Lazard Ltd. — Q1 2012 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three months ended March 31, 2012, compared with the same 2011 period. Lazard is a global financial advisory and asset management firm, with Financial Advisory and Asset Management as its principal businesses and selected activities, cash, investments and debt in its Corporate segment. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2012 | Q1 2011 / comparator |
|---|---|---|
| Total revenue | $506.5 million | $461.3 million |
| Net revenue | $486.0 million | $438.0 million |
| Operating expenses | $448.2 million | $364.6 million |
| Operating income | $37.8 million; 8% of net revenue | $73.4 million; 17% of net revenue |
| Net income | $29.1 million | $60.0 million |
| Net income attributable to Lazard Ltd | $25.6 million | $55.0 million |
| Basic / diluted EPS | $0.21 / $0.20 | $0.48 / $0.43 |
| Dividend declared per share | $0.16 | $0.125 |
- Revenue and segment performance: Net revenue rose 11%. Financial Advisory net revenue grew 21% to $277.2 million and operating income rose to $27.3 million from $15.3 million. Asset Management net revenue fell 5% to $214.5 million and operating income declined to $54.0 million from $77.6 million. Corporate reported a $43.5 million operating loss, versus $19.5 million.
- Profitability and costs: Compensation and benefits expense increased to $338.3 million from $270.0 million, including $21.8 million of staff-reduction costs (approximately $25 million including related non-compensation costs). Adjusted compensation expense, a non-GAAP measure, was $312.7 million, or 62.7% of operating revenue, versus $268.9 million, or 58.9%. Non-compensation expense increased 17% to $108.8 million.
- Cash flow: Operating cash flow was negative $82.2 million, compared with negative $69.7 million. Investing cash flow was negative $25.2 million, including $26.8 million of property additions; financing cash flow was negative $138.7 million, including $70.5 million of share repurchases and $19.2 million of dividends. Cash and cash equivalents decreased $238.1 million to $765.7 million.
- Balance sheet and liquidity: At March 31, cash and cash equivalents were $765.7 million, bank deposits $257.7 million, and total assets $2.91 billion, down from $3.08 billion at year-end. Total liabilities were $2.05 billion and stockholders’ equity $860.8 million. Senior debt was $1.077 billion, unchanged from year-end; no revolving credit facility borrowings were outstanding. Lazard reported approximately $315 million of unused company credit lines, plus unused lines of approximately $93 million at LFB and $65 million at Edgewater. Management said cash flows and available credit should be sufficient for obligations over the next 12 months and beyond.
- Debt and covenants: Senior notes include $528.5 million of 7.125% notes due 2015 and $548.4 million of 6.85% notes due 2017. The $150 million revolving facility expires April 2013. The company reported compliance with covenants; its leverage and interest-coverage ratios were 2.11x and 7.53x, respectively, against limits of 4.00x maximum and 3.00x minimum.
- Asset Management scale: AUM was $156.7 billion at March 31, up 11% from year-end, primarily due to market appreciation; average quarterly AUM was $150.3 billion, down 5% year over year. Quarterly net flows were negative $162 million. AUM on April 27 was $155.7 billion, reflecting market/FX depreciation partly offset by net inflows.
Material changes and management commentary
- Financial Advisory benefited from several significant restructuring, M&A, sovereign and government advisory closings. Advisory fees increased 24%, and restructuring fees increased 97%, despite lower industry M&A activity. Global announced M&A value fell 27% year over year, according to Dealogic.
- Asset Management fees were pressured by lower average AUM; the quarter-end AUM increase reflected market appreciation, not positive net flows. Management noted global equity markets had risen from year-end but remained below or mixed versus year-earlier levels across regions.
- Management described early-2012 equity and credit market conditions as healthier, with low interest rates, high corporate cash balances and improving CEO confidence, but emphasized continuing uncertainty around global financial stability. Results are volatile and quarterly performance may not indicate full-year results.
- Management’s stated 2012 assumptions included an approximately 60% full-year awarded-compensation-to-operating-revenue ratio, based on current market conditions. It expected deferred incentive compensation amortization of approximately $341 million for 2012, excluding the staff-reduction charge, versus $289 million in 2011; the filing says this expense is expected to decline in 2013. Rockefeller Center occupancy-related costs were estimated to increase by approximately $11 million for full-year 2012 versus 2011. These are management estimates, not formal earnings guidance.
- On April 24, 2012, the board declared a $0.20 quarterly dividend per share, payable May 25, and authorized an additional $125 million of repurchases through December 31, 2013. This followed $70.5 million of Q1 repurchases.
Risks, contingencies and unusual items
- Revenue depends on the timing and completion of advisory transactions; Asset Management fees are exposed to market movements, currency changes, client flows and investment performance. Approximately 61% of AUM was denominated in foreign currencies.
- The filing identifies economic and market weakness, third-party losses, unexpected risks, liquidity constraints, competition and employee retention as risks. It also notes potential effects from restrictions on public-pension placement agents and evolving regulation, including Dodd-Frank and possible Federal Reserve consolidated supervision.
- Management reported pending judicial, regulatory and arbitration matters, including former-employee claims, but believed their aggregate outcome would not materially affect business or financial condition based on information then available. No material risk-factor changes from the 2011 Form 10-K were reported.
- Private equity investments included $115.2 million valued using NAV and not redeemable in the near term; related unfunded investment commitments were $35.9 million. The filing also reports $1.1 billion of operating lease obligations and $35.9 million of investment funding commitments among contractual obligations.
- UK pension funding terms remained subject to completion of the 2010 triennial valuation; the company and trustees had a tentative funding arrangement, with the valuation expected to conclude in Q2 2012.
Important facts for investors to verify
- Whether advisory closings and restructuring revenue can sustain Financial Advisory growth as transaction markets fluctuate.
- Whether average AUM, net flows and management fees recover, and how currency and market changes affect reported AUM.
- How compensation, deferred-award amortization, severance and occupancy costs affect full-year margins and the assumptions behind management’s compensation estimates.
- Cash conversion and seasonal cash use, including annual incentive payments, repurchases, dividends and capital spending; assess liquidity alongside $1.077 billion of debt and upcoming maturities.
- Progress and final terms of the UK pension valuation and funding agreement, and any material developments in legal, regulatory or placement-agent matters.