Lazard, Inc. (Lazard Ltd) — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014, compared with the same periods in 2013. Lazard is a global financial advisory and asset management firm, with Financial Advisory and Asset Management as its principal businesses; selected activities are reported in Corporate. Unless noted, dollar amounts below are in millions.
Financial results and key metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $581.7 | $500.5 | $1,713.7 | $1,433.3 |
| Net revenue | $566.2 | $480.4 | $1,666.5 | $1,372.7 |
| Operating income | $113.7 | $81.1 | $319.9 | $143.7 |
| Net income attributable to Lazard Ltd | $88.9 | $60.3 | $254.9 | $107.0 |
| Diluted EPS | $0.67 | $0.45 | $1.91 | $0.81 |
| Dividends declared per share | $0.30 | $0.25 | $0.90 | $0.50 |
- Net revenue increased 18% in Q3 and 21% for the first nine months. Lazard-attributable net income rose about 47% and 138%, respectively.
- GAAP operating margin on net revenue was 20.1% in Q3 versus 16.9%; for nine months it was 19.2% versus 10.5%. The prior-year nine-month comparison included $64.7 million of cost-saving initiative charges.
- Company-reported non-GAAP earnings from operations were $130.6 million in Q3 and $373.7 million for nine months, with margins on operating revenue of 22.4% and 22.1%, respectively. Adjusted compensation expense was 58.8% of operating revenue in both 2014 periods, versus 60.0% in 2013.
- Segments: Q3 Financial Advisory net revenue was $291.1 million and operating income $35.9 million; Asset Management net revenue was $292.0 million and operating income $100.5 million. Nine-month operating income was $92.9 million for Financial Advisory (versus a $9.1 million loss) and $296.2 million for Asset Management (up from $230.1 million).
- Asset Management AUM was $197.6 billion at September 30, up 6% from year-end 2013, but down from $204.5 billion at June 30. Nine-month average AUM rose 15% year over year. Nine-month net inflows were $8.2 billion; market appreciation added $9.3 billion while foreign exchange reduced AUM by $6.8 billion.
- Net cash provided by operating activities was $415.4 million for nine months, versus $167.9 million; investing activities used $13.1 million and financing activities used $396.1 million. Cash and cash equivalents ended at $820.6 million, down from $841.5 million at year-end 2013. The filing does not present free cash flow as a defined metric.
- At September 30, total assets were $3,042.9 million, total liabilities $2,405.2 million and stockholders’ equity $637.7 million. Senior debt was $1,048.4 million, unchanged from year-end; no borrowings were outstanding on the $150 million revolving credit facility. Lazard reported about $262 million of unused company lines, plus $44 million for LFB and $64 million for Edgewater.
Changes, outlook and material items
- Financial Advisory growth was led by M&A and other advisory fees: up 37% in Q3 and 38% for nine months. Restructuring revenue declined 24% and 16%, respectively, amid low industry restructuring activity. Asset Management fee growth reflected higher average AUM.
- Management described the outlook as cautiously optimistic entering Q4 2014, citing a resilient U.S. economy, uneven European recovery, active announced M&A markets and renewed market volatility. It intended to capitalize on M&A momentum and equity-market strength. These are expectations, not guidance on specific revenue or earnings.
- Management expected approximately $160 million in annual savings from the 2012 cost-saving initiatives—about $120 million in compensation and $40 million in other costs—and expected the full savings impact in 2014. The firm’s stated through-cycle goal for awarded compensation expense was a mid-to-high-50s percentage of operating revenue; attainment is not assured.
- In May 2014, the remaining LAZ-MD Holdings interests were exchanged for Class A shares, making Lazard Group wholly owned indirectly by Lazard Ltd and leaving one outstanding common-stock class. In Q3, Lazard acquired certain convertible-securities business assets from LFCM Holdings, terminated the business alliance and received surrendered leasehold interests; management did not expect a material effect on consolidated results. The arrangements reduced committed sublease proceeds by about $79.6 million.
- Tax receivable agreement expense was $9.1 million for the nine months. The company had about $1.23 billion of valuation allowance against deferred tax assets at year-end 2013 and said its assessment was unchanged at September 30. A potential future allowance release could produce a significant tax benefit, partly offset by a related tax-receivable-agreement liability; timing and amount are uncertain.
- Other notable items: share repurchases totaled $192.7 million for the nine months, including 1 million shares bought from Natixis for about $50.3 million; $128.9 million of authorization remained. The October 22 dividend declaration was $0.30 per share, payable November 14. Currency translation contributed to a $18.6 million nine-month other comprehensive loss.
Risks and contingencies
- Revenue and earnings are volatile and depend on transaction completions, M&A and restructuring activity, AUM, market performance, client flows, foreign exchange and compensation levels. Management cautioned that interim results may not indicate future periods.
- Approximately 75% of AUM had foreign-currency exposure. AUM is also affected by investment performance and client decisions; many advisory contracts can be terminated on short notice.
- Commitments include $873.9 million of net operating lease payments and $19.1 million of investment funding commitments. The company also disclosed pension-funding obligations and ordinary-course legal and regulatory proceedings; management said pending matters were not expected in aggregate to materially affect business or financial condition.
- Senior notes are unsecured: $548.4 million at 6.85% due 2017 and $500 million at 4.25% due 2020. The company reported compliance with debt covenants and a 1.32x leverage ratio and 13.23x interest coverage ratio for the trailing 12 months.
Important facts for investors to verify
- Whether advisory fee growth and announced M&A activity convert into completed transactions and sustainable revenue.
- Subsequent AUM, flows, market and currency effects, and the durability of Asset Management fee growth.
- Actual 2014 cost savings and compensation ratio versus management’s targets, including the effect of higher revenue and hiring.
- Cash deployment, share repurchases, dividends, and liquidity relative to the 2015 credit-facility expiry and debt maturities.
- Developments in deferred-tax-asset realizability and the related tax receivable agreement; legal, lease, pension and investment-funding exposures.