Lazard Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Unaudited. Lazard is a global financial advisory and asset management firm. Unless otherwise stated, financial amounts below are U.S. dollars.
Financial performance
- Revenue: Total revenue was $637.4 million and net revenue was $623.5 million, up 25% from $498.2 million in Q1 2016. Investment banking and advisory fees rose 26% to $334.9 million; asset management fees rose 17% to $272.9 million.
- Profit and margins: Operating income increased 53% to $150.2 million; operating margin on net revenue was 24.1%, versus 19.7%. Net income was $110.4 million, versus $70.7 million; net income attributable to Lazard Ltd was $107.6 million, or $0.88 basic and $0.81 diluted per share, versus $66.8 million, or $0.53 and $0.50.
- Segments: Financial Advisory net revenue was $335.8 million, up 26%, and operating income was $73.1 million, versus $38.9 million. Restructuring revenue increased 105% to $88 million; M&A and Strategic Advisory revenue rose 11% to $248 million. Asset Management net revenue was $283.4 million, up 15%, and operating income was $94.6 million, versus $70.6 million.
- Asset management: Quarter-end AUM was $215.2 billion, up 9% from year-end, reflecting market and foreign-exchange appreciation and net inflows. Net inflows were $3.3 billion; market appreciation was $11.1 billion and FX appreciation $2.8 billion. Average AUM rose 12% year over year.
- Expenses: Compensation and benefits expense rose 22% to $361.8 million. Adjusted compensation expense was 56.5% of operating revenue, down from 58.9%. Non-compensation expense rose 6% to $107.9 million; adjusted non-compensation expense was 17.2% of operating revenue, versus 20.1%.
- Cash flow: Operating activities provided $94.4 million, compared with $99.9 million used in Q1 2016. Investing activities used $3.7 million; financing activities used $369.9 million, mainly for dividends, share repurchases and share-based compensation settlements. Cash and cash equivalents declined $267.3 million to $891.5 million.
- Liquidity and debt: At March 31, cash and cash equivalents were $891.5 million and deposits with banks and short-term investments were $572.5 million. Senior debt had $1.2 billion principal and $1.189 billion carrying value; no revolving-credit borrowings were outstanding. Lazard reported approximately $172 million of unused corporate credit lines, plus approximately $21 million available to LFB.
- Capital returns: Lazard repurchased 2.46 million shares for $106.0 million at an average $43.02 per share. Cash dividends were $192.3 million; dividends declared were $1.58 per share for the quarter. On April 26, the board declared a further $0.41-per-share quarterly dividend.
Material changes and notable items
- Revenue growth reflected higher advisory fees, including stronger restructuring activity, and higher asset management fees, primarily from increased average AUM. The growth occurred despite a year-over-year decline in completed global M&A transaction value and volume.
- Cash flow improved year over year, but cash balances fell because financing outflows, including dividends and repurchases, exceeded operating cash generation. Management notes that cash typically declines early in the year because incentive compensation payments are concentrated in the first quarter.
- Receivables, net of allowance, fell to $527.6 million from $638.3 million at year-end, while the allowance for doubtful accounts rose to $29.7 million from $16.4 million. Q1 bad-debt expense, net of recoveries, was $13.7 million versus $0.5 million.
- Adoption of new share-based compensation accounting guidance added $81.5 million of deferred tax assets, net of valuation allowance, with an offsetting increase to opening retained earnings. The quarter’s tax provision included $7.4 million of excess tax benefits from vesting awards.
- The contingent consideration liability increased to $25.1 million; a $2.7 million fair-value loss was recorded in acquisition-related costs.
- Total stockholders’ equity was $1.213 billion, down from $1.294 billion at year-end, after dividends, repurchases and share-based award settlements; adoption of the accounting guidance increased opening equity by $81.5 million.
Outlook, commentary and risks
- Management described the near- to mid-term macroeconomic outlook as generally positive and said longer-term trends appeared favorable for both businesses. It cited continued demand for independent strategic advice and opportunities to grow Asset Management through new strategies and developing markets. No specific revenue or earnings guidance was provided.
- Management targets awarded and adjusted compensation ratios in the mid-to-high-50% range over the cycle, but cautioned that this is not assured. Q1 adjusted compensation ratio was 56.5%.
- Results may fluctuate materially with completed advisory transactions, M&A and restructuring activity, equity markets, AUM flows and mix, foreign exchange, compensation and client decisions. Management specifically identifies economic or market declines, lower M&A activity or AUM, third-party losses, liquidity constraints, competition and employee retention as risks.
- The company reported compliance with debt covenants; its 12-month leverage ratio was 1.27x and interest coverage ratio was 19.35x, against limits of 3.25x maximum leverage and 3.00x minimum coverage. Management said operating cash flow and credit lines should fund obligations for the next 12 months.
- Legal, regulatory and arbitration matters arise in the ordinary course, including former-employee claims. Management did not expect pending matters in aggregate to materially affect the business or financial condition. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether advisory revenue growth and stronger restructuring fees persist given transaction timing and changing M&A and default activity.
- Whether AUM inflows, investment performance, market movements and foreign exchange sustain asset management fees; 72% of AUM had foreign-currency exposure.
- The causes and collectability of the higher doubtful-account allowance and past-due or deemed-uncollectible receivables, which were $42.5 million at quarter-end.
- Cash availability after seasonal compensation payments, dividends and buybacks, including the distinction between cash and bank deposits or short-term investments.
- Potential variability in tax expense and the estimated $512.9 million tax receivable agreement obligation, whose payment amount and timing depend on assumptions.
- The effect of share-based compensation, future repurchases and the $1.2 billion debt principal on dilution, capital returns and liquidity.