10-Q 1 d883538d10q.htm 10-Q 10-Q
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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, 2015

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 Website, 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 17, 2015, there were 129,766,091 shares of the Registrant’s Class A common stock outstanding (including 3,756,974 shares held by subsidiaries).

 

 

 


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, 2015 of all 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

     40   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     71   

Item 4. Controls and Procedures

     72   

Part II. Other Information

  

Item 1. Legal Proceedings

     73   

Item 1A. Risk Factors

     73   

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

     73   

Item 3. Defaults Upon Senior Securities

     74   

Item 4. Mine Safety Disclosures

     74   

Item 5. Other Information

     74   

Item 6. Exhibits

     75   

Signatures

     80   

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

     Page  

Condensed Consolidated Statements of Financial Condition as of March 31, 2015 and December 31, 2014

     2   

Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2015 and 2014

     4   

Condensed Consolidated Statements of Comprehensive Income for the three month periods ended March  31, 2015 and 2014

     5   

Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2015 and 2014

     6   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2015 and 2014

     7   

Notes to Condensed Consolidated Financial Statements

     9   

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2015 AND DECEMBER 31, 2014

(UNAUDITED)

(dollars in thousands, except for per share data)

 

    

March 31,

     December 31,  
     2015      2014  

ASSETS

     
Cash and cash equivalents    $ 606,336       $ 1,066,580   
Deposits with banks and short-term investments      217,626         207,760   
Cash deposited with clearing organizations and other segregated cash      46,700         43,290   

Receivables (net of allowance for doubtful accounts of $18,459 and $23,540 at
March 31, 2015 and December 31, 2014, respectively):

     

Fees

     457,337         483,681   

Customers and other

     135,323         72,648   

Related parties

     1,181         1,267   
  

 

 

    

 

 

 
     593,841         557,596   

Investments

     486,746         620,352   
     

Property (net of accumulated amortization and depreciation of $245,842 and $256,286 at March 31, 2015 and December 31, 2014, respectively)

     209,211         222,569   

Goodwill and other intangible assets (net of accumulated amortization of $52,773 and $51,754 at March 31, 2015 and December 31, 2014, respectively)

     335,966         347,438   
Other assets      331,305         266,651   
  

 

 

    

 

 

 

Total Assets

   $ 2,827,731       $ 3,332,236   
  

 

 

    

 

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2015 AND DECEMBER 31, 2014

(UNAUDITED)

(dollars in thousands, except for per share data)

 

                               
     March 31,
2015
    December  31,
2014
 
      

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 377,511      $ 314,284   

Accrued compensation and benefits

     316,553        606,290   

Senior debt

     998,350        1,048,350   

Capital lease obligations

     10,184        12,015   

Related party payables

     28,544        21,894   

Other liabilities

     559,284        559,346   
  

 

 

   

 

 

 

Total Liabilities

     2,290,426        2,562,179   

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, 2015 and December 31, 2014

              

Series B - no shares issued and outstanding

              

Common stock:

    

Class A, par value $.01 per share (500,000,000 shares authorized;
129,766,091 shares issued at March 31, 2015 and December 31, 2014, including shares held by subsidiaries as indicated below)

     1,298        1,298   

Additional paid-in-capital

     509,383        702,800   

Retained earnings

     338,165        464,655   

Accumulated other comprehensive loss, net of tax

     (233,494     (200,766
  

 

 

   

 

 

 
     615,352        967,987   

Class A common stock held by subsidiaries, at cost (3,758,081 and 7,450,745 shares at March 31, 2015 and December 31, 2014, respectively)

     (142,269     (261,243
  

 

 

   

 

 

 

Total Lazard Ltd Stockholders’ Equity

     473,083        706,744   

Noncontrolling interests

     64,222        63,313   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     537,305        770,057   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 2,827,731      $ 3,332,236   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

(dollars in thousands, except for per share data)

 

                               
    Three Months Ended
March 31,
 
    2015     2014  

REVENUE

   

Investment banking and other advisory fees

  $ 301,372      $ 272,675   

Asset management fees

    261,955        253,031   

Interest income

    929        1,419   

Other

    29,629        22,228   
 

 

 

   

 

 

 

Total revenue

    593,885        549,353   

Interest expense

    16,136        15,953   
 

 

 

   

 

 

 

Net revenue

    577,749        533,400   
 

 

 

   

 

 

 

OPERATING EXPENSES

   

Compensation and benefits

    328,502        321,565   

Occupancy and equipment

    27,339        28,312   

Marketing and business development

    19,190        19,233   

Technology and information services

    22,893        23,487   

Professional services

    11,459        7,591   

Fund administration and outsourced services

    16,148        15,454   

Amortization of intangible assets related to acquisitions

    1,033        1,220   

Provision pursuant to tax receivable agreement

    6,535          

Other

    69,987        9,358   
 

 

 

   

 

 

 

Total operating expenses

    503,086        426,220   
 

 

 

   

 

 

 

OPERATING INCOME

    74,663        107,180   

Provision for income taxes

    12,017        21,751   
 

 

 

   

 

 

 

NET INCOME

    62,646        85,429   

LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

    6,693        4,587   
 

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO LAZARD LTD

  $ 55,953      $   80,842   
 

 

 

   

 

 

 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

   

WEIGHTED AVERAGE SHARES OF COMMON STOCK
OUTSTANDING:

   

Basic

    123,655,689        121,776,207   

Diluted

    133,735,946        134,025,991   

NET INCOME PER SHARE OF COMMON STOCK:

   

Basic

    $0.45        $0.66   
 

 

 

   

 

 

 

Diluted

    $0.42        $0.61   
 

 

 

   

 

 

 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $1.30        $0.30   
 

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March  31,
 
     2015     2014  

NET INCOME

   $ 62,646      $ 85,429   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

    

Currency translation adjustments

     (34,133     5,913   

Employee benefit plans:

    

Actuarial gain (loss) (net of tax benefit (expense) of $(115) and $50 for the three months ended March 31, 2015 and 2014, respectively)

     219        (557

Adjustment for items reclassified to earnings (net of tax expense of $563 and $532 for the three months ended March 31, 2015 and 2014, respectively)

     1,186        1,289   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

     (32,728     6,645   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

     29,918        92,074   

LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     6,693        4,611   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD LTD

   $ 23,225      $ 87,463   
  

 

 

   

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2015 AND 2014

(UNAUDITED)

(dollars in thousands)

 

                               
     Three Months Ended 
March 31,
 
    2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $ 62,646      $ 85,429   

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

   

Depreciation and amortization of property

    7,876        8,859   

Amortization of deferred expenses and share-based incentive compensation

    106,379        83,023   

Amortization of intangible assets related to acquisitions

    1,033        1,220   

Loss on extinguishment of debt

    60,219          

(Increase) decrease in operating assets:

   

Deposits with banks and short-term investments

    (35,081     (29,370

Cash deposited with clearing organizations and other segregated cash

    (5,544     (2,284

Receivables-net

    (64,321     (9,149

Investments

    118,677        61,090   

Other assets

    (101,761     (102,518

Increase (decrease) in operating liabilities:

   

Deposits and other payables

    106,835        71,680   

Accrued compensation and benefits and other liabilities

    (221,990     (114,174
 

 

 

   

 

 

 

Net cash provided by operating activities

    34,968        53,806   
 

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Additions to property

    (4,055     (3,153

Disposals of property

    44        250   
 

 

 

   

 

 

 

Net cash used in investing activities

    (4,011     (2,903
 

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from:

   

Contributions from noncontrolling interests

    57        384   

Issuance of senior debt, net of expenses

    396,272          

Excess tax benefits from share-based incentive compensation

    9,516        1,925   

Payments for:

   

Senior debt

    (509,098       

Capital lease obligations

    (539     (583

Distributions to noncontrolling interests

    (5,841     (4,312

Purchase of Class A common stock

    (82,963     (106,935

Class A common stock dividends

    (158,390     (35,917

Settlement of vested share-based incentive compensation

    (101,885     (82,021

Other financing activities

    (1,155     (332
 

 

 

   

 

 

 

Net cash used in financing activities

    (454,026     (227,791
 

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    (37,175     1,995   
 

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (460,244     (174,893

CASH AND CASH EQUIVALENTS—January 1

    1,066,580        841,482   
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—March 31

  $ 606,336      $ 666,589   
 

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2014

(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, 2014

    7,921      $  –        129,056,082      $ 1,291      $ 737,899      $ 203,236      $ (133,004     8,317,065      $ (249,213   $ 560,209      $ 69,789      $ 629,998   
                       

Comprehensive income:

                       

Net income

              80,842              80,842        4,587        85,429   

Other comprehensive income - net of tax

                6,621            6,621        24        6,645   

Business acquisitions and related equity transactions:

                       

Class A common stock issuable (including related amortization)

            128                128        1        129   

Amortization of share-based incentive compensation

            60,464                60,464        333        60,797   

Dividend-equivalents

            5,013        (5,343           (330     (2     (332

Class A common stock dividends

              (35,917           (35,917       (35,917

Purchase of Class A common stock

                  2,392,674        (106,935)        (106,935            (106,935

Delivery of Class A common stock in connection with share-based incentive compensation and related tax benefit of $1,776

            (247,810         (4,649,300     167,555        (80,255     10        (80,245

Distributions to noncontrolling interests, net

                             (3,928     (3,928

Adjustments related to noncontrolling interests

            1,017                1,017        (1,017       
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2014

    7,921      $  –        129,056,082      $ 1,291      $ 556,711      $ 242,818      $ (126,383     6,060,439      $ (188,593   $ 485,844      $ 69,797      $ 555,641   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(*)

Includes 129,056,081 shares of the Company’s Class A common stock issued at January 1, 2014 and March 31, 2014, and 1 share of the Company’s Class B common stock issued at each such date.

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2015

(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, 2015

    7,921      $  –        129,766,091      $ 1,298      $ 702,800      $ 464,655      $ (200,766     7,450,745      $ (261,243   $ 706,744      $ 63,313      $ 770,057   

Comprehensive income (loss):

                       

Net income

              55,953              55,953        6,693        62,646   

Other comprehensive loss - net of tax

                (32,728         (32,728       (32,728

Business acquisitions and related equity transactions:

                       

Class A common stock issuable (including related amortization)

            89                89          89   

Amortization of share-based incentive compensation

            77,923                77,923          77,923   

Dividend-equivalents

            22,898        (24,053           (1,155       (1,155

Class A common stock dividends

              (158,390           (158,390       (158,390

Purchase of Class A common stock

                  1,677,464        (82,963     (82,963       (82,963

Delivery of Class A common stock in connection with share-based incentive compensation and related tax benefit of $9,495

            (294,327         (5,370,128     201,937        (92,390       (92,390

Distributions to noncontrolling interests, net

                             (5,784     (5,784
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2015

    7,921      $        129,766,091      $ 1,298      $ 509,383      $ 338,165      $ (233,494     3,758,081      $ (142,269   $ 473,083      $ 64,222      $ 537,305   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

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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, governments, institutions, partnerships and individuals.

Lazard Ltd indirectly held 100% of all outstanding Lazard Group common membership interests as of March 31, 2015 and December 31, 2014. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group, which is governed by an Operating Agreement dated as of May 10, 2005, as amended (the “Operating Agreement”). LAZ-MD Holdings LLC (“LAZ-MD Holdings”), an entity formerly owned by Lazard Group’s current and former managing directors, held approximately 0.5% of the outstanding Lazard Group common membership interests as of January 1, 2014. As of January 1, 2014, LAZ-MD Holdings was also the sole owner of the one issued and outstanding share of Lazard Ltd’s Class B common stock (the “Class B common stock”). In May 2014, the remaining outstanding Lazard Group common membership interests held by LAZ-MD Holdings were exchanged for shares of the Company’s Class A common stock, par value $0.01 per share (“Class A common stock”), and the sole issued and outstanding share of the Company’s Class B common stock was automatically converted into one share of the Company’s Class A common stock pursuant to the provisions of the Company’s bye-laws, resulting in only one outstanding class of common stock (the “Final Exchange of LAZ-MD Interests”). Following the Final Exchange of LAZ-MD Interests, Lazard Group became a wholly-owned indirect subsidiary of Lazard Ltd.

