Lazard, Inc. 10-Q Summary: Period Ended September 30, 2005
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2005, for Lazard Ltd, a Bermuda exempted company. The filing reflects a significant corporate transformation: on May 10, 2005, Lazard completed an equity public offering and a separation and recapitalization. Consequently, the "Capital Markets and Other" segment was transferred to LFCM Holdings and is reported as discontinued operations. The company now operates primarily through two segments: Financial Advisory and Asset Management. Historical results prior to May 10, 2005, are not directly comparable to current results due to changes in accounting for managing director compensation and the introduction of U.S. federal income taxes.
Key Financial Metrics
| Metric ($ in thousands) | Three Months Ended Sep 30, 2005 | Nine Months Ended Sep 30, 2005 |
|---|---|---|
| Net Revenue | $356,903 | $934,365 |
| Operating Income | $77,289 | $265,278 |
| Net Income (Continuing Ops) | $19,011 | $137,128 |
| Net Income (Total) | $18,603 | $119,552 |
| Cash and Cash Equivalents | $371,983 | $371,983 (as of Sep 30) |
| Senior Borrowings | $1,005,918 | $1,005,918 (as of Sep 30) |
| Operating Margin | 22% | 28% |
Note: Net Income for the nine-month period includes a loss of $17,576 from discontinued operations.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 59% for the quarter and 33% for the nine-month period compared to 2004. Financial Advisory revenue drove this growth, with M&A fees up 78% (quarterly) and 57% (year-to-date), and Financial Restructuring fees up 92% (quarterly) and 53% (year-to-date).
- Expense Structure: Compensation and benefits expense increased significantly (97% quarterly, 47% YTD) primarily because, post-IPO, payments to managing directors are now recorded as compensation expense rather than distributions to members or minority interest.
- Discontinued Operations: The Capital Markets segment was separated. This resulted in a net loss of $408,000 for the quarter and $17.6 million for the nine months ended September 30, 2005, compared to a loss of $2.9 million and income of $3.2 million in the prior year periods.
- Tax Provision: Income tax provision increased substantially ($17.2M quarterly, $50.4M YTD) due to the new corporate structure subjecting a portion of income to U.S. federal taxes, which was not applicable prior to the May 10, 2005 IPO.
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. Incentive fees for Asset Management are typically recorded in the fourth quarter. The company anticipates incremental annual interest costs of approximately $56 million related to the new financing transactions.
Risks and Contingencies:
- Legal Proceedings: Lazard is a defendant in putative class action and derivative lawsuits regarding its equity public offering. Additionally, the company is subject to industry investigations by the NASD, SEC, and U.S. Attorney's Office regarding gifts and gratuities, primarily focused on the separated Capital Markets business.
- Joint Venture Dispute: Banca Intesa, a 40% partner in Lazard's Italian business, has notified Lazard of its intention to commence arbitration to terminate the joint venture early. If successful, Lazard may be required to repurchase Intesa's interest and notes for approximately $150 million.
- Market Risk: Approximately 74% of consolidated operating income is generated in non-U.S. dollar currencies, exposing the company to foreign exchange rate fluctuations.
Investor Verification Checklist
- Compensation Accounting: Verify the impact of the accounting change regarding managing director compensation on operating margins and comparability with pre-May 2005 periods.
- Discontinued Operations: Confirm the final settlement of liabilities and assets related to the separated Capital Markets business (LFCM Holdings).
- Debt Service: Assess the company's ability to service the new senior borrowings ($1.0 billion outstanding) and the associated $56 million annual incremental interest cost.
- Legal Exposure: Monitor the status of the Intesa arbitration and the securities class action lawsuits for potential material financial impact.
- Minority Interest: Review the allocation of income to LAZ-MD Holdings (approx. 62.4% ownership) and its impact on net income available to Class A shareholders.