Lazard, Inc. (Lazard Ltd) — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; filed November 4, 2019. Lazard provides financial advisory and asset management services through its Financial Advisory, Asset Management and Corporate segments. Amounts below are in U.S. dollars; financial statement amounts are converted to millions where indicated.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First 9 months 2019 | First 9 months 2018 |
|---|---|---|---|---|
| Total revenue | $611.1m | $640.8m | $1,923.6m | $2,180.5m |
| Net revenue | $591.1m | $626.5m | $1,865.4m | $2,139.1m |
| Operating income | $52.4m | $138.7m | $273.7m | $524.4m |
| Net income attributable to Lazard Ltd | $46.7m | $107.1m | $209.5m | $413.7m |
| Diluted EPS | $0.40 | $0.82 | $1.77 | $3.16 |
| Operating margin | 8.9% | 22.1% | 14.7% | 24.5% |
In Q3, advisory fees were $305.3m, down 1%, and asset management fees were $287.1m, down 8%. For the first nine months, advisory fees fell 15% to $970.1m and asset management fees fell 11% to $876.2m. The nine-month effective tax rate was 20.3%, versus 20.2%; Q3’s rate was 8.0%, versus 21.6%, reflecting discrete tax benefits.
Management’s non-GAAP measures show first-nine-month operating revenue of $1,838.0m, down 11%; earnings from operations of $412.2m, down 28%; and an operating earnings margin of 22.4%, versus 27.7%. Adjusted compensation was 57.5% of operating revenue, compared with 55.8%; adjusted non-compensation was 20.1%, compared with 16.5%. These measures exclude specified items and should be read with the filing’s reconciliations.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $959.0m; deposits with banks and short-term investments were $1,289.3m; and clearing and other segregated cash was $40.3m. Together these cash and restricted-cash categories totaled $2,288.6m, nearly unchanged from year-end 2018.
- Total assets were $5,551.9m, versus $4,997.2m at December 31, 2018. Total stockholders’ equity was $686.2m, down from $970.1m.
- Senior debt had a $1,678.9m carrying value ($1,700m principal), compared with $1,434.3m at year-end. Lazard issued $500m of 4.375% notes due 2029 and used proceeds in part to retire the remaining 2020 notes. No borrowings were outstanding under its $150m revolving facility; about $167m of credit lines were unused.
- Operating lease liabilities were $652.7m following adoption of lease accounting in 2019. The filing reports a 12-year weighted-average remaining lease term and a 3.6% discount rate.
- Nine-month operating cash flow was $318.4m, investing cash outflow was $40.6m, and financing cash outflow was $188.7m. Financing included $430.3m of share repurchases and $205.6m of dividends. The period-end total of cash and restricted-cash categories decreased $3.3m.
- Lazard reported compliance with debt covenants. For the 12 months ended September 30, its consolidated leverage ratio was 1.78x versus a 3.25x maximum, and interest coverage was 13.99x versus a 3.00x minimum.
Material changes and segment trends
- Lower earnings: Nine-month net revenue declined 13% and Lazard-attributable net income declined 49%. Lower advisory and asset management fees were the principal revenue drivers; operating income fell 48%.
- Financial Advisory: Nine-month net revenue fell 15% to $974.0m and operating income fell 56% to $110.3m. Q3 segment operating loss was $1.2m, including $35.7m of realignment compensation expense. The filing cites fewer advisory fees above $5m year to date. Industry-wide completed and announced M&A activity was also lower year over year for the first nine months.
- Asset Management: Nine-month net revenue fell 11% to $917.4m and operating income fell 27% to $265.3m. AUM was $230.9bn at quarter-end, up 8% from December 2018, primarily due to market appreciation; nine-month net flows were negative $9.6bn and foreign exchange reduced AUM by $4.5bn. Average AUM was down 6% year over year for the first nine months.
- Business realignment: A review led to employee reductions and closure of subscale offices and investment strategies, mostly completed in Q3. Lazard recorded $51.5m of related costs ($49.1m compensation and $2.3m other expenses).
- Capital return: Lazard repurchased 11.9m shares for $430.3m in the first nine months. On October 30, the board authorized a further $300m of repurchases, bringing remaining authorization to approximately $437m. It also declared a $0.47-per-share quarterly dividend. On October 31, 17m shares held by Lazard Group were distributed to Lazard Ltd and cancelled, with no effect on total equity.
Outlook, commentary and risks
Management said M&A fundamentals—including technological disruption and low interest rates—appeared supportive, and described Financial Advisory as competitively positioned. It sees opportunities in Asset Management, including developing and seeding strategies and assessing acquisitions. These are qualitative views, not quantified earnings guidance. Management cautioned that results are cyclical and quarterly revenue and profits may not indicate future results.
Key exposures include economic and market weakness, M&A and restructuring activity, AUM levels and investment performance, client outflows, foreign exchange, competition and retaining senior professionals. Advisory fees depend in part on uncertain transaction announcements and completions; asset management revenue is sensitive to markets, asset mix and flows. Lazard also cites liquidity, counterparty, investment, regulatory, operational, tax and litigation risks. It stated that pending legal matters, in aggregate, were not expected to materially affect business or financial condition; no material changes to previously disclosed risk factors were reported.
The filing identifies an estimated $246.953m tax receivable agreement obligation; actual payment amount and timing may differ and could accelerate with changes in structure or taxable income. Management stated that operating cash flow and available credit should fund current obligations for the next 12 months. Results remain subject to estimates and assumptions, including interim compensation accruals.
Most important facts for investors to verify
- Whether advisory transaction completions and fee mix recover after the year-to-date decline, and the extent of client concentration in advisory revenue.
- Whether negative asset-management net flows persist, and how markets, foreign exchange and product mix affect AUM and fees.
- How much of the $51.5m realignment charge is nonrecurring, and whether the cost actions improve margins.
- The sustainability of compensation and non-compensation ratios, including the filing’s non-GAAP adjustments and stated mid-to-high-50s compensation-ratio goal over the cycle.
- Debt, lease and tax receivable agreement obligations, liquidity availability, and continued compliance with credit covenants.
- Whether buybacks and dividends remain supportable given lower earnings, compensation-related share issuance and the company’s capital needs.