LAZARD The following discussion should be read in conjunction withLazard Ltd's consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K (this "Form 10-K"). This discussion contains forward-looking statements that are subject to known and unknown risks and uncertainties. Actual results and the timing of events may differ significantly from those expressed or implied in such forward-looking statements due to a number of factors, including those set forth in the sections entitled "Risk Factors" and "Special Note Regarding Forward-Looking Statements" and elsewhere in this Form 10-K. Business Summary Lazard is one of the world's preeminent financial advisory and asset management firms. We have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Founded in 1848 inNew Orleans , we currently operate from more than 40 cities and 25 countries across key business and financial centers inNorth America ,Europe ,Asia ,Australia , and Central andSouth America . Our primary business purpose is to serve our clients. Our deep roots in business centers around the world form a global network of relationships with key decision-makers in corporations, governments and investing institutions. This network is both a competitive strength and a powerful resource for Lazard and our clients. As a firm that competes on the quality of our advice, we have two fundamental assets: our people and our reputation. We operate in cyclical businesses across multiple geographies, industries and asset classes. In recent years, we have expanded our geographic reach, bolstered our industry expertise and continued to build in growth areas. Companies, government bodies and investors seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global, regional and local economic conditions. We believe that our business model as an independent advisor will continue to create opportunities for us to attract new clients and key personnel.
Our principal sources of revenue are derived from activities in the following business segments:
• Financial Advisory, which offers corporate, partnership, institutional,
government, sovereign and individual clients across the globe a wide
array of financial advisory services regarding mergers and acquisitions
("M&A"), capital advisory, restructurings, shareholder advisory,
sovereign advisory, capital raising and other strategic advisory
matters, and
• Asset Management, which offers a broad range of global investment
solutions and investment management services in equity and fixed income
strategies, asset allocation strategies, alternative investments andprivate equity funds to corporations, public funds, sovereign entities,
endowments and foundations, labor funds, financial intermediaries and
private clients.
In addition, we record selected other activities in our Corporate segment,
including management of cash, investments, deferred tax assets, outstanding
indebtedness, certain contingent obligations, and assets and liabilities
associated with
Our consolidated net revenue was derived from the following segments:
Year Ended December 31,
2019 2018 2017
Financial Advisory 53 % 55 % 52 %
Asset Management 48 47 48
Corporate (1 ) (2 ) -
Total 100 % 100 % 100 %
We also invest our own capital from time to time, generally alongside capital of
qualified institutional and individual investors in alternative investments or
private equity investments, and, since 2005, we have engaged in a number of
alternative investments and private equity activities, including, historically,
investments through (i)
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Edgewater, our
Business Environment and Outlook
Economic and global financial market conditions can materially affect our financial performance. As described above, our principal sources of revenue are derived from activities in our Financial Advisory and Asset Management business segments. As our Financial Advisory revenues are primarily dependent on the successful completion of merger, acquisition, restructuring, capital raising or similar transactions, and our Asset Management revenues are primarily driven by the levels of assets under management, weak economic and global financial market conditions can result in a challenging business environment for M&A and capital-raising activity as well as our Asset Management business, but may provide opportunities for our restructuring business. On an ongoing basis, regional, macroeconomic and geopolitical factors, including trade policy and regional tax and regulatory reform, may impact our business. Overall, the global macroeconomic environment remains favorable, equity market fundamentals are strong and credit is widely available.
Our outlook with respect to our Financial Advisory and Asset Management businesses is described below.
• Financial Advisory-The fundamentals for continued M&A activity and
recent trends such as technological disruption and shareholder activism,
which can be a catalyst for global strategic activity, appear to remain
in place. We believe our Financial Advisory business is in a strong
competitive position as demand continues for expert, independentstrategic advice that can be levered across geographies and our range of
capabilities. The global scale and breadth of our Financial Advisory
business allows us to advise on a wide range of strategic and
restructuring transactions across a variety of industries. In addition,
we believe our businesses throughout North America , Europe and the
emerging markets position us for growth in these markets, while
enhancing our relationships with, and the services that we can provideto, clients in other economies. We continue to invest in our Financial
Advisory business by selectively hiring talented senior professionals
and continuing to focus on our M&A and other advisory services.
• Asset Management-In the short to intermediate term, we expect most
investor demand will come through financial institutions, and from
defined benefit and defined contribution plans in developed economies
because of their sheer scope and size. Over the longer term, and
depending upon local market conditions, we would expect an increasing
share of our AUM to come from the developing economies around the globe,
as their retirement systems evolve and individual wealth is increasingly
deployed in the financial markets. Given our diversified investment
platform and our ability to provide investment solutions for a global
mix of clients, we believe we are positioned to benefit from
opportunities across the asset management industry. We are continually
developing and seeding new investment strategies that extend our
existing platforms and assessing potential product acquisitions or other
inorganic growth opportunities. Recent examples of growth initiatives
include the following investment strategies: various Quantitative Equity
strategies, explainable AI capabilities, a U.S. Systematic Equity
strategy, and sustainable investment strategies.
We operate in a very competitive and rapidly changing environment. New risks and
uncertainties emerge continuously, and it is not possible for our management to
predict all risks and uncertainties, nor can we assess the impact of all
potentially applicable factors on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements. See Item 1A, "Risk
Factors" in this Form 10-K. Furthermore, net income and revenue in any period
may not be indicative of full-year results or the results of any other period
and may vary significantly from year to year and quarter to quarter.
Overall, we continue to focus on the development of our business, including the
generation of stable revenue growth, earnings growth and shareholder returns,
the evaluation of potential growth opportunities, the investment in new
technology to support the development of existing and new business
opportunities, the prudent management of our costs and expenses, the efficient
use of our assets and the return of capital to our shareholders.
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Certain market data with respect to our Financial Advisory and Asset Management businesses is included below.
Financial Advisory
As reflected in the following table, which sets forth global M&A industry statistics, the value and number of all completed transactions, including the subset of completed transactions involving values greater than$500 million , decreased in 2019 as compared to 2018. With respect to announced M&A transactions, the value and number of all transactions, including the subset of announced transactions involving values greater than$500 million , are flat as compared to 2018, apart from the number of announced transactions involving values greater than$500 million , which decreased in 2019 as compared to 2018. Year Ended December 31, % 2019 2018 Incr / (Decr) ($ in billions) Completed M&A Transactions: All deals: Value$ 3,656 $ 4,298 (15 )% Number 34,422 35,755 (4 )% Deals Greater than$500 million: Value$ 2,852 $ 3,396 (16 )% Number 1,114 1,320 (16 )% Announced M&A Transactions: All deals: Value$ 4,094 $ 4,114 (0 )% Number 35,299 35,797 (1 )% Deals Greater than$500 million: Value$ 3,236 $ 3,203 1 % Number 1,222 1,347 (9 )%
Source: Dealogic as of
Global restructuring activity during 2019, as measured by the number of
corporate defaults, increased as compared to 2018. The number of defaulting
issuers increased to 101 in 2019, according to
Net revenue trends in Financial Advisory are generally correlated to the level of completed industry-wide M&A transactions and restructuring transactions occurring subsequent to corporate debt defaults, respectively. However, deviations from this relationship can occur in any given year for a number of reasons. For instance, our results can diverge from industry-wide activity where there are material variances from the level of industry-wide M&A activity in a particular market where Lazard has significant market share, or regarding the relative number of our advisory engagements with respect to larger-sized transactions, and where we are involved in non-public or sovereign advisory assignments.
Asset Management
Equity market indices for major markets at
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The percentage change in major equity market indices (i) at December 31, 2019 ,
as compared to such indices at December 31, 2018 , and (ii) at December 31, 2018 ,
as compared to such indices at December 31, 2017 , is shown in the table below.
Percentage Changes
December 31,
2019 vs. 2018 2018 vs. 2017
MSCI World Index 28 % (8 %)
Euro Stoxx 29 % (11 %)
MSCI Emerging Market 19 % (14 %)
S&P 500 31 % (4 %)
The fees that we receive for providing investment management and advisory
services are primarily driven by the level of AUM and the nature of the AUM
product mix. Accordingly, market movements, foreign currency exchange rate
volatility and changes in our AUM product mix will impact the level of revenues
we receive from our Asset Management business when comparing periodic results. A
substantial portion of our AUM is invested in equities. Movements in AUM during
the period generally reflect the changes in equity market indices.
Financial Statement Overview
Net Revenue
The majority of Lazard's Financial Advisory net revenue historically has been earned from the successful completion of M&A transactions, capital advisory services, capital raising, restructuring, shareholder advisory, sovereign advisory and other strategic advisory matters. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, with such fees not being dependent on a specific transaction, and may also earn fees in connection with public and private securities offerings. Significant fluctuations in Financial Advisory net revenue can occur over the course of any given year, because a significant portion of such net revenue is earned upon the successful completion of a transaction, restructuring or capital raising activity, the timing of which is uncertain and is not subject to Lazard's control. Lazard's Asset Management segment principally includes LAM, LFG and Edgewater. Asset Management net revenue is derived from fees for investment management and advisory services provided to clients. As noted above, the main driver of Asset Management net revenue is the level and product mix of AUM, which is generally influenced by the performance of the global equity markets and, to a lesser extent, fixed income markets as well as Lazard's investment performance, which impacts its ability to successfully attract and retain assets. As a result, fluctuations (including timing thereof) in financial markets and client asset inflows and outflows have a direct effect on Asset Management net revenue and operating income. Asset Management fees are generally based on the level of AUM measured daily, monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations, currency fluctuations, changes in product mix, or net client asset flows will result in a corresponding increase or decrease in management fees. The majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less. Institutional and individual clients, and firms with which we have strategic alliances, can terminate their relationship with us, reduce the aggregate amount of AUM or shift their funds to other types of accounts with different rate structures for a number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. In addition, as Lazard's AUM includes significant amounts of assets that are denominated in currencies other thanU.S. Dollars, changes in the value of theU.S. Dollar relative to foreign currencies will impact the value of Lazard's AUM and the overall amount of management fees generated by the AUM. Fees vary with the type of assets managed and the vehicle in which they are managed, with higher fees earned on equity assets and alternative investment funds, such as hedge funds and private equity funds, and lower fees earned on fixed income and cash management products. 39
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The Company earns performance-based incentive fees on various investment products, including traditional products and alternative investment funds, such as hedge funds and private equity funds.
