LAZARD The following discussion should be read in conjunction withLazard Ltd's condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the "Form 10-Q"), as well as Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 (the "Form 10-K"). All references to "2020," "2019," "first quarter" or "the period" refer to, as the context requires, the three month periods endedMarch 31, 2020 andMarch 31, 2019 .
Forward-Looking Statements and Certain Factors that May Affect Our Business
Management has included in Parts I and II of this Form 10-Q, including in its
MD&A, statements that are forward-looking statements. In some cases, you can
identify these statements by forward-looking words such as "may," "might,"
"will," "should," "could," "would," "expect," "plan," "anticipate," "believe,"
"estimate," "predict," "potential," "target," "goal" or "continue," and the
negative of these terms and other comparable terminology. These forward-looking
statements, which are subject to known and unknown risks, uncertainties and
assumptions about us, may include projections of our future financial
performance based on our growth strategies, business plans and initiatives and
anticipated trends in our business. These statements including with respect to
the current COVID-19 pandemic, are only predictions based on our current
expectations and projections about future events. There are important factors
that could cause our actual results, level of activity, performance or
achievements to differ materially from the results, level of activity,
performance or achievements expressed or implied by the forward-looking
statements. These factors include, but are not limited to, those discussed in
our Form 10-K under the caption "Risk Factors," including the following:
• a decline in general economic conditions or the global or regional
financial markets;
• a decline in our revenues, for example due to a decline in overall mergers
and acquisitions ("M&A") activity, our share of the M&A market or our
assets under management ("AUM");
• losses caused by financial or other problems experienced by third parties;
• losses due to unidentified or unanticipated risks;
• a lack of liquidity, i.e., ready access to funds, for use in our
businesses; and
• competitive pressure on our businesses and on our ability to retain and
attract employees at current compensation levels.
These risks and uncertainties are not exhaustive. Other sections of the Form 10-K and this Form 10-Q describe additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all 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. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations and we do not intend to do so.
Forward-looking statements include, but are not limited to, statements about:
• financial goals, including ratios of compensation and benefits expense to
operating revenue;
• ability to deploy surplus cash through dividends, share repurchases and
debt repurchases;
• ability to offset stockholder dilution through share repurchases;
• possible or assumed future results of operations and operating cash flows;
• strategies and investment policies; • financing plans and the availability of short-term borrowing; • competitive position;
• future acquisitions, including the consideration to be paid and the timing
of consummation;
• potential growth opportunities available to our businesses;
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• potential impact of investments in our technology infrastructure and data
science capabilities;
• recruitment and retention of our managing directors and employees;
• potential levels of compensation expense, including awarded compensation
and benefits expense and adjusted compensation and benefits expense, and
non-compensation expense;
• potential operating performance, achievements, productivity improvements,
efficiency and cost reduction efforts;
• likelihood of success and impact of litigation;
• expected tax rates, including effective tax rates;
• changes in interest and tax rates;
• availability of certain tax benefits, including certain potential deductions;
• potential impact of certain events or circumstances on our financial
statements and operations, including the current COVID-19 pandemic;
• changes in foreign currency exchange rates;
• expectations with respect to the economy, the securities markets, the
market for mergers, acquisitions, restructuring and other financial
advisory activity, the market for asset management activity and other
macroeconomic, regional and industry trends;
• effects of competition on our business; and
• impact of new or future legislation and regulation, including tax laws and
regulations, on our business.
The Company is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, the Company uses its website, its twitter account (twitter.com/Lazard) and other social media sites to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates of AUM in our Asset Management business. Investors can link toLazard Ltd ,Lazard Group and their operating company websites through http://www.lazard.com. Our websites and social media sites and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-Q.
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. 39 --------------------------------------------------------------------------------
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 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 and private 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:
Three Months Ended
March 31,
2020 2019Financial Advisory 56 % 53 % Asset Management 53 47 Corporate (9 ) - Total 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) Edgewater, ourChicago -based private equity firm and (ii) a fund targeting significant noncontrolling-stake investments in established private companies. We also make investments to seed our Asset Management strategies.
