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Lazard Ltd Reports Third-Quarter and Nine-Month 2016 Results

October 27, 2016 6:49 AM

NEW YORK--(BUSINESS WIRE)-- Lazard Ltd (NYSE: LAZ):

Highlights

($ in millions, exceptper share data and AUM)

Quarter Ended

Sept. 30,

Nine Months Ended

Sept. 30,

2016 2015 %’16-’15 2016 2015 %’16-’15

Net Income

U.S. GAAP $ 113 $ 399 (72 )% $ 260 $ 829 (69 )%
Per share, diluted $ 0.85 $ 2.99 (72 )% $ 1.96 $ 6.22 (68 )%
Adjusted1,2 $ 113 $ 124 (9 )% $ 260 $ 357 (27 )%
Per share, diluted $ 0.85 $ 0.93 (9 )% $ 1.96 $ 2.68 (27 )%

Operating Revenue1

Total operating revenue $ 611 $ 594 3 % $ 1,659 $ 1,782 (7 )%
Financial Advisory $ 343 $ 331 4 % $ 896 $ 949 (6 )%
Asset Management $ 265 $ 262 1 % $ 755 $ 823 (8 )%

AUM ($ in billions)

As of quarter end $ 205 $ 183 12 %
Average $ 201 $ 192 5 % $ 193 $ 198 (3 )%

Note: Endnotes are on page 12 of this release. A reconciliation to U.S. GAAP is on page 19.

Lazard Ltd (NYSE: LAZ) today reported net income, as adjusted1, of $113 million for the quarter ended September 30, 2016. Net income per share, as adjusted1, was $0.85 (diluted) for the quarter, compared to $0.93 (diluted) for the 2015 third quarter2. On a U.S. GAAP basis, net income was $113 million for the 2016 third quarter, or $0.85 (diluted) per share, compared to $2.99 (diluted) per share for the 2015 third quarter, which included a significant benefit from the partial extinguishment of our Tax Receivable Agreement obligation2. Pre-tax income per share (diluted), as adjusted1, was flat from the third quarter of 2015.

For the first nine months of 2016, net income was $260 million, or $1.96 per share (diluted), as adjusted1 and on a U.S. GAAP basis.

A reconciliation of our U.S. GAAP results to the adjusted results is presented on page 19 of this press release.

“Lazard’s record third-quarter operating revenue reflects strong performance across our businesses globally,” said Kenneth M. Jacobs, Chairman and Chief Executive Officer of Lazard. “We remain focused on serving clients, reinforcing our global franchise, and building shareholder value.”

“In Financial Advisory, we continue to advise clients around the world on large, complex and transformational transactions, and have expanded our operations in the Americas,” said Mr. Jacobs. “Asset Management achieved a record level of assets under management and strong net inflows across our platforms.”

“We are maintaining our cost discipline even as we invest in the business,” said Matthieu Bucaille, Chief Financial Officer of Lazard. “Lazard continues to generate significant cash, and we have been actively repurchasing Lazard shares.”

OPERATING REVENUE

Operating revenue1 was a third-quarter record of $611 million, up 3% from the record third quarter of 2015, and was $1,659 million for the first nine months of 2016, down 7% from the record first nine months of 2015.

Financial Advisory

In the text portion of this press release, we present our Financial Advisory results as Strategic Advisory and Restructuring. Strategic Advisory includes 1) M&A and Other Advisory (Other includes Capital Advisory and Sovereign Advisory) and 2) Capital Raising (includes Capital Markets Advisory and Private Capital Advisory).

Third Quarter

Financial Advisory operating revenue was $343 million for the third quarter of 2016, 4% higher than the third quarter of 2015.

Strategic Advisory operating revenue was $292 million for the third quarter of 2016, 4% lower than the third quarter of 2015.

Among the major M&A transactions that were completed during the third quarter of 2016 were the following (clients are in italics): Dell’s $67 billion acquisition of EMC; Tyco’s $36 billion merger with Johnson Controls; Delhaize’s €31 billion merger with Ahold; ARM Holdings on the £24.3 billion recommended all-cash offer by SoftBank Group; and Starwood Hotels & Resorts’ $14.9 billion sale to Marriott.

During the third quarter of 2016, Lazard remained engaged in highly visible, complex M&A transactions and other strategic advisory assignments, including cross-border transactions, distressed asset sales, capital structure and sovereign advisory, in the Americas, Europe, Africa, Asia and Australia. Transactions on which we continued to advise during or since the third quarter include: Dow Chemical’s $130 billion merger of equals with DuPont; Anheuser-Busch InBev’s $109 billion acquisition of SABMiller; Aetna’s $37 billion acquisition of Humana; Deutsche Börse on its €27 billion proposed merger with the London Stock Exchange; Sanofi and Boehringer Ingelheim’s swap of businesses valued at €11.4 billion and €6.7 billion, respectively; and Danone’s $12.5 billion acquisition of WhiteWave.

