XNYS:LAZ Lazard Ltd Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNYS:LAZ (Lazard Ltd): Fair Value Estimate
Premium
XNYS:LAZ (Lazard Ltd): Consider Buying
Premium
XNYS:LAZ (Lazard Ltd): Consider Selling
Premium
XNYS:LAZ (Lazard Ltd): Fair Value Uncertainty
Premium
XNYS:LAZ (Lazard Ltd): Economic Moat
Premium
XNYS:LAZ (Lazard Ltd): Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                         

001-32492

(Commission File Number)

 

 

LAZARD LTD

(Exact name of registrant as specified in its charter)

 

Bermuda    98-0437848
(State or Other Jurisdiction of Incorporation    (I.R.S. Employer Identification No.)
or Organization)   

 

 

Clarendon House

2 Church Street

Hamilton HM11, Bermuda

(Address of principal executive offices)

Registrant’s telephone number: (441) 295-1422

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x    Accelerated filer  ¨
Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of April 24, 2012, there were 123,094,507 shares of the Registrant’s Class A common stock (including 3,790,857 shares held by subsidiaries) and one share of the registrant’s Class B common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

When we use the terms “Lazard”, “we”, “us”, “our” and “the Company”, we mean Lazard Ltd, a company incorporated under the laws of Bermuda, and its subsidiaries, including Lazard Group LLC, a Delaware limited liability company (“Lazard Group”), that is the current holding company for our businesses. Lazard Ltd has no material operating assets other than indirect ownership as of March 31, 2012 of approximately 94.9% of the common membership interests in Lazard Group and its controlling interest in Lazard Group.

 

     Page  

Part I. Financial Information

  

Item 1. Financial Statements (Unaudited)

     1   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     39   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     67   

Item 4. Controls and Procedures

     67   

Part II. Other Information

  

Item 1. Legal Proceedings

     68   

Item 1A. Risk Factors

     68   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     68   

Item 3. Defaults Upon Senior Securities

     69   

Item 4. Mine Safety Disclosures

     69   

Item 5. Other Information

     69   

Item 6. Exhibits

     70   

Signatures

     76   

 

i


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

     Page  

Condensed Consolidated Statements of Financial Condition as of March 31, 2012 and
December  31, 2011

     2   

Condensed Consolidated Statements of Operations for the three month periods ended
March  31, 2012 and 2011

     4   

Condensed Consolidated Statements of Comprehensive Income for the three month periods ended
March 31, 2012 and 2011

     5   

Condensed Consolidated Statements of Cash Flows for the three month periods ended
March  31, 2012 and 2011

     6   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2012 and 2011

     7   

Notes to Condensed Consolidated Financial Statements

     9   

 

1


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2012 AND DECEMBER 31, 2011

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,      December 31,  
     2012      2011  

ASSETS

     
Cash and cash equivalents    $ 765,686       $ 1,003,791   
Deposits with banks      257,685         286,037   
Cash deposited with clearing organizations and other segregated cash      74,502         75,506   

Receivables (net of allowance for doubtful accounts of $21,172 and $19,450 at March 31, 2012 and December 31, 2011, respectively):

     

Fees

     436,201         402,843   

Customers and other

     71,152         83,111   

Related parties

     15,232         18,501   
  

 

 

    

 

 

 
     522,585         504,455   

Investments

     378,273         378,521   
     

Property (net of accumulated amortization and depreciation of $265,223 and $266,673 at March 31, 2012 and December 31, 2011, respectively)

     190,080         168,429   

Goodwill and other intangible assets (net of accumulated amortization of $28,040 and $26,922 at March 31, 2012 and December 31, 2011, respectively)

     395,962         393,099   
Other assets      323,225         272,098   
  

 

 

    

 

 

 

Total assets

   $ 2,907,998       $ 3,081,936   
  

 

 

    

 

 

 

 

See notes to condensed consolidated financial statements.

 

2


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION—(Continued)

MARCH 31, 2012 AND DECEMBER 31, 2011

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,     December 31,  
     2012     2011  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 274,690      $ 288,427   

Accrued compensation and benefits

     210,439        383,513   

Senior debt

     1,076,850        1,076,850   

Capital lease obligations

     19,891        20,084   

Related party payables

     10,988        6,075   

Other liabilities

     454,362        440,131   
  

 

 

   

 

 

 

Total liabilities

     2,047,220        2,215,080   

Commitments and contingencies

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, par value $.01 per share; 15,000,000 shares authorized:

    

Series A - 7,921 shares issued and outstanding at March 31, 2012 and December 31, 2011

              

Series B - no shares issued and outstanding

              

Common stock:

    

Class A, par value $.01 per share (500,000,000 shares authorized; 123,094,507 and 123,009,311 shares issued at March 31, 2012 and December 31, 2011, respectively, including shares held by subsidiaries as indicated below)

     1,231        1,230   

Class B, par value $.01 per share (1 share authorized, issued and outstanding at March 31, 2012 and December 31, 2011)

              

Additional paid-in-capital

     638,868        659,013   

Retained earnings

     262,100        258,646   

Accumulated other comprehensive loss, net of tax

     (71,903     (88,364
  

 

 

   

 

 

 
     830,296        830,525   

Class A common stock held by subsidiaries, at cost (3,267,892 and 3,492,017 shares at March 31, 2012 and December 31, 2011, respectively)

     (91,962     (104,382
  

 

 

   

 

 

 

Total Lazard Ltd stockholders’ equity

     738,334        726,143   

Noncontrolling interests

     122,444        140,713   
  

 

 

   

 

 

 

Total stockholders’ equity

     860,778        866,856   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $
2,907,998
  
  $ 3,081,936   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

3


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED)

(dollars in thousands, except for per share data)

 

    Three Months Ended
March 31,
 
    2012     2011  

REVENUE

   

Investment banking and other advisory fees

    $273,541        $220,327   

Money management fees

    204,561        214,692   

Interest income

    2,150        3,492   

Other

    26,209        22,830   
 

 

 

   

 

 

 

Total revenue

    506,461        461,341   

Interest expense

    20,422        23,318   
 

 

 

   

 

 

 

Net revenue

    486,039        438,023   
 

 

 

   

 

 

 

OPERATING EXPENSES

   

Compensation and benefits

    338,317        269,999   

Occupancy and equipment

    26,282        22,708   

Marketing and business development

    28,267        18,111   

Technology and information services

    20,393        19,567   

Professional services

    9,311        9,841   

Fund administration and outsourced services

    13,451        13,251   

Amortization of intangible assets related to acquisitions

    1,118        1,474   

Other

    11,077        9,626   
 

 

 

   

 

 

 

Total operating expenses

    448,216        364,577   
 

 

 

   

 

 

 

OPERATING INCOME

    37,823        73,446   

Provision for income taxes

    8,767        13,463   
 

 

 

   

 

 

 

NET INCOME

    29,056        59,983   

LESS—NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

    3,504        4,976   
 

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO LAZARD LTD

    $  25,552        $  55,007   
 

 

 

   

 

 

 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

   

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

   

Basic

    119,229,541        115,334,754   

Diluted

    136,594,178        138,590,593   

NET INCOME PER SHARE OF COMMON STOCK:

   

Basic

    $0.21        $0.48   
 

 

 

   

 

 

 

Diluted

    $0.20        $0.43   
 

 

 

   

 

 

 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $0.16        $0.125   
 

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

4


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

NET INCOME

   $ 29,056      $ 59,983   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

    

Currency translation adjustments

     19,129        23,738   

Amortization of interest rate hedge

     264        264   

Employee benefit plans:

    

Net actuarial loss (net of tax benefit of $1,282 and $1,935 for the three months ended March 31, 2012 and 2011, respectively)

     (2,597     (3,685

Adjustment for items reclassified to earnings (net of tax expense of $297 and $255 for the three months ended March 31, 2012 and 2011, respectively)

     815        548   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME, NET OF TAX

     17,611        20,865   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

     46,667        80,848   

LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     4,602        6,245   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD LTD

   $ 42,065      $ 74,603   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

5


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2012 AND 2011

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 29,056      $ 59,983   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Noncash items included in net income:

    

Depreciation and amortization of property

     6,975        5,916   

Amortization of deferred expenses, share-based incentive compensation
and interest rate hedge

     93,937        100,113   

Amortization of intangible assets related to acquisitions

     1,118        1,474   

(Increase) decrease in operating assets:

    

Deposits with banks

     36,866        69,199   

Cash deposited with clearing organizations and other segregated cash

     3,124        (1,518

Receivables-net

     (11,454     47,125   

Investments

     2,687        13,363   

Other assets

     (52,523     (11,722

Increase (decrease) in operating liabilities:

    

Deposits and other payables

     (17,602     (51,497

Accrued compensation and benefits and other liabilities

     (174,391     (302,122
  

 

 

   

 

 

 

Net cash used in operating activities

     (82,207     (69,686
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Additions to property

     (26,848     (1,954

Disposals of property

     1,609        44   
  

 

 

   

 

 

 

Net cash used in investing activities

     (25,239     (1,910
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from:

    

Contributions from noncontrolling interests

     704        884   

Other financing activities

            1,374   

Payments for:

    

Capital lease obligations

     (740     (675

Distributions to noncontrolling interests

     (23,961     (2,886

Repurchase of common membership interests from members of
LAZ-MD Holdings

            (794

Purchase of Class A common stock

     (70,540     (32,689

Class A common stock dividends

     (19,164     (14,115

Settlement of vested share-based incentive compensation

     (24,925     (83,016

Other financing activities

     (28     (19
  

 

 

   

 

 

 

Net cash used in financing activities

     (138,654     (131,936
  

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

     7,995        9,771   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (238,105     (193,761

CASH AND CASH EQUIVALENTS—January 1

     1,003,791        1,209,695   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—March 31

   $ 765,686      $ 1,015,934   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

6


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2011

(UNAUDITED)

(dollars in thousands)

 

    Series A
Preferred
Stock
    Common Stock     Additional
Paid-In-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
    Class A
Common Stock
Held By Subsidiaries
    Total
Lazard Ltd
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 
    Shares       $       Shares (*)       $             Shares       $          

Balance – January 1, 2011

    22,021      $        119,697,937      $ 1,197      $ 758,841      $ 166,468      $ (46,158     6,847,508      $ (227,950   $ 652,398      $ 143,719      $ 796,117   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

                       

Net income

              55,007              55,007        4,976        59,983   

Other comprehensive income (loss)-net of tax:

                       

Currency translation adjustments

                22,297            22,297        1,441        23,738   

Amortization of interest rate hedge

                248            248        16        264   

Employee benefit plans:

                       

Net actuarial loss

                (3,464         (3,464     (221     (3,685

Adjustments for items reclassified to earnings

                515            515        33        548   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income

                      74,603        6,245        80,848   
                   

 

 

   

 

 

   

 

 

 

Business acquisitions and related equity transactions:

                       

Class A common stock issued/issuable (including related amortization)

            2,416                2,416        154        2,570   

Amortization of share-based incentive compensation

            87,948                87,948        5,609        93,557   

Dividend-equivalents

            2,680        (2,694           (14     (1     (15

Class A common stock dividends

              (14,115           (14,115       (14,115

Purchase of Class A common stock

                  766,814        (32,689     (32,689       (32,689

Delivery of Class A common stock in connection with share-based incentive compensation

            (245,984         (4,889,175     162,968        (83,016       (83,016

Repurchase of common membership interests from LAZ-MD Holdings

            (746             (746     (48     (794

Distributions to noncontrolling interests, net

                        (2,002     (2,002

Adjustments related to noncontrolling interests

            6,946          (5         6,941        (6,941       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2011

    22,021      $   –        119,697,937      $ 1,197      $ 612,101      $ 204,666      $ (26,567     2,725,147      $ (97,671   $ 693,726      $ 146,735      $ 840,461   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*) Includes 119,697,936 shares of the Company’s Class A common stock issued at January 1, 2011 and March 31, 2011 and 1 share of the Company’s Class B common stock issued at each such date.

See notes to condensed consolidated financial statements.

