Lazard, Inc. (Lazard Ltd) — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Financial statements are unaudited. Lazard operates Financial Advisory and Asset Management businesses, plus a Corporate segment.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $717.2 million | $534.7 million | $1,340.6 million | $1,032.9 million |
| Operating income | $172.5 million | $113.2 million | $322.7 million | $211.6 million |
| Net income attributable to Lazard Ltd | $120.4 million | $80.4 million | $227.9 million | $147.2 million |
| Diluted EPS | $0.91 | $0.61 | $1.72 | $1.11 |
| GAAP operating margin | 24.1% | 21.2% | 24.1% | 20.5% |
| Operating cash flow | Not separately reported for the quarter | $278.4 million | $18.3 million |
- Q2 net revenue rose 34% and first-half net revenue rose 30%. Investment banking and advisory fees increased 43% in Q2 and 35% in the first half; asset management fees increased 22% and 19%, respectively.
- Q2 adjusted earnings from operations, a non-GAAP measure, were $197.2 million, or 27.4% of operating revenue, versus $123.7 million, or 22.8%, a year earlier. First-half adjusted earnings were $361.3 million, or 26.9%, versus $230.2 million, or 22.0%.
- Adjusted compensation expense was 56.5% of operating revenue in Q2, unchanged year over year; for the first half it was 56.5%, compared with 57.6%. Adjusted non-compensation expense was 16.1% of operating revenue in Q2 versus 20.7%, and 16.6% for the first half versus 20.4%.
- Financial Advisory operating income increased 83% in Q2 and 85% in the first half. Asset Management operating income increased 32% and 33%, respectively. Q2 operating margins were 23.6% for Financial Advisory and 30.3% for Asset Management.
- Asset Management AUM was $225.8 billion at June 30, up 14% from year-end, mainly from market and foreign-exchange appreciation and net inflows. First-half net flows were positive $2.9 billion; average AUM rose 14% year over year.
Financial position, cash flow and capital
- At June 30, cash and cash equivalents were $955.6 million; deposits with banks and short-term investments were $756.5 million; and total assets were $4.77 billion. Cash decreased $203.1 million from year-end, while deposits and short-term investments increased, principally reflecting higher LFB customer deposits.
- First-half operating cash flow was $278.4 million. Investing activities used $9.2 million and financing activities used $512.2 million. Financing outflows included $242.4 million of dividends, $184.9 million of share repurchases and $66.1 million for settlement of vested share-based awards.
- Senior debt had $1.20 billion principal and $1.19 billion carrying value, essentially unchanged from year-end. Notes mature in 2020, 2025 and 2027. No borrowings were outstanding under the $150 million revolving credit facility; Lazard reported approximately $174 million of unused lines available to it and a further approximately $23 million available to LFB.
- The company reported compliance with debt covenants. For the 12 months ended June 30, its leverage ratio was 1.14x against a 3.25x maximum, and interest coverage was 20.96x against a 3.00x minimum. Management stated cash flows and available credit should be sufficient for obligations over the next 12 months.
- Total stockholders’ equity was $1.30 billion. The tax receivable agreement obligation was $512.8 million. Declared dividends were $0.41 per share for Q2; the board declared another $0.41 per share on July 26, payable August 18, 2017.
Changes, outlook and risks
- Financial Advisory growth exceeded broader M&A market trends: first-half completed global M&A value and deal count fell 7% and 6%, respectively, while Lazard’s M&A and Strategic Advisory revenue rose 30% and restructuring revenue rose 53%. Global corporate defaults fell 43% year over year.
- Management described the near- to mid-term macroeconomic outlook as positive and said Financial Advisory remained competitively positioned. It expects asset-management demand from developed-market retirement plans in the nearer term and potential longer-term growth in developing economies. No quantified earnings or revenue guidance was provided.
- AUM after quarter-end was $231.2 billion as of July 25, up $5.4 billion since June 30; market and foreign-exchange appreciation were partly offset by net outflows.
- Q2 and first-half results included $8.9 million of ERP implementation expense and $3.2 million of office reorganization expense. Higher gains on investments associated with deferred compensation (LFI) contributed to other revenue, with corresponding compensation expense effects. First-half results also included an $8.3 million tax benefit from adopting new share-based compensation accounting guidance; adoption increased opening deferred tax assets and retained earnings by $81.5 million, net of valuation allowance.
- Management highlighted earnings sensitivity to deal timing, M&A and restructuring activity, AUM levels, market performance, foreign exchange, client flows, competition and employee retention. It also noted liquidity, counterparty, investment and operational risks. Receivables past due or deemed uncollectible were $38.7 million versus $22.2 million at year-end; the allowance for doubtful accounts was $25.1 million.
- The filing reports ordinary-course legal, regulatory and arbitration matters, including former-employee claims; management did not expect pending matters in aggregate to materially affect the business or financial condition. No material changes to previously disclosed risk factors were reported. Revenue-recognition guidance was expected to be adopted in Q1 2018; its potential effect on timing of certain advisory fees and contract-cost presentation remained under evaluation.
Important facts for investors to verify
- Whether Financial Advisory revenue growth and transaction completions persist despite weaker industry-wide M&A activity.
- Whether AUM inflows, market performance and foreign-exchange movements support asset-management fees, and whether client outflows increase.
- How compensation, one-time ERP and office costs, and LFI-related gains or expenses affect margins and comparability.
- Cash generation and capital returns relative to share repurchases, dividends, debt service, leases and the $512.8 million tax receivable agreement obligation.
- The eventual impact of the new revenue-recognition standard on advisory-fee timing and contract-cost presentation.