Business Context and Reporting Period
Lazard, Inc. (Lazard Ltd) is a Bermuda-based holding company and a global financial advisory and asset management firm. This Form 10-Q covers the quarterly period ended March 31, 2009. The Company operates primarily through two segments: Financial Advisory and Asset Management, with a Corporate segment managing cash, investments, and the commercial banking activities of Lazard Frères Banque SA (LFB). The reporting period was characterized by extraordinary disruption in global financial markets, leading to a significant contraction in M&A activity and a decline in Assets Under Management (AUM).
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Revenue | $248.4 million | $308.1 million |
| Total Operating Expenses | $339.2 million | $290.1 million |
| Operating Income (Loss) | $(90.8) million | $18.0 million |
| Net Income (Loss) | $(86.6) million | $13.2 million |
| Net Income (Loss) Attributable to Lazard Ltd | $(53.5) million | $7.8 million |
| Diluted EPS (Attributable to Lazard Ltd) | $(0.77) | $0.14 |
| Cash and Cash Equivalents (End of Period) | $826.6 million | $729.1 million |
| Total Assets | $2,396.2 million | $2,862.9 million |
| Total Liabilities | $2,150.3 million | $2,551.2 million |
| Senior Debt Outstanding | $1,086.9 million | $1,087.8 million |
| Subordinated Debt Outstanding | $150.0 million | $150.0 million |
Material Changes vs. Prior Period
- Revenue Decline: Net revenue decreased 19% year-over-year. Investment banking fees fell 18% due to a dramatic slowdown in global M&A activity. Money management fees dropped 37% driven by a 38% decline in average AUM caused by market depreciation and foreign exchange impacts.
- Restructuring Charge: The Company recorded a pre-tax restructuring charge of $62.6 million in Q1 2009. This charge, primarily consisting of severance and the acceleration of unrecognized RSU expenses for terminated employees, significantly impacted operating results. Excluding this charge, the operating loss would have been $28.2 million.
- Expense Management: While compensation and benefits increased slightly ($10 million) due to RSU amortization, non-compensation expenses decreased 24% ($23 million) due to reduced travel, recruiting, and consulting fees.
- Segment Performance:
- Financial Advisory: Reported an operating loss of $14.6 million (vs. $37.5 million income in 2008). Financial Restructuring revenue increased 292% to $60.9 million, offsetting a 42% decline in M&A and Strategic Advisory revenue.
- Asset Management: Operating income declined 78% to $11.1 million (vs. $50.4 million in 2008) due to lower management fees.
- Corporate: Reported an operating loss of $87.2 million, heavily influenced by the restructuring charge and net interest expense.
Guidance, Outlook, and Risks
- Outlook: Management expects 2009 to remain a challenging year. While M&A activity is expected to remain low, the Financial Restructuring practice is anticipated to benefit from the acceleration in corporate defaults. The Company is actively optimizing its personnel mix and redeploying staff to growth areas.
- Liquidity and Capital: As of March 31, 2009, the Company held $827 million in cash and cash equivalents and had approximately $212 million in unused lines of credit, including a $150 million senior revolving credit facility. The Company is in compliance with all debt covenants, with a Consolidated Leverage Ratio of 1.99 to 1.00.
- Primary Risks:
- Market Conditions: Continued volatility in equity and credit markets poses a risk to AUM levels and fee income.
- Receivables: The Company holds a receivable of approximately $11.3 million from the Reserve Primary Fund, which is in liquidation following the Lehman Brothers collapse. While the Company expects to recover the carrying value, there is a risk of diminution.
- Regulatory Changes: A new New York policy banning placement agents for public pension funds may impact the Private Fund Advisory Group.
Investor Verification Checklist
- Restructuring Impact: Verify the remaining liability associated with the restructuring plan (approx. $32 million as of March 31, 2009) and the timing of future cash outflows.
- Primary Fund Exposure: Monitor the liquidation status of the Reserve Primary Fund and the final recovery rate on the $11.3 million receivable.
- Compensation Ratio: Track the compensation-to-operating revenue ratio, which rose to 74.6% in Q1 2009 (excluding restructuring), significantly above the 57.5% target, to assess future cost pressures.
- Share Repurchases: Confirm the remaining authorization under the share repurchase program ($120.7 million as of March 31, 2009) and execution pace.
- Debt Covenants: Review future quarterly reports to ensure continued compliance with the Consolidated Leverage Ratio (max 4.00:1) and Interest Coverage Ratio (min 3.00:1) under the Credit Facility.