In Capital Advisory, we continued to advise public and private clients globally, including: Banca Monte dei Paschi di Siena’s disposal of its bad loan portfolio for €9.1 billion and planned €5.0 billion capital increase; Gilead Sciences’ $5.0 billion senior unsecured notes offering; Nets, a portfolio company of Advent International and Bain Capital, on its DKK 15.8 billion initial public offering; and Korian’s €1.3 billion term loan refinancing.

Our Sovereign Advisory business remained active worldwide, including assignments in developed and emerging markets globally.

Restructuring operating revenue was $51 million for the third quarter of 2016, compared to $26 million for the third quarter of 2015. The increase primarily reflects a continued high level of activity in the U.S. energy sector. During and since the third quarter of 2016 we have been engaged in a broad range of restructuring and debt advisory assignments, including: Linn Energy; Pacific Exploration & Production; Stone Energy; SunEdison; and Takata.

Please see a more complete list of M&A transactions on which Lazard advised in the third quarter, or continued to advise or completed since September 30, 2016, as well as Capital Advisory, Sovereign Advisory and Restructuring assignments, on pages 8-11 of this release.

First Nine Months

Financial Advisory operating revenue was $896 million for the first nine months of 2016, 6% lower than the record first nine months of 2015.

Strategic Advisory operating revenue was $730 million, 16% lower than the record first nine months of 2015, primarily driven by a 15% decrease in M&A and Other Advisory revenue.

Restructuring operating revenue was $166 million for the first nine months of 2016, compared to $75 million for the first nine months of 2015.

Asset Management

Third Quarter

Asset Management operating revenue was $265 million for the third quarter of 2016, 1% higher than the third quarter of 2015.

Management fees were $252 million for the third quarter of 2016, 1% higher than the third quarter of 2015, and 6% higher than the second quarter of 2016. The sequential increase was primarily driven by an increase in average assets under management (AUM). Incentive fees during the period were $1 million, compared to $3 million for the third quarter of 2015.

Average AUM for the third quarter of 2016 was $201 billion, 5% higher than the third quarter of 2015, and 4% higher than the second quarter of 2016.

AUM as of September 30, 2016, was a record $205 billion, 12% higher than AUM as of September 30, 2015. AUM increased 7% from June 30, 2016, primarily driven by market appreciation and net inflows. Net inflows of $2.8 billion were primarily driven by strategies in our Emerging Markets Fixed Income, Local Equity and Multi-Regional Equity platforms.

First Nine Months

Asset Management operating revenue was $755 million for the first nine months of 2016, 8% lower than the first nine months of 2015.

Management fees were $716 million for the first nine months of 2016, 6% lower than the first nine months of 2015, reflecting lower average AUM and a change in the mix of assets. Incentive fees were $4 million for the first nine months of 2016, compared to $16 million for the first nine months of 2015.

Average AUM for the first nine months of 2016 was $193 billion, 3% lower than the first nine months of 2015. Net inflows were $2.9 billion for the first nine months of 2016.

OPERATING EXPENSES

Compensation and Benefits

In managing compensation and benefits expense, we focus on annual awarded compensation (cash compensation and benefits plus deferred incentive compensation with respect to the applicable year, net of estimated future forfeitures and excluding charges). We believe annual awarded compensation reflects the actual annual compensation cost more accurately than the GAAP measure of compensation cost, which includes applicable-year cash compensation and the amortization of deferred incentive compensation principally attributable to previous years’ deferred compensation. We believe that by managing our business using awarded compensation with a consistent deferral policy, we can better manage our compensation costs, increase our flexibility in the future and build shareholder value over time.

For the third quarter of 2016, we accrued compensation and benefits expense1 at an adjusted compensation1 ratio of 56.5%. This resulted in $345 million of adjusted compensation and benefits expense, compared to $331 million for the third quarter of 2015, a 4% increase.

For the first nine months of 2016, adjusted compensation and benefits expense1 was $949 million, compared to $991 million for the first nine months of 2015, a 4% decrease.

We manage our compensation and benefits expense based on awarded compensation with a consistent deferral policy. Assuming that the performance of both of our businesses, our hiring levels, and the compensation environment are similar to 2015, we expect our 2016 awarded compensation ratio to be in line with the 2015 awarded compensation ratio.