For hedge funds, incentive fees are calculated based on a specified percentage of a fund's net appreciation, in some cases in excess of established benchmarks or thresholds. The Company records incentive fees on traditional products and hedge funds at the end of the relevant performance measurement period, when potential uncertainties regarding the ultimate realizable amounts have been determined. The incentive fee measurement period is generally an annual period (unless an account terminates or redemption occurs during the year). The incentive fees received at the end of the measurement period are not subject to reversal or payback. Incentive fees on hedge funds are often subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain gains realized by the hedge funds in future periods before any incentive fees can be earned. For private equity funds, incentive fees may be earned in the form of a "carried interest" if profits arising from realized investments exceed a specified threshold. Typically, such carried interest is ultimately calculated on a whole-fund basis and, therefore, clawback of carried interest during the life of the fund can occur. As a result, incentive fees earned on our private equity funds are not recognized until potential uncertainties regarding the ultimate realizable amounts have been determined, including any potential for clawback. Corporate segment net revenue consists primarily of investment gains and losses on the Company's "seed investments" related to our Asset Management business and principal investments in private equity funds, net of hedging activities, as well as gains and losses on investments held in connection withLazard Fund Interests ("LFI") and interest income and interest expense. Corporate net revenue also can fluctuate due to changes in the fair value of debt and equity securities, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness. Although Corporate segment net revenue during 2019 is not significant compared to Lazard's net revenue, total assets in the Corporate segment represented 65% of Lazard's consolidated total assets as ofDecember 31, 2019 , which are attributable to cash and cash equivalents, investments in debt and equity securities, interests in alternative investment, debt, equity and private equity funds, deferred tax assets and certain assets associated with LFB.
Operating Expenses
The majority of Lazard's operating expenses relate to compensation and benefits for managing directors and employees. Our compensation and benefits expense includes (i) salaries and benefits, (ii) amortization of the relevant portion of previously granted deferred incentive compensation awards, including (a) share-based incentive compensation under theLazard Ltd 2018 Incentive Compensation Plan (the "2018 Plan") and theLazard Ltd 2008 Incentive Compensation Plan (the "2008 Plan"), and (b) LFI and other similar deferred compensation arrangements (see Note 16 of Notes to Consolidated Financial Statements), (iii) a provision for discretionary or guaranteed cash bonuses and profit pools and (iv) when applicable, severance payments. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our actual and forecasted operating and financial performance, staffing levels, estimated forfeiture rates, competitive pay conditions and the nature of revenues earned, as well as the mix between current and deferred compensation. We believe that "awarded compensation and benefits expense" and the ratio of "awarded compensation and benefits expense" to "operating revenue," both non-GAAP measures, are the most appropriate measures to assess the annual cost of compensation and provide the most meaningful basis for comparison of compensation and benefits expense between present, historical and future years. "Awarded compensation and benefits expense" for a given year is calculated using "adjusted compensation and benefits expense," also a non-GAAP measure, as modified by the following items:
• we deduct amortization expense recorded for accounting principles
generally accepted in the United States of America ("U.S. GAAP")
purposes in the fiscal year associated with deferred incentive
compensation awards;
• we add incentive compensation with respect to the fiscal year, which is
comprised of:
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(i) the deferred incentive compensation awards granted in the year-end
compensation process with respect to the fiscal year (e.g., deferred
incentive compensation awards granted in 2020 related to the 2019
year-end compensation process), including performance-based
restricted stock unit ("PRSU") and performance-based restricted
participation unit ("PRPU") awards (based on the target payout
level);
(ii) the portion of investments in people (e.g., "sign-on" bonuses or
retention awards) and other special deferred incentive compensation
awards that is applicable to the fiscal year the award becomes
effective; and
(iii) amounts in excess of the target payout level for PRSU and PRPU
awards at the end of their respective performance periods; and
• we reduce the amounts in (i), (ii) and (iii) above by an estimate of
future forfeitures with respect to such awards.
We also use "adjusted compensation and benefits expense" and the ratio of "adjusted compensation and benefits expense" to "operating revenue," both non-GAAP measures, for comparison of compensation and benefits expense between periods. For the reconciliations and calculations with respect to "adjusted compensation and benefits expense" and "awarded compensation and benefits expense" and related ratios to "operating revenue," see the table under "Consolidated Results of Operations" below.
Compensation and benefits expense is the largest component of our operating expenses. We seek to maintain discipline with respect to compensation, including the rate at which we award deferred compensation. Our goal is to maintain a ratio of awarded compensation and benefits expense to operating revenue and a ratio of adjusted compensation and benefits expense to operating revenue over the cycle in the mid- to high-50s percentage range. While we have implemented policies and initiatives that we believe will assist us in maintaining ratios within this range, there can be no guarantee that we will continue to maintain such ratios, or that our policies or initiatives will not change in the future. We may benefit from pressure on compensation costs within the financial services industry in future periods; however, increased competition for senior professionals, changes in the macroeconomic environment or the financial markets generally, lower operating revenue resulting from, for example, a decrease in M&A activity, our share of the M&A market or our AUM levels, changes in the mix of revenues from our businesses, investments in our businesses or various other factors could prevent us from achieving this goal. Our operating expenses also include "non-compensation expense", which includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and other expenses. Our occupancy costs represent a significant portion of our aggregate operating expenses and are subject to change from time to time, particularly as leases for real property expire and are renewed or replaced with new, long-term leases for the same or other real property.
We believe that "adjusted non-compensation expense", a non-GAAP measure, provides a more meaningful basis for our investors to assess our operating results. For calculations with respect to "adjusted non-compensation expense", see the table under "Consolidated Results of Operations" below.
Our operating expenses also include our "benefit pursuant to the tax receivable agreement" (which, in 2017, was offset by the charges described below relating to the Tax Act) and "amortization and other acquisition-related (benefits) costs", which includes the change in fair value of the contingent consideration associated with business acquisitions.
Business Realignment
We conducted a review of our business, which resulted in a realignment that included employee reductions and the closing of subscale offices and investment strategies, most of which were completed during the third quarter of 2019. We believe these actions better align the business with changes in the marketplace and create greater flexibility to focus on strategic growth opportunities. These actions resulted in expenses of$68 million in 2019. See Note 18 of Notes to Consolidated Financial Statements. 41
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Provision for Income Taxes
Lazard Ltd , through its subsidiaries, is subject toU.S. federal income taxes on all of itsU.S. operating income, as well as on the portion of non-U.S. income attributable to itsU.S. subsidiaries. In addition,Lazard Ltd , through its subsidiaries, is subject to state and local taxes on its income apportioned to various state and local jurisdictions. Outside theU.S. ,Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions.Lazard Group is also subject to Unincorporated Business Tax ("UBT") attributable to its operations apportioned toNew York City . OnDecember 22, 2017 , the Tax Cuts and Jobs Act (the "Tax Act") was enacted. The Tax Act significantly revised theU.S. corporate income tax system by, among other changes, lowering the corporate income tax rate from 35% to 21%, implementing a partial territorial tax system and imposing a one-time repatriation tax on the deemed repatriated earnings of foreign subsidiaries. The Tax Act also included several provisions that limited the benefit of the tax rate reduction, such as restricting the deductibility of interest expense and other corporate business expenses. The Tax Act further included anti-base erosion provisions such as the BEAT and tax on GILTI. The GILTI provisions impose a tax on certain income from foreign operations and we have elected to account for the tax on GILTI as a current period expense. See "Critical Accounting Policies and Estimates-Income Taxes" below and Notes 19 and 21 of Notes to Consolidated Financial Statements for additional information regarding income taxes, the impact of the Tax Act on us, our deferred tax assets and the tax receivable agreement obligation.
Noncontrolling Interests
Noncontrolling interests primarily consist of amounts related to Edgewater's management vehicles that the Company is deemed to control but not own, profits interest participation rights and consolidated VIE interests held by employees. See Notes 15 and 24 of Notes to Consolidated Financial Statements for information regarding the Company's noncontrolling interests and consolidated VIEs.
Consolidated Results of Operations
Lazard's consolidated financial statements are presented inU.S. Dollars. Many of our non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than theU.S. Dollar, generally the currency of the country in which the subsidiaries are domiciled. Such subsidiaries' assets and liabilities are translated intoU.S. Dollars using exchange rates as of the respective balance sheet date, while revenue and expenses are translated at average exchange rates during the respective periods based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary's functional currency are reported as a component of stockholders' equity. Foreign currency remeasurement gains and losses on transactions in non-functional currencies are included in the consolidated statements of operations. A portion of our net revenue is derived from transactions that are denominated in currencies other than theU.S. Dollar. Net revenue for the year endedDecember 31, 2019 was negatively impacted, and net revenue for the year endedDecember 31, 2018 was positively impacted, by exchange rate movements, in each case in comparison to the relevant prior year period. The majority of the impact to net revenue, in both periods, was offset by the impact of the exchange rate movements on our operating expenses during the years denominated in currencies other than theU.S. Dollar. 42
-------------------------------------------------------------------------------- The consolidated financial statements are prepared in conformity withU.S. GAAP. Selected financial data derived from the Company's reported consolidated results of operations is set forth below, followed by a more detailed discussion of both the consolidated and business segment results. Year Ended December 31, 2019 2018 2017 ($ in thousands) Net Revenue$ 2,586,773 $ 2,826,352 $ 2,644,311 Operating Expenses (a): Compensation and benefits 1,563,395 1,514,735 1,512,873 Non-compensation 611,773 653,243 499,024 Amortization and other acquisition-related (benefits) costs 19,410 (15,897 ) 9,514 Benefit pursuant to tax receivable agreement (503 ) (6,495 ) (202,546 ) Total operating expenses 2,194,075 2,145,586 1,818,865 Operating Income 392,698 680,766 825,446 Provision for income taxes 94,982 148,317 565,599 Net Income 297,716 532,449 259,847 Less - Net Income Attributable to Noncontrolling Interests 11,216 5,324
6,264
Net Income Attributable to Lazard Ltd$ 286,500 $ 527,125 $ 253,583 Operating Income, as a % of net revenue 15.2 % 24.1 % 31.2 %
(a) See Note 18 of Notes to Consolidated Financial Statements for information
regarding business realignment.
