment purposes. Compensation and benefits includes $61 million, $51 million and $19 million for the three months ended May 26, 2006, February 24, 2006 and May 27, 2005, respectively, attributable to these consolidated entities. | |
(7) | Beginning with fiscal year 2006, includes 1,225 and 1,168 employees as of May 2006 and February 2006, respectively, of Goldman Sachs’ consolidated property management and loan servicing subsidiaries. May 2005 has been restated to conform to the current presentation and includes 912 employees. | |
(8) | VaR is the potential loss in value of Goldman Sachs’ trading positions due to adverse market movements over a one-day time horizon with a 95% confidence level. The modeling of the risk characteristics of the firm’s trading positions involves a number of assumptions and approximations. While management believes that these assumptions and approximations are reasonable, there is no standard methodology for estimating VaR, and different assumptions and/or approximations could produce materially different VaR estimates. For a further discussion of the calculation of VaR, see Part II, Item 7A “Quantitative and Qualitative Disclosures About Market Risk” in the firm’s Annual Report on Form 10-K for the fiscal year ended November 25, 2005. | |
(9) | Equals the difference between total VaR and the sum of the VaRs for the four risk categories. This effect arises because the four market risk categories are not perfectly correlated. | |
(10) | In the first fiscal quarter of 2006, the methodology for classifying certain non-money market assets was changed. The changes were primarily to reclassify certain assets allocated to external investment managers out of alternative investment assets and to reclassify currency assets into alternative investment assets. The changes did not impact total assets under management and May 2005 has been restated to conform to the current presentation. Substantially all assets under management are valued as of calendar month end. | |
(11) | Includes $3 billion of net asset inflows in connection with the December 30, 2005 acquisition of the variable annuity and variable life insurance business of The Hanover Insurance Group, Inc. (formerly Allmerica Financial Corporation), including its wholly owned life insurance subsidiary, Allmerica Financial Life Insurance and Annuity Company. | |
(12) | Excludes an economic hedge on the unrestricted shares of common stock underlying the investment. As of May 26, 2006, the fair value of this hedge was $2.33 billion. Includes the impact of foreign exchange revaluation on the investment, for which the firm also maintains an economic hedge. | |
(13) | Includes economic interests of $1.65 billion as of May 26, 2006 assumed by investment funds managed by Goldman Sachs. |
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Item 9.01 Financial Statements and Exhibits.
(d) Exhibits.
The following exhibit is furnished as part of this Report on Form 8-K:
99.1 | Press release of the Registrant dated June 13, 2006 containing financial information for its fiscal second quarter ended May 26, 2006. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
THE GOLDMAN SACHS GROUP, INC. (Registrant) | ||||||||
Date: June 13, 2006 | By: | /s/ David A. Viniar | ||||||
Name: | David A. Viniar | |||||||
Title: | Chief Financial Officer |
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