 

7


Table of Contents

LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THREE MONTH PERIOD ENDED MARCH 31, 2012

(UNAUDITED)

(dollars in thousands)

 

    Series A
Preferred Stock
    Common Stock     Additional
Paid-In-
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income (Loss),
Net of Tax
    Class A
Common Stock
Held By Subsidiaries
    Total
Lazard Ltd
Stockholders’
Equity
    Noncontrolling
Interests
    Total
Stockholders’
Equity
 
                   
    Shares       $       Shares(*)         $               Shares       $          

Balance – January 1, 2012

    7,921      $  –        123,009,312      $ 1,230      $ 659,013      $ 258,646      $ (88,364     3,492,017      $ (104,382   $ 726,143      $ 140,713      $ 866,856   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss):

                       

Net income

              25,552              25,552        3,504        29,056   

Other comprehensive income (loss) - net of tax:

                       

Currency translation adjustments

                17,953            17,953        1,176        19,129   

Amortization of interest rate hedge

                250            250        14        264   

Employee benefit plans:

                       

Net actuarial loss

                (2,463         (2,463     (134     (2,597

Adjustments for items reclassified to earnings

                773            773        42        815   
                   

 

 

   

 

 

   

 

 

 

Comprehensive income

                      42,065        4,602        46,667   
                   

 

 

   

 

 

   

 

 

 

Amortization of share-based incentive compensation

            81,708                81,708        4,428        86,136   

Dividend-equivalents

            2,912        (2,934           (22     (1     (23

Class A common stock dividends

              (19,164           (19,164       (19,164

Purchase of Class A common stock

                  2,378,445        (70,540     (70,540       (70,540

Delivery of Class A common stock in connection with share-based incentive compensation and related tax expense of $972

         

 

(108,807

        (2,602,570     82,960        (25,847     (50     (25,897

Class A common stock issued in exchange for Lazard Group common membership interests

        85,196        1        (1                             

Distributions to noncontrolling interests, net

                             (23,257     (23,257

Adjustments related to noncontrolling interests

            4,043          (52         3,991        (3,991       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2012

    7,921      $        123,094,508      $ 1,231      $ 638,868      $ 262,100      $ (71,903     3,267,892      $ (91,962   $ 738,334      $ 122,444      $ 860,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(*)

Includes 123,009,311 and 123,094,507 shares of the Company’s Class A common stock issued at January 1, 2012 and March 31, 2012, respectively, and 1 share of the Company’s Class B common stock issued at each such date.

See notes to condensed consolidated financial statements.

 

8


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Lazard Ltd, a Bermuda holding company, and its subsidiaries (collectively referred to as “Lazard Ltd”, “Lazard”, “we” or the “Company”), including Lazard Ltd’s indirect investment in Lazard Group LLC, a Delaware limited liability company (collectively referred to, together with its subsidiaries, as “Lazard Group”), is one of the world’s preeminent financial advisory and asset management firms and has long specialized in crafting solutions to the complex financial and strategic challenges of our clients. We serve a diverse set of clients around the world, including corporations, partnerships, institutions, governments and high net worth individuals.

Lazard Ltd indirectly held approximately 94.9% and 94.8% of all outstanding Lazard Group common membership interests as of March 31, 2012 and December 31, 2011, respectively. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group. LAZ-MD Holdings LLC (“LAZ-MD Holdings”), an entity owned by Lazard Group’s current and former managing directors, held approximately 5.1% and 5.2% of the outstanding Lazard Group common membership interests as of March 31, 2012 and December 31, 2011, respectively. Additionally, LAZ-MD Holdings was the sole owner of the one issued and outstanding share of Lazard Ltd’s Class B common stock (the “Class B common stock”) which provided LAZ-MD Holdings with approximately 5.1% and 5.2% of the voting power but no economic rights in the Company as of such respective dates. Subject to certain limitations, LAZ-MD Holdings’ interests in Lazard Group are exchangeable for Lazard Ltd Class A common stock, par value $0.01 per share (“Class A common stock”). Lazard Group is governed by an Operating Agreement dated as of May 10, 2005, as amended (the “Operating Agreement”).

Our sole operating asset is our indirect ownership of common membership interests of Lazard Group and our managing member interest of Lazard Group, whose principal operating activities are included in two 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”) and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and

 

   

Asset Management, which includes strategies for the management of equity and fixed income securities and alternative investment and private equity funds, as well as wealth management.

In addition, we record selected other activities in our Corporate segment, including management of cash, certain investments and the commercial banking activities of Lazard Group’s Paris-based Lazard Frères Banque SA (“LFB”). We also allocate outstanding indebtedness to our Corporate segment.

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel. It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, asset-liability management and limited trading in securities and foreign exchange.

Basis of Presentation

The accompanying condensed consolidated financial statements of Lazard Ltd have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements

 

9


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

and should be read in conjunction with the audited consolidated financial statements and notes thereto included in Lazard Ltd’s Annual Report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”). The accompanying December 31, 2011 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented. Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates. The consolidated results of operations for the three month period ended March 31, 2012 are not necessarily indicative of the results to be expected for any future interim or annual period.

The condensed consolidated financial statements include Lazard Ltd, Lazard Group and Lazard Group’s principal operating subsidiaries: Lazard Frères & Co. LLC (“LFNY”), a New York limited liability company, along with its subsidiaries, including Lazard Asset Management LLC and its subsidiaries (collectively referred to as “LAM”); the French limited liability companies Compagnie Financière Lazard Frères SAS (“CFLF”) along with its subsidiaries, LFB and LFG, and Maison Lazard SAS and its subsidiaries; and Lazard & Co., Limited (“LCL”), through Lazard & Co., Holdings Limited, an English private limited company (“LCH”), together with their jointly owned affiliates and subsidiaries.

The Company’s policy is to consolidate (i) entities in which it has a controlling financial interest, (ii) variable interest entities (“VIEs”) where the Company has a variable interest and is deemed to be the primary beneficiary and (iii) limited partnerships where the Company is the general partner, unless the presumption of control is overcome. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of earnings or losses of the entity. Intercompany transactions and balances have been eliminated.

 

2. RECENT ACCOUNTING DEVELOPMENTS

Fair Value Measurements—In the first quarter of 2012, the Company adopted the amended fair value measurement guidance issued by the Financial Accounting Standards Board (the “FASB”), which the FASB stated was designed to achieve common fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Although many of the changes for U.S. GAAP purposes are clarifications of existing guidance or wording changes to align with IFRS, additional disclosures about fair value measurements are required, including (i) a quantitative disclosure of the unobservable inputs and assumptions used in the measurement, (ii) the valuation processes used and the sensitivity of fair value measurements related to investments categorized within Level 3 of the hierarchy of fair value measurements to changes in unobservable inputs and the interrelationships between those unobservable inputs, if any, and (iii) the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial condition but for which the fair value is required to be disclosed. The amended fair value measurement guidance became effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The adoption of the amended fair value measurement guidance did not have a material impact on the Company’s consolidated financial statements, primarily because substantially all Level 3 assets are carried at net asset value (“NAV”) or its equivalent.

Other Comprehensive Income—In the first quarter of 2012, the Company adopted the FASB’s amended guidance regarding the presentation of comprehensive income, which the FASB stated was designed to improve

 

10


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

comparability, consistency and transparency. The amendment required that all changes in comprehensive income be presented either in (i) a single continuous statement of comprehensive income or in (ii) two separate but consecutive statements. The amendment was to be applied retrospectively and is effective with interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company elected the two-statement method.

 

3. RECEIVABLES - NET

The Company’s “receivables - net” represents receivables from fees, customers and other and related parties.

Receivables are stated net of an estimated allowance for doubtful accounts of $21,172 and $19,450 at March 31, 2012 and December 31, 2011, respectively, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. The Company recorded bad debt expense of $1,281 and $967 for the three month periods ended March 31, 2012 and 2011, respectively. In addition, the Company recorded charge-offs, foreign currency translation and other adjustments, which resulted in a net increase (decrease) to the allowance for doubtful accounts of $441 and $(487) for the three month periods ended March 31, 2012 and 2011, respectively. At March 31, 2012 and December 31, 2011, the Company had receivables deemed past due or uncollectible of $21,615 and $22,785 respectively.

 

4. INVESTMENTS

The Company’s investments and securities sold, not yet purchased, consist of the following at March 31, 2012 and December 31, 2011:

 

    

March 31,

     December 31,  
     2012      2011  

Debt

   $ 9,149       $ 36,966   
  

 

 

    

 

 

 

Equities (a)

     170,438         156,053   
  

 

 

    

 

 

 

Other:

     

Interests in alternative asset management funds (a)

     37,851         20,610   

Fixed income funds (a)

     32,951         31,121   

Private equity

     116,563         122,718   

Equity method investments

     11,321         11,053   
  

 

 

    

 

 

 
     198,686         185,502   
  

 

 

    

 

 

 

Total investments

     378,273         378,521   

Less:

     

Interest-bearing deposits (included in “debt” above)

     2,958         2,834   

Equity method investments

     11,321         11,053   
  

 

 

    

 

 

 

Investments, at fair value

   $ 363,994       $ 364,634   
  

 

 

    

 

 

 

Securities sold, not yet purchased, at fair value (included in “other liabilities”)

   $ 1,952       $ 4,282   
  

 

 

    

 

 

 

 

11


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

 

(a) Equities, interests in alternative asset management funds and fixed income funds include investments with fair values of $22,224, $3,619 and $5,056, respectively, at March 31, 2012 and $19,857, $2,256 and $5,212, respectively, at December 31, 2011, held in order to satisfy the Company’s liability upon vesting of previously granted Lazard Fund Interests (“Lazard Fund Interests”) and other similar deferred compensation arrangements. Lazard Fund Interests represent grants by the Company to eligible employees of actual or notional interests in a number of Lazard-managed funds (see Notes 6 and 12 of Notes to Condensed Consolidated Financial Statements).

Debt securities included in the table above are categorized as “trading” securities. Debt securities primarily relate to Asset Management seed investments and U.S. government debt securities and, at December 31, 2011, non-U.S. government securities which matured during the first quarter of 2012.

Equities primarily relate to the Company’s seed investments in Asset Management products, which in turn invest in marketable equity securities of large-, mid- and small-cap domestic, international and global companies and include investments in public and private asset management funds managed both by LAM and third-party asset managers.

Interests in alternative asset management funds represent general partner (“GP”) interests in various Lazard-managed alternative asset management funds.

Fixed income funds primarily consist of amounts seeding products of our Asset Management business.

Private equity investments include those owned by Lazard and those consolidated but not owned by Lazard. Private equity investments owned by Lazard are primarily comprised of investments in private equity funds and direct private equity interests. Such investments primarily include (i) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies, (ii) Corporate Partners II Limited (“CP II”), a private equity fund targeting significant noncontrolling-stake investments in established public and private companies, (iii) Lazard Senior Housing Partners LP (“Senior Housing”), which targets controlling interests in companies and assets in the senior housing, extended-stay hotel and shopping center sectors, (iv) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), a private equity fund primarily making equity and buyout investments in lower middle market companies and (v) Lazard Australia Corporate Opportunities Fund 2 (“COF 2”), a Lazard-managed Australian private equity fund.

Private equity investments consolidated but not owned by Lazard relate to the economic interests that are owned by the leadership team and other investors in the Edgewater Funds (“Edgewater”) which aggregated $22,059 and $18,502 at March 31, 2012 and December 31, 2011, respectively.

During the three month periods ended March 31, 2012 and 2011, the Company recognized gross investment gains and losses in “revenue-other” on its condensed consolidated statements of operations as follows:

 

     Three Months Ended
March 31,
 
     2012      2011  

Gross investment gains

   $ 27,644       $ 6,375   

Gross investment losses

   $ 984       $ 1,016   

 

12


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The table above includes gross unrealized investment gains and losses pertaining to “trading” securities as follows:

 

   

     Three Months Ended
March 31,
 
     2012      2011  

Gross unrealized investment gains

   $ 1,045       $ 573   

Gross unrealized investment losses

   $       $ 120   

 

5. FAIR VALUE MEASUREMENTS

Lazard categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:

 

Level 1. Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Lazard has the ability to access.

 

Level 2. Assets and liabilities whose values are based on quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in non-active markets or assets valued based on NAV or its equivalent redeemable at the measurement date or within the near term without redemption restrictions, or inputs other than quoted prices that are directly observable or derived principally from, or corroborated by, market data.

 

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis as well as assets valued based on NAV not redeemable within the near term.

The Company’s investments in U.S. Government and agency debt securities as well as in non-U.S. Government and other debt securities are considered Level 1 assets when their respective fair values are based on unadjusted quoted prices in active markets and are considered Level 2 assets when their fair values are primarily based on broker quotes as provided by external pricing services.

The fair value of equities is principally classified as Level 1, Level 2 or Level 3 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that security; public asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; investments in private asset management funds are classified as Level 2 and are primarily valued based on information provided by fund managers and, secondarily, from external pricing services to the extent managed by LAM; and Level 3 represents equities valued based on NAV and are not redeemable within the near term.

The fair value of interests in alternative asset management funds is classified as either Level 2 or Level 3 depending on the time frame of any applicable redemption restriction, and is based on information provided by external pricing services.

 

13


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The Company’s investments in fixed income funds are considered Level 1 assets when the fair values are based on the reported closing price for the fund or Level 2 assets when the fair values are primarily based on broker quotes as provided by external pricing services.

The fair value of private equity investments is classified as Level 3, and is primarily based on NAV. Such investments are not redeemable within the near term.

The fair values of derivatives entered into by the Company are classified as Level 2 and are based on the values of the related underlying assets, indices or reference rates as follows - the fair value of forward foreign currency exchange rate contracts is a function of the spot rate and the interest rate differential of the currency from the trade date to settlement date; the fair value of equity and fixed income swaps is based on the change in fair values of the related underlying equity security, financial instrument or index and a specified notional holding; and the fair values of interest rate swaps are based on the interest rate yield curve.

