Lazard Ltd. — FY 2019 Form 10-K
Filing identity and period: The supplied filing is for Lazard Ltd., not “Lazard, Inc.” It covers the fiscal year ended December 31, 2019; quarterly figures below identify the fourth quarter. Unless noted, dollar amounts are USD.
Business context and reporting period
Lazard provides financial advisory services—including M&A, restructuring and capital advice—and manages client assets. Financial Advisory and Asset Management generated 53% and 48% of FY 2019 net revenue, respectively; Corporate contributed negative 1%. The company operates globally and reports under U.S. GAAP.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Net revenue | $2,586.8m | $2,826.4m | Down 8% |
| Operating income | $392.7m | $680.8m | Down 42% |
| Net income attributable to Lazard Ltd | $286.5m | $527.1m | Down 46% |
| Diluted EPS | $2.44 | $4.06 | Down 40% |
| Operating margin | 15.2% | 24.1% | Down 8.9 percentage points |
| Operating cash flow | $678.0m | $699.0m | Down $21.1m |
Fourth quarter: Net revenue was $721.3m versus $687.2m in Q4 2018; operating income was $119.0m versus $156.3m; net income attributable to Lazard Ltd was $77.0m versus $113.4m; diluted EPS was $0.67 versus $0.89.
- Segment results: Financial Advisory revenue fell 12% to $1,374.0m and operating income fell 58% to $148.2m (10.8% margin, versus 22.9%). Asset Management revenue fell 7% to $1,237.4m and operating income fell 17% to $349.9m (28.3% margin, versus 31.5%).
- Assets under management: Year-end AUM increased 16% to $248.2bn, primarily from market appreciation, partly offset by net outflows and foreign-exchange depreciation. Average AUM declined 3% to $234.4bn. FY net flows were negative $9.1bn; market appreciation added $43.0bn.
- Costs and margins: Compensation and benefits rose 3% to $1,563.4m, including $56.6m of realignment-related compensation expense. Adjusted non-compensation expense increased 3% to $498.6m; its share of operating revenue rose to 19.6% from 17.6%. Management’s adjusted and awarded compensation ratios were 57.5% and 57.7%, respectively.
- Cash and liquidity: Cash and cash equivalents were $1,231.6m; cash, bank deposits/short-term investments and segregated cash totaled $2,455.6m. The company reported $168m of unused credit lines, including a $150m revolving facility due to expire in September 2020. Management said operating cash flow and credit lines should cover obligations for the next 12 months.
- Debt and capital: Senior debt principal was $1.70bn ($1,679.6m carrying value), up from $1.45bn principal in 2018. Lazard issued $500m of 4.375% notes due 2029 and used proceeds in part to retire the remaining $250m of 2020 notes. No revolver borrowings were outstanding. Leverage and interest coverage ratios were 1.84x and 12.82x, within covenants of no more than 3.25x and no less than 3.00x.
- Shareholder returns and equity: FY dividends declared were $2.35 per share, versus $3.03 in 2018. The company repurchased 13.7m shares for $494.7m. Total stockholders’ equity declined to $681.6m from $970.1m.
Changes, outlook, risks and unusual items
- Lower Financial Advisory fees—especially fewer fees above $5m—and lower Asset Management fees drove the revenue decline. Global completed M&A value fell 15% in 2019; announced deal value was broadly flat. Management reported increased corporate defaults, which may support restructuring activity.
- Management described the overall macroeconomic environment as favorable at the time of filing and said M&A fundamentals and demand for independent advice remained supportive. It planned selective hiring, continued investment in technology and new asset-management strategies, and disciplined cost management. No specific financial guidance was provided.
- A business review led to employee reductions and closures of subscale offices and investment strategies, mostly completed in Q3 2019. Associated expenses were $67.8m; $25.3m remained accrued at year-end.
- Cash generation is seasonal: significant incentive-compensation payments generally occur in the first three months of the year. Results are also sensitive to transaction timing, market levels, AUM flows and foreign exchange. The company noted that 67% of year-end AUM had foreign-currency exposure.
- Key stated risks include cyclical advisory activity, investment underperformance and client withdrawals, talent retention and compensation costs, intense competition and fee pressure, extensive regulation, litigation/conflicts, cyber and operational failures, and tax uncertainty. The UK’s EU departure created potential regulatory, cost and market uncertainty; management did not then expect likely arrangements to have a material adverse effect.
- The tax receivable agreement liability was $247.3m; approximately $25m was expected to be paid within 12 months. Tax authorities’ challenges or changes in tax assumptions could affect the liability and cash payments. Pending legal matters were not expected by management to be material in aggregate based on information then available.
- Deloitte issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective. The auditor identified investment-banking and advisory fee recognition timing as a critical audit matter.
Most important facts for investors to verify
- Whether Financial Advisory revenue and margins recover, particularly the pipeline and realization of large transaction fees.
- Whether Asset Management net outflows persist and how market gains, performance and product mix affect average AUM and fee revenue.
- Cash available for corporate use versus amounts held in regulated entities or related to customer deposits; also the renewal or replacement of the revolving credit facility expiring in September 2020.
- The ongoing cash and earnings effects of the $1.7bn debt balance, tax receivable agreement payments, dividends and share repurchases.
- Actual costs and benefits of the 2019 realignment and technology investments, and any material developments in litigation, regulation or tax examinations.