Lazard, Inc. annual report, FY2015

Lazard, Inc. (Lazard Ltd) — 2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results; amounts below are U.S. dollars unless stated otherwise.

Business context and reporting period

Lazard is a global financial advisory and asset management firm operating through Financial Advisory and Asset Management, with selected activities in a Corporate segment. It operated in 43 cities across 27 countries. Financial Advisory revenue is transaction-dependent; Asset Management revenue is principally driven by assets under management (AUM), investment performance and client flows.

Financial and operating results

Metric	2015	2014	Change
Net revenue	$2.354 billion	$2.300 billion	Up 2%
Operating income (loss), reported	$(16.6) million	$519.5 million	Down $536 million
Net income attributable to Lazard Ltd	$986.4 million	$427.3 million	Up $559.1 million
Diluted earnings per share	$7.40	$3.20	Up $4.20
Cash flow from operations	$887.3 million	$736.0 million	Up $151.3 million
Year-end AUM	$186.4 billion	$197.1 billion	Down 5%

Revenue mix: Financial Advisory generated $1.280 billion, up 6%, or 54% of net revenue. Asset Management generated $1.111 billion, down 2%, or 47%. Corporate net revenue was negative $37.1 million.
Financial Advisory: M&A and other advisory revenue rose 9% to $1.104 billion; capital raising fell 14% to $69.6 million; restructuring declined 8% to $105.9 million. Segment operating income was $273.8 million, with a 21.4% margin, versus $229.1 million and 19.0% in 2014.
Asset Management: Management fees fell 2% to $1.000 billion and incentive fees fell 52% to $25.1 million; other income rose to $86.0 million, including a $24.4 million gain related to disposal of the Australian private equity business. Segment operating income was $374.3 million, with a 33.7% margin, versus $385.3 million and 34.0%.
Underlying operating measures: Management’s non-GAAP “earnings from operations” were $627.2 million, or 26.4% of operating revenue, compared with $597.7 million and 25.5% in 2014. Awarded compensation and benefits were $1.329 billion, 55.8% of operating revenue, unchanged as a ratio from 2014; management cited a through-cycle target in the mid-to-high-50% range.
Cash and balance sheet: Year-end cash and cash equivalents were $1.132 billion; total assets were $4.487 billion and total stockholders’ equity was $1.367 billion. Operating cash flow was $887.3 million; investing cash use was $26.0 million and financing cash use was $746.8 million. Cash increased $65.5 million during the year.
Debt and liquidity: Senior debt was $998.4 million and capital lease obligations were $9.0 million. Debt included $98.4 million of 6.85% notes due 2017, $500 million of 4.25% notes due 2020 and $400 million of 3.75% notes due 2025. Lazard had approximately $235 million of unused credit lines and no borrowings under its $150 million revolving facility. It reported compliance with facility covenants: leverage ratio 1.10x versus a 3.25x limit; interest coverage 21.03x versus a 3.00x minimum.
Shareholder returns: Dividends declared totaled $2.35 per share for 2015. The board subsequently declared a $1.20 special dividend and a $0.35 quarterly dividend, and authorized an additional $200 million share repurchase program in January 2016.

Material changes versus prior period and unusual items

Reported operating loss in 2015 principally reflects a $547.7 million provision pursuant to the tax receivable agreement and a $60.2 million loss on redemption of a significant portion of the 2017 notes. Excluding these items, management-reported earnings from operations increased 5% year over year.
Net income and EPS were substantially affected by a $1.010 billion income tax benefit, primarily associated with releasing substantially all of certain deferred-tax-asset valuation allowances after concluding that relevant entities had sustained profitability. This is a significant nonrecurring accounting effect and should not be treated as ordinary operating earnings or cash generation.
The tax receivable agreement obligation was $524.0 million at year-end, compared with $19.6 million a year earlier. The liability followed a 2015 valuation-allowance release and was reduced after Lazard paid $42.2 million to acquire and cancel interests, recognizing a $420.8 million pre-tax gain from extinguishing obligations. Future payments and estimates depend on tax savings and assumptions about profitability.
Lazard issued $400 million of 2025 notes and used proceeds plus cash to retire $450 million of 2017 notes. Total debt declined by approximately $53 million, including capital leases, from year-end 2014.
Average AUM was essentially flat year over year, but year-end AUM fell $10.7 billion. Net inflows of $0.9 billion and market appreciation of $0.5 billion were outweighed by $12.1 billion of adverse foreign-exchange movements. AUM was $177.4 billion on February 17, 2016, down $9.0 billion since year-end, mainly from market depreciation.

Outlook, management commentary and risks

The filing gives no quantified revenue or earnings guidance. Management said market volatility continued into 2016, while corporate cash balances remained high and rates low for highly rated companies. It viewed longer-term conditions as potentially supportive of both businesses.
Management saw continued M&A demand and opportunities in complex cross-border transactions, but restructuring activity remained low. It expected asset-management demand near-term to be led largely by defined-benefit and defined-contribution plans in developed markets, with longer-term growth potential in developing economies.
Key risks include market-driven reductions in M&A activity, transaction closings and AUM; investment underperformance, withdrawals and fee pressure; foreign-exchange exposure (about 40% of 2015 revenue was in non-U.S. currencies, and 72% of year-end AUM had foreign-currency exposure); competition for clients and senior talent; and extensive regulation, litigation, conflicts, cyber and operational risks.
Financial Advisory engagements generally are separately awarded, without long-term contracted revenue, and fees often depend on successful transaction completion. Most asset-management mandates may be terminated on short notice. Compensation flexibility may lag revenue declines.
Contractual obligations included $869.9 million of operating lease payments (before $63.8 million of committed sublease income), in addition to debt and capital leases. The $524.0 million tax receivable agreement obligation is excluded from the contractual-obligations table because payment timing cannot be reliably estimated; approximately $10.1 million was expected to be paid within 12 months.
Management said pending legal matters were not expected, in aggregate, to materially affect the business or financial condition. The independent auditor issued unqualified opinions on the financial statements and internal controls; management reported effective internal control over financial reporting as of year-end.

Important facts for investors to verify

Reconcile the unusually high 2015 net income and EPS to the deferred tax benefit, tax receivable agreement expense and related extinguishment gain; assess sustainable earnings excluding these effects.
Review the assumptions, timing and cash consequences underlying the $524.0 million tax receivable agreement liability and deferred tax assets.
Monitor AUM flows, investment performance and the continuing impact of foreign exchange and market depreciation, including subsequent-period AUM.
Track Financial Advisory fee mix, large-transaction dependence, deal completions and restructuring activity, alongside Asset Management fees and incentive-fee trends.
Assess debt maturities, liquidity availability, regulated-subsidiary capital restrictions and the sustainability of dividends and share repurchases.
Consider management’s non-GAAP operating measures alongside GAAP results, and verify any subsequent guidance, material legal or regulatory developments, and changes in key personnel.