Where information reported is based on broker quotes, the Company generally obtains one quote/price per instrument. In some cases, quotes related to corporate bonds obtained through external pricing services represent the average of several broker quotes. Where information reported is based on data received from fund managers or from external pricing services, the Company reviews such information to ascertain at which level within the fair value hierarchy to classify the investment.

 

14


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following tables present the categorization of investments and certain other assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 into the three-level fair value hierarchy in accordance with fair value measurement disclosure requirements:

 

    March 31, 2012  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt (excluding interest-bearing deposits)

  $ 1,609      $ 4,582      $      $ 6,191   

Equities

    118,154        52,057        227        170,438   

Other (excluding equity method investments):

       

Interest in alternative asset management funds

           31,946        5,905        37,851   

Fixed income funds

    19,141        13,810               32,951   

Private equity

                  116,563        116,563   

Derivatives

           1,454               1,454   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 138,904      $ 103,849      $ 122,695      $ 365,448   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 1,952      $      $      $ 1,952   

Derivatives

           96,092               96,092   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ 1,952      $ 96,092      $      $ 98,044   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2011  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt (excluding interest-bearing deposits)

  $ 17,111      $ 17,021      $      $ 34,132   

Equities

    115,380        37,332        3,341        156,053   

Other (excluding equity method investments):

       

Interest in alternative asset management funds

           13,569        7,041        20,610   

Fixed income funds

    27,539        3,582               31,121   

Private equity

                  122,718        122,718   

Derivatives

           7,131               7,131   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

  $ 160,030      $ 78,635      $ 133,100      $ 371,765   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 4,282      $      $      $ 4,282   

Derivatives

           30,713               30,713   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

  $ 4,282      $ 30,713      $      $ 34,995   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy during the three month periods ended March 31, 2012 and 2011.

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month periods ended March 31, 2012 and 2011:

 

    Three Months Ended March 31, 2012  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included In

Revenue-Other (a)
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 3,341      $      $ 10      $ (3,130   $ 6      $ 227   

Interest in alternative asset management funds

    7,041        127               (1,263            5,905   

Private equity

    122,718        7,564        2,696        (17,872     1,457        116,563   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 133,100      $ 7,691      $ 2,706      $ (22,265   $ 1,463      $ 122,695   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended March 31, 2011  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included In
Revenue-Other (a)
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 316      $      $      $ (195   $ 8      $ 129   

Private equity

    163,482        279        12,153        (7,108     2,681        171,487   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 163,798      $ 279      $ 12,153      $ (7,303   $ 2,689      $ 171,616   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(a) Earnings for the three month periods ended March 31, 2012 and 2011 include net unrealized gains of $6,080 and $279, respectively, pertaining to investments outstanding at the end of each respective period.

 

16


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Fair Value of Certain Investments Based on NAV—The Company’s Level 2 and Level 3 investments at March 31, 2012 and December 31, 2011 include certain investments that are valued using an NAV as a practical expedient in determining fair value. Information with respect thereto was as follows:

 

    March 31, 2012
                      Estimated Liquidation Period of
Investments Not Redeemable
    Investments Redeemable
    Fair Value     Unfunded
Commitments
    % of
Fair Value
Not
Redeemable
    %
Next
5 Years
    %
5-10
Years
    %
Thereafter
    Redemption
Frequency
  Redemption
Notice
Period

Equity funds

  $ 52,211      $        2     1     0     1   Quarterly   60 Days

Interests in alternative asset management funds

    37,851               0     0     0     0   Quarterly   >90 Days

Fixed income funds

    13,810               0     0     0     0   Monthly   60 Days

Private equity funds

    115,200        35,883        100     26     34     40   NA   NA
 

 

 

   

 

 

             

Total

  $ 219,072      $ 35,883               
 

 

 

   

 

 

             
               

 

    December 31, 2011
                      Estimated Liquidation Period of
Investments Not Redeemable
    Investments Redeemable
    Fair Value     Unfunded
Commitments
    % of
Fair Value
Not
Redeemable
    %
Next
5 Years
    %
5-10
Years
    %
Thereafter
    Redemption
Frequency
  Redemption
Notice
Period

Equity funds

  $ 40,512      $        2     1     0     1   Quarterly   60 Days

Interests in alternative asset management funds

    20,600               0     0     0     0   Quarterly   >90 Days

Fixed income funds

    3,582               0     0     0     0   Monthly   60 Days

Private equity funds

    121,276        52,197        100     33     28     39   NA   NA
 

 

 

   

 

 

             

Total

  $ 185,970      $ 52,197               
 

 

 

   

 

 

             

Investment Capital Funding Commitments—At March 31, 2012, the current maximum unfunded commitments by the Company for capital contributions to investment funds related to (i) CP II, amounting to $2,124 for potential “follow-on investments” and/or for fund expenses through the earlier of February 25, 2017 or the liquidation of the fund, (ii) EGCP III, amounting to $25,673 through the earlier of October 12, 2016 (i.e., the end of the investment period) for investments and/or expenses (with a portion of the undrawn amount of such commitment as of that date remaining committed until October 12, 2023 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund and (iii) COF 2, amounting to $8,086, through the earlier of November 11, 2016 (i.e., the end of the investment period) for investments and/or fund expenses (with a portion of the undrawn amount of such commitment as of that date remaining committed until November 11, 2019 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund.

The commitment regarding EGCP III described above reflects a March 1, 2012 reduction of approximately $17,400 from the original commitment of $50,000 that an investor group agreed to acquire from the Company.

 

17


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

6. DERIVATIVES

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, equity and fixed income swaps and other derivative contracts to hedge exposures to fluctuations in currency exchange rates, interest rates and equity and debt markets. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of set-off exists under a master netting agreement enforceable by law. The Company’s derivative instruments are recorded at their fair value, and are included in “other assets” and “other liabilities” on the consolidated statements of financial condition. Gains and losses on the Company’s derivative instruments not designated as hedging instruments, as well as gains and losses on derivative instruments accounted for as fair value hedges, are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, on the consolidated statements of operations. Furthermore, with respect to derivative instruments designated as fair value hedges, the hedged item is required to be adjusted for changes in fair value of the risk being hedged, with such adjustment accounted for in the consolidated statements of operations.

In addition to the derivative instruments described above, the Company records derivative liabilities relating to its obligations pertaining to Lazard Fund Interests 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, and is included in “accrued compensation and benefits” in the consolidated statements of financial condition. Changes in the fair value of the derivative liabilities are included in “compensation and benefits” in the consolidated statements of operations, the impact of which equally offsets the changes in the fair value of the underlying investments owned, which is reported in “revenue-other” in the consolidated statements of operations.

The table below represents the fair values of the Company’s derivative instruments reported within “other assets” and “other liabilities” and the fair value of the Company’s derivative liabilities relating to its obligations pertaining to Lazard Fund Interests and other similar deferred compensation arrangements reported within “accrued compensation and benefits” (see Note 12 of Notes to Condensed Consolidated Financial Statements) on the accompanying condensed consolidated statements of financial condition as of March 31, 2012 and December 31, 2011:

 

   

March 31,

    December 31,  
    2012          2011       

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 1,403      $ 4,245   

Equity and fixed income swaps and other

    51        2,886   
 

 

 

   

 

 

 
  $ 1,454      $ 7,131   
 

 

 

   

 

 

 
   

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 1,478      $ 445   

Interest rate swaps

    274        277   

Equity and fixed income swaps

    4,054        91   

Lazard Fund Interests and other similar deferred compensation arrangements
(see Note 12)

    90,286        29,900   
 

 

 

   

 

 

 
  $ 96,092      $ 30,713   
 

 

 

   

 

 

 

 

18


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Net gains (losses) with respect to derivative instruments not designated as hedging instruments (predominantly reflected in “revenue-other”) and the Company’s derivative liabilities relating to its obligations pertaining to Lazard Fund Interests and other similar deferred compensation arrangements (reported in “compensation and benefits” expense, which equally offsets corresponding amounts reported in “revenue-other” as described above) as reflected on the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2012 and 2011, by type of derivative, were as follows:

 

     Three Months Ended
March 31,
 
           2012     2011        

Forward foreign currency exchange rate contracts

   $ (1,922   $ (6,258

Equity and fixed income swaps and other

     (10,255     (2,289

Lazard Fund Interests and other similar deferred compensation arrangements

     (2,767       
  

 

 

   

 

 

 
   $ (14,944   $ (8,547
  

 

 

   

 

 

 

 

7. BUSINESS ACQUISITIONS

On July 15, 2009, the Company established a private equity business with Edgewater. Edgewater manages funds primarily focused on buy-out and growth equity investments in middle market companies. The acquisition was structured as a purchase by Lazard Group of interests in a holding company that in turn owns interests in the general partner and management company entities of the current Edgewater private equity funds (the “Edgewater Acquisition”). Following the Edgewater Acquisition, Edgewater’s leadership team retained a substantial economic interest in such entities. Edgewater’s activities are recorded in the Company’s Asset Management segment.

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock subject to earnout criteria and payable over time (the “Earnout Shares”). The Initial Shares are subject to forfeiture provisions that lapse only upon the achievement of certain performance thresholds and transfer restrictions during the four year period ending December 2014. The Earnout Shares will be issued only if certain performance thresholds are met. On December 30, 2011, 285,715 Initial Shares and 57,287 Earnout Shares became unrestricted or were otherwise delivered.

In prior years, the Company made certain other business acquisitions. These purchases were effected through an exchange of a combination of cash, Class A common stock, and by Lazard Ltd issuing shares of non-participating convertible Series A and Series B preferred stock, which were each convertible into Class A common stock. In connection with such acquisitions, as of both March 31, 2012 and December 31, 2011, 47,474 shares of Class A common stock were issuable on a non-contingent basis. At March 31, 2012, no shares of Series A preferred stock were convertible into shares of Class A common stock on a contingent or a non-contingent basis. See Note 11 of Notes to Condensed Consolidated Financial Statements for additional information relating to preferred stock.

 

19


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of goodwill and other intangible assets at March 31, 2012 and December 31, 2011 are presented below:

 

   

March 31,

    December 31,  
    2012     2011  

Goodwill

  $ 360,638      $ 356,657   

Other intangible assets (net of accumulated amortization)

    35,324        36,442   
 

 

 

   

 

 

 
  $ 395,962      $ 393,099   
 

 

 

   

 

 

 

At March 31, 2012 and December 31, 2011, goodwill of $296,097 and $292,116, respectively, was attributable to the Company’s Financial Advisory segment and, at such respective dates, $64,541 of goodwill was attributable to the Company’s Asset Management segment.

Changes in the carrying amount of goodwill for the three month periods ended March 31, 2012, and 2011 are as follows:

 

    Three Months Ended
March 31,
 
    2012     2011  

Balance, January 1

  $ 356,657      $ 313,229   

Foreign currency translation adjustments

    3,981        2,872   
 

 

 

   

 

 

 

Balance, March 31

  $ 360,638      $ 316,101   
 

 

 

   

 

 

 

The gross cost and accumulated amortization of other intangible assets as of March 31, 2012 and December 31, 2011, by major intangible asset category, are as follows:

 

    March 31, 2012     December 31, 2011  
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
 

Success/performance fees

  $ 30,740      $ 7,122      $ 23,618      $ 30,740      $ 7,122      $ 23,618   

Management fees, customer relationships and non-compete agreements

    32,624        20,918        11,706        32,624        19,800        12,824   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 63,364      $ 28,040      $ 35,324      $ 63,364      $ 26,922      $ 36,442   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Amortization expense of intangible assets for the three month periods ended March 31, 2012 and 2011 was $1,118 and $1,474, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Future
Amortization
Expense (a)
 

2012 (April 1 through December 31)

   $ 4,280   

2013

     10,338   

2014

     8,332   

2015

     6,735   

2016

     5,639   
  

 

 

 

Total amortization expense

   $ 35,324   
  

 

 

 

 

  (a) Approximately 46% of intangible asset amortization is attributable to a noncontrolling interest.

 

9. SENIOR DEBT

Senior debt is comprised of the following as of March 31, 2012 and December 31, 2011:

 

                          Outstanding As Of  
      Initial
Principal

Amount
    Maturity
Date
     Annual
Interest
Rate
     March 31,      December 31,  
             2012      2011  

Lazard Group 7.125% Senior Notes

   $ 550,000        5/15/15         7.125    $ 528,500       $ 528,500   

Lazard Group 6.85% Senior Notes

     600,000        6/15/17         6.85      548,350         548,350   

Lazard Group Credit Facility

     150,000        4/29/13         1.90                
          

 

 

    

 

 

 

Total

           $ 1,076,850       $ 1,076,850   
          

 

 

    

 

 

 

Lazard Group has in place a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”), which expires in April, 2013. Interest rates under the Credit Facility vary and are based on either a Federal Funds rate or a Eurodollar rate, in each case plus an applicable margin. As of March 31, 2012, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 1.90%. At March 31, 2012 and December 31, 2011, no amounts were outstanding under the Credit Facility.

