Lazard, Inc. (Lazard Ltd) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Lazard is a global financial advisory and asset management firm with Financial Advisory and Asset Management operating segments.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $661.7 million | $768.2 million | Down 14% |
| Net revenue | $643.7 million | $754.7 million | Down 15% |
| Operating income | $119.7 million | $185.8 million | Down 36% |
| Net income attributable to Lazard Ltd | $97.0 million | $159.7 million | Down 39% |
| Basic / diluted EPS | $0.87 / $0.80 | $1.33 / $1.21 | Lower |
| Operating margin on net revenue | 18.6% | 24.6% | Down 6.0 percentage points |
| Effective tax rate | 19.4% | 13.0% | Higher |
Investment banking and other advisory fees declined 18% to $335.8 million; asset management fees declined 14% to $292.4 million. The higher tax rate primarily reflected lower excess tax benefits from share-based compensation and tax-reform effects, including the base erosion and anti-abuse tax.
Segment results
| Segment | Net revenue | Operating income | Operating margin |
|---|---|---|---|
| Financial Advisory | $338.4 million, down 17% | $58.1 million, down 31% | 17.2%, versus 20.6% |
| Asset Management | $301.8 million, down 15% | $94.5 million, down 24% | 31.3%, versus 35.2% |
| Corporate | $3.5 million, versus $(8.7) million | $(32.9) million, versus $(23.2) million | Not meaningful |
Financial Advisory weakness reflected fewer transactions with fees above $5 million. Global announced M&A value and volume fell 14% and 23%, respectively. Asset Management results reflected average AUM down 11% year over year and incentive fees of $0.6 million, versus $5.6 million. Period-end AUM was $235.0 billion, up 9% from December 31, 2018, due to market appreciation and net inflows, partly offset by foreign-exchange depreciation; net flows were approximately flat.
Cash flow, balance sheet and liquidity
- Cash flow: Operating cash use was $161.3 million, compared with $38.7 million used in Q1 2018. Investing cash use was $5.8 million; financing provided $93.6 million. Cash, cash equivalents and restricted cash ended at $2.19 billion, down $103.2 million from year-end.
- Balance sheet: Total assets were $5.50 billion and total liabilities $4.73 billion at March 31. Cash and cash equivalents were $1.01 billion, with another $1.14 billion in bank deposits and short-term investments. Total equity was $771.4 million, down from $970.1 million at year-end.
- Debt: Senior debt carrying value was $1.76 billion, versus $1.43 billion at year-end; principal outstanding was $1.78 billion. In March, Lazard Group issued $500 million of 4.375% notes due 2029 and used proceeds to retire 2020 notes. The remaining $82.1 million principal of the 2020 notes was retired on April 10, 2019. No revolving-credit-facility borrowings were outstanding.
- Liquidity and covenants: Approximately $168 million of unused credit lines were available. Management stated cash flows and credit lines should fund current obligations for the next 12 months. Lazard Group reported leverage of 1.74x and interest coverage of 17.83x for the twelve months ended March 31, within covenant limits of 3.25x maximum leverage and 3.00x minimum interest coverage.
- Other obligations: Adoption of lease accounting on January 1, 2019 recognized $489.1 million of lease right-of-use assets and $568.1 million of lease liabilities. The tax receivable agreement obligation was $247.0 million.
Material changes, outlook and risks
- Compensation and benefits expense fell 8%, but adjusted compensation expense was 57.5% of operating revenue, up from 55.8%. Adjusted non-compensation expense was nearly flat in dollars but rose to 18.7% of operating revenue from 15.8%. These are company-defined non-GAAP measures.
- Share repurchases totaled $192.1 million for the quarter, covering 5.18 million shares at an average $37.10. The company reported $403.4 million of remaining authorization. Q1 dividends paid were $103.4 million; after quarter-end, the board declared a $0.47-per-share quarterly dividend.
- Management said M&A fundamentals appeared to remain in place and described Lazard as competitively positioned, while noting slower European growth and a challenging environment tied to markets and transaction activity. For Asset Management, management cited potential long-term demand from developing economies and continued development of investment strategies. No specific earnings or revenue guidance was provided.
- Management cautioned that results are volatile and a single quarter is not indicative of future periods. Key exposures include economic and financial-market weakness, lower M&A activity or AUM, client flows and investment performance, foreign exchange, competition for talent, counterparty risks, liquidity, and market risk in investments.
- The company disclosed ordinary-course legal and regulatory matters, including former-employee claims; management did not expect pending matters in aggregate to materially affect business or financial condition. LFB had $45.6 million of indemnifications fully collateralized, with loss considered remote. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether Financial Advisory transaction activity and fee-generating deal completions recover, given the year-over-year decline in industry M&A and Lazard advisory revenue.
- Whether AUM, average AUM, client flows and asset mix support a recovery in Asset Management fees; distinguish period-end AUM growth from lower year-over-year average AUM.
- How compensation and non-compensation ratios evolve relative to management’s stated mid-to-high-50s compensation ratio goal over the cycle.
- The debt refinancing’s effect on interest expense and maturities, and the timing and cash demands of lease and tax receivable agreement obligations.
- Whether operating cash flow improves after seasonal incentive-compensation payments and whether capital returns remain consistent with liquidity and regulatory needs.