The tables below describe the components of operating revenue, adjusted and
awarded compensation and benefits expense, adjusted non-compensation expense,
earnings from operations and related key ratios, which are non-GAAP measures
used by the Company to manage its business. We believe such non-GAAP measures
provide the most meaningful basis for comparison between present, historical and
future periods, as described above.
Year Ended December 31,
2019 2018 2017
($ in thousands)
Operating Revenue:
Net revenue $ 2,586,773 $ 2,826,352 $ 2,644,311
Adjustments:
Interest expense (a) 74,521 54,126 49,983
Distribution fees, reimbursable deal costs
and bad debt
expense (b) (76,032 ) (120,995 ) -
Revenue related to noncontrolling interests
(c) (23,426 ) (18,787 ) (16,228 )
(Gains) losses on investments pertaining to
LFI (d) (31,657 ) 14,086 (23,526 )
Private equity investment adjustment (e) 12,056 - -
Losses associated with business realignment
(f) 3,727 - -
Operating revenue 2,545,962 $ 2,754,782 $ 2,654,540 (a) Interest expense (excluding interest expense incurred by LFB) is added back
in determining operating revenue because such expense relates to corporate
financing activities and is not considered to be a cost directly related to
the revenue of our business.
(b) Represents certain distribution fees, reimbursable deal costs paid to third
parties and bad debt expense relating to fees that are deemed uncollectible
for which an equal amount is excluded for purposes of determining adjusted
non-compensation expense.
(c) Revenue related to the consolidation of noncontrolling interests is excluded
from operating revenue because the Company has no economic interest in such
amount.
(d) Represents changes in the fair value of investments held in connection with
LFI and other similar deferred compensation arrangements for which a
corresponding equal amount is excluded from compensation and benefits
expense.
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(e) Represents write-down of a private equity investment to the potential
transaction value.
(f) Represents losses associated with the closing of certain offices as part of
business realignment.
Year Ended December 31,
2019 2018 2017
($ in thousands)
Compensation and Benefits Expense:
Total compensation and benefits expense $ 1,563,395 $ 1,514,735 $ 1,512,873
Adjustments:
Expenses associated with business realignment (56,635 ) - -
Noncontrolling interests (a) (11,175 ) (10,999 ) (8,285 )
(Charges) credits pertaining to LFI (b) (31,657 ) 14,086 (23,526 )
Expenses associated with ERP system
implementation (c) - (1,190 ) -
Adjusted compensation and benefits expense 1,463,928 1,516,632
1,481,062
Deduct - amortization of deferred incentive compensation awards (367,920 ) (375,772 ) (367,350 ) Total adjusted cash compensation and benefits expense (d) 1,096,008 1,140,860
1,113,712
Add:
Year-end deferred incentive compensation awards (e) 361,345 377,901
350,975
Sign-on and other special incentive awards (f) 37,552 45,726
36,201
Deduct - adjustments for estimated forfeitures (g) (25,928 ) (27,534 ) (25,166 ) Awarded compensation and benefits expense$ 1,468,977 $ 1,536,953 $ 1,475,722 Adjusted compensation and benefits expense, as a % of operating revenue 57.5 % 55.1 % 55.8 % Awarded compensation and benefits expense, as a % of operating revenue 57.7 % 55.8 % 55.6 %
(a) Expenses related to the consolidation of noncontrolling interests are
excluded because Lazard has no economic interest in such amounts.
(b) Represents changes in fair value of the compensation liability recorded in
connection with LFI and other similar deferred incentive compensation awards
for which a corresponding equal amount is excluded from operating revenue.
(c) Represents expenses associated with the Enterprise Resource Planning ("ERP")
system implementation.
(d) Includes base salaries and benefits of $705,156 , $695,398 and $648,130 for
2019, 2018 and 2017, respectively, and cash incentive compensation of
$390,852 , $445,462 and $465,582 for the respective years.
(e) Deferred incentive compensation awards applicable to the relevant year-end
compensation process (e.g., deferred incentive compensation awards granted
in 2020, 2019 and 2018 related to the 2019, 2018 and 2017 year-end
compensation processes, respectively).
(f) Represents special deferred incentive awards that are granted outside theyear-end compensation process, and includes grants to new hires, retention
awards and performance units earned under PRSU grants.
(g) An estimate, based on historical experience and future expectations, for
future forfeitures of the deferred portion of such awards in order topresent awarded compensation and benefits expense on a similar basis to that
under U.S. GAAP, which also considers estimated forfeitures.
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Year Ended December 31,
2019 2018 2017
($ in thousands)
Adjusted Non-Compensation Expense:
Total non-compensation expense $ 611,773 $ 653,243 $ 499,024
Adjustments:
Expenses associated with business realignment (6,922 ) - -
Expenses associated with ERP system
implementation (a) (17,359 ) (27,495 ) (25,308 )
Expenses relating to office space
reorganization (b) (4,711 ) (2,345 ) (11,354 )
Distribution fees, reimbursable deal costs
and bad debt
expense (c) (76,032 ) (120,995 ) -
Charges pertaining to senior debt refinancing
(d) (6,505 ) (6,523 ) -
Noncontrolling interests (e) (1,693 ) (1,754 ) (1,684 )
Expenses associated with the Lazard
Foundation (f) - (10,000 ) -
Adjusted non-compensation expense $ 498,551 $ 484,131 $ 460,678
Adjusted non-compensation expense, as
a % of operating revenue 19.6 % 17.6 % 17.4 %
(a) Represents expenses associated with the Enterprise Resource Planning ("ERP")
system implementation.
(b) Represents incremental rent expense and lease abandonment costs related to
office space reorganization.
(c) Represents certain distribution fees, reimbursable deal costs paid to third
parties and bad debt expense relating to fees that are deemed uncollectible
for which an equal amount is included for purposes of determining operating
revenue.
(d) In 2019 and 2018, represents charges pertaining to the redemption of the
Company's 4.25% senior notes due 2020 (the "2020 Notes"), due to the
non-operating nature of such transaction. See "-Liquidity and Capital
Resources-Financing Activities."
(e) Expenses related to the consolidation of noncontrolling interests are
excluded because the Company has no economic interest in such amounts.
(f) Represents expenses associated with an unconditional commitment to the
Lazard Foundation .
Year Ended December 31,
2019 2018 2017
($ in thousands)
Earnings From Operations:
Operating revenue $ 2,545,962 $ 2,754,782 $ 2,654,540
Deduct:
Adjusted compensation and benefits expense (1,463,928 ) (1,516,632 ) (1,481,062 )
Adjusted non-compensation expense (498,551 ) (484,131 ) (460,678 )
Earnings from operations $ 583,483 $ 754,019 $ 712,800
Earnings from operations, as a % of operating
revenue 22.9 % 27.4 % 26.8 %
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Headcount information is set forth below:
As of December 31,
2019 (a) 2018 (b) 2017
Headcount:
Managing Directors:
Financial Advisory 163 166 152
Asset Management 104 102 96
Corporate 19 17 22
Total Managing Directors 286 285 270
Other Business Segment Professionals and
Support Staff:
Financial Advisory 1,355 1,312 1,180
Asset Management 986 1,014 806
Corporate 391 385 587
Total 3,018 2,996 2,843
(a) Includes the impact of business realignment as of
(b) Reduction in the Corporate segment in 2018 relates to a realignment of
certain headcount from Corporate to the Financial Advisory and Asset
Management segments.
A review of our operating results for the year endedDecember 31, 2019 compared to our operating results for the year endedDecember 31, 2018 appears below. A detailed review of our operating results for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 is set forth in Part II, Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2018 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations-Operating Results".
Operating Results
Year Ended
The Company reported net income attributable to
Net revenue decreased$240 million , or 8%, with operating revenue decreasing$209 million , or 8%, as compared to 2018. Fee revenue from investment banking and other advisory activities decreased$183 million , or 12%, as compared to 2018. Asset management fees, including incentive fees, decreased$88 million , or 7%, as compared to 2018. In the aggregate, interest income, other revenue and interest expense increased$31 million as compared to 2018.
Compensation and benefits expense, which included
Adjusted compensation and benefits expense was$1,464 million , a decrease of$53 million , or 3%, as compared to$1,517 million in 2018. The ratio of adjusted compensation and benefits expense to operating revenue was 57.5% for 2019, as compared to 55.1% for 2018. Awarded compensation and benefits expense in 2019 was$1,469 million , a decrease of$68 million , or 4%, when compared to$1,537 million in 2018. The ratio of awarded compensation and benefits expense to operating revenue was 57.7%, as compared to 55.8% for 2018. The year-end deferred incentive compensation awarded for 2019 was$361 million , representing a decrease of$17 million , or 4%, as compared to 2018. As described above, when analyzing compensation and benefits expense on a full-year basis, we believe that awarded compensation and benefits expense provides the most meaningful basis for comparison of compensation and benefits expense between present, historical and future years. Non-compensation expense decreased$41 million , or 6%, as compared to 2018, primarily due to higher bad debt expense in 2018 and lower fund administration fees in 2019, partially offset by investments in technology infrastructure and increased business development expenses in 2019. Adjusted non-compensation expense increased$14 million , or 3%, as compared to 2018, primarily due to investments in technology infrastructure and increased 46
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business development expenses in 2019. The ratio of adjusted non-compensation expense to operating revenue was 19.6% for 2019, as compared to 17.6% in 2018.
Amortization and other acquisition-related (benefits) costs reflect a cost of$19 million in the 2019 period, as compared to a benefit of$16 million in the 2018 period, primarily due to the change in the fair market value of contingent consideration.
