Lazard, Inc. (Lazard Ltd) — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is an annual report, not a quarterly filing; fourth-quarter figures are noted separately where available. Lazard is a global financial advisory and asset management firm operating in 42 cities across 27 countries.
Business context and reporting period
Lazard’s principal businesses are Financial Advisory, which advises on M&A, restructuring, capital raising and other strategic matters, and Asset Management, which manages investment strategies for institutional and individual clients. Results are cyclical: advisory fees depend partly on transaction closings, while asset management fees are primarily tied to AUM. All amounts below are U.S. dollars.
Financial and operating metrics
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Net revenue | $2.333 billion | $2.354 billion | Down 1% |
| Operating income (GAAP) | $517 million | $(17) million | 2015 included a $548 million tax receivable agreement provision |
| Net income attributable to Lazard Ltd | $388 million | $986 million | 2015 was unusually high, principally due to deferred tax benefits |
| Diluted EPS | $2.92 | $7.40 | Not directly comparable given 2015 tax items |
| Operating cash flow | $601 million | $887 million | Down 32% |
| Cash and cash equivalents | $1.159 billion | $1.132 billion | At year-end |
| Total assets | $4.557 billion | $4.478 billion | At year-end |
| Total debt, including capital leases | $1.196 billion | $998 million | Debt increased following 2027 note issuance |
| Total stockholders’ equity | $1.294 billion | $1.367 billion | At year-end |
GAAP operating margin was 22.2% in 2016 versus negative 1.0% in 2015, a comparison heavily affected by the 2015 tax receivable agreement provision. On Lazard’s non-GAAP measure, earnings from operations were $585 million, or 25.0% of operating revenue, compared with $627 million, or 26.4%, in 2015. Awarded compensation and benefits expense was $1.309 billion, 55.8% of operating revenue, unchanged as a percentage from 2015.
- Financial Advisory: Revenue was $1.301 billion, up 2%; operating income was $284 million, up 4%, with a 21.8% margin versus 21.4%. Restructuring revenue rose 91% to $202 million, largely reflecting U.S. energy-sector activity. M&A and Other Advisory revenue fell 7% to $1.031 billion, and Capital Raising revenue was down 2%.
- Asset Management: Revenue was $1.051 billion, down 5%; operating income declined 25% to $282 million, and margin fell to 26.8% from 33.7%. Management fees decreased 3%, incentive fees decreased 38%, and other revenue decreased 20%.
- AUM: Year-end AUM was $197.9 billion, up 6% from $186.4 billion, reflecting market appreciation and net inflows, partly offset by adverse foreign exchange. Net flows were positive $160 million; average AUM declined 1% to $194.8 billion.
- Fourth quarter: Net revenue was $692 million, operating income $157 million, net income attributable to Lazard Ltd $128 million and diluted EPS $0.96.
Material changes versus the prior comparable period
- Financial Advisory revenue increased modestly as restructuring growth more than offset lower M&A and capital-raising revenue. Global announced M&A value declined 18% in 2016; completed deal value declined 10%.
- Asset Management revenue and operating income weakened despite higher year-end AUM, reflecting lower average AUM, product mix, lower incentive fees and a prior-year gain on the sale of the Australian private equity business.
- Reported net income fell sharply from 2015, but the comparison is distorted: 2015 included a $1.010 billion income tax benefit and a $548 million tax receivable agreement expense. The company released substantially all of its deferred-tax valuation allowance in 2015, producing a substantial non-recurring tax benefit.
- In November 2016, Lazard Group issued $300 million of 3.625% senior notes due 2027 and used part of the proceeds to retire the remaining $98 million of 6.85% notes due 2017, recording a $3 million extinguishment loss.
- Lazard acquired a Canadian advisory firm and, in October, the portion of MBA Lazard it did not previously own, fully integrating its Latin American operations. A $30 million change in fair value of Edgewater acquisition contingent consideration contributed to 2016 acquisition-related expense.
Liquidity, debt and capital returns
Year-end cash and cash equivalents were $1.159 billion; Lazard also reported $420 million of deposits with banks and short-term investments, some of which relate to regulated or customer activities. Approximately $179 million of unused credit lines were available, including a $150 million revolving facility. Management stated that operating cash flows and credit lines should be sufficient to fund obligations for the next 12 months. No revolver borrowings were outstanding at year-end.
Senior notes had principal of $1.2 billion: $500 million due 2020, $400 million due 2025 and $300 million due 2027. Lazard reported compliance with its credit agreement covenants; leverage was 1.32x against a 3.25x maximum, and interest coverage was 19.68x against a 3.00x minimum. The tax receivable agreement liability was $514 million; the company estimated approximately $0.7 million would be paid within 12 months, while future payment amounts and timing remain uncertain.
Lazard repurchased $300 million of Class A shares in 2016. Dividends declared were $2.69 per share for the year, including a special dividend. In February 2017, the board declared a quarterly dividend of $0.38 and a special dividend of $1.20 per share.
Outlook, commentary, risks and contingencies
Management said market volatility continued into 2017, but viewed longer-term trends as favorable for both businesses. It saw fundamentals for continued M&A activity as remaining in place and expected developing economies to contribute more to AUM over time. This is directional commentary, not quantified earnings or revenue guidance. Lazard’s stated priorities include business growth and productivity, cost discipline, efficient use of assets and shareholder returns.
- Results are exposed to market and economic cycles, M&A and restructuring volumes, deal completion risk, client flows, investment performance and compensation costs. Advisory engagements are generally separately negotiated rather than long-term contracted.
- Foreign exchange is material: about 36% of 2016 consolidated revenue was received in currencies other than the U.S. dollar, and about 70% of AUM had foreign-currency exposure. Lazard generally does not hedge foreign-exchange exposure arising in non-U.S. subsidiaries.
- Other principal risks include competition and retention of key professionals, regulation, litigation and conflicts of interest, cyber and operational disruptions, counterparty credit exposure, and valuation and liquidity risks in private equity and other investments.
- The filing discussed uncertainty around the U.K.’s exit from the EU and potential market volatility; management did not then expect likely arrangements to have a material adverse impact, though changes could increase costs.
- The company was involved in legal, regulatory and arbitration matters, including former-employee claims. Management believed pending matters in aggregate would not materially affect the business or financial condition, based on information available.
- The medical post-retirement plan was terminated effective December 31, 2016; settling obligations produced a $1.8 million gain. Internal control over financial reporting was assessed as effective, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Separate recurring operating performance from the major 2015 tax-accounting effects; assess the trend in non-GAAP earnings from operations and margins alongside GAAP results.
- Track whether restructuring revenue can remain elevated and whether M&A closings and average transaction fees recover.
- Monitor AUM flows, investment performance, product mix, average AUM and foreign-exchange impacts, given the decline in Asset Management operating income.
- Review debt service and covenant headroom, the $514 million tax receivable agreement obligation, and the timing and amount of future payments under that agreement.
- Assess capital returns, share repurchases and dilution from incentive awards, as well as the sustainability of dividends.
- Check subsequent filings for developments in litigation, regulation, Brexit-related exposure, acquisitions and the implementation of new accounting standards.