Our sole operating asset is our indirect ownership of the 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 offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients.

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

LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel et de Résolution (“ACPR”). 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, and asset-liability management.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

Basis of Presentation

The accompanying condensed consolidated financial statements of Lazard Ltd have been prepared pursuant to the rules and regulations of the United States 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 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, 2014 (the “Form 10-K”). The accompanying December 31, 2014 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. For example, discretionary compensation and benefits expense for interim periods is accrued based on the year-to-date amount of revenue earned, and an assumed annual ratio of compensation and benefits expense to revenue, with the applicable amounts adjusted for certain items. 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, 2015 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 (“LCH”), an English private limited company, together with their jointly owned affiliates and subsidiaries.

The Company’s policy is to consolidate entities in which it has a controlling financial interest. The Company consolidates (i) a voting interest entity (“VOE”) where the Company either holds a majority of the voting interest in such entity or is the general partner in such entity and the third-party investors do not have the right to replace the general partner and (ii) a variable interest entity (“VIE”) where the Company absorbs a majority of the expected losses, expected residual returns, or both, of such entity. When the Company does not have a controlling interest in an entity, but exerts significant influence over such 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

Revenue from Contracts with Customers—In May 2014, the Financial Accounting Standards Board (the “FASB”) issued comprehensive new revenue recognition guidance. The guidance requires a company to recognize revenue when it transfers promised services to customers in an amount that reflects the consideration

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

to which the company expects to be entitled in exchange for those services and requires enhanced disclosures. The new guidance is effective for annual and interim periods beginning after December 15, 2016, and early adoption is not permitted. On April 1, 2015, the FASB tentatively decided to defer the effective date of the new revenue guidance by one year to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for annual periods beginning after December 15, 2016. The Company is currently evaluating the new guidance.

Amendments to the Consolidation Analysis—In February 2015, the FASB issued updated guidance for the consolidation of certain legal entities. The updated guidance eliminates the deferral of certain consolidation standards for entities considered to be investment companies and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or VOEs. The new guidance is effective for annual reporting periods beginning after December 31, 2015, with early adoption permitted. The Company does not expect that the adoption of this guidance will have a material impact on our consolidated financial statements or related disclosures.

Interest—Imputation of Interest—In April 2015, the FASB issued updated guidance which requires a company to classify debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption permitted. The new guidance is to be applied on a retrospective basis. The Company does not expect that the adoption of this guidance will have a material impact on our consolidated financial statements or related disclosures.

 

3. RECEIVABLES

The Company’s receivables represent receivables from fees, customers and other and related parties.

Receivables are stated net of an estimated allowance for doubtful accounts, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. Activity in the allowance for doubtful accounts for the three month periods ended March 31, 2015 and 2014 was as follows:

 

      Three Months Ended
March 31,
 
         2015              2014      

Balance, January 1

   $ 23,540       $ 28,777   

Bad debt expense, net of recoveries

    
1,232
  
     9,136   

Charge-offs, foreign currency translation and other adjustments

     (6,313      (6,589
  

 

 

    

 

 

 

Balance, March 31

   $ 18,459       $ 31,324   
  

 

 

    

 

 

 

Bad debt expense, net of recoveries is included in “investment banking and other advisory fees” on the condensed consolidated statements of operations.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

At March 31, 2015 and December 31, 2014, the Company had receivables past due or deemed uncollectible of $19,220 and $24,578, respectively.

Of the Company’s fee receivables at March 31, 2015 and December 31, 2014, $76,878 and $86,221, respectively, represented interest-bearing financing receivables. Based upon our historical loss experience, the credit quality of the counterparties, and the lack of past due or uncollectible amounts, there was no allowance for doubtful accounts required at those dates related to such receivables.

The aggregate carrying amount of our non-interest bearing receivables of $516,963 and $471,375 at March 31, 2015 and December 31, 2014, respectively, approximates fair value.

 

4. INVESTMENTS

The Company’s investments and securities sold, not yet purchased, consist of the following at March 31, 2015 and December 31, 2014:

 

    

March 31,

     December 31,  
     2015      2014  

Interest-bearing deposits

   $ 54,248       $ 84,575   
  

 

 

    

 

 

 

Debt

     1,933         10,426   
  

 

 

    

 

 

 

Equities

     54,671         57,302   
  

 

 

    

 

 

 

Funds:

     

Alternative investments (a)

     29,896         34,705   

Debt (a)

     59,960         82,889   

Equity (a)

     171,944         228,209   

Private equity

     107,440         114,470   
  

 

 

    

 

 

 
     369,240         460,273   
  

 

 

    

 

 

 

Equity method

     6,654         7,776   
  

 

 

    

 

 

 

Total investments

     486,746         620,352   

Less:

     

Interest-bearing deposits

     54,248         84,575   

Equity method

     6,654         7,776   
  

 

 

    

 

 

 

Investments, at fair value

   $ 425,844       $ 528,001   
  

 

 

    

 

 

 

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

   $ 3,094       $ 9,290   
  

 

 

    

 

 

 

 

(a) Interests in alternative investment funds, debt funds and equity funds include investments with fair values of $4,862, $18,982 and $117,447, respectively, at March 31, 2015 and $8,321, $42,070 and $162,798, respectively, at December 31, 2014, held in order to satisfy the Company’s liability upon vesting of previously granted Lazard Fund Interests (“LFI”) and other similar deferred compensation arrangements. LFI represent grants by the Company to eligible employees of actual or notional interests in a number of Lazard-managed funds, subject to service-based vesting conditions (see Notes 6 and 12 of Notes to Condensed Consolidated Financial Statements).

Interest-bearing deposits have original maturities of greater than three months but equal to or less than one year and are carried at cost that approximates fair value due to their short-term maturities.

Debt securities primarily consist of seed investments invested in debt securities held within separately managed accounts related to our Asset Management business.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

Equities primarily consist of seed investments invested in marketable equity securities of large-, mid- and small-cap domestic, international and global companies held within separately managed accounts related to our Asset Management business.

Alternative investment funds primarily consist of interests in various Lazard-managed hedge funds and funds of funds.

Debt funds primarily consist of seed investments in funds related to our Asset Management business that invest in debt securities, amounts related to LFI discussed above and an investment in a debt fund held by the Company’s broker-dealer subsidiary.

Equity funds primarily consist of seed investments in funds related to our Asset Management business that invest in equity securities, and amounts related to LFI discussed above.

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. 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 fund targeting significant noncontrolling-stake investments in established private companies, (iii) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), a fund primarily making equity and buyout investments in middle market companies and (iv) Lazard Australia Corporate Opportunities Fund (“COF2”), a Lazard-managed Australian fund targeting Australian mid-market investments.

Private equity investments consolidated but not owned by Lazard relate to the economic interests that are owned by the management team and other investors in the Edgewater Funds (“Edgewater”) which totaled $5,408 and $6,421 at March 31, 2015 and December 31, 2014, respectively (see Note 10 of Notes to Condensed Consolidated Financial Statements).

During the three month periods ended March 31, 2015 and 2014, the Company reported in “revenue-other” on its condensed consolidated statements of operations net unrealized investment gains and losses pertaining to “trading” securities still held as of the reporting date as follows:

 

     Three Months Ended
March 31,
 
       2015            2014    

Net unrealized investment gains

   $ 2,193       $ 491   

 

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 (i) quoted prices for similar assets or liabilities in an active market, or quoted prices for identical or similar assets or liabilities in non-active markets, (ii) assets valued based on net asset value (“NAV”) or its equivalent redeemable at the measurement date or within the near term without redemption restrictions, or (iii) inputs other than quoted prices that are directly observable or derived principally from, or corroborated by, market data.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

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 trading 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 or its equivalent, but not redeemable within the near term as a result of redemption restrictions.

The Company’s investments in debt securities are classified as Level 1 when their respective fair values are based on unadjusted quoted prices in active markets and are classified as Level 2 when their fair values are primarily based on prices as provided by external pricing services.

The fair value of equities is classified as Level 1 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 as provided by external pricing services; equity securities in private companies are generally classified as Level 3.

The fair value of investments in alternative investment funds is classified as Level 2 and is valued at NAV or its equivalent, which is primarily determined based on information provided by external fund administrators. Such investments are redeemable within the near term.

The fair value of investments in debt funds is classified as Level 1 when the fair values are primarily based on the publicly reported closing price for the fund, and classified as Level 2 when the fair values are primarily based on NAV or its equivalent and are redeemable within the near term.

The fair value of investments in equity funds is classified as Level 1 or 2 as follows: publicly traded asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; and investments in asset management funds redeemable in the near term are classified as Level 2 and are valued at NAV or its equivalent, which is primarily determined based on information provided by external fund administrators.

The fair value of investments in private equity funds is classified as Level 3, and is primarily based on NAV or its equivalent, except for certain investments that are valued based on potential transaction value. 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 two currencies from the trade date to settlement date; the fair value of total return swaps is based on the change in fair values of the related underlying equity security, financial instrument or index and a specified notional holding; the fair value of interest rate swaps is based on the interest rate yield curve; and the fair value of derivative liabilities related to LFI and other similar deferred compensation arrangements is based on the value of the underlying investments, adjusted for forfeitures. See Note 6 of Notes to Condensed Consolidated Financial Statements.

Where reported information regarding an investment is based on data received from external fund administrators or pricing services, the Company reviews such information and classifies the investment at the relevant level within the fair value hierarchy.

 

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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 classification of investments and certain other assets and liabilities measured at fair value on a recurring basis as of March 31, 2015 and December 31, 2014 within the fair value hierarchy:

 

    March 31, 2015  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt

  $ 1,933      $      $      $ 1,933   

Equities

    53,382               1,289        54,671   

Funds:

       

Alternative investments

           29,896               29,896   

Debt

    59,954        6               59,960   

Equity

    171,900        44               171,944   

Private equity

                  107,440        107,440   

Derivatives

           4,296               4,296   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 287,169      $ 34,242      $ 108,729      $ 430,140   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 3,094      $      $      $ 3,094   

Derivatives

           227,628               227,628   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,094      $ 227,628      $      $ 230,722   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

    December 31, 2014  
    Level 1     Level 2     Level 3     Total  

Assets:

       

Investments:

       

Debt

  $ 5,540      $ 4,886      $      $ 10,426   

Equities

    55,987               1,315        57,302   

Funds:

       

Alternative investments

           34,705               34,705   

Debt

    82,885        4               82,889   

Equity

    228,166        43               228,209   

Private equity

                  114,470        114,470   

Derivatives

           2,355               2,355   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 372,578      $ 41,993      $ 115,785      $ 530,356   
 

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

       

Securities sold, not yet purchased

  $ 9,290      $      $      $ 9,290   

Derivatives

           208,093               208,093   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 9,290      $ 208,093      $      $ 217,383   
 

 

 

   

 

 

   

 

 

   

 

 

 

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, 2015 and 2014.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

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, 2015 and 2014:

 

    Three Months Ended March 31, 2015  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included

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

Investments:

           

Equities

  $        1,315      $ 2      $      $      $ (28   $ 1,289   

Private equity funds

    114,470        7,848        709        (10,531     (5,056     107,440   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 115,785      $ 7,850      $ 709      $ (10,531   $ (5,084   $ 108,729   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Three Months Ended March 31, 2014  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included
In Revenue-
Other (a)
    Purchases/
Acquisitions
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

  $ 1,340      $ 2      $      $      $ (5   $ 1,337   

Private equity funds

    114,193        5,582        347        (4,669     84        115,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 115,533      $ 5,584      $ 347      $ (4,669   $ 79      $ 116,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Earnings for the three month periods ended March 31, 2015 and 2014 include net unrealized gains of $6,097 and $4,413, respectively.