Operating income decreased
Earnings from operations decreased$171 million , or 23%, as compared to 2018, and, as a percentage of operating revenue, was 22.9%, as compared to 27.4% in 2018.
The provision for income taxes reflects an effective tax rate of 24.2%, as compared to 21.8% in 2018. See Note 19 of Notes to Consolidated Financial Statements and "Critical Accounting Policies-Income Taxes" below.
Net income attributable to noncontrolling interests increased
Business Segments
The following is a discussion of net revenue and operating income for the Company's segments: Financial Advisory, Asset Management and Corporate. Each segment's operating expenses include (i) compensation and benefits expenses that are incurred directly in support of the segment and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourcing, and indirect support costs (including compensation and benefits expense and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, human resources, legal, information technology, facilities management and senior management activities. Such support costs are allocated to the relevant segments based on various statistical drivers such as revenue, headcount, square footage and other factors.
Financial Advisory
The following table summarizes the reported operating results attributable to the Financial Advisory segment:
Year Ended December 31,
2019 2018 2017
($ in thousands)
Net Revenue $ 1,374,036 $ 1,555,526 $ 1,387,682
Operating Expenses 1,225,795 1,198,807 1,143,586
Operating Income (a) $ 148,241 $ 356,719 $ 244,096 Operating Income, as a % of net revenue 10.8 % 22.9 %
17.6 %
(a) See Note 18 of Notes to Consolidated Financial Statements for information
regarding business realignment.
Certain Lazard fee and transaction statistics for the Financial Advisory segment
are set forth below:
Year Ended December 31,
2019 2018 2017
Lazard Statistics:
Number of clients with fees greater than $1 million:
Financial Advisory 288 287 304
Percentage of total Financial Advisory net revenue
from top 10 clients (a) 17 % 19 % 22 %
Number of M&A transactions completed with
values greater than $500 million (b) 74 89 84
47
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(a) No individual client constituted more than 10% of our Financial Advisory
segment net revenue in the years ended
(b) Source: Dealogic as of
The geographical distribution of Financial Advisory net revenue is set forth below in percentage terms and is based on the Lazard offices that generate Financial Advisory net revenue, which are located in theAmericas (primarily in theU.S. ,Canada , andLatin America ), EMEA (primarily in theU.K. ,France ,Germany ,Italy andSpain ) and theAsia Pacific region (primarily inAustralia ) and therefore may not be reflective of the geography in which the clients are located. Year Ended December 31, 2019 2018 2017 Americas 66 % 60 % 60 % EMEA 32 36 36 Asia Pacific 2 4 4 Total 100 % 100 % 100 % The Company's managing directors and many of its professionals have significant experience, and many of them are able to use this experience to advise on M&A, restructuring and other strategic advisory matters, depending on clients' needs. This flexibility allows Lazard to better match its professionals with the counter-cyclical business cycles of mergers and acquisitions and restructurings. While Lazard measures revenue by practice area, Lazard does not separately measure the costs or profitability of M&A services as compared to restructuring or other services. Accordingly, Lazard measures performance in its Financial Advisory segment based on overall segment operating revenue and operating income margins.
Financial Advisory Results of Operations
Year Ended
Financial Advisory net revenue decreased$181 million , or 12%, as compared to 2018. The decrease in Financial Advisory net revenue was primarily a result of a decrease in the number of fees greater than$5 million as compared to 2018.
Operating expenses, which included
Financial Advisory operating income was
48--------------------------------------------------------------------------------
Asset Management
The following table shows the composition of AUM for the Asset Management segment (see Item 1, "Business-Principal Business Lines-Asset Management-Investment Strategies"):
As of December 31,
2019 2018 2017
($ in millions)
AUM by Asset Class:
Equity:
Emerging Markets $ 40,612 $ 41,899 $ 52,349
Global 49,759 41,490 43,663
Local 48,985 36,020 42,650
Multi-Regional 66,185 57,589 70,696
Total Equity 205,541 176,998 209,358
Fixed Income:
Emerging Markets 14,387 14,980 17,320
Global 9,233 4,851 4,109
Local 5,450 6,113 4,497
Multi-Regional 9,193 6,994 9,154
Total Fixed Income 38,263 32,938 35,080
Alternative Investments 2,149 2,430 2,846
Private Equity 1,385 1,469 1,478
Cash Management 901 899 697
Total AUM $ 248,239 $ 214,734 $ 249,459 Total AUM at
As ofDecember 31, 2019 approximately 86% of our AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors as compared to approximately 88% as ofDecember 31, 2018 . As ofDecember 31, 2019 , approximately 14% of our AUM was managed on behalf of individual client relationships, which are principally with family offices and individuals, as compared to approximately 12% as ofDecember 31, 2018 .
As of
49--------------------------------------------------------------------------------
The following is a summary of changes in AUM by asset class for the years ended
Year Ended December 31, 2019
Foreign
AUM Market Value Exchange AUM
Beginning Net Appreciation/ Appreciation/ Ending
Balance Inflows Outflows Flows (Depreciation) (Depreciation) Balance
($ in millions)
Equity $ 176,998 $ 29,078 $ (38,722 ) $ (9,644 ) $ 38,421 $ (234 ) $ 205,541
Fixed Income 32,938 8,743 (7,787 ) 956 4,526 (157 ) 38,263
Other 4,798 1,143 (1,529 ) (386 ) 32 (9 ) 4,435
Total $ 214,734 $ 38,964 $ (48,038 ) $ (9,074 ) $ 42,979 $ (400 ) $ 248,239
Inflows in the Equity asset class were primarily attributable to the Global,
Local and Multi-Regional platforms, and inflows in the Fixed Income asset class
were primarily attributable to the Global, Multi-Regional and Emerging Markets
platforms. Outflows in the Equity asset class were primarily attributable to the
Emerging Markets, Global and Multi-Regional equity platforms, and outflows in
the Fixed Income asset class were primarily attributable to the Emerging Markets
and Global platforms.
Year Ended December 31, 2018
Foreign
AUM Market Value Exchange AUM
Beginning Net Appreciation/ Appreciation/ Ending
Balance Inflows Outflows Flows (Depreciation) (Depreciation) Balance
($ in millions)
Equity $ 209,358 $ 31,657 $ (37,211 ) $ (5,554 ) $ (19,967 ) $ (6,839 ) $ 176,998
Fixed Income 35,080 7,720 (6,725 ) 995 (1,475 ) (1,662 ) 32,938
Other 5,021 563 (902 ) (339 ) 144 (28 ) 4,798
Total $ 249,459 $ 39,940 $ (44,838 ) $ (4,898 ) $ (21,298 ) $ (8,529 ) $ 214,734
Year Ended December 31, 2017
Foreign
AUM Market Value Exchange AUM
Beginning Net Appreciation/ Appreciation/ Ending
Balance Inflows Outflows Flows (Depreciation) (Depreciation) Balance
($ in millions)
Equity $ 162,841 $ 37,158 $ (33,778 ) $ 3,380 $ 34,556 $ 8,581 $ 209,358
Fixed Income 31,155 5,558 (6,080 ) (522 ) 2,615 1,832 35,080
Other 3,914 1,088 (856 ) 232 693 182 5,021
Total $ 197,910 $ 43,804 $ (40,714 ) $ 3,090 $ 37,864 $ 10,595 $ 249,459
As of February 18, 2020 , AUM was $247.8 billion , a $0.4 billion decrease since
December 31, 2019 . The decrease in AUM was due to foreign exchange depreciation
of $3.7 billion and net outflows of $1.4 billion , offset by market appreciation
of $4.7 billion .
50
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Average AUM for the years ended
Year Ended December 31,
2019 2018 2017
($ in millions)
Average AUM by Asset Class:
Equity $ 193,091 $ 201,404 $ 188,796
Fixed Income 36,442 34,883 33,187
Alternative Investments 2,479 2,846 2,774
Private Equity 1,397 1,459 1,373
Cash Management 965 655 395
Total Average AUM $ 234,374 $ 241,247 $ 226,525 The following table summarizes the reported operating results attributable to the Asset Management segment:
Year Ended December 31,
2019 2018 2017
($ in thousands)
Net Revenue $ 1,237,390 $ 1,331,801 $ 1,255,820
Operating Expenses (a) 887,522 912,110 810,870
Operating Income $ 349,868 $ 419,691 $ 444,950 Operating Income, as a % of net revenue 28.3 % 31.5 %
35.4 %
(a) See Note 18 of Notes to Consolidated Financial Statements for information
regarding business realignment.
Our top ten clients accounted for 28%, 26% and 25% of our total AUM atDecember 31, 2019 , 2018 and 2017, respectively, and no individual client constituted more than 10% of our Asset Management segment net revenue during any of the respective years. The geographical distribution of Asset Management net revenue is set forth below in percentage terms, and is based on the Lazard offices that manage and distribute the respective AUM amounts. Such geographical distribution may not be reflective of the geography of the investment products or clients. Year Ended December 31, 2019 2018 2017 Americas 55 % 56 % 58 % EMEA 33 34 32 Asia Pacific 12 10 10 Total 100 % 100 % 100 %
Asset Management Results of Operations
Year Ended
Asset Management net revenue decreased$94 million , or 7%, as compared to 2018. Management fees and other revenue was$1,216 million , a decrease of$95 million , or 7%, as compared to$1,311 million in 2018, primarily due to a decrease in average AUM and change in asset mix. Incentive fees were unchanged as compared to 2018.
Operating expenses, which included
51--------------------------------------------------------------------------------
Asset Management operating income was
Corporate
The following table summarizes the reported operating results attributable to
the Corporate segment:
Year Ended December 31,
2019 2018 2017
($ in thousands)
Interest Income $ 12,030 $ 11,152 $ 5,538
Interest Expense (75,593 ) (55,021 ) (51,452 )
Net Interest (Expense) (63,563 ) (43,869 ) (45,914 )
Other Revenue (Expense) 38,910 (17,106 ) 46,723
Net Revenue (Expense) (24,653 ) (60,975 ) 809Operating Expenses (Benefit) (a) 80,758 34,669 (135,591 ) Operating Income (Loss)
$ (105,411 ) $ (95,644 ) $ 136,400
(a) Includes in 2019, 2018 and 2017, benefits of
respectively, pursuant to the tax receivable agreement.