The Credit Facility, as amended, contains customary terms and conditions, including certain financial covenants. In addition, the Credit Facility, as well as the indenture and the supplemental indentures relating to Lazard Group’s senior notes, contain certain covenants, events of default and other customary provisions, including, where applicable, a customary make-whole provision in the event of early redemption. As of March 31, 2012, the Company was in compliance with all of these provisions. All of the Company’s senior debt obligations are unsecured.

As of March 31, 2012, the Company had approximately $315,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $93,000 (at March 31, 2012 exchange rates) and Edgewater of $65,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

 

21


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The Company’s senior debt at March 31, 2012 and December 31, 2011 is recorded at historical amounts. At those dates, the fair value of such senior debt outstanding was approximately $1,174,000 and $1,138,000, respectively, and exceeded the aggregate carrying value by approximately $97,000 and $61,000, respectively. The fair value of the Company’s senior debt was estimated using a discounted cash flow analysis based on the Company’s current borrowing rates for similar types of borrowing arrangements or based on market quotations, where available. The Company’s senior debt would be categorized within Level 2 of the hierarchy of fair value measurements if carried at fair value.

 

10. COMMITMENTS AND CONTINGENCIES

Leases—The Company has various leases and other contractual commitments arising in the ordinary course of business. In the opinion of management, the fulfillment of such commitments, in accordance with their terms, will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

Guarantees—In the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At March 31, 2012, LFB had $5,482 of such indemnifications and held $4,198 of collateral/counter-guarantees to secure these commitments. The Company believes the likelihood of loss with respect to these indemnities is remote. Accordingly, no liability is recorded in the consolidated statement of financial condition.

Other Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. Such commitments at March 31, 2012 aggregated $23,409. These commitments have varying expiration dates and are fully collateralized and generally contain requirements for the counterparty to maintain a minimum collateral level. These commitments may not represent future cash requirements as they may expire without being drawn upon.

See Notes 5, 7 and 13 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to investment capital funding commitments, business acquisitions and obligations to fund our pension plans, respectively.

The Company has various other contractual commitments arising in the ordinary course of business. In addition, from time to time, LFB enters into underwriting commitments in which it participates as a joint underwriter. The settlement of such transactions are not expected to have a material adverse effect on the Company’s consolidated financial position or results of operations. At March 31, 2012, LFB had no such underwriting commitments.

Legal—The Company is involved from time to time in judicial, regulatory and arbitration proceedings and inquiries concerning matters arising in connection with the conduct of our businesses, including proceedings initiated by former employees alleging wrongful termination. The Company reviews such matters on a case-by-case basis and establishes any required accrual if a loss is probable and the amount of such loss can be reasonably estimated. The Company does experience significant variation in its revenue and earnings on a quarterly basis. Accordingly, the results of any pending matter or matters could be significant when compared to the Company’s earnings in any particular fiscal quarter. The Company believes, however, based on currently available information, that the results of any pending matters, in the aggregate, will not have a material effect on its business or financial condition.

 

22


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

11. STOCKHOLDERS’ EQUITY

Lazard Group Distributions—As previously described, Lazard Group’s common membership interests are held by subsidiaries of Lazard Ltd and by LAZ-MD Holdings. Pursuant to provisions of the Operating Agreement, Lazard Group distributions in respect of its common membership interests are allocated to the holders of such interests on a pro rata basis. Such distributions represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltd’s subsidiaries and the members of LAZ-MD Holdings incur as a result of holding Lazard Group common membership interests.

During the three month periods ended March 31, 2012 and 2011, Lazard Group distributed the following amounts to LAZ-MD Holdings and the subsidiaries of Lazard Ltd (none of which related to tax distributions):

 

     Three Months Ended
March 31,
 
     2012      2011  

LAZ-MD Holdings

   $ 1,081       $ 955   

Subsidiaries of Lazard Ltd

     19,164         14,115   
  

 

 

    

 

 

 
   $ 20,245       $ 15,070   
  

 

 

    

 

 

 

Pursuant to the Operating Agreement, Lazard Group allocates and distributes to its members a substantial portion of its distributable profits in installments, as soon as practicable after the end of each fiscal year. Such installment distributions usually begin in February.

Exchange of Lazard Group Common Membership Interests— During the three month period ended March 31, 2012, Lazard Ltd issued 85,196 shares of Class A common stock in connection with the exchange of a like number of Lazard Group common membership interests (received from members of LAZ-MD Holdings in exchange for a like number of LAZ-MD Holdings exchangeable interests). No such exchanges occurred in the three month period ended March 31, 2011.

See “Noncontrolling Interests” below for additional information regarding Lazard Ltd’s and LAZ-MD Holdings’ ownership interests in Lazard Group.

Share Repurchase Program—In February 2011 and October 2011, the Board of Directors of Lazard Ltd authorized, on a cumulative basis, the repurchase of up to $250,000 and $125,000, respectively, in aggregate cost of Class A common stock and Lazard Group common membership interests through December 31, 2012 and December 31, 2013, respectively. The Company’s prior share repurchase authorizations expired on December 31, 2009 and December 31, 2011. The Company expects that the share repurchase program, with respect to the Class A common stock, will continue to be used primarily to offset a portion of the shares that have been or will be issued under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”). Pursuant to such authorizations, purchases have been made in the open market or through privately negotiated transactions. During the three month period ended March 31, 2012, the Company made purchases of 2,378,445 Class A common shares, at an aggregate cost of $70,540 (no Lazard Group common membership interests were purchased during such three month period).

As of March 31, 2012, $141,603 of the current aggregate $375,000 share repurchase amount authorized as of such date remained available under the share repurchase program as follows – $16,603 of the $250,000 share

 

23


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

repurchase amount expiring December 31, 2012, and all of the $125,000 share repurchase amount expiring December 31, 2013. In addition, under the terms of the 2005 Plan and the 2008 Plan, upon the vesting of restricted stock units (“RSUs”), shares of Class A common stock may be withheld by the Company to cover the recipient’s estimated income tax liability (see Note 12 of Notes to Condensed Consolidated Financial Statements). On April 24, 2012, the Board of Directors of Lazard Ltd authorized the repurchase of up to an additional $125,000 in aggregate cost of Lazard Ltd Class A common stock and Lazard Group common membership interests through December 31, 2013.

During the first quarter of 2012, the Company had a written trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 in place, pursuant to which it effected stock repurchases through the open market.

Preferred Stock—Lazard Ltd has 15,000,000 authorized shares of preferred stock, par value $0.01 per share, inclusive of its Series A preferred stock and Series B preferred stock. The Series A and Series B preferred shares are each non-participating securities that are or were each convertible into Class A common stock, and have no voting or dividend rights. As of both March 31, 2012 and December 31, 2011, 7,921 shares of Series A preferred stock were outstanding, and no shares of Series B preferred stock were outstanding at such respective dates.

Accumulated Other Comprehensive Income (Loss), Net of Tax (“AOCI”)—The components of AOCI at March 31, 2012 and December 31, 2011 are as follows:

 

    

March 31,

    December 31,  
     2012     2011  

Currency translation adjustments

   $ 22,848      $ 3,719   

Interest rate hedge

     (3,293     (3,557

Employee benefit plans

     (94,419     (92,637
  

 

 

   

 

 

 

Total AOCI

     (74,864     (92,475

Less amount attributable to noncontrolling interests

     (2,961     (4,111
  

 

 

   

 

 

 

Total Lazard Ltd AOCI

   $ (71,903   $ (88,364
  

 

 

   

 

 

 

Noncontrolling Interests—Noncontrolling interests principally represent interests held in (i) Lazard Group by LAZ-MD Holdings and (ii) Edgewater’s management vehicles that the Company is deemed to control, but does not own.

As of March 31, 2012 and December 31, 2011, LAZ-MD Holdings held approximately 5.1% and 5.2%, respectively, of the outstanding Lazard Group common membership interests. Subject to certain limitations, LAZ-MD Holdings’ interests in Lazard Group are exchangeable for Class A common stock.

 

24


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following tables summarize the changes in ownership interests in Lazard Group held by Lazard Ltd and LAZ-MD Holdings during the three month periods ended March 31, 2012, and 2011:

 

    Lazard Ltd     LAZ-MD Holdings     Total
Lazard Group
Common
Membership
Interests
 
  Common
Membership
Interests
    %
Ownership
    Common
Membership
Interests
    %
Ownership
   

Balance, January 1, 2011

    119,697,936        94.0     7,652,625        6.0     127,350,561   

Activity January 1, 2011 to March 31, 2011:

         

Common membership interest activity in connection with:

         

Repurchase of common membership interests from LAZ-MD Holdings

             (19,032       (19,032
 

 

 

     

 

 

     

 

 

 

Balance, March 31, 2011

    119,697,936        94.0     7,633,593        6.0     127,331,529   
 

 

 

     

 

 

     

 

 

 

Balance, January 1, 2012

    123,009,311        94.8     6,756,779        5.2     129,766,090   

Activity January 1, 2012 to March 31, 2012:

         

Common membership interest activity in connection with:

         

Exchanges for Class A common stock

    85,196          (85,196         
 

 

 

     

 

 

     

 

 

 

Balance, March 31, 2012

    123,094,507        94.9     6,671,583        5.1     129,766,090   
 

 

 

     

 

 

     

 

 

 

The change in Lazard Ltd’s ownership in Lazard Group in the three month periods ended March 31, 2012 and 2011 did not materially impact Lazard Ltd’s stockholders’ equity.

The tables below summarize net income attributable to noncontrolling interests for the three month periods ended March 31, 2012 and 2011 and noncontrolling interests as of March 31, 2012 and December 31, 2011 in the Company’s condensed consolidated financial statements:

 

     Net Income
Attributable to Noncontrolling
Interests
 
   Three Months Ended
March 31,
 
     2012      2011  

LAZ-MD Holdings

   $ 1,325       $ 3,734   

Edgewater

     2,174         1,023   

Other

     5         219   
  

 

 

    

 

 

 

Total

   $ 3,504       $ 4,976   
  

 

 

    

 

 

 

 

     Noncontrolling Interests As Of  
     March 31,
2012
     December 31,

2011

 

LAZ-MD Holdings

   $ 33,612       $ 31,954   

Edgewater

     87,069         91,713   

Other

    
1,763
  
     17,046   
  

 

 

    

 

 

 

Total

   $ 122,444       $ 140,713   
  

 

 

    

 

 

 

 

25


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Dividend Declared, April, 2012—On April 24, 2012, the Board of Directors of Lazard Ltd declared a quarterly dividend of $0.20 per share on its Class A common stock, totaling $24,619, payable on May 25, 2012, to stockholders of record on May 4, 2012.

 

12. INCENTIVE PLANS

Share-Based Incentive Plan Awards

A description of Lazard Ltd’s 2005 Plan and 2008 Plan and activity with respect thereto during the three month periods ended March 31, 2012 and 2011 is presented below.

Shares Available Under the 2005 Plan and 2008 Plan

The 2005 Plan authorizes the issuance of up to 25,000,000 shares of Class A common stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock, stock units and other equity-based awards. Each stock unit granted under the 2005 Plan represents a contingent right to receive one share of Class A common stock, at no cost to the recipient. The fair value of such stock unit awards is generally determined based on the closing market price of Class A common stock on the day prior to the date of grant.

In addition to the shares available under the 2005 Plan, additional shares of Class A common stock are available under the 2008 Plan. The maximum number of shares available under the 2008 Plan is based on a formula that limits the aggregate number of shares that may, at any time, be subject to awards that are considered “outstanding” under the 2008 Plan to 30% of the then-outstanding shares of Class A common stock (treating, for this purpose, the then-outstanding exchangeable interests of LAZ-MD Holdings on a “fully-exchanged” basis as described in the 2008 Plan).

The following is a summary of the impact of share-based incentive plans on “compensation and benefits” expense within the Company’s condensed consolidated statements of operations:

 

      Three Months Ended
March 31,
 
     2012      2011  

Share-based incentive compensation:

     

RSUs

   $ 81,891       $ 84,858   

Deferred stock units (“DSUs”)

     70         56   

Restricted stock

     4,175         8,643   
  

 

 

    

 

 

 

Total

   $ 86,136       $ 93,557   
  

 

 

    

 

 

 

The Company’s incentive plans are described below.

Restricted and Deferred Stock Units

RSUs generally require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into Class A common stock on a one-for-one basis after the stipulated vesting periods. The grant date fair value of the

 

26


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods, and, for purposes of calculating diluted net income per share, RSUs are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method.

RSUs issued subsequent to December 31, 2005 generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any ordinary quarterly dividends paid on Class A common stock during such period. During the three month periods ended March 31, 2012 and 2011, issuances of RSUs pertaining to such dividend participation rights and respective charges to “retained earnings”, net of estimated forfeitures (with corresponding credits to “additional paid-in-capital”) consisted of the following:

 

      Three Months Ended
March 31,
 
     2012      2011  

Number of RSUs issued

     101,597         60,223   

Charges to retained earnings, net of estimated forfeitures

   $ 2,912       $ 2,409   

Non-executive members of the Board of Directors receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs. Their remaining compensation is payable in cash, which they may elect to receive in the form of additional DSUs under the Directors’ Fee Deferral Unit Plan described below. DSUs are convertible into Class A common stock at the time of cessation of service to the Board, and, for purposes of calculating diluted net income per share, are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method. DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock, and resulted in nominal cash payments for the three month periods ended March 31, 2012 and 2011.

