Lazard Ltd. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Lazard operates Financial Advisory and Asset Management businesses, with selected activities reported in Corporate. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Total revenue | $422.1 million | $506.5 million |
| Net revenue | $401.9 million | $486.0 million |
| Operating income | $21.6 million | $37.8 million |
| Net income attributable to Lazard Ltd | $15.4 million | $25.6 million |
| Diluted EPS | $0.12 | $0.20 |
| Net cash used in operating activities | $73.1 million | $82.2 million |
| Cash and cash equivalents at period end | $586.1 million | $765.7 million |
- Operating margin on net revenue was 5.4%, down from 7.8%. Adjusted earnings from operations, a non-GAAP measure, were $65.9 million versus $80.8 million; the related margin was 15.9% versus 16.2%.
- Q1 2013 operating, investing and financing cash flows were respectively $(73.1) million, $(26.6) million and $(148.5) million. The cash decrease also reflected $(15.9) million of foreign exchange effects.
- Senior debt was $1.077 billion, unchanged from year-end 2012. No borrowings were outstanding under the $150 million revolving facility. The company reported $274 million of unused lines available to it, plus separate facilities available to LFB and Edgewater.
- Total assets were $2.728 billion and total liabilities $2.151 billion at March 31, 2013. Total stockholders’ equity was $577.1 million, down from $651.5 million at December 31, 2012.
- Financial Advisory generated $168.5 million net revenue and a $48.4 million operating loss; Asset Management generated $244.0 million net revenue and $88.9 million operating income. Corporate reported a $18.9 million operating loss.
- Asset Management AUM was $172.0 billion at quarter-end, up 3% from year-end, largely due to market appreciation. Average AUM rose 14% year over year to $170.7 billion. Net flows were outflows of $1.0 billion.
Material changes versus the prior comparable period
- Net revenue declined 17%. Investment banking and other advisory fees fell 39% to $168.1 million, reflecting weaker advisory and restructuring fees, prior-year large assignments and transaction timing.
- Money management fees increased 13% to $231.1 million, supported by higher average AUM; Asset Management operating income increased 65% and its margin rose to 36.5% from 25.2%.
- Financial Advisory net revenue fell 39% to $168.5 million. M&A and other advisory revenue decreased 37%, while restructuring revenue fell 53%. Global completed M&A value rose 24%, but transaction count fell 19%.
- Compensation and benefits expense decreased 18% to $277.7 million. Adjusted compensation expense declined 21% to $248.2 million, and its ratio to operating revenue improved to 60.0% from 62.7%.
- Operating income fell 43%; net income attributable to Lazard Ltd declined 40%. The effective tax rate decreased to 18.3% from 23.2%, primarily due to geographic earnings mix.
Outlook, commentary, risks and unusual items
- Management described macroeconomic conditions as improving but uncertain, particularly in Europe. It cited weaker European M&A and low restructuring activity, while noting potential opportunities in sovereign advisory, capital raising and recovery-driven transaction activity.
- October 2012 cost-saving initiatives targeted approximately $125 million in annual savings. Cumulative implementation expense was approximately $129 million through March 31, 2013, including $26.3 million in Q1. Management expected completion by June 30, 2013, additional Q2 implementation expense no greater than Q1, and full savings impact in 2014.
- Based on then-current market conditions, management estimated a full-year 2013 awarded-compensation-to-operating-revenue ratio of approximately 58.5%; its longer-term target was the mid-to-high-50% range. These are management estimates, not guarantees.
- Management stated that operating cash flow is seasonal, with substantial incentive-compensation payments typically made in the first quarter. It expected cash flows and available credit lines to fund obligations for the next 12 months and beyond. The company reported covenant compliance; its leverage and interest coverage ratios were 1.89 and 8.11, respectively, against limits of 4.00 maximum and 3.00 minimum.
- Q1 financing cash use included $117.0 million of share withholding to meet employee tax obligations, $30.2 million of share repurchases and $2.6 million of distributions to noncontrolling interests. A quarterly dividend of $0.25 per share was declared on April 25, 2013, payable May 24.
- Comprehensive income attributable to Lazard Ltd was $1.1 million, including a substantial currency translation loss. The filing identifies market, transaction-volume, client-flow, foreign-exchange, credit, liquidity, competition and employee-retention risks.
- The company disclosed ongoing legal, regulatory and arbitration matters, including former-employee claims, but stated that pending matters in aggregate were not expected to have a material effect on business or financial condition. No material change to previously reported risk factors was disclosed.
Important facts for investors to verify
- Whether Financial Advisory revenue and margins recover, given the segment’s Q1 operating loss and reliance on transaction closings.
- Whether Asset Management AUM and fee growth persist, particularly in light of Q1 net outflows and reported $2 billion net outflows after quarter-end through April 23.
- Actual delivery and timing of cost savings versus implementation costs, including additional Q2 charges.
- Cash levels and seasonal operating cash use, including employee compensation payments, share withholding and capital returns.
- Debt maturities, credit-facility availability and continued compliance with debt covenants.
- Potential outcomes of legal matters, investment valuations and other contingencies; the filing does not quantify possible losses for pending legal proceedings.