10-Q 1 d150073d10q.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, 2016

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 15, 2016, there were 129,766,091 shares of the Registrant’s Class A common stock outstanding (including 3,949,249 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’s primary operating asset is its indirect ownership as of March 31, 2016 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

     71   

Part II. Other Information

  

Item 1. Legal Proceedings

     72   

Item 1A. Risk Factors

     72   

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

     74   

Item 3. Defaults Upon Senior Securities

     75   

Item 4. Mine Safety Disclosures

     75   

Item 5. Other Information

     75   

Item 6. Exhibits

     76   

Signatures

     79   

 

 

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PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

     Page  

Condensed Consolidated Statements of Financial Condition as of March 31, 2016 and December  31, 2015

     2   

Condensed Consolidated Statements of Operations for the three month periods ended
March  31, 2016 and 2015

     4   

Condensed Consolidated Statements of Comprehensive Income for the three month periods ended March  31, 2016 and 2015

     5   

Condensed Consolidated Statements of Cash Flows for the three month periods ended March  31, 2016 and 2015

     6   

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2016 and 2015

     7   

Notes to Condensed Consolidated Financial Statements

     9   

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2016 AND DECEMBER 31, 2015

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,
     2016    
     December 31,
     2015    
 

ASSETS

     
Cash and cash equivalents    $ 701,324       $ 1,132,083   
Deposits with banks and short-term investments      387,550         389,861   
Cash deposited with clearing organizations and other segregated cash      34,034         34,948   

Receivables (net of allowance for doubtful accounts of $11,230 and $12,882 at March 31, 2016 and December 31, 2015, respectively):

     

Fees

     414,464         423,817   

Customers and other

     100,058         73,396   
  

 

 

    

 

 

 
     514,522         497,213   

Investments

     460,281         541,911   
     

Property (net of accumulated amortization and depreciation of $279,432 and $265,506 at March 31, 2016 and December 31, 2015, respectively)

     206,856         207,165   

Goodwill and other intangible assets (net of accumulated amortization of $58,205 and $57,561 at March 31, 2016 and December 31, 2015, respectively)

     332,621         326,976   

Deferred tax assets

     1,126,019         1,130,595   
Other assets      248,384         217,022   
  

 

 

    

 

 

 

Total Assets

   $ 4,011,591       $ 4,477,774   
  

 

 

    

 

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD LTD

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2016 AND DECEMBER 31, 2015

(UNAUDITED)

(dollars in thousands, except for per share data)

 

     March 31,
     2016    
    December 31,
     2015    
 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits and other customer payables

   $ 525,439      $ 506,665   

Accrued compensation and benefits

     234,741        570,409   

Senior debt

     989,735        989,358   

Tax receivable agreement obligation

     513,648        523,962   

Deferred tax liabilities

     10,794        11,104   

Capital lease obligations

     9,013        9,028   

Other liabilities

     505,473        499,942   
  

 

 

   

 

 

 

Total Liabilities

     2,788,843        3,110,468   

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, 2016 and December 31, 2015

              

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, 2016 and December 31, 2015, including shares held by subsidiaries as indicated below)

     1,298        1,298   

Additional paid-in-capital

     526,298        600,034   

Retained earnings

     970,808        1,123,728   

Accumulated other comprehensive loss, net of tax

     (221,572     (234,356
  

 

 

   

 

 

 
     1,276,832        1,490,704   

Class A common stock held by subsidiaries, at cost (3,002,995 and 4,253,381 shares at March 31, 2016 and December 31, 2015, respectively)

     (111,504     (177,249
  

 

 

   

 

 

 

Total Lazard Ltd Stockholders’ Equity

     1,165,328        1,313,455   

Noncontrolling interests

     57,420        53,851   
  

 

 

   

 

 

 

Total Stockholders’ Equity

     1,222,748        1,367,306   
  

 

 

   

 

 

 

Total Liabilities and Stockholders’ Equity

   $ 4,011,591      $ 4,477,774   
  

 

 

   

 

 

 

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, 2016 AND 2015

(UNAUDITED)

(dollars in thousands, except for per share data)

 

                               
    Three Months Ended
March  31,
 
          2016                 2015        

REVENUE

   

