Lazard Ltd. — FY 2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed February 28, 2013. The filing is an annual report, not a standalone fourth-quarter filing. Lazard is a global financial advisory and asset management firm operating in 27 countries. The registrant is Lazard Ltd.; Lazard Group conducts the principal operating businesses.
Financial performance and position
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net revenue | $1.912 billion | $1.830 billion | Up 5% |
| Operating income | $123.9 million | $235.5 million | Down 47% |
| Net income attributable to Lazard Ltd | $84.3 million | $174.9 million | Down 52% |
| Diluted earnings per share | $0.65 | $1.36 | Down |
| Operating margin on net revenue | 6.5% | 12.9% | Down 6.4 percentage points |
| Operating cash flow | $481.9 million | $397.8 million | Up |
| Cash and cash equivalents at year-end | $850.2 million | $1.004 billion | Down $153.6 million |
| Total debt, including capital leases | $1.095 billion | $1.097 billion | Approximately flat |
| Total stockholders’ equity | $651.5 million | $866.9 million | Down |
- Financial Advisory: Revenue was $1.049 billion, up 6%. M&A and other advisory revenue rose 13%, while capital raising fell 22% and restructuring revenue fell 8%. Segment operating loss was $8.5 million, including $77.5 million of cost-initiative charges; excluding that charge, operating income was $69 million versus $62 million in 2011.
- Asset Management: Revenue was $896.3 million, essentially unchanged. Operating income was $236.8 million, down from $268.5 million; excluding $12.8 million of cost-initiative charges, it was $249.5 million. Year-end AUM was $167.1 billion, up 18%, primarily from market appreciation; net inflows were $2.7 billion. Average AUM increased 2%.
- Expenses and margins: Compensation and benefits rose 16% to $1.351 billion, including $100.0 million of fourth-quarter cost-initiative charges and $21.8 million for first-quarter staff reductions. Adjusted compensation was 61.8% of operating revenue; awarded compensation was 59.4%, versus 62.0% in 2011. Adjusted non-compensation expense rose 5% to $421.0 million.
- Cash flow and capital returns: Investing activities used $84.9 million and financing activities used $563.2 million, principally reflecting repurchases, dividends and other financing items. Lazard repurchased 12.8 million shares for $354.5 million during 2012 and declared $1.16 per share in dividends, including a special dividend and an accelerated fourth-quarter payment.
- Debt and liquidity: Senior notes outstanding were $1.077 billion: $528.5 million at 7.125% due 2015 and $548.4 million at 6.85% due 2017. No borrowings were outstanding under the revolving credit facility. Approximately $301 million of unused credit lines were available, including a $150 million revolver. Management said cash flows and available credit should fund obligations for the next 12 months and beyond. Credit-facility leverage and interest-coverage ratios were within covenant limits.
Material changes versus prior period
- Revenue improved 5%, led by Financial Advisory M&A and other advisory fees. Industry-wide completed global M&A value declined 14%, while Lazard’s M&A and other advisory revenue increased.
- Reported operating income and attributable net income fell sharply as compensation expense increased and the company recorded cost-reduction charges. Fourth-quarter 2012 revenue was $560.7 million, but the quarter posted an operating loss of $5.2 million and a $5.4 million net loss attributable to Lazard Ltd.
- AUM increased from $141.0 billion to $167.1 billion, mainly due to market and foreign-exchange appreciation; net flows were positive after outflows in 2011.
- Year-end cash declined, while equity fell by $215.3 million. Share repurchases and dividends were significant uses of capital.
Outlook, commentary, risks and unusual items
- Cost program: Announced in October 2012, the initiatives target approximately $125 million of annual savings: about $85 million in compensation and benefits and $40 million in other expenses. At least two-thirds of savings were expected in 2013, with the full effect in 2014. Pre-tax implementation costs were estimated at $110–$130 million; $102.6 million was recorded in Q4 2012, with the balance expected in the first half of 2013. Approximately 75% of implementation costs were expected to be paid in cash.
- Business outlook: Management cited low interest rates and high corporate cash balances, but emphasized continuing uncertainty, especially in Europe. It expected advisory opportunities in sovereign advice, restructuring, capital raising and emerging markets, and saw potential asset-management growth in developed-market retirement plans and, over time, developing economies. No firm revenue or earnings guidance was provided.
- Key risks: Advisory revenue is transaction-dependent and not contractually recurring; results can be volatile. Asset-management fees depend on AUM, investment performance, client flows and markets. Other material risks include competition and retention of senior talent, foreign-exchange movements, extensive regulation, counterparty and investment risks, litigation and operational disruption.
- Other items: The Lazard–Natixis cooperation arrangement expired December 31, 2012; discussions about renewal or a new arrangement were ongoing. The company reported a $1.24 billion valuation allowance against $1.41 billion of gross deferred tax assets. Management said pending legal matters, in aggregate, were not expected to materially affect the business or financial condition. The auditors issued unqualified opinions on the financial statements and internal controls; management also reported effective controls.
Important facts for investors to verify
- Whether the expected $125 million annual savings are achieved, and how much is offset by implementation costs or reinvestment.
- Whether the Q4 2012 cost charges are substantially nonrecurring and how underlying segment profitability develops.
- How much future AUM growth comes from net inflows rather than market appreciation, and whether investment performance sustains client retention.
- Cash generation, planned dividends and repurchases, and capacity to meet the 2015 and 2017 note maturities alongside lease commitments.
- Progress on renewal or replacement of the expired Natixis arrangement, and developments affecting tax assets, the valuation allowance and tax receivable agreement.