Lazard Ltd. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. The filing identifies the registrant as Lazard Ltd., a Bermuda holding company whose principal businesses are Financial Advisory and Asset Management.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $436.9 million | $477.3 million | $922.9 million | $915.3 million |
| Operating income | $44.5 million | $89.2 million | $82.4 million | $162.6 million |
| Net income attributable to Lazard Ltd. | $30.8 million | $62.0 million | $56.4 million | $117.0 million |
| Diluted earnings per share | $0.24 | $0.48 | $0.44 | $0.91 |
| Operating margin on net revenue | 10.2% | 18.7% | 8.9% | 17.8% |
| Cash flow from operations | Not presented quarterly | $34.5 million | $14.9 million |
- Revenue mix: Q2 advisory fees were $240.3 million, down about 1%; money management fees were $201.6 million, down about 13%. For the first half, advisory fees rose about 11% to $513.8 million, while money management fees fell about 9% to $406.2 million.
- Profitability and expense: Q2 net revenue fell about 8%, while operating expenses rose about 1%, driving operating income down about 50%. First-half net revenue was nearly flat, but operating expenses increased about 12%, reducing operating income by about 49%.
- Non-GAAP operating measures: First-half adjusted compensation expense was $598.0 million, or 62.7% of operating revenue, versus 58.5% a year earlier. Adjusted non-compensation expense was $211.0 million, or 22.1% of operating revenue, versus 20.3%.
- Segments: Q2 Financial Advisory net revenue was $242.6 million and operating income $11.4 million, versus $249.2 million and $35.0 million. Asset Management net revenue was $211.1 million and operating income $54.4 million, versus $244.9 million and $83.9 million. First-half advisory revenue increased to $519.8 million, while Asset Management revenue declined to $425.6 million.
- Assets under management: AUM was $148.4 billion at June 30, up 5% from year-end 2011, principally due to market appreciation. Average AUM for the first half was $149.2 billion, down 6% from the prior-year period.
- Cash and liquidity: Cash and cash equivalents were $751.2 million, down from $1.004 billion at year-end. The company also reported $324.4 million of bank deposits and $78.8 million of segregated cash. Unused credit lines were approximately $299 million for Lazard, plus approximately $88 million for LFB and $55 million for Edgewater.
- Debt and capital: Senior debt was $1.077 billion, unchanged from year-end; it consisted principally of notes maturing in 2015 and 2017. No borrowings were outstanding under the $150 million revolving facility, which expires in April 2013. Total liabilities were $2.151 billion and total stockholders’ equity $826.4 million.
- Cash uses: First-half operating cash flow was $34.5 million; investing activities used $46.9 million, including $48.9 million in property additions; financing activities used $238.9 million. The company repurchased $152.4 million of Class A shares and paid $43.0 million in dividends.
Material changes and unusual items
- Q2 weakness reflected lower restructuring and other advisory revenue and lower Asset Management fees, including the effect of average AUM declining 6% year over year. First-half advisory revenue benefited from M&A, sovereign and government advisory work and higher restructuring fees, partly offset by lower Asset Management revenue.
- First-half compensation expense included a $21.8 million staff-reduction charge; associated non-compensation costs were $2.9 million, bringing the disclosed charges to approximately $25 million. Higher deferred compensation amortization also weighed on results.
- Management reported that the 2012 increase in deferred compensation amortization was principally associated with the 2008 grant, and expected amortization to ease after the first quarter of 2013 as that grant fully vests.
- Other comprehensive income was negative $23.5 million in Q2, including a $21.1 million currency translation loss. First-half other comprehensive loss was $5.8 million.
- The company adopted updated fair-value and comprehensive-income presentation guidance in 2012; management said the fair-value adoption had no material impact.
Outlook, risks and contingencies
- No specific revenue or earnings forecast was provided. Management described a challenging, uncertain macroeconomic environment, particularly in Europe, and noted lower industry M&A and capital-raising activity. It cited potential support from advisory market share and restructuring, debt, capital-markets and sovereign-advisory opportunities.
- Management’s compensation objective is an over-the-cycle awarded-compensation-to-operating-revenue ratio in the mid-to-high 50% range. Based on then-current conditions, it assumed approximately 60% for full-year 2012; this is an expectation, not a guarantee. It estimated 2012 deferred compensation amortization of approximately $341 million, excluding the staff-reduction charge, versus $289 million in 2011.
- Management said cash flows and available credit lines should fund obligations for the next 12 months and beyond. It reported compliance with debt covenants; the revolving-facility leverage and interest-coverage ratios were 2.20x and 7.11x, respectively, against limits of 4.00x maximum and 3.00x minimum.
- Key risks include volatile transaction timing, market movements and foreign exchange effects on AUM, client withdrawals, employee retention and compensation costs, liquidity and counterparty risks, and regulatory change. The filing states risk factors were not materially changed from the prior Form 10-K.
- Investment-fund commitments totaled $35.7 million, including $24.9 million due in less than one year in the contractual-obligations table. The company disclosed ordinary-course legal proceedings, including former-employee matters, but believed pending matters in aggregate would not materially affect business or financial condition. LFB also had $22 million of fully collateralized credit commitments.
Important facts for investors to verify
- Whether advisory transaction completions and Asset Management flows sustain revenue, given lower average AUM and volatile M&A markets.
- How compensation and occupancy costs evolve, including the effect of deferred-award amortization and the Rockefeller Center lease and build-out.
- Cash generation after share repurchases, dividends and investment commitments, and the refinancing or repayment plan for the 2013 credit facility and 2015 notes.
- Whether management’s full-year compensation assumptions and expected post-2013 amortization reduction are borne out.
- The recoverability of deferred tax assets: the filing describes approximately $1.1 billion of valuation allowance at year-end 2011, unchanged in its assessment at June 30, 2012, against approximately $1.3 billion of deferred tax assets at year-end 2011.