Lazard, Inc. (Lazard Ltd) — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Unless stated otherwise, financial figures below are in U.S. dollars. Lazard provides Financial Advisory services, Asset Management, and certain corporate and banking activities.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $549.4 million | $422.1 million | +30% |
| Net revenue | $533.4 million | $401.9 million | +33% |
| Operating income | $107.2 million | $21.6 million | +$85.6 million |
| Net income | $85.4 million | $17.6 million | — |
| Net income attributable to Lazard Ltd | $80.8 million | $15.4 million | — |
| Diluted earnings per share | $0.61 | $0.12 | — |
| Operating margin on net revenue | 20.1% | 5.4% | +14.7 percentage points |
Financial Advisory and other advisory fees were $272.7 million, up 62%; money management fees were $253.0 million, up 9%. Interest expense declined to $16.0 million from $20.2 million, primarily reflecting the refinancing of debt. Compensation and benefits expense rose 16% to $321.6 million, largely with higher revenue. Management’s adjusted compensation-to-operating-revenue ratio was 58.8%, versus 60.0%; adjusted non-compensation expense was $103.0 million, up 3% excluding specified items.
- Segments: Financial Advisory net revenue was $275.5 million (up 64%) and operating income was $30.1 million, versus a $48.4 million loss that included $22.0 million of cost-initiative charges in Q1 2013. Asset Management net revenue was $268.6 million (up 10%); operating income was $92.8 million (up 4%), with margin declining to 34.6% from 36.5%. Corporate recorded a $15.7 million operating loss.
- Asset Management: AUM was $189.5 billion at March 31, up 1% from December 31, 2013. Average AUM rose 9% year over year to $185.6 billion. Quarterly net flows were positive $0.8 billion; market and foreign-exchange appreciation added $1.7 billion.
- Cash flow: Operating activities provided $53.8 million, compared with $73.1 million used in Q1 2013. Investing activities used $2.9 million; financing activities used $227.8 million, including $106.9 million of share repurchases and $35.9 million of dividends. Cash and cash equivalents declined $174.9 million during the quarter to $666.6 million.
- Balance sheet and liquidity: Total assets were $2.90 billion and total liabilities $2.34 billion at March 31, 2014. Senior debt was $1.05 billion, unchanged from year-end; no borrowings were outstanding under the $150 million revolving credit facility. Lazard reported approximately $258 million of available company credit lines, plus approximately $48 million available to LFB and $55 million to Edgewater.
- Capital returns: Lazard repurchased 2.39 million shares at an average $44.69 for $106.9 million. The quarter’s declared dividend was $0.30 per share. In April, the board authorized up to an additional $200 million of repurchases.
Material changes versus the prior comparable period
- Revenue growth was led by Financial Advisory: M&A and other advisory revenue nearly doubled, supported by more completed high-fee transactions. Capital-raising revenue fell 58%, while restructuring revenue declined 9% amid subdued industry activity.
- Asset Management benefited from higher average AUM and increased management and incentive fees, but higher expenses compressed its operating margin.
- Q1 2013 included $26.3 million of cost-saving initiative expenses ($22.0 million in Financial Advisory). These charges depressed the prior-year operating result; therefore, the reported improvement in operating income is not solely an underlying year-over-year comparison.
- Cash from operations improved from a use of cash to a source, while financing outflows increased, principally because of share repurchases and the new dividend.
- Shareholders’ equity declined to $555.6 million from $630.0 million at year-end, reflecting repurchases, share-based compensation settlements and dividends, partly offset by income and other comprehensive income.
Outlook, risks, contingencies, and unusual items
- Outlook: Management described developed-market conditions as improving and said it intended to capitalize on a potential recovery in M&A and equity markets. It expected growth in Asset Management, including from new strategies and emerging markets. These are qualitative expectations, not specific financial guidance.
- Cost-saving initiatives were substantially complete. Lazard expected approximately $160 million of annual savings, partly offset by business investment; more than two-thirds had been realized through 2013, with the full impact expected in 2014.
- Management’s through-the-cycle goal was an awarded-compensation-to-operating-revenue ratio in the mid-to-high 50% range; it cautioned that achieving this target was not assured. Q1’s adjusted ratio was 58.8%.
- Results are sensitive to transaction timing and M&A activity, AUM and investment performance, market and foreign-exchange movements, client flows, competition for senior talent, and third-party credit or operational problems. The company highlighted quarterly earnings volatility and said interim results are not necessarily indicative of future periods.
- Cash flow is seasonal: significant incentive-compensation payments are generally made early in the year. Management believed cash flow and available credit would be sufficient for obligations over the next 12 months. The company was in compliance with debt covenants; its reported leverage and interest-coverage ratios were 1.50x and 10.85x, respectively.
- Legal proceedings 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. LFB had $5.9 million of indemnifications, secured by $5.3 million of collateral or counter-guarantees; management considered loss remote. Investment-fund commitments totaled $27.2 million.
- The company recorded $9.1 million of bad-debt expense, net of recoveries, compared with $0.1 million in Q1 2013; the receivable allowance was $31.3 million. It reported $35.6 million of receivables past due or deemed uncollectible.
- A $1.23 billion valuation allowance against deferred tax assets remained in place. Management said a future release could materially affect the effective tax rate; the filing does not indicate that a release was assured.
- Following quarter-end, Lazard expected remaining LAZ-MD Holdings exchangeable interests to be exchanged in May 2014. On April 30, it announced a $0.30-per-share dividend payable in May.
Most important facts for investors to verify
- Whether the strong Financial Advisory fee growth continues, given the dependence on large transactions and the decline in total completed industry M&A deal count.
- Whether AUM, net flows, fee mix and investment performance sustain Asset Management revenue growth and restore segment margin.
- How the $160 million expected annual cost savings translate into realized savings, after reinvestment and higher compensation costs.
- Cash generation and capital returns against the $1.05 billion debt balance, seasonal compensation payments and contractual commitments.
- Credit quality and collection of advisory receivables, including the elevated bad-debt expense and the $35.6 million past-due or deemed-uncollectible balance.
- Developments in the deferred-tax-asset valuation allowance, litigation and regulatory requirements, and the planned exchange of remaining LAZ-MD Holdings interests.