Lazard Ltd. — Q2 2022 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2022; unaudited. Lazard provides financial advisory and asset management services. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net revenue | $639.5 million | $823.1 million | $1,334.4 million | $1,483.2 million |
| Operating income | $125.8 million | $166.3 million | $285.6 million | $300.6 million |
| Net income attributable to Lazard Ltd. | $95.5 million | $123.2 million | $209.4 million | $210.5 million |
| Diluted EPS | $0.92 | $1.08 | $1.97 | $1.83 |
| Operating income / net revenue | 19.7% | 20.2% | 21.4% | 20.3% |
- Q2 investment banking and advisory fees were $405.1 million, down 15% year over year. Asset management fees were $269.0 million, down 22%. Total revenue was $660.7 million; net revenue deducts $21.1 million of interest expense.
- First-half advisory fees were broadly unchanged at $794.8 million. Asset management fees declined 13% to $584.1 million.
- Q2 adjusted compensation expense was $395.4 million, or 58.5% of operating revenue, versus 59.5% a year earlier. Adjusted non-compensation expense rose 10% to $130.9 million; its ratio to operating revenue increased to 19.4% from 14.5%. These are company-defined non-GAAP measures.
- Segment results: Q2 Financial Advisory net revenue declined 10% to $407.9 million, but operating income rose 10% to $91.3 million. Asset Management net revenue fell 21% to $289.2 million and operating income fell 41% to $56.6 million. Corporate recorded a $22.1 million operating loss, versus a $12.5 million loss a year earlier.
Cash flow, balance sheet and capital
- First-half operating cash flow was $85.1 million, compared with $15.1 million in 2021. Investing cash outflow was $19.5 million. Financing cash outflow was $62.2 million, including $375.2 million of share repurchases and $92.7 million of dividends. Foreign-exchange effects reduced cash and restricted cash by $208.0 million.
- At June 30, cash and cash equivalents were $907.5 million; deposits with banks and short-term investments were $1.701 billion; restricted cash was $617.1 million. Combined, these totaled $3.225 billion, down from $3.430 billion at year-end. Restricted cash principally includes LGAC trust funds and is not equivalent to freely available operating cash.
- Total assets were $6.712 billion, down from $7.147 billion at December 31, 2021. Stockholders’ equity was $827.0 million, down from $1.078 billion, reflecting buybacks, dividends and other comprehensive losses, partly offset by earnings and share-based compensation.
- Senior debt carrying value was $1.686 billion, essentially unchanged. The $1.7 billion principal amount consists of unsecured notes due 2025, 2027, 2028 and 2029. No borrowings were outstanding on the $200 million revolving facility; approximately $208.8 million of credit lines were unused. The revolver expires in July 2023.
- Management stated it expects operating cash flows to fund obligations for the next 12 months. Lazard was in compliance with debt covenants; its reported leverage ratio was 1.39x and interest coverage ratio 15.82x for the 12 months ended June 30.
Changes, outlook and risks
- Market conditions weakened: global announced M&A value declined 23% in the first half versus 2021, while major equity indices fell substantially. Management cited high inflation, rising interest rates, turbulent markets and geopolitical uncertainty.
- Asset Management AUM fell 21% from year-end to $216.6 billion, driven by market depreciation of $35.6 billion, foreign-exchange depreciation of $10.3 billion and net outflows of $11.2 billion. AUM was $220.2 billion on July 22, reflecting subsequent market appreciation partly offset by currency losses and outflows.
- Management said Financial Advisory client engagement remained robust and highlighted selective senior hiring. It noted that market uncertainty may affect Asset Management unpredictably and continued to pursue new strategies, ESG-related products and potential product acquisitions. No specific earnings or revenue guidance was provided.
- Management’s stated through-cycle goal is an adjusted or awarded compensation-to-operating-revenue ratio in the mid-to-high-50% range; the first-half adjusted ratio was 58.5%. Management cautioned that market, revenue mix, hiring and other factors could prevent achieving this goal.
- Q2 Corporate results were affected by investment and deferred-compensation mark-to-market movements. The filing reports first-half unrealized investment losses of $103.0 million on equity and trading debt securities held at period-end; LFI-related investment gains or losses are substantially offset by related compensation-liability remeasurement.
- Other risks include transaction timing and cyclicality, AUM market and currency sensitivity, competition for talent, counterparty and investment risks, regulatory requirements, foreign exchange, and legal proceedings. The company said pending matters were not expected in aggregate to materially affect its business or financial condition; it reported no material change in risk factors from its 2021 Form 10-K.
- After quarter-end, the board authorized up to $500 million of additional repurchases, bringing available authorization to approximately $559 million, and declared a $0.50 quarterly dividend payable August 19, 2022.
Investor verification points
- Track advisory engagement conversion and transaction completions against the weaker M&A market, as advisory fees are timing-sensitive.
- Monitor AUM flows, market performance, foreign-exchange effects and their impact on management and incentive fees.
- Assess Corporate mark-to-market volatility and the extent to which deferred-compensation liabilities offset related investment movements.
- Reconcile reported cash and liquidity with restricted LGAC cash, customer deposits, seasonal compensation payments and planned buybacks and dividends.
- Review the sustainability of margins and compensation ratios, the remaining buyback authorization, and the July 2023 revolver maturity.