Investment banking and other advisory fees

    $265,143        $301,372   

Asset management fees

    233,731        261,955   

Interest income

    1,372        929   

Other

    9,870        29,629   
 

 

 

   

 

 

 

Total revenue

    510,116        593,885   

Interest expense

    11,898        16,136   
 

 

 

   

 

 

 

Net revenue

    498,218        577,749   
 

 

 

   

 

 

 

OPERATING EXPENSES

   

Compensation and benefits

    297,210        328,502   

Occupancy and equipment

    27,007        27,339   

Marketing and business development

    19,688        19,190   

Technology and information services

    22,931        22,893   

Professional services

    9,762        11,459   

Fund administration and outsourced services

    13,435        16,148   

Amortization of intangible assets related to acquisitions

    644        1,033   

Provision pursuant to tax receivable agreement

           6,535   

Other

    9,164        69,987   
 

 

 

   

 

 

 

Total operating expenses

    399,841        503,086   
 

 

 

   

 

 

 

OPERATING INCOME

    98,377        74,663   

Provision for income taxes

    27,654        12,017   
 

 

 

   

 

 

 

NET INCOME

    70,723        62,646   

LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

    3,900        6,693   
 

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO LAZARD LTD

    $66,823        $55,953   
 

 

 

   

 

 

 

ATTRIBUTABLE TO LAZARD LTD CLASS A COMMON STOCKHOLDERS:

   

WEIGHTED AVERAGE SHARES OF COMMON STOCK OUTSTANDING:

   

Basic

    126,040,441        123,655,689   

Diluted

    132,891,284        133,735,946   

NET INCOME PER SHARE OF COMMON STOCK:

   

Basic

    $0.53        $0.45   
 

 

 

   

 

 

 

Diluted

    $0.50        $0.42   
 

 

 

   

 

 

 

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

    $1.55        $1.30   
 

 

 

   

 

 

 

 

 

 

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, 2016 AND 2015

(UNAUDITED)

(dollars in thousands)

 

     Three Months Ended
March  31,
 
         2016             2015      

NET INCOME

   $ 70,723      $ 62,646   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:

    

Currency translation adjustments (including a tax benefit of $1,146 for the three months ended March 31, 2016)

     11,739        (34,133

Employee benefit plans:

    

Actuarial gain (loss) (net of tax expense (benefit) of $(70) and $115 for the three months ended March 31, 2016 and 2015, respectively)

     (141     219   

Adjustment for items reclassified to earnings (net of tax expense of $393 and $563 for the three months ended March 31, 2016 and 2015, respectively)

     1,186        1,186   
  

 

 

   

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX

     12,784        (32,728
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

     83,507        29,918   

LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS

     3,900        6,693   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD LTD

   $ 79,607      $ 23,225   
  

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2016 AND 2015

(UNAUDITED)

(dollars in thousands)

 

                               
     Three Months Ended
March 31,
 
    2016     2015  

CASH FLOWS FROM OPERATING ACTIVITIES:

   

Net income

  $ 70,723      $ 62,646   

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

   

Depreciation and amortization of property

    8,389        7,876   

Amortization of deferred expenses and share-based incentive compensation

    117,140        106,379   

Amortization of intangible assets related to acquisitions

    644        1,033   

Deferred tax provision (benefit)

    11,586        (9,112

Provision pursuant to tax receivable agreement

           6,535   

Loss on extinguishment of debt

           60,219   

(Increase) decrease in operating assets:

   

Deposits with banks and short-term investments

    19,498        (35,081

Cash deposited with clearing organizations and other segregated cash

    1,474        (5,544

Receivables-net

    (11,757     (64,321

Investments

    86,169        118,677   

Other assets

    (46,592     (91,913

Increase (decrease) in operating liabilities:

   

Deposits and other payables

    (2,729     100,300   

Accrued compensation and benefits and other liabilities

    (354,436     (222,726
 

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (99,891     34,968   
 

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

   

Additions to property

    (5,454     (4,055

Disposals of property

    104        44   
 

 

 

   

 

 

 

Net cash used in investing activities

    (5,350     (4,011
 

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

   

Proceeds from:

