Lazard Ltd. 2014 Form 10-K Summary
Business context and reporting period
Lazard Ltd. reported for the fiscal year ended December 31, 2014. It is a global financial advisory and asset management firm operating in 43 cities across 27 countries. Financial Advisory provides M&A, restructuring, capital structure and related advice; Asset Management provides investment management across equity, fixed income and alternative strategies. Results are cyclical and transaction-dependent. The filing presents full-year results, with unaudited fourth-quarter data also included.
Financial and operating metrics
| Metric | 2014 | 2013 | Change or context |
|---|---|---|---|
| Net revenue | $2.300 billion | $1.985 billion | Up 16% |
| Operating income | $519 million | $217 million | Operating margin 22.6%, versus 10.9% |
| Net income attributable to Lazard Ltd. | $427 million | $160 million | Diluted EPS $3.20, versus $1.21 |
| Operating cash flow | $736 million | $527 million | Year-end cash and cash equivalents were $1.067 billion |
| Total assets | $3.332 billion | $3.011 billion | Year-end balance sheet |
| Total debt, including capital leases | $1.060 billion | $1.064 billion | Senior notes were $1.048 billion; no borrowings under the $150 million revolving facility |
| Total stockholders’ equity | $770 million | $630 million | Year-end balance sheet |
| Assets under management | $197.1 billion | $186.9 billion | Up 5% at year-end; average AUM rose 13% to $196.0 billion |
Segment performance: Financial Advisory revenue rose 23% to $1.207 billion, with operating income of $229 million versus $21 million. M&A and other advisory revenue increased 31%; restructuring revenue declined 14%. Asset Management revenue increased 9% to $1.135 billion, and operating income rose 15% to $385 million. Management fees grew 13%, while incentive fees fell 34% to $52 million.
Fourth quarter: Net revenue was $634 million, operating income $200 million, net income attributable to Lazard Ltd. $172 million, and diluted EPS $1.29. In fourth-quarter 2013, the comparable figures were $613 million, $73 million, $53 million and $0.40, respectively.
Operating cash flow exceeded net income; cash-flow reconciliation included substantial noncash amortization and working-capital movements. Cash flows from financing activities were a use of $435 million, including $193 million for share repurchases and $146 million for dividends. The company declared $1.20 per share in 2014 dividends. Available unused credit lines were approximately $244 million. The company said operating cash flow and available credit should fund obligations for the next 12 months.
Material changes versus prior periods
- Revenue growth was led by stronger completed M&A and advisory activity and higher average AUM. Global completed M&A value increased 7%; Lazard reported more large-fee clients and completed transactions above $500 million.
- Profitability improved materially as revenue grew while operating expenses rose only modestly. The 2013 comparison included approximately $64 million of cost-saving initiative charges and $54 million related to debt refinancing; the 2014 comparison also benefited from the absence of these items.
- Adjusted compensation expense was $1.302 billion, up 9%; its ratio to operating revenue declined to 55.6% from 58.8%. Management’s longer-term compensation-ratio objective was the mid-to-high 50% range, with no assurance of attainment.
- AUM growth reflected $11.3 billion of net inflows and $11.3 billion of market appreciation, partly offset by $12.4 billion of foreign-exchange depreciation. Emerging-market equity and fixed-income strategies contributed inflows, while certain equity and fixed-income strategies experienced outflows.
- The exchange of remaining Lazard Group interests in May 2014 made Lazard Group a wholly owned indirect subsidiary and left Lazard Ltd. with one outstanding class of common stock.
Outlook, risks, contingencies and unusual items
- Management described the longer-term outlook as favorable, citing high corporate cash balances, low interest-rate expectations, an improving U.S. economy and continued M&A momentum. It expected advisory opportunities and investor demand to support both businesses, but provided no numerical revenue or earnings guidance.
- Key business risks include volatile markets, fewer or delayed transactions, short-notice client withdrawals, investment underperformance, fee pressure, foreign-exchange movements and retaining key professionals. About 43% of 2014 revenue was received in currencies other than U.S. dollars, and 73% of year-end AUM had foreign-currency exposure.
- Debt refinancing announced after year-end: in February 2015 Lazard Group issued $400 million of 3.75% notes due 2025 and gave notice to redeem $450 million of its 6.85% notes due 2017, using the proceeds and cash on hand. It estimated an approximately $61 million after-tax extinguishment loss.
- Tax uncertainty is significant: the company maintained a $1.044 billion valuation allowance against $1.178 billion in gross deferred tax assets. Management said a significant release might occur in 2015 if relevant entities remained profitable, but timing and amount were uncertain. The tax receivable agreement generally requires payment of 85% of qualifying realized cash tax savings to LMDC Holdings.
- Legal, regulatory and arbitration matters arise in the ordinary course, including former-employee claims; management did not expect pending matters in aggregate to materially affect business or financial condition based on information then available. The company also disclosed risks from extensive regulation, cyber incidents, operational disruption and conflicts of interest.
- The board declared a further $1.00 special dividend and $0.30 quarterly dividend per share in February 2015, and authorized up to $150 million in additional share repurchases. These were post-year-end actions.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective as of December 31, 2014.
Important facts for investors to verify
- Whether the 2014 M&A-led advisory growth and higher AUM translate into sustained revenue, especially as restructuring revenue remains lower and advisory fees depend on completed engagements.
- Actual client flows, investment performance, incentive fees and foreign-exchange effects on AUM and fee revenue.
- Cash generation after seasonal incentive-compensation payments, dividends and repurchases, and the execution and cost of the 2015 debt refinancing.
- Progress toward releasing the deferred-tax valuation allowance, related tax receivable agreement payments, and any changes in the effective tax rate.
- Future compensation expense, share issuance and repurchases, including their effect on dilution and shareholder returns.
- Developments in material litigation, regulatory matters, cyber and operational risks, and any restrictions on distributions from regulated subsidiaries.