We continue to maintain a disciplined approach to compensation, and our goal is to achieve a compensation-to-operating revenue ratio over the cycle in the mid- to high-50s percentage range on both an awarded and adjusted basis, with consistent deferral policies.

Non-Compensation Expense

For the third quarter of 2016, adjusted non-compensation expense1,2 was $105 million, 2% higher than the third quarter of 2015. The ratio of adjusted non-compensation expense to operating revenue for the third quarter of 2016 was 17.2%, the same as the third quarter of 2015.

For the first nine months of 2016, adjusted non-compensation expense1,2 was $319 million, flat from the first nine months of 2015. The ratio of adjusted non-compensation expense to operating revenue for the first nine months of 2016 was 19.2%, compared to 17.9% for the first nine months of 2015.

Our goal remains to achieve an adjusted non-compensation expense-to-operating revenue ratio over the cycle of 16% to 20%.

TAXES

The provision for taxes, on an adjusted basis1,2, was $36 million for the third quarter and $96 million for the first nine months of 2016. The effective tax rate on the same basis was 24.4% for the third quarter and 27.0% for the first nine months of 2016, compared to historically low rates of 16.9% and 17.7% for the respective 2015 periods.

CAPITAL MANAGEMENT AND BALANCE SHEET

Our primary capital management goals include managing debt and returning capital to shareholders through dividends and share repurchases.

For the third quarter of 2016, Lazard returned $83 million to shareholders, which included: $47 million in dividends; $34 million in share repurchases of our Class A common stock; and $2 million in satisfaction of employee tax obligations in lieu of share issuances upon vesting of equity grants.

For the first nine months of 2016, Lazard returned $574 million to shareholders, which included: $289 million in dividends; $229 million in share repurchases of our Class A common stock; and $56 million in satisfaction of employee tax obligations in lieu of share issuances upon vesting of equity grants.

Year to date, we have repurchased 7.4 million shares at an average price of $34.47 per share. In line with our objectives, these repurchases have more than offset the potential dilution from our 2015 year-end equity-based compensation awards (net of estimated forfeitures and tax withholding to be paid in cash in lieu of share issuances), which were granted at an average price of $34.42 per share. As of today, our remaining share repurchase authorization is $164 million.

On October 26, 2016, Lazard declared a quarterly dividend of $0.38 per share on its outstanding common stock. The dividend is payable on November 18, 2016, to stockholders of record on November 7, 2016.

Lazard’s financial position remains strong. As of September 30, 2016, our cash and cash equivalents were $854 million, and stockholders’ equity related to Lazard’s interests was $1,243 million.

***

CONFERENCE CALL

Lazard will host a conference call at 8:00 a.m. EDT on October 27, 2016, to discuss the company’s financial results for the third quarter and first nine months of 2016. The conference call can be accessed via a live audio webcast available through Lazard’s Investor Relations website at www.lazard.com, or by dialing 1 (888) 437-9366 (U.S. and Canada) or +1 (719) 325-2248 (outside of the U.S. and Canada), 15 minutes prior to the start of the call.

A replay of the conference call will be available by 10:00 a.m. EDT on October 27, 2016, via the Lazard Investor Relations website, or by dialing 1 (888) 203-1112 (U.S. and Canada) or +1 (719) 457-0820 (outside of the U.S. and Canada). The replay access code is 8628350.

***

ABOUT LAZARD

Lazard, one of the world's preeminent financial advisory and asset management firms, operates from 42 cities across 27 countries in North America, Europe, Asia, Australia, Central and South America. With origins dating to 1848, the firm provides advice on mergers and acquisitions, strategic matters, restructuring and capital structure, capital raising and corporate finance, as well as asset management services to corporations, partnerships, institutions, governments and individuals. For more information on Lazard, please visit www.lazard.com.

***

Cautionary Note Regarding Forward-Looking Statements:

This press release contains 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 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 these forward-looking statements.

These factors include, but are not limited to, those discussed in our Annual Report on Form 10-K under Item 1A “Risk Factors,” and also discussed from time to time in our reports on Forms 10-Q and 8-K, including the following:

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. 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 release to conform our prior statements to actual results or revised expectations and we do not intend to do so.

Lazard Ltd is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, Lazard and its operating companies use their websites to convey information about their businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates of assets under management in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC and Lazard Frères Gestion SAS. Investors can link to Lazard and its operating company websites through www.lazard.com.