   

Contributions from noncontrolling interests

    93        57   

Issuance of senior debt, net of expenses

           396,272   

Excess tax benefits from share-based incentive compensation

    2,720        9,516   

Payments for:

   

Senior debt

           (509,098

Capital lease obligations

    (417     (539

Distributions to noncontrolling interests

    (424     (5,841

Payments under tax receivable agreement

    (10,086       

Purchase of Class A common stock

    (83,140     (82,963

Class A common stock dividends

    (194,382     (158,390

Settlement of vested share-based incentive compensation

    (50,455     (101,885

Other financing activities

    (1,614     (1,155
 

 

 

   

 

 

 

Net cash used in financing activities

    (337,705     (454,026
 

 

 

   

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

    12,187        (37,175
 

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

    (430,759     (460,244

CASH AND CASH EQUIVALENTS—January 1

    1,132,083        1,066,580   
 

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS—March 31

  $ 701,324      $ 606,336   
 

 

 

   

 

 

 

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

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

Business acquisitions and related equity transactions:

                       

Class A common stock issuable (including related amortization)

            89                89          89   

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

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2016

(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, 2016

    7,921      $  –        129,766,091      $ 1,298      $ 600,034      $ 1,123,728      $ (234,356     4,253,381      $ (177,249   $ 1,313,455      $ 53,851      $ 1,367,306   

Comprehensive income:

                       

Net income

              66,823              66,823        3,900        70,723   

Other comprehensive income - net of tax

                12,784            12,784          12,784   

Amortization of share-based incentive compensation

            94,638                94,638          94,638   

Dividend-equivalents

            23,793        (25,361           (1,568       (1,568

Class A common stock dividends

              (194,382           (194,382       (194,382

Purchase of Class A common stock

                  2,424,571        (83,140     (83,140       (83,140

Delivery of Class A common stock in connection with share-based incentive compensation and related tax benefit of $7,219

            (192,121         (3,674,957     148,885        (43,236       (43,236

Distributions to noncontrolling interests, net

                             (331     (331

Other

            (46             (46       (46
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance – March 31, 2016

    7,921      $        129,766,091      $ 1,298      $ 526,298      $ 970,808      $ (221,572     3,002,995      $ (111,504   $ 1,165,328      $ 57,420      $ 1,222,748   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2016 and December 31, 2015. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group, which is governed by an Amended and Restated Operating Agreement dated as of October 26, 2015 (the “Operating Agreement”).

Lazard Ltd’s primary operating asset is its indirect ownership of the common membership interests of, and managing member interests in, 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, corporate preparedness 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, deferred tax assets, outstanding indebtedness and assets and liabilities associated with Lazard Group’s Paris-based subsidiary Lazard Frères Banque SA (“LFB”).

LFB, as a registered bank, 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.

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, 2015 (the “Form 10-K”). The accompanying December 31, 2015 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures

 

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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)

 

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, 2016 are not 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:

 

   

Voting interest entities (“VOEs”) where the Company holds a majority of the voting interest in such VOEs and,

 

   

Variable interest entities (“VIEs”) where the Company is the primary beneficiary having the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of, or receive benefits from, the VIE that could be potentially significant to the VIE.

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.

Certain prior period amounts have been reclassified to conform to the current period presentation, primarily as a result of the adoption of the current guidance on classification of debt issuance costs and the impact of such guidance on the condensed consolidated statements of financial condition.

 

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 to which the company expects to be entitled in exchange for those services and requires enhanced disclosures.

 

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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 new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is not permitted. On July 9, 2015, the FASB approved the deferral of 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 15, 2015, with early adoption permitted. The Company adopted this guidance using the modified retrospective method with an effective adoption date of January 1, 2016. The adoption of this guidance did not 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 and is to be applied on a retrospective basis. The adoption of this guidance by the Company in the first quarter of 2016 resulted in a reclassification as of December 31, 2015 of $8,992 from “other assets” to “senior debt” on our condensed consolidated statements of financial condition.