On May 9, 2006, the Board of Directors adopted the Directors’ Fee Deferral Unit Plan, which allows the Company’s non-executive directors to elect to receive additional DSUs pursuant to the 2005 Plan in lieu of some or all of their cash fees. The number of DSUs that shall be granted to a non-executive director pursuant to this election will equal the value of cash fees that the applicable non-executive director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date on which the foregone cash fees would otherwise have been paid. During the three month periods ended March 31, 2012 and 2011, 2,522 and 1,249 DSUs, respectively, had been granted pursuant to such plan.

DSU awards are expensed at their fair value on their date of grant, inclusive of amounts related to the Directors’ Fee Deferral Unit Plan.

 

27


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following is a summary of activity relating to RSUs and DSUs during the three month periods ended March 31, 2012 and 2011:

 

    RSUs     DSUs  
    Units     Weighted
Average
Grant Date
Fair Value
    Units     Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2012

    20,751,829      $ 36.84        140,660      $ 34.83   

Granted (including 101,597 RSUs relating to dividend participation)

    7,147,059      $ 27.73        2,522      $ 27.89   

Forfeited

    (76,264   $ 33.14                 

Vested

    (3,270,375   $ 34.28                 
 

 

 

     

 

 

   

Balance, March 31, 2012

    24,552,249      $ 34.54        143,182      $ 34.71   
 

 

 

     

 

 

   

Balance, January 1, 2011

    22,108,635      $ 35.67        121,737      $ 34.46   

Granted (including 60,223 RSUs relating to dividend participation)

    6,038,286      $ 45.12        1,249      $ 45.55   

Forfeited

    (122,774   $ 38.24                 

Vested

    (6,678,444   $ 39.45                 
 

 

 

     

 

 

   

Balance, March 31, 2011

    21,345,703      $ 37.15        122,986      $ 34.57   
 

 

 

     

 

 

   

In connection with RSUs which vested during the three month periods ended March 31, 2012 and 2011, the Company satisfied certain employees’ tax obligations in lieu of issuing 802,810 and 1,947,471 shares of Class A common stock in the respective three month periods. Accordingly, 2,467,565 and 4,730,973 shares of Class A common stock held by Lazard Group were delivered during the three month periods ended March 31, 2012 and 2011, respectively.

As of March 31, 2012, unrecognized RSU compensation expense, adjusted for estimated forfeitures, was approximately $360,000, with such unrecognized compensation expense expected to be recognized over a weighted average period of approximately 1.6 years subsequent to March 31, 2012. The ultimate amount of such expense is dependent upon the actual number of RSUs that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described herein.

 

28


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Restricted Stock

The following is a summary of activity related to shares of restricted Class A common stock associated with compensation arrangements during the three month periods ended March 31, 2012 and 2011:

 

     Restricted
Shares
    Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2012

     95,332      $ 37.63   

Granted/Exchanged

     577,323      $ 29.25   

Vested/Converted

     (119,552   $ 28.54   
  

 

 

   

Balance, March 31, 2012

     553,103      $ 30.85   
  

 

 

   

Balance, January 1, 2011

     95,332      $ 37.63   

Granted

     183,422      $ 45.26   

Vested

     (183,422   $ 45.26   
  

 

 

   

Balance, March 31, 2011

     95,332      $ 37.63   
  

 

 

   

The Company satisfied certain employees’ tax obligations in lieu of delivering 25,661 and 25,220 shares of Class A common stock in connection with shares of restricted Class A common stock that vested during the three month periods ended March 31, 2012 and 2011, respectively. Accordingly, 93,891 and 158,202 shares of Class A common stock held by the Company were delivered during the respective three month periods.

The awards include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At March 31, 2012, unrecognized restricted stock expense was approximately $12,000, with such expense to be recognized over a weighted average period of approximately 2.1 years subsequent to March 31, 2012.

For purposes of calculating diluted net income per share, such awards are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method.

Lazard Fund Interests

As previously described, commencing in February 2011, the Company granted to eligible employees Lazard Fund Interests. In connection with the Lazard Fund Interests and other similar deferred compensation arrangements, which generally require future service as a condition for vesting, the Company recorded a prepaid compensation asset and a corresponding compensation liability on the grant date based upon the fair value of the award. The prepaid asset is amortized on a straight-line basis over the applicable vesting periods or requisite service periods, and is charged to “compensation and benefits” expense within the Company’s consolidated statement of operations. Lazard Fund Interests and similar deferred compensation arrangements that do not require future service are expensed immediately. The related compensation liability is accounted for at fair value as a derivative liability, and is adjusted for changes in fair value primarily related to the changes in the fair value of the underlying investments. Such changes in the fair value of the derivative liability are recorded to “compensation and benefits” expense within the Company’s consolidated statements of operations, the impact of which equally offsets the changes in fair value of the underlying investments owned, which is reported in “revenue-other” in the consolidated statement of operations (see Note 6 of Notes to Condensed Consolidated Financial Statements).

 

29


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following is a summary of activity relating to Lazard Fund Interests and other similar deferred compensation arrangements during the three month period ended March 31, 2012:

 

    Prepaid
Compensation
Asset
      Derivative  
Liability
 

Balance January 1, 2012

  $ 17,782      $ 29,900   

Granted

    64,598        64,598   

Settled

           (6,922

Amortization (including grants of awards to retirement-eligible recipients)

    (6,185       

Increase in fair value

           2,767   

Foreign currency translation and other adjustments

    162        (57
 

 

 

   

 

 

 

Balance, March 31, 2012

  $ 76,357      $ 90,286   
 

 

 

   

 

 

 

The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 2.4 years subsequent to March 31, 2012.

The following is a summary of the impact of Lazard Fund Interests and other similar deferred compensation arrangements on “compensation and benefits” expense within the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2012 and 2011:

 

     Three Months Ended
March  31,
 
     2012      2011  

Compensation expense:

     

Amortization (including grants of awards to retirement-eligible recipients)

   $ 6,185       $ 2,641   

Change in fair value of compensation liability

     2,767           
  

 

 

    

 

 

 

Total

   $ 8,952       $ 2,641   
  

 

 

    

 

 

 

 

13. EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined contribution and defined benefit pension plans and other post-retirement plans. These plans generally provide benefits to participants based on average levels of compensation. Expenses related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the consolidated statements of operations.

Employer Contributions to Pension Plans—The Company’s funding policy for its U.S. and non-U.S. pension plans is to fund when required or when applicable upon an agreement with the plans’ Trustees. Management also evaluates from time to time whether to make voluntary contributions to the plans. The Company made a contribution to the U.S. pension plans during the three month period ended March 31, 2012 of approximately $700.

 

30


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

In accordance with agreements reached with the Trustees of certain U.K. pension plans in 2005, the Company was obligated to make further contributions to such pension plans based upon the cumulative performance of the plans’ assets against specific benchmarks as measured on June 1, 2009 and subsequently remeasured on June 1, 2010. As of December 31, 2009, the obligation related to the cumulative underperformance of the plans’ assets (the “underperformance obligation”) was payable in equal monthly installments through May 2013. During the year ended December 31, 2010, the Company contributed approximately $8,600 to settle the plans’ underperformance obligation in full.

Further, on June 30, 2009, the Company and the Trustees concluded the December 31, 2007 triennial valuation of the U.K. pension plans discussed above, pursuant to which the Company agreed to annual future contributions to the plan through 2018. The agreement also required the Company to secure its obligations’ to the pension plans by placing in escrow 12.5 million British pounds (with the Company depositing such amount in escrow in July 2009), with a final redemption date of December 31, 2018. The terms of this agreement were subject to adjustment (see below) based on the results of the December 31, 2010 triennial valuation and subsequent triennial valuations.

During 2011, the Company and the Trustees of the U.K. pension plans referred to above commenced negotiations regarding the terms of the December 31, 2010 triennial valuations of the plans and potential future contributions to the plans. We currently anticipate that the valuations will be concluded during the second quarter of 2012. In addition, the Company and the Trustees agreed in principle on a tentative agreement that would supersede the June 2009 agreement described above and that provides pension funding terms whereby the Company: (i) made a contribution in December 2011 to the plans of 2.3 million British pounds ($3,687 at December 31, 2011 exchange rates) from the escrow account, (ii) will make contributions of 1 million British pounds during each year from 2012 through 2020 inclusive and (iii) will amend and extend the existing escrow arrangement into an account security arrangement covering 10.2 million British pounds from the existing escrow and additional contributions of 1 million British pounds into such account security arrangement during each year from 2014 through 2020, inclusive, with an agreement that assets from the account security arrangements will be released into the plans if and to the extent that the value of the plans’ assets falls short of the funding target for June 1, 2020 that has been agreed upon with the Trustees. The terms of the tentative agreement are subject to adjustment based on the results of subsequent triennial valuations. Additionally, the Company is discussing with the Trustees the extent to which the Company would contribute to the plans to cover their administrative expenses. The aggregate escrow balance at March 31, 2012 has been recorded in “cash deposited with clearing organizations and other segregated cash” on the accompanying condensed consolidated statement of financial condition. Income on the escrow balance accretes to the Company and is recorded in interest income.

During the three month period ended March 31, 2012, no contribution to these U.K. pension plans was required, and no contributions were required to be made to other non-U.S. pension plans.

 

31


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The following table summarizes the components of net benefit cost (credit) for the three month periods ended March 31, 2012 and 2011:

 

    Pension Plans     Post-Retirement
Medical Plans
 
    Three Months Ended March 31,  
    2012     2011     2012     2011  

Components of Net Benefit Cost (Credit):

       

Service cost

  $ 172      $ 163      $ 11      $ 15   

Interest cost

    6,902        7,067        53       
70
  

Expected return on plan assets

    (6,672     (7,622              

Amortization of:

       

Prior service cost

    701        740                 

Net actuarial loss

    411        63                 
 

 

 

   

 

 

   

 

 

   

 

 

 

Net benefit cost

  $ 1,514      $ 411      $ 64      $ 85   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

14. INCOME TAXES

As a result of its indirect investment in Lazard Group, Lazard Ltd, through certain of its subsidiaries, is subject to U.S. federal income taxes on its portion of Lazard Group’s operating income. Although a portion of Lazard Group’s income is subject to U.S. federal income taxes, Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income from its U.S. operations is generally not subject to U.S. federal income taxes because such income is attributable to its partners. In addition, Lazard Group is subject to New York City Unincorporated Business Tax (“UBT”) which is attributable to Lazard Group’s operations apportioned to New York City. UBT is incremental to the U.S. federal statutory tax rate. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes.

The Company recorded income tax provisions of $8,767 and $13,463 for the three month periods ended March 31, 2012 and 2011, respectively, representing effective tax rates of 23.2% and 18.3%, respectively. The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates reflected above principally relates to (i) Lazard Group primarily operating as a limited liability company in the U.S., (ii) foreign source income (loss) not subject to U.S. income taxes, (iii) Lazard Group’s income from U.S. operations attributable to noncontrolling interests and (iv) U.S. state and local taxes (primarily UBT), which are incremental to the U.S. federal statutory tax rate.

Substantially all of Lazard’s foreign operations are conducted in “pass-through” entities for U.S. income tax purposes and the Company provides for U.S. income taxes on a current basis for substantially all of those earnings. The repatriation of prior earnings attributable to “non-pass-through” entities would not result in the recognition of a material amount of additional U.S. income taxes.

Tax Receivable Agreement

The redemption of historical partner interests in connection with the Company’s separation and recapitalization that occurred in May 2005 and subsequent exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock have resulted, and future exchanges of LAZ-MD Holdings exchangeable interests for shares of

 

32


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Class A common stock may result, in increases in the tax basis of the tangible and/or intangible assets of Lazard Group. The tax receivable agreement dated as of May 10, 2005 with LFCM Holdings LLC (“LFCM Holdings”) requires the Company to pay LFCM Holdings 85% of the cash savings, if any, in U.S. federal, state and local income tax or franchise tax that the Company actually realizes as a result of the above-mentioned increases in tax basis. The Company calculates this provision annually and includes such amounts in operating expenses on its consolidated statements of operations once the results of operations for the full year are known. As a result, there is no provision for such payments in the three month periods ended March 31, 2012 and 2011. If any provision is required pursuant to the tax receivable agreement, such amount would be fully offset by a reduction in the Company’s income tax expense.

 

15. NET INCOME PER SHARE OF CLASS A COMMON STOCK

The Company’s basic and diluted net income per share calculations for the three month periods ended March 31, 2012 and 2011 are computed as described below.

Basic Net Income Per Share

Numerator—utilizes net income attributable to Lazard Ltd for the respective years, plus applicable adjustments to such net income associated with the inclusion of shares of Class A common stock issuable on a non-contingent basis.

