Lazard Ltd. — Q1 2016 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2016, compared with Q1 2015. Lazard is a global financial advisory and asset management firm, with Financial Advisory and Asset Management as its principal businesses. Amounts below are U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue | $510.1 | $593.9 |
| Net revenue | $498.2 | $577.7; down 14% |
| Operating income | $98.4 | $74.7 |
| Net income attributable to Lazard Ltd | $66.8 | $56.0 |
| Basic / diluted EPS | $0.53 / $0.50 | $0.45 / $0.42 |
| Operating margin on net revenue | 19.7% | 12.9% |
| Cash flow from operations | $(99.9) | $35.0 |
- Revenue and segments: Investment banking and advisory fees were $265.1, down 12%; asset management fees were $233.7, down 11%. Financial Advisory net revenue fell 12% to $266.0, while operating income fell 34% to $38.9 (14.6% margin). Asset Management net revenue fell 12% to $245.8 and operating income fell 28% to $70.6 (28.7% margin).
- Asset management scale: Period-end AUM was $190.6 billion, up 2% from December 31, 2015, mainly from market and foreign exchange appreciation, partly offset by net outflows. Average AUM was $184.8 billion, down 7% year over year. Q1 net flows were outflows of $0.4 billion. As of April 14, AUM was $192.5 billion.
- Cash and liquidity: Cash and cash equivalents were $701.3 at quarter-end, down from $1,132.1 at year-end. Deposits with banks and short-term investments were $387.6; segregated cash was $34.0. Management cited approximately $241 million of unused company credit lines, plus approximately $34 million available to LFB and $55 million to Edgewater. The company expects operating cash flow and available credit to cover obligations for the next 12 months.
- Debt: Senior debt carrying value was $989.7, against $998.4 principal outstanding; notes mature in 2017, 2020 and 2025. No borrowings were outstanding under the $150 million revolving facility. Lazard reported compliance with debt covenants; leverage and interest coverage ratios were 1.10x and 21.22x, respectively.
- Equity and capital returns: Total stockholders’ equity was $1,222.7, down from $1,367.3 at year-end. The company repurchased 2.42 million shares for $83.1 million during Q1 and paid $194.4 million in dividends. Q1 dividends declared per share were $1.55; on April 20, the board declared a further quarterly dividend of $0.38 per share.
- Other balance-sheet items: Total assets were $4,011.6 and total liabilities were $2,788.8. The tax receivable agreement obligation was $513.6, down from $524.0 at year-end.
Material changes and drivers
- Lower M&A closings and average transaction fees drove weaker advisory results; Financial Advisory M&A and Other Advisory revenue declined 18%. Restructuring revenue increased 84%, reflecting several large assignments and greater U.S. energy-sector activity.
- Asset Management fees were pressured by lower average AUM, a less favorable asset mix and lower incentive fees. Management fees declined 10% and incentive fees declined 71% year over year.
- Reported operating income rose despite lower revenue largely because Q1 2015 included a $60.2 million debt-extinguishment charge and a $6.5 million tax receivable agreement provision. On Lazard’s adjusted operating measure, earnings from operations fell 30% to $106.5, and its margin declined to 21.0% from 26.1%.
- Adjusted compensation expense was $298.0 million, down 8%, but its ratio to operating revenue increased to 58.9% from 55.6%. The effective income tax rate increased to 28.1% from 16.1%, reflecting the prior-year valuation-allowance effects and a changed geographic mix of earnings.
- Operating cash flow turned negative, primarily reflecting the seasonal timing of incentive compensation payments and changes in operating assets and liabilities. The company describes this early-year cash decline as a recurring seasonal pattern.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said M&A fundamentals and longer-term trends appear supportive, while noting continued market volatility and uncertainty. It expects investor demand for asset management in the near to intermediate term to be driven largely by developed-market retirement plans and sees longer-term potential in developing economies.
- Management’s stated priorities include revenue and earnings growth, cost discipline, efficient use of assets and shareholder returns. Its compensation-cost objective is a mid-to-high-50% ratio of awarded compensation to operating revenue over the cycle; the Q1 adjusted compensation ratio was 58.9% and is a different measure.
- Key business risks include cyclical M&A and restructuring activity, market levels and AUM flows, foreign exchange movements, competition for senior staff, client or counterparty losses, liquidity needs, and extensive financial-services regulation. Management noted potential effects from U.K.–EU developments and proposed U.S. tax changes.
- The tax receivable agreement liability is based on estimates and assumptions; actual payment amounts and timing could differ materially. The filing also reports ordinary-course legal and regulatory matters, including former-employee claims, but management did not expect pending matters in aggregate to materially affect the business or financial condition.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing cautions that quarterly results are volatile and are not necessarily indicative of future periods.
Most important facts for investors to verify
- Whether weaker advisory closings and lower average AUM persist, and how fee mix and client flows affect subsequent revenue.
- Whether the increase in the adjusted compensation-to-revenue ratio is temporary or indicates reduced operating leverage.
- Cash generation after seasonal compensation and shareholder distributions, alongside the company’s liquidity and investment commitments.
- The assumptions, timing and cash consequences underlying the $513.6 million tax receivable agreement obligation and deferred tax assets.
- Debt maturity and covenant compliance, as well as the pace of buybacks and dividends relative to operating cash flow.