Lazard Ltd. (NYSE: LAZ) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The filing identifies the registrant as Lazard Ltd. Lazard operates Financial Advisory and Asset Management businesses, with other activities reported in Corporate. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $650.8 | $771.5 | $1,312.5 | $1,539.7 |
| Net revenue | $630.7 | $757.9 | $1,274.4 | $1,512.6 |
| Operating income | $101.7 | $199.9 | $221.3 | $385.8 |
| Net income attributable to Lazard Ltd. | $65.8 | $147.0 | $162.8 | $306.7 |
| Diluted EPS | $0.55 | $1.13 | $1.36 | $2.34 |
| Operating income / net revenue | 16.1% | 26.4% | 17.4% | 25.5% |
- Q2 net revenue fell 17% year over year; first-half net revenue fell 16%. Advisory fees declined 22% in Q2 and 20% in the first half, while Asset Management fees, including incentive fees, declined 12% and 13%, respectively.
- Q2 compensation and benefits expense decreased 10% to $372.5 million. Non-compensation expense was $151.5 million, up 1%. First-half compensation expense fell 9% to $744.7 million; non-compensation expense fell 4% to $299.8 million.
- Management’s non-GAAP adjusted compensation-to-operating-revenue ratio was 57.5% in both Q2 and the first half, versus 55.8% in comparable 2018 periods. Adjusted non-compensation expense was $128.0 million in Q2 and $243.8 million in the first half; its ratio to operating revenue increased to 20.3% and 19.5%, respectively.
- First-half operating cash flow was $82.6 million, versus $64.8 million. Investing activities used $18.0 million; financing activities used $87.3 million. Cash, bank deposits, short-term investments and segregated cash totaled $2.26 billion at June 30, compared with $2.29 billion at year-end 2018; cash and cash equivalents alone were $919.2 million.
- Senior debt had $1.70 billion principal outstanding and a $1.68 billion carrying value at June 30, versus $1.45 billion principal at year-end. The company issued $500 million of 4.375% notes due 2029 and retired $250 million of 4.25% notes due 2020. No revolver borrowings were outstanding; approximately $168 million of credit lines were unused.
- Total assets were $5.51 billion and total liabilities $4.79 billion at June 30. Stockholders’ equity was $717.9 million, down from $970.1 million at year-end, reflecting, among other items, $351.7 million of share repurchases and $155.3 million of dividends in the first half.
Business performance and changes
- Financial Advisory: Q2 net revenue was $329.6 million, down 22%; operating income was $53.4 million, down 49%, and margin was 16.2% versus 24.6%. First-half revenue declined 20% to $668.0 million, primarily due to fewer fees above $5 million; operating income fell 41% to $111.5 million.
- Asset Management: Q2 net revenue was $315.6 million, down 10%; operating income declined 22% to $96.6 million and margin fell to 30.6% from 34.9%. First-half revenue declined 13% to $617.4 million and operating income declined 23% to $191.1 million, mainly reflecting lower average AUM and incentive fees.
- AUM was $237.5 billion at June 30, up 11% from year-end, principally due to market appreciation, partly offset by net outflows and foreign-exchange depreciation. First-half net flows were negative $5.2 billion; average AUM declined 7% year over year for the first half.
- Global completed M&A transaction value declined 18% in the first half year over year; announced transaction value declined 8%. Management said M&A fundamentals remained supportive, but transaction timing and market conditions make quarterly results volatile.
Outlook, risks and notable items
- No specific financial forecast or formal revenue/EPS guidance is provided. Management stated a goal of maintaining awarded and adjusted compensation ratios in the mid-to-high 50% range over the cycle, while noting there is no assurance it can do so.
- Management described Financial Advisory as competitively positioned and continued investment and selective hiring. It cited potential Asset Management opportunities from diversified strategies, new product development and seeding, while noting demand, AUM and fees depend on market performance and client flows.
- Principal risks include weaker economic or financial-market conditions, lower M&A activity or market share, declining AUM, competition for and retention of employees, third-party losses, liquidity constraints, currency changes, and regulatory or tax developments. The filing said there were no material changes to the risk factors in the 2018 Form 10-K.
- Unusual or period-specific items included a $6.5 million debt-extinguishment loss in the first half, acquisition-related costs including changes in contingent consideration fair value, and the January 2019 adoption of lease accounting, which added $477.4 million of right-of-use assets and $555.3 million of lease liabilities at quarter-end. The filing reports $710.6 million of undiscounted remaining operating lease payments.
- The effective tax rate was 27.7% in Q2 and 23.2% for the first half, compared with 25.8% and 19.6%. The company cited reduced excess tax benefits from share-based compensation and U.S. tax reform, including the base erosion and anti-abuse tax, among drivers.
- The tax receivable agreement obligation was $247.0 million. Management noted that its estimated amount and payment timing depend on assumptions and could change materially. Pending legal matters were not expected, in aggregate, to materially affect the business or financial condition based on information available.
- After quarter-end, the board declared a $0.47 per-share quarterly dividend, payable August 16, 2019. The company repurchased 9.7 million shares in the first half at an average $36.20 per share; $243.8 million of authorization remained at June 30.
Important facts for investors to verify
- Whether Financial Advisory activity and fee realization recover after the first-half decline, and how much revenue depends on large or completion-based transactions.
- Whether AUM and client flows stabilize, given first-half net outflows and lower average AUM, and the resulting effect on management fees and margins.
- Whether compensation and non-compensation costs remain aligned with management’s stated mid-to-high-50s compensation-ratio objective.
- Debt maturities, refinancing costs, lease obligations, revolver availability and compliance with credit covenants; Lazard reported compliance and a 1.78 leverage ratio and 15.24 interest-coverage ratio for the trailing 12 months.
- Use of capital for dividends and repurchases, including whether buybacks offset share-based compensation dilution; and developments in the tax receivable agreement, contingencies and deferred tax asset assumptions.