Lazard, Inc. (Lazard Ltd) — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; financial statements are unaudited. Amounts below are in U.S. dollars, generally millions unless noted.
Business context and reporting period
Lazard provides financial advisory services and asset management globally, with Financial Advisory, Asset Management and Corporate segments. Results are affected by the timing of advisory transactions, markets, assets under management (AUM), foreign exchange and compensation. The filing cautions that quarterly results may not indicate full-year or future results.
Financial results and material changes
| Metric | Q3 2017 | Q3 2016 | First nine months 2017 | First nine months 2016 |
|---|---|---|---|---|
| Total revenue | $638.1 | $621.1 | $2,005.5 | $1,677.9 |
| Net revenue | $624.9 | $608.9 | $1,965.5 | $1,641.8 |
| Operating income | $144.2 | $149.0 | $466.9 | $360.6 |
| Net income attributable to Lazard Ltd | $109.2 | $112.5 | $337.1 | $259.7 |
| Diluted earnings per share | $0.82 | $0.85 | $2.55 | $1.96 |
| Operating margin on net revenue | 23.1% | 24.5% | 23.8% | 22.0% |
- Q3: Net revenue rose 3%, but operating income fell 3% and net income attributable to Lazard fell 3%. Advisory fees declined 11%, mainly from lower M&A and Strategic Advisory revenue; Asset Management fees rose 19%, primarily on higher average AUM. Adjusted compensation was 56.5% of operating revenue, unchanged year over year; adjusted non-compensation expense rose 5% and was 17.6% of operating revenue versus 17.2%.
- First nine months: Net revenue rose 20% and operating income 29%; Lazard-attributable net income increased 30%. Advisory fees increased 17% and Asset Management fees 19%. Adjusted compensation was 56.5% of operating revenue versus 57.2%; adjusted non-compensation expense increased 5%, while its ratio to operating revenue improved to 16.9% from 19.2%.
- Segment performance: Q3 Financial Advisory net revenue was $305.9 million, down 11%, and operating income was $60.4 million, down 29%; its margin fell to 19.8% from 24.6%. Asset Management net revenue was $320.5 million, up 20%, and operating income was $103.3 million, up 26%; its margin rose to 32.2% from 30.6%. For nine months, Financial Advisory net revenue rose 17% and Asset Management net revenue 19%.
Cash flow, balance sheet and capital
- Cash flow, first nine months: Operating activities provided $678.1 million, compared with $299.1 million in 2016. Investing activities used $15.2 million and financing activities used $633.5 million. Cash and cash equivalents increased $95.2 million to $1,254.0 million; the filing attributes $65.8 million of the increase to exchange-rate changes.
- Liquidity: Cash and cash equivalents were $1,254.0 million, with approximately $607 million held outside the U.S. Deposits with banks and short-term investments were $652.5 million. The company reported approximately $175 million of unused credit lines, including a $150 million revolving facility; no revolver borrowings were outstanding.
- Debt: Senior notes had $1.20 billion principal and $1,189.9 million carrying value, essentially unchanged from year-end 2016. Notes mature in 2020, 2025 and 2027. Lazard reported compliance with debt covenants; its leverage ratio was 1.15x against a 3.25x maximum, and interest coverage was 20.44x against a 3.00x minimum.
- Other balance-sheet items: Total assets were $4,836.4 million and total stockholders’ equity $1,368.5 million at September 30, 2017. The tax receivable agreement obligation was $512.8 million. Receivables, net of allowance, were $551.9 million; the allowance was $27.5 million, versus $16.4 million at year-end 2016.
- Capital returns: The company paid $292.3 million in common-stock dividends and spent $252.5 million repurchasing shares during the first nine months. It declared a $0.41-per-share quarterly dividend on October 25, 2017 and authorized up to $200 million in additional repurchases, also on October 25.
Outlook, commentary and risks
- Management described the near- to mid-term macroeconomic outlook as generally positive and said conditions appeared supportive of both businesses, while emphasizing uncertainty and quarter-to-quarter volatility. It gave no specific consolidated revenue or earnings guidance in the provided filing text.
- Management viewed Financial Advisory as competitively positioned and said M&A fundamentals remained in place. Completed global M&A value fell 5% year over year in the first nine months, while announced deal counts increased. Lazard’s restructuring revenue rose 38% despite a 44% decline in corporate defaults.
- AUM was $238.1 billion at September 30, up 20% from December 31, 2016, mainly from market and foreign-exchange appreciation and net inflows. First-nine-month net flows were positive by $3.0 billion. AUM was $240.4 billion on October 20, with post-quarter net outflows of $0.8 billion partly offset by market appreciation.
- Key business risks include weaker M&A or capital-raising activity, lower AUM or adverse markets, foreign-exchange movements, client outflows, competition for employees, counterparty losses, liquidity constraints, regulatory change and legal proceedings. Management said pending legal matters were not expected, in aggregate, to materially affect business or financial condition; outcomes could nevertheless be significant relative to an individual quarter.
- Unusual and accounting items include adoption of new share-based compensation guidance in January 2017, producing an $81.5 million net deferred-tax-asset adjustment to opening retained earnings and $9.1 million of excess tax benefits recognized in the nine-month tax provision. Q3 non-compensation costs also included ERP implementation and office reorganization expenses; adjusted expense measures exclude specified items. Lazard plans to adopt new revenue-recognition guidance January 1, 2018 and was still assessing its effects, including advisory-fee timing and gross presentation of certain costs.
Important facts for investors to verify
- Whether AUM growth, investment performance and client flows support recurring Asset Management fee growth; distinguish market and currency gains from net inflows.
- Whether advisory revenue and margins recover or remain sensitive to transaction timing, lower completed deal values and client concentration.
- How compensation, ERP and office-reorganization costs evolve, and how reported results compare with management’s non-GAAP adjusted measures.
- Receivable collectability: past-due or deemed-uncollectible receivables rose to $44.4 million from $22.2 million at year-end 2016, alongside a higher allowance.
- Cash available for corporate use versus customer-related deposits, debt service, share repurchases, dividends, lease commitments and the $512.8 million tax receivable agreement obligation.
- The effects of the 2018 revenue-recognition standard, tax estimates and the timing and amount of future tax receivable agreement payments.