***

FINANCIAL ADVISORY ASSIGNMENTS

Mergers and Acquisitions (Completed in the third quarter of 2016)

Among the large, publicly announced M&A Advisory transactions or assignments completed during the third quarter of 2016 on which Lazard advised were the following:

Mergers and Acquisitions (Announced)

Among the ongoing, large, publicly announced M&A transactions and assignments on which Lazard advised during or since the 2016 third quarter, or completed since September 30, 2016, are the following:

*Transaction completed since September 30, 2016

Capital Advisory

Among the publicly announced Capital Advisory transactions or assignments on which Lazard completed or advised during or since the third quarter of 2016 were the following:

Sovereign Advisory

Among the publicly announced Sovereign Advisory assignments on which Lazard advised during or since the third quarter of 2016, were the following:

Restructuring and Debt Advisory Assignments

Restructuring and debtor or creditor advisory assignments completed during the third quarter of 2016 on which Lazard advised include: Toys “R” Us on its public exchange offer; Energy Future Holdings; Horsehead Holding; Primorsk; Sabine Oil & Gas; and Seventy Seven Energy in connection with their Chapter 11 bankruptcy restructurings; hibu on its restructuring; and Sirti on its distressed sale to Pillarstone and restructuring transaction.

Notable Chapter 11 or similar bankruptcies, on which Lazard advised debtors or creditors, or related parties, during or since the third quarter of 2016, are the following: Breitburn Energy Partners; C&J Energy Services; Goodrich Petroleum*; Linn Energy; Paragon Offshore; Peabody Energy; and SunEdison.

Among other publicly announced restructuring and debt advisory assignments on which Lazard advised debtors or creditors during or since the third quarter of 2016, are the following:

*Assignment completed since September 30, 2016

***

ENDNOTES

1 A non-U.S. GAAP measure. See attached financial schedules and related notes for a detailed explanation of adjustments to corresponding U.S. GAAP results. We believe that presenting our results on an adjusted basis, in addition to the U.S. GAAP results, is the most meaningful and useful way to compare our operating results across periods.

2 Third-quarter and first nine months 2015 results were affected by the following benefits and charges:

LAZ-EPE

LAZARD LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(U.S. GAAP)
Three Months Ended % Change From
September 30, June 30, September 30, June 30, September 30,
($ in thousands, except per share data) 2016 2016 2015 2016 2015
Total revenue $ 621,102 $ 546,642 $ 585,316 14 % 6 %
Interest expense ($12,194 ) (11,962 ) (11,798 )
Net revenue 608,908 534,680 573,518 14 % 6 %
Operating expenses:
Compensation and benefits 353,756 308,310 319,565 15 % 11 %
Occupancy and equipment 26,973 27,163 26,278
Marketing and business development 16,927 23,877 18,244
Technology and information services 24,179 24,296 22,923
Professional services 10,870 11,245 10,758
Fund administration and outsourced services 17,097 15,895 14,367
Amortization and other acquisition-related costs 863 330 511
Other 9,251 10,328 10,920
Subtotal 106,160 113,134 104,001 (6 %) 2 %
Benefit pursuant to tax receivable agreement - - (420,792 )
Operating expenses 459,916 421,444 2,774 9 % NM
Operating income 148,992 113,236 570,744 32 % (74 %)
Provision for income taxes 36,374 31,872 170,954 14 % (79 %)
Net income 112,618 81,364 399,790 38 % (72 %)
Net income attributable to noncontrolling interests 82 1,007 1,269
Net income attributable to Lazard Ltd $ 112,536 $ 80,357 $ 398,521 40 % (72 %)
Attributable to Lazard Ltd Common Stockholders:
Weighted average shares outstanding:
Basic 124,408,884 125,461,948 125,925,006 (1 %) (1 %)
Diluted 132,320,855 132,341,522 133,115,419 (0 %) (1 %)
Net income per share:
Basic $ 0.90 $ 0.64 $ 3.16 41 % (72 %)
Diluted $ 0.85 $ 0.61 $ 2.99 39 % (72 %)
LAZARD LTD
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(U.S. GAAP)
Nine Months Ended
September 30, September 30,
($ in thousands, except per share data) 2016 2015 % Change
Total revenue $ 1,677,860 $ 1,799,790 (7 %)
Interest expense (36,054 ) (39,431 )
Net revenue 1,641,806 1,760,359 (7 %)
Operating expenses:
Compensation and benefits 959,276 984,786 (3 %)
Occupancy and equipment 81,143 80,889
Marketing and business development 60,492 55,758
Technology and information services 71,406 68,850
Professional services 31,877 36,100
Fund administration and outsourced services 46,427 48,008
Amortization and other acquisition-related costs 1,837 3,401
Other 28,743 90,845
Subtotal 321,925 383,851 (16 %)
Provision pursuant to tax receivable agreement - 547,691
Operating expenses 1,281,201 1,916,328 (33 %)
Operating income (loss) 360,605 (155,969 ) NM
Provision (benefit) for income taxes 95,900 (993,560 ) NM
Net income 264,705 837,591 (68 %)
Net income attributable to noncontrolling interests 4,989 9,004
Net income attributable to Lazard Ltd $ 259,716 $ 828,587 (69 %)
Attributable to Lazard Ltd Common Stockholders:
Weighted average shares outstanding:
Basic 125,303,758 125,264,447 0 %
Diluted 132,517,887 133,219,137 (1 %)
Net income per share:
Basic $ 2.07 $ 6.61 (69 %)
Diluted $ 1.96 $ 6.22 (68 %)
LAZARD LTD
UNAUDITED CONDENSED CONSOLIDATED
STATEMENT OF FINANCIAL CONDITION
(U.S. GAAP)
September 30, December 31,
($ in thousands) 2016 2015

