Lazard Ltd. Form 10-Q Summary
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2016; filed August 1, 2016. The filing identifies the registrant as Lazard Ltd. Lazard provides Financial Advisory and Asset Management services globally, with selected activities reported in Corporate. Unless noted, amounts below are U.S. dollars.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $534.7m | $609.1m | $1,032.9m | $1,186.8m |
| Operating income (loss) | $113.2m | ($801.4m) | $211.6m | ($726.7m) |
| Net income | $81.4m | $375.2m | $152.1m | $437.8m |
| Net income attributable to Lazard Ltd | $80.4m | $374.1m | $147.2m | $430.1m |
| Diluted EPS | $0.61 | $2.82 | $1.11 | $3.23 |
| Operating earnings margin, non-GAAP | 22.8% | 26.3% | 22.0% | 26.2% |
Revenue and segment trends. Q2 net revenue fell 12% year over year; first-half revenue fell 13%. Financial Advisory revenue declined 9% in Q2 and 11% in the first half, as lower M&A and capital-raising fees outweighed stronger restructuring fees, particularly in the U.S. energy sector. Asset Management revenue declined 17% in Q2 and 15% in the first half, reflecting lower average AUM, product mix, reduced traditional-product incentive fees, and the absence of a prior-year Australian private-equity disposal gain.
- Financial Advisory operating income was $53.2m in Q2 and $92.2m in the first half; margins were 18.6% and 16.7%, respectively, versus 20.0% and 19.7% in the comparable 2015 periods.
- Asset Management operating income was $71.4m in Q2 and $142.0m in the first half; margins were 28.1% and 28.4%, versus 36.6% and 35.9%.
- Average AUM declined 5% in Q2 and 6% in the first half year over year. Period-end AUM was $191.9bn, up 3% from year-end 2015, primarily on market appreciation and foreign exchange; net flows for the first half were slightly positive. AUM on July 22 was $196.7bn.
Expenses and margins. Compensation and benefits expense declined 8% in Q2 and 9% in the first half. Adjusted compensation as a percentage of operating revenue was 56.5% in Q2 and 57.6% for the first half, compared with 55.6% in each 2015 period. Adjusted non-compensation expense was up 2% in Q2 and down 1% in the first half; its share of operating revenue rose to 20.7% and 20.4%, respectively. Management’s stated goal is to keep awarded and adjusted compensation ratios over the cycle in the mid-to-high-50% range; achievement is not assured.
Cash, liquidity, debt, and capital
- Cash and cash equivalents were $646.5m at June 30, down $485.6m from year-end 2015. Deposits with banks and short-term investments were $667.3m, up from $389.9m; the filing attributes the increase largely to higher LFB customer demand deposits, which also increased customer payables.
- First-half operating cash flow was $18.3m, versus $211.3m a year earlier. Investing cash outflow was $11.0m; financing cash outflow was $494.5m, including $194.7m of share repurchases, $242.1m of dividends, and $10.1m paid under the tax receivable agreement. Cash flow reflects seasonal incentive-compensation payments and working-capital movements.
- Senior debt principal was $998.4m, with a carrying value of $990.1m. Notes include $98.4m due June 2017, $500m due 2020, and $400m due 2025. No borrowings were outstanding under the $150m revolving facility; Lazard reported about $215m in unused lines available to it, plus separate LFB and Edgewater facilities.
- The company reported compliance with debt covenants. For the 12 months ended June 30, 2016, the leverage ratio was 1.13x against a maximum of 3.25x, and interest coverage was 20.50x against a minimum of 3.00x.
- Total assets were $4.22bn and total stockholders’ equity $1.20bn, down from $4.48bn and $1.37bn at December 31, 2015. The tax receivable agreement obligation was $513.6m. Contractual obligations listed include $1.24bn of senior debt payments including interest and $839.0m of operating leases; the table excludes estimated tax receivable agreement payments because timing could not be reliably estimated.
- The board declared a $0.38-per-share quarterly dividend on July 27, payable August 19, 2016. During the first half, Lazard repurchased 5.65m shares at an average $34.49 per share; $224.6m of authorization remained at June 30.
Comparability, outlook, and risks
- Reported 2015 operating losses and net income comparisons are heavily distorted by unusual tax items. 2015 included a $961.9m Q2 and $968.5m first-half provision related to the tax receivable agreement, alongside substantial deferred tax benefits from releasing valuation allowances. The 2015 effective tax rates were 146.8% for Q2 and 160.2% for the first half, versus 28.1% in 2016. The 2015 first half also included a $60.2m debt-extinguishment loss and a $24.4m gain on disposal of the Australian private-equity business. Lazard’s non-GAAP operating earnings declined 22% in Q2 and 26% in the first half.
- Management described weaker global M&A activity and volatile markets during the first half: completed M&A value and deal count fell 13% and 15%, respectively, year over year. Corporate defaults rose, driven largely by commodities. Management said M&A fundamentals remained supportive over the longer term and cited potential growth in developing-market asset management, while noting continued market and revenue uncertainty. No specific full-year revenue or earnings guidance is provided in the filing.
- The U.K. vote to leave the EU heightened geopolitical and market uncertainty. The company did not then expect likely future EU-U.K. arrangements to have a material adverse impact, but warned that changes could increase costs and that prolonged or worsening volatility could adversely affect results. Other principal risks include declines in M&A activity or AUM, market and foreign-exchange movements, competition and talent retention, liquidity, counterparty losses, and operational or regulatory risks.
- Lazard is involved in judicial, regulatory, and arbitration matters, including former-employee claims; management said pending matters in aggregate were not expected to materially affect business or financial condition. The filing does not provide a clear quantified estimate of potential losses.
Important facts for investors to verify
- Whether weaker advisory and asset-management revenue, average AUM, and segment margins persist, and how post-quarter AUM changes develop.
- How much of the reported year-over-year earnings change reflects underlying operations versus the exceptional 2015 tax-receivable, valuation-allowance, debt-refinancing, and disposal items.
- Cash generation after seasonal compensation payments, the liquidity impact of customer deposits and payables, and progress in funding shareholder distributions and repurchases.
- Repayment or refinancing plans for the $98.4m of notes maturing in 2017, continued covenant compliance, and the timing and amount of tax receivable agreement payments.
- Potential effects of Brexit-related uncertainty, currency and market volatility, litigation or regulatory matters, and any revisions to management’s outlook or compensation-cost objectives.