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 AUM, 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.
In the first quarter of 2020, regional outbreaks of a novel coronavirus
("COVID-19") became a global pandemic of unprecedented proportion and impact.
The actions taken by governments, including social distancing mandates, severely
impacted the global economy. As a result of this global crisis, we are
experiencing an unprecedented period of volatility. The impact of this global
crisis on the economy and our businesses remains uncertain but we expect a
challenging environment in the near-term as a result of elevated uncertainty,
capital markets volatility, lower asset valuations and a downturn in global M&A
activity.
Our outlook with respect to our Financial Advisory and Asset Management businesses is described below.
• Financial Advisory-During this period of financial stress and uncertainty,
we are focused on serving clients with our depth of expertise in capital
structure, capital raising, debt negotiations and restructuring and exchange
offers. We expect that the volume and timing of new M&A transactions will be
severely impacted in the near term. We are seeing increased activity in our
restructuring, capital advisory and sovereign advisory practices, however,
the increased activity in these areas may not fully offset the anticipated
decline in M&A activity in the near term, though we expect to see an
increase in distressed M&A activity as the year progresses. We believe our
Financial Advisory business is in a strong competitive position as demand
continues for expert, independent strategic 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 ofindustries. In addition, we continue to invest in our Financial Advisory
business by selectively hiring talented senior professionals and continuing
to focus on our M&A, restructuring and other advisory services.
• Asset Management-In the short to intermediate term, we normally would expect
most investor demand to come through financial institutions, and from
defined benefit and defined contribution plans in developed economies
because of their sheer
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scope and size. However, the current volatility in the capital markets and
the uncertainties arising from the COVID-19 pandemic may negatively impact
our business in a manner that we cannot predict. Over the longer term, and
depending upon local and global 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 despite the current
challenges that markets have created for that industry. We are continually
developing new investment strategies that extend our existing platforms and
assessing potential product acquisitions or other inorganic growth
opportunities. Among other efforts, we have been particularly focused on
continuing to incorporate environmental, social and corporate governance
("ESG") considerations, as appropriate, into our investment research and
launching strategies that use ESG factors to drive long-term investment
returns. In addition to these new ESG and sustainable strategies, recent
examples of growth initiatives include the following: various Quantitative
Equity strategies, explainable AI capabilities, and several
Equity 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-Q and our 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.
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 the first quarter of 2020 as compared to 2019. With respect to announced M&A transactions, the value and number of all transactions, including the subset of announced transactions involving values greater than$500 million , decreased in the first quarter of 2020 as compared to 2019. Three Months Ended March 31, % 2020 2019 Incr / (Decr) ($ in billions) Completed M&A Transactions: All deals: Value$ 653 $ 939 (30 )% Number 7,679 8,707 (12 )% Deals Greater than$500 million: Value$ 496 $ 734 (32 )% Number 239 292 (18 )% Announced M&A Transactions: All deals: Value$ 689 $ 1,072 (36 )% Number 8,021 8,722 (8 )% Deals Greater than$500 million: Value$ 516 $ 875 (41 )% Number 222 250 (11 )%
Source: Dealogic as of
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Global restructuring activity during the first quarter of 2020, as measured by
the number of corporate defaults, increased as compared to the first quarter of
2019. The number of defaulting issuers was 28 in the first quarter of 2020
according to Moody's Investors Service, Inc , as compared to 20 in the first
quarter of 2019.
