Lazard Ltd. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2015, with nine-month year-to-date comparisons against 2014. The filing identifies the registrant as Lazard Ltd. (not Lazard, Inc.). Lazard operates Financial Advisory and Asset Management businesses, plus a Corporate segment.
Key financial results
Amounts below are in millions of U.S. dollars, except per-share data, percentages and AUM.
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net revenue | $573.5 | $566.2 | $1,760.4 | $1,666.5 |
| GAAP operating income (loss) | $570.7 | $113.7 | ($156.0) | $319.9 |
| Net income attributable to Lazard Ltd | $398.5 | $88.9 | $828.6 | $254.9 |
| Diluted EPS | $2.99 | $0.67 | $6.22 | $1.91 |
| Cash from operating activities | — | $519.4 | $415.4 |
- Quarterly performance: Net revenue increased 1%. Financial Advisory growth was largely offset by lower Asset Management fees. Adjusted earnings from operations, a company-defined non-GAAP measure, were $161.4 million (27.2% of operating revenue), versus $130.6 million (22.4%) a year earlier.
- Year-to-date performance: Net revenue rose 6%. Adjusted earnings from operations were $472.4 million (26.5% of operating revenue), up 26% from $373.7 million (22.1%). These adjusted results exclude specified items and are not GAAP measures.
- Segment results: Financial Advisory net revenue was $330.8 million in Q3 and $948.7 million for 9M; operating income was $68.9 million and $190.6 million, respectively. Asset Management net revenue was $264.6 million in Q3 and $850.2 million for 9M; operating income was $85.4 million and $295.5 million.
- Compensation and expense: Adjusted compensation was 55.6% of operating revenue in both Q3 and 9M, compared with 58.8% in the corresponding 2014 periods. Adjusted non-compensation expense was 17.2% in Q3 and 17.9% for 9M.
Liquidity, debt and capital
- Cash and cash equivalents were $860.0 million at September 30, down $206.6 million from year-end 2014. The company generated $519.4 million of operating cash, used $18.0 million in investing activities and used $676.6 million in financing activities during 9M.
- Senior debt was $998.4 million, versus $1,048.4 million at December 31, 2014. Lazard issued $400 million of 3.75% notes due 2025 and redeemed $450 million of 6.85% notes due 2017; the refinancing produced a $60.2 million extinguishment loss.
- A new $150 million five-year revolving facility expires in September 2020; there were no borrowings outstanding. The filing reports approximately $247 million of unused company credit lines, plus unused lines of approximately $39 million at LFB and $55 million at Edgewater.
- Total stockholders’ equity was $1.212 billion, up from $770.1 million at year-end. During 9M, Lazard paid $246.8 million of common dividends and spent $159.5 million repurchasing shares. The board declared a further $0.35 per-share quarterly dividend in October 2015.
Material changes, unusual items and outlook
- Tax receivable agreement (TRA) and deferred taxes materially distort reported earnings. In Q3, a $420.8 million benefit from partially extinguishing TRA obligations contributed to reported operating income. The related reduction in deferred tax assets generated approximately $161 million of tax expense. The TRA liability was $523.9 million at quarter-end. For 9M, Lazard recorded $547.7 million of TRA expense, while the income tax line showed a $993.6 million benefit, principally reflecting the release of valuation allowances and related tax accounting. The resulting GAAP operating loss for 9M and reported net income should not be read as a straightforward measure of underlying operating performance.
- Other unusual item: Lazard sold its Australian private equity business in Q2 and recorded $24.4 million of revenue, primarily from carried interest realized at fair value. The company also recognized a $60.2 million debt-extinguishment loss in 9M.
- Business conditions: Management described global M&A markets as active, with transaction values up year over year, while restructuring activity remained low. It said Financial Advisory fundamentals for continued M&A appeared supportive. Asset Management faced market depreciation and adverse foreign-exchange effects; AUM declined 7% from year-end to $182.6 billion, partly offset by net inflows. As of October 16, AUM had risen to $193.1 billion, principally from market and currency appreciation, with slight net outflows.
- Management’s compensation objective: Over the cycle, Lazard aims for awarded compensation and benefits expense in the mid-to-high 50s as a percentage of operating revenue; management cautioned that this is not assured. The filing gives no quantitative earnings or revenue forecast.
- Key risks: Results are transaction- and market-sensitive; a stronger U.S. dollar can reduce reported revenue and AUM; investment performance and client flows can affect Asset Management fees; and the timing and amount of future TRA payments depend on estimates and tax-benefit realization. The company also cited economic and market weakness, liquidity access, third-party losses, competition and employee retention as risks. It reported compliance with debt covenants and regulatory capital requirements and said pending legal matters were not expected, in aggregate, to materially affect its business or financial condition.
Important facts for investors to verify
- Separate recurring operating performance from the TRA gain, valuation-allowance release, debt-refinancing loss and Australian business disposal; review the company’s non-GAAP reconciliations.
- Assess the assumptions underlying deferred tax asset recoverability and the $523.9 million TRA liability, including the potential timing and cash cost of payments.
- Track AUM, net client flows, market and foreign-exchange effects, and whether the October AUM increase persisted.
- Compare Financial Advisory growth and Asset Management fee trends with transaction activity, incentive fees and market conditions.
- Monitor cash generation, capital returns, debt maturities, unused credit availability and compliance with facility covenants.