 

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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, 2015 and December 31, 2014 include certain investments that are valued using NAV or its equivalent as a practical expedient in determining fair value. Information with respect thereto was as follows:

 

    March 31, 2015
                % of
Fair Value
Not
Redeemable
  Estimated Liquidation Period of
Investments Not Redeemable
  Investments Redeemable
    Fair Value     Unfunded
Commitments
      %
Next
5 Years
  %
5-10
Years
  %
Thereafter
  Redemption
Frequency
    Redemption
Notice Period

Alternative investment funds:

               

Hedge funds

  $ 27,601      $      NA   NA   NA   NA     (a)      <30-60 days

Funds of funds

    476             NA   NA   NA   NA     (b)      <30-90 days

Other

    1,819             NA   NA   NA   NA     (c)      <30-60 days

Debt funds

    6             NA   NA   NA   NA     (d)      30 days

Equity funds

    44             NA   NA   NA   NA     (e)      <30-90 days

Private equity funds:

               

Equity growth

    50,850        6,012 (f)    100%   6%   92%   2%     NA      NA

Mezzanine debt

    34,465             100%       100%     NA      NA
 

 

 

   

 

 

             

Total

  $ 115,261      $ 6,012               
 

 

 

   

 

 

             

 

(a) weekly (17%), monthly (69%) and quarterly (14%)
(b) monthly (98%) and quarterly (2%)
(c) daily (19%), weekly (5%) and monthly (76%)
(d) daily (100%)
(e) daily (14%), monthly (58%) and quarterly (28%)
(f) Unfunded commitments to private equity investments consolidated but not owned by Lazard of $6,588 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

 

    December 31, 2014
                % of
Fair Value
Not
Redeemable
  Estimated Liquidation Period of
Investments Not Redeemable
  Investments Redeemable
    Fair Value     Unfunded
Commitments
      %
Next
5 Years
  %
5-10
Years
  %
Thereafter
  Redemption
Frequency
    Redemption
Notice Period

Alternative investment funds:

               

Hedge funds

  $ 31,042      $      NA   NA   NA   NA     (a)      <30-60 days

Funds of funds

    475             NA   NA   NA   NA     (b)      <30-90 days

Other

    3,188             NA   NA   NA   NA     (c)      <30-60 days

Debt funds

    4             NA   NA   NA   NA     (d)      30 days

Equity funds

    43             NA   NA   NA   NA     (e)      30-90 days

Private equity funds:

               

Equity growth

    75,578        18,676 (f)    100%   10%   63%   27%     NA      NA

Mezzanine debt

    38,892             100%       100%     NA      NA
 

 

 

   

 

 

             

Total

  $ 149,222      $ 18,676               
 

 

 

   

 

 

             

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

 

(a) weekly (15%), monthly (66%) and quarterly (19%)
(b) monthly (98%) and quarterly (2%)
(c) daily (11%), weekly (3%) and monthly (86%)
(d) daily (100%)
(e) daily (14%), monthly (58%) and quarterly (28%)
(f) Unfunded commitments to private equity investments consolidated but not owned by Lazard of $6,888 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

See Note 4 of Notes to Condensed Consolidated Financial Statements for discussion of significant investment strategies for investments with value based on NAV.

Investment Capital Funding Commitments—At March 31, 2015, the Company’s maximum unfunded commitments for capital contributions to investment funds arose from (i) commitments to CP II, which amounted to $1,499 for potential “follow-on investments” and/or for fund expenses through the earlier of February 25, 2017 or the liquidation of the fund, (ii) commitments to EGCP III, which amounted to $12,035, 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 commitments 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) commitments to COF2, which amounted to $4,144, 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 commitments 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.

 

6. DERIVATIVES

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, total return swap contracts on various equity and debt indices and other derivative contracts to economically hedge exposures to fluctuations in currency exchange rates, interest rates and equity and debt prices. 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 condensed consolidated statements of financial condition. Gains and losses on the Company’s derivative instruments not designated as hedging instruments are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, in the condensed consolidated statements of operations.

In addition to the derivative instruments described above, the Company records derivative liabilities relating to its obligations pertaining to LFI 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 condensed consolidated statements of financial condition. Changes in the fair value of the derivative liabilities are included in “compensation and benefits” in the condensed consolidated statements of operations, the impact of which equally offsets the changes in the fair value of investments which are currently expected to be delivered upon settlement of LFI and other similar deferred compensation arrangements, which are reported in “revenue-other” in the condensed consolidated statements of operations.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The tables below present the fair values of the Company’s derivative instruments reported within “other assets” and “other liabilities” and the fair values of the Company’s derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements) on the accompanying condensed consolidated statements of financial condition as of March 31, 2015 and December 31, 2014:

 

    March 31,
2015
    December 31,
2014
 

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 4,296      $ 2,355   
 

 

 

   

 

 

 

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 520      $
124
  

Total return swaps and other (a)

    1,001        663   

LFI and other similar deferred compensation arrangements

    226,107        207,306   
 

 

 

   

 

 

 
  $ 227,628      $ 208,093   
 

 

 

   

 

 

 

 

(a) For total return swaps, amounts represent the netting of gross derivative assets and liabilities of $530 and $1,531 as of March 31, 2015, respectively, and $1,123 and $1,786 as of December 31, 2014, respectively, for contracts with the same counterparty under legally enforceable master netting agreements. Such amounts are recorded “net” in “other assets”, with receivables for net cash collateral under such contracts of $11,214 and $12,364 as of March 31, 2015 and December 31, 2014, respectively.

Net gains (losses) with respect to derivative instruments (predominantly reflected in “revenue-other”) and the Company’s derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements (included in “compensation and benefits” expense) as reflected on the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2015 and 2014, were as follows:

 

     Three Months Ended
March 31,
 
     2015     2014  

Forward foreign currency exchange rate contracts

   $ 15,400      $ (1,153

LFI and other similar deferred compensation arrangements

     (4,136     (2,626

Total return swaps and other

     (3,168     (1,946
  

 

 

   

 

 

 

Total

   $ 8,096      $ (5,725
  

 

 

   

 

 

 

 

19


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

7. PROPERTY

At March 31, 2015 and December 31, 2014, property consists of the following:

 

     Estimated
Depreciable
Life in Years
     March 31,
2015
     December 31,
2014
 

Buildings

     33       $ 135,568       $ 152,982   

Leasehold improvements

     3-20        
162,785
  
     167,837   

Furniture and equipment

     3-10         150,706         150,458   

Construction in progress

        5,994         7,578   
     

 

 

    

 

 

 

Total

       
455,053
  
     478,855   

Less - Accumulated depreciation and amortization

        245,842         256,286   
     

 

 

    

 

 

 

Property

      $ 209,211       $ 222,569   
     

 

 

    

 

 

 

 

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of goodwill and other intangible assets at March 31, 2015 and December 31, 2014 are presented below:

 

    March 31,
2015
    December 31,
2014
 

Goodwill

  $ 324,963      $ 335,402   

Other intangible assets (net of accumulated amortization)

    11,003        12,036   
 

 

 

   

 

 

 
  $ 335,966      $ 347,438   
 

 

 

   

 

 

 

At March 31, 2015 and December 31, 2014, goodwill of $260,422 and $270,861, respectively, was attributable to the Company’s Financial Advisory segment and, at each such respective date, $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, 2015 and 2014 are as follows:

 

    Three Months Ended
March 31,
 
    2015     2014  

Balance, January 1

  $
335,402
  
  $ 345,453   

Foreign currency translation adjustments

    (10,439     4,263   
 

 

 

   

 

 

 

Balance, March 31

  $ 324,963      $ 349,716   
 

 

 

   

 

 

 

All changes in the carrying amount of goodwill for the three month periods ended March 31, 2015 and 2014 are attributable to the Company’s Financial Advisory segment.

 

20


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The gross cost and accumulated amortization of other intangible assets as of March 31, 2015 and December 31, 2014, by major intangible asset category, are as follows:

 

    March 31, 2015     December 31, 2014  
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
 

Performance fees

  $ 30,740      $ 21,639      $ 9,101      $ 30,740      $ 21,116      $ 9,624   

Management fees, customer relationships and non-compete agreements

    33,036        31,134        1,902        33,050        30,638        2,412   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 63,776      $ 52,773      $ 11,003      $ 63,790      $ 51,754      $ 12,036   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization expense of intangible assets for the three month periods ended March 31, 2015 and 2014 was $1,033 and $1,220, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Amortization
Expense (a)
 

2015 (April 1 through December 31)

   $ 5,525   

2016

     5,478   
  

 

 

 

Total amortization expense

   $ 11,003   
  

 

 

 

 

  (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, 2015 and December 31, 2014:

 

      Initial
Principal

Amount
    Maturity
Date
     Annual
Interest
Rate
     Outstanding As Of  
             March 31,
2015
     December 31,
2014
 

Lazard Group 6.85% Senior Notes

     600,000        6/15/17         6.85      98,350         548,350   

Lazard Group 4.25% Senior Notes

     500,000        11/14/20         4.25      500,000         500,000   

Lazard Group 3.75% Senior Notes (a)

     400,000        2/13/25         3.75      400,000           

Lazard Group Credit Facility

     150,000        9/25/15         0.80                
          

 

 

    

 

 

 

Total

           $ 998,350       $ 1,048,350   
          

 

 

    

 

 

 

 

(a) During February 2015, Lazard Group completed an offering of $400,000 aggregate principal amount of 3.75% senior notes due 2025 (the “2025 Notes”). Lazard Group also issued a notice to redeem $450,000 of Lazard Group’s 6.85% senior notes due June 15, 2017 (the “2017 Notes”) in February 2015. Interest on the 2025 Notes is payable semi-annually on March 1 and September 1 of each year beginning September 1, 2015. Lazard Group used the net proceeds of the 2025 Notes, together with cash on hand, to redeem or otherwise retire $450,000 of the 2017 Notes, which, including the recognition of unamortized issuance costs, resulted in a loss on debt extinguishment of $60,219. Such loss on debt extinguishment was recorded in “operating expenses—other” on the condensed consolidated statement of operations for the three month period ended March 31, 2015.

On September 25, 2012, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the “Credit Facility”), which expires in September 2015. The Credit Facility replaced a similar

 

21


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

revolving credit facility which was terminated as a condition to effectiveness of the Credit Facility. 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, 2015, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 0.80%. At March 31, 2015 and December 31, 2014, no amounts were outstanding under the Credit Facility.

The Credit Facility contains customary terms and conditions, including certain financial covenants. In addition, the Credit Facility, the indenture and the supplemental indentures relating to Lazard Group’s senior notes contain certain covenants, events of default and other customary provisions, including a customary make-whole provision in the event of early redemption, where applicable. As of March 31, 2015, the Company was in compliance with such provisions. All of the Company’s senior debt obligations are unsecured.

As of March 31, 2015, the Company had approximately $245,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $38,000 (at March 31, 2015 exchange rates) and Edgewater of $55,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

The Company’s senior debt at March 31, 2015 and December 31, 2014 is carried at historical amounts. At those dates, the fair value of such senior debt was approximately $1,037,000 and $1,135,000, respectively, and exceeded the aggregate carrying value by approximately $39,000 and $87,000, respectively. The fair value of the Company’s senior debt is based on market quotations. 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.

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, 2015, LFB had $3,698 of such indemnifications and held $3,276 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 condensed consolidated statement of financial condition.

Certain Business Transactions—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.

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 (the “Earnout Shares”) that are subject to earnout criteria and payable over time. The Earnout Shares will be issued only if certain performance thresholds are met. As of March 31, 2015 and December 31, 2014, 913,722 shares are

 

22


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

issuable on a contingent basis, and 1,371,992 shares have been earned because applicable performance thresholds have been satisfied. As of March 31, 2015 and December 31, 2014, 1,371,992 of the earned shares have been settled.

Contingent Consideration Relating To Other Business Acquisitions—For a business acquired in 2012, at December 31, 2012, 170,988 shares of Class A common stock (including dividend equivalent shares) were issuable on a non-contingent basis. Such shares were delivered in the first quarter of 2013. The Company is obligated to issue a maximum of 202,650 additional shares of Class A common stock if certain performance thresholds are achieved by December 31, 2014. The extent of the achievement of such performance thresholds is currently under review.

Other Commitments—In the normal course of business, LFB enters into commitments to extend credit, predominately at variable interest rates. These commitments have varying expiration dates, 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. At March 31, 2015, these commitments were not material.

