Business Context and Reporting Period
This summary covers the Form 10-Q filed by Lazard Ltd for the quarterly period ended September 30, 2007. Lazard Ltd is a Bermuda holding company that controls Lazard Group LLC, a Delaware limited liability company. The Company operates primarily through two business segments: Financial Advisory (M&A, restructuring, capital raising) and Asset Management (equity, fixed income, and alternative investments). A Corporate segment manages cash, investments, and commercial banking activities via Lazard Frères Banque SA (LFB).
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Net Revenue | $542.0 million | $1,332.6 million |
| Operating Income | $118.6 million | $286.0 million |
| Net Income | $40.3 million | $95.9 million |
| Diluted EPS (Class A) | $0.73 | $1.72 |
| Total Assets | $3,514.2 million | (Balance Sheet Item) |
| Cash and Cash Equivalents | $959.1 million | (Balance Sheet Item) |
| Senior Borrowings | $1,592.9 million | (Balance Sheet Item) |
| Subordinated Borrowings | $150.0 million | (Balance Sheet Item) |
| Assets Under Management (AUM) | $142.1 billion | (As of Sep 30, 2007) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 82% year-over-year for the quarter and 31% for the nine-month period. Financial Advisory fees rose 102% (quarter) and 24% (nine months), driven by increased M&A transaction volume and size. Asset Management fees increased 42% (quarter) and 29% (nine months), reflecting a 44% increase in average AUM for the quarter.
- Profitability: Net income surged 206% for the quarter and 70% for the nine-month period compared to 2006. Operating income margins improved to 22% for the quarter (from 17% in 2006) and remained stable at 21% for the nine-month period.
- Acquisitions: The Company acquired Goldsmith, Agio, Helms & Lynner, LLC (GAHL) and Carnegie, Wylie & Company (CWC) in the third quarter of 2007. These acquisitions contributed to revenue growth and resulted in the recording of approximately $153.5 million in goodwill.
- Debt Structure: Senior borrowings increased significantly due to a $600 million private placement of 6.85% senior notes in June 2007. Concurrently, the Company redeemed a $96 million senior promissory note and a $50 million subordinated promissory note.
- Minority Interest: Minority interest in net income increased due to higher overall Lazard Group income, though the percentage ownership of LAZ-MD Holdings (the minority interest holder) decreased from 62.3% in 2006 to 51.7% in 2007 following prior year offerings.
Guidance, Outlook, and Risks
- Market Environment: Management notes that while M&A activity remained strong in Q3 2007, the number and size of announced transactions began to slow toward the end of the quarter due to less favorable financing conditions. Global market indices generally increased compared to the prior year, supporting Asset Management revenue.
- Seasonality: Cash flows are historically seasonal, with significant outflows for incentive compensation and distributions occurring in the first four months of the year. The Company expects this pattern to continue.
- Regulatory and Legal Risks: The Company is subject to ongoing investigations by the NASD, SEC, and U.S. Attorney's Office regarding gifts and gratuities related to its former Capital Markets business (transferred to LFCM Holdings in 2005). Management believes the aggregate outcome will not have a material adverse effect on financial condition but could impact operating results in a specific period.
- Tax Legislation: Proposed U.S. Senate legislation could tax publicly traded partnerships deriving income from investment adviser services as corporations. If enacted, this could impact Lazard Ltd's effective tax rate starting in 2013.
- Subsequent Event: On October 11, 2007, a special purpose acquisition company (Sapphire Industrials Corp.) formed by Lazard Funding filed for an IPO to raise $500 million. Lazard has committed to purchasing warrants and shares in this entity.
Investor Verification Checklist
- Acquisition Integration: Verify the financial contribution and integration progress of the GAHL and CWC acquisitions, including the realization of contingent consideration.
- Debt Covenants: Confirm continued compliance with financial maintenance covenants under the $150 million credit facility and senior note indentures, particularly given the increased leverage.
- Regulatory Investigations: Monitor the status of the NASD/SEC investigations regarding the former Capital Markets business for potential fines or settlements.
- AUM Flows: Track net inflows/outflows in the Asset Management segment, as revenue is highly sensitive to market performance and client flows.
- Minority Interest Dynamics: Review the ownership structure of Lazard Group, specifically the exchangeable interests held by LAZ-MD Holdings, which significantly impacts reported Net Income attributable to Lazard Ltd.