Lazard Ltd. Form 10-Q Summary
Filing and period: This filing is for Lazard Ltd, not a registrant named Lazard, Inc. It reports the quarter and six months ended June 30, 2013, compared with the corresponding 2012 periods. Lazard provides financial advisory and asset management services.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $490.4m | $436.9m | $892.3m | $922.9m |
| Operating income | $40.9m | $44.5m | $62.5m | $82.4m |
| Net income attributable to Lazard Ltd | $31.4m | $30.8m | $46.7m | $56.4m |
| Diluted EPS | $0.24 | $0.24 | $0.36 | $0.44 |
| Operating margin on net revenue | 8.3% | 10.2% | 7.0% | 8.9% |
- Q2 net revenue rose 12%: advisory fees increased 8% and money management fees increased 17%, reflecting higher average AUM and incentive fees. Operating income declined 8%, while Lazard-attributable net income was broadly unchanged.
- First-half net revenue fell 3%, as lower advisory revenue outweighed higher asset management fees. Attributable net income declined 17% and diluted EPS fell from $0.44 to $0.36.
- On Lazard’s non-GAAP adjusted measures, first-half earnings from operations increased 14% to $165.4m, with margin of 17.9% versus 15.2%. Adjusted compensation expense was 60.0% of operating revenue versus 62.7%; adjusted non-compensation expense was 22.1% in both periods.
Segments and assets under management
- Financial Advisory: Q2 net revenue was $263.3m, up 9%; operating income was $23.5m versus $11.4m. First-half revenue was $431.8m, down 17%, and the segment reported a $24.9m operating loss versus $38.7m income. Advisory results reflected lower first-half M&A and restructuring fees.
- Asset Management: Q2 revenue was $245.5m, up 16%, and operating income was $57.9m, up 6%. First-half revenue rose 15% to $489.5m and operating income rose 35% to $146.9m. Growth was driven by higher average AUM and incentive fees.
- AUM at June 30 was $163.3bn, down 2% from year-end, primarily due to first-half net outflows of $5.1bn. Average AUM rose 14% year over year in the first half. By July 29, AUM had increased to $169.3bn, including $0.9bn net inflows and $5.1bn market and foreign-exchange appreciation.
Cash flow, balance sheet and capital
- First-half operating cash flow was $13.6m, down from $34.5m. Investing cash outflow was $35.6m, including $41.3m of property additions; financing cash outflow was $207.3m. Cash and cash equivalents fell $248.7m to $601.5m. Cash-flow timing is affected by fee collections and incentive compensation payments.
- At June 30, total assets were $2.92bn, total liabilities $2.33bn and total stockholders’ equity $592.2m. Cash deposits with banks were $344.8m and segregated cash was $60.8m; these balances are not necessarily freely available for general corporate use.
- Senior debt was $1.077bn, unchanged from year-end: $528.5m of 7.125% notes due 2015 and $548.4m of 6.85% notes due 2017. No borrowings were outstanding under the $150m revolving facility. Lazard reported $262m of unused lines for the company, plus separate unused lines for LFB and Edgewater. The company said available cash flows and credit lines should fund obligations for the next 12 months and beyond; it was in covenant compliance.
- First-half share repurchases were $50.4m; common-stock dividends paid were $30.3m. A quarterly dividend of $0.25 per share was declared July 24, payable August 23, 2013.
Outlook, unusual items and risks
- The October 2012 cost-saving program was expected to produce about $160m in annual savings, partly offset by business investment: approximately $120m in compensation and $40m in other costs. More than two-thirds was expected in 2013, with the full effect in 2014. Implementation charges totaled about $167m through Q2 2013; $64.7m was recorded in the first half, and remaining cash payments were expected primarily in the second half of 2013.
- Management’s current-market assumption implied a 2013 full-year awarded-compensation ratio of about 58.5% of operating revenue, versus 59.4% in 2012. Management described a through-cycle goal in the mid-to-high-50% range, not a guarantee, and expected 2013 amortization of deferred incentive compensation of about $304m versus $335m in 2012.
- Management cited uncertain macroeconomic conditions, particularly in Europe; transaction timing and M&A activity; market performance, AUM flows and foreign-exchange movements; competition and employee retention; liquidity, counterparty, operational and investment risks. Restructuring activity remained low relative to historical levels. Results can vary substantially by quarter.
- Legal proceedings arise in the ordinary course, including former-employee claims; management said pending matters in aggregate were not expected to materially affect the business or financial condition. The filing reported no material change in previously disclosed risk factors and no material change in internal controls.
Important facts for investors to verify
- Whether advisory activity and fees recover after the first-half declines, and whether Financial Advisory returns to profitability without restructuring charges.
- Whether AUM inflows resume and the July AUM increase persists, separating market gains from client flows.
- Delivery and cash realization of the $160m cost-saving target, remaining implementation payments, and compensation-ratio assumptions.
- Cash-flow conversion, availability of reported cash and credit lines, and debt maturities in 2015 and 2017.
- Exposure to variable compensation, foreign exchange, investments—including $113.5m of Level 3 fair-value assets—and the outcome of legal and other contingencies.