Lazard Ltd. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; filed May 4, 2020. Lazard operates Financial Advisory and Asset Management businesses, with selected activities reported in Corporate. Amounts below are U.S. dollars; financial statement figures are unaudited.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Total revenue | $558.2 million | $661.7 million |
| Net revenue | $538.0 million | $643.7 million |
| Operating income | $84.1 million; 15.6% of net revenue | $119.7 million; 18.6% |
| Net income | $58.3 million | $96.5 million |
| Net income attributable to Lazard Ltd | $64.0 million; diluted EPS $0.56 | $97.0 million; diluted EPS $0.80 |
| Cash flow from operations | $(156.0) million | $(161.3) million |
| Cash, bank deposits, short-term investments and segregated cash | $1.916 billion | $2.456 billion at Dec. 31, 2019 |
| Senior debt carrying value | $1.680 billion | $1.680 billion at Dec. 31, 2019 |
| Total stockholders’ equity | $559.6 million | $681.6 million at Dec. 31, 2019 |
Compensation and benefits expense was $319.8 million, down 14%; non-compensation expense was $133.7 million, down 10%. The non-GAAP adjusted compensation ratio rose to 60.0% from 57.5%, while adjusted non-compensation expense was 20.0% of operating revenue versus 18.7%. The effective tax rate increased to 30.6% from 19.4%.
Business segments and activity
- Financial Advisory: Net revenue was $299.0 million, down 12%; operating income was $52.1 million, down 10%, with a 17.4% margin versus 17.2%. Management attributed the revenue decline chiefly to fewer fees above $10 million.
- Asset Management: Net revenue was $282.5 million, down 6%; operating income was $77.8 million, down 18%, with a 27.5% margin versus 31.3%. Management fees and other revenue fell 7%; incentive fees were $1.5 million versus $0.6 million.
- Corporate: Operating loss was $45.8 million versus $32.9 million. Other revenue was a loss of $26.4 million, primarily reflecting investment-related losses versus gains in the prior-year quarter.
- Assets under management: $193.0 billion at quarter-end, down 22% from $248.2 billion at year-end, reflecting market depreciation, net outflows and foreign-exchange depreciation. Net outflows were $4.9 billion and market depreciation was $43.7 billion. AUM was $198.1 billion on April 24, reflecting subsequent market appreciation partly offset by outflows and currency depreciation.
Material changes and liquidity
Net revenue declined 16% year over year; operating income declined 30% and Lazard-attributable net income declined 34%. Financial Advisory and Asset Management fee revenue both weakened. Other revenue shifted from a $29.6 million gain to an $11.1 million loss, including $44.4 million of unrealized investment losses on securities still held at quarter-end, compared with $19.9 million of gains in Q1 2019.
Operating cash flow remained negative, mainly reflecting seasonal compensation payments and changes in operating assets and liabilities. Financing activities used $310.2 million, including $95.2 million for share repurchases, $48.8 million for dividends, and share-based compensation tax settlements. Cash and cash equivalents alone were $793.5 million; the broader cash total also includes deposits with banks and short-term investments and segregated cash. Management cited lower LFB customer deposits as a factor in the quarter’s decline in cash balances.
Senior notes had $1.700 billion principal outstanding across maturities from 2025 to 2029. Lazard reported approximately $168 million in unused credit lines, including a $150 million revolving facility due to expire in September 2020; no amount was drawn. It was compliant with debt covenants and reported a 1.83x leverage ratio and 12.21x interest coverage ratio for the trailing 12 months. Management said operating cash flows should be sufficient to fund obligations for the next 12 months.
Outlook, risks and unusual items
- COVID-19: Management described an unprecedented period of volatility and expected a challenging near-term environment, with lower asset valuations and global M&A activity. It anticipated increased restructuring, capital advisory and sovereign advisory activity, but said this might not offset weaker M&A. The impact on Asset Management remained uncertain.
- Management reported remote work for virtually all employees and restricted travel; it said operations, financial reporting systems and controls had not been materially affected at the time of filing. The filing identified risks from market disruption, client and counterparty credit, remote-work productivity, cyber/security events and vendor interruptions.
- Industry completed M&A value fell 30% year over year and announced M&A value fell 36%. Global equity indices cited in the filing declined 20%–25% from year-end levels. Management cautioned that quarterly results are volatile and not indicative of full-year results.
- No quantified earnings or revenue guidance was provided. The company stated a goal of maintaining adjusted and awarded compensation ratios in the mid-to-high 50% range over the cycle; the Q1 adjusted ratio was 60.0%.
- The board declared a $0.47 per-share quarterly dividend on April 29, payable May 22, 2020. The company repurchased 2.9 million shares for $95.2 million during the quarter. A $7.6 million retained-earnings adjustment was recorded upon adoption of the new expected-credit-loss accounting standard.
- Goodwill decreased by $16.1 million, primarily from foreign-currency translation. Legal matters were described as ordinary-course proceedings; management did not expect them, in aggregate, to materially affect the business or financial condition. No material change to previously reported risk factors was identified other than the COVID-19 risk.
Key facts for investors to verify
- Whether subsequent M&A activity, transaction closings and restructuring engagements offset the expected near-term advisory slowdown.
- Whether AUM and client flows stabilize or recover, and how markets and foreign exchange affect fees and investment performance.
- Cash generation after seasonal compensation payments, the composition and accessibility of reported liquidity, and the refinancing or replacement of the revolving credit facility expiring in September 2020.
- Progress toward the compensation-cost objective, including whether adjusted compensation ratios decline from the Q1 level.
- Market-sensitive investment valuations, receivable collectability and the timing and amount of tax receivable agreement payments; the recorded obligation was $221.8 million at quarter-end.