Corporate Results of Operations
Year Ended
Net interest expense increased
Other revenue increased
Operating expenses, which included (i) in 2019,$8 million associated with business realignment and (ii) in 2018,$10 million relating to expenses associated with an unconditional commitment to theLazard Foundation , increased$46 million in 2019, primarily due to an increase in compensation and benefits expense, which reflected an increase in charges pertaining to LFI.
Cash Flows
The Company's cash flows are influenced primarily by the timing of the receipt of Financial Advisory and Asset Management fees, the timing of distributions to shareholders, payments of incentive compensation to managing directors and employees and purchases of Class A common stock. Cash flows were also affected: (i) in 2019, byLazard Group's issuance of$500 million aggregate principal amount of its 4.375% senior notes maturing in 2029 (the "2029 Notes"); (ii) in 2018, byLazard Group's issuance of$500 million aggregate principal amount of its 4.50% senior notes maturing in 2028 (the "2028 Notes") and (iii) in 2019 and 2018, the redemption of the 2020 Notes. M&A and other advisory and Asset Management fees are generally collected within 60 days of billing, while Restructuring fee collections may extend beyond 60 days, particularly those that involve bankruptcies with court-ordered holdbacks. Fees from our Private Capital Advisory activities are generally collected over a four-year period from billing and typically include an interest component. The Company makes cash payments for, or in respect of, a significant portion of its incentive compensation during the first three months of each calendar year with respect to the prior year's results. The Company also paid a special dividend in 2019, 2018 and 2017. 52
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Summary of Cash Flows:
Year Ended December 31,
2019 2018 2017
($ in millions)
Cash Provided By (Used In):
Operating activities:
Net income $ 298 $ 532 $ 260
Adjustments to reconcile net income to net
cash provided by operating activities (a) 512 435 698
Other operating activities (b) (132 ) (268 ) 71 Net cash provided by operating activities 678 699 1,029 Investing activities (42 ) (46 ) (27 ) Financing activities (c) (444 ) (726 ) (318 ) Effect of exchange rate changes (28 ) (90 ) 164 Net Increase (Decrease) in Cash and Cash Equivalents and Restricted Cash 164 (163 ) 848 Cash and Cash Equivalents and Restricted Cash (d): Beginning of Period 2,292 2,455 1,607 End of Period$ 2,456 $ 2,292 $ 2,455
(a) Consists of the following:
Year Ended December 31,
2019 2018 2017
($ in millions)
Depreciation and amortization of property
60 - -
Amortization of deferred expenses and
share-based incentive
compensation 366 371 359
Deferred tax provision 25 45 501
Amortization and other acquisition-related
(benefits) costs 19 (16 ) 10
Benefit pursuant to tax receivable agreement (1 ) (6 ) (203 )
Loss on extinguishment of debt 7 7 -
Total $ 512 $ 435 $ 698 (b) Includes net changes in operating assets and liabilities.
(c) Consists primarily of purchases of shares of Class A common stock, tax
withholdings related to the settlement of vested RSUs, vested restricted
stock awards and vested PRSUs, Class A common stock dividends, changes in
customer deposits, distributions to noncontrolling interest holders, andactivity relating to borrowings (including, in 2019 and 2018, the redemption
of the 2020 Notes and the issuance of the 2029 and 2028 Notes,
respectively).
(d) Cash and cash equivalents and restricted cash consists of cash and cash
equivalents, deposits with banks and short-term investments and cash
deposited with clearing organizations and other segregated cash.
Liquidity and Capital Resources
The Company's liquidity and capital resources are derived from operating activities, financing activities and equity offerings.
Operating Activities
Net revenue, operating income and cash receipts fluctuate significantly between
periods. In the case of Financial Advisory, fee receipts are generally dependent
upon the successful completion of client transactions, the occurrence and timing
of which is irregular and not subject to Lazard's control.
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Liquidity is significantly impacted by cash payments for, or in respect of,
incentive compensation, a significant portion of which are made during the first
three months of the year. As a consequence, cash on hand generally declines in
the beginning of the year and gradually builds over the remainder of the year.
We also pay certain tax advances during the year on behalf of certain managing
directors, which serve to reduce their respective incentive compensation
payments. We expect this seasonal pattern of cash flow to continue.
Liquidity is also affected by the level of deposits and other customer payables,
principally at LFB. To the extent that such deposits and other customer payables
rise or fall, this has a corresponding impact on liquidity held at LFB, with the
majority of such amounts generally being recorded in "deposits with banks and
short-term investments". In the year ended December 31, 2019 , as reflected on
the consolidated statements of financial condition, both "deposits with banks
and short-term investments" and "deposits and other customer payables" increased
as compared to December 31, 2018 , due to a higher level of LFB customer-related
demand deposits, primarily from clients and funds managed by LFG.
Lazard's consolidated financial statements are presented in U.S. Dollars. Many
of Lazard's non-U.S. subsidiaries have a functional currency (i.e., the currency
in which operational activities are primarily conducted) that is other than the
U.S. Dollar, generally the currency of the country in which such subsidiaries
are domiciled. Such subsidiaries' assets and liabilities are translated into
U.S. Dollars at the respective balance sheet date exchange rates, while revenue
and expenses are translated at average exchange rates during the year based on
the daily closing exchange rates. Adjustments that result from translating
amounts from a subsidiary's functional currency are reported as a component of
stockholders' equity. Foreign currency remeasurement gains and losses on
transactions in non-functional currencies are included on the consolidated
statements of operations.
We regularly monitor our liquidity position, including cash levels, investments
in U.S. Treasury securities, credit lines, principal investment commitments,
interest and principal payments on debt, capital expenditures, dividend
payments, purchases of shares of Class A common stock and matters relating to
liquidity and to compliance with regulatory net capital requirements. At
December 31, 2019 , Lazard had approximately $1,232 million of cash, with such
amount including approximately $612 million held at Lazard's operations outside
the U.S. Lazard provides for income taxes on substantially all of its foreign
earnings. We expect that no material amount of additional taxes would be
recognized upon receipt of dividends or distributions of such earnings from our
foreign operations.
We maintain lines of credit in excess of anticipated liquidity requirements. As
of December 31, 2019 , Lazard had approximately $168 million in unused lines of
credit available to it, including a $150 million , five-year, senior revolving
credit facility with a group of lenders that expires in September 2020 (the
"Amended and Restated Credit Agreement") (see "-Financing Activities" below) and
unused lines of credit available to LFB of approximately $17 million .
The Amended and Restated Credit Agreement contains customary terms and
conditions, including limitations on consolidations, mergers, indebtedness and
certain payments, as well as financial condition covenants relating to leverage
and interest coverage ratios. Lazard Group's obligations under the Amended and
Restated Credit Agreement may be accelerated upon customary events of default,
including non-payment of principal or interest, breaches of covenants,
cross-defaults to other material debt, a change in control and specified
bankruptcy events.
54--------------------------------------------------------------------------------
Financing Activities
The table below sets forth our corporate indebtedness as ofDecember 31, 2019 and 2018. The agreements with respect to this indebtedness are discussed in more detail in our consolidated financial statements and related notes included elsewhere in this Form 10-K. Outstanding as of December 31, 2019 December 31, 2018 Maturity Unamortized Carrying Unamortized Carrying Senior Debt Date Principal Debt Costs Value Principal Debt Costs Value ($ in millions) Lazard Group 2020 Senior Notes 2020 $ - $ -
$ -
2.4 397.6 400.0 2.9 397.1
Lazard Group 2027 Senior Notes 2027 300.0 2.8 297.2 300.0 3.2 296.8
Lazard Group 2028 Senior Notes 2028 500.0 7.8 492.2 500.0 8.8 491.2
Lazard Group 2029 Senior Notes 2029 500.0 7.4 492.6 - - -
$ 1,700.0 $ 20.4 $ 1,679.6 $ 1,450.0 $ 15.8 $ 1,434.2
During March 2019 , Lazard Group completed an offering of the 2029 Notes. Lazard
Group used a portion of the net proceeds of the 2029 Notes to redeem or
otherwise retire the remaining 2020 Notes in transactions that occurred during
March 2019 and April 2019 .
During September 2018 , Lazard Group completed an offering of the 2028 Notes.
Lazard Group used a portion of the net proceeds of the 2028 Notes to redeem or
otherwise retire $250 million of the 2020 Notes.
Lazard's annual cash flow generated from operations historically has been
sufficient to enable it to meet its annual obligations. We believe that our cash
flows from operating activities, along with the use of our credit lines as
needed, should be sufficient for us to fund our current obligations for the next
12 months.
As long as the lenders' commitments remain in effect, any loan pursuant to the
Amended and Restated Credit Agreement remains outstanding and unpaid or any
other amount is due to the lending bank group, the Amended and Restated Credit
Agreement includes financial covenants that require that Lazard Group not permit
(i) its Consolidated Leverage Ratio (as defined in the Amended and Restated
Credit Agreement) for the 12-month period ending on the last day of any fiscal
quarter to be greater than 3.25 to 1.00 or (ii) its Consolidated Interest
Coverage Ratio (as defined in the Amended and Restated Credit Agreement) for the
12-month period ending on the last day of any fiscal quarter to be less than
3.00 to 1.00. For the 12-month period ended December 31, 2019 , Lazard Group was
in compliance with such ratios, with its Consolidated Leverage Ratio being 1.84
to 1.00 and its Consolidated Interest Coverage Ratio being 12.82 to 1.00. In any
event, no amounts were outstanding under the Amended and Restated Credit
Agreement as of December 31, 2019 .
