Lazard, Inc. quarterly report, Q2 FY2010

Lazard, Inc. (Lazard Ltd) — Form 10-Q Summary

Reporting period: Quarter and six months ended June 30, 2010. Financial statements are unaudited. Lazard provides financial advisory and asset management services, with selected banking, investment and financing activity reported in Corporate.

Key financial results

Metric	Q2 2010	Q2 2009	Six months 2010	Six months 2009
Total revenue	$443.2 million	$402.7 million	$907.0 million	$678.6 million
Net revenue	$419.0 million	$375.6 million	$857.2 million	$624.0 million
Operating income (loss)	$67.1 million	$56.9 million	$32.6 million	$(33.8) million
Net income (loss) attributable to Lazard Ltd	$44.6 million	$28.2 million	$11.0 million	$(25.3) million
Basic EPS	$0.43	$0.38	$0.11	$(0.36)

Q2 operating margin was 16% of net revenue versus 15% a year earlier. First-half reported operating margin was 4% versus negative 5%; excluding special items, it was 17% versus 5%.
First-half net income attributable to Lazard, excluding the after-tax impact of restructuring and the retirement-policy RSU charge, was $91.6 million versus $9.8 million in 2009. This is a company-presented non-GAAP measure.
Q2 advisory fees were $245.3 million, up 4%; money management fees were $180.9 million, up 50%. For the first half, advisory fees rose 29% and money management fees rose 63%.
Asset Management average AUM was $129.2 billion in Q2 and $129.3 billion for the first half, each 44% above the comparable 2009 average. Period-end AUM was $123.5 billion, down 5% from December 31, 2009. Lazard reported AUM of $132.8 billion on July 26, reflecting post-quarter market appreciation and net inflows.

Cash flow, balance sheet and liquidity

Cash and cash equivalents were $797.4 million at June 30, down $119.9 million from year-end 2009. Total assets were $2.81 billion, compared with $3.15 billion at December 31, 2009.
First-half operating cash flow was a use of $91.4 million, versus $52.9 million provided in 2009. The company attributed the decline mainly to operating-liability movements, including compensation and other liability payments. Investing activities provided $99.0 million, including proceeds related to the Sapphire investment; financing activities used $103.7 million.
Senior debt was $1.077 billion and subordinated debt was $150.0 million; total senior and subordinated debt was $1.227 billion. Lazard repurchased $10 million principal amount of senior notes during the half. The $150 million revolving credit facility had no borrowings outstanding.
Lazard reported approximately $1 billion of cash and liquid securities and $259 million of unused credit lines available to it, plus $89 million of unused lines available to LFB and Edgewater. Management said operating cash flows and credit lines should fund obligations for the next 12 months and beyond.
Stockholders’ equity was $584.9 million, including $154.4 million of noncontrolling interests. Lazard’s ownership of Lazard Group increased to approximately 89.0% from 74.5% at year-end, principally through exchanges of membership interests.

Changes versus comparable periods

Q2 net revenue increased 12% year over year. Higher asset-management fees, reflecting higher average AUM, more than offset lower Corporate and restructuring-related revenue.
First-half net revenue increased 37%. Both advisory and asset-management activity improved versus the weak 2009 comparison; management cited market appreciation and net inflows as drivers of higher asset-management fees.
First-half reported results include $87.1 million of 2010 restructuring charges and a $24.9 million noncash compensation charge from amending the RSU retirement-eligibility policy. The 2009 comparison includes $62.6 million of restructuring charges. These items materially affect reported period comparisons.
Compensation expense was 60.0% of operating revenue in both second quarters. Excluding the 2010 RSU policy charge, the first-half ratio was 60.2%, down from 65.9% in 2009. Management said it sought to grow compensation expense more slowly than operating revenue.

Outlook, risks and unusual items

No numerical earnings or revenue guidance is provided. Management cautioned that quarterly revenue and profits can vary materially with transaction timing, market conditions, AUM, client flows and incentive-fee recognition.
Management described Q2 market volatility associated with concerns about public finances in some European economies, while noting healthier domestic credit markets, improved corporate earnings and low interest rates. It remained cautious about economic vulnerabilities and M&A conditions.
Global restructuring activity declined from 2009 record levels as defaults fell; management expected the restructuring business to remain active, while noting assignments typically take six to eighteen months.
Asset-management revenues are exposed to market levels, foreign exchange movements, client inflows and outflows, investment performance and client termination or mandate changes. About 42% of AUM was denominated in foreign currencies at quarter-end.
Regulatory risks include restrictions on placement agents seeking public-pension-fund business and the Dodd-Frank Act, signed July 21, 2010, which provides for eventual elimination of the SEC’s SIBHC program. Lazard said it was evaluating the impact.
Legal and regulatory proceedings, including former-employee claims, are described as not expected in aggregate to materially affect financial condition, but could affect operating results or cash flows in a particular period. The filing also identifies potential conflicts involving LAZ-MD Holdings and LFCM Holdings.
Other items to monitor include $23.4 million remaining liability for the 2010 restructuring plan; pension contribution commitments; $7.4 million of stated CP II funding commitments; and approximately $324 million of unrecognized RSU compensation expense expected to be recognized over a weighted-average 1.8 years.

Important facts for investors to verify

Separate recurring operating performance from the $112.0 million of first-half restructuring and RSU-policy charges; review the assumptions behind management’s non-GAAP comparisons.
Track AUM, client flows, market and currency effects, and whether post-quarter AUM gains persisted.
Assess cash conversion and seasonal incentive-compensation payments, particularly given first-half operating cash outflow and lower cash balances.
Review debt maturities, credit-facility covenant headroom and liquidity availability; Lazard reported leverage of 2.20x and interest coverage of 7.03x at June 30, within stated covenant limits.
Monitor regulatory changes, litigation and contingencies, pension funding, and the potential effects of the Dodd-Frank Act and placement-agent restrictions.