See Notes 5 and 13 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to investment capital funding commitments 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, each of LFB and LFNY may enter into underwriting commitments in which it will participate as an underwriter. At March 31, 2015, LFB and LFNY had no such underwriting commitments.

In the opinion of management, the fulfillment of the commitments described herein will not have a material adverse effect on the Company’s condensed consolidated financial position or results of operations.

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 experiences 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.

 

11. STOCKHOLDERS’ EQUITY

Share Repurchase Program—During the three month period ended March 31, 2015 and for the years ended December 31, 2014, 2013, and 2012, the Board of Directors of Lazard authorized the repurchase of Class A common stock and Lazard Group common membership interests as set forth in the table below.

 

Date

   Repurchase
Authorization
     Expiration  

October 2012

   $ 200,000         December 31, 2014   

October 2013

   $ 100,000         December 31, 2015   

April 2014

   $ 200,000         December 31, 2015   

February 2015

   $ 150,000         December 31, 2016   

 

23


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The Company expects that the share repurchase program will primarily be used 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 the share repurchase program, purchases have been made in the open market or through privately negotiated transactions. The rate at which the Company purchases shares in connection with the share repurchase program may vary from quarter to quarter due to a variety of factors. Purchases with respect to such program are set forth in the table below:

 

     Number  of
Shares

Purchased
     Average
Price  Per
Share
 

Three Months Ended March 31:

     

2014

     2,392,674       $ 44.69   

2015

     1,677,464       $ 49.46   

As of March 31, 2015, a total of $195,969 of share repurchase authorizations remained available under the Company’s share repurchase program, $45,969 of which will expire on December 31, 2015 and $150,000 of which will expire on December 31, 2016.

During the three month period ended March 31, 2015, the Company had in place trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, pursuant to which it effected stock repurchases in 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 and Series B preferred stock. Series A and Series B preferred shares were issued in connection with certain prior year business acquisitions and are each non-participating securities convertible into Class A common stock, and have no voting or dividend rights. As of both March 31, 2015 and December 31, 2014, 7,921 shares of Series A preferred stock were outstanding, and no shares of Series B preferred stock were outstanding. At March 31, 2015 and December 31, 2014, no shares of Series A preferred stock were convertible into shares of Class A common stock on a contingent or a non-contingent basis.

Accumulated Other Comprehensive Income (Loss), Net of Tax (“AOCI”)The tables below reflect changes in the balances of each component of AOCI during the three month periods ended March 31, 2015 and 2014:

 

    Currency
Translation
Adjustments
    Employee
Benefit
Plans
    Total
AOCI
    Amount
Attributable to
Noncontrolling
Interests
    Total
Lazard Ltd
AOCI
 

Balance, January 1, 2015

  $ (46,102   $ (154,665   $ (200,767   $ (1   $ (200,766
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Activity January 1 to March 31, 2015:

         

Other comprehensive income (loss) before reclassifications

    (34,133     219        (33,914            (33,914

Adjustments for items reclassified to earnings, net of tax

           1,186        1,186               1,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

    (34,133     1,405        (32,728            (32,728
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2015

  $ (80,235   $ (153,260   $ (233,495   $ (1   $ (233,494
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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)

 

    Currency
Translation
Adjustments
    Employee
Benefit
Plans
    Total
AOCI
    Amount
Attributable to
Noncontrolling
Interests
    Total
Lazard Ltd
AOCI
 

Balance, January 1, 2014

  $ 3,869      $ (137,431   $ (133,562   $ (558   $ (133,004
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Activity January 1 to March 31, 2014:

         

Other comprehensive income (loss) before reclassifications

    5,913        (557     5,356        17        5,339   

Adjustments for items reclassified to earnings, net of tax

           1,289        1,289        7        1,282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income

    5,913        732        6,645        24        6,621   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

  $ 9,782      $ (136,699   $ (126,917   $ (534   $ (126,383
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below reflects adjustments for items reclassified out of AOCI, by component, for the three month periods ended March 31, 2015 and 2014:

 

     Three Months Ended
March 31,
 
         2015              2014      

Amortization relating to employee benefit plans (a)

   $ 1,749       $ 1,821   

Less – related income taxes

     563         532   
  

 

 

    

 

 

 

Total reclassifications, net of tax

   $ 1,186       $ 1,289   
  

 

 

    

 

 

 

 

(a) Included in the computation of net periodic benefit cost (see Note 13 of Notes to Condensed Consolidated Financial Statements). Such amount is included in “compensation and benefits” expense on the condensed consolidated statement of operations.

Noncontrolling Interests—Noncontrolling interests principally represent interests held in (i) Lazard Group by LAZ-MD Holdings until May 2014 and (ii) Edgewater’s management vehicles that the Company is deemed to control, but does not own. Following the Final Exchange of LAZ-MD Interests, Lazard Group became a wholly-owned indirect subsidiary of Lazard Ltd.

The following table summarizes the ownership interests in Lazard Group held by Lazard Ltd and LAZ-MD Holdings:

 

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

As of March 31:

  Common
Membership
Interests
    %
Ownership
    Common
Membership
Interests
    %
Ownership
   

2014

    129,056,081        99.5     710,009        0.5     129,766,090   

2015

    129,766,090        100                129,766,090   

 

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)

 

The tables below summarize net income attributable to noncontrolling interests for the three month periods ended March 31, 2015 and 2014 and noncontrolling interests as of March 31, 2015 and December 31, 2014 in the Company’s condensed consolidated financial statements:

 

     Net Income
Attributable to Noncontrolling
Interests
 
     Three Months Ended
March 31,
 
          2015                2014       

Edgewater

   $ 6,693       $ 4,120   

LAZ-MD Holdings

             467   
  

 

 

    

 

 

 

Total

   $  6,693       $ 4,587   
  

 

 

    

 

 

 

 

     Noncontrolling Interests As Of  
     March 31,
2015
     December 31,
2014
 

Edgewater

   $  63,504       $ 62,584   

Other

     718         729   
  

 

 

    

 

 

 

Total

   $ 64,222       $ 63,313   
  

 

 

    

 

 

 

Dividends Declared, April 2015— On April 22, 2015, the Board of Directors of Lazard Ltd declared a quarterly dividend of $0.35 per share on its Class A common stock, payable on May 15, 2015, to stockholders of record on May 4, 2015.

 

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, 2015 and 2014, is presented below.

Shares Available Under the 2005 Plan and the 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 units (“RSUs”) and other equity-based awards. Each stock unit or similar award 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 awards is generally determined based on the closing market price of Class A common stock at 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.

 

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)

 

The following reflects the amortization expense recorded with respect to share-based incentive plans within “compensation and benefits” expense (with respect to RSUs, performance-based restricted stock units (“PRSUs”) and restricted stock awards) and “professional services” expense (with respect to deferred stock units (“DSUs”)) within the Company’s accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2015 and 2014:

 

     Three Months Ended March 31,  
           2015                  2014        

Share-based incentive awards:

     

RSUs

   $ 59,071       $ 52,285   

PRSUs

     6,198         1,798   

Restricted Stock

     12,623         6,612   

DSUs

     31         102   
  

 

 

    

 

 

 

Total

   $ 77,923       $ 60,797   
  

 

 

    

 

 

 

The ultimate amount of compensation and benefits expense relating to share-based awards is dependent upon the actual number of shares of Class A common stock that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates results in a cumulative adjustment to previously recorded compensation and benefits expense and also would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described below.

For purposes of calculating diluted net income per share, RSUs, DSUs and restricted stock awards are included in the diluted weighted average shares of Class A common stock outstanding using the “treasury stock” method. PRSUs are included in the diluted weighted average shares of Class A common stock outstanding to the extent the performance conditions are met at the end of the reporting period, also using the “treasury stock” method.

The Company’s incentive plans are described below.

RSUs and DSUs

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 shares of Class A common stock on a one-for-one basis after the stipulated vesting periods. PRSUs, which are RSUs that are also subject to service-based vesting conditions, have additional performance conditions, and are described below. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods (generally one-third after two years, and the remaining two-thirds after the third year), and is adjusted for actual forfeitures over such period.

 

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)

 

RSUs generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any dividends paid on Class A common stock during such period. During the three month periods ended March 31, 2015 and 2014, 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,
 
           2015                  2014        

Number of RSUs issued

     453,751         115,297   

Charges to retained earnings, net of estimated forfeitures

   $ 22,898       $ 5,013   

Non-executive members of the Board of Directors (“Non-Executive Directors”) receive approximately 55% of their annual compensation for service on the Board of Directors and its committees in the form of DSUs. No such DSUs were granted in connection with annual compensation during the three month periods ended March 31, 2015 and 2014. 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 shares of Class A common stock at the time of cessation of service to the Board of Directors 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.

The Company’s Directors’ Fee Deferral Unit Plan permits the 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 immediately preceding the date of the grant. During the three month periods ended March 31, 2015 and 2014, 619 and 2,310 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.

 

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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, 2015 and 2014:

 

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

Balance, January 1, 2015

    13,529,116      $ 35.19        286,227      $ 34.21   

Granted (including 453,751 RSUs relating to dividend participation)

    3,865,598      $ 48.93        619      $ 50.90   

Forfeited

    (110,530   $ 38.80                 

Vested

    (6,608,777   $ 30.30                 
 

 

 

     

 

 

   

Balance, March 31, 2015

    10,675,407      $ 43.16        286,846      $ 34.25   
 

 

 

     

 

 

   

Balance, January 1, 2014

    16,630,009      $ 34.51        251,434      $ 32.02   

Granted (including 115,297 RSUs relating to dividend participation)

    3,492,223      $ 43.00        2,310      $ 44.35   

Forfeited

    (21,301   $ 34.61                 

Vested

    (6,317,612   $ 38.04                 
 

 

 

     

 

 

   

Balance, March 31, 2014

    13,783,319      $ 35.04        253,744      $ 32.13   
 

 

 

     

 

 

   

In connection with RSUs that vested during the three month periods ended March 31, 2015 and 2014, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 1,892,454 and 1,843,389 shares of Class A common stock in the respective three month periods. Accordingly, 4,716,323 and 4,474,223 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2015 and 2014, respectively.

As of March 31, 2015, estimated unrecognized RSU compensation expense was approximately $231,921, with such expense expected to be recognized over a weighted average period of approximately 1.0 years subsequent to March 31, 2015.

 

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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, 2015 and 2014:

 

     Restricted
Shares
     Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2015

     729,827       $ 38.63   

Granted

     576,886       $ 50.88   

Forfeited

     (1,300    $ 47.09   

Vested

     (438,743    $ 37.93   
  

 

 

    

Balance, March 31, 2015

     866,670       $ 47.12   
  

 

 

    

Balance, January 1, 2014

     575,054       $ 32.72   

Granted

     449,344       $ 45.52   

Vested

     (205,075    $ 35.23   
  

 

 

    

Balance, March 31, 2014

     819,323       $ 39.11   
  

 

 

    

In connection with shares of restricted Class A common stock that vested during the three month periods ended March 31, 2015 and 2014, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 88,492 and 29,999 shares of Class A common stock during such respective three month periods. Accordingly, 350,251 and 175,076 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2015 and 2014, respectively.

The restricted stock awards include a cash dividend participation right equivalent to any ordinary dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At March 31, 2015, estimated unrecognized restricted stock expense was approximately $26,051, with such expense to be recognized over a weighted average period of approximately 1.1 years subsequent to March 31, 2015.

