Lazard, Inc. (Lazard Ltd) — FY 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone Q4 filing; it also provides unaudited quarterly results. Lazard is a global financial advisory and asset management firm. Its principal businesses are Financial Advisory and Asset Management, with a Corporate segment that includes financing costs, investments and banking activities.
Financial performance and position
| Metric | FY 2010 | FY 2009 |
|---|---|---|
| Net revenue | $1.905 billion | $1.531 billion |
| Operating income (loss), reported | $243.7 million | $(182.2) million |
| Operating income, excluding special items (non-U.S. GAAP) | $346.8 million | $27.3 million |
| Net income (loss) attributable to Lazard Ltd | $175.0 million | $(130.2) million |
| Basic / diluted earnings per share | $1.68 / $1.36 | $(1.68) / $(1.68) |
| Net cash from operating activities | $168.8 million | $244.8 million |
| Cash and cash equivalents at year-end | $1.210 billion | $917.3 million |
| Total debt, including capital leases | $1.250 billion | $1.261 billion |
| Total stockholders’ equity | $796.1 million | $523.1 million |
| Assets under management (AUM), year-end | $155.3 billion | $129.5 billion |
Reported operating margin was approximately 13%, versus negative 12% in 2009; excluding special items, management reported margins of 18% and 2%, respectively. The adjusted figures are non-U.S. GAAP measures and should be considered alongside reported results.
- Financial Advisory: Revenue was $1.120 billion, up 13%. Segment operating income was $168.9 million reported, or $188.5 million excluding allocated special items. M&A and strategic advisory revenue rose to $714.1 million from $526.2 million; restructuring revenue fell to $293.9 million from $376.7 million.
- Asset Management: Revenue was $849.7 million, up 41%. Segment operating income was $265.3 million reported, or $268.2 million excluding special items. AUM increased 20% year over year; average AUM rose 32% to $137.4 billion. The AUM increase reflected market appreciation and net inflows of $9.3 billion.
- Q4 results: Net revenue was $594.9 million and operating income was $131.6 million. Net income attributable to Lazard Ltd was $99.9 million; diluted EPS was $0.77. In Q4 2009, net revenue was $494.8 million, operating loss was $221.6 million and attributable net loss was $142.4 million.
- Cash flow and liquidity: Operating cash flow declined despite the return to profitability, reflecting working-capital and other operating movements. Investing activities provided $411.7 million, principally associated with investment-security sales and maturities; financing activities used $277.9 million, including share repurchases, dividends and distributions. Management cited approximately $1.3 billion of cash and liquid securities and about $300 million of unused credit lines at year-end. No amount was drawn on the $150 million revolving facility.
- Debt and capital: Senior and subordinated debt totaled $1.227 billion, mainly $528.5 million of 7.125% notes due 2015, $548.4 million of 6.85% notes due 2017, and a $150 million 3.25% convertible note due 2016. The company reported compliance with its covenants; year-end leverage and interest coverage ratios were 1.80x and 9.66x, respectively.
Changes versus the prior comparable period
- Net revenue increased 24%, led by higher Asset Management fees and stronger M&A activity. Management fees benefited from increased average AUM, favorable product mix and net inflows.
- Financial Advisory improved overall, although restructuring revenue declined as defaults and restructuring activity eased with the economic recovery.
- Reported profitability improved markedly from 2009’s loss. Comparisons are affected by significant special items: 2010 included $87.1 million of restructuring expense and a $24.9 million noncash charge from an RSU retirement-policy amendment; 2009 included $62.6 million of restructuring expense and accelerated compensation charges of $147.0 million.
- Compensation expense excluding special items was 59.1% of operating revenue, down from 71.8% in 2009. Total operating expenses fell to $1.662 billion from $1.713 billion, despite higher business activity.
- AUM rose from $129.5 billion to $155.3 billion, while net cash from operating activities decreased from $244.8 million to $168.8 million.
Outlook, commentary, risks and unusual items
- Management described 2010 markets as recovering unevenly, with volatility during the second quarter and stronger markets in the second half. It noted improving M&A activity and expected restructuring work in progress to remain active, while anticipating corporate defaults to be relatively flat in 2011 versus 2010. These are expectations, not quantified earnings guidance; the filing gives no specific revenue or EPS forecast.
- Results are sensitive to market conditions, transaction completion timing, AUM levels, investment performance, client flows, foreign exchange rates and employee compensation. Financial Advisory engagements are generally individually awarded and not long-term contracted; asset-management mandates may be terminated on short notice.
- Regulatory uncertainty includes implementation of the Dodd-Frank Act and the planned 2011 end of the SEC’s SIBHC program, which will require another comprehensive supervisory framework. Restrictions on placement agents and public-pension fundraising may also affect advisory activity.
- Tax-related estimates warrant attention: deferred tax assets were $1.295 billion, offset by a $1.165 billion valuation allowance. The company also pays LFCM Holdings 85% of specified realized tax savings under a tax receivable agreement. Tax authorities may challenge tax positions, and the filing describes potential future tax-law changes.
- A proposed Rockefeller Center lease amendment, subject to required conditions, would extend the lease to 2033 and add approximately $600 million of rentals beyond amounts in the contractual-obligations table. Existing net operating-lease commitments were $372.3 million before that potential increment.
- Management said pending legal, regulatory and arbitration matters were not expected in aggregate to materially affect financial condition, though they could affect results or cash flows in a particular period. The filing identifies no unresolved SEC staff comments and reports effective disclosure controls and internal control over financial reporting; the auditor expressed unqualified opinions.
Most important facts for investors to verify
- Reconcile reported versus adjusted operating income and net income, including the nature, allocation and cash impact of special items.
- Track whether higher AUM and advisory revenues persist, and distinguish market appreciation from net client inflows and completed transactions.
- Review cash-flow conversion, working-capital movements, liquidity available within regulated subsidiaries, and debt maturities and covenant headroom.
- Assess potential dilution from outstanding RSUs, exchangeable interests and convertible debt; the filing reports 22.1 million outstanding RSUs and a convertible note potentially exchangeable for up to 2.6 million shares.
- Monitor the conditional New York lease amendment, the tax receivable agreement, deferred-tax valuation allowance and evolving regulatory requirements.