Lazard, Inc. (Lazard Ltd) — FY 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report; the supplied filing text does not provide a complete Q4-only income statement.
Business context
Lazard provides financial advisory services, including M&A, restructuring and capital advisory, and manages client assets through equity, fixed-income and alternative strategies. It operates globally. The results reflect a year disrupted by COVID-19 and market volatility.
Financial performance and liquidity
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Net revenue | $2.566 billion | $2.587 billion | Down 1% |
| Operating income | $502 million | $393 million | Up 28% |
| Operating margin | 19.6% | 15.2% | Up 4.4 percentage points |
| Net income attributable to Lazard Ltd | $402 million | $287 million | Up 40% |
| Diluted EPS | $3.54 | $2.44 | Up 45% |
| Cash provided by operating activities | $576 million | $678 million | Down 15% |
- Revenue mix: Financial Advisory generated $1.421 billion, up 3% year over year; Asset Management generated $1.167 billion, down 6%. Corporate net revenue was negative $22 million.
- Segment margins: Financial Advisory operating income was $290 million, or 20.4% of segment revenue, versus $148 million and 10.8% in 2019. Asset Management operating income was $306 million, or 26.2%, versus $350 million and 28.3%.
- Compensation and expenses: GAAP compensation expense was $1.551 billion, down 1%. The company’s non-GAAP awarded compensation-to-operating-revenue ratio rose to 59.8% from 57.7%; management’s stated through-cycle goal is the mid-to-high 50% range. Non-compensation expense declined 16%, largely reflecting lower travel and marketing costs.
- AUM: Year-end AUM was $258.6 billion, up 4% from $248.2 billion, reflecting market and foreign-exchange appreciation partly offset by net outflows of $11.4 billion. Average AUM fell 4% to $225.4 billion. Asset Management fees declined despite higher incentive fees ($58 million versus $21 million).
- Cash and debt: Cash and cash equivalents were $1.390 billion; deposits with banks and short-term investments were $1.134 billion, and restricted/segregated cash was $44 million. Cash and restricted cash totaled $2.569 billion. Senior debt was $1.7 billion principal ($1.683 billion carrying value), with maturities in 2025, 2027, 2028 and 2029. No amounts were drawn on the $200 million revolving facility; approximately $213 million of credit lines were available.
- Capital returns: Cash dividends were $197 million and common-stock repurchases were $95 million in 2020. A $0.47-per-share quarterly dividend was declared in February 2021.
Material changes and management outlook
- Revenue was nearly flat, but operating income and attributable net income improved, supported by lower expenses, including the absence of most 2019 business-realignment costs. Financial Advisory improved while Asset Management revenue and operating income declined.
- Global announced M&A value fell 9% in 2020, while completed deal value fell 15%; corporate defaults increased to 209 from 105 in 2019. Lazard reported that global M&A activity strengthened in Q4 2020.
- Management described near-term conditions as challenging given COVID-19 uncertainty and capital-market volatility, while noting recovering announced M&A activity and optimism associated with fiscal and monetary support and vaccine rollout. No quantified financial guidance was provided.
- Management said remote work and travel restrictions had not materially impaired business operations or financial reporting controls. The financial effects of the pandemic remained uncertain.
Risks, contingencies and unusual items
- Revenue is cyclical and transaction-dependent: advisory fees often depend on successful deal completion, while asset-management fees depend on AUM, investment performance and client flows. Many advisory engagements are not long-term contracts, and asset-management clients can generally withdraw assets on short notice.
- Other material risks include competition and retaining key professionals, foreign-exchange exposure, investment valuation volatility, cyber and operational disruptions, extensive regulation, litigation and tax uncertainty. Approximately 69% of year-end AUM had foreign-currency exposure.
- The company reported $1.7 billion of senior debt and $607 million of operating lease liabilities. The tax receivable agreement obligation was $221 million; about $10 million was expected to be paid within 12 months. Contractual obligations also include $736 million of undiscounted lease payments.
- Management said pending legal matters, in aggregate, were not expected to materially affect the business or financial condition, based on information then available. The filing does not quantify potential losses for matters where amounts or timing cannot be reliably estimated.
- The 2020 effective tax rate was 19.8%, down from 24.2%. A $7.6 million cumulative retained-earnings adjustment arose from adoption of the expected-credit-loss standard.
- The independent auditor issued unqualified opinions on the financial statements and internal controls. The auditor identified advisory-fee recognition timing as a critical audit matter.
Important facts for investors to verify
- Whether AUM flows and the decline in average AUM improve, and whether management-fee revenue stabilizes.
- Whether the Q4 M&A recovery translates into completed transactions and advisory fees, given the timing uncertainty inherent in deal closings.
- How compensation expense and its ratio to operating revenue develop relative to management’s stated through-cycle goal.
- Cash availability at operating subsidiaries, debt-service capacity, covenant compliance and the timing of tax-receivable-agreement payments.
- Whether the pandemic, foreign-exchange movements, investment performance or regulatory developments materially alter results after year-end.