Lazard, Inc. (Lazard Ltd) - 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for the period ended September 30, 2006. Lazard Ltd is a Bermuda holding company that controls Lazard Group LLC, a Delaware limited liability company. The Company operates primarily through two business segments: Financial Advisory (M&A, restructuring, capital raising) and Asset Management (equity, fixed income, and merchant banking funds). A "Corporate" segment captures cash, long-term investments, and the commercial banking activities of Lazard Frères Banque SA (LFB).
Note on Comparability: Historical results prior to the May 10, 2005 equity public offering are not directly comparable to current results due to changes in accounting for managing director compensation (now an expense rather than a distribution) and the inclusion of U.S. corporate federal income taxes.
Key Financial Metrics (Nine Months Ended Sept 30, 2006)
| Metric | 2006 (9 Months) | 2005 (9 Months) |
|---|---|---|
| Total Revenue | $1,097.6 million | $987.9 million |
| Net Revenue (Revenue less Interest Expense) | $1,020.7 million | $934.4 million |
| Operating Income | $212.0 million | $265.3 million |
| Net Income (Continuing Operations) | $56.4 million | $137.1 million |
| Net Income Per Share (Diluted) | $1.45 | $0.81 |
| Cash and Cash Equivalents (Sept 30, 2006) | $530.3 million | $492.3 million (Dec 31, 2005) |
| Total Assets | $2,031.3 million | $1,910.9 million |
| Total Liabilities | $2,701.2 million | $2,669.8 million |
| Senior Borrowings | $1,083.5 million | $1,022.1 million |
| Subordinated Borrowings | $200.0 million | $200.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 9% year-over-year to $1.02 billion. This was driven by a 15% increase in Money Management fees (due to a 10% rise in average Assets Under Management to $94.2 billion) and a 7% increase in Investment Banking fees (driven by strong M&A activity in the first half of 2006).
- Profitability Decline: Despite revenue growth, Net Income from Continuing Operations dropped significantly to $56.4 million from $137.1 million in the prior year. This decline is primarily attributed to:
- Compensation Expense: A 28% increase in compensation and benefits expense ($615.3 million vs. $482.2 million), reflecting higher performance-based bonuses and the full-year inclusion of managing director payments as an expense (a change from the prior year where some were treated as distributions).
- Interest Expense: A 44% increase in interest expense ($76.9 million vs. $53.5 million) due to incremental debt and equity security units issued in May 2005.
- One-Time Gain: The Company recognized a gain of approximately $13.7 million (pre-tax) from the termination of its strategic alliance with Banca Intesa S.p.A. in Italy, which increased operating income by approximately $5.3 million after costs.
- Segment Performance:
- Financial Advisory: Operating income decreased 19% to $172.6 million due to lower restructuring fees and higher compensation costs.
- Asset Management: Operating income remained flat at $82.3 million despite a 15% revenue increase, as higher compensation costs offset revenue growth.
Guidance, Outlook, and Risks
- Outlook: Management expects continued fluctuations in net revenue and operating income due to the transaction-based nature of the Financial Advisory business and market-driven fluctuations in Asset Management fees. The Company anticipates a seasonal cash flow pattern, with significant cash outflows in the first four months of the year for bonuses and distributions.
- Liquidity: As of September 30, 2006, the Company had $234 million in unused lines of credit. Cash and cash equivalents stood at $530.3 million. Management believes cash flows from operations and credit lines are sufficient to fund obligations for the next 12 months.
- Legal Proceedings: The Company is involved in putative class action lawsuits and derivative suits related to its 2005 equity public offering. Management believes these suits are without merit and intends to defend them vigorously. Additionally, the Company is cooperating with industry investigations regarding gifts and gratuities related to its former Capital Markets business (now separated).
- Regulatory Capital: All principal subsidiaries (U.S., U.K., France) were in compliance with regulatory net capital requirements as of September 30, 2006.
- Accounting Changes: The Company is assessing the impact of several new accounting standards (SFAS 155, 156, 157, 158, FIN 48, SAB 108) expected to be adopted in future periods.
Investor Verification Checklist
- Compensation Policy Impact: Verify the sustainability of the 28% increase in compensation expense and its correlation with future revenue targets.
- Minority Interest: Review the $110.8 million minority interest charge, which represents the share of income allocable to LAZ-MD Holdings (approx. 62.3% ownership), to understand the true economic earnings available to public shareholders.
- Intesa Termination: Confirm the details of the $13.7 million gain from the Intesa joint venture termination and the new debt obligations ($96 million senior note, $50 million subordinated note) assumed in the transaction.
- Assets Under Management (AUM): Monitor the $99.3 billion AUM figure and the mix of fee-generating assets, as this is the primary driver of the Asset Management segment's recurring revenue.
- Debt Structure: Examine the $1.08 billion in senior borrowings and the $437.5 million in notes associated with Equity Security Units (ESUs), noting the remarketing risks and maturity dates (2008-2035).