Lazard Ltd. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; filed August 4, 2020. Lazard provides Financial Advisory and Asset Management services globally. Amounts below are U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net revenue | $572.3 | $630.7 | $1,110.3 | $1,274.4 |
| Operating income | $95.9 | $101.7 | $180.0 | $221.3 |
| Net income | $73.1 | $73.5 | $131.4 | $170.0 |
| Net income attributable to Lazard Ltd | $73.5 | $65.8 | $137.5 | $162.8 |
| Diluted earnings per share | $0.66 | $0.55 | $1.22 | $1.36 |
| Operating margin on net revenue | 16.8% | 16.1% | 16.2% | 17.4% |
Q2 net revenue fell 9% year over year, while net income attributable to Lazard rose 12%, reflecting lower expenses and a lower effective tax rate, among other factors. First-half net revenue fell 13% and attributable net income fell 16%. The Q2 effective tax rate was 23.8%, versus 27.7%; the first-half rate was 27.0%, versus 23.2%.
- Financial Advisory: Q2 net revenue was $304.8 million, down 8%; operating income was $53.8 million, up slightly, and segment margin improved to 17.6% from 16.2%. First-half revenue decreased 10% to $603.8 million and operating income decreased 5% to $105.9 million. Fewer large M&A fees were partly offset by higher restructuring fees.
- Asset Management: Q2 net revenue was $254.8 million, down 19%; operating income declined 38% to $59.8 million, and margin fell to 23.5% from 30.6%. First-half revenue decreased 13% to $537.4 million and operating income decreased 28% to $137.6 million. Lower average AUM and a change in asset mix drove the revenue decline.
- Cash flow: First-half operating cash flow was essentially break-even, a use of $0.3 million, versus $82.6 million provided in H1 2019. Investing activities used $24.8 million, mainly for property additions; financing activities used $314.0 million. Cash, bank deposits, short-term investments and segregated cash decreased $362.9 million to $2.093 billion.
Balance sheet, liquidity and capital returns
- At June 30, 2020, total assets were $5.312 billion and stockholders’ equity was $684.0 million. Cash and cash equivalents were $896.8 million; deposits with banks and short-term investments were $1.156 billion; segregated cash was $40.3 million.
- Senior debt had a carrying value of $1.681 billion ($1.700 billion principal), consisting of notes due 2025, 2027, 2028 and 2029. No revolving-credit borrowings were outstanding. Lazard reported approximately $168 million of unused credit lines and compliance with applicable debt covenants.
- On July 22, 2020, Lazard Group replaced its existing facility with a three-year, $200 million revolving credit facility expiring in July 2023. Management said operating cash flow should be sufficient to fund obligations over the next 12 months.
- First-half share repurchases totaled $95.2 million for 2.9 million shares, averaging $32.70 per share. The company paid $97.9 million in dividends during the half. On July 29, the board declared a $0.47-per-share quarterly dividend, payable August 21, 2020.
Material changes, outlook and risks
- AUM was $214.7 billion at June 30, down 13% from $248.2 billion at December 31, 2019, due to market depreciation, net outflows and foreign-exchange depreciation. H1 net outflows were $10.9 billion. AUM was $224.3 billion as of July 29, including market and foreign-exchange appreciation partly offset by net outflows.
- Management described near-term conditions as challenging amid COVID-19, market volatility and reduced global M&A activity. It expected new M&A volume and timing to be severely affected in the near term, while restructuring, capital advisory and sovereign advisory activity had increased; that activity might not fully offset weaker M&A. Management anticipated M&A activity could increase as the year progressed. No specific full-year financial guidance was provided.
- Most employees worked remotely; the company said its operations and financial reporting controls had not been materially impaired. The duration and financial impact of the pandemic remained uncertain, including possible effects on advisory fees, AUM, client activity, credit exposure, operations, cybersecurity and vendors.
- Credit-loss allowance for receivables was $41.0 million at June 30, versus $27.1 million at year-end; the company recorded $8.9 million of net bad-debt expense in H1. Management adopted the expected-credit-loss standard on January 1, recording a $7.6 million cumulative adjustment to retained earnings.
- Q2 Corporate results included $43.5 million of net unrealized investment gains on securities still held at quarter-end; H1 recorded a $0.9 million net unrealized loss on those holdings. Investment marks can make Corporate results volatile. The filing also notes ongoing legal and regulatory matters, but management did not expect pending matters in aggregate to materially affect the business or financial condition based on information then available.
Important facts for investors to verify
- Whether M&A closings and restructuring activity develop as management anticipated, and how that translates into advisory fees.
- Subsequent AUM levels, client flows, investment performance and foreign-exchange effects, given Asset Management’s revenue sensitivity to AUM and product mix.
- Cash generation and liquidity, particularly the timing of incentive-compensation payments, dividends, repurchases and customer deposits.
- Debt covenants and refinancing capacity, including terms and availability under the post-quarter $200 million revolving facility.
- Receivable collectability, allowance adequacy, and the valuation and earnings impact of investments and deferred compensation arrangements.
- Further COVID-19 effects on business activity, remote-work controls, cybersecurity, counterparties and third-party service providers.