Lazard Ltd. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. The filing identifies the registrant as Lazard Ltd., not Lazard, Inc. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions unless noted.
Business context
Lazard operates in Financial Advisory, Asset Management and Corporate. Advisory revenue depends substantially on transaction activity and completion timing; Asset Management fees are driven principally by assets under management (AUM), investment performance and client flows.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Total revenue | $461.3 million | $463.8 million |
| Net revenue | $438.0 million | $438.2 million |
| Operating income (loss) | $73.4 million | $(34.5) million reported |
| Net income (loss) attributable to Lazard Ltd. | $55.0 million | $(33.5) million reported |
| Basic / diluted earnings (loss) per share | $0.48 / $0.43 | $(0.38) / $(0.38) |
| Operating cash flow | $(69.7) million | $(230.8) million |
| Cash and cash equivalents, March 31 | $1,015.9 million | $704.1 million |
Q1 2010 included $87.1 million of restructuring expense and $24.9 million of accelerated RSU compensation expense. Excluding these special items, 2010 operating income was $77.5 million and net income attributable to Lazard Ltd. was $47.0 million. On that basis, Q1 2011 attributable net income rose 17%, while operating income declined about 5%.
- Revenue mix and segments: Financial Advisory net revenue fell 15% to $228.8 million; segment operating income was $15.3 million (7% margin). Asset Management net revenue rose 21% to $226.9 million; operating income was $77.6 million (34% margin). Corporate recorded a $19.5 million operating loss.
- Drivers: Advisory fees declined 18% overall, mainly because restructuring revenue fell 65%, partly offset by higher M&A, strategic advisory and capital markets revenue. Money management fees rose 21%, primarily from higher average AUM and a more favorable product mix; incentive fees were lower.
- Costs and margins: Compensation and benefits were $270.0 million, 59.1% of operating revenue, versus 60.3% in 2010 excluding the prior-year special compensation charge. Non-compensation expense increased 12% to $93.1 million.
- Cash flow: Operating cash use reflected working-capital movements and seasonal incentive-compensation payments. Financing cash use was $131.9 million, including $32.7 million of share repurchases, $14.1 million of dividends and $83.0 million used to settle vested share-based compensation obligations. Cash and cash equivalents decreased $193.8 million during the quarter.
- Assets and equity: Total assets were $3.16 billion, down from $3.42 billion at year-end 2010. Total stockholders’ equity was $840.5 million, up from $796.1 million.
- Debt and liquidity: Senior debt was $1.077 billion and subordinated debt $150 million; no amount was drawn on the $150 million revolving credit facility. Lazard reported approximately $1.1 billion of cash and liquid securities and about $298 million of unused company credit lines, plus $125 million available to LFB and Edgewater. Management said cash flows and credit lines should fund obligations for the next 12 months and beyond. The company was in covenant compliance; reported leverage and interest-coverage ratios were 1.77x and 10.11x.
- AUM: AUM was $160.5 billion at March 31, up 3% from year-end; average Q1 AUM of $157.9 billion was 19% above Q1 2010. Quarterly net inflows were $0.7 billion. AUM was $164.5 billion as of April 21, 2011, according to the filing.
Changes, outlook and risks
- Management described Q1 markets and deal activity as mixed: M&A and capital raising strengthened toward quarter-end and into early April, while restructuring activity remained low as defaults declined. It expected 2011 defaults to be below 2010 levels and restructuring activity to remain active but lower than the prior year.
- Management noted that Q1 results are not necessarily indicative of full-year results. No specific full-year earnings or revenue guidance was provided in the supplied filing text.
- After the quarter, the board declared a $0.16 per-share quarterly dividend, payable May 27, 2011. The Q1 statement reports $0.125 per share declared for the period.
- Material exposures include transaction and market volatility, AUM flows and foreign exchange, employee retention and compensation, liquidity, credit and investment valuation risk, and extensive regulation. The filing also notes pending changes to U.S. group-supervision arrangements following the planned elimination of the SEC’s SIBHC program in July 2011.
- Operating lease commitments were $1.06 billion gross, or $961.2 million net of sublease income. The Rockefeller Center lease amendment extended the lease term to 2033. A $90.3 million cash payment related to the LAM merger was scheduled for October 2011.
- Management said legal matters were not expected in aggregate to materially adversely affect financial condition, but could materially affect results or cash flows in a particular period. No material change to previously disclosed risk factors was reported.
Most important facts for investors to verify
- Whether advisory transaction revenue and restructuring activity recover, and how much of reported earnings depends on successful transaction completions.
- Whether AUM growth, client flows and market performance sustain management-fee growth, especially given the high equity concentration and foreign-currency exposure.
- Cash conversion and seasonal compensation outflows, including the effects of working capital, repurchases and share-based compensation settlements.
- Debt service, covenant headroom, available credit lines and the timing and funding of the LAM merger payment and lease commitments.
- The comparability of Q1 2011 earnings with Q1 2010, which was significantly affected by restructuring and accelerated RSU charges.
- Regulatory developments, legal contingencies, and any effects on placement-agent or other advisory activities.