ASSETS

Cash and cash equivalents $ 853,887 $ 1,132,083
Deposits with banks and short-term investments 534,865 389,861
Cash deposited with clearing organizations and other segregated cash 35,168 34,948
Receivables 537,695 497,213
Investments 462,758 541,911
Goodwill and other intangible assets 353,850 326,976
Deferred tax assets 1,107,046 1,130,595
Other assets 417,034 424,187
Total Assets $ 4,302,303 $ 4,477,774

LIABILITIES & STOCKHOLDERS' EQUITY

Liabilities
Deposits and other customer payables $ 587,059 $ 506,665
Accrued compensation and benefits 375,512 570,409
Senior debt 990,488 989,358
Tax receivable agreement obligation 513,623 523,962
Other liabilities 534,479 520,074
Total liabilities 3,001,161 3,110,468
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share - -
Common stock, par value $.01 per share 1,298 1,298
Additional paid-in capital 623,512 600,034
Retained earnings 1,058,189 1,123,728
Accumulated other comprehensive loss, net of tax (236,088 ) (234,356 )
Subtotal 1,446,911 1,490,704
Class A common stock held by subsidiaries, at cost (203,736 ) (177,249 )
Total Lazard Ltd stockholders' equity 1,243,175 1,313,455
Noncontrolling interests 57,967 53,851
Total stockholders' equity 1,301,142 1,367,306
Total liabilities and stockholders' equity $ 4,302,303 $ 4,477,774
LAZARD LTD
SELECTED SUMMARY FINANCIAL INFORMATION (a)
(Non-GAAP - unaudited)
Three Months Ended % Change From
September 30, June 30, September 30, June 30, September 30,
($ in thousands, except per share data) 2016 2016 2015 2016 2015
Revenues:
Financial Advisory
M&A and Other Advisory $ 281,649 $ 203,403 $ 288,109 38 % (2 %)
Capital Raising 10,569 11,299 16,932 (6 %) (38 %)
Strategic Advisory 292,218 214,702 305,041 36 % (4 %)
Restructuring 51,272 72,265 25,791 (29 %) NM
Total 343,490 286,967 330,832 20 % 4 %
Asset Management
Management fees 251,851 238,067 248,143 6 % 1 %
Incentive fees 591 1,184 2,705 (50 %) (78 %)
Other 12,624 11,479 10,743 10 % 18 %
Total 265,066 250,730 261,591 6 % 1 %
Corporate 2,212 4,610 1,844 (52 %) 20 %
Operating revenue (b) $ 610,768 $ 542,307 $ 594,267 13 % 3 %
Expenses:
Compensation and benefits expense (c) $ 345,084 $ 306,404 $ 330,554 13 % 4 %
Ratio of compensation to operating revenue 56.5 % 56.5 % 55.6 %
Non-compensation expense (d) $ 104,832 $ 112,167 $ 102,321 (7 %) 2 %
Ratio of non-compensation to operating revenue 17.2 % 20.7 % 17.2 %
Earnings:
Earnings from operations (e) $ 160,852 $ 123,736 $ 161,392 30 % (0 %)
Operating margin (f) 26.3 % 22.8 % 27.2 %
Net income (g) $ 112,536 $ 80,357 $ 124,131 40 % (9 %)
Diluted net income per share $ 0.85 $ 0.61 $ 0.93 39 % (9 %)
Diluted weighted average shares 132,320,855 132,341,522 133,115,419 (0 %) (1 %)
Effective tax rate (h) 24.4 % 28.4 % 16.9 %

This presentation includes non-U.S. GAAP ("non-GAAP") measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for the corresponding U.S. GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see Reconciliation of U.S. GAAP to Selected Summary Financial Information and Notes to Financial Schedules.