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 atMarch 31, 2020 generally decreased as compared to such indices atDecember 31, 2019 andMarch 31, 2019 . The percentage change in major equity market indices atMarch 31, 2020 , as compared to such indices atDecember 31, 2019 and atMarch 31, 2019 , is shown in the table below. Percentage Changes March 31, 2020 vs. December 31, March 31, 2019 2019 MSCI World Index (21 )% (10 )% Euro Stoxx (25 )% (14 )% MSCI Emerging Market (24 )% (17 )% S&P 500 (20 )% (7 )% 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 includesLazard Asset Management LLC (together with its subsidiaries, "LAM"), Lazard Frères Gestion SAS ("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 42
-------------------------------------------------------------------------------- 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.
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. Corporate segment total assets represented 64% of Lazard's consolidated total assets as ofMarch 31, 2020 , 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 13 of Notes to Condensed 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. For interim periods, we 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 related ratios to "operating revenue," see the table under "Consolidated Results of Operations" below. 43 -------------------------------------------------------------------------------- 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:
(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-basedrestricted
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 incentivecompensation
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.
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 "amortization and other acquisition-related costs" which includes in 2019 the change in fair value of the contingent consideration associated with business acquisitions.
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 . See "Critical Accounting Policies and Estimates-Income Taxes" below and Notes 16 and 18 of Notes to Condensed Consolidated Financial Statements for additional information regarding income taxes, our deferred tax assets and the tax receivable agreement obligation. 44 --------------------------------------------------------------------------------
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 12 and 21 of Notes to Condensed Consolidated Financial Statements for information regarding the Company's noncontrolling interests and consolidated VIEs.
Consolidated Results of Operations
Lazard's condensed 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 condensed 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 three month period endedMarch 31, 2020 was negatively impacted by exchange rate movements in comparison to the relevant prior year period. The majority of the impact to net revenue was offset by the impact of the exchange rate movements on our operating expenses during the periods denominated in currencies other than theU.S. Dollar. The condensed consolidated financial statements are prepared in conformity withU.S. GAAP. Selected financial data derived from the Company's reported condensed consolidated results of operations is set forth below, followed by a more detailed discussion of both the consolidated and business segment results. Three Months Ended March 31, 2020 2019 ($ in thousands) Net Revenue$ 538,014 $ 643,674 Operating Expenses: Compensation and benefits 319,755 372,254 Non-compensation 133,716 148,287 Amortization and other acquisition-related costs 446 3,470 Total operating expenses 453,917 524,011 Operating Income 84,097 119,663 Provision for income taxes 25,766 23,187 Net Income 58,331 96,476
Less - Net Loss Attributable to Noncontrolling Interests (5,691 )
(566 ) Net Income Attributable to Lazard Ltd$ 64,022 $
97,042
Operating Income, as a % of net revenue 15.6 % 18.6 %
The tables below describe the components of operating revenue, adjusted
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.
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Three Months Ended
March 31,
2020 2019
($ in thousands)
Operating Revenue:
Net revenue $ 538,014 $ 643,674
Adjustments:
Interest expense (a) 18,772 16,789Distribution fees, reimbursable deal costs and bad debt
expense (b) (16,384 ) (24,332 ) (Revenue) loss related to noncontrolling interests (c) 2,772 (2,271 ) (Gains) losses on investments pertaining to LFI (d) 19,637 (13,870 ) Operating revenue$ 562,811 $ 619,990
(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 or loss 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.
Three Months Ended
March 31,
2020 2019
($ in thousands)
Adjusted Compensation and Benefits Expense:
Total compensation and benefits expense $ 319,755 $ 372,254
Adjustments:
Noncontrolling interests (a) (1,706 ) (1,890 ) (Charges) credits pertaining to LFI (b) 19,637 (13,870 ) Adjusted compensation and benefits expense$ 337,686 $
356,494
Adjusted compensation and benefits expense, as a % of operating revenue 60.0 % 57.5 %
(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.
