Lazard, Inc. (Lazard Ltd) — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual report, not a quarterly filing; fourth-quarter results are identified separately below. Amounts are U.S. dollars unless noted.
Business context
Lazard is a global financial advisory and asset management firm. Its principal segments are Financial Advisory, driven largely by transaction completions, and Asset Management, whose fees depend chiefly on assets under management (AUM). Lazard reported operations in 42 cities across 27 countries and had 2,511 employees at year-end.
Financial results and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net revenue | $1.830 billion | $1.905 billion | Down 4% |
| Operating income | $235.5 million | $243.7 million | Down 3% |
| Operating margin | 13% | 13% | Reported margin unchanged |
| Net income attributable to Lazard Ltd | $174.9 million | $175.0 million | Essentially flat |
| Diluted EPS | $1.36 | $1.36 | Unchanged |
| Operating cash flow | $397.8 million | $168.8 million | Increased |
| Cash and cash equivalents | $1.004 billion | $1.210 billion | Down $205.9 million |
| Total debt, including capital leases | $1.097 billion | $1.250 billion | Down $152.8 million |
| Total stockholders’ equity | $866.9 million | $796.1 million | Increased |
- Financial Advisory: Revenue was $992.1 million, down 11%. M&A and strategic advisory revenue declined 2%; restructuring revenue fell 33% to $197.7 million. Segment operating income was $62.4 million, versus $168.9 million in 2010.
- Asset Management: Revenue rose 6% to $897.4 million. Management fees grew 14% to $818.0 million, while incentive fees fell 70% to $26.2 million. Operating income was $268.5 million, up slightly from $265.3 million.
- AUM: Year-end AUM was $141.0 billion, down 9% from $155.3 billion, mainly from market and foreign-exchange depreciation. Average AUM increased 11% to $152.1 billion. Net flows were negative $1.0 billion.
- Liquidity and debt: The company reported approximately $1.0 billion of cash and $312 million of unused credit lines. No amounts were outstanding under its $150 million revolving facility. It repurchased $150 million face value of 3.25% subordinated notes for $131.8 million, recognizing an $18.2 million pretax gain. Senior notes outstanding were $528.5 million due 2015 and $548.4 million due 2017. Lazard reported compliance with debt covenants.
Material changes versus the prior year
- Total revenue declined as advisory fees decreased $135 million, reflecting lower restructuring activity and slower M&A activity. Restructuring revenue decreased $96 million.
- Asset Management benefited from higher average AUM and a shift toward higher-margin equity products, but lower incentive fees substantially offset management-fee growth.
- Reported FY2010 earnings included special charges that reduced net income attributable to Lazard Ltd by $71.7 million. Excluding those items, management said FY2011 attributable net income declined $72 million, or 29%, from adjusted FY2010.
- Cash from operations increased, while cash declined as financing outflows included share repurchases, dividends, compensation-related share settlements and the debt repurchase.
Outlook, commentary, risks and unusual items
- Management described the 2012 outlook as improving but uncertain: it cited low interest rates, high corporate cash balances and improving CEO confidence, while noting continued uncertainty about the global financial system and other economic factors. The filing provides no formal earnings or revenue guidance.
- Management anticipated about $41 million of additional deferred-compensation amortization expense in 2012, a first-quarter 2012 compensation charge of $25–$30 million for severance and related costs, and approximately $11 million of additional occupancy costs from the amended Rockefeller Center lease.
- AUM had rebounded to $155.7 billion by February 17, 2012, from $141.0 billion at year-end, primarily reflecting market and foreign-exchange appreciation; net inflows were $0.1 billion.
- Fourth-quarter 2011 revenue was $451.8 million, but operating expenses of $466.7 million produced an operating loss of $14.9 million. Net loss attributable to Lazard Ltd was $4.8 million. The quarter included charges related to U.K. leased facilities and the write-off of costs for an option to acquire North American fund-management activities.
- Other material exposures include volatile transaction-dependent advisory fees, market-sensitive AUM and investment performance, foreign-exchange movements, competition for senior talent, extensive and changing regulation, litigation and counterparty risk, and the possibility that clients withdraw assets on short notice.
- The company recorded $1.279 billion of gross deferred tax assets and a $1.145 billion valuation allowance at year-end. It also disclosed a tax receivable agreement under which 85% of specified realized tax savings are payable to LFCM Holdings.
- Management and Deloitte reported effective internal control over financial reporting; Deloitte issued an unqualified opinion on the consolidated financial statements and internal controls. 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 advisory activity, especially M&A and restructuring, recovers sufficiently to improve Financial Advisory revenue and segment margins.
- Whether the AUM rebound persists and whether net flows and investment performance support recurring management-fee growth.
- How the anticipated 2012 compensation, severance and occupancy costs affect operating leverage and margins.
- Cash generation and liquidity after dividends, repurchases, compensation payments, pension contributions and investment commitments; also monitor debt maturities in 2015 and 2017.
- The recoverability of deferred tax assets, the valuation allowance and potential payments under the tax receivable agreement.
- Developments in regulatory requirements, client or counterparty exposures, litigation, and the U.K. pension funding arrangement.