LAZARD LTD
SELECTED SUMMARY FINANCIAL INFORMATION (a)
(Non-GAAP - unaudited)
Nine Months Ended September 30
($ in thousands, except per share data) 2016 2015 % Change
Revenues:
Financial Advisory
M&A and Other Advisory $ 699,643 $ 822,063 (15 %)
Capital Raising 30,741 51,809 (41 %)
Strategic Advisory 730,384 873,872 (16 %)
Restructuring 166,087 74,878 NM
Total 896,471 948,750 (6 %)
Asset Management
Management fees 716,368 758,631 (6 %)
Incentive fees 3,581 15,966 (78 %)
Other 35,397 48,122 (26 %)
Total 755,346 822,719 (8 %)
Corporate 7,324 10,385 (29 %)
Operating revenue (b) $ 1,659,141 $ 1,781,854 (7 %)
Expenses:
Compensation and benefits expense (c) $ 949,460 $ 991,132 (4 %)
Ratio of compensation to operating revenue 57.2 % 55.6 %
Non-compensation expense (d) $ 318,588 $ 318,347 0 %
Ratio of non-compensation to operating revenue 19.2 % 17.9 %
Earnings:
Earnings from operations (e) $ 391,093 $ 472,375 (17 %)
Operating margin (f) 23.6 % 26.5 %
Net income (g) $ 259,716 $ 357,425 (27 %)
Diluted net income per share $ 1.96 $ 2.68 (27 %)
Diluted weighted average shares 132,517,887 133,219,137 (1 %)
Effective tax rate (h) 27.0 % 17.7 %

This presentation includes non-U.S. GAAP ("non-GAAP") measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for the corresponding U.S. GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. For a detailed explanation of the adjustments made to the corresponding U.S. GAAP measures, see Reconciliation of U.S. GAAP to Selected Summary Financial Information and Notes to Financial Schedules.

LAZARD LTD
ASSETS UNDER MANAGEMENT ("AUM")
(unaudited)
($ in millions)
As of Variance
September 30, June 30, December 31,
2016 2016 2015 Qtr to Qtr YTD
Equity:
Emerging Markets $ 43,624 $ 40,329 $ 36,203 8.2 % 20.5 %
Global 32,021 30,483 31,407 5.0 % 2.0 %
Local 34,415 31,767 31,354 8.3 % 9.8 %
Multi-Regional 57,272 53,993 52,531 6.1 % 9.0 %
Total Equity 167,332 156,572 151,495 6.9 % 10.5 %
Fixed Income:
Emerging Markets 17,112 14,414 14,378 18.7 % 19.0 %
Global 4,660 4,302 4,132 8.3 % 12.8 %
Local 4,067 3,967 3,899 2.5 % 4.3 %
Multi-Regional 8,120 7,894 7,978 2.9 % 1.8 %
Total Fixed Income 33,959 30,577 30,387 11.1 % 11.8 %
Alternative Investments 2,823 3,290 3,297 (14.2 %) (14.4 %)
Private Equity 950 933 858 1.8 % 10.7 %
Cash Management 376 493 343 (23.7 %) 9.6 %
Total AUM $ 205,440 $ 191,865 $ 186,380 7.1 % 10.2 %
Three Months Ended September 30 Nine Months Ended September 30
2016 2015 2016 2015
AUM - Beginning of Period $ 191,865 $ 203,086 $ 186,380 $ 197,103
Net Flows 2,773 201 2,865 2,790
Market and foreign exchange
appreciation (depreciation) 10,802 (20,665 ) 16,195 (17,271 )
AUM - End of Period $ 205,440 $ 182,622 $ 205,440 $ 182,622
Average AUM $ 201,028 $ 192,026 $ 192,989 $ 198,085
% Change in average AUM 4.7 % (2.6 %)

Note: Average AUM generally represents the average of the monthly ending AUM balances for the period.