In addition, the Amended and Restated Credit Agreement, indenture and
supplemental indentures relating to Lazard Group's senior notes contain certain
other covenants (none of which relate to financial condition), events of default
and other customary provisions. At December 31, 2019 , the Company was in
compliance with all of these provisions. We may, to the extent required and
subject to restrictions contained in our financing arrangements, use other
financing sources, which may cause us to be subject to additional restrictions
or covenants.
See Note 13 of Notes to Consolidated Financial Statements for additional information regarding senior debt.
55--------------------------------------------------------------------------------
Stockholders' Equity
AtDecember 31, 2019 , total stockholders' equity was$682 million , as compared to$970 million and$1,259 million atDecember 31, 2018 and 2017, respectively, including$610 million ,$917 million and$1,200 million attributable toLazard Ltd on the respective dates. The net activity in stockholders' equity during the years endedDecember 31, 2019 and 2018 is reflected in the table below: Year Ended December 31, 2019 2018 ($ in millions) Stockholders' Equity - Beginning of Year$ 970 $ 1,259 Increase (decrease) due to: Net income 298 532 Other comprehensive loss (20 ) (41 ) Amortization of share-based incentive compensation 253
268
Purchase of Class A common stock (495 ) (553 ) Settlement of share-based incentive compensation (a) (96 ) (118 ) Class A common stock dividends (255 ) (360 ) Other - net 27 (17 ) Stockholders' Equity - End of Year$ 682 $ 970
(a) The tax withholding portion of share-based compensation is settled in cash,
not shares.
The Board of Directors of Lazard has issued a series of authorizations to
repurchase Class A common stock, which help offset the dilutive effect of our
share-based incentive compensation plans. During a given year the Company
intends to repurchase at least as many shares as it expects to ultimately issue
pursuant to such compensation plans in respect of year-end incentive
compensation attributable to the prior year. The rate at which the Company
purchases shares in connection with this annual objective may vary from period
to period due to a variety of factors. Purchases with respect to such program
are set forth in the table below:
Average
Number of Price Per
Year Ended December 31: Shares Share
2017 6,956,097 $ 44.10
2018 12,206,652 $ 45.29
2019 13,674,439 $ 36.18
As of December 31, 2019 , a total of $401 million of share repurchase
authorization remained available under the Company's share repurchase program,
$101 million of which will expire on December 31, 2020 and $300 million of which
will expire on December 31, 2021 .
During the year ended December 31, 2019 , the Company had in place trading plans
under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, pursuant
to which it effected stock repurchases in the open market.
On October 31, 2019 , Lazard Group distributed to its managing members, which are
subsidiaries of Lazard Ltd , 17,000,000 shares of Class A common stock that were
held by Lazard Group . These shares were ultimately received by Lazard Ltd and
cancelled. There was no impact on total stockholders' equity as a result of the
share cancellation.
On
56
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The Company plans to continue to deploy excess cash and may do so in a variety
of ways, which may include repurchasing outstanding shares of Class A common
stock, paying dividends to stockholders and repurchasing its outstanding debt.
See Notes 15 and 16 of Notes to Consolidated Financial Statements for additional information regarding Lazard's stockholders' equity and incentive plans, respectively.
We actively monitor our regulatory capital base. Our principal subsidiaries are subject to regulatory requirements in their respective jurisdictions to ensure their general financial soundness and liquidity, which require, among other things, that we comply with rules regarding certain minimum capital requirements, record-keeping, reporting procedures, relationships with customers, experience and training requirements for employees and certain other requirements and procedures. These regulatory requirements may restrict the flow of funds to and from affiliates. See Note 22 of Notes to Consolidated Financial Statements for further information. These regulations differ in theU.S. , theU.K. ,France and other countries in which we operate. Our capital structure is designed to provide each of our subsidiaries with capital and liquidity consistent with its business and regulatory requirements. For a discussion of regulations relating to us, see Item 1, "Business-Regulation" included in this Form 10-K. Contractual Obligations
The following table sets forth information relating to Lazard's contractual
obligations as of
Contractual Obligations Payment Due by Period
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
($ inthousands)
Senior debt (including interest) (a)$ 2,273,667 $ 70,250 $ 140,500 $ 140,500 $ 1,922,417 Operating leases (exclusive of$19,584 of committed sublease income) 794,075 89,130 152,472 124,064 428,409 Investment capital funding commitments (b) 6,056 6,056 - - - Total (c)$ 3,073,798 $ 165,436 $ 292,972 $ 264,564 $ 2,350,826
(a) During
principal amount of the 2029 Notes. Interest on the 2029 Notes is payable
semi-annually on
11, 2019.
during March and
Statements.
(b) Unfunded commitments to private equity investments consolidated but not
owned by Lazard of
funded by capital contributions from noncontrolling interest holders. See
Note 7 of Notes to Consolidated Financial Statements. These amounts are
generally due on demand and therefore are presented in the "less than 1
year" category.
(c) The table above excludes contingent obligations, given the inability to make
a reasonably reliable estimate of the timing of the amounts of any such
payments. The table above also excludes any possible payments for uncertain
tax positions and payments pursuant to the Company's tax receivable
agreement, given that the actual amount and timing of payments under the tax
receivable agreement could differ materially from our estimates. At December
31, 2019, a tax receivable agreement obligation of
the consolidated statements of financial condition, of which the Company
currently expects that approximately
months. See "Critical Accounting Policies and Estimates-Income Taxes" below.
See also Notes 14, 16, 17, 19 and 21 of Notes to Consolidated Financial
Statements regarding information in connection with commitments, incentive
plans, employee benefit plans, income taxes and tax receivable agreement
obligations, respectively.
57
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Effect of Inflation
We do not believe inflation will significantly affect our compensation costs as they are substantially variable in nature. However, the rate of inflation may affect certain of our other expenses, such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets or general macroeconomic conditions, it may adversely affect our financial position and results of operations by impacting overall levels of M&A activity, reducing our AUM or net revenue, or otherwise. See Item 1A, "Risk Factors-Other Business Risks-Difficult market conditions can adversely affect our business in many ways, including by reducing the volume of the transactions involving our Financial Advisory business and reducing the value or performance of the assets we manage in our Asset Management business, which, in each case, could materially reduce our revenue or income and adversely affect our financial position".
Critical Accounting Policies and Estimates
Management's discussion and analysis of our consolidated financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in conformity withU.S. GAAP. The preparation of Lazard's consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, Lazard evaluates its estimates, including those related to revenue recognition, income taxes (including the impact on the tax receivable agreement obligation), investing activities and goodwill. Lazard bases these estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments, including judgments regarding the carrying values of assets and liabilities, that are not readily apparent from other sources. Actual results may differ from these estimates.
Lazard believes that the critical accounting policies set forth below comprise the most significant estimates and judgments used in the preparation of its consolidated financial statements.
Revenue Recognition
Lazard generates substantially all of its net revenue from providing Financial
Advisory and Asset Management services to clients. Lazard recognizes revenue
when the following criteria are met:
• a contract with a client has been identified;
• the performance obligations in the contract have been identified;
• the fee or other transaction price has been determined;
• the fee or other transaction price has been allocated to each
performance obligation in the contract; and
• the Company has satisfied the applicable performance obligation.
The Company earns performance-based incentive fees on various investment
products, including traditional products and alternative investment funds such
as hedge funds and private equity funds. See "Financial Statement Overview" for
a description of our revenue recognition policies on such fees.
If, in Lazard's judgment, collection of a fee is not probable, Lazard will not
recognize revenue until the uncertainty is removed. We maintain an allowance for
doubtful accounts to provide coverage for estimated losses from our receivables.
We determine the adequacy of the allowance by estimating the probability of loss
based on our analysis of the client's creditworthiness and specifically reserve
against exposures where we determine the receivables are impaired, which may
include situations where a fee is in dispute or litigation has commenced.
With respect to fees receivable from Financial Advisory activities, such
receivables are generally deemed past due when they are outstanding 60 days from
the date of invoice. However, some Financial Advisory transactions include
specific contractual payment terms that may vary from one month to four years
(as is the case for our Private Capital Advisory fees) following the invoice
date or may be subject to court approval (as is the case with restructuring
assignments that include bankruptcy proceedings). In such cases, receivables are
deemed past due
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-------------------------------------------------------------------------------- when payment is not received by the agreed-upon contractual date or the court approval date, respectively. Financial Advisory fee receivables past due in excess of 180 days are fully provided for unless there is evidence that the balance is collectible. Asset Management fees are deemed past due and fully provided for when such receivables are outstanding 12 months after the invoice date. Notwithstanding our policy for receivables past due, we specifically reserve against exposures relating to Financial Advisory and Asset Management fees where we determine receivables are impaired.
Income Taxes
As part of the process of preparing our consolidated financial statements, we estimate our income taxes for each of our tax-paying entities in its respective jurisdiction. In addition to estimating actual current tax liabilities for these jurisdictions, we also must account for the tax effects of differences between the financial reporting and tax reporting of items, such as basis adjustments, compensation and benefits expense, and depreciation and amortization. Differences which are temporary in nature result in deferred tax assets and liabilities. Significant judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, any valuation allowance recorded against our deferred tax assets and our unrecognized tax benefits. We recognize a deferred tax asset if it is more likely than not (defined as a likelihood of greater than 50%) that a tax benefit will be accepted by a taxing authority. The measurement of deferred tax assets and liabilities is based upon currently enacted tax rates in the applicable jurisdictions. AtDecember 31, 2019 , on a consolidated basis, we recorded gross deferred tax assets of approximately$737 million , with such amount partially offset by a valuation allowance of approximately$76 million (as described below). Subsequent to the initial recognition of deferred tax assets, we also must continually assess the likelihood that such deferred tax assets will be realized. If we determine that we may not fully derive the benefit from a deferred tax asset, we consider whether it would be appropriate to apply a valuation allowance against the applicable deferred tax asset, taking into account all available information. The ultimate realization of a deferred tax asset for a particular entity depends, among other things, on the generation of taxable income by such entity in the applicable jurisdiction.
We consider multiple possible sources of taxable income when assessing a valuation allowance against a deferred tax asset, including:
• future reversals of existing taxable temporary differences;
• future taxable income exclusive of reversing temporary differences and
carryforwards;
• taxable income in prior carryback years; and
• tax-planning strategies.