Three Months Ended
March 31,
2020 2019
($ in thousands)
Adjusted Non-Compensation Expense:
Total non-compensation expense $ 133,716 $ 148,287
Adjustments:
Expenses associated with ERP system implementation (a)
- (3,205 )
Expenses relating to office space reorganization (b) (3,664 ) -
Distribution fees, reimbursable deal costs and bad debt expense (c)
(16,384 ) (24,332 )
Charges pertaining to senior debt refinancing (d) - (4,243 )
Noncontrolling interests (e) (1,036 ) (770 )
Adjusted non-compensation expense $ 112,632 $ 115,737
Adjusted non-compensation expense, as a % of
operating revenue 20.0 % 18.7 %
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(a) Represents expenses associated with the Enterprise Resource Planning ("ERP") system implementation.
(b) Represents incremental rent expense 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, represents charges pertaining to the partial 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" below.
(e) Expenses related to the consolidation of noncontrolling interests are
excluded because the Company has no economic interest in such amounts.
Three Months Ended
March 31,
2020 2019
($ in thousands)
Earnings From Operations:
Operating revenue $ 562,811 $ 619,990
Deduct:
Adjusted compensation and benefits expense (337,686 ) (356,494 )
Adjusted non-compensation expense (112,632 ) (115,737 )
Earnings from operations $ 112,493 $ 147,759
Earnings from operations, as a % of operating revenue 20.0 %
23.8 %
Headcount information is set forth below:
As of
March 31, December 31, March 31,
2020 2019 2019
Headcount:
Managing Directors:
Financial Advisory 170 163 181
Asset Management 107 104 110
Corporate 21 19 17
Total Managing Directors 298 286 308
Other Business Segment Professionals and
Support Staff:
Financial Advisory 1,359 1,355 1,337
Asset Management 965 986 1,004
Corporate 420 391 398
Total 3,042 3,018 3,047
Operating Results
The Company's quarterly revenue and profits can fluctuate materially depending
on the number, size and timing of completed transactions on which it advised, as
well as seasonality, the performance of equity markets and other factors.
Accordingly, the revenue and profits in any particular quarter may not be
indicative of future results. Lazard management believes that annual results are
the most meaningful basis for comparison among present, historical and future
periods.
Three Months Ended
The Company reported net income attributable toLazard Ltd of$64 million , as compared to net income attributable toLazard Ltd of$97 million in the 2019 period. Net revenue decreased$106 million , or 16%, with operating revenue decreasing$57 million , or 9%, as compared to the 2019 period. Fee revenue from investment banking and other advisory activities decreased$38 million , or 11%, as compared to the 2019 period. Asset management fees, including incentive fees, decreased$23 million , or 8%, as compared to the 2019 period. In the aggregate, interest income, other revenue and interest expense decreased$45 million , as compared to the 2019 period.
Compensation and benefits expense decreased
47
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Adjusted compensation and benefits expense (which excludes certain items and
which we believe allows for improved comparability between periods, as described
above) decreased $19 million , or 5%, as compared to the 2019 period. The ratio
of adjusted compensation and benefits expense to operating revenue was 60.0% for
the 2020 period, as compared to 57.5% for the 2019 period.
Non-compensation expense decreased $15 million , or 10%, as compared to the 2019
period, primarily due to decreased marketing and business development expenses.
Adjusted non-compensation expense decreased $3 million , or 3%, as compared to
the 2019 period. The ratio of adjusted non-compensation expense to operating
revenue was 20.0% for the 2020 period, as compared to 18.7% for the 2019 period.
Amortization and other acquisition-related costs decreased
Operating income decreased
Earnings from operations decreased$35 million , or 24%, as compared to the 2019 period, and, as a percentage of operating revenue, was 20.0%, as compared to 23.8% in the 2019 period.
The provision for income taxes reflects an effective tax rate of 30.6%, as compared to 19.4% for the 2019 period. The increase in the effective tax rate principally relates to a decrease in discrete benefits from share-based incentive compensation and changes in the geographic mix of earnings.