PRSUs

PRSUs are subject to both performance-based and service-based vesting conditions. The number of shares of Class A common stock that a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics that relate to the Company’s performance over a three-year period. The target number of shares of Class A common stock subject to each PRSU is one; however, based on the achievement of the performance criteria, the number of shares of Class A common stock that may be received in connection with each PRSU generally can range from zero to two times the target number (with the exception of the PRSUs granted in 2013, for which (i) the performance period ended on December 31, 2014 and (ii) the number of shares of Class A common stock that may be received is equal to approximately 2.2 times the target number). The PRSUs granted in 2015 and 2014 will vest on a single date three years following the date of the grant and the PRSUs granted in 2013 vested 33% in March 2015 and will vest 67% in March 2016, in each case provided the applicable service and performance conditions are satisfied, other than with respect to the PRSUs granted in 2013, which performance conditions have been satisfied as of December 31, 2014. In addition, the performance metrics applicable to each PRSU will be evaluated on an annual basis at the end of each fiscal year during the performance period and, if the Company has achieved a threshold level of performance with respect to the fiscal year, 25% of the target number of shares of Class A common stock subject to

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

each PRSU award will no longer be at risk of forfeiture based on the achievement of performance criteria. PRSUs include dividend participation rights that provide that during vesting periods the target number of PRSUs (or, following the relevant performance period, the actual number of shares of Class A common stock that are no longer subject to performance conditions) receive dividend equivalents at the same rate that dividends are paid on Class A common stock during such period. These dividend equivalents are credited as RSUs that are not subject to the performance-based vesting criteria but are otherwise subject to the same restrictions as the underlying PRSUs to which they relate.

The following is a summary of activity relating to PRSUs during the three month periods ended March 31, 2015 and 2014:

 

     PRSUs     Weighted
Average
Grant Date
Fair Value
 

Balance January 1, 2015

     1,347,148      $ 37.79   

Granted

     368,389      $ 52.85   

Vested

     (328,793   $ 35.56   
  

 

 

   

Balance March 31, 2015

     1,386,744      $ 42.32   
  

 

 

   

Balance, January 1, 2014

     448,128      $ 36.11   

Granted

     360,783      $ 44.46   
  

 

 

   

Balance, March 31, 2014

     808,911      $ 39.83   
  

 

 

   

In connection with PRSUs that vested during the three month period ended March 31, 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 25,239 shares of Class A common stock in the period. Accordingly, 303,554 shares of Class A common stock held by the Company were delivered during the three month period ended March 31, 2015.

Compensation expense recognized for PRSU awards is determined by multiplying the number of shares of Class A common stock underlying such awards that, based on the Company’s estimate, are considered probable of vesting, by the grant date fair value. As of March 31, 2015, the total estimated unrecognized compensation expense was approximately $32,820, and the Company expects to amortize such expense over a weighted-average period of approximately 0.9 years subsequent to March 31, 2015.

LFI and Other Similar Deferred Compensation Arrangements

Commencing in February 2011, the Company granted LFI to eligible employees. In connection with LFI 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 (which are generally similar to the comparable periods for RSUs), and is charged to “compensation and benefits” expense within the Company’s condensed consolidated statement of operations. LFI 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, which contemplates the impact of estimated forfeitures, and is adjusted for changes in fair value primarily related to changes in value of the underlying investments.

 

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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 LFI and other similar deferred compensation arrangements during the three month periods ended March 31, 2015 and 2014:

 

    Prepaid
Compensation
Asset
      Compensation  
Liability
 

Balance, January 1, 2015

  $ 73,278      $ 207,306   

Granted

    89,965        89,965   

Settled

           (75,002

Forfeited

    (104     (619

Amortization

    (24,614       

Change in fair value related to:

   

Increase in fair value of underlying investments

           4,136   

Adjustment for estimated forfeitures

           2,565   

Other

    (844     (2,244
 

 

 

   

 

 

 

Balance, March 31, 2015

  $ 137,681      $ 226,107   
 

 

 

   

 

 

 
    Prepaid
Compensation

Asset
      Compensation  
Liability
 

Balance, January 1, 2014

  $ 60,433      $ 162,422   

Granted

    92,711        92,711   

Settled

           (45,450

Forfeited

    (9     (2

Amortization

    (19,407       

Change in fair value related to:

   

Increase in fair value of underlying investments

           2,626   

Adjustment for estimated forfeitures

           899   

Other

    116        232   
 

 

 

   

 

 

 

Balance, March 31, 2014

  $ 133,844      $ 213,438   
 

 

 

   

 

 

 

The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 1.1 years subsequent to March 31, 2015.

The following is a summary of the impact of LFI 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, 2015 and 2014:

 

     Three Months Ended
March 31,
 
         2015              2014      

Amortization, net of forfeitures

   $ 26,664       $ 20,313   

Change in the fair value of underlying investments

     4,136         2,626   
  

 

 

    

 

 

 

Total

   $ 30,800       $ 22,939   
  

 

 

    

 

 

 

 

32


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

13. EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined benefit pension plans (the “pension plans”) and, in the U.S., a partially funded contributory post-retirement plan covering qualifying U.S. employees (the “medical plan” and together with the pension plans, the “post-retirement plans”). The Company also offers defined contribution plans to its employees. The post-retirement 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 condensed 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 (the “Trustees”). Management also evaluates from time to time whether to make voluntary contributions to the plans.

On March 31, 2015, the Company and the Trustees of the U.K. defined benefit pension plans concluded the December 31, 2013 triennial valuations of the plans. In connection with such valuations, the Company and the Trustees agreed upon pension funding terms pursuant to which the Company agreed, among other things, (i) to make contributions of 11.2 million British pounds into the plans by way of three equal contributions at June 30, September 30 and December 31, 2015, and (ii) that the Company’s existing account security arrangement would be dissolved and the cash balances within such accounts would be paid into the plans by June 30, 2015. The aggregate amount in the account security arrangement was approximately $16,600 and $17,500 at March 31, 2015 and December 31, 2014, respectively, and has been recorded in “cash deposited with clearing organizations and other segregated cash” on the accompanying condensed consolidated statements of financial condition. Income on the account security arrangement accretes to the Company and is recorded in interest income.

The following table summarizes the components of net periodic benefit cost (credit) related to the Company’s post-retirement plans for the three month periods ended March 31, 2015 and 2014:

 

    Pension Plans     Medical Plan  
    Three Months Ended March 31,  
        2015             2014             2015             2014      

Components of Net Periodic Benefit Cost (Credit):

       

Service cost

  $ 360      $ 223      $ 8      $ 12   

Interest cost

    6,106        7,531        49        53   

Expected return on plan assets

    (7,071     (8,079    

Amortization of:

       

Prior service cost

    603        733       

Net actuarial loss (gain)

    1,146        1,111          (23
 

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

  $ 1,144      $ 1,519      $ 57      $ 42   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

14. INCOME TAXES

Lazard Ltd, through its subsidiaries, is subject to U.S. federal income taxes on all of its U.S. operating income, as well as on the portion of non-U.S. income attributable to its U.S. subsidiaries. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions. Lazard Group is also subject to New York City Unincorporated Business Tax (“UBT”) attributable to its operations apportioned to New York City.

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

The Company recorded income tax provisions of $12,017 and $21,751 for the three month periods ended March 31, 2015 and 2014, respectively, representing effective tax rates of 16.1% and 20.3%, respectively. The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates reflected above principally relates to (i) taxes payable to foreign jurisdictions that are not offset against U.S. income taxes, (ii) foreign source income (loss) not subject to U.S. income taxes (including interest on intercompany financings), (iii) change in the U.S. federal valuation allowance affecting the provision for income taxes, 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. The Company provides for U.S. income taxes on a current basis for 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 partnership interests that were held by former and current managing directors of the Company (including the Company’s executive officers) in connection with the Company’s separation and recapitalization that occurred in May 2005, and the subsequent exchanges of LAZ-MD Holdings exchangeable interests for shares of Class A common stock, have resulted in increases in the tax basis of the tangible or intangible assets of Lazard Group. The tax receivable agreement requires the Company to pay LMDC Holdings LLC (“LMDC 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 these increases in tax basis. The Company records provisions for payments under the tax receivable agreement to the extent they are probable and estimable. During the three month period ended March 31, 2015, the Company recorded a “provision pursuant to tax receivable agreement” on the condensed consolidated statement of operations of $6,535 (no provision was recorded for the three month period ended March 31, 2014), with the liability related thereto included within “related party payables” on the condensed consolidated statement of financial condition (see Note 16 of Notes to Condensed Consolidated Financial Statements).

 

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, 2015 and 2014 are computed as described below.

Basic Net Income Per Share

Numerator—utilizes net income attributable to Lazard Ltd for the respective periods, 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 periods, 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 periods as in the basic net income per share calculation described above, plus, to the extent applicable and dilutive, (i) changes in net

 

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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation and, in 2014, on an “as-if-exchanged” basis, amounts applicable to LAZ-MD Holdings exchangeable interests and (ii) income tax related to (i) above.

Denominator—utilizes the weighted average number of shares of Class A common stock outstanding for the respective periods 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 required to settle share-based incentive compensation and, in 2014, LAZ-MD Holdings exchangeable interests, using the “treasury stock” method or the “as-if-exchanged” basis, as applicable.

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, 2015 and 2014 are presented below:

 

                                                       
    Three Months Ended 
March 31,
 
    2015     2014  

Net income attributable to Lazard Ltd

  $ 55,953        $80,842   

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

             
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - basic

    55,953        80,842   

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, and exchangeable interests, net of tax

           433   
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - diluted

  $ 55,953        $81,275   
 

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding

    123,583,678        121,361,210   

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

    72,011        414,997   
 

 

 

   

 

 

 

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

    123,655,689        121,776,207   

Add - dilutive effect, as applicable, of:

   

Weighted average number of incremental shares of Class A common stock issuable from share-based incentive compensation and exchangeable interests

    10,080,257        12,249,784   
 

 

 

   

 

 

 

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

    133,735,946        134,025,991   
 

 

 

   

 

 

 

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

   

Basic

    $0.45        $0.66   
 

 

 

   

 

 

 

Diluted

    $0.42        $0.61   
 

 

 

   

 

 

 

 

35


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LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

16. RELATED PARTIES

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

 

                                           
     March 31,
       2015      
     December 31,
       2014      
 

Receivables

     

LMDC Holdings

   $ 1,059       $ 1,107   

MBA Lazard Holdings S.A. and its affiliates

     115         115   

Other

     7         45   
  

 

 

    

 

 

 

Total

   $ 1,181       $ 1,267   
  

 

 

    

 

 

 

Payables

     

LMDC Holdings (a)

   $ 27,206       $ 20,654   

MBA Lazard Holdings S.A. and its affiliates

     1,338         1,240   
  

 

 

    

 

 

 

Total

   $ 28,544       $ 21,894   
  

 

 

    

 

 

 

 

(a) Primarily relating to obligations pursuant to the tax receivable agreement (See Note 14 of Notes to Condensed Consolidated Financial Statements).

LMDC Holdings is owned in large part by former and current managing directors of the Company (including the Company’s executive officers).

MBA Lazard Holdings S.A. and its affiliates (“MBA”), in which the Company has a 50% ownership interest, has operating companies in several South American countries.

 

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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 Securities Exchange Act of 1934. Under the basic method permitted by this rule, the minimum required net capital, as defined, is a specified fixed percentage (6  2/3%) 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. In addition, the ratio of aggregate indebtedness (as defined) to net capital may not exceed 15:1. At March 31, 2015, LFNY’s regulatory net capital was $62,839, which exceeded the minimum requirement by $59,209. LFNY’s aggregate indebtedness to net capital ratio was 0.87:1 as of March 31, 2015.

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (collectively, the “U.K. Subsidiaries”) are regulated by the Financial Conduct Authority. At March 31, 2015, the aggregate regulatory net capital of the U.K. Subsidiaries was $120,399, which exceeded the minimum requirement by $103,121.

CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the ACPR for its banking activities conducted through its subsidiary, LFB. The investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), also are subject to regulation and supervision by the Autorité des Marchés Financiers. At March 31, 2015, the consolidated regulatory net capital of CFLF was $128,933, which exceeded the minimum requirement set for regulatory capital levels by $88,477. In addition, pursuant to the consolidated supervision rules in the European Union, LFB, in particular, as a French credit institution, is required to be supervised by a regulatory body, either in the U.S. or in the European Union. During the third quarter of 2013, the Company and the ACPR agreed on terms for the consolidated supervision of LFB and certain other non-Financial Advisory European subsidiaries of the Company (referred to herein, on a combined basis, as the “combined European regulated group”) under such rules. Under this new supervision, the combined European regulated group is required to comply with minimum requirements for regulatory net capital to be reported on a semi-annual basis and satisfy periodic financial and other reporting obligations. At December 31, 2014, the regulatory net capital of the combined European regulated group was $180,047, which exceeded the minimum requirement set for regulatory capital levels by $104,309. Additionally, the combined European regulated group, together with our European Financial Advisory entities, is required to perform an annual risk assessment and provide certain other information on a periodic basis, including financial reports and information relating to financial performance, balance sheet data and capital structure (which is similar to the information that the Company had already been providing informally). This new supervision under, and provision of information to, the ACPR became effective December 31, 2013.

