Lazard, Inc. (Lazard Ltd) — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results. Lazard provides financial advisory and asset management services; amounts below are U.S. dollars, generally in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $608.9 | $573.5 | $1,641.8 | $1,760.4 |
| Operating income (loss) | $149.0 | $570.7 | $360.6 | $(156.0) |
| Net income attributable to Lazard Ltd | $112.5 | $398.5 | $259.7 | $828.6 |
| Diluted earnings per share | $0.85 | $2.99 | $1.96 | $6.22 |
| Operating income as % of net revenue | 24.5% | 99.5% | 22.0% | (8.9)% |
The prior-year comparisons are materially distorted by unusual tax-receivable-agreement and tax-accounting items; they should not be read as ordinary operating trends. On management’s non-GAAP measures, Q3 earnings from operations were $160.9 million, or 26.3% of operating revenue, versus $161.4 million, or 27.2%, a year earlier. For the first nine months, those measures were $391.1 million, or 23.6%, versus $472.4 million, or 26.5%.
Revenue and segments
- Q3: Net revenue rose 6%. Financial Advisory revenue increased 4% to $343.5 million, mainly from higher restructuring fees, while Asset Management revenue was broadly stable at $267.7 million.
- Nine months: Net revenue fell 7%. Financial Advisory revenue declined 6% to $896.5 million as M&A and capital-raising fees weakened; restructuring revenue rose 122% to $166.1 million, partly offsetting the decline. Asset Management revenue decreased 10% to $767.6 million.
- Q3 segment operating income was $84.6 million for Financial Advisory (24.6% margin) and $82.0 million for Asset Management (30.6% margin). Nine-month amounts were $176.8 million (19.7%) and $224.0 million (29.2%), respectively.
- Asset Management AUM was $205.4 billion at September 30, up 10% from year-end, due primarily to market and foreign-exchange appreciation and net inflows. Average AUM increased 5% year over year in Q3 but declined 3% for the nine-month period. As of October 24, AUM was $202.6 billion, reflecting foreign-exchange depreciation and net outflows, partly offset by market appreciation.
Cash flow, liquidity and capital
- Operating cash flow was $299.1 million for the first nine months, down from $519.4 million in 2015. Investing activities used $21.2 million; financing activities used $556.2 million. Cash and cash equivalents declined $278.2 million to $853.9 million.
- At September 30, cash and cash equivalents were $853.9 million; deposits with banks and short-term investments were $534.9 million. Management said operating cash flow and credit lines should be sufficient to fund current obligations for the next 12 months.
- Senior debt had a $998.4 million principal balance and $990.5 million carrying value. It included $98.35 million of 6.85% notes due June 2017, $500 million of 4.25% notes due 2020, and $400 million of 3.75% notes due 2025. No revolving-credit-facility borrowings were outstanding; approximately $164 million of company lines and $11 million of LFB lines were unused.
- Total liabilities were $3.00 billion and total stockholders’ equity was $1.30 billion. The tax receivable agreement obligation was $513.6 million. The company repurchased $228.9 million of stock and paid $289.3 million in dividends during the first nine months. A quarterly dividend of $0.38 per share was declared after quarter-end.
Changes, outlook and risks
- Q3 compensation and benefits expense increased 11% to $353.8 million; management cited higher discretionary compensation and LFI-related charges. Adjusted compensation was 56.5% of operating revenue in Q3 and 57.2% for the nine months, above the company’s stated over-the-cycle goal of the mid-to-high-50% range.
- Management reported lower global M&A activity in the first nine months of 2016: completed transaction value and count fell 13% and 14%, respectively. Restructuring activity increased, primarily in the commodity sector. Management noted market volatility and potential effects from macroeconomic and geopolitical developments, including the U.K. vote to leave the EU.
- Management views longer-term conditions as potentially favorable for both businesses, citing continued demand for independent strategic advice and possible growth in global asset management. This is not quantified financial guidance; Lazard cautioned that quarterly results are volatile and not necessarily indicative of future periods.
- Key risks include cyclical M&A and capital-raising activity, AUM and market performance, client flows, foreign-exchange movements, competition and employee retention, counterparty losses, liquidity needs, and regulatory or legal matters. Management said pending legal matters, in aggregate, were not expected to materially affect business or financial condition; no material change to previously disclosed risk factors was reported.
- Unusual comparability items: 2015 Q3 included a $420.8 million benefit from partial extinguishment of the tax receivable agreement obligation. The 2015 nine-month period included a $547.7 million tax-receivable-agreement provision, a $60.2 million debt-extinguishment loss, and substantial deferred-tax benefits, contributing to an unusual 637% effective tax rate. The 2016 nine-month effective tax rate was 26.6%.
- The company completed a North American advisory acquisition in Q3 and acquired the remaining portion of MBA Lazard in October 2016. It recorded a $17.0 million contingent-consideration liability for a Q3 acquisition; none of the maximum 606,061 contingent shares had been earned by September 30.
Important facts for investors to verify
- Normalize prior-year earnings for tax-receivable-agreement, valuation-allowance, debt-refinancing and disposal items before assessing year-over-year profitability.
- Track whether M&A advisory revenue recovers and whether restructuring revenue remains elevated; both depend on transaction timing and market conditions.
- Monitor AUM flows, asset mix, investment performance and currency effects, which drive Asset Management fees and margins.
- Review the 2017 note maturity, the $513.6 million tax receivable agreement obligation, and cash available after compensation, dividends and repurchases.
- Assess compensation ratios, share-based award dilution and the pace of repurchases relative to shareholder distributions.