Lazard, Inc. (Lazard Ltd) — 2018 Q2 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Unaudited results. Lazard’s two principal businesses are Financial Advisory and Asset Management; the filing reports in U.S. dollars.
Financial results and position
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net revenue | $757.9 million | $717.2 million | $1,512.6 million | $1,340.6 million |
| Operating income | $199.9 million | $172.5 million | $385.8 million | $322.7 million |
| Net income attributable to Lazard Ltd | $147.0 million | $120.4 million | $306.7 million | $227.9 million |
| Diluted earnings per share | $1.13 | $0.91 | $2.34 | $1.72 |
| Operating margin on net revenue | 26.4% | 24.1% | 25.5% | 24.1% |
- Revenue mix and segments: Q2 Financial Advisory net revenue was $422.1 million, up 3%; Asset Management was $352.6 million, up 14%. First-half Financial Advisory revenue was $831.2 million, up 11%; Asset Management was $706.9 million, up 19%. Corporate recorded net revenue of negative $16.7 million in Q2 and negative $25.4 million in the first half.
- Compensation and costs: Q2 compensation and benefits expense was $416.2 million, versus $414.6 million; first-half expense was $821.2 million, up 6%. The company’s non-GAAP adjusted compensation-to-operating-revenue ratio was 55.8% for both Q2 and the first half, compared with 56.5% in the corresponding 2017 periods. Adjusted non-compensation expense was up 2% in Q2 and 4% in the first half.
- Taxes: Effective tax rates were 25.8% for Q2 and 19.6% for the first half, versus 29.9% and 28.3%, respectively. Management attributed the reductions chiefly to tax benefits from share-based compensation and Tax Act effects.
- Cash flow: First-half cash from operating activities was $64.8 million, down from $372.6 million. Investing activities used $30.7 million; financing activities used $559.2 million, including $223.8 million for share repurchases and $255.2 million for dividends. Cash, bank deposits/short-term investments and segregated cash totaled $1.883 billion at June 30, down from $2.455 billion at year-end 2017.
- Debt and liquidity: Senior debt carrying value was $1.191 billion, essentially unchanged from year-end. The notes comprise $500 million due 2020, $400 million due 2025 and $300 million due 2027. The $150 million revolving credit facility was undrawn; total unused credit lines were approximately $169 million. Lazard reported compliance with debt covenants; leverage and interest coverage ratios were 1.09x and 21.54x, respectively.
- Balance sheet: Total assets were $4.628 billion and total stockholders’ equity was $1.113 billion at June 30, 2018. The tax receivable agreement obligation was $277.2 million.
Material changes versus comparable periods
- Q2 net revenue rose about 6% and first-half net revenue about 13%; attributable net income increased about 22% and 35%, respectively. Higher Asset Management fees, supported by higher average AUM, and stronger first-half advisory fees contributed to growth.
- Average AUM increased 10% in Q2 and 17% in the first half year over year. However, period-end AUM fell 5% from December 31, 2017, to $237.9 billion, reflecting foreign-exchange depreciation, market depreciation and net outflows. First-half net flows were negative $1.4 billion.
- First-half operating cash flow declined substantially, with changes in operating assets and liabilities—including higher receivables—contributing to the decrease. Cash and restricted cash also declined amid shareholder distributions, share purchases and foreign-exchange effects.
- Corporate results were weaker, primarily because income from investments associated with deferred compensation arrangements was lower.
Outlook, commentary, risks and unusual items
- Management described the near- to mid-term macroeconomic outlook as supportive, citing healthy U.S. conditions, an improved European environment, high corporate cash balances and low borrowing costs for strong-credit companies. It said M&A fundamentals remained in place and that Lazard was positioned for growth, while noting market volatility and geopolitical, trade and regulatory developments could affect results.
- No specific earnings or revenue guidance was provided. Management emphasized that quarterly results can vary materially with transaction timing, financial markets, AUM and client flows. It aims to keep awarded and adjusted compensation ratios in the mid- to high-50% range over the cycle; this is a stated goal, not a forecast or guarantee.
- Adoption of new revenue-recognition guidance increased reported revenue and operating expenses by $24.1 million in Q2 and $47.6 million in the first half due to gross presentation of certain distribution and reimbursable deal costs; management said net income was not materially affected.
- Amortization and acquisition-related items included an $8.5 million Q2 benefit, chiefly from a decrease in the estimated fair value of contingent consideration. First-half benefit was $7.6 million.
- The Tax Act’s reduction in the U.S. corporate tax rate required deferred-tax and tax-receivable-agreement remeasurement. Management said its analysis of provisional tax amounts was expected to be completed in the second half of 2018.
- Risks include cyclical advisory activity, market and foreign-exchange movements affecting AUM and fees, client outflows, credit and liquidity risks, competition and employee retention. The filing says there were no material changes to previously disclosed risk factors. Pending legal and regulatory matters were described as not expected, in aggregate, to materially affect business or financial condition, based on information then available.
- The board declared a $0.44-per-share quarterly dividend on July 25, 2018, payable August 17, 2018. The company repurchased 4.15 million shares in the first half at an average $53.96 per share; $324.6 million of authorization remained at June 30.
Important facts for investors to verify
- Whether the improvement in fee revenue and earnings is sustained, given the timing-sensitive nature of advisory fees and market dependence of Asset Management.
- Whether AUM outflows, market performance and foreign-exchange movements continue to weigh on period-end assets and future management fees.
- The drivers of the sharp year-over-year decline in operating cash flow and the expected timing of fee collections, compensation payments and shareholder distributions.
- The sustainability of the lower effective tax rate, including share-based compensation tax benefits and completion of the Tax Act analysis.
- Debt maturities, covenant headroom, the tax receivable agreement’s estimated amount and payment timing, and the contingent exposure from legal matters and commitments.