Lazard, Inc. (Lazard Ltd) - Q1 2007 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2007. Lazard Ltd is a Bermuda holding company that controls Lazard Group LLC, a global financial advisory and asset management firm. The company operates primarily through two segments: Financial Advisory (M&A, restructuring, capital raising) and Asset Management (equity, fixed income, and merchant banking funds). As of March 31, 2007, Lazard Ltd owned approximately 47.9% of Lazard Group, with the remaining 52.1% held by LAZ-MD Holdings (minority interest).
Key Financial Metrics
| Metric (in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Revenue | $369,198 | $336,258 |
| Operating Income | $78,268 | $78,116 |
| Net Income | $26,354 | $19,686 |
| Operating Margin | 21.2% | 23.2% |
| Total Assets | $2,614,790 | $3,208,665 (Dec 31, 2006) |
| Cash and Cash Equivalents | $682,227 | $969,483 (Dec 31, 2006) |
| Senior Borrowings | $1,083,508 | $1,087,057 (Dec 31, 2006) |
| Subordinated Borrowings | $200,000 | $200,000 (Dec 31, 2006) |
| Net Cash Used in Operating Activities | $(239,676) | $(50,593) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 10% to $369 million, driven primarily by a 23% increase in money management fees ($136 million) due to a 28% rise in average Assets Under Management (AUM) to $117.6 billion. Investment banking fees declined slightly by 2% to $215 million.
- Expense Increases: Total operating expenses rose 13% to $291 million. Compensation and benefits increased 10% to $220 million, reflecting higher incentive compensation and headcount growth. Non-compensation expenses increased 22% to $71 million, partly due to currency fluctuations and increased business development costs.
- Profitability: Operating income remained flat at $78 million year-over-year. Net income attributable to Lazard Ltd increased 34% to $26.4 million, largely due to a reduction in the minority interest charge (from 62.4% to 52.1% ownership by LAZ-MD Holdings) following the December 2006 stock offerings.
- Cash Flow: Net cash used in operating activities increased significantly to $240 million (vs. $51 million in Q1 2006). This is consistent with the company's seasonal pattern of paying annual incentive compensation and distributions to minority interest holders in the first quarter.
Outlook, Risks, and Management Commentary
- Segment Performance: Financial Advisory revenue was flat, with M&A revenue up 1% but Financial Restructuring revenue down 29% due to low corporate debt defaults. Asset Management revenue grew 19% driven by strong net inflows ($11.6 billion) and market appreciation.
- Liquidity: The company maintains approximately $238 million in unused lines of credit. Management expects the seasonal cash outflow pattern to continue, with cash levels rebuilding throughout the year.
- Legal Proceedings: All lawsuits regarding the 2005 equity public offering were dismissed in early 2007. Ongoing regulatory investigations regarding the former Capital Markets business (transferred to LFCM Holdings) continue, but management does not expect a material adverse effect on financial condition.
- Accounting Changes: The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on January 1, 2007, resulting in a $13.2 million reduction to retained earnings. The company is assessing the impact of SFAS 157 and SFAS 159 regarding fair value measurements.
Key Investor Verification Points
- Seasonal Cash Flow: Verify the sustainability of cash levels given the significant Q1 outflow for incentive compensation and minority interest distributions.
- Minority Interest Structure: Confirm the impact of the 52.1% minority interest held by LAZ-MD Holdings on net income attribution and future dilution potential via exchangeable interests.
- Restructuring Revenue: Monitor the Financial Restructuring segment, which saw a 29% revenue decline, as it is highly sensitive to corporate debt default cycles.
- Regulatory Capital: Review compliance with regulatory net capital requirements for subsidiaries in the U.S., U.K., and France, which exceeded minimums by significant margins as of March 31, 2007.
- Debt Maturities: Note the $437.5 million in notes issued in connection with Equity Security Units (ESUs), which have variable maturity dates depending on remarketing success (potentially as early as May 2008).