This summary is based on the fourth quarter fiscal 2007 earnings call conducted by Lehman Brothers Holdings Inc. (LEH) on December 13, 2007.
Chief Financial Officer: Erin Callan
Global Head of Risk Management and former CFO: Chris O''Meara
Director of Investor Relations: Shaun Butler
Key Investors Issues
- The earnings per share fell to $1.54 as against $1.72 in the previous year.
- Quarterly revenue dropped from $4.53 billion in last year to $4.39 billion.
- In Q4, the firm repurchased 5.3 million shares, bringing the full year buybacks to 43 million.
- Earnings were at all time highs of $4.2 billion or $7.26 a share, on revenue of $19.3 billion.
Fourth Quarter Fiscal 2007 Financial Highlights
Lehman Brothers reported net income of $886 million, or $1.54 per share, representing decreases of 12% and 10%, respectively, from net income of $1 billion, or $1.72 per share in prior year.
For the third quarter of fiscal 2007, net income was $887 million, or $1.54 per share.
Net revenues for the quarter were $4.4 billion, a decrease of 3% from $4.5 billion in prior year and an increase of 2% from $4.3 billion reported in the sequential third quarter.
- Capital Markets net revenues decreased 10% to $2.7 billion in the fourth quarter of fiscal 2007 from $3 billion in he fourth quarter of fiscal 2006.
- Investment Banking reported net revenues of $831 million, a decrease of 3% from $858 million in the fourth quarter of fiscal 2006, driven by declines in debt and equity origination revenues
- Investment Management reported record net revenues of $832 million in the fourth quarter of fiscal 2007, an increase of 30% from $640 million in the fourth quarter of fiscal 2006.
Non-interest expenses were $3.2 billion, compared to $3 billion in the fourth quarter of fiscal 2006 and $3.1 billion in the third quarter of fiscal 2007.
Compensation and benefits as a percentage of net revenues was 49.3% during the fourth quarter of fiscal 2007, consistent with both the fourth quarter of fiscal 2006 and the third quarter of fiscal 2007. Non-personnel expenses in the fourth quarter of fiscal 2007 were $996 million, compared with $979 million in the third quarter of fiscal 2007 and $809 million in the fourth quarter of fiscal 2006, reflecting continued investments in growing the franchise.
The Firm’s pre-tax margin was 28.0% for the fourth quarter of fiscal 2007 and 31.2% for the full 2007 fiscal year, compared to 32.8% for the fourth quarter of fiscal 2006 and 33.6% for the full2006 fiscal year.
- The effective tax rate was 27.9%, reflecting the large pre-tax contribution from outside the US.
- Return on average common equity was 16.6% for the fourth quarter of fiscal 2007, compared with 22.3% for the fourth quarter of fiscal 2006.
- Return on average tangible common equity was 20.6% for the fourth quarter of fiscal 2007, compared with 27.6% for the fourth quarter of fiscal 2006.
- The firm ended the quarter with total stockholders equity of approximately $22.5 billion and the long-term capital rose to $146 billion.
- Over the course of the quarter, the company repurchased 5.3 million shares at an average price of $62.43 per share, bringing the full year buybacks to a total of 43 million shares.
- Book value per share increased to $39.45, up 3% during the period and a 16% increase for the full year. This is in line with the firm’s historical book value compound annual growth rate over time.
- The firm ended the quarter with a net leverage ratio of approximately 16.1 times in line with last quarter, and the average historical simulation value at risk increased to $124 million in the current period, reflecting higher volatility in interest rates and equities and greater correlations over the period.
The company’s liquidity pool, which is invested in cash and liquid assets, was $35 billion at the end of the quarter.
This does not include the significant additional liquidity pool at the regulated banks and broker dealers. This corresponds to a cash capital surplus at the holding company of $8 billion, which is the excess of long-term funding sources over the long-term funding requirements. In addition, these measures exclude unencumbered collateral of over $50 billion available to the holding company and an additional over $50 billion in regulated banks and broker dealers. Furthermore, the firm has seen no reduction in access to secured funding in the repo markets.
At quarter-end, Lehman Brothers had non-investment grade contingent acquisition facilities of approximately $9.8 billion, down from $27 billion at the end of the third quarter and from $44 billion at the end of the second quarter.
The decline in commitments is the result of deals being completed and sold in the market, and some deals being closed, but still in the process of being syndicated. The $9.8 billion of commitments at the end of the period is spread over 16 transactions and hence, there is a lot of diversification within this book.
The mortgage inventory at year-end totaled $91 billion, reflecting the decline in securitization activity.
Of this, $12 billion reflects those amounts that the firm has sold to third parties, but has to gross up under FAS 140, and it is not at risk for. The remaining $79 billion is roughly evenly split between residential mortgage-related inventory and commercial mortgage related inventory.
