Lazard, Inc. (Lazard Ltd) — Q3 2013 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Lazard operates in Financial Advisory and Asset Management, with selected activities reported in Corporate. Dollar amounts below are in millions unless otherwise stated.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $500.5 | $449.5 | $1,433.3 | $1,413.2 |
| Net revenue | $480.4 | $428.8 | $1,372.7 | $1,351.8 |
| Operating income | $81.1 | $46.7 | $143.7 | $129.1 |
| Net income attributable to Lazard Ltd | $60.3 | $33.3 | $107.0 | $89.7 |
| Diluted EPS | $0.45 | $0.26 | $0.81 | $0.70 |
| Operating income / net revenue | 16.9% | 10.9% | 10.5% | 9.5% |
- Revenue mix and segments: Q3 advisory and investment banking fees rose 6% to $232.0; money management fees rose 12% to $241.5. For the first nine months, advisory fees fell 10% to $660.4, while money management fees rose 14% to $707.5.
- Segment results: Q3 Financial Advisory net revenue was $233.8 and operating income $15.8, versus $220.0 and $7.5. Nine-month Financial Advisory revenue fell to $665.6 from $739.8 and recorded an operating loss of $9.1, including $47.8 of cost-initiative charges. Asset Management Q3 revenue was $252.1 and operating income $83.2; nine-month figures were $741.6 and $230.1, respectively, both higher year over year. Corporate recorded operating losses of $17.9 for Q3 and $77.4 for nine months.
- Cash flow: Nine-month operating cash flow was $167.9, down from $239.8. Investing activities used $48.5; financing activities used $273.9, mainly reflecting share purchases, equity-compensation settlements and dividends. Cash and cash equivalents declined $161.8 to $688.4.
- Liquidity and debt: At September 30, cash and cash equivalents were $688.4, deposits with banks $273.2 and segregated cash $59.5. Total assets were $2,956.5, total liabilities $2,299.4 and stockholders’ equity $657.1. Senior debt was $1,076.9, unchanged from year-end 2012; no borrowings were outstanding under the $150.0 revolving facility. Lazard reported approximately $264 of unused company credit lines, plus separate unused lines at LFB and Edgewater. Management said cash flows and credit lines should cover current obligations for the next 12 months.
- Other metrics: AUM was $176.5 billion at September 30, up 6% from year-end, primarily from market appreciation; nine-month net flows were negative $3.4 billion. Average AUM increased 11% year over year. Dividends declared were $0.25 per share in Q3, versus $0.20 a year earlier.
Material changes versus the prior period
- Q3 net revenue rose 12% and net income attributable to Lazard Ltd rose about 81%. Higher advisory revenue and Asset Management fees supported the increase; operating income margin improved to 16.9% from 10.9%.
- For the first nine months, net revenue increased only 2%. Asset Management growth more than offset lower Financial Advisory revenue, which reflected fewer high-fee advisory transactions and lower restructuring revenue compared with 2012.
- Cost-saving initiative expenses totaled $64.7 in the first nine months of 2013; cumulative charges from October 2012 through September 2013 were $167.3. Compensation and benefits expense was $910.7 for the nine months, slightly above 2012, but the company’s adjusted compensation ratio improved to 60.0% from 62.7%.
- Cash and cash equivalents fell from $850.2 at December 31, 2012, while senior debt remained unchanged. Receivables rose to $536.2 from $478.0; past-due or deemed-uncollectible receivables increased to $36.3 from $25.6.
Outlook, commentary and risks
- Management described global conditions as improving but uncertain, with Europe remaining challenging. Industry completed M&A value and volume fell 2% and 12%, respectively, in the first nine months of 2013; announced deal value increased partly due to one large transaction.
- Management expected approximately $160 million in annual savings from the cost initiatives, partly offset by reinvestment, with more than two-thirds expected in 2013 and the full benefit reflected in 2014. It estimated a 2013 full-year awarded compensation ratio of approximately 58.5%, versus 59.4% in 2012. This is management’s estimate, not formal earnings guidance.
- Management cited potential growth from an M&A recovery, advisory work in sovereign, restructuring and capital advisory, and Asset Management demand. It reported positive flows in emerging-markets debt and emerging-market and multi-regional equity platforms during the period. AUM was $183.9 billion on October 18, 2013, including $7.1 billion of market and foreign-exchange appreciation and $0.3 billion of net inflows since quarter-end.
- Key risks include economic and market deterioration, lower M&A activity or AUM, market and currency movements, counterparty and liquidity risks, competition and retention of key professionals. The filing reported no material changes to previously disclosed risk factors. Pending legal and regulatory matters were described as not expected, in aggregate, to materially affect business or financial condition, based on information then available.
- Unusual or judgment-sensitive items include the cost-initiative charges, variable transaction-driven advisory revenue, Level 3 investments valued substantially using NAV, and a $1.24 billion valuation allowance against deferred tax assets at year-end 2012 that management said remained unchanged. The filing notes a potential significant tax benefit and related tax-receivable-agreement liability if that allowance is later reduced.
- The company agreed to new consolidated European regulatory supervision expected to take effect December 31, 2013. It reported compliance with applicable debt covenants and regulatory capital requirements at September 30.
Important facts for investors to verify
- Whether Asset Management growth and market-driven AUM appreciation can continue, particularly given negative nine-month net flows.
- Whether the projected $160 million annual cost savings are realized as expected, and how much is offset by business investment or compensation costs.
- Financial Advisory pipeline, large-fee transaction timing, and the persistence of lower nine-month advisory and restructuring revenue.
- Cash conversion, seasonal incentive-compensation payments, receivable aging and collections, and the use of cash for dividends and repurchases.
- Debt maturity and covenant capacity, the deferred-tax-asset valuation allowance, and any material developments in legal or regulatory matters.