Lazard Ltd. — FY 2017 Form 10-K
Period and business: Fiscal year ended December 31, 2017; the filing is an annual report, not a quarterly filing. Lazard is a global financial advisory and asset management firm operating in 27 countries. The request metadata says “Lazard, Inc.”; the registrant named in the filing is Lazard Ltd.
Financial results
Amounts below are in U.S. dollars; figures are rounded to millions unless noted. Annual comparisons are with FY 2016.
| Metric | FY 2017 | FY 2016 | Change / context |
|---|---|---|---|
| Net revenue | $2,644m | $2,333m | Up 13% |
| Operating income | $825m | $517m | Up 60%; includes a $203m tax-receivable-agreement benefit |
| Earnings from operations, company-defined non-GAAP | $713m | $585m | Up 22%; margin 26.8% vs. 25.0% |
| Net income attributable to Lazard Ltd. | $254m | $388m | Down 35% |
| Diluted EPS | $1.91 | $2.92 | Down 35% |
| Operating cash flow | $1,015m | $601m | Cash and cash equivalents ended the year at $1,484m |
| Total assets / stockholders’ equity | $4,929m / $1,259m | $4,557m / $1,294m | Equity declined despite higher assets |
| Debt | $1,190m carrying value | $1,189m | $1,200m principal outstanding |
Business segments and assets under management
| Segment | FY 2017 revenue | FY 2016 revenue | FY 2017 operating income | Margin |
|---|---|---|---|---|
| Financial Advisory | $1,388m | $1,301m | $244m | 17.6%, down from 21.8% |
| Asset Management | $1,256m | $1,051m | $445m | 35.4%, up from 26.8% |
- Asset Management AUM was $249.5bn at year-end, up 26%; average AUM rose 16%. The increase reflected market and foreign-exchange appreciation and net inflows. Net flows were $3.1bn.
- Financial Advisory revenue rose 7%: Strategic Advisory revenue increased 2% and Restructuring revenue rose 30% to $262m.
- Cash flow: operating activities provided $1,015m; investing activities used $27m; financing activities used $740m. Financing outflows included $341m in dividends and $307m in share repurchases.
- Liquidity included approximately $169m of unused credit lines, including a $150m revolving facility with no borrowings outstanding. About $710m of cash was held outside the U.S. Management said cash flows and available credit should fund obligations for the next 12 months.
- Senior notes mature: $500m in 2020, $400m in 2025 and $300m in 2027. The company reported compliance with credit-facility covenants; year-end leverage and interest-coverage ratios were 1.16x and 20.44x, respectively.
Material changes and unusual items
- The Tax Cuts and Jobs Act reduced the U.S. corporate rate to 21%. Remeasurement of deferred tax assets produced an estimated $420m tax charge, while the lower rate reduced the tax-receivable-agreement obligation by $203m, recorded as an operating-expense benefit. The resulting effective tax rate was 68.5%, versus 23.9% in 2016; management said the tax calculations remained provisional pending further guidance and analysis.
- The quarterly results show FY 2017 fourth-quarter net revenue of $679m and operating income of $359m, but a net loss attributable to Lazard Ltd. of $84m and diluted loss per share of $0.70, principally reflecting the year-end tax effects. Fourth-quarter 2016 net revenue was $692m and attributable net income was $128m.
- Compensation and benefits expense increased 13% to $1,513m. Company-defined awarded compensation was $1,476m, or 55.6% of operating revenue, within management’s stated mid-to-high-50s target range over the cycle.
- Management adopted new revenue-recognition guidance effective January 1, 2018. It expected no material effect on net income, but certain distribution and deal costs would move from net revenue presentation to gross revenue and expenses.
Outlook, commentary and risks
- Management described the near- to mid-term macroeconomic outlook as strengthening and said fundamentals for continued M&A activity remained in place. It highlighted low borrowing costs, high corporate cash balances and its independent-advice model, but issued no quantified financial guidance.
- Industry conditions were mixed: global completed M&A transaction value declined 10% in 2017, while Lazard’s Strategic Advisory revenue increased 2%. Global corporate defaults fell to 90 from 142, even as Lazard’s restructuring revenue rose 30%.
- Key exposures include cyclical deal activity and transaction closings; market performance, investment returns, client withdrawals and fee pressure affecting AUM; foreign currency movements (38% of consolidated revenue was earned in non-U.S. currencies, and 74% of AUM had foreign-currency exposure); and competition to retain and recruit key professionals.
- Other disclosed risks include extensive and changing regulation, litigation and conflicts of interest, cyber and operational disruptions, illiquid investment exposure, debt-market access, tax uncertainty and the uncertain consequences of U.K.–EU arrangements. The company said pending legal matters, in aggregate, were not expected to materially affect its business or financial condition.
- The board declared FY 2017 dividends of $2.81 per share. In January 2018 it declared $1.71 per share, including a $1.30 extra cash dividend. Repurchases are intended in part to offset employee-share dilution.
Most important facts for investors to verify
- Separate recurring operating performance from the $203m tax-receivable-agreement benefit and the approximately $420m Tax Act deferred-tax charge; review the final tax accounting and effective tax rate.
- Assess whether Asset Management’s AUM growth and net inflows persist, and how market, currency, investment-performance and redemption changes affect fee revenue.
- Track Financial Advisory conversion of announced engagements into completed transactions, advisory margins, and the sustainability of restructuring revenue.
- Review cash availability and regulatory restrictions on moving cash between subsidiaries, along with the $500m 2020 note maturity and ongoing dividend and repurchase commitments.
- Consider share dilution from deferred awards and the status of the successor to the 2008 Incentive Compensation Plan, which was due to expire in May 2018.
- The filing reports unqualified audit opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at December 31, 2017.