Net loss attributable to noncontrolling interests increased
Business Segments
The following is a discussion of net revenue and operating income for the Company's segments: Financial Advisory, Asset Management and Corporate. Each segment's operating expenses include (i) compensation and benefits expenses that are incurred directly in support of the segment and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourcing, and indirect support costs (including compensation and benefits expense and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, human resources, legal, information technology, facilities management and senior management activities. Such support costs are allocated to the relevant segments based on various statistical drivers such as revenue, headcount, square footage and other factors.
Financial Advisory
The following table summarizes the reported operating results attributable to the Financial Advisory segment:
Three Months Ended
March 31,
2020 2019
($ in thousands)
Net Revenue $ 298,966 $ 338,370
Operating Expenses 246,847 280,261
Operating Income $ 52,119 $ 58,109 Operating Income, as a % of net revenue 17.4 % 17.2 %
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Certain Lazard fee and transaction statistics for the Financial Advisory segment
are set forth below:
Three Months Ended
March 31,
2020 2019
Lazard Statistics:
Number of clients with fees greater than
56 63
Percentage of total Financial Advisory net revenue from top 10
clients 40 % 43 % Number of M&A transactions completed with values greater than$500 million (a) 19 22
(a) 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. Three Months Ended March 31, 2020 2019 Americas 59 % 65 % EMEA 39 32 Asia Pacific 2 3 Total 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
Financial Advisory's quarterly revenue and profits can fluctuate materially depending on the number, size and timing of completed transactions on which it advised, as well as seasonality and other factors. Accordingly, the revenue and profits in any particular quarter or period may not be indicative of future results. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and future periods.
Three Months Ended
Financial Advisory net revenue decreased$39 million , or 12%, as compared to the 2019 period. The decrease in Financial Advisory net revenue was primarily a result of a decrease in the number of fees greater than$10 million as compared to the 2019 period.
Operating expenses decreased
Financial Advisory operating income was$52 million , a decrease of$6 million , or 10%, as compared to operating income of$58 million in the 2019 period and, as a percentage of net revenue, was 17.4%, as compared to 17.2% in the 2019 period. 49 --------------------------------------------------------------------------------
Asset Management
The following table shows the composition of AUM for the Asset Management
segment:
As of
March 31, December 31,
2020 2019
($ in millions)
AUM by Asset Class:
Equity:
Emerging Markets $ 27,716 $ 40,612
Global 39,094 49,759
Local 37,496 48,985
Multi-Regional 50,335 66,185
Total Equity 154,641 205,541
Fixed Income:
Emerging Markets 11,424 14,387
Global 9,100 9,233
Local 5,421 5,450
Multi-Regional 8,376 9,193
Total Fixed Income 34,321 38,263
Alternative Investments 1,902 2,149
Private Equity 1,406 1,385
Cash Management 778 901
Total AUM $ 193,048 $ 248,239
Total AUM at March 31, 2020 was $193 billion , a decrease of $55 billion , or 22%,
as compared to total AUM of $248 billion at December 31, 2019 due to market
depreciation, net outflows and foreign exchange depreciation. Average AUM for
the first quarter of 2020 decreased 3% as compared to the first quarter of 2019
and decreased 7% as compared to the fourth quarter of 2019.
As of both March 31, 2020 and December 31, 2019 , approximately 86% of our AUM
was managed on behalf of institutional clients, including corporations, labor
unions, public pension funds, insurance companies and banks, and through
sub-advisory relationships, mutual fund sponsors, broker-dealers and registered
advisors. As of both March 31, 2020 and December 31, 2019 , approximately 14% of
our AUM was managed on behalf of individual client relationships, which are
principally with family offices and individuals.
