Lazard, Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2011. Lazard is a financial advisory and asset management firm, with Financial Advisory and Asset Management operating segments and a Corporate segment. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Total revenue | $500.6 | $443.2 | $961.9 | $907.0 |
| Net revenue | $477.3 | $419.0 | $915.3 | $857.2 |
| Operating income | $89.2 | $67.1 | $162.6 | $32.6 |
| Net income attributable to Lazard Ltd | $62.0 | $44.6 | $117.0 | $11.0 |
| Diluted EPS | $0.48 | $0.39 | $0.91 | $0.10 |
- Q2 net revenue grew 14%; operating income margin was 19%, versus 16% a year earlier. First-half operating margin was 18%, versus 4% reported in 2010.
- First-half 2010 included $87.1 million of restructuring expense and $24.9 million of accelerated share-based compensation. Excluding those special items, 2010 operating income was $144.5 million and net income attributable to Lazard was $91.6 million; against those adjusted figures, first-half 2011 operating income rose 13% and attributable net income rose 28%.
- Financial Advisory: Q2 net revenue was $249.2 million, up 1%, and operating income was $35.0 million, up from $32.1 million. M&A/strategic and capital-markets advisory gains were largely offset by weaker restructuring. First-half net revenue fell 7% to $478.0 million; operating income was $50.3 million versus $82.3 million excluding the prior-year special item.
- Asset Management: Q2 net revenue increased 29% to $244.9 million and operating income increased to $83.9 million from $52.5 million. First-half net revenue rose 25% to $471.7 million and operating income was $161.6 million, versus $113.7 million excluding the 2010 special item. Higher management fees more than offset lower incentive fees.
- Corporate: Operating loss was $29.7 million in Q2 and $49.2 million for the first half; first-half 2010 reported loss included restructuring and other special charges.
Cash flow, balance sheet and capital
- First-half operating cash flow was positive $14.9 million, versus negative $91.4 million in 2010. Investing cash flow was negative $5.5 million and financing cash flow was negative $254.5 million, including $126.2 million of share repurchases, $32.9 million of dividends and $90.6 million for settlement of vested share-based compensation. Cash and cash equivalents declined $225.7 million to $984.0 million.
- At June 30, total assets were $3.081 billion, total liabilities $2.223 billion and stockholders’ equity $857.8 million. Cash, bank deposits and segregated cash were $1.333 billion in aggregate; management cited approximately $1.1 billion of cash and liquid securities.
- Senior debt was $1.077 billion and subordinated debt $150 million, with no borrowing outstanding on the $150 million revolving credit facility. Lazard reported $285 million of unused company credit lines, plus $107 million available to LFB and $20 million to Edgewater. It was in covenant compliance; leverage and interest coverage ratios were 1.67x and 10.83x, respectively.
- On July 22, 2011, the company repurchased its $150 million 3.25% subordinated note for $131.8 million, generating a pre-tax gain of $18.2 million to be recognized in Q3. The note was no longer convertible after June 30.
- Declared dividends were $0.16 per share in Q2, versus $0.125 in Q2 2010. The board declared another $0.16 quarterly dividend on July 27, payable August 26, 2011.
Business trends, outlook and risks
- Assets under management were $161.6 billion at June 30, up 4% from year-end 2010. Average AUM rose 25% in Q2 and 23% in the first half year over year. First-half net flows were positive $368 million; Q2 flows were negative $327 million. As of July 22, AUM was $162.7 billion, with $1.8 billion market/FX appreciation offset partly by $0.7 billion net outflows.
- Management described first-half markets and transaction activity as mixed. M&A announced value increased year over year, but activity slowed from Q1 amid uncertainty about European public finances and high U.S. unemployment. Management expected 2011 defaults to be significantly below 2010 and restructuring activity to remain active but at a lower level than the prior year. No specific earnings or revenue guidance was provided.
- Management expects seasonal cash-flow patterns to continue, including substantial incentive-compensation payments early in the year. It stated operating cash flow and credit lines should fund obligations for the next 12 months and beyond.
- Key risks include market and economic weakness affecting advisory transactions and AUM; volatile, transaction-dependent advisory fees; investment, credit, foreign-exchange and interest-rate exposures; employee retention and competition; and liquidity needs. Nearly 47% of AUM was foreign-currency denominated. A substantial portion of advisory revenue came from a small number of clients: the top 10 generated 38% of Q2 Financial Advisory revenue.
- Rules restricting placement agents to public pension funds were expanding; Lazard was assessing the potential effect on its Private Fund Advisory business. The SEC’s supervised investment bank holding company program ended July 21, 2011 under Dodd-Frank; Lazard was awaiting Federal Reserve regulations before deciding whether to seek consolidated Fed supervision.
- Commitments include $900.1 million of net operating-lease payments and $90.3 million of remaining LAM merger cash consideration due within one year. The filing says pending legal matters, in aggregate, are not expected to materially affect the business or financial condition, while noting that individual matters could be significant relative to a quarter’s earnings.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. Management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How sustainable Asset Management fee growth is, given its reliance on market levels, client flows and AUM mix, and whether the Q2 net outflow trend continues.
- Whether Financial Advisory revenue can recover from lower restructuring fees and the first-half year-over-year decline, given transaction timing and client concentration.
- The recurring cash-generation profile after buybacks, dividends and compensation settlements, and the company’s liquidity needs alongside debt and lease commitments.
- The effect of the July subordinated-note repurchase on Q3 earnings, cash and debt, and the future pace of share repurchases; $165.7 million remained under the repurchase authorization at June 30.
- Potential effects of public-pension placement-agent restrictions, Dodd-Frank implementation and future regulatory-supervision requirements.