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the respective years, plus applicable adjustments to such shares associated with shares of Class A common stock issuable on a non-contingent basis.

Diluted Net Income Per Share

Numerator—utilizes net income attributable to Lazard Ltd for the respective years as in the basic net income per share calculation described above, plus, to the extent applicable and dilutive, (i) interest expense on convertible debt, (ii) changes in net income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation, convertible debt and convertible preferred stock and, on an “as-if-exchanged” basis, amounts applicable to LAZ-MD Holdings exchangeable interests and (iii) income tax related to (i) and (ii) above.

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the respective years as in the basic net income per share calculation described above, plus, to the extent dilutive, the incremental number of shares of Class A common stock to settle share-based incentive compensation, convertible debt, convertible preferred stock and LAZ-MD Holdings exchangeable interests, using the “treasury stock” method, the “if converted” method or the “as-if-exchanged” basis, as applicable.

 

33


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

The calculations of the Company’s basic and diluted net income per share and weighted average shares outstanding for the three month periods ended March 31, 2012 and 2011 are presented below:

 

    Three Months Ended
March 31,
 
    2012     2011  

Net income attributable to Lazard Ltd

    $25,552        $55,007   

Add (deduct) - adjustment associated with Class A common stock issuable on a non-contingent basis

    –          97   
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - basic

    25,552        55,104   

Add - dilutive effect, as applicable, of:

   

Adjustments to income relating to interest expense and changes in net income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation, convertible debt in 2011, convertible preferred stock and exchangeable interests, net of tax

    1,190        4,424   
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - diluted

    $ 26,742        $59,528   
 

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding

    118,679,859        111,681,448   

Add - adjustment for shares of Class A common stock issuable on a non-contingent basis

    549,682        3,653,306   
 

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding - basic

    119,229,541        115,334,754   

Add - dilutive effect, as applicable, of:

   

Weighted average number of incremental shares of Class A common stock issuable from share-based incentive compensation, convertible debt in 2011, convertible preferred stock and exchangeable interests

    17,364,637        23,255,839   
 

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding - diluted

    136,594,178        138,590,593   
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd per share of Class A common stock:

   

Basic

    $0.21        $0.48   
 

 

 

   

 

 

 

Diluted

    $0.20        $0.43   
 

 

 

   

 

 

 

 

16. RELATED PARTIES

Amounts receivable from, and payable to, related parties are set forth below:

 

     March 31,
2012
     December 31,
2011
 

Receivables

     

LFCM Holdings

   $
11,393
  
   $ 14,790   

Other

    
3,839
  
     3,711   
  

 

 

    

 

 

 

Total

   $
15,232
  
   $ 18,501   
  

 

 

    

 

 

 

Payables

     

LFCM Holdings

   $ 10,043       $ 4,850   

Other

     945         1,225   
  

 

 

    

 

 

 

Total

   $
10,988
  
   $ 6,075   
  

 

 

    

 

 

 

 

34


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

LFCM Holdings

LFCM Holdings owns and operates the capital markets business and fund management activities, as well as other specified non-operating assets and liabilities, that were transferred to it by Lazard Group (referred to as the “separated businesses”) in May 2005 and is owned by various current and former working members, including certain of Lazard’s current and former managing directors (which also include certain of the Company’s executive officers) who were or are also members of LAZ-MD Holdings. In addition to the master separation agreement dated as of May 10, 2005, by and among Lazard Ltd, Lazard Group, LAZ-MD Holdings and LFCM Holdings (the “master separation agreement”), which effected the separation and recapitalization that occurred in May 2005, LFCM Holdings entered into certain agreements that addressed various business matters associated with the separation, including agreements related to administrative and support services (the “administrative services agreement”), employee benefits, insurance matters and licensing. In addition, LFCM Holdings and Lazard Group entered into a business alliance agreement (the “business alliance agreement”). Certain of these agreements are described in more detail in the Company’s Form 10-K.

For the three month periods ended March 31, 2012 and 2011, amounts recorded by Lazard Group relating to the administrative services agreement amounted to $813 and $614, respectively, and net referral fees for underwriting, private placement, M&A and restructuring transactions under the business alliance agreement amounted to $814 and $6,947, respectively. Amounts relating to the administrative services agreement are reported as reductions to operating expenses. Net referral fees for underwriting transactions under the business alliance agreement are reported in “revenue-other”. Net referral fees for private placement, M&A and restructuring transactions under the business alliance agreement are reported in advisory fee revenue.

Receivables from LFCM Holdings and its subsidiaries as of March 31, 2012 and December 31, 2011 primarily include $4,632 and $10,722, respectively, related to administrative and support services, sublease income and reimbursement of expenses incurred on behalf of LFCM Holdings, and $6,606 and $2,928, respectively, related to referral fees for underwriting and private placement transactions. Payables to LFCM Holdings and its subsidiaries at March 31, 2012 and December 31, 2011 consist of $7,253 and $2,060, respectively, principally relating to certain advances and referral fees for Financial Advisory transactions and obligations pursuant to the tax receivable agreement of $2,790 at each respective date (see Note 14 of Notes to Condensed Consolidated Financial Statements).

Other

Other receivables and payables at March 31, 2012 and December 31, 2011 primarily relate to referral fees for restructuring and M&A transactions with MBA Lazard Holdings S.A. and its subsidiaries and a related party loan.

LAZ-MD Holdings

Lazard Group provides selected administrative and support services to LAZ-MD Holdings through the administrative services agreement as discussed above, with such services generally to be provided until December 31, 2014 unless terminated earlier because of a change in control of either party. Lazard Group charges LAZ-MD Holdings for these services based on Lazard Group’s cost allocation methodology and, for the three month periods ended March 31, 2012 and 2011, such charges amounted to $188 for each period.

 

35


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

17. REGULATORY AUTHORITIES

LFNY is a U.S. registered broker-dealer and is subject to the net capital requirements of Rule 15c3-1 under the Exchange Act. Under the basic method permitted by this rule, the minimum required net capital, as defined, is a specified fixed percentage of total aggregate indebtedness recorded in LFNY’s Financial and Operational Combined Uniform Single (“FOCUS”) report filed with the Financial Industry Regulatory Authority (“FINRA”), or $100, whichever is greater. At March 31, 2012, LFNY’s regulatory net capital was $81,766, which exceeded the minimum requirement by $77,549.

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (the “U.K. Subsidiaries”) are regulated by the Financial Services Authority. At March 31, 2012, the aggregate regulatory net capital of the U.K. Subsidiaries was $155,827, which exceeded the minimum requirement by $131,663.

CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the Autorité de Contrôle Prudentiel for its banking activities conducted through its subsidiary, LFB. In addition, the investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), are subject to regulation and supervision by the Autorité des Marchés Financiers. At March 31, 2012, the consolidated regulatory net capital of CFLF was $178,345, which exceeded the minimum requirement set for regulatory capital levels by $80,612.

Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At March 31, 2012, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $108,515, which exceeded the minimum required capital by an aggregate of $85,762.

At March 31, 2012, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

Lazard Ltd had been subject to supervision by the SEC as a Supervised Investment Bank Holding Company (“SIBHC”). As a SIBHC, Lazard Ltd was subject to group-wide supervision, which required it to compute allowable capital and risk allowances on a consolidated basis. However, pursuant to Section 617 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the SEC’s SIBHC program was eliminated on July 21, 2011. Pursuant to relevant rules in the European Union, Lazard Ltd is required to be supervised by another regulatory body, either in the U.S. or the European Union. The Dodd-Frank Act allows certain securities holding companies seeking consolidated supervision, including Lazard Ltd, to elect to be supervised by the Board of Governors of the Federal Reserve. Lazard Ltd anticipates that the Board of

Governors of the Federal Reserve will adopt regulations pursuant to Section 618 of the Dodd-Frank Act in the near future for companies that seek to come under its consolidated supervision. Once it analyzes the final scope of such regulations, Lazard Ltd will determine whether it will elect to register to come under the consolidated supervision of the Federal Reserve. Until such regulations are adopted, however, we cannot determine the full impact of such regulations on us. The Dodd-Frank Act and the rules and regulations that may be adopted thereunder (including regulations that have not yet been proposed) could have other effects on us. We continue to monitor the process as such rules are proposed and adopted.

 

36


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

18. SEGMENT INFORMATION

The Company’s reportable segments offer different products and services and are managed separately as different levels and types of expertise are required to effectively manage the segments’ transactions. Each segment is reviewed to determine the allocation of resources and to assess its performance. The Company’s principal operating activities are included in two business segments as described in Note 1 above - Financial Advisory and Asset Management. In addition, as described in Note 1 above, the Company records selected other activities in its Corporate segment.

The Company’s segment information for the three month periods ended March 31, 2012 and 2011 is prepared using the following methodology:

 

   

Revenue and expenses directly associated with each segment are included in determining operating income.

 

   

Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including revenue, headcount, square footage and other factors.

 

   

Segment assets are based on those directly associated with each segment, and include an allocation of certain assets relating to various segments, based on the most relevant measures applicable, including headcount, square footage and other factors.

The Company allocates investment gains and losses, interest income and interest expense among the various segments based on the segment in which the underlying asset or liability is reported.

Each segment’s operating expenses include (i) compensation and benefits expenses incurred directly in support of the businesses 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 outsourced services and indirect support costs (including compensation and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, legal, facilities management and senior management activities.

 

37


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, except for per share data, unless otherwise noted)

 

Management evaluates segment results based on net revenue and operating income (loss) and believes that the following information provides a reasonable representation of each segment’s contribution with respect to net revenue, operating income (loss) and total assets:

 

          Three Months Ended
March 31,
 
          2012     2011  

Financial Advisory

   Net Revenue    $ 277,196      $ 228,845   
   Operating Expenses      249,897        213,566   
     

 

 

   

 

 

 
   Operating Income    $ 27,299      $ 15,279   
     

 

 

   

 

 

 

Asset Management

   Net Revenue    $ 214,527      $ 226,853   
   Operating Expenses      160,501        149,204   
     

 

 

   

 

 

 
   Operating Income    $ 54,026      $ 77,649   
     

 

 

   

 

 

 

Corporate

   Net Revenue    $ (5,684   $ (17,675
   Operating Expenses      37,818        1,807   
     

 

 

   

 

 

 
   Operating Loss    $ (43,502   $ (19,482
     

 

 

   

 

 

 

Total

   Net Revenue    $ 486,039      $ 438,023   
   Operating Expenses      448,216        364,577   
     

 

 

   

 

 

 
   Operating Income    $ 37,823      $ 73,446   
     

 

 

   

 

 

 

 

     As Of  
     March 31,
2012
     December 31,
2011
 

Total Assets

     

Financial Advisory

   $ 797,733       $ 767,699   

Asset Management

     534,558         583,524   

Corporate

     1,575,707         1,730,713   
  

 

 

    

 

 

 

Total

   $ 2,907,998       $ 3,081,936   
  

 

 

    

 

 

 

 

38


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Lazard 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 ended December 31, 2011 (the “Form 10-K”). All references to “2012”, “2011”, “first quarter” or “the period” refer to, as the context requires, the three month periods ended March 31, 2012 and March 31, 2011.

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,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” 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 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 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 financial markets,

 

   

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 our employees.

These risks and uncertainties are not exhaustive. Other sections of the Form 10-K may include additional factors, which could adversely impact 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 to 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 the:

 

   

business’ possible or assumed future results of operations and operating cash flows,

 

   

business’ strategies and investment policies,

 

   

business’ financing plans and the availability of short-term borrowing,

 

   

business’ competitive position,

 

   

future acquisitions, including the consideration to be paid and the timing of consummation,

 

   

potential growth opportunities available to our businesses,

 

39


Table of Contents
   

recruitment and retention of our managing directors and employees,

 

   

potential levels of compensation expense,

 

   

business’ potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts,

 

   

likelihood of success and impact of litigation,

 

   

expected tax rates,

 

   

changes in interest and tax rates,

 

   

expectations with respect to the economy, securities markets, the market for mergers, acquisitions and strategic advisory and restructuring activity, the market for asset management activity and other industry trends,

 

   

effects of competition on our business, and

 

   

impact of future legislation and regulation 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 websites 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 assets under management (“AUM”) in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC (“LAM”) and its subsidiaries. Monthly updates of these funds are posted to the LAM website (www.lazardnet.com) on the third business day following the end of each month. Investors can link to Lazard Ltd, Lazard Group and their operating company websites through http://www.lazard.com. Our websites and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-Q.

Business Summary

Lazard is a preeminent financial advisory and asset management firm. 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 in New Orleans, we currently operate from 42 cities in key business and financial centers across 27 countries throughout Europe, North America, Asia, Australia, the Middle East and Central and South America.

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”) and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and

 

   

Asset Management, which includes strategies for the management of equity and fixed income securities and alternative investment and private equity funds, as well as wealth management.

In addition, we record selected other activities in our Corporate segment, including management of cash, certain investments and the commercial banking activities of Lazard Group’s Paris-based Lazard Frères Banque SA (“LFB”). We also allocate outstanding indebtedness to our Corporate segment.