As of
The following is a summary of changes in AUM by asset class for the three month
periods ended
Three Months Ended March 31, 2020
Foreign
AUM Market Value Exchange AUM
Beginning Net Appreciation/ Appreciation/ Ending
Balance Inflows (a) Outflows (a) Flows (Depreciation) (Depreciation) Balance
($ in millions)
Equity $ 205,541 $ 6,593 $ (10,398 ) $ (3,805 ) $ (42,083 ) $ (5,012 ) $ 154,641
Fixed Income 38,263 2,442 (3,487 ) (1,045 ) (1,397 ) (1,500 ) 34,321
Other 4,435 250 (313 ) (63 ) (207 ) (79 ) 4,086
Total $ 248,239 $ 9,285 $ (14,198 ) $ (4,913 ) $ (43,687 ) $ (6,591 ) $ 193,048
(a) Inflows in the Equity asset class were primarily attributable to the
Global, Multi-Regional and Emerging Markets platforms, and inflows in the Fixed
Income asset class were primarily attributable to the Global and Multi-Regional
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.
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Three Months Ended March 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 $ 6,398 $ (7,229 ) $ (831 ) $ 19,564 $ (636 ) $ 195,095
Fixed Income 32,938 2,618 (1,884 ) 734 1,568 (232 ) 35,008
Other 4,798 519 (384 ) 135 (44 ) (13 ) 4,876
Total $ 214,734 $ 9,535 $ (9,497 ) $ 38 $ 21,088 $ (881 ) $ 234,979 As of
Average AUM for the three month periods endedMarch 31, 2020 and 2019 for each significant asset class is set forth below. Average AUM generally represents the average of the monthly ending AUM balances for the period. Three Months Ended March 31, 2020 2019 ($ in millions) Average AUM by Asset Class: Equity$ 180,375 $ 189,221 Fixed Income 36,896 34,716 Alternative Investments 2,047 2,693 Private Equity 1,400 1,415 Cash Management 816 792 Total Average AUM$ 221,534 $ 228,837
The following table summarizes the reported operating results attributable to the Asset Management segment:
Three Months Ended
March 31,
2020 2019
($ in thousands)
Net Revenue $ 282,521 $ 301,833
Operating Expenses 204,769 207,348
Operating Income $ 77,752 $ 94,485 Operating Income, as a % of net revenue 27.5 % 31.3 %
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.
Three Months Ended
March 31,
2020 2019
Americas 51 % 55 %
EMEA 36 34
Asia Pacific 13 11
Total 100 % 100 %
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Asset Management Results of Operations
Asset Management's quarterly revenue and profits in any particular quarter or period may not be indicative of future results and may fluctuate based on the performance of the equity and other capital markets. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and future periods.
Three Months Ended
Asset Management net revenue decreased$19 million , or 6%, as compared to the 2019 period. Management fees and other revenue was$281 million , a decrease of$20 million , or 7%, as compared to$301 million in the 2019 period, primarily due to a decrease in average AUM and change in asset mix. Incentive fees were$2 million , an increase of$1 million as compared to$1 million in the 2019 period.
Operating expenses decreased
Asset Management operating income was$78 million , a decrease of$16 million , or 18%, as compared to operating income of$94 million in the 2019 period and as a percentage of net revenue, was 27.5%, as compared to 31.3% in the 2019 period.
Corporate
The following table summarizes the reported operating results attributable to
the Corporate segment:
Three Months Ended
March 31,
2020 2019
($ in thousands)
Interest Income $ 2,000 $ 2,841
Interest Expense (19,039 ) (17,016 )
Net Interest (Expense) (17,039 ) (14,175 )
Other Revenue (Expense) (26,434 ) 17,646
Net Revenue (Expense) (43,473 ) 3,471
Operating Expenses (Benefit) 2,301 36,402
Operating Income (Loss) $ (45,774 ) $ (32,931 ) Corporate Results of Operations
Corporate operating results in any particular quarter or period may not be indicative of future results and may fluctuate based on a variety of factors. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and future periods.
Three Months Ended
Net interest expense increased
Other revenue decreased
Operating expenses decreased
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 common stock. Cash flows were also affected in 2019 byLazard Group's issuance of$500 million aggregate principal amount of its 4.375% senior notes maturing in 2029 (the "2029 Notes") and 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 52
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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 inFebruary 2019 .
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