Lazard Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted. Lazard is a global financial advisory and asset management firm. The filing reports unaudited interim results.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $679.9 million | $558.2 million | +22% |
| Net revenue | $660.1 million | $538.0 million | +23% |
| Operating income | $134.3 million | $84.1 million | +60% |
| Net income | $90.8 million | $58.3 million | +56% |
| Net income attributable to Lazard Ltd. | $87.3 million | $64.0 million | +36% |
| Diluted earnings per share | $0.75 | $0.56 | +34% |
Operating margin was 20.3% of net revenue, up from 15.6%. The effective tax rate rose to 32.4% from 30.6%. Adjusted compensation expense was $385.5 million, 59.5% of operating revenue versus 60.0%; adjusted non-compensation expense was $102.5 million, or 15.8% versus 20.0%. These adjusted measures are non-GAAP.
Business segments
- Financial Advisory: Net revenue rose 7% to $318.4 million; operating income increased to $60.4 million from $52.1 million. Management cited growth in fees between $1 million and $5 million.
- Asset Management: Net revenue increased 23% to $347.5 million; operating income rose 47% to $115.4 million. Management and other fees grew 12%, while incentive fees were $33.0 million versus $1.5 million.
- Corporate: Operating loss narrowed to $41.5 million from $45.8 million, principally reflecting improved investment-related revenue, partly offset by higher expenses.
Assets under management were $264.9 billion at March 31, up 2% from year-end, reflecting $12.5 billion of market appreciation, offset by $4.6 billion of foreign-exchange depreciation and $1.7 billion of net outflows. AUM was $274.1 billion as of April 23, 2021.
Cash flow, balance sheet and capital
- Operating cash flow was negative $123.3 million, compared with negative $156.0 million in Q1 2020. Investing cash outflow was $6.9 million.
- Financing activities provided $244.5 million, including $575 million of LGAC IPO proceeds, partly offset by share repurchases, dividends, compensation-related payments and other financing outflows. Foreign-exchange effects reduced cash and restricted cash by $79.2 million.
- Cash, bank deposits and short-term investments, and restricted cash totaled $2.604 billion at quarter-end, versus $2.569 billion at year-end. This total includes IPO trust funds restricted for LGAC; cash and cash equivalents alone were $974.7 million.
- Total assets were $6.210 billion; total liabilities were $4.768 billion. Senior debt had $1.700 billion principal outstanding and a $1.683 billion carrying value. No revolving-credit borrowings were outstanding; approximately $213 million of credit lines were unused.
- Stockholders’ equity was $866.7 million, down from $999.4 million at year-end. Q1 included $122.7 million of share repurchases and $49.4 million of common dividends. The company repurchased 2.90 million shares at an average $42.30 per share.
- The board declared a further $0.47-per-share dividend payable May 21, 2021. On April 29, it authorized an additional $300 million of repurchases, bringing available authorization to approximately $439 million.
Management said operating cash flows should be sufficient to fund current obligations for the next 12 months. The company reported compliance with debt covenants; for the 12 months ended March 31, its leverage ratio was 1.69 and interest coverage ratio was 13.53.
Changes, outlook and risks
- Growth reflected higher advisory fees, stronger average AUM and incentive fees, and improved market-related results. Global announced M&A transaction value rose substantially year over year, while restructuring activity, measured by corporate defaults, declined.
- In February, Lazard Growth Acquisition Corp. I completed a $575 million IPO. The proceeds are held in restricted cash pending a business combination or shareholder redemptions; the corresponding $575 million redeemable noncontrolling interest is temporary equity. IPO warrants are recorded as derivative liabilities.
- Management described announced M&A activity as recovering, but warned that near-term uncertainty remained due to COVID-19. Most employees worked remotely during the quarter. Asset Management remains exposed to market performance, currency movements, product mix and client flows; Q1 net outflows were $1.7 billion.
- Management’s compensation-cost objective is to maintain adjusted and awarded compensation ratios in the mid-to-high 50% range over the cycle; Q1 adjusted compensation was 59.5% of operating revenue. No specific earnings or revenue guidance was provided.
- Key risks include cyclical advisory activity, AUM and market declines, competition for talent, liquidity needs, investment and counterparty risks, foreign exchange movements, COVID-19 effects and regulatory changes. The company reported no material change to previously disclosed risk factors. It said pending legal matters were not expected, in aggregate, to materially affect business or financial condition, while noting individual outcomes could be significant relative to a quarter’s earnings.
- Unusual or judgment-sensitive items include variable transaction fees recognized upon announcement or completion, incentive-fee uncertainty, deferred compensation and fair-value movements, and tax receivable agreement payments. The TRA liability was $211.2 million; actual payment timing and amounts may differ from estimates.
Investor verification priorities
- Reconcile reported revenue and earnings growth with non-GAAP operating revenue and adjusted expense measures.
- Track AUM flows separately from market and currency effects, and assess the persistence of incentive-fee revenue.
- Assess operating cash generation after seasonal compensation payments; distinguish unrestricted cash from LGAC restricted trust funds.
- Review share repurchases, dividends and share-based compensation for their effects on liquidity, equity and dilution.
- Monitor debt covenant headroom, the $1.7 billion senior-note balance, TRA obligations and the potential treatment of LGAC warrants and redeemable interests.
- Evaluate the sensitivity of advisory revenues to transaction timing and asset-management fees to markets, FX and client flows; confirm whether subsequent AUM and market trends persist.