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, 2015, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $97,272, which exceeded the minimum required capital by $72,054.

At March 31, 2015, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

Any new or expanded rules and regulations that may be adopted in countries in which we operate (including regulations that have not yet been proposed) could affect us in other ways.

 

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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 its Financial Advisory and Asset Management business segments, as described in Note 1 of Notes to Condensed Consolidated Financial Statements. In addition, as described in Note 1 of Notes to Condensed Consolidated Financial Statements, the Company records selected other activities in its Corporate segment.

The Company’s segment information for the three months ended March 31, 2015 and 2014 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 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, human resources, legal, facilities management and senior management activities.

 

38


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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,
 
                2015                 2014        

Financial Advisory

   Net Revenue    $ 301,519      $ 275,496   
   Operating Expenses      242,935        245,415   
     

 

 

   

 

 

 
   Operating Income    $ 58,584      $ 30,081   
     

 

 

   

 

 

 

Asset Management

   Net Revenue    $ 279,807      $ 268,564   
   Operating Expenses      181,792        175,761   
     

 

 

   

 

 

 
   Operating Income    $ 98,015      $ 92,803   
     

 

 

   

 

 

 

Corporate

   Net Revenue    $ (3,577   $ (10,660
   Operating Expenses      78,359        5,044   
     

 

 

   

 

 

 
   Operating Loss    $ (81,936   $ (15,704
     

 

 

   

 

 

 

Total

   Net Revenue    $ 577,749      $ 533,400   
   Operating Expenses      503,086        426,220   
     

 

 

   

 

 

 
   Operating Income    $ 74,663      $ 107,180   
     

 

 

   

 

 

 

 

     As Of  
     March 31,
2015
     December 31,
2014
 

Total Assets

     

Financial Advisory

   $ 751,621       $ 785,557   

Asset Management

     579,027         588,403   

Corporate

     1,497,083         1,958,276   
  

 

 

    

 

 

 

Total

   $ 2,827,731       $ 3,332,236   
  

 

 

    

 

 

 

 

39


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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, 2014 (the “Form 10-K”). All references to “2015”, “2014”, “first quarter”, “three months” or “the period” refer to, as the context requires, the three month periods ended March 31, 2015 and March 31, 2014.

Forward-Looking Statements and Certain Factors that May Affect Our Business

Management has included in Parts I and II of this Form 10-Q, including in its MD&A, statements that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target,” “goal” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies, business plans and initiatives and anticipated trends in our business. These statements 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 global or regional financial markets;

 

   

a decline in our revenues, for example due to a decline in overall mergers and acquisitions (“M&A”) activity, our share of the M&A market or our assets under management (“AUM”);

 

   

losses caused by financial or other problems experienced by third parties;

 

   

losses due to unidentified or unanticipated risks;

 

   

a lack of liquidity, i.e., ready access to funds, for use in our businesses; and

 

   

competitive pressure on our businesses and on our ability to retain and attract employees at current compensation levels.

These risks and uncertainties are not exhaustive. Other sections of the Form 10-K and this Form 10-Q describe additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations and we do not intend to do so.

Forward-looking statements include, but are not limited to, statements about:

 

   

financial goals, including the ratio of awarded compensation and benefits expense to operating revenue;

 

   

ability to deploy surplus cash through dividends, share repurchases and debt repurchases;

 

   

ability to offset stockholder dilution through share repurchases;

 

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possible or assumed future results of operations and operating cash flows;

 

   

strategies and investment policies;

 

   

financing plans and the availability of short-term borrowing;

 

   

competitive position;

 

   

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

 

   

potential growth opportunities available to our businesses;

 

   

recruitment and retention of our managing directors and employees;

 

   

potential levels of compensation expense and non-compensation expense;

 

   

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

 

   

likelihood of success and impact of litigation;

 

   

expected tax rates, including effective tax rates;

 

   

changes in interest and tax rates;

 

   

expectations with respect to the economy, the securities markets, the market for mergers, acquisitions and strategic advisory and restructuring activity, the market for asset management activity and other macroeconomic and 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 AUM in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC (together with its subsidiaries, “LAM”). 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 one of the world’s preeminent financial advisory and asset management firms. We have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Founded in 1848 in New Orleans, we currently operate from 43 cities in key business and financial centers across 27 countries throughout North America, Europe, Asia, Australia, the Middle East, and Central and South America.

Our primary business purpose is to serve our clients. Our deep roots in business centers around the world form a global network of relationships with key decision-makers in corporations, governments and investing institutions. This network is both a competitive strength and a powerful resource for Lazard and our clients. As a firm that competes on the quality of our advice, we have two fundamental assets: our people and our reputation.

We operate in cyclical businesses across multiple geographies, industries and asset classes. In recent years, we have expanded our geographic reach, bolstered our industry expertise and continued to build in growth areas. Companies, government bodies and investors seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global 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.

 

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Our principal sources of revenue are derived from activities in the following business segments:

 

   

Financial Advisory, which offers corporate, partnership, institutional, government, sovereign and individual clients across the globe a wide array of financial advisory services regarding M&A and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and

 

   

Asset Management, which offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients.

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

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

Our consolidated net revenue was derived from the following segments:

 

      Three Months Ended 
March 31,
 
         2015             2014      

Financial Advisory

     52     52

Asset Management

     49        50   

Corporate

     (1     (2
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

We also invest our own capital from time to time, generally alongside capital of qualified institutional and individual investors in alternative investments or private equity investments, and, since 2005, we have engaged in a number of alternative investments and private equity activities, including, historically, investments through (i) the Edgewater Funds (“Edgewater”), our Chicago-based private equity firm (see Note 10 of Notes to Condensed Consolidated Financial Statements), (ii) Lazard Australia Corporate Opportunities Fund 2 (“COF2”), a Lazard-managed Australian fund targeting Australasian mid-market investments, (iii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small-to mid-cap European companies and (iv) a fund targeting significant noncontrolling-stake investments in established private companies. We also make investments to seed our Asset Management strategies.

Business Environment and Outlook

Economic and global financial market conditions can materially affect our financial performance. As described above, our principal sources of revenue are derived from activities in our Financial Advisory and Asset Management business segments. As our Financial Advisory revenues are primarily dependent on the successful completion of merger, acquisition, restructuring, capital raising or similar transactions, and our Asset Management revenues are primarily driven by the levels of AUM, weak economic and global financial market conditions can result in a challenging business environment for M&A and capital-raising activity as well as our Asset Management business, but may provide opportunities for our restructuring business.

 

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Despite some market volatility in the early part of the first quarter of 2015, equity market indices for developed markets at March 31, 2015 generally increased as compared to such indices at March 31, 2014. Emerging markets indices at March 31, 2015 have decreased as compared to March 31, 2014, but are up slightly in the first quarter of 2015 compared to December 31, 2014. In the global M&A markets during the first quarter of 2015, the value of all completed M&A transactions increased as compared to the same period in the prior year, as did the subset of such transactions involving values greater than $500 million. During the same time, the value of all announced M&A transactions, including the subset of such transactions involving values greater than $500 million, also increased, reflecting an active global M&A environment. While the value of completed and announced transactions increased as compared to the prior period, the number of announced transactions (excluding the subset of announced transactions involving values greater than $500 million) decreased. During the first quarter of 2015, global restructuring activity remained low, consistent with the last several years.

In the first quarter of 2015, corporate cash balances remain high and interest rates remain low. The U.S. macroeconomic environment has improved, but Europe and many of the developing markets remain unsettled, particularly with respect to foreign currency markets. Volatility has generally reduced across the capital markets. Although market and foreign currency volatility may continue, the longer-term trends appear to remain favorable for both of our businesses.

We intend to leverage our existing infrastructure to capitalize on any global macroeconomic recovery, positive momentum in the M&A cycle, and strength in the global equity markets. We believe that we can generate revenue growth by remaining adequately staffed to capitalize on any macroeconomic recovery and deploying our intellectual capital to generate new revenue streams.

Our outlook with respect to our Financial Advisory and Asset Management businesses is described below.

 

  Financial Advisory – The fundamentals for continued growth of a strategic M&A cycle appear to remain in place. Demand continues for expert, independent strategic advice that can be levered across geographies and our range of advisory capabilities. The global scale and breadth of our Financial Advisory business allows us to advise on large, complex cross-border transactions across a variety of industries. In addition, we believe our businesses throughout the emerging markets, Japan and Australia position us for growth in these markets, while enhancing our relationships with, and the services that we can provide to, clients in developed economies.

 

  Asset Management – Generally, we have seen increased investor demand across regions and investment platforms. In the short to intermediate term, we expect most of our growth will come from defined benefit and defined contribution plans in the developed economies because of their sheer scope and size. Over the longer term, we expect an increasing share of our AUM to come from the developing economies in Asia, Latin America and the Middle East, as their retirement systems evolve and individual wealth is increasingly deployed in the financial markets. Our global footprint is already well established in the developed economies and we expect our business in the developing economies will continue to expand. Given our globally diversified platform and our ability to provide investment solutions for a global mix of clients, we believe we are positioned to benefit from growth that may occur in the asset management industry. In recent years, we have expanded the global footprint of our Asset Management business by opening offices in Zurich, Singapore, Dubai and Dublin. We are continually developing and seeding new investment strategies that extend our existing platforms. Recent examples of growth initiatives include the following investment strategies: Emerging Markets Debt, Emerging Markets Small Cap Equity, Real Estate, Managed Volatility Strategies, Middle East North African Equities, Asian Equities, U.S. Long/Short Equity and International Concentrated Equity.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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See Item 1A, “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.

Overall, we continue to focus on the development of our business, including the generation of stable revenue growth, earnings growth and shareholder returns, the prudent management of our costs and expenses, the efficient use of our assets and the return of capital to our shareholders.

Certain data with respect to our Financial Advisory and Asset Management businesses is included below.

Financial Advisory

As reflected in the following table, which sets forth global M&A industry statistics, the value of all completed transactions, including completed transactions with values greater than $500 million, increased in the 2015 period as compared to the 2014 period, while the number of such transactions decreased. With respect to announced M&A transactions, the value of all transactions increased, while the number decreased, in the 2015 period compared to the 2014 period.

 

      Three Months Ended
March 31, 
 
      2015      2014      %
Incr /  (Decr)
 
    

($ in billions)

 

Completed M&A Transactions:

        

All deals:

        

Value

   $ 803       $ 738         9

Number

     8,599         9,631         (11 )% 

Deals Greater than $500 million:

        

Value

   $ 632       $ 556         14

Number

     243         260         (7 )% 

Announced M&A Transactions:

        

All deals:

        

Value

   $ 880       $ 733         20

Number

     9,394         9,830         (4 )% 

Deals Greater than $500 million:

        

Value

   $ 682       $ 544         25

Number

     268         245         9

 

Source: Dealogic as of April 2, 2015.

Global restructuring activity during the 2015 period, as measured by the number of corporate defaults, decreased as compared to the 2014 period, and the aggregate value of debt defaults remained low, consistent with the last several years. The number of defaulting issuers increased to 16 in the 2015 period, according to Moody’s Investors Service, Inc., as compared to 8 in the 2014 period. The value of defaults also increased in the 2015 period as compared to the 2014 period, primarily due to one notable default of significant value in the U.S.

 

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Asset Management

The percentage change in major equity market indices at March 31, 2015, as compared to such indices at December 31, 2014, and at March 31, 2014, is shown in the table below.

 

      Percentage Changes
March 31, 2015 vs.
 