LAZARD LTD
RECONCILIATION OF U.S. GAAP TO SELECTED SUMMARY FINANCIAL INFORMATION (a)
(unaudited)
Three Months Ended Nine Months Ended
September 30, June 30, September 30, September 30, September 30,
($ in thousands, except per share data) 2016 2016 2015 2016 2015
Operating Revenue
Net revenue - U.S. GAAP Basis $ 608,908 $ 534,680 $ 573,518 $ 1,641,806 $ 1,760,359
Adjustments:
Revenue related to noncontrolling interests (i) (2,661 ) (3,398 ) (2,995 ) (12,271 ) (15,317 )
(Gains) losses related to Lazard Fund Interests ("LFI") and other similar arrangements (6,909 ) (312 ) 12,145 (4,707 ) 9,903
Private Equity revenue adjustment (j) - - - - (12,203 )
Interest expense 11,430 11,337 11,599 34,313 39,112
Operating revenue, as adjusted (b) $ 610,768 $ 542,307 $ 594,267 $ 1,659,141 $ 1,781,854
Compensation & Benefits Expense
Compensation & benefits expense - U.S. GAAP Basis $ 353,756 $ 308,310 $ 319,565 $ 959,276 $ 984,786
Adjustments:
(Charges) credits pertaining to LFI and other similar arrangements (6,909 ) (312 ) 12,145 (4,707 ) 9,903
Compensation related to noncontrolling interests (i) (1,763 ) (1,594 ) (1,156 ) (5,109 ) (3,557 )
Compensation & benefits expense, as adjusted (c) $ 345,084 $ 306,404 $ 330,554 $ 949,460 $ 991,132
Non-Compensation Expense
Non-compensation expense - Subtotal - U.S. GAAP Basis $ 106,160 $ 113,134 $ 104,001 $ 321,925 $ 383,851
Adjustments:
Charges pertaining to Senior Debt refinancing (k) - - - - (60,219 )
Expense related to partial extinguishment of TRA obligation (l) - - (759 ) - (759 )
Amortization and other acquisition-related costs (863 ) (330 ) (511 ) (1,837 ) (3,401 )
Non-compensation expense related to noncontrolling interests (i) (465 ) (637 ) (410 ) (1,500 ) (1,125 )
Non-compensation expense, as adjusted (d) $ 104,832 $ 112,167 $ 102,321 $ 318,588 $ 318,347
Pre-Tax Income and Earnings From Operations
Operating Income (loss) - U.S. GAAP Basis $ 148,992 $ 113,236 $ 570,744 $ 360,605 ($155,969 )
Adjustments:
Gain on partial extinguishment of TRA obligation (l) - - (420,035 ) - (420,035 )
Accrual of tax receivable agreement obligation ("TRA") - - - - 968,483
Charges pertaining to Senior Debt refinancing (k) - - - - 62,874
Private Equity revenue adjustment (j) - - - - (12,203 )
Net income related to noncontrolling interests (i) (82 ) (1,007 ) (1,269 ) (4,989 ) (9,004 )
Pre-tax income, as adjusted 148,910 112,229 149,440 355,616 434,146
Interest expense 11,430 11,337 11,599 34,313 36,457
Amortization and other acquisition-related costs (LAZ only) 512 170 353 1,164 1,772
Earnings from operations, as adjusted (e) $ 160,852 $ 123,736 $ 161,392 $ 391,093 $ 472,375
Net Income attributable to Lazard Ltd
Net income attributable to Lazard Ltd - U.S. GAAP Basis $ 112,536 $ 80,357 $ 398,521 $ 259,716 $ 828,587
Adjustments:
Gain on partial extinguishment of TRA obligation (net of tax) (l) - - (259,256 ) - (259,256 )
Charges pertaining to Senior Debt refinancing (k) - - - - 62,874
Private Equity revenue adjustment (j) - - - - (12,203 )
Recognition of deferred tax assets (net of TRA accrual) (m) - - (17,862 ) - (254,598 )
Tax expense (benefit) allocated to adjustments - - 2,728 - (7,979 )
Net income, as adjusted (g) $ 112,536 $ 80,357 $ 124,131 $ 259,716 $ 357,425
Diluted net income per share:
U.S. GAAP Basis $ 0.85 $ 0.61 $ 2.99 $ 1.96 $ 6.22
Non-GAAP Basis, as adjusted $ 0.85 $ 0.61 $ 0.93 $ 1.96 $ 2.68

This presentation includes non-U.S. GAAP ("non-GAAP") measures. Our non-GAAP measures are not meant to be considered in isolation or as a substitute for comparable U.S. GAAP measures, and should be read only in conjunction with our consolidated financial statements prepared in accordance with U.S. GAAP. For a detailed explanation of the adjustments made to comparable U.S. GAAP measures, see Notes to Financial Schedules.

