Lazard Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2011. Lazard provides financial advisory and asset management services; its principal operating segments are Financial Advisory and Asset Management. Unless noted, financial amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $484.6M | $477.3M | $1,446.5M | $1,384.3M |
| Net revenue | $462.4M | $453.2M | $1,377.7M | $1,310.5M |
| Operating income | $87.7M | $79.5M | $250.4M | $112.0M |
| Net income attributable to Lazard Ltd | $62.7M | $64.1M | $179.7M | $75.1M |
| Diluted EPS | $0.49 | $0.51 | $1.39 | $0.58 |
| Operating margin on net revenue | 19% | 18% | 18% | 9% |
- Q3 net revenue rose 2%; operating income increased 10%, while net income attributable to Lazard declined 2% and diluted EPS declined 4%.
- For the first nine months, net revenue rose 5% and operating income more than doubled on a reported basis. The comparison includes the $87.1M 2010 restructuring charge and $24.9M 2010 accelerated RSU expense.
- Management’s adjusted comparison excludes special items: Q3 2011 net income attributable to Lazard fell $7M (12%) year over year; nine-month adjusted net income rose $19M (12%). Adjusted operating income was down 12% in Q3 and up 4% for the nine months.
- Q3 compensation and benefits expense was $273.5M, down 3%; non-compensation expense was $99.4M, up 11%. Adjusted compensation was 59.3% of operating revenue in Q3 and 58.7% for the nine months, versus 59.5% and 59.8%, respectively, in 2010. Adjusted non-compensation ratios increased to 21.1% and 20.6% from 18.9% and 19.0%.
Segment trends and material changes
- Financial Advisory: Net revenue was $253.6M in Q3, essentially flat year over year, and $731.6M for nine months, down 5%. Q3 M&A and Strategic Advisory revenue increased 24%, but restructuring revenue fell 42%. For nine months, M&A and Strategic Advisory revenue grew 17%, offset by a 50% decline in restructuring revenue. Nine-month segment operating income was $90.2M, down from $100.9M.
- Asset Management: Net revenue was $219.1M in Q3, up 4%, and $690.8M for nine months, up 18%. Higher average AUM supported management fees; lower traditional incentive fees partly offset that growth. Segment operating income was $62.4M in Q3 and $224.0M for nine months, up 5% and 31%, respectively, on reported comparisons.
- AUM was $135.8B at September 30, down 13% from December 31, 2010, mainly from market and foreign-exchange depreciation. Nine-month net flows were negative $0.8B. Average AUM increased 11% in Q3 and 15% for the nine months year over year. Lazard reported AUM of $149.4B as of October 27, 2011, reflecting $13.2B market/FX appreciation and $0.4B net inflows since quarter-end.
- Corporate: Nine-month segment operating loss improved to $63.8M from $159.4M, substantially because the prior-year period included restructuring and RSU-related special charges. Q3 corporate net revenue remained negative, at $10.2M.
Cash flow, balance sheet, debt and liquidity
- Operating cash flow for the nine months was $281.6M, versus $46.6M in 2010. Investing cash flow was negative $16.9M; financing cash flow was negative $484.7M, principally reflecting share repurchases, dividends, share-award settlements, distributions, and debt repurchase. Cash and cash equivalents declined $219.8M to $989.9M.
- At September 30, 2011, total assets were $3.14B, total liabilities $2.22B, and total stockholders’ equity $918.0M. Cash deposits with banks were an additional $267.9M; segregated cash was $66.2M.
- Senior debt was $1.077B, unchanged from year-end 2010. The company repurchased its $150M, 3.25% subordinated note for $131.8M in July, recording an $18.2M pretax gain; no subordinated debt remained at quarter-end. Senior notes bear fixed rates of 7.125% and 6.85%, maturing in 2015 and 2017.
- No borrowings were outstanding under the $150M revolving credit facility. Lazard reported approximately $322M of unused credit lines available to it, plus approximately $100M available to LFB and $65M to Edgewater. It stated that cash flows and credit lines should be sufficient to fund obligations for the next 12 months and beyond. The company was in compliance with debt covenants; leverage and interest coverage ratios were 1.58x and 9.20x, against limits of 4.00x maximum and 3.00x minimum.
- Class A dividends declared were $0.16 per share for Q3, versus $0.125 in Q3 2010. The board declared a further $0.16 quarterly dividend on October 26, payable November 25, 2011.
Outlook, risks and unusual items
- No specific consolidated earnings or revenue guidance was provided. Management emphasized that quarterly results can vary significantly with transaction timing, markets, AUM, incentive compensation and foreign exchange; interim results are not necessarily indicative of future periods.
- Management described Q3 market conditions as volatile, with major equity indices falling sharply and M&A activity uneven amid economic uncertainty. It expected restructuring activity to remain active but at a lower level than the prior year, reflecting fewer defaults. Asset Management fees remain exposed to market moves, currency changes and client flows.
- Unusual Q3 item: the $18.2M pretax gain on the subordinated-note repurchase. Other notable comparison items were the $87.1M 2010 restructuring charge and the $24.9M 2010 RSU retirement-policy charge.
- Commitments include $899.5M of net minimum operating lease payments, $90.3M cash consideration related to the LAM merger due within one year, and $69.4M of investment-funding commitments. The filing also reports $309M of unrecognized RSU compensation expense expected to be recognized over a weighted-average 1.5 years.
- Management said pending legal matters, in aggregate, were not expected to materially affect the business or financial condition, while acknowledging outcomes could be significant relative to a particular quarter’s earnings. It reported no material change in previously disclosed risk factors. Regulatory risks include evolving Dodd-Frank requirements and possible Federal Reserve consolidated supervision; the company had not yet determined the impact of prospective rules.
Important facts for investors to verify
- Whether the AUM rebound reported after quarter-end persisted, and how much resulted from market appreciation versus client flows.
- Whether Financial Advisory M&A revenue can offset continued weakness in restructuring and capital-markets advisory.
- Whether rising non-compensation costs and compensation obligations affect margins and cash generation.
- The implications of the subordinated-debt repurchase, remaining senior debt maturities, credit-facility covenants and substantial lease commitments.
- Potential effects of market volatility, foreign exchange, fair-value estimates for Level 3 investments, regulatory changes and unresolved legal matters.
- The effects of repurchases, equity awards and exchanges of Lazard Group interests on dilution and per-share results.