Lazard Ltd. Form 10-Q Summary
Reporting period: First quarter ended March 31, 2015, compared with the three months ended March 31, 2014. Balance-sheet comparisons are with December 31, 2014. Financial amounts are in U.S. dollars; monetary figures are in millions unless stated otherwise. The filing identifies the registrant as Lazard Ltd.
Business context
Lazard provides financial advisory services and asset management globally, with additional activities in its Corporate segment. Results are cyclical: advisory fees depend partly on completed transactions, while asset-management fees are driven mainly by assets under management (AUM), investment performance, client flows and foreign exchange.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 / prior date | Change |
|---|---|---|---|
| Total revenue | $593.9 | $549.4 | Up 8% |
| Net revenue | $577.7 | $533.4 | Up 8% |
| Operating income | $74.7 | $107.2 | Down 30%; margin 12.9%, versus 20.1% |
| Net income attributable to Lazard Ltd | $56.0 | $80.8 | Down 31% |
| Diluted earnings per share | $0.42 | $0.61 | Down 31% |
| Operating cash flow | $35.0 | $53.8 | Down |
| Cash and cash equivalents | $606.3 | $1,066.6 at Dec. 31, 2014 | Down $460.2 |
| Senior debt | $998.4 | $1,048.4 at Dec. 31, 2014 | Down $50.0 |
| Total stockholders’ equity | $537.3 | $770.1 at Dec. 31, 2014 | Down $232.8 |
Financial Advisory net revenue was $301.5, up 9%, and operating income was $58.6, versus $30.1. Asset Management net revenue was $279.8, up 4%, and operating income was $98.0, up 6%. Corporate recorded an $81.9 operating loss, including the debt-redemption charge.
Asset Management AUM was $199.2 billion at quarter-end, up 1% from year-end; average AUM rose 7% year over year. Net flows were positive by $1.0 billion, and market appreciation added $8.9 billion, partly offset by $7.9 billion of adverse foreign-exchange movements. AUM was $205.2 billion as of April 17, 2015, according to the filing.
Operating cash flow was positive, but financing activities used $454.0 million, including $158.4 million of common dividends, $83.0 million of share repurchases, share-compensation settlements and debt transactions. The company said cash flows and available credit lines should be sufficient to fund obligations for the next 12 months. It reported approximately $245 million of unused company credit lines, plus approximately $38 million available to LFB and $55 million to Edgewater. The $150 million revolving facility was due to expire in September 2015.
Material changes and unusual items
- Revenue increased, led by advisory fees and management fees. Advisory M&A and other advisory fees rose 9%; capital-raising revenue increased, while restructuring revenue declined 23% amid low industry activity.
- Operating expenses included a $60.2 million loss on extinguishment of debt. Excluding this charge and specified noncontrolling-interest costs, adjusted non-compensation expense was $106.4 million, up 3%. Adjusted compensation expense was $323.1 million, and its ratio to operating revenue improved to 55.6% from 58.8%.
- Adjusted earnings from operations, a non-GAAP measure, were $151.4 million, up 27%, with a 26.1% margin versus 22.1%. This measure excludes specified items and is not the same as GAAP operating income.
- Lazard issued $400 million of 3.75% senior notes due 2025 and used proceeds plus cash to redeem or retire $450 million of 6.85% notes due 2017. The refinancing reduced reported debt by $50 million and generated the $60.2 million extinguishment loss.
- The declared common dividend was $1.30 per share for Q1, compared with $0.30 a year earlier; cash dividends paid were $158.4 million. On April 22, the board declared a further quarterly dividend of $0.35 per share.
- Currency translation reduced other comprehensive income by $32.7 million. The effective income-tax rate fell to 16.1% from 20.3%; the company continued to maintain a valuation allowance on substantially all deferred tax assets.
Outlook, commentary and risks
Management described global M&A conditions as active, with the value of announced and completed transactions higher year over year, but noted that transaction counts were lower for all deals and restructuring activity remained subdued. It cited generally favorable longer-term trends for both businesses, while stating that economic, market and currency conditions can materially affect results. Management expects near-term Asset Management growth to rely substantially on defined-benefit and defined-contribution plans in developed economies, with developing markets a longer-term opportunity. The filing provides no specific quarterly or annual earnings guidance.
Management’s stated compensation objective is for awarded compensation expense to grow more slowly than operating revenue, and it described a through-cycle target ratio in the mid-to-high 50% range; this is an objective, not a guarantee. Risks include market and economic weakness, lower M&A activity or AUM, client withdrawals, foreign-exchange volatility, competition for talent, counterparty or operational losses, and liquidity constraints. The filing reported routine legal and regulatory matters and said pending matters were not expected, in aggregate, to materially affect the business or financial condition. It also disclosed $17.7 million of investment-fund commitments and agreed U.K. pension contributions of £11.2 million in 2015. Management reported compliance with debt covenants and regulatory capital requirements.
Important facts for investors to verify
- How much of the decline in GAAP operating income and EPS reflects the one-time $60.2 million debt-extinguishment charge, and how sustainable are the adjusted results?
- Whether AUM growth, net flows and advisory transaction activity continue, especially given adverse foreign-exchange effects and lower restructuring revenue.
- Cash needs from seasonal incentive-compensation payments, dividends and repurchases, and the status of the revolving facility expiring in September 2015.
- Debt refinancing economics, future interest costs and continued compliance with leverage and interest-coverage covenants.
- The outlook for deferred-tax-asset valuation allowances and payments under the tax receivable agreement, including the related-party payable.
- Potential effects of deferred equity compensation, share issuance and repurchases on future compensation expense, cash flow and share dilution.