LAZARD LTD
Notes to Financial Schedules
(a) Selected Summary Financial Information are non-U.S. GAAP ("non-GAAP") measures. Lazard believes that presenting results and measures on an adjusted basis in conjunction with U.S. GAAP measures provides the most meaningful basis for comparison of its operating results across periods.
(b) A non-GAAP measure which excludes (i) revenue related to non-controlling interests (see (i) below), (ii) (gains)/losses related to the changes in the fair value of investments held in connection with Lazard Fund Interests and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from compensation & benefits expense, (iii) for the nine month period ended September 30, 2015, private equity carried interest reduction (see (j) below), (iv) interest expense primarily related to corporate financing activities, and (v) for the nine month period ended September 30, 2015, excess interest expense pertaining to Senior Debt refinancing (see (k) below).
(c) A non-GAAP measure which excludes (i) (charges)/credits related to the changes in the fair value of the compensation liability recorded in connection with Lazard Fund Interests and other similar deferred compensation arrangements, and (ii) compensation and benefits related to noncontrolling interests (see (i) below).
(d) A non-GAAP measure which excludes (i) for the nine month period ended September 30, 2015, charges pertaining to Senior Debt refinancing (see (k) below), (ii) amortization and other acquisition-related costs, and (iii) expenses related to noncontrolling interests (see (i) below), and (iv) for the three and nine month periods ended September 30, 2015, expenses related to partial extinguishment of TRA obligation (see (l) below).
(e) A non-GAAP measure which excludes (i) for the nine month period ended September 30, 2015, a provision pursuant to the tax receivable agreement ("TRA"), (ii) for the nine month period ended September 30, 2015, charges pertaining to Senior Debt refinancing (see (k) below), (iii) for the nine month period ended September 30, 2015, private equity carried interest reduction (see (j) below), (iv) revenue and expenses related to noncontrolling interests (see (i) below), (v) interest expense primarily related to corporate financing activities, (vi) for the three and nine month periods ended September 30, 2015, gain related to partial extinguishment of TRA obligation (see (l) below, and (vii) amortization and other acquisition-related costs (Lazard only).
(f) Represents earnings from operations as a percentage of operating revenue, and is a non-GAAP measure.
(g) A non-GAAP measure which excludes (i) for the nine month period ended September 30, 2015, charges pertaining to Senior Debt refinancing, net of tax benefits (see (k) below), (ii) for the nine month period ended September 30, 2015, the private equity carried interest reductions (see (j) below), (iii) for the three and nine month period ended September 30, 2015, a release of deferred tax valuation allowance, net of the related provision for TRA (see (m) below), and (iv) for the three and nine month periods ended September 30, 2015, gain related to partial extinguishment of TRA obligation (see (l) below).
(h) Effective tax rate is a non-GAAP measure based upon the U.S. GAAP rate with adjustments for the tax applicable to the non-GAAP adjustments to operating income, generally based upon the effective marginal tax rate in the applicable jurisdiction of the adjustments. The computation is based on a quotient, the numerator of which is the provision for income taxes of $36,374, $31,872, and $25,311 for the three month periods ended September 30, 2016, June 30, 2016, and September 30, 2015, respectively, $95,900 and $76,723 for the nine month periods ended September 30, 2016 and 2015, respectively, and the denominator of which is pre-tax income of $148,910, $112,229, and $149,442 for the three month periods ended September 30, 2016, June 30, 2016, and September 30, 2015, respectively, $355,616 and $434,148 for the nine month periods ended September 30, 2016 and 2015, respectively. The numerator also excludes for the three and nine month periods ended September 30, 2015, a release of deferred tax valuation allowance (see (m) below).
(i) Noncontrolling interests include revenue and expenses principally related to Edgewater, and is a non-GAAP measure.
(j) Revenue relating to the Company's disposal of the Australian private equity business is adjusted for the recognition of an obligation, which was previously recognized for U.S. GAAP.
(k) Represents charges related to the extinguishment of $450 million of the Company's 6.85% Senior Notes maturing in June 2017 and the issuance of $400 million of 3.75% notes maturing in February 2025. The charges include a pre-tax loss on the extinguishment of $60.2 million and excess interest expense of $2.7 million (due to the delay between the issuance of the 2025 notes and the settlement of the 2017 notes).
(l) In July of 2015 the Company extinguished approximately 47% of the outstanding TRA obligation. Accordingly, for the three and nine month periods ended September 30, 2015, the Company recorded a pre-tax gain of $420 million and a related tax expense of $161 million.
(m) Represents the recognition of deferred tax assets of $1,199 million, net of the accrual of $962 million for the tax receivable agreement.
NM Not meaningful

Lazard Ltd

Media:

Judi Frost Mackey, +1-212-632-1428

[email protected]

or

Investors:

Armand Sadoughi, +1-212-632-6358

[email protected]

Source: Lazard Ltd

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