Lazard, Inc. (Lazard Ltd) — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Lazard provides financial advisory and asset management services through its Financial Advisory and Asset Management segments, with selected activities in Corporate. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $716.1 million | $679.9 million | +5% |
| Net revenue | $694.9 million | $660.1 million | +5% |
| Operating income | $159.7 million | $134.3 million | +19% |
| Net income attributable to Lazard Ltd | $113.9 million | $87.3 million | +30% |
| Diluted earnings per share | $1.05 | $0.75 | Up $0.30 |
| Operating margin on net revenue | 23.0% | 20.3% | Up 2.7 percentage points |
| Effective tax rate | 24.3% | 32.4% | Down 8.1 percentage points |
- Financial Advisory: Net revenue was $390.2 million, up 23%; operating income was $92.0 million, up 52%, and its margin rose to 23.6% from 19.0%. Management attributed revenue growth primarily to more fees exceeding $10 million.
- Asset Management: Net revenue was $338.5 million, down 3%; operating income fell 16% to $97.0 million, and margin declined to 28.7% from 33.2%. Management fees and other revenue were $313.3 million; incentive fees declined to $25.2 million from $33.0 million.
- Corporate: Reported a $33.8 million net revenue loss versus a $5.8 million loss a year earlier. The deterioration chiefly reflected investment losses, including losses associated with LFI deferred compensation investments, compared with gains in Q1 2021. Corporate operating expenses were a $4.6 million credit, primarily reflecting lower LFI-related compensation charges.
- Adjusted compensation expense was $408.7 million, or 58.5% of operating revenue, versus $385.5 million and 59.5%. Adjusted non-compensation expense increased 14% to $117.1 million, or 16.8% of operating revenue, from 15.8%. Management’s stated through-cycle goal for adjusted and awarded compensation ratios is the mid-to-high 50% range.
Cash flow, balance sheet and capital
- Cash flow: Cash used in operating activities was $213.5 million, compared with $123.3 million used in Q1 2021. Cash used in investing was $13.5 million. Financing used $19.2 million, including $175.8 million of share repurchases and $46.7 million of dividends, partly offset by a $302.3 million net increase in customer deposits. Management says first-quarter cash outflow is typically seasonal, in part because of incentive-compensation payments.
- Cash and liquidity: At March 31, cash and cash equivalents were $878.2 million; deposits with banks and short-term investments were $1.639 billion; and restricted cash was $615.2 million. Combined cash, deposits/short-term investments and restricted cash totaled $3.132 billion. Restricted cash principally includes LGAC trust funds; customer-related deposits and regulatory requirements also affect the availability of liquidity.
- Debt: Senior debt carrying value was $1.686 billion, representing $1.700 billion principal across notes due 2025, 2027, 2028 and 2029. No borrowings were outstanding under the $200 million revolving facility, which expires in July 2023. Lazard reported approximately $206.7 million of unused credit lines and compliance with debt covenants.
- Other balance-sheet items: Total assets were $6.848 billion, down from $7.147 billion at year-end 2021. Total liabilities were $5.304 billion; stockholders’ equity was $969.6 million, down from $1.078 billion. The tax receivable agreement obligation was $192.5 million after a $20.9 million payment during the quarter.
- Capital returns: Lazard repurchased 4.72 million shares for approximately $175.8 million, at an average price of $37.26 per share. The quarterly dividend was $0.47 per share; the Board declared the next $0.47 dividend on April 27, payable May 20, 2022.
Material changes and outlook
- Financial Advisory growth more than offset lower Asset Management and Corporate results. Consolidated net revenue rose 5%, while operating income rose 19%; the lower effective tax rate also supported net income growth.
- Asset Management AUM fell 8% from $273.7 billion at December 31, 2021 to $252.7 billion at March 31, 2022, reflecting $12.4 billion of market depreciation, $2.1 billion of foreign-exchange depreciation and $6.5 billion of net outflows. On April 22, AUM was $243.4 billion, a further $9.3 billion decline from quarter-end, mostly from market and foreign-exchange depreciation.
- Management described client engagement in Financial Advisory as robust despite unsettled conditions and said it continued selective senior hiring. It highlighted uncertainty for Asset Management and the broader outlook, while pursuing new investment strategies and ESG-related offerings. The filing provides no specific numerical earnings or revenue guidance.
- Management cited geopolitical instability, including Russia’s invasion of Ukraine, inflation, China’s COVID-related lockdowns, rising interest rates and supply-chain challenges. Advisory revenue depends on the timing and completion of transactions; Asset Management revenue is exposed to market movements, foreign exchange, AUM flows and investment performance.
- Global announced M&A value declined 30% year over year in Q1, while completed deal value was down 1%; Lazard cautioned that quarterly results can be volatile and are not necessarily indicative of future periods. Other risks include competition and talent retention, investment and counterparty risk, liquidity, operational and cyber risk, and changes in regulation or taxes.
- The company reported no material change in previously disclosed risk factors. It is involved in legal, regulatory and arbitration matters, including former-employee claims; management believes pending matters in aggregate will not materially affect the business or financial condition. No material contingency amount is specified in the filing text.
Important facts for investors to verify
- Whether Financial Advisory fees and deal completions remain resilient as announced M&A activity weakens, and how concentrated advisory revenue is: the top 10 clients represented 44% of Financial Advisory net revenue versus 32% a year earlier.
- Subsequent AUM trends, net flows and market/foreign-exchange effects, given the fall to $243.4 billion by April 22 and the impact of AUM on fees.
- Cash conversion and seasonal compensation outflows, while distinguishing unrestricted operating liquidity from restricted LGAC cash, customer deposits and regulated subsidiary capital.
- How share repurchases and dividends are balanced against $1.7 billion of senior-note principal, lease commitments and other capital needs.
- The sustainability of Q1 margins and tax rate: compensation estimates use assumptions, and management notes that quarterly results and effective tax rates can vary.