Lazard, Inc. (Lazard Ltd) — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. Unless noted, amounts are U.S. dollars in millions. Lazard’s principal businesses are Financial Advisory and Asset Management, with selected activities and debt reported in Corporate.
Financial results
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $449.5 | $484.6 | $1,413.2 | $1,446.5 |
| Net revenue | $428.8 | $462.4 | $1,351.8 | $1,377.7 |
| Operating income | $46.7 | $87.7 | $129.1 | $250.4 |
| Net income attributable to Lazard Ltd | $33.3 | $62.7 | $89.7 | $179.7 |
| Diluted EPS | $0.26 | $0.49 | $0.70 | $1.39 |
| Operating income / net revenue | 10.9% | 19.0% | 9.5% | 18.2% |
- Q3: Net revenue fell 7% year over year. Advisory fees declined 12%, mainly on lower average fees for larger assignments. Money management fees rose 1%, supported by higher average AUM. Operating expenses increased 2%, with compensation expense higher. Adjusted compensation expense was nearly flat, but its ratio to operating revenue rose to 62.7% from 59.3%.
- First nine months: Net revenue declined 2%; operating expenses rose 8%. Compensation and benefits increased 9%, including $22 million of first-quarter staff-reduction charges and higher deferred-award amortization. Operating income fell 48% and Lazard-attributable net income fell 50%.
- Reported 2011 comparisons include an $18.2 million pre-tax gain on repurchase of subordinated debt, recorded in Q3 2011. The 2012 first-nine-month results included $25 million of staff-reduction charges.
Segments and operating indicators
- Financial Advisory: Q3 net revenue was $220.0 million, down 13%, and operating income was $7.5 million versus $40.0 million. For nine months, revenue was $739.8 million, up 1%, while operating income declined to $46.2 million from $90.2 million. Nine-month M&A and Strategic Advisory revenue rose 5% and Restructuring revenue rose 10%, but Capital Markets and Other Advisory revenue fell 40%.
- Asset Management: Q3 net revenue was $221.5 million, up 1%, and operating income was $60.6 million versus $62.4 million. Nine-month revenue fell 6% to $647.1 million and operating income fell 24% to $169.1 million. AUM was $160.4 billion at September 30, up 14% from year-end, principally from market appreciation; nine-month average AUM declined 0.4% year over year. Nine-month net flows were positive $2.8 billion.
- Corporate: Operating loss was $21.4 million in Q3 and $86.3 million for nine months. Nine-month loss increased from $63.8 million, including the $25 million staff-reduction charge.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $239.8 million, versus $281.6 million. Investing activities used $69.6 million, principally reflecting $71.7 million of property additions; financing activities used $347.4 million, including $222.7 million of share repurchases and $66.2 million of dividends. Cash and cash equivalents decreased $170.9 million to $832.9 million.
- At September 30, total assets were $2,994.9 million and total liabilities were $2,161.1 million. Total stockholders’ equity was $833.8 million, down from $866.9 million at year-end 2011. Senior debt was unchanged at $1,076.9 million; no borrowings were outstanding under the revolving credit facility.
- Lazard reported approximately $301 million of unused company credit lines, plus approximately $91 million available to LFB and $55 million to Edgewater. A new $150 million revolving facility, expiring in September 2015, replaced a prior facility. The company stated it was in compliance with debt covenants; its leverage and interest coverage ratios were 2.30x and 6.81x against limits of 4.00x maximum and 3.00x minimum.
- Management said operating cash flow and credit lines should fund current obligations for the next 12 months and beyond. Liquidity is seasonal, including substantial incentive-compensation payments early in the year.
Outlook, risks and unusual items
- Management described global conditions as uncertain, particularly in Europe. Industry M&A activity generally weakened in the first nine months, while equity markets had risen; the firm cited opportunities in restructuring, debt, sovereign and other advisory work and expected to pursue growth across advisory and asset-management businesses. No specific revenue or earnings forecast was provided.
- In October 2012, Lazard announced cost-saving initiatives targeting approximately $125 million of annual expense savings: at least two-thirds expected in 2013 and the full effect in 2014. Expected pre-tax implementation costs are $110–$130 million, mostly in Q4 2012 and the balance in the first half of 2013; approximately 75% is expected to be paid in cash.
- The board declared a $0.20 quarterly dividend in October, payable November 23, 2012. In October it also authorized an additional $200 million share-repurchase authorization; the company bought 3.4 million shares for $97.9 million through October 24.
- Key risks include economic and market weakness, transaction-dependent advisory revenue, AUM and market movements, client or counterparty losses, liquidity, competition and retention of employees, foreign-exchange exposure, and operational and regulatory risks. Advisory and asset-management revenues and profits can vary substantially by quarter.
- Legal proceedings and inquiries arise in the ordinary course, including former-employee claims; management said pending matters in aggregate were not expected to materially affect business or financial condition. LFB had $22 million of fully collateralized credit commitments and approximately $5 million of indemnifications, with management assessing loss likelihood as remote.
- Deferred tax assets were approximately $1.3 billion at year-end 2011, with a valuation allowance of approximately $1.1 billion; the filing reported no change in the assessment through September 2012. A future release could affect reported tax expense and would have tax-receivable-agreement implications.
Investor verification priorities
- Track whether the announced cost savings are achieved on schedule and compare realized savings with implementation costs and cash outlays.
- Monitor compensation expense and deferred-award amortization, particularly the expected decline after the 2008 grant finishes vesting in early 2013.
- Check advisory transaction volume, fee levels and concentration in large clients, alongside AUM flows, market-driven valuation changes and product mix.
- Assess cash generation against repurchases, dividends, debt service, lease commitments and investment-fund commitments; confirm continued covenant compliance and access to unused credit lines.
- Review the valuation and liquidity of Level 3/private-equity investments, tax valuation-allowance judgments, and developments in legal or regulatory matters.