     December 31,
2014
    March 31,
2014
 

Euro Stoxx

     18     17

MSCI Emerging Market

     2     (2 )% 

MSCI World Index

     2     4

S&P 500

     1     10

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM and the nature of the AUM product mix. Accordingly, market movements, foreign currency exchange rate volatility and changes in our AUM product mix will impact the level of revenues we receive from our Asset Management business when comparing periodic results. A substantial portion of our AUM is invested in equities. Movements in AUM during the period generally reflect the changes in equity market indices. Our AUM at March 31, 2015 increased 1% versus AUM at December 31, 2014, primarily due to market appreciation and net inflows, partially offset by adverse foreign exchange movements. Average AUM in the 2015 period increased 7% as compared to average AUM in the 2014 period.

Financial Statement Overview

Net Revenue

The majority of Lazard’s Financial Advisory net revenue historically has been earned from the successful completion of M&A transactions, 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 defaults and the environment for capital raising activities, particularly in the industries and geographic markets in which Lazard focuses. In some client engagements, often those involving financially distressed companies, revenue is earned in the form of retainers and similar fees that are contractually agreed upon with each client for each assignment and are not necessarily linked to the completion of a transaction. In addition, Lazard also earns fees from providing strategic advice to clients, with such fees not being dependent on a specific transaction, and may also earn fees in connection with public and private securities offerings. Significant fluctuations in Financial Advisory net revenue can occur over the course of any given year, because a significant portion of such net revenue is earned upon the successful completion of a transaction, restructuring or capital raising activity, the timing of which is uncertain and is not subject to Lazard’s control.

Lazard’s Asset Management segment principally includes LAM, LFG and Edgewater. Asset Management net revenue is derived from fees for investment management and advisory services provided to clients. As noted above, the main driver of Asset Management net revenue is the level and product mix of AUM, which is generally influenced by the performance of the global equity markets and, to a lesser extent, fixed income markets as well as Lazard’s investment performance, which impacts its ability to successfully attract and retain assets. As a result, fluctuations (including timing thereof) in financial markets and client asset inflows and outflows have a direct effect on Asset Management net revenue and operating income. Asset Management fees are generally based on the level of AUM measured daily, monthly or quarterly, and an increase or reduction in AUM, due to market price fluctuations, currency fluctuations, changes in product mix, or net client asset flows will result in a corresponding increase or decrease in management fees. The majority of our investment advisory contracts are generally terminable at any time or on notice of 30 days or less. Institutional and individual clients, and firms with which we have strategic alliances, can terminate their relationship with us, reduce the aggregate amount of AUM or shift their funds to other types of accounts with different rate structures for a number of reasons, including investment performance, changes in prevailing interest rates and financial market performance. In addition, as Lazard’s AUM includes significant amounts of assets that are denominated in currencies other than U.S. Dollars, changes in the

 

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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 and alternative investment funds, such as hedge funds and private equity funds, and lower fees earned on fixed income and cash management products.

The Company earns performance-based incentive fees on various investment products, including traditional products and alternative investment funds, such as hedge funds and private equity funds.

For hedge funds, incentive fees are calculated based on a specified percentage of a fund’s net appreciation, in some cases in excess of established benchmarks or thresholds. The Company records incentive fees on traditional products and hedge funds at the end of the relevant performance measurement period, when potential uncertainties regarding the ultimate realizable amounts have been determined. The incentive fee measurement period is generally an annual period (unless an account terminates during the year). The incentive fees received at the end of the measurement period are not subject to reversal or payback. Incentive fees on hedge funds are often subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain gains realized by the hedge funds in future periods before any incentive fees can be earned.

For private equity funds, incentive fees may be earned in the form of a “carried interest” if profits arising from realized investments exceed a specified threshold. Typically, such carried interest is ultimately calculated on a whole-fund basis and, therefore, clawback of carried interest during the life of the fund can occur. As a result, incentive fees earned on our private equity funds are not recognized until potential uncertainties regarding the ultimate realizable amounts have been determined, including any potential for clawback.

Corporate segment net revenue consists primarily of investment gains and losses on the Company’s “seed investments” related to our Asset Management business, principal investments in private equity funds and “equity method” investments, net of hedging activities, as well as gains and losses on investments held in connection with Lazard Fund Interests (“LFI”) and 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.

Although Corporate segment net revenue during the first quarter of 2015 represented (1)% of Lazard’s net revenue, total assets in the Corporate segment represented 53% of Lazard’s consolidated total assets as of March 31, 2015, which are attributable to investments in money market funds, debt and equity securities, interests in alternative investment, debt, equity and private equity funds, 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, 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) LFI and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements), (iii) a provision for discretionary or guaranteed cash bonuses and profit pools and (iv) when applicable, severance payments. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our actual and forecasted operating and financial performance, staffing levels, 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 reconciliations and calculations with respect to “adjusted compensation and benefits expense” and related ratios to “operating revenue,” see the table under “Consolidated Results of Operations” below.

 

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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, are the most appropriate measures to assess the annual cost of compensation and provide the most meaningful basis for comparison of compensation and benefits expense between present, historical and future years. “Awarded compensation and benefits expense” for a given year is calculated using “adjusted compensation and benefits expense,” also a non-U.S. GAAP measure, as modified by the following items:

 

   

We deduct amortization expense recorded for accounting principles generally accepted in the United States of America (“U.S. GAAP”) purposes in each fiscal year associated with the vesting of deferred incentive compensation awards,

 

   

We add (i) the deferred incentive compensation awards granted applicable to the relevant year-end compensation process (e.g. deferred incentive compensation awards granted in 2015, 2014 and 2013 related to the 2014, 2013 and 2012 year-end compensation processes, respectively) and (ii) investments in people (e.g. “sign-on” bonuses) and other special deferred incentive compensation 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.

Compensation and benefits expense is the largest component of our operating expenses. Our goal is for annual awarded compensation and benefits expense to rise at a slower rate than operating revenue growth, and if operating revenue declines, awarded compensation and benefits expense should also decline. In addition, we seek to maintain discipline with respect to the rate at which we award deferred compensation. Based on a similar level and mix of revenues from our business as in 2012 and a gradual improvement in the macroeconomic environment, we believe that over the cycle we can attain a ratio of awarded compensation and benefits expense to operating revenue in the mid-to-high-50s percentage range, which compares to 55.8% for the year ended December 31, 2014. While we have implemented initiatives that we believe will assist us in attaining a ratio within this range, there can be no guarantee that such a ratio will be attained or that our policies or initiatives will not change in the future. We may benefit from pressure on compensation costs within the financial services industry in future periods; however, increased competition for senior professionals, changes in the macroeconomic environment or the financial markets generally, lower operating revenue resulting from, for example, a decrease in M&A activity, our share of the M&A market or our AUM levels, changes in the mix of revenues from our businesses or various other factors could prevent us from attaining this goal.

Our operating expenses also include “non-compensation expense,” which includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and other expenses. In 2015, non-compensation expense also included the expenses related to the redemption of a substantial majority of the Company’s 6.85% senior notes due 2017 (the “2017 Notes”) (see Note 9 of Notes to Condensed Consolidated Financial Statements). For all periods, the amortization of intangible assets related to acquisitions pertains primarily to the acquisition of Edgewater.

We believe that “adjusted non-compensation expense,” a non-U.S. GAAP measure, provides a more meaningful basis for assessing our operating results. For calculations with respect to “adjusted non-compensation expense” see the table under “Consolidated Results of Operations” below.

Provision for Income Taxes

Lazard Ltd, through its subsidiaries, is subject to U.S. federal income taxes on all of its U.S. operating income, as well as on the portion of non-U.S. income attributable to its U.S. subsidiaries. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions. Lazard Group is also subject to Unincorporated Business Tax (“UBT”) attributable to its operations apportioned to New York City (see Note 14 of Notes to Condensed Consolidated Financial Statements for additional information).

 

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Noncontrolling Interests

Noncontrolling interests primarily consist of amounts related to Edgewater’s management vehicles that the Company is deemed to control but not own and, through May 2014, the amount attributable to LAZ-MD Holdings LLC’s (“LAZ-MD Holdings”) ownership interest in the net income of Lazard Group. See Note 11 of Notes to Condensed Consolidated Financial Statements for information regarding the Company’s noncontrolling interests. In May 2014, the remaining Lazard Group common membership interests held by LAZ-MD Holdings were exchanged for shares of the Company’s Class A common stock. Following the exchange, Lazard Group became a wholly-owned indirect subsidiary of Lazard Ltd, and the sole issued and outstanding share of the Company’s Class B common stock was automatically converted into one share of the Company’s Class A common stock pursuant to the provisions of the Company’s bye-laws, resulting in only one outstanding class of common stock. See Note 1 of Notes to Condensed Consolidated Financial Statements.

Consolidated Results of Operations

Lazard’s condensed 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 stockholders’ equity. Foreign currency remeasurement gains and losses on transactions in non-functional currencies are included in the condensed consolidated statements of operations.

A portion of our net revenue is derived from transactions that are denominated in currencies other than the U.S. dollar. Since the middle of 2014, the value of the U.S. dollar has strengthened against many other major currencies. As a result, net revenue for the three months ended March 31, 2015 was negatively impacted in comparison to the prior year period. However, a portion of our operating expenses also are denominated in currencies other than the U.S. dollar. Consequently, operating income for the three months ended March 31, 2015 was not significantly affected in comparison to the prior year period by the strengthening of the U.S. dollar.

The condensed consolidated financial statements are prepared in conformity with 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,
 
          2015         2014  
    

($ in thousands)

 

Net Revenue

   $ 577,749      $ 533,400   

Operating Expenses:

    

Compensation and benefits

     328,502        321,565   

Non-compensation

     167,016        103,435   

Amortization of intangible assets related to acquisitions

     1,033        1,220   

Provision pursuant to tax receivable agreement

     6,535        —     
  

 

 

   

 

 

 

Total operating expenses

     503,086        426,220   
  

 

 

   

 

 

 

Operating Income

     74,663        107,180   

Provision for income taxes

     12,017        21,751   
  

 

 

   

 

 

 

Net Income

     62,646        85,429   

Less – Net Income Attributable to Noncontrolling Interests

     6,693        4,587   
  

 

 

   

 

 

 

Net Income Attributable to Lazard Ltd

   $ 55,953      $ 80,842   
  

 

 

   

 

 

 

Operating Income, as a % of net revenue

     12.9     20.1
  

 

 

   

 

 

 

 

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The tables below describe the components of operating revenue, adjusted compensation and benefits expense, adjusted non-compensation expense, earnings from operations and related key ratios, which are non-U.S. GAAP measures used by the Company to manage its business. 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,

 
         2015         2014  
    

($ in thousands)

 

Operating Revenue:

    

Net revenue

   $ 577,749      $ 533,400   

Adjustments:

    

Interest expense (a)

     16,077        15,716   

Revenue related to noncontrolling interests (b)

     (8,734     (6,266

Gains on investments pertaining to LFI (c)

     (4,136     (2,626
  

 

 

   

 

 

 

Operating revenue

   $ 580,956      $ 540,224   
  

 

 

   

 

 

 

 

(a) Interest expense (excluding interest expense incurred by LFB) is added back in determining operating revenue because such expense relates to corporate financing activities and is not considered to be a cost directly related to the revenue of our business.
(b) Revenue related to the consolidation of noncontrolling interests is excluded from operating revenue because the Company has no economic interest in such amount.
(c) Represents changes in the fair value of investments held in connection with LFI and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from compensation and benefits expense.

 

     Three Months Ended
March 31,
 
     2015     2014  
    

($ in thousands)

 

Adjusted Compensation and Benefits Expense:

    

Total compensation and benefits expense

   $ 328,502      $ 321,565   

Adjustments:

    

Noncontrolling interests (a)

     (1,217     (1,148

Charges pertaining to LFI (b)

     (4,136     (2,626
  

 

 

   

 

 

 

Adjusted compensation and benefits expense

   $ 323,149      $ 317,791   
  

 

 

   

 

 

 

Adjusted compensation and benefits expense, as a % of operating revenue

     55.6     58.8
  

 

 

   

 

 

 

 

(a) Expenses related to the consolidation of noncontrolling interests are excluded because Lazard has no economic interest in such amounts.
(b) Represents changes in fair value of the compensation liability recorded in connection with LFI and other similar deferred incentive compensation awards for which a corresponding equal amount is excluded from operating revenue.

