Lazard Ltd. 2010 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2010, compared with the corresponding 2009 periods. Balance-sheet comparisons are with December 31, 2009. Amounts below are in U.S. dollars; financial amounts are rounded to millions unless otherwise indicated.
Business context
Lazard is a global financial advisory and asset management firm, with Financial Advisory and Asset Management as its principal operating segments. Its Corporate segment includes cash management, investments, Paris-based Lazard Frères Banque activities and corporate debt. At September 30, Lazard Ltd owned approximately 91.5% of Lazard Group, up from 74.5% at year-end 2009.
Financial results and key metrics
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Total revenue | $477.3 | $438.3 | $1,384.3 | $1,116.9 |
| Net revenue | $453.2 | $411.7 | $1,310.5 | $1,035.7 |
| Operating income | $79.5 | $73.2 | $112.0 | $39.3 |
| Net income attributable to Lazard Ltd | $64.1 | $37.4 | $75.1 | $12.1 |
| Diluted earnings per share | $0.51 | $0.41 | $0.58 | $0.16 |
| Dividends declared per share | $0.125 | $0.125 | $0.375 | $0.325 |
- Revenue mix: Q3 advisory fees were $245.3 million, down 3%; money management fees were $202.7 million, up 36%. For nine months, advisory fees rose 17% to $759.8 million and money management fees rose 52% to $560.7 million.
- Margins and costs: Operating margin on net revenue was 18% in both Q3 periods; for nine months it was 9% reported versus 4% in 2009. Excluding specified special items, management reported nine-month operating income of $224.0 million and a 17% margin, versus $101.9 million and 10% in 2009. The nine-month compensation-to-operating-revenue ratio, excluding the 2010 retirement-policy charge, was 60.0%, compared with 62.9%.
- Segments: Q3 Financial Advisory net revenue was $254.0 million and operating income $38.2 million; Asset Management net revenue was $210.1 million and operating income $59.6 million. Nine-month segment operating income was $100.9 million for Financial Advisory and $170.5 million for Asset Management, including the effects of special items.
- Assets under management: AUM was $143.6 billion at September 30, up 11% from year-end 2009. Average AUM rose 22% year over year in Q3 and 36% for the first nine months. At October 22, AUM was $148.5 billion, reflecting market/foreign-exchange appreciation and net inflows since quarter-end.
- Cash flow: Nine-month operating cash flow was $46.6 million, down from $127.9 million. Investing activities provided $113.2 million, including proceeds from the Sapphire investment disposition; financing activities used $225.8 million, including share repurchases, dividends, distributions and share-based compensation settlements. Cash and cash equivalents declined $69.9 million to $847.4 million.
- Balance sheet and liquidity: Total assets were $3.124 billion, total liabilities $2.488 billion and total equity $636.0 million. Cash and cash equivalents were $847.4 million; management reported approximately $1.1 billion of cash and liquid securities and $235 million of unused credit lines.
- Debt: Senior debt was $1.077 billion and subordinated debt $150 million, or $1.227 billion combined. Lazard had no balance outstanding under its $150 million revolving facility. It reported compliance with covenants; the leverage ratio was 2.22:1 against a 4.00:1 maximum, and interest coverage was 6.83:1 against a 3.00:1 minimum.
Material changes versus the prior period
- Nine-month net revenue increased 27%, driven mainly by higher Asset Management fees from increased AUM and stronger M&A and strategic advisory activity. Reported net income attributable to Lazard rose to $75.1 million from $12.1 million.
- Reported nine-month results include $87.1 million of 2010 restructuring expense and a $24.9 million non-cash compensation charge from an RSU retirement-policy amendment. The comparable 2009 restructuring charge was $62.6 million. Excluding the after-tax effects of the stated special items, nine-month net income attributable to Lazard was $148.6 million in 2010 versus $47.2 million in 2009.
- Q3 advisory revenue declined modestly as lower restructuring fees outweighed growth in M&A, strategic advisory and capital markets/other advisory. Nine-month restructuring revenue fell 10% as defaults and active assignments declined.
- Senior debt fell by $10 million following a note repurchase. Total stockholders’ equity increased from $523.1 million at year-end, while cash declined. Lazard repurchased $106.3 million of Class A shares during the first nine months and had $88.6 million of repurchase authorization remaining at September 30.
Outlook, commentary, risks and contingencies
- Management described economic and market conditions as showing a gradual but uneven recovery and said it remained cautious about the outlook for M&A. It expected restructuring activity to remain active but at a lower level, with current assignments generally taking six to twelve months to complete.
- Management said cash flows and available credit lines should be sufficient to meet obligations for the next 12 months and beyond, while noting seasonal cash-flow patterns tied to incentive compensation payments. No quantified earnings or revenue guidance is provided in the filing.
- Key business risks include volatile financial markets and economic conditions, transaction timing and volume, AUM market movements and client flows, foreign-exchange movements, competition and employee retention, liquidity and counterparty risks, and changing regulation. The filing notes potential effects from the Dodd-Frank Act and restrictions on placement agents serving public pension funds.
- Legal, regulatory and arbitration matters arise in the ordinary course, including former-employee claims. Management believed the matters in aggregate would not materially adversely affect financial condition, but could affect results or cash flows in a particular period. LFB also had $6.8 million of indemnifications, substantially collateralized; management considered loss remote. Private-equity funding commitments were approximately $6.7 million for CP II.
- Reported investment risks include approximately $12 million of pre-tax unrealized losses in the corporate-bond portfolio and $144.1 million of Level 3 fair-value assets, principally private equity. Management said no credit loss was required for available-for-sale debt securities in the 2010 periods.
- After quarter-end, the board declared a $0.125 quarterly dividend per Class A share on October 26, payable November 26, 2010. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the reported nine-month earnings with the substantial restructuring and RSU retirement-policy charges; assess the recurring nature of the company’s “excluding special items” measures.
- Track AUM, market-driven gains and client flows, and whether higher management fees translate into sustainable segment margins.
- Assess cash generation relative to compensation payments, dividends, repurchases and debt service; confirm availability and terms of unused credit lines.
- Review the debt covenants, pension contribution commitments, LAM merger consideration due in 2011, and other contractual obligations.
- Monitor Level 3 valuation assumptions, bond unrealized losses, receivable collectability, litigation developments and regulatory changes, including placement-agent restrictions.