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel. It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, asset-liability management and limited trading in securities and foreign exchange.

 

40


Table of Contents

Our consolidated net revenue was derived from the following segments:

 

     Three Months Ended
March 31,
 
          2012                     2011        

Financial Advisory

          57             52

Asset Management

    44          52   

Corporate

    (1       (4
 

 

 

     

 

 

 

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 investments through (i) the Edgewater Funds (“Edgewater”), our Chicago-based private equity firm, (ii) Lazard Australia Corporate Opportunities Fund 2, which has an opportunistic investment strategy focused on the Australian mid-market, (iii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies, (iv) Corporate Partners II Limited (“CP II”), a private equity fund targeting significant non-controlling investments in established public and private companies and (v) Lazard Senior Housing Partners LP (“Senior Housing”), which acquires companies and assets in the senior housing, extended stay and shopping center sectors. We continue to explore and discuss opportunities to expand the scope of our alternative investment and private equity activities in Europe, the U.S. and elsewhere. These opportunities could include internal growth of new funds and direct investments by us, partnerships or strategic relationships, investments with third parties or acquisitions of existing funds or management companies. Also, consistent with our obligations to LFCM Holdings LLC (“LFCM Holdings”), we may explore discrete capital markets opportunities.

Business Environment

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 for the most part 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.

Overall, global equity market indices at March 31, 2012 increased when compared to such indices at December 31, 2011. For the same period, capital-raising and M&A activity has generally declined. The announced and completed value of M&A activity decreased in the first quarter of 2012 as compared to the corresponding period in 2011. The cyclical decline in restructuring volume continued in the first quarter of 2012, as compared to the corresponding period in 2011, despite an increase in the number of corporate defaults.

In early 2012, the outlook for equity and credit markets appears healthier, interest rates remain low while corporate cash balances remain high, CEO confidence appears to be improving and, as such, companies may be better positioned to make acquisitions for future growth and investors may be increasingly interested in deploying capital for investment purposes. Uncertainty remains, however, with regard to the stability of the global financial system and a variety of other factors.

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 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. We seek to leverage the power and scale of our firm-wide global

 

41


Table of Contents

network to drive growth in both our Financial Advisory and Asset Management business segments. We believe that we are well positioned to benefit from opportunities that may result from regional or global increases in M&A, restructuring, capital-raising or similar transactions, as well as increases in demand for investment management and advisory services. We continue to focus on the development of our business in this environment and on a wide variety of related factors, including the generation of stable revenue growth during periods of macroeconomic volatility, the prudent management of our costs and expenses and the return of cash to our shareholders.

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 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 the section entitled “Risk Factors” in 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.

Financial Advisory

Global and Trans-Atlantic completed and announced transactions for the first quarter of 2012 decreased as compared to the first quarter of 2011, as shown in the following table, which sets forth industry statistics regarding the number and value of such transactions in the respective periods:

 

      Three Months Ended
March 31,
     %
Incr /  (Decr)
 
      2012      2011     
    

($ in billions)

        

Completed M&A Transactions:

        

Global:

        

Value

   $ 352       $ 597         (41 )% 

Number

     6,408         8,033         (20 )% 

Trans-Atlantic:

        

Value

   $ 21       $ 25         (16 )% 

Number

     243         339         (28 )% 

Announced M&A Transactions:

        

Global:

        

Value

   $ 446       $ 615         (27 )% 

Number

     8,559         10,611         (19 )% 

Trans-Atlantic:

        

Value

   $ 41       $ 48         (15 )% 

Number

     287         387         (26 )% 

 

Source: Dealogic as of April 11, 2012.

Global restructuring activity during the first quarter of 2012, as measured by the value of debt defaults, decreased from the corresponding period in 2011. However, the number of issuers defaulting increased to 20 in the first quarter of 2012, according to Moody’s Investors Service, Inc., as compared to 9 in the corresponding period of 2011. Our Restructuring activities include advising companies on matters relating to debt restructurings, refinancings and other on- and off-balance sheet assignments, and our assignments are generally executed over a six- to eighteen-month period.

Our Private Fund Advisory Group, which is part of our Financial Advisory segment and is conducted in the U.S. through Lazard Frères & Co. LLC (“LFNY”), an SEC-registered broker-dealer and municipal advisor and member of the Financial Industry Regulatory Authority (“FINRA”) and the Municipal Securities Rulemaking

 

42


Table of Contents

Board (the “MSRB”), acts as placement agent for investment funds, including investment funds that have historically received capital from certain public pension funds. In April 2009, governmental officials in New York announced a new policy banning the use of placement agents by funds seeking investment contributions from the New York State and New York City public pension funds. The use of placement agents has also been prohibited or otherwise restricted with respect to investments by public pension funds in Illinois, Ohio, California and New Mexico, and similar measures are being considered or have been implemented in other jurisdictions. On June 22, 2011, the SEC approved an amendment to its June 30, 2010 rule which, among other things, will place certain restrictions on the use of placement agents. As amended, the SEC rule will prohibit investment advisors from paying a third-party placement agent for soliciting investment advisory business from a U.S. governmental entity, unless the placement agent is (i) an SEC-registered investment advisor complying with the rule, (ii) an SEC-registered broker-dealer that is a member of FINRA and thus subject to FINRA’s forthcoming “pay-to-play” rule, or (iii) a “municipal advisor” that is registered with the SEC under Section 15B of the Securities Exchange Act of 1934, as amended, and subject to the “pay-to-play” rules that will be adopted by the MSRB. We are continuing to evaluate the potential impact of state, local and other restrictions on our Private Fund Advisory business.

Asset Management

As shown in the table below, major equity market indices at March 31, 2012 increased across all regions, when compared to such indices at December 31, 2011. However, the U.S. markets increased, while markets outside the U.S. decreased, when comparing market indices at March 31, 2012 to the corresponding equity market indices at March 31, 2011.

 

      Percentage Changes
March 31, 2012 vs.
 
     December 31,
2011
    March 31,
2011
 

MSCI World Index

     10     (2 )% 

CAC 40

     8     (14 )% 

DAX

     18     (1 )% 

FTSE 100

     3     (3 )% 

TOPIX 100

     20     (4 )% 

MSCI Emerging Market

     13     (12 )% 

Dow Jones Industrial Average

     8     7

NASDAQ

     19     11

S&P 500

     12     6

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM. Accordingly, since market movements and foreign currency volatility impact the level of our AUM, such items will impact the level of revenues we receive from our Asset Management business. A substantial portion of our AUM is invested in equities, and market movements reflected in the changes in Lazard’s AUM during the period generally reflect the changes in global market indices. Our AUM at March 31, 2012 increased 11% versus AUM at December 31, 2011 (primarily reflecting market appreciation), while our average AUM for the first quarter of 2012 decreased 5% as compared to our average AUM for the corresponding period of 2011. The lower levels of average AUM contributed to decreased management fee revenues in the 2012 period when compared to the corresponding period in 2011.

Financial Statement Overview

Net Revenue

The majority of Lazard’s Financial Advisory net revenue is earned from the successful completion of M&A transactions, strategic advisory matters, restructuring and capital structure advisory services, capital raising and similar transactions. The main drivers of Financial Advisory net revenue are overall M&A activity, the level of corporate debt

 

43


Table of Contents

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 and for referring opportunities to LFCM Holdings for underwriting, distribution and placement of securities. The referral fees received from LFCM Holdings are generally one-half of the revenue recorded by LFCM Holdings in respect of such activities. 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, Edgewater and Lazard Wealth Management. Asset Management net revenue is derived from fees for investment management and advisory services provided to institutional and private clients. As noted above, the main driver of Asset Management net revenue is the level of AUM, which is generally influenced by the performance of the global equity markets and, to a lesser extent, fixed income markets and 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, net client asset flows or otherwise, 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 than U.S. Dollars, changes in the value of the U.S. Dollar relative to foreign currencies will impact the value of Lazard’s AUM. Fees vary with the type of assets managed and the vehicle in which they are managed, with higher fees earned on equity assets, alternative investments (such as hedge funds) and private equity investments, 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 during the year), and therefore such incentive fees are usually recorded in the fourth quarter of Lazard’s fiscal year. These incentive fees received at the end of the measurement period are not subject to reversal or payback. Incentive fees on hedge funds generally are subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain future period net appreciation 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 interests 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” in LAM equity and fixed income funds and principal investments in equities and alternative asset

 

44


Table of Contents

management funds, investments at LFB and “equity method” investments (including gains and losses on the extinguishment of debt (to the extent applicable), interest income and interest expense). Corporate net revenue also can fluctuate due to changes in the fair value of investments classified as “trading”, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness. The Company holds no “available-for-sale” or “held-to-maturity” investments.

Although Corporate segment net revenue during the first quarter of 2012 represented (1)% of Lazard’s net revenue, total assets in the Corporate segment represented 54% of Lazard’s consolidated total assets as of March 31, 2012, which is attributable to investments in government bonds and money market funds, fixed income funds, alternative asset management funds and other securities, private equity investments, cash and 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 (see Note 12 of Notes to Condensed Consolidated Financial Statements) including (a) share-based incentive compensation under the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”) and the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and (b) Lazard Fund Interests and (iii) a provision for discretionary or guaranteed cash bonuses and profit pools. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our operating and financial performance, staffing levels, 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-U.S. GAAP measures, for comparison of compensation and benefits expense between periods. For the calculations with respect to “adjusted compensation and benefits expense” and the ratio of “adjusted compensation and benefits expense” to “operating revenue,” see the table under “Consolidated Results of Operations” below.

We believe that “awarded compensation and benefits expense” and the ratio of “awarded compensation and benefits expense” to “operating revenue,” both non-U.S. GAAP measures, 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,” as modified by the following items:

 

   

We deduct amortization expense recorded for U.S. GAAP purposes in each fiscal year associated with the vesting of deferred incentive compensation awards,

 

   

We add (i) the grant date fair value of the deferred incentive compensation awards granted applicable to the relevant year-end compensation process (e.g. grant date fair value of deferred incentive awards granted in 2012, 2011 and 2010 related to the 2011, 2010 and 2009 year-end compensation processes, respectively) and (ii) investments in people (e.g. “sign-on” bonuses) and other special deferred incentive awards granted throughout the applicable year, with such amounts in (i) and (ii) reduced by an estimate of future forfeitures of such awards, and

 

   

We adjust for year-end foreign exchange fluctuations.

Lazard’s 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), and amortization of intangible assets related to acquisitions. Amortization of intangible assets relates primarily to the acquisition of Edgewater.

 

45


Table of Contents

Provision for Income Taxes

As a result of its indirect investment in Lazard Group, Lazard Ltd, through certain of its subsidiaries, is subject to U.S. federal income taxes on its portion of Lazard Group’s operating income. Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income pertaining to the limited liability company is not subject to U.S. federal income taxes because taxes associated with such income represent obligations of the individual partners. Outside the U.S., Lazard Group operates principally through corporations and is subject to local income taxes. Income taxes shown on Lazard’s consolidated statements of operations are principally related to non-U.S. entities and to New York City Unincorporated Business Tax (“UBT”) attributable to Lazard’s operations apportioned to New York City.

Noncontrolling Interests

Noncontrolling interests primarily relate to the amount attributable to LAZ-MD Holdings’ ownership interest in the net income of Lazard Group and amounts related to Edgewater’s management vehicles that the Company is deemed to control but not own. See Note 11 of Notes to Condensed Consolidated Financial Statements for information regarding the Company’s noncontrolling interests.

Consolidated Results of Operations

Lazard’s consolidated financial statements are presented in U.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 the U.S. Dollar, generally the currency of the country in which the subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.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 members’/stockholders’ equity. Foreign currency remeasurement gains and losses on transactions in non-functional currencies are included in the consolidated statements of operations.

The condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Selected financial data 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,
 
      2012         2011      
    

($ in thousands)

 

Net Revenue

   $ 486,039      $ 438,023   
  

 

 

   

 

 

 

Operating Expenses:

    

Compensation and benefits

     338,317        269,999   

Non-compensation

     108,781        93,104   

Amortization of intangible assets related to acquisitions

     1,118        1,474   
  

 

 

   

 

 

 

Total operating expenses

     448,216        364,577   
  

 

 

   

 

 

 

Operating Income

     37,823        73,446   

Provision for income taxes

     8,767        13,463   
  

 

 

   

 

 

 

Net Income

     29,056        59,983   

Less – Net Income Attributable to Noncontrolling Interests

     3,504        4,976   
  

 

 

   

 

 

 

Net Income Attributable to Lazard Ltd

   $ 25,552      $ 55,007   
  

 

 

   

 

 

 

Operating Income, As A % Of Net Revenue

     8     17
  

 

 

   

 

 

 

 

46


Table of Contents

The tables below describe the components of operating revenue, adjusted compensation and benefits expense and related key ratios, which include non-U.S. GAAP measures used by the Company to manage total compensation and benefits expense. We believe such non-U.S. GAAP measures provide the most meaningful basis for comparison between present, historical and future periods, as described above.

