Lazard Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. The filing is for Lazard Ltd., a Bermuda holding company whose principal operating businesses are Financial Advisory and Asset Management.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $626.5 million | $624.9 million | $2,139.1 million | $1,965.5 million |
| Operating income | $138.7 million | $144.2 million | $524.4 million | $466.9 million |
| Net income attributable to Lazard Ltd | $107.1 million | $109.2 million | $413.7 million | $337.1 million |
| Diluted EPS | $0.82 | $0.82 | $3.16 | $2.55 |
| Operating margin | 22.1% | 23.1% | 24.5% | 23.8% |
| Effective tax rate | 21.6% | 22.7% | 20.2% | 26.6% |
Q3 net revenue was nearly flat year over year, while operating income and attributable net income declined. For the first nine months, net revenue rose 9%, operating income rose 12%, and attributable net income rose 23%. Nine-month growth reflected higher advisory fees and Asset Management fees, alongside a lower effective tax rate.
- Business segments: Q3 Financial Advisory net revenue was $310.4 million, up 1%, with operating income of $59.8 million, down slightly. Nine-month revenue was $1,141.6 million, up 8%, and operating income was $248.1 million, up 8%.
- Q3 Asset Management net revenue was $325.2 million, up 1%, and operating income was $113.7 million, up 10%. Nine-month revenue was $1,032.1 million, up 13%, and operating income was $361.3 million, up 24%.
- Corporate reported operating losses of $34.8 million in Q3 and $85.0 million for the nine months. Nine-month investment-related revenue was lower than the prior year.
- Adjusted compensation expense was 55.8% of operating revenue for both Q3 and the nine-month period, versus 56.5% in the comparable 2017 periods. Adjusted non-compensation expense was 18.1% for Q3 and 16.5% for nine months.
Cash flow, liquidity and capital
- Nine-month cash provided by operating activities was $291.5 million, down from $705.4 million in 2017. Operating asset and liability movements used cash, including increases in receivables, investments and other assets.
- Cash, cash equivalents and restricted cash totaled $2.186 billion at September 30, 2018, including $1.132 billion of cash and cash equivalents, $1.016 billion of deposits and short-term investments, and $38.0 million of segregated cash. Management cited seasonal cash flows, including incentive compensation payments early in the year.
- Senior debt had a $1.450 billion principal balance and $1.434 billion carrying value, compared with $1.200 billion and $1.190 billion, respectively, at year-end 2017. Lazard issued $500 million of 4.50% notes due 2028 and used part of the proceeds to retire $250 million of notes due 2020, recording a $6.5 million extinguishment loss.
- Approximately $169 million of unused credit lines were available; nothing was drawn on the $150 million revolving facility. The company reported compliance with debt covenants, including leverage of 1.32x and interest coverage of 21.20x.
- Nine-month financing outflows included $307.9 million of common dividends and $306.6 million of share repurchases. The quarterly dividend was $0.44 per share. A further $300 million repurchase authorization was approved after quarter-end, bringing authorization to approximately $524 million.
Changes, outlook and risks
- Asset Management: Period-end AUM was $240.1 billion, down 4% from December 2017, primarily due to foreign-exchange depreciation, net outflows and market depreciation. Average AUM increased 3% in Q3 and 12% for the nine months year over year. AUM was $229.7 billion on October 19, down $10.4 billion since quarter-end, mainly from market depreciation.
- Market context and outlook: Management said M&A fundamentals remained supportive and described Financial Advisory as competitively positioned. Global completed M&A transaction counts fell in the first nine months, while announced deal value increased. Management sees potential longer-term Asset Management growth in developing economies and continues to seed strategies; no specific earnings or revenue guidance was provided.
- Management expects operating cash flows and available credit lines to cover current obligations for the next 12 months. Its stated through-cycle goal is to keep awarded and adjusted compensation ratios in the mid-to-high 50% range of operating revenue.
- Accounting presentation: New revenue guidance had no material impact on revenue-recognition timing or net income, but moved certain distribution and reimbursable deal costs to gross presentation. This increased both revenue and expenses by $72.0 million for the nine months, with no material net-income effect.
- Risks and contingencies: Results remain sensitive to transaction completions, AUM levels, market performance, foreign exchange, client flows, competition and employee retention. The company cited ordinary-course litigation and inquiries, including former-employee claims, but said pending matters in aggregate were not expected to materially affect business or financial condition. It reported no material change in previously disclosed risk factors.
- Other items to monitor include the $277.2 million tax receivable agreement obligation, deferred-tax estimates under the Tax Act, long-term lease commitments, and the seasonal and transaction-driven variability of revenue and cash flow.
Important facts for investors to verify
- Whether subsequent market conditions and AUM flows sustain or reverse the October decline in AUM.
- How Financial Advisory transaction completions and Asset Management client flows affect future revenue and margins.
- The drivers of the sharp year-over-year decline in operating cash flow and the availability of cash held in regulated or customer-related operations.
- The effects of debt refinancing, dividends and buybacks on leverage, liquidity and share dilution.
- Updates to tax receivable agreement estimates, Tax Act provisional amounts, litigation contingencies and lease obligations.