The assessment regarding whether a valuation allowance is required or should be adjusted also considers all available information, including the following:
• nature, frequency, magnitude and duration of any past losses and current
operating results;
• duration of statutory carryforward periods;
• historical experience with tax attributes expiring unused; and
• near-term and medium-term financial outlook.
The weight we give to any particular item is, in part, dependent upon the degree
to which it can be objectively verified. We give greater weight to the recent
results of operations of a relevant entity. Pre-tax operating losses on a three
year cumulative basis or lack of sustainable profitability are considered
objectively verifiable evidence and will generally outweigh a projection of
future taxable income.
Certain of our tax-paying entities have individually experienced losses on a
cumulative three year basis or have tax attributes that may expire unused. In
addition, one of our tax-paying entities has recorded a valuation allowance on
substantially all of its deferred tax assets due to the combined effect of
operating losses in certain subsidiaries of that entity as well as foreign taxes
that together substantially offset any U.S. tax liability. Taking into
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account all available information, we cannot determine that it is more likely
than not that deferred tax assets held by these entities will be realized.
Consequently, we have recorded valuation allowances on $76 million of deferred
tax assets held by these entities as of December 31, 2019 .
We record tax positions taken or expected to be taken in a tax return based upon
our estimates regarding the amount that is more likely than not to be realized
or paid, including in connection with the resolution of any related appeals or
other legal processes. Accordingly, we recognize liabilities for certain
unrecognized tax benefits based on the amounts that are more likely than not to
be settled with the relevant taxing authority. Such liabilities are evaluated
periodically as new information becomes available and any changes in the amounts
of such liabilities are recorded as adjustments to "income tax expense."
Liabilities for unrecognized tax benefits involve significant judgment and the
ultimate resolution of such matters may be materially different from our
estimates.
On January 1, 2017 , we adopted new accounting guidance on share-based incentive
compensation. As a result of the adoption of this new guidance, we recognized
excess tax benefits of $11 million , $33 million and $9 million from the vesting
of share-based incentive compensation in the provision for income taxes in the
consolidated statements of operations for the years ended December 31, 2019 ,
2018 and 2017, respectively. Upon adoption of the new guidance, we also recorded
deferred tax assets of $82 million , net of a valuation allowance of $12 million ,
for previously unrecognized excess tax benefits (including tax benefits from
dividends or dividend equivalents) on share-based incentive compensation, with
an offsetting adjustment to retained earnings. The new guidance has since
January 1, 2017 affected, and the Company expects that in future periods the new
guidance will affect, the provision for income taxes for the delivery of stock
under share-based incentive compensation arrangements, as well as the effective
tax rate in the relevant periods, which could be material to the consolidated
statements of operations and the classification of cash flows in the relevant
periods.
On December 22, 2017 , the Tax Act was enacted. The Tax Act significantly revised
the U.S. corporate income tax system by, among other changes, lowering the
corporate income tax rate from 35% to 21%, implementing a partial territorial
tax system and imposing a one-time repatriation tax on the deemed repatriated
earnings of foreign subsidiaries. The Tax Act also included several provisions
that limited the benefit of the tax rate reduction, such as restricting the
deductibility of interest expense and other corporate business expenses. The Tax
Act further included anti-base erosion provisions such as the BEAT and tax on
GILTI and in 2019, the IRS issued broad and complex final and proposed
regulations interpreting such provisions of the Tax Act.
Lazard is a holding company that is treated as a publicly traded partnership for
U.S. tax purposes, and our U.S. and certain foreign subsidiaries were impacted
by the Tax Act. See Notes 19 and 21 of Notes to Consolidated Financial
Statements for additional information regarding the impact of the Tax Act on us.
In addition to the discussion above regarding deferred tax assets and associated
valuation allowances, as well as unrecognized tax benefit liability estimates,
other factors affect our provision for income taxes, including changes in the
geographic mix of our business, the level of our annual pre-tax income, transfer
pricing and intercompany transactions.
See Item 1A, "Risk Factors" and Note 19 of Notes to Consolidated Financial Statements for additional information related to income taxes.
Amended and Restated Tax Receivable Agreement
During the period ended
The amount of the Amended and Restated Tax Receivable Agreement liability is an
undiscounted amount based upon currently enacted tax laws, including the Tax
Act, the current structure of the Company and various
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assumptions regarding potential future operating profitability. The assumptions
reflected in the estimate involve significant judgment, and if our structure
were to change or our annual taxable income were to increase, we could be
required to accelerate payments under the Amended and Restated Tax Receivable
Agreement. As such, the actual amount and timing of payments under the Amended
and Restated Tax Receivable Agreement could differ materially from our
estimates. Any changes in the amount of the estimated liability would be
recorded as a non-compensation expense in the consolidated statement of
operations. Adjustments, if necessary, to the related deferred tax assets would
be recorded through income tax expense.
The cumulative liability relating to our obligations under the Amended and
Restated Tax Receivable Agreement recorded as of December 31, 2019 and 2018 was
$247 million and $271 million , respectively, and is recorded in "tax receivable
agreement obligation" on the consolidated statements of financial condition.
Investments
Investments consist primarily of interest-bearing deposits, debt and equity securities, and interests in alternative investment, debt, equity and private equity funds.
These investments, with the exception of interest-bearing deposits, are carried
at fair value on the consolidated statements of financial condition, and any
increases or decreases in the fair value of these investments are reflected in
earnings. The fair value of investments is generally based upon market prices or
the net asset value ("NAV") or its equivalent for investments in funds. See Note
7 of Notes to Consolidated Financial Statements for additional information on
the measurement of the fair value of investments.
Lazard is subject to market and credit risk on investments held. As such, gains
and losses on investment positions held, which arise from sales or changes in
the fair value of the investments, are not predictable and can cause periodic
fluctuations in net income.
Data relating to investments is set forth below:
December 31,
2019 2018
($ in thousands)
Seed investments by asset class:
Equities (a) $ 93,535 $ 73,410
Fixed income 13,923 9,548
Alternative investments 5,850 7,131
Total seed investments 113,308 90,089
Other investments owned:
Private equity (b) 23,588 41,788
Interest-bearing deposits 517 510
Fixed income and other (c) 124,670 226,346
Total other investments owned 148,775 268,644
Subtotal 262,083 358,733
Add:
Private equity consolidated, not owned (d) 10,774 14,555
LFI (e) 259,138 201,860
Total investments $ 531,995 $ 575,148
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(a) At
securities were invested as follows:
December 31,
2019 2018
Percentage invested in:
Financials 26 % 30 %
Consumer 32 28
Industrial 15 13
Technology 16 14
Other 11 15
Total 100 % 100 %
(b) Private equity investments include investments related to certain legacy
businesses and co-investments in private equity funds managed by our Asset
Management business. Co-investments owned were
as of December 31, 2019 and 2018, respectively.
(c) At December 31, 2019 and 2018, includes investments in U.S. Treasury
securities of approximately
with original maturities of greater than three months and less than one
year.
(d) Represents private equity investments that are consolidated but owned bynoncontrolling interests, and therefore do not subject the Company to market
or credit risk. The applicable noncontrolling interests are presented within
"stockholders' equity" on the consolidated statements of financial
condition.
(e) Composed of investments held in connection with LFI and other similar
deferred compensation arrangements. The market risk associated with such
investments is equally offset by the market risk associated with the
derivative liability with respect to awards expected to vest. The Company is
subject to market risk associated with any portion of such investments that
employees may forfeit. See "-Risk Management-Risks Related to Derivatives"
for risk management information relating to derivatives. LFI investments
held in entities in which the Company maintained a controlling interest were
$93 million in eight entities as ofDecember 31, 2019 , as compared to$69 million in three entities as ofDecember 31, 2018 . AtDecember 31, 2019 and 2018, total investments with a fair value of$531 million and$575 million , respectively, included$34 million and$57 million , respectively, or 6% and 10%, respectively, of investments that were classified using NAV or its equivalent as a practical expedient. See Notes 6 and 7 of Notes to Consolidated Financial Statements for additional information regarding investments measured at fair value, including the levels of fair value within which such measurements of fair value fall.
As of
As ofDecember 31, 2019 and 2018, the Company did not consolidate or deconsolidate any seed investment entities or LFI investment entities, with the exception of the recent consolidation of certain LFI funds (see Note 24 of Notes to Consolidated Financial Statements). As such, 100% of the recorded balance of seed investments and substantially all of LFI investments as ofDecember 31, 2019 and 2018 represented the Company's economic interest in the seed and LFI investments. See "-Consolidation of Variable Interest Entities" below for more information on the Company's policy regarding the consolidation of seed and LFI investment entities. For additional information regarding risks associated with our investments, see "Risk Management-Investments" below as well as Item 1A, "Risk Factors-Other Business Risks-Our results of operations may be affected by fluctuations in the fair value of positions held in our investment portfolios". 62
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Assets Under Management
AUM primarily consists of debt and equity instruments, which have a value that is readily available based on either prices quoted on a recognized exchange or prices provided by external pricing services. Prices of equity and debt securities and other instruments that comprise our AUM are provided by well-recognized, independent, third-party vendors. Such third-party vendors rely on prices provided by external pricing services which are obtained from recognized exchanges or markets, or, for certain fixed income securities, from an evaluated bid or other similarly sourced price. Either directly, or through our third-party vendors, we perform a variety of regular due diligence procedures on our pricing service providers. Those procedures include oversight by our internal operations group, review of the pricing service providers' internal control frameworks, review of the pricing service providers' valuation methodologies, reconciliation to client custodial account values and comparison of significant pricing differences.
In accordance with current accounting guidance, goodwill has an indefinite life and is tested for impairment annually, as ofNovember 1 , or more frequently if circumstances indicate impairment may have occurred. The Company performs a qualitative evaluation about whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount in lieu of actually calculating the fair value of the reporting unit. The goodwill impairment test as ofNovember 1, 2019 indicated that no reporting units were at risk of impairment. See Note 11 of Notes to Consolidated Financial Statements for additional information regarding goodwill.
