Lazard Ltd. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2014. The supplied filing identifies the registrant as Lazard Ltd., not Lazard, Inc. Dollar amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless otherwise stated.
Business context
Lazard provides financial advisory services, including M&A, restructuring and capital-raising advice, and asset management. Its principal segments are Financial Advisory and Asset Management; Corporate includes cash, investments, debt management and certain banking activities. Results are affected by transaction timing, financial markets, assets under management (AUM), client flows and compensation.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net revenue | $566.9 | $490.4 | $1,100.3 | $892.3 |
| Operating income | $99.0 | $40.9 | $206.2 | $62.5 |
| Net income | $85.9 | $31.9 | $171.3 | $49.6 |
| Net income attributable to Lazard Ltd. | $85.2 | $31.4 | $166.0 | $46.7 |
| Diluted earnings per share | $0.64 | $0.24 | $1.25 | $0.36 |
| Dividends declared per share | $0.30 | $0.25 | $0.60 | $0.25 |
- Net revenue grew 16% in Q2 and 23% in the first half. Advisory fee revenue increased 8% and 29%, respectively; asset management fees increased 17% and 13%.
- Operating margin on net revenue was 17.5% in Q2 versus 8.3%, and 18.7% for the first half versus 7.0%. The comparison periods in 2013 included cost-saving initiative charges.
- Management’s adjusted compensation ratio was 58.8% of operating revenue in both 2014 periods, compared with 60.0% in 2013. Adjusted earnings from operations were $123.6 million in Q2 and $243.1 million in the first half; these are non-GAAP measures.
- Financial Advisory: segment net revenue was $280.8 million in Q2 and $556.3 million in the first half, up 7% and 29%. First-half operating income was $57.0 million, versus a $24.9 million loss in 2013, when restructuring and cost-saving charges weighed on results.
- Asset Management: segment net revenue was $288.2 million in Q2 and $556.7 million in the first half, up 17% and 14%. Operating income was $102.9 million and $195.7 million, respectively. Q2 and first-half operating margins were 35.7% and 35.2%.
- Corporate: operating losses were $30.9 million in Q2 and $46.6 million in the first half. Lower interest expense after refinancing helped, while investment-related compensation and a tax receivable agreement provision affected costs.
Cash flow, liquidity and debt
- First-half operating cash flow was $129.6 million, compared with $13.6 million in 2013. Investing cash outflow was $5.5 million; financing cash outflow was $284.0 million, principally reflecting share repurchases, dividends and share-based compensation settlements.
- Cash and cash equivalents were $684.5 million at June 30, down from $841.5 million at year-end 2013. Bank deposits were $322.3 million and segregated cash was $67.7 million. Cash outside the U.S. was approximately $340 million.
- Senior debt was $1,048.4 million, unchanged from year-end: $548.4 million of 6.85% notes due 2017 and $500 million of 4.25% notes due 2020. No borrowing was outstanding on Lazard Group’s $150 million revolving facility; it matures in September 2015. The company reported compliance with debt covenants.
- Management reported approximately $238 million of unused company credit lines, plus approximately $48 million available to LFB and $35 million to Edgewater. The filing says operating cash flows and credit lines should be sufficient for obligations over the next 12 months.
- Total stockholders’ equity was $566.7 million, down from $630.0 million at December 31, 2013. The company repurchased 4.1 million shares in the first half for approximately $192.7 million; a $50.3 million Natixis share purchase settled July 1.
Material changes, outlook and risks
- Asset Management AUM reached $204.5 billion at June 30, up 9% from year-end, reflecting market and foreign-exchange appreciation and net inflows. Average AUM was up 18% in Q2 and 13% in the first half year over year. Approximately 64% of AUM was foreign-currency denominated.
- Management described improving developed-market conditions, returning corporate confidence and positive longer-term M&A and equity-market trends, while noting possible market volatility. It expected U.S. conditions to remain relatively strong and cited investor demand and growth initiatives in Asset Management; no specific revenue or earnings forecast was provided.
- The company expects approximately $160 million of annual savings from cost-saving initiatives, partially offset by business investment. More than two-thirds had been realized through 2013, with the full impact expected in 2014. Management’s stated compensation goal is a mid-to-high-50s awarded-compensation-to-operating-revenue ratio over the cycle; achievement is not assured.
- Industry conditions were mixed: first-half completed global M&A value and deal count declined 7% and 11% year over year, while announced deal value rose 42%. Restructuring activity remained low. Lazard’s own first-half M&A and Other Advisory revenue increased 39%.
- Unusual items include a $9.2 million provision under the tax receivable agreement in 2014, with none in the comparable 2013 period, and investment gains associated with deferred compensation arrangements. The filing also reports a $20 million Edgewater-related credit-line draw and related-party loan expected to be repaid in Q3 2014.
- Management identified risks including weaker economic or financial-market conditions, lower M&A activity or AUM, client and counterparty losses, liquidity constraints, competition for talent, market and foreign-exchange movements, and uncertain quarterly transaction timing. It said pending legal matters were not expected in aggregate to materially affect business or financial condition; no material change to previously reported risk factors was disclosed.
- After quarter-end, Lazard announced a $0.30 quarterly dividend and described expected arrangements to acquire certain convertible-securities business assets from LFCM Holdings and end or modify related agreements by year-end. The filing said these arrangements were not expected to materially affect results.
Important facts for investors to verify
- Whether advisory revenue growth and the increase in completed high-fee transactions can be sustained despite weaker industry-wide completed M&A statistics.
- How much AUM growth reflects net client inflows versus market and foreign-exchange appreciation, and whether flows persist across asset classes.
- The sustainability of margins and compensation ratios as business activity and staffing change, including the realized net benefit of the cost-saving program.
- Cash availability after dividends, buybacks, incentive-compensation payments and commitments; confirm the Natixis transaction settlement and repayment of the Edgewater loan.
- Potential tax effects of deferred tax assets and the tax receivable agreement, including the timing and amount of any valuation-allowance change.
- Exposure to less-liquid investments: approximately $118 million of fair-value investments were Level 3 at June 30, and private-equity commitments totaled $26.4 million.