Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007, for Lazard Ltd, a Bermuda holding company. The Company operates through two primary segments: Financial Advisory (M&A, restructuring, capital raising) and Asset Management (equity, fixed income, and merchant banking funds). A "Corporate" segment manages cash, investments, and the commercial banking activities of Lazard Frères Banque SA (LFB). As of June 30, 2007, Lazard Ltd held approximately 47.9% of the common membership interests in Lazard Group LLC, with the remaining 52.1% held by LAZ-MD Holdings.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Net Revenue | $421.4 million | $790.6 million |
| Operating Income | $89.2 million | $167.4 million |
| Net Income | $29.3 million | $55.7 million |
| Diluted EPS (Class A) | $0.52 | $0.98 |
| Cash and Cash Equivalents | $1,029.0 million | $1,029.0 million (Balance Sheet) |
| Senior Borrowings | $1,591.0 million | $1,591.0 million (Balance Sheet) |
| Subordinated Borrowings | $150.0 million | $150.0 million (Balance Sheet) |
| Assets Under Management (AUM) | $135.4 billion (End of Period) | $135.4 billion (End of Period) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 9% year-over-year for the six-month period ($790.6M vs. $723.2M). This was driven by a 23% increase in Money Management fees ($284.3M vs. $230.5M) and a 128% increase in Interest income ($40.7M vs. $17.8M), partially offset by a 6% decline in Investment Banking fees ($443.3M vs. $472.4M).
- Profitability: Net income rose 29% to $55.7 million for the six months ended June 30, 2007, compared to $43.2 million in the prior year. Operating income increased 3% to $167.4 million.
- Segment Performance:
- Financial Advisory: Operating income decreased 20% to $103.0 million due to a reduced number of completed M&A transactions over $1 billion (17 in 2007 vs. 29 in 2006).
- Asset Management: Operating income increased 35% to $80.7 million, driven by a 34% increase in average AUM to $123.5 billion.
- Debt Structure: Senior borrowings increased significantly to $1.59 billion from $1.09 billion at year-end 2006, primarily due to the issuance of $600 million in 6.85% senior notes in June 2007. Proceeds were used to redeem $146 million in maturing notes and for general corporate purposes.
- Cash Flow: Net cash used in operating activities was $296.4 million for the six months ended June 30, 2007, compared to cash provided of $39.2 million in the prior year. This shift reflects the timing of fee collections and the payment of incentive compensation and distributions to minority interest holders.
Guidance, Outlook, and Risks
- Outlook: Management expects net revenue and operating income to fluctuate significantly due to the transaction-based nature of the Financial Advisory business and the market-dependent nature of Asset Management fees. No specific numerical guidance was provided for the full year.
- Acquisitions: The Company announced three acquisitions pending regulatory approval: a 50% joint venture in Argentina (MBA), a Minneapolis-based investment bank (GAHL), and an Australian advisory firm (CWC). Aggregate consideration is approximately $139 million cash and $47 million stock.
- Risks:
- Market Conditions: Performance is highly sensitive to global M&A volume and equity market performance.
- Regulatory: Ongoing investigations by the NASD, SEC, and U.S. Attorney's Office regarding gifts and gratuities in the former Capital Markets business (transferred to LFCM Holdings) continue, with outcomes unpredictable.
- Tax Legislation: Proposed U.S. Senate legislation could tax publicly traded partnerships deriving income from asset management services as corporations, potentially impacting Lazard's tax liability starting in 2013.
- Unusual Items: Other revenue included a $9.3 million gain from the sale of a portion of LFCM Holdings' interest in Panmure Gordon & Co. plc. Operating expenses included a $4 million charge for abandoned leased facilities in the U.K.
Investor Verification Checklist
- Debt Maturity Profile: Verify the impact of the new $600 million senior notes (due 2017) on future interest expense and liquidity.
- Acquisition Integration: Monitor the regulatory approval status and financial integration of the MBA, GAHL, and CWC acquisitions.
- Regulatory Investigations: Track the status of the NASD/SEC investigations regarding the former Capital Markets business for potential fines or penalties.
- AUM Flows: Assess the sustainability of the 34% increase in average AUM, which drove the Asset Management segment's growth.
- Minority Interest: Understand the impact of the 52.1% minority interest held by LAZ-MD Holdings on reported Net Income attributable to Lazard Ltd shareholders.