Consolidation
The consolidated financial statements include the accounts ofLazard Group and entities in which it has a controlling interest. Lazard determines whether it has a controlling interest in an entity by first evaluating whether the entity is a voting interest entity ("VOE") or a variable interest entity ("VIE") underU.S. GAAP. • Voting Interest Entities. VOEs are entities in which (i) the total equity investment at risk is sufficient to enable the entity to finance
itself independently and (ii) the equity holders have the obligation to
absorb losses, the right to receive residual returns and the right to
make decisions about the entity's activities. Lazard is required to
consolidate a VOE if it holds a majority of the voting interest in such
VOE.
• Variable Interest Entities. VIEs are entities that lack one or more of
the characteristics of a VOE. If Lazard has a variable interest, or a
combination of variable interests, in a VIE, it is required to analyze
whether it needs to consolidate such VIE. Lazard is required to
consolidate a VIE if we are the primary beneficiary having (i) the power
to direct the activities of the VIE that most significantly impact the
VIE's economic performance and (ii) the obligation to absorb losses of,
or receive benefits from, the VIE that could be potentially significant
to the VIE.
Lazard's involvement with various entities that are VOEs or VIEs primarily
arises from LFI investments and investment management contracts with fund
entities in our Asset Management business. Lazard is not required to consolidate
such entities because, with the exception of certain seed and LFI investments,
as discussed below, we do not hold more than an inconsequential equity interest
in such entities and we do not hold other variable interests (including our
investment management agreements, which do not meet the definition of variable
interests) in such entities.
Lazard makes seed and LFI investments in certain entities that are considered
VOEs and VIEs and often require consolidation as a result of our investment. The
impact of seed and LFI investment entities that require consolidation on the
consolidated financial statements, including any consolidation or
deconsolidation of such entities, is not material to our financial statements.
Our exposure to loss from entities in which we have made such investments is
limited to the extent of our investment in, or investment commitment to, such
entities. See "Critical Accounting Policies and Estimates-Investments" above for
more information regarding our investments.
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Generally, when the Company initially invests to seed an investment entity, the
Company is the majority owner of the entity. Our majority ownership in seed
investment entities represents a controlling interest, except when we are the
general partner in such entities and the third-party investors have the right to
replace the general partner. To the extent material, we consolidate seed and LFI
investment entities in which we own a controlling interest, and we would
deconsolidate any such entity when we no longer have a controlling interest in
such entity.
Risk Management
Investments
The Company has investments in a variety of asset classes, primarily debt and
equity securities, and interests in alternative investments, debt, equity and
private equity funds. The Company makes investments primarily to seed strategies
in our Asset Management business or to reduce exposure arising from LFI and
other similar deferred compensation arrangements. The Company measures its net
economic exposure to market and other risks arising from investments that it
owns, excluding (i) investments held in connection with LFI and other similar
deferred compensation arrangements, (ii) investments in funds owned entirely by
the noncontrolling interest holders of certain acquired entities and (iii)
interest-bearing deposits with maturities over 90 days that allow daily
withdrawals without principal penalties.
Risk sensitivities include the effects of economic hedging. For equity market
price risk, investment portfolios and their corresponding hedges are
beta-adjusted to the All-Country World equity index. Fair value and sensitivity
measurements presented herein are based on various portfolio exposures at a
particular point in time and may not be representative of future results. Risk
exposures may change as a result of ongoing portfolio activities and changing
market conditions, among other things.
Equity Market Price Risk-At December 31, 2019 and 2018, the Company's exposure
to equity market price risk in its investment portfolio, which primarily relates
to investments in equity securities, equity funds and hedge funds, was
approximately $85 million and $84 million , respectively. The Company hedges
market exposure arising from a significant portion of our equity investment
portfolios by entering into total return swaps. The Company estimates that a
hypothetical 10% adverse change in market prices would result in a net decrease
of approximately $1.0 million and $0.8 million in the carrying value of such
investments as of December 31, 2019 and 2018, respectively, including the effect
of the hedging transactions.
Interest Rate/Credit Spread Risk-At December 31, 2019 and 2018, the Company's
exposure to interest rate and credit spread risk in its investment portfolio
related to investments in debt securities or funds which invest primarily in
debt securities was $153 million and $245 million , respectively. The Company
hedges market exposure arising from a portion of our debt investment portfolios
by entering into total return swaps. The Company estimates that a hypothetical
100 basis point adverse change in interest rates or credit spreads would result
in a decrease of approximately $1.0 million and $0.9 million in the carrying
value of such investments as of December 31, 2019 and 2018, respectively,
including the effect of the hedging transactions.
Foreign Exchange Rate Risk-At December 31, 2019 and 2018, the Company's exposure
to foreign exchange rate risk in its investment portfolio, which primarily
relates to investments in foreign currency denominated equity and debt
securities, was $37 million and $41 million , respectively. A significant portion
of the Company's foreign currency exposure related to our equity and debt
investment portfolios is hedged through the aforementioned total return swaps.
The Company estimates that a 10% adverse change in foreign exchange rates versus
the U.S. Dollar would result in a decrease of approximately $0.2 million and
$0.1 million in the carrying value of such investments as of December 31, 2019
and 2018, respectively, including the effect of the hedging transactions.
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Private Equity-The Company invests in private equity primarily as a part of its
co-investment activities and in connection with certain legacy businesses. At
December 31, 2019 and 2018, the Company's exposure to changes in fair value of
such investments was approximately $24 million and $42 million , respectively.
The Company estimates that a hypothetical 10% adverse change in fair value would
result in a decrease of approximately $2.4 million and $4.2 million in the
carrying value of such investments as of December 31, 2019 and 2018,
respectively.
Risks Related to Receivables
We maintain an allowance for doubtful accounts to provide coverage for probable losses from our receivables. We determine the adequacy of the allowance by estimating the probability of loss based on our analysis of the client's creditworthiness, among other things, and specifically provide for exposures where we determine the receivables are impaired. AtDecember 31, 2019 , total receivables amounted to$663 million , net of an allowance for doubtful accounts of$27 million . As of that date, Financial Advisory and Asset Management fees, and customers and other receivables comprised 81% and 19% of total receivables, respectively. AtDecember 31, 2018 , total receivables amounted to$686 million , net of an allowance for doubtful accounts of$40 million . As of that date, Financial Advisory and Asset Management fees, and customers and other receivables comprised 73% and 27% of total receivables, respectively. AtDecember 31, 2019 and 2018, the Company had receivables past due or deemed uncollectible of approximately$43 million and$42 million , respectively. See also "Critical Accounting Policies and Estimates-Revenue Recognition" above and Note 5 of Notes to Consolidated Financial Statements for additional information regarding receivables.
LFB engages in lending activities, including commitments to extend credit
(primarily for clients of LFG). At
Credit Concentrations
To reduce the exposure to concentrations of credit, the Company monitors large exposures to individual counterparties.
Risks Related to Derivatives
Lazard enters into forward foreign currency exchange contracts and interest rate swaps to hedge exposures to currency exchange rates and interest rates and uses total return swap contracts on various equity and debt indices to hedge a portion of its market exposure with respect to certain seed investments related to our Asset Management business. Derivative contracts are recorded at fair value. Derivative assets amounted to$1 million and$12 million atDecember 31, 2019 and 2018, respectively, and derivative liabilities, excluding the derivative liability arising from the Company's obligation pertaining to LFI and other similar deferred compensation arrangements, amounted to$10 million and$1 million at such respective dates. The Company also records derivative liabilities relating to its obligations pertaining to LFI awards and other similar deferred compensation arrangements, the fair value of which is based on the value of the underlying investments, adjusted for estimated forfeitures. Changes in the fair value of the derivative liabilities are equally offset by the changes in the fair value of investments which are expected to be delivered upon settlement of LFI awards. Derivative liabilities relating to LFI amounted to$226 million and$188 million atDecember 31, 2019 and 2018, respectively. 65
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Risks Related to Cash and Cash Equivalents and Corporate Indebtedness
A significant portion of the Company's indebtedness has fixed interest rates, while its cash and cash equivalents generally have market interest rates. Based on account balances as ofDecember 31, 2019 , Lazard estimates that its annual operating income relating to cash and cash equivalents would increase by approximately$12 million in the event interest rates were to increase by 1% and decrease by approximately$12 million if rates were to decrease by 1%. As ofDecember 31, 2019 , the Company's cash and cash equivalents totaled approximately$1,232 million . Substantially all of the Company's cash and cash equivalents were invested in (i) highly liquid institutional money market funds (a significant majority of which were invested solely inU.S. Government or agency money market funds), (ii) short-term interest bearing and non-interest bearing accounts at a number of leading banks throughout the world, (iii) short-term certificates of deposit from such banks and (iv) short-termU.S. Treasury securities. Cash and cash equivalents are constantly monitored. On a regular basis, management reviews its investment profile as well as the credit profile of its list of depositor banks in order to adjust any deposit or investment thresholds as necessary.
Operational Risk
Operational risk is inherent in all of our businesses and may, for example, manifest itself in the form of errors, breaches in the system of internal controls, employee misconduct, business interruptions, fraud, including fraud perpetrated by third parties, or legal actions due to operating deficiencies or noncompliance. The Company maintains a framework including policies and a system of internal controls designed to monitor and manage operational risk and provide management with timely and accurate information. Management within each of the operating companies is primarily responsible for its operational risk programs. The Company has in place business continuity and disaster recovery programs that manage its capabilities to provide services in the case of a disruption. We purchase insurance policies designed to help protect the Company against accidental loss and losses that may significantly affect our financial objectives, personnel, property or our ability to continue to meet our responsibilities to our various stakeholder groups. See Item 1A, "Risk Factors" above for more information regarding operational risk in our business.
Recent Accounting Developments
For a discussion of recently issued accounting developments and their impact or potential impact on Lazard's consolidated financial statements, see Note 3 of Notes to Consolidated Financial Statements.
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