Business Context and Reporting Period
This summary covers the Form 10-Q for Lazard Ltd, a Bermuda holding company and preeminent international financial advisory and asset management firm. The report covers the quarterly period ended September 30, 2009, and the nine-month period ended on the same date. The Company operates through two primary segments: Financial Advisory and Asset Management, with a Corporate segment managing cash, investments, and banking activities.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|---|---|
| Total Revenue | $438.3 million | $1,116.9 million | $439.5 million | $1,292.0 million |
| Net Revenue | $411.7 million | $1,035.7 million | $405.8 million | $1,181.3 million |
| Operating Income (Loss) | $73.2 million | $39.3 million | $(134.7) million | $(29.0) million |
| Net Income (Loss) | $53.2 million | $10.0 million | $(143.0) million | $(60.2) million |
| Net Income Attributable to Lazard Ltd | $37.4 million | $12.1 million | $(77.0) million | $(34.8) million |
| Diluted EPS (Lazard Ltd) | $0.41 | $0.16 | $(1.17) | $(0.61) |
| Cash and Cash Equivalents | $795.1 million (as of Sep 30, 2009) | |||
| Total Assets | $2,900 million (as of Sep 30, 2009) | |||
| Total Liabilities | $2,275 million (as of Sep 30, 2009) | |||
| Senior Debt | $1,087 million (as of Sep 30, 2009) | |||
| Subordinated Debt | $150 million (as of Sep 30, 2009) |
Material Changes vs. Prior Period
- Profitability Turnaround: The Company reported a net income of $37.4 million for the quarter ended September 30, 2009, a significant improvement from a net loss of $77.0 million in the same period in 2008. This reversal is primarily attributed to the absence of the $197.6 million LAM Merger compensation charge that impacted the 2008 results.
- Revenue Mix Shift: While M&A and Strategic Advisory fees declined 46% year-over-year due to a slowdown in global M&A activity, Restructuring revenue surged 397% to $119.1 million, driven by a significant increase in corporate debt defaults.
- Asset Management Performance: Asset Management net revenue increased 9% in the quarter, driven by higher incentive fees, despite a 12% decline in average Assets Under Management (AUM) compared to 2008 due to market depreciation.
- Restructuring Costs: In the first quarter of 2009, the Company incurred a $62.6 million restructuring charge related to staff reductions and realignments, which reduced nine-month net income attributable to Lazard Ltd by $35.1 million.
- Compensation Ratio: The compensation and benefits expense to operating revenue ratio was 58.2% for the quarter and 62.9% for the nine months ended September 30, 2009, exceeding the Company's target of 57.5% due to revenue declines and accelerated RSU amortization.
Guidance, Outlook, and Risks
- Management Commentary: Management expects the Restructuring business to remain very active over the next several years due to high levels of corporate defaults. The Company remains cautious regarding the broader economic environment but believes it is well-positioned for an upturn as clients refinance and restructure.
- Regulatory Environment: The Company is monitoring potential regulatory reforms, including the proposed elimination of the Supervised Investment Bank Holding Company (SIBHC) program, which could alter its reporting obligations.
- Key Risks:
- Market Volatility: Continued volatility in global financial markets impacts AUM and fee income.
- Counterparty Risk: Exposure to the Reserve Primary Fund (approx. $7.8 million receivable) remains a contingency, though the Company expects to recover the carrying value.
- Regulatory Changes: Restrictions on the use of placement agents by public pension funds in various jurisdictions may impact the Private Fund Advisory Group.
- Unusual Items:
- LAM Merger (2008): A $197.6 million non-recurring compensation charge in Q3 2008 significantly distorted year-over-year comparisons.
- Restructuring (2009): A $62.6 million charge in Q1 2009 for severance and accelerated RSU expense.
- Subsequent Event: On October 14, 2009, Chairman and CEO Bruce Wasserstein passed away. The Company expects to record a pre-tax charge of approximately $86.5 million in Q4 2009 related to the acceleration of his RSU awards.
Investor Verification Checklist
- Compensation Ratio Sustainability: Verify if the compensation ratio can return to the target of 57.5% as revenue stabilizes, given the high fixed cost base.
- Restructuring Revenue Durability: Assess whether the surge in restructuring fees is a temporary anomaly or a sustained trend given the economic cycle.
- Primary Fund Recovery: Monitor the liquidation of the Reserve Primary Fund to confirm the full recovery of the $7.8 million receivable.
- Q4 2009 Impact: Evaluate the financial impact of the $86.5 million charge related to the late CEO's RSU acceleration on full-year 2009 results.
- Debt Covenants: Confirm continued compliance with the Consolidated Leverage Ratio (2.03:1) and Interest Coverage Ratio (7.81:1) under the Credit Facility.