Lazard, Inc. (Lazard Ltd) — FY 2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2018; it is not a quarterly filing. Lazard operates globally in Financial Advisory and Asset Management. Financial Advisory generated about 55% of consolidated net revenue and Asset Management about 47%, with Corporate activities reducing revenue by about 2%.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net revenue | $2.826 billion | $2.644 billion |
| Operating income | $681 million | $825 million |
| Net income attributable to Lazard Ltd | $527 million | $254 million |
| Diluted earnings per share | $4.06 | $1.91 |
| Operating cash flow | $699 million | $1.029 billion |
| Year-end AUM | $214.7 billion | $249.5 billion |
| Debt carrying value | $1.434 billion | $1.190 billion |
- Net revenue rose 7%. Advisory fee revenue increased 12%, primarily from M&A activity; Asset Management revenue rose 6%, supported by higher average AUM and the revenue-accounting change.
- Reported operating margin was 24.1%, versus 31.2%. The comparison is affected by a $203 million tax receivable agreement benefit recorded in 2017. On Lazard’s non-GAAP basis, earnings from operations increased 6% to $754 million and margin improved to 27.4% from 26.8%.
- Financial Advisory revenue was $1.556 billion and segment operating income was $357 million, up 12% and 46%, respectively. Asset Management revenue was $1.332 billion; operating income fell 6% to $420 million, and its margin declined to 31.5% from 35.4%.
- Year-end AUM fell 14%, reflecting market and foreign-exchange depreciation and net outflows. Average AUM increased 6%. Net outflows were $4.9 billion; market depreciation was $21.3 billion and foreign-exchange depreciation $8.5 billion.
- Cash and cash equivalents were $1.247 billion; cash, deposits and restricted cash totaled $2.292 billion. Available unused credit lines were about $168 million. Lazard reported $699 million of operating cash flow, $46 million used in investing activities and $726 million used in financing activities.
- Senior notes had $1.45 billion principal outstanding: $250 million due 2020, $400 million due 2025, $300 million due 2027 and $500 million due 2028. Lazard issued the 2028 notes and used part of the proceeds to retire $250 million of 2020 notes. No revolver borrowings were outstanding; the company reported compliance with debt covenants.
- Fourth-quarter 2018 net revenue was $687 million, operating income $156 million, net income attributable to Lazard $113 million and diluted EPS $0.89. The comparable fourth quarter of 2017 included $359 million operating income and an $84 million net loss attributable to Lazard, substantially affected by tax-related items.
Changes, outlook and material matters
- Adoption of new revenue-recognition guidance in 2018 changed presentation: certain reimbursable deal and distribution costs were reported gross, increasing both revenue and expenses by $94 million, with no material net-income impact. The company said adoption had no material effect on revenue-recognition timing.
- The 2017 Tax Act drove a roughly $420 million charge, principally from reducing deferred tax assets, partly offset by the $203 million tax receivable agreement benefit. The 2018 effective tax rate was 21.8%, compared with 68.5% in 2017.
- 2018 included $6.5 million of debt-extinguishment expense, a $10 million unconditional commitment to the Lazard Foundation and $27.5 million of ERP implementation costs. Adjusted non-compensation expense increased 5%, mainly reflecting technology investment.
- Management described U.S. economic conditions as healthy, European growth as slower but continuing, and emerging markets as volatile. It said M&A fundamentals remained supportive and emphasized selective hiring, investment in technology and data science, and growth in Asset Management products. These are management views, not earnings guidance; the filing gives no specific 2019 revenue or EPS forecast.
- Subsequent to year-end, AUM was $232.2 billion as of February 19, 2019. On February 4, 2019, the board declared $0.94 per share in dividends, including a $0.50 extra dividend, and authorized an additional $300 million of repurchases.
- Key risks include transaction-dependent and volatile advisory fees, market-driven AUM and investment performance, competition and retention of senior professionals, foreign-exchange exposure, regulatory and litigation risks, cyber and operational disruptions, and tax uncertainty. Management stated pending legal matters, in aggregate, were not expected to materially affect business or financial condition. Total stockholders’ equity declined to $970 million from $1.259 billion, amid $553 million of repurchases and $360 million of dividends.
Important facts for investors to verify
- Separate recurring operating performance from 2017’s large tax receivable agreement benefit and the Tax Act’s deferred-tax charge; reconcile GAAP results with Lazard’s non-GAAP operating measures.
- Assess whether 2018 AUM outflows and market and currency depreciation persist, and review subsequent AUM, client flows, investment performance and fee mix.
- Review the cash-flow impact of compensation payments, dividends and repurchases, and the company’s capacity to sustain shareholder distributions alongside debt and lease commitments.
- Check the treatment and collectability of receivables: net receivables were $686 million, with a $40 million allowance; past-due or deemed-uncollectible receivables were about $42 million.
- Monitor tax receivable agreement obligations ($271 million recorded), tax-rule developments, foreign-exchange exposure and the $250 million 2020 note maturity.