 

     Three Months Ended
March  31,
 
     2012     2011  
    

($ in thousands)

 

Operating Revenue

    

Total revenue

   $ 506,461      $ 461,341   

Add (deduct):

    

LFB interest expense (a)

     (506     (1,064

Revenue related to noncontrolling interests (b)

     (4,439     (3,426

Changes in fair value pertaining to Lazard Fund Interests (c)

     (2,767       
  

 

 

   

 

 

 

Operating revenue

   $ 498,749      $ 456,851   
  

 

 

   

 

 

 

 

(a) Interest expense incurred by LFB is reported as a charge in determining operating revenue because LFB is a commercial bank and we consider its interest expense to be a cost directly related to the revenues of its business.
(b) Revenue related to the consolidation of noncontrolling interests is excluded because the Company has no economic interest in such amount.
(c) Changes in the fair value of investments held in connection with Lazard Fund Interests and other similar deferred compensation arrangements are excluded because they are equally offset by the change in value of the derivative liability pertaining to such awards, which is recorded within compensation and benefits expense.

 

     Three Months Ended 
March 31,
 
     2012     2011  
     ($ in thousands)  

Adjusted Compensation and Benefits Expense

    

Total compensation and benefits expense

   $ 338,317      $ 269,999   

Deduct:

    

Noncontrolling interests (a)

     (1,080)        (1,078)   

Changes in fair value pertaining to Lazard Fund Interests (b)

     (2,767)          

Costs related to staff reductions (c)

     (21,754)          
  

 

 

   

 

 

 

Adjusted compensation and benefits expense

   $ 312,716      $ 268,921   
  

 

 

   

 

 

 

Adjusted compensation and benefits expense, as a % of Operating Revenue

     62.7     58.9
  

 

 

   

 

 

 

 

(a) Expenses related to the consolidation of noncontrolling interests are excluded because, as is the case with operating revenue, Lazard has no economic interest in such amounts.
(b) Changes in fair value of the derivative compensation liability recorded in connection with Lazard Fund Interests and other similar deferred compensation arrangements are excluded because such amounts are equally offset by a corresponding change in the fair value of the underlying investments excluded from operating revenue.
(c) Severance costs and benefit payments associated with staff reductions, including the acceleration of unrecognized amortization expense of deferred incentive compensation previously granted to individuals being terminated, are excluded to enhance comparability of adjusted compensation and benefits expense relative to operating revenue between present, historical and future periods.

 

47


Table of Contents

Certain additional key ratios and headcount information are set forth below:

 

         Three Months Ended
March  31,
               2012               2011      

As a % of Net Revenue, by Revenue Category:

          

Investment banking and other advisory fees

         56 %               50 %

Money management fees

         42         49  

Interest income

         1         1  

Other

         5         5  

Interest expense

         (4 )       (5 )
        

 

 

     

 

 

 

Net Revenue

         100 %               100 %
        

 

 

     

 

 

 

 

         As Of
         March 31,
2012
   December 31,
2011
   March 31,
2011

Headcount:

                

Managing Directors:

                

Financial Advisory

         149          140          140  

Asset Management

         79          71          68  

Corporate

         13          11          11  

Other Employees:

                

Business segment professionals

         1,085          1,092          999  

All other professionals and support staff

         1,204          1,197          1,136  
        

 

 

      

 

 

      

 

 

 

Total

         2,530          2,511          2,354  
        

 

 

      

 

 

      

 

 

 

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 March 31, 2012 versus March 31, 2011

The Company reported net income attributable to Lazard Ltd in the 2012 period of $26 million, as compared to net income of $55 million in the 2011 period. The changes in the Company’s operating results during these periods are described below.

Net revenue in the 2012 period increased by $48 million, or 11%, with operating revenue increasing by $42 million, or 9%, respectively, as compared to the 2011 period. Fees from investment banking and other advisory activities increased $53 million, or 24%, primarily reflecting the closing of several significant restructuring, M&A and sovereign and government advisory transactions during the 2012 period, as well as the strong performance of Lazard Middle Market. The number of M&A transactions with fees greater than $1 million also increased as compared to the 2011 period. Restructuring fee revenues in the 2012 period increased $35 million, or 97%, driven primarily by a higher number of closings and increased average fees for assignments with completion fees greater than $1 million. Total Strategic Advisory fees in the 2012 period increased $14 million, or 7%. Money management fees decreased $10 million, or 5%, during the 2012 period primarily due to an $8 billion, or 5%, decrease in average AUM, on which management fees are earned. In the aggregate, interest income, other revenue and interest expense reflected an increase in net revenue of $5 million as compared to the corresponding period in 2011.

 

48


Table of Contents

Compensation and benefits expense in the 2012 period was $338 million, as compared to $270 million in the corresponding prior year period. Factors contributing to the increase included higher compensation costs relating to the growth in operating revenue and a $22 million charge associated with staff reductions, representing severance costs and benefit payments, including $7 million relating to the acceleration of unrecognized amortization expense of deferred incentive compensation previously granted to individuals being terminated, as well as increased headcount. Adjusted compensation and benefits expense (which excludes certain items that management believes allows for improved comparability between interim periods, and which is described more thoroughly above), was $313 million in the 2012 period, an increase of $44 million, or 16%, when compared to $269 million in the 2011 period. The resulting ratio of adjusted compensation and benefits expense to operating revenue was 62.7% for the 2012 period, which compares to 58.9% and 62.0% for the first quarter and full year of 2011, respectively. The first quarter 2012 ratio of adjusted compensation and benefits expense to operating revenue assumed, based on current market conditions, a ratio of awarded compensation and benefits expense to operating revenue of approximately 60% for the full year of 2012, as compared to 61.7% for the full year of 2011. 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.

We currently expect that the amortization of deferred incentive compensation awards will approximate $341 million for the full year of 2012, compared to $289 million for the comparable 2011 period, when excluding the $7 million charge in 2012 related to staff reductions. The increase of $52 million is primarily related to the amortization of the 2008 plan year deferred incentive compensation awards (the “2008 grant”). The 2008 grant is the last grant with a vesting period in excess of three years. Our amortization expense is higher in 2012, compared to 2011, in part because of the overlapping vesting periods, but is expected to revert to a lower level in 2013.

Non-compensation expense in the 2012 period was $109 million, an increase of $16 million, or 17%, as compared to $93 million in the corresponding period in 2011. Non-compensation expense in the first quarter of 2012 included charges totaling $3 million associated with the staff reductions. When excluding such charges, as well as non-compensation costs relating to noncontrolling interests, non-compensation expense in the first quarter of 2012 increased $12 million, or 13%, primarily attributable to (i) deal-related costs, specific to transactions that closed in the 2012 period, (ii) generally higher levels of business development expenses in our Financial Advisory business and (iii) higher occupancy costs in the 2012 period as a result of our amended lease and associated build-out costs of our Rockefeller Center facility. The ratio of non-compensation expense to operating revenue was 21.1% in the 2012 period versus 20.3% for the corresponding period in 2011. We currently estimate that, on a full year basis in 2012 as compared to 2011, our occupancy-related costs associated with the amended lease at our Rockefeller Center facility will increase by approximately $11 million.

Amortization of intangible assets remained substantially unchanged as compared to the 2011 period.

Operating income in the 2012 period was $38 million, a decrease of $35 million, or 49%, as compared to operating income of $73 million in the 2011 period, and, as a percentage of net revenue, was 8% as compared to 17% in the 2011 period.

The provision for income taxes was $9 million and $13 million for the 2012 and 2011 periods, respectively, representing effective tax rates of 23.2% and 18.3% for the respective periods.

Net income attributable to noncontrolling interests was $4 million and $5 million in the 2012 and 2011 periods, respectively. The decrease of $1 million principally reflects LAZ-MD Holdings’ reduced ownership interest in Lazard Group in the 2012 period, partially offset by an increase in the noncontrolling interest relating to Edgewater in the 2012 period.

 

49


Table of Contents

Business Segments

The following is a discussion of net revenue and operating income for the Company’s business 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, legal, 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 tables summarize the reported operating results of the Financial Advisory segment:

 

     Three Months Ended
March 31,
 
     2012     2011  
     ($ in thousands)  

M&A and Strategic Advisory

   $ 192,611      $ 163,752   

Capital Markets and Other Advisory

     14,370        29,536   
  

 

 

   

 

 

 

Total Strategic Advisory

     206,981        193,288   

Restructuring

     70,215        35,557   
  

 

 

   

 

 

 

Net Revenue

     277,196        228,845   

Operating Expenses (a)

     249,897        213,566   
  

 

 

   

 

 

 

Operating Income

   $ 27,299      $ 15,279   
  

 

 

   

 

 

 

Operating Income, As A Percentage Of Net Revenue

     10     7
  

 

 

   

 

 

 

 

(a) Includes indirect support costs (including compensation and benefits expense and other operating expenses related thereto).

Net revenue trends in Financial Advisory for M&A and Strategic Advisory and Restructuring are generally correlated to the volume of completed industry-wide M&A transactions and restructurings 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 significant non-public assignments. While the M&A industry data described above on completed and announced transactions reflects decreased M&A activity in the 2012 period as compared to the corresponding period in 2011, our M&A and Strategic Advisory revenue (which includes Sovereign and Government Advisory revenue) increased 18% in the 2012 period as compared to the 2011 period.

Certain Lazard client statistics and global industry statistics are set forth below:

     Three Months Ended
March  31,
 
     2012         2011      

Lazard Statistics:

    

Number of Clients With Fees Greater Than $1 Million:

    

Total Financial Advisory

     64        58   

M&A and Strategic Advisory

     50        39   

Percentage of Financial Advisory Net Revenue from Top 10 Clients

     41     32

Number of M&A Transactions Completed With Values Greater than $1 billion (a)

     11        12   

 

(a) Source: Dealogic as of April 11, 2012.

 

50


Table of Contents

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 the U.S., Europe (primarily in the U.K., France, Italy, Spain and Germany) and the rest of the world (primarily in Australia) and therefore may not be reflective of the geography in which the clients are located.

 

     Three Months Ended
March  31,
 
         2012             2011      

United States

     55     48

Europe

     41        41   

Rest of World

     4        11   
  

 

 

   

 

 

 

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, strategic advisory matters and restructuring transactions, 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 services. Accordingly, Lazard measures performance in its Financial Advisory segment based on overall segment net 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 March 31, 2012 versus March 31, 2011

Total Strategic Advisory net revenue, representing fees from M&A, Sovereign, Capital Markets, Private Funds and Other Advisory businesses, increased $14 million, or 7%, and Restructuring revenue increased $35 million, or 97%, as compared to the 2011 period.

M&A and Strategic Advisory revenue increased $29 million, or 18% as compared to the 2011 period. Capital Markets and Other Advisory revenue decreased $15 million, or 51%. The increase in M&A and Strategic Advisory revenue was principally due to a higher level of fees earned from our top 10 clients and higher average fees per M&A and Strategic Advisory transaction, which reflected the closing of several significant M&A and sovereign and government advisory transactions, as well as the strong performance of Lazard Middle Market. Our major clients, which, in the aggregate, represented a significant portion of our M&A and Strategic Advisory revenue for the first quarter of 2012, included 3b-fibreglass, 99 Cents Only Stores, Azur Pharma, Brookside Foods, European Goldfields, Hellenic Republic, ITT, Simon Property Group, Sonneborn and Western Lime.

The decrease in Capital Markets and Other Advisory revenue in the 2012 period was primarily attributable to a lower level of closings by Private Fund Advisory.

Restructuring revenue is derived from various activities including bankruptcy assignments, global debt and financing restructurings, distressed asset sales and advice on complex on- and off-balance sheet assignments. The increase in Restructuring revenue in the 2012 period was driven by a higher number of closings and increased average fees for assignments with completion fees greater than $1 million. Notable assignments completed in the first quarter of 2012 included A&P, Eastman Kodak Company, Lehman Brothers and Spanish Broadcasting Systems.

 

51


Table of Contents

Operating expenses increased $36 million, or 17%, as compared to the 2011 period. The principal contributors to the increase were increases in compensation and deal-related costs specific to transactions which closed in the 2012 period, a higher level of business development expense and higher occupancy costs in the 2012 period as a result of our amended lease and associated build-out costs of our Rockefeller Center facility.

Financial Advisory operating income in the 2012 period was $27 million, an increase of $12 million, or 79%, as compared to operating income of $15 million in the 2011 period and, as a percentage of net revenue, was 10% as compared to 7% in the 2011 period.

Asset Management

The following table shows the composition of AUM for the Asset Management segment:

 

     As of  
     March 31,
2012
     December 31,
2011
 
    

($ in millions)

 

AUM:

     

International Equities

   $ 31,020       $ 27,599   

Global Equities

    
77,730
  
     68,584   

U.S. Equities

    
21,903
  
     20,179   
  

 

 

    

 

 

 

Total Equities

     130,653         116,362   
  

 

 

    

 

 

 

European and International Fixed Income

     13,744         12,293