Lazard Ltd. — FY2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013; the filing also provides unaudited fourth-quarter results. The filing registrant is Lazard Ltd., a Bermuda holding company whose principal businesses are Financial Advisory and Asset Management. Financial amounts below are U.S. dollars.
Business context and results
Lazard advises corporate, government and institutional clients on M&A, restructuring, capital structure and other financial matters, and manages client assets across equity, fixed-income and alternative strategies. Its revenues are cyclical: advisory fees depend substantially on transaction closings, while asset-management fees depend on AUM, markets and client flows.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net revenue | $1,985 million | $1,912 million | +4% |
| Operating income | $217 million | $124 million | +75% |
| Operating margin | 10.9% | 6.5% | +4.4 percentage points |
| Net income attributable to Lazard Ltd | $160 million | $84 million | +90% |
| Diluted EPS | $1.21 | $0.65 | Higher |
| Operating cash flow | $527 million | $482 million | +$45 million |
| AUM at year-end | $186.9 billion | $167.1 billion | +12% |
FY2013 adjusted non-GAAP earnings from operations were $428 million, or 21.1% of operating revenue, versus $332 million and 16.8% in 2012. These measures exclude specified items and are not U.S. GAAP results.
Segments and changes versus 2012
- Financial Advisory: Revenue declined 7% to $981 million. M&A and other advisory fees fell 3%, and restructuring revenue declined 27%, reflecting fewer large completed assignments and low industry restructuring activity. Segment operating income was $21 million, versus a $9 million loss in 2012; excluding cost-saving charges, operating income was approximately $68 million in both years.
- Asset Management: Revenue rose 16% to $1.039 billion; segment operating income increased 42% to $335 million (32.2% margin). Average AUM increased 12% to $173.7 billion. Year-end AUM growth was primarily market appreciation, despite net outflows of $1.9 billion and $4.4 billion of foreign-exchange depreciation during 2013.
- Corporate: Revenue remained negative at $34 million, compared with negative $33 million. Operating loss widened to $139 million from $104 million, including a $54 million debt-refinancing charge in 2013.
Fourth-quarter 2013 net revenue was $613 million, operating income $73 million, net income $53 million and net income attributable to Lazard Ltd $53 million. Diluted EPS was $0.40. The comparable fourth-quarter 2012 reported a $5 million operating loss and a $5 million net loss attributable to Lazard Ltd.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $841 million, down from $850 million; operating cash flow was $527 million. Investing activities used $55 million and financing activities used $487 million; cash decreased by $9 million overall.
- Total debt, including capital leases, was approximately $1.064 billion, versus $1.095 billion in 2012. Senior debt was $1.048 billion: $548 million of 6.85% notes due 2017 and $500 million of 4.25% notes due 2020.
- Lazard refinanced its 7.125% notes due 2015 with the 2020 notes; the transaction generated a $54 million pretax loss. The $150 million revolving credit facility was undrawn. The company reported $258 million of unused credit lines overall and stated that cash flow and available lines should cover obligations for the next 12 months.
- At year-end, Lazard reported covenant leverage of 1.63x versus a 4.00x maximum and interest coverage of 9.51x versus a 3.00x minimum. Total stockholders’ equity was $630 million, compared with $652 million in 2012.
Outlook, unusual items and principal risks
- Management described improving developed-market conditions, low interest rates and high corporate cash balances as supportive of potential M&A activity. It entered 2014 with record AUM, while acknowledging that market volatility could persist. As of February 21, 2014, AUM was $185.2 billion, down $1.7 billion from year-end due to market and FX depreciation, partly offset by net inflows.
- The October 2012 cost-saving program was substantially complete. Lazard expected approximately $160 million in annual savings, of which more than two-thirds had been realized through 2013; the full impact was expected in 2014. Implementation charges totaled approximately $167 million through 2013. The filing reports a 2013 $12 million private-equity incentive-compensation charge, as well as the refinancing loss.
- Compensation remained a major expense. Management’s non-GAAP awarded compensation ratio was 58.3% of operating revenue in 2013; its stated through-cycle objective was the mid-to-high-50% range, with no assurance it would be achieved.
- Key risks include market-driven declines in M&A activity or AUM, unpredictable timing of advisory fees, investment underperformance and client withdrawals, competition for clients and senior professionals, foreign-exchange exposure, regulatory change, litigation and operational or cyber incidents. About 39% of 2013 consolidated net revenue was received in currencies other than the U.S. dollar.
- Gross deferred tax assets were $1.404 billion, with a $1.225 billion valuation allowance. A future allowance release could materially affect reported tax expense and earnings; realization depends on sustainable taxable profits at relevant entities. Management said pending legal matters, in aggregate, were not expected to materially affect the business or financial condition.
Important facts for investors to verify
- Whether Asset Management growth and market appreciation can offset advisory revenue softness and net asset outflows.
- Whether the anticipated 2014 cost savings are realized and translate into sustained margin improvement.
- The timing, cost and covenant implications of debt maturities, and the availability of credit lines and cash across regulated subsidiaries.
- How performance, client flows, foreign exchange and investment mix affect AUM and management-fee revenue.
- Developments in deferred-tax-asset realizability, the valuation allowance and payments under the tax receivable agreement.
- Fourth-quarter comparability: reported results include the refinancing charge, while segment results also reflect cost-saving and compensation items.