Business Context and Reporting Period
Company: The Goldman Sachs Group, Inc.
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended August 31, 2001.
Business Overview: A global investment banking and securities firm operating in two primary segments: Global Capital Markets (Investment Banking, Trading, Principal Investments) and Asset Management and Securities Services.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended Aug 31, 2001 | 9 Months Ended Aug 31, 2001 |
|---|---|---|
| Net Revenues | $3,661 | $12,384 |
| Pre-tax Earnings | $767 | $2,972 |
| Net Earnings | $468 | $1,813 |
| Diluted EPS | $0.87 | $3.33 |
| Total Assets | $302,029 | $302,029 |
| Shareholders' Equity | $17,958 | $17,958 |
| Cash and Cash Equivalents | $4,631 | $4,631 |
| Short-term Borrowings | $38,230 | $38,230 |
| Long-term Borrowings | $30,275 | $30,275 |
Liquidity & Leverage: Adjusted leverage ratio was 12.4x as of August 31, 2001. The firm maintains unencumbered securities with a market value in excess of all uncollateralized short-term borrowings.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 19% for the quarter and 6% for the nine months compared to the prior year periods, driven primarily by a slowdown in global economic growth and reduced M&A and equity underwriting activity.
- Profitability Drop: Net earnings fell 43% for the quarter and 26% for the nine months year-over-year.
- Segment Performance:
- Global Capital Markets: Net revenues dropped 32% (quarter) and 17% (nine months). Investment Banking revenues declined due to lower M&A and underwriting volumes. Trading revenues were mixed; FICC grew 27% (quarter) while Equities declined. Principal Investments recorded significant losses ($445M quarter, $580M nine months) due to mark-to-market losses in high-tech and telecom sectors.
- Asset Management & Securities Services: Net revenues increased 21% (quarter) and 24% (nine months), aided by the inclusion of Spear, Leeds & Kellogg (SLK) and growth in assets under management.
- Expense Management: Total operating expenses decreased 8% for the quarter, largely due to a 21% reduction in compensation and benefits, partially offset by increased non-compensation expenses related to the SLK acquisition.
Outlook, Risks, and Contingencies
- September 11 Impact: Management stated that liquidity, facilities, and financial condition were not materially affected by the terrorist attacks on September 11, 2001. However, the firm anticipates continued weakness in the business and economic environment, which may negatively affect fourth-quarter results.
- Market Risks: The firm faces risks from declining equity valuations, reduced corporate activity, and lower trading volumes. Standard & Poor's revised its outlook on the firm's credit rating from "stable" to "negative" in July 2001.
- Legal Proceedings: The firm is involved in various proceedings, including antitrust matters regarding underwriting discounts, municipal securities settlements, and a class action lawsuit regarding research independence. Management believes the aggregate results will not have a material adverse effect on financial condition.
- Accounting Changes: The firm adopted SFAS No. 140 regarding securitizations. It plans to adopt SFAS No. 142 (Goodwill) in December 2001, which is expected to increase net earnings by approximately $95 million in 2002 by eliminating goodwill amortization.
Investor Verification Checklist
- Principal Investment Valuations: Verify the magnitude and drivers of the $580 million loss in Principal Investments over nine months, specifically regarding high-tech and telecom mark-to-market adjustments.
- SLK Integration: Assess the long-term revenue contribution of the Spear, Leeds & Kellogg (SLK) acquisition versus the associated increase in non-compensation expenses.
- Liquidity Post-9/11: Monitor subsequent filings for any material changes to liquidity or credit ratings resulting from the September 11, 2001 attacks.
- Compensation Ratios: Track the ratio of compensation to net revenues (49% for the nine months) to ensure expense discipline continues in a lower-revenue environment.
- Goodwill Amortization: Confirm the impact of the upcoming SFAS No. 142 adoption on future earnings reports starting in fiscal 2002.