 

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     Three Months Ended
March 31,
 
         2015             2014      
    

($ in thousands)

 

Adjusted Non-Compensation Expense:

    

Total non-compensation expense

     $167,016        $103,435   

Adjustments:

    

Noncontrolling interests (a)

     (363     (434

Charges pertaining to senior debt refinancing (b)

     (60,219       
  

 

 

   

 

 

 

Adjusted non-compensation expense

     $106,434        $103,001   
  

 

 

   

 

 

 

Adjusted non-compensation expense, as a % of operating revenue

     18.3     19.1
  

 

 

   

 

 

 

 

(a) Expenses related to the consolidation of noncontrolling interests are excluded because the Company has no economic interest in such amounts.
(b) Charges pertaining to the redemption of a substantial majority of the Company’s 2017 Notes are excluded because of the non-recurring nature of such transaction. See “—Liquidity and Capital Resources—Financing Activities.”

 

     Three Months Ended
March 31,
 
         2015         2014  
    

($ in thousands)

 

Earnings From Operations:

    

Operating revenue

   $ 580,956      $ 540,224   

Deduct:

    

Adjusted compensation and benefits expense

     (323,149     (317,791

Adjusted non-compensation expense

     (106,434     (103,001
  

 

 

   

 

 

 

Earnings from operations

   $ 151,373      $ 119,432   
  

 

 

   

 

 

 

Earnings from operations, as a % of operating revenue

     26.1     22.1
  

 

 

   

 

 

 

Headcount information is set forth below:

 

     As Of
     March 31,
2015
   December 31,
2014
   March 31,
2014

Headcount:

              

Managing Directors:

              

Financial Advisory

       147          139          140  

Asset Management

      
90
 
       81          82  

Corporate

       17          16          17  
    

 

 

      

 

 

      

 

 

 

Total Managing Directors

      
254
 
       236          239  

Other Employees:

              

Business segment professionals

      
1,121
 
       1,139          1,082  

All other professionals and support staff

      
1,151
 
       1,148          1,119  
    

 

 

      

 

 

      

 

 

 

Total

      
2,526
 
       2,523          2,440  
    

 

 

      

 

 

      

 

 

 

 

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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, 2015 versus March 31, 2014

The Company reported net income attributable to Lazard Ltd of $56 million, as compared to net income of $81 million in the 2014 period. The changes in the Company’s operating results during these periods are described below.

Net revenue increased $44 million, or 8%, with operating revenue increasing $41 million, or 8%, as compared to the 2014 period. Fee revenue from investment banking and other advisory activities increased $29 million, or 11%, primarily due to increases in M&A and Other Advisory fees. The increase in M&A and Other Advisory fee revenue was primarily due to an increase in the number of completed transactions involving fees greater than $1 million as compared to the 2014 period. Asset management fees, including incentive fees, increased $9 million, or 4%, principally reflecting a $13 billion, or 7%, increase in average AUM as compared to the 2014 period. In the aggregate, interest income, other revenue and interest expense increased $7 million, or 87%, as compared to the 2014 period.

Compensation and benefits expense increased $7 million, or 2%, as compared to the 2014 period, primarily driven by an increase in amortization of deferred compensation expense, partially offset by a decrease in discretionary compensation.

Adjusted compensation and benefits expense (which excludes certain items and which we believe allows for improved comparability between periods, as described above) was $323 million, an increase of $5 million, or 2%, as compared to $318 million in the 2014 period, primarily due to the factors described above. The ratio of adjusted compensation and benefits expense to operating revenue was 55.6% for the 2015 period, as compared to 58.8% for the 2014 period and 55.6% for full-year 2014.

Non-compensation expense increased $64 million, or 61%, as compared to the 2014 period. In the 2015 period, non-compensation expense included a charge of $60 million related to the redemption of a substantial majority of the Company’s 2017 Notes. When excluding such charge, as well as non-compensation costs relating to noncontrolling interests, adjusted non-compensation expense increased $3 million, or 3%, as compared to the 2014 period, primarily reflecting increased business activity and investment in our businesses. The ratio of adjusted non-compensation expense to operating revenue was 18.3%, as compared to 19.1% in the 2014 period.

Amortization of intangible assets remained substantially unchanged in the 2015 period as compared to the 2014 period.

Based on the expected utilization of certain deferred tax assets that are subject to the tax receivable agreement, the provision pursuant to the tax receivable agreement in the 2015 period was $7 million (see Note 14 of Notes to Condensed Consolidated Financial Statements for additional information).

Operating income (which included the charge relating to the redemption of a substantial majority of the Company’s 2017 Notes), decreased $33 million as compared to the 2014 period, and, as a percentage of net revenue, was 12.9%, as compared to 20.1% in the 2014 period.

Earnings from operations, which excluded the charge related to the redemption of a substantial majority of the Company’s 2017 Notes, increased $32 million, or 27%, as compared to the 2014 period, and, as a percentage of operating revenue, was 26.1%, as compared to 22.1% in the 2014 period.

 

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The provision for income taxes reflects an effective tax rate of 16.1%, as compared to 20.3% for the 2014 period. The decrease in the effective tax rate primarily reflects the change in the geographic mix of earnings and the increased utilization of net operating loss carryforwards and other attributes (see Note 14 of Notes to Condensed Consolidated Financial Statements for additional information).

Net income attributable to noncontrolling interests increased $2 million as compared to the 2014 period.

Business Segments

The following is a discussion of net revenue and operating income for the Company’s segments: Financial Advisory, Asset Management and Corporate. Each segment’s operating expenses include (i) compensation and benefits expenses that are incurred directly in support of the segment and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourcing, and indirect support costs (including compensation and benefits expense and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, human resources, legal, information technology, facilities management and senior management activities. Such support costs are allocated to the relevant segments based on various statistical drivers such as revenue, headcount, square footage and other factors.

Financial Advisory

The following tables summarize the reported operating results attributable to the Financial Advisory segment:

 

     Three Months Ended 
March 31,
 
     2015     2014  
    

($ in thousands)

 

M&A and Other Advisory

   $ 260,804      $ 239,144   

Capital Raising

     17,569        6,216   
  

 

 

   

 

 

 

Total Strategic Advisory

     278,373        245,360   

Restructuring

     23,146        30,136   
  

 

 

   

 

 

 

Net Revenue

     301,519        275,496   

Operating Expenses 

     242,935        245,415   
  

 

 

   

 

 

 

Operating Income

   $ 58,584      $ 30,081   
  

 

 

   

 

 

 

Operating Income, as a % of net revenue

     19.4     10.9
  

 

 

   

 

 

 

Net revenue trends in Financial Advisory for M&A and Other Advisory and Restructuring are generally correlated to the level of completed industry-wide M&A transactions and restructuring transactions occurring subsequent to corporate debt defaults, respectively. However, deviations from this relationship can occur in any given year for a number of reasons. For instance, our results can diverge from industry-wide activity where there are material variances from the level of industry-wide M&A activity in a particular market where Lazard has significant market share, or regarding the relative number of our advisory engagements with respect to larger-sized transactions, and where we are involved in non-public or sovereign advisory assignments. For example, our M&A and Other Advisory revenue, which includes Sovereign and Capital Structure Advisory revenue, increased 9% in 2015 as compared to 2014. In contrast, the industry statistics for global M&A transactions described above reflect a 9% increase in the value, and an 11% decrease in the number, of all completed transactions in 2015 as compared to 2014. For M&A deals with values greater than $500 million, the value of completed transactions in 2015 increased 14%, while the number of such deals decreased 7%, as compared to 2014.

 

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Certain Lazard fee and transaction statistics are set forth below:

 

     Three Months Ended
March 31, 
 
         2015             2014      

Lazard Statistics:

    

Number of clients with fees greater than $1 million:

    

Total Financial Advisory

     68        62   

M&A and Other Advisory

     56        51   

Percentage of total Financial Advisory net revenue from top 10 clients

     39     42

Number of M&A transactions completed with values greater than $500 million (a)

     19        20   

 

(a) Source: Dealogic as of April 2, 2015.

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, 
 
         2015             2014      

United States

     57     62

Europe

     39        31   

Rest of World

     4        7   
  

 

 

   

 

 

 

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 operating revenue and operating income margins.

Financial Advisory Results of Operations

Financial Advisory’s quarterly revenue and profits can fluctuate materially depending on the number, size and timing of completed transactions on which it advised, as well as seasonality and other factors. Accordingly, the revenue and profits in any particular quarter or period may not be indicative of future results. Lazard management believes that annual results are the most meaningful basis for comparison among present, historical and future periods.

Three Months Ended March 31, 2015 versus March 31, 2014

Financial Advisory net revenue increased $26 million, or 9%, as compared to the 2014 period. Total Strategic Advisory net revenue, representing fees from our M&A and Other Advisory and Capital Raising businesses, increased $33 million, or 13%, and Restructuring revenue decreased $7 million, or 23%, as compared to the 2014 period.

M&A and Other Advisory revenue increased $22 million, or 9%, while Capital Raising revenue increased by $11 million as compared to the 2014 period. The increase in M&A and Other Advisory revenue was primarily

 

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due to an increase in the number of completed transactions involving fees greater than $1 million as compared to the 2014 period. Our major clients, which in the aggregate represented a significant portion of our M&A and Other Advisory revenue in the 2015 period, included Arbor Pharmaceuticals, GlaxoSmithKline, Klépierre, LabCorp, Paroc Group, Philips, Rockwood, Shire and Tekmira.

The decrease in Restructuring revenue in the 2015 period was generally in line with the continued industry-wide low level of corporate restructuring activity. Our major clients, which in the aggregate represented a significant portion of our Restructuring revenue for the 2015 period, included RadioShack and Sorgenia.

Operating expenses decreased $2 million, or 1%, as compared to the 2014 period, primarily due to (i) a decrease in compensation and benefits expense primarily related to a decrease in discretionary compensation, partially offset by an increase in amortization of deferred compensation expense; partially offset by (ii) an increase in non-compensation expense reflecting increased business activity.

Financial Advisory operating income was $59 million, an increase of $29 million, as compared to operating income of $30 million in the 2014 period and, as a percentage of net revenue, was 19.4%, as compared to 10.9% in the 2014 period.

Asset Management

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

 

     As of  
     March 31,
2015
     December 31,
2014
 
    

($ in millions)

 

AUM by Asset Class:

     

Equity:

     

Emerging Markets

   $ 46,916       $ 48,459   

Global

     33,595         33,982   

Local

     32,000         31,684   

Multi-Regional

     50,341         46,787   
  

 

 

    

 

 

 

Total Equity

     162,852         160,912   
  

 

 

    

 

 

 

Fixed Income:

     

Emerging Markets

     15,130         14,227   

Global

     3,895         3,771   

Local

     3,910         3,676   

Multi-Regional

     8,787         9,436   
  

 

 

    

 

 

 

Total Fixed Income

     31,722         31,110   
  

 

 

    

 

 

 

Alternative Investments

     3,446         3,799   

Private Equity

     1,057         1,091   

Cash Management

     104         191   
  

 

 

    

 

 

 

Total AUM

   $ 199,181       $ 197,103   
  

 

 

    

 

 

 

Total AUM at March 31, 2015 was $199 billion, an increase of $2 billion, or 1%, as compared to total AUM of $197 billion at December 31, 2014, primarily due to market appreciation and net inflows, partially offset by adverse foreign exchange movements. Average AUM for the three months ended March 31, 2015 was 7% higher than that for the 2014 period.

As of March 31, 2015, approximately 90% of our AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through

 

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sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors, and approximately 10% of our AUM was managed on behalf of individual client relationships, which are principally with family offices and individuals, and was unchanged from the corresponding percentages at December 31, 2014.

As of March 31, 2015 and December 31, 2014, AUM with foreign currency exposure represented approximately 73% of our total AUM for each respective period. AUM with foreign currency exposure generally declines in value with the strengthening of the U.S. Dollar and increases in value as the U.S. Dollar weakens, with all other factors held constant.

The following is a summary of changes in AUM by asset class for the three months ended March 31, 2015 and 2014: