This summary is based on the second quarter fiscal 2008 earnings call conducted by Lehman Brothers Inc . (LEH) on June 16, 2008.
Management:
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Chairman of the Board, Chief Executive Officer: Richard S. Fuld Jr.
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Chief Financial Officer, Executive Vice President, Co-Chief Administrative Officer: Ian T. Lowitt
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President, Chief Operating Officer: Herbert McDade
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Director, Investor Relations: Edward Grieb
Key Investors Issues
- Net revenues of negative $668 million down from $5.5 billion in the prior year.
- The firm reported a net loss of $2.8 billion or $5.14 a share, down from net income of $1.3 billion or $2.21 a share in 2007.
- The company increased the cash capital surplus to $15 billion.
Half Year Highlights:
- The firm reported a net loss of $2.3 billion, or ($4.33) per share compared to net income of $2.4 billion, or $4.17 per common share in 2007.
- Net revenues of $2.8 billion, dropped from $10.6 billion in the prior year.
Second Quarter Highlights
The firm reported net revenues of negative $668 million down from $5.5 billion in the prior year due to a significant dislocation in spread movements between derivative instruments and cash assets.
- Lehman reported a net loss of $2.8 billion or $5.14 a share, down from net income of $1.3 billion or $2.21 a share in the prior year as it reported gross mark-to-market adjustments of $3.6 billion concentrated in the residential and commercial exposures.
- However, these gross mark-to-market adjustments were 23% lower than the $4.7 billion of gross adjustments recorded in the first quarter.
- Additionally, the firm incurred a net loss of $100 million on the hedges against these assets for net mark-to-market of $3.7 billion.
- The principal portfolios also incurred losses of $500 million, including $300 million reported in the equities component of capital markets, including the mark-to-market adjustment on the investment in GLG.
It had $700 million of losses associated with defensive positioning in the credit and rates businesses, impacting revenues by a total of $4.9 billion.
- Total compensation expense was $2.3 billion, a $418 million increase from last quarter. - The firm incurred severance costs of $140 million that were included in the compensation expense as the headcount declined by 1900 as it continues to scale businesses to the respective opportunities.
- Non-personnel expenses totaled $1.1 billion.
- The firm reduced gross assets by $147 billion from $786 billion to $639 billion and reduced net assets by $70 billion from $397 billion to $327 billion.
As a result, it reduced gross leverage from 31.7 times to 24.3 times at May 31st, and reduced net leverage from 15.4 times to 12 times prior to the impact of last week’s capital raised.
- Deleveraging included a reduction of assets across the firm, including residential and commercial mortgages, real estate held for sale, and acquisition finance.
- The firm reduced residential mortgage assets to $24.9 billion from $31.8 billion in the first quarter, a decline of $6.9 billion, or 22%.
- Whole loans are now $8.3 billion at 30% reduction from $11.9 billion last quarter, and servicing is at $1.6 billion.
- It sold $11 billion of residential mortgage assets and purchased $6 billion for net sales of $5 billion, further demonstrating the very active trading in this asset class this quarter.
Alt-A assets were reduced by 30% to $10.2 billion from $14.6 billion and sub-prime assets declined by 30% to $2.8 billion from $4 billion.
- The firm reduced European residential assets to $9.3 billion from $9.5 billion in the first quarter, and reduced gross ABS/CDO exposure to $600 million from $900 million.
- The firm plans to continue reducing exposure to commercial mortgage assets and real estate held for sale substantially.
- It sold $800 million of assets and had gross write-downs of $400 million offset by other purchases as a result of continued trading activity in these assets.
- The firm reduced non-investment grade exposure by 35% to $11.5 billion, driven by $4.6 billion of sales and syndications and $1.4 billion of commitments rolling off.
Business Segments:
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Investment banking: posted revenues of $858 million, essentially flat versus the sequential period and down 25% year over year.
- The pretax operating income was $193 million, representing a pretax margin of 22%.
- Year-to-date, the firm continues to gain fee share in banking and believes fee share has increased from 4.4% in 2007 to 4.8% this year.
- U.S. financials raised a total of $150 billion of equity and hybrid capital in the first five months of 2008, excluding self-issuances.
- The firm lead managed 37% of this volume, including $5.2 billion of new capital for Fannie Mae, $7 billion for Washington Mutual, $1.5 billion for CIT, and $1.4 billion for Sovereign Bancorp.
In equity origination, revenues totaled $330 million, up 54% from last quarter and flat versus the year-ago period.
- Globally, the firm has grown the equity market share from 5.8% this year from 3.6% in 2007 and is now number three year-to-date in U.S. follow-ons, with 12.4% market share, up from 7.8% in 2007.
- Fixed income origination revenues were $288 million, down 11% sequentially and 47% versus the year-ago period.
- M&A advisory revenues were $240 million, down 27% sequentially and 13% versus the year-ago period.
As of the second quarter, the firm had advised on three of the top four completed deals and three of the top 10 announced M&A transactions of the year.
- It is working on some of the largest assignments in the second quarter, including HP’s acquisition of EDF, Sprint-Nextel’s joint venture with Clearwire, Liberty Mutual’s acquisition of SafeCo, and Finmeccanica’s acquisition of U.S. defense company, DRS.
- The firm also closed the Philip Morris International spin-off and Carlsberg’s acquisition of Scottish & Newcastle, and defended Yahoo! against a hostile bid from Microsoft.
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Investment Management: generated revenues of $848 million this quarter, down 12% sequentially and 10% higher than the second quarter of 2007.
- The sequential revenue decline was attributable to a reduction in revenues from minority stakes in external hedge fund managers.
- Assets under management were flat at $277 billion, as net outflows were offset by market appreciation.
- Net outflows were primarily in lower fee money market assets, with $4 billion of inflows in higher fee-based alternative assets.
- Pretax operating income was $229 million, representing a pretax margin of 27%.