Intangibles—Goodwill and Other—Internal-Use Software: Customers Accounting for Fees Paid in a Cloud Computing Arrangement—In April 2015, the FASB issued updated guidance providing clarification on whether a cloud computing arrangement that contains a software license should be accounted for as internal-use software. The new guidance is effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The adoption of this guidance by the Company in the first quarter of 2016 did not have a material impact on our consolidated financial statements.

Fair Value Measurement—In May 2015, the FASB issued updated guidance for the classification and disclosure of certain investments using the net asset value (“NAV”) as a practical expedient to measure the fair value of the investment. The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using NAV as a practical expedient. 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 elected to early adopt this guidance in the quarter ended September 30, 2015 and has removed investments that are measured at NAV as a practical expedient from the fair value hierarchy in all periods presented in the consolidated financial statements and related disclosures.

Leases—In February 2016, the FASB issued updated guidance for leases. The guidance requires a lessee to (i) recognize a right-of-use asset and a lease liability, initially measured at the present value of the lease payments, in the statement of financial condition, (ii) recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis, and (iii) classify all cash payments within operating activities in the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. The new guidance is to be applied on a modified retrospective basis. The Company is currently evaluating the new guidance.

 

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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)

 

Compensation—Stock Compensation: Improvements to Employee Share-Based Payment AccountingIn March 2016, the FASB issued new guidance regarding equity-based incentive compensation. The new guidance includes several amendments which affect various aspects of the accounting for equity-based incentive compensation transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is permitted. The Company is currently evaluating the new guidance.

 

3. RECEIVABLES

The Company’s receivables represent fee receivables, amounts due from customers and other receivables.

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, 2016 and 2015 was as follows:

 

     Three Months Ended
March 31,
 
         2016              2015      

Beginning Balance

   $ 12,882       $ 23,540   

Bad debt expense, net of recoveries

     514        
1,232
  

Charge-offs, foreign currency translation and other adjustments

     (2,166      (6,313
  

 

 

    

 

 

 

Ending Balance

   $ 11,230       $ 18,459   
  

 

 

    

 

 

 

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

At March 31, 2016 and December 31, 2015, the Company had receivables past due or deemed uncollectible of $16,038 and $19,923, respectively.

Of the Company’s fee receivables at March 31, 2016 and December 31, 2015, $78,271 and $81,774, 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 $436,251 and $415,439 at March 31, 2016 and December 31, 2015, respectively, approximates fair value.

 

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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)

 

4. INVESTMENTS

The Company’s investments and securities sold, not yet purchased, consist of the following at March 31, 2016 and December 31, 2015:

 

     March 31,
2016
     December 31,
2015
 

Interest-bearing deposits

   $ 57,399       $ 54,885   
  

 

 

    

 

 

 

Debt

     —           535   
  

 

 

    

 

 

 

Equities

     39,481         44,834   
  

 

 

    

 

 

 

Funds:

     

Alternative investments (a)

     54,907         67,600   

Debt (a)

     59,015         67,134   

Equity (a)

     137,132         197,787   

Private equity

     104,224         100,219   
  

 

 

    

 

 

 
     355,278         432,740   
  

 

 

    

 

 

 

Equity method

     8,123         8,917   
  

 

 

    

 

 

 

Total investments

     460,281         541,911   

Less:

     

Interest-bearing deposits

     57,399         54,885   

Equity method

     8,123         8,917   
  

 

 

    

 

 

 

Investments, at fair value

   $ 394,759       $ 478,109   
  

 

 

    

 

 

 

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

   $ 2,876       $ 3,239   
  

 

 

    

 

 

 

 

(a) Interests in alternative investment funds, debt funds and equity funds include investments with fair values of $11,715, $22,628 and $99,898, respectively, at March 31, 2016 and $10,996, $31,598 and $156,081, respectively, at December 31, 2015, 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).

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.

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, funds of funds and mutual 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 Lazard-managed debt fund.

 

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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)

 

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) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), a fund primarily making equity and buyout investments in middle market companies, (ii) until the fourth quarter of 2015, Lazard Australia Corporate Opportunities Fund 2 (“COF2”), an Australian fund targeting Australian 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.

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”).

During the three month periods ended March 31, 2016 and 2015, 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,
 
     2016      2015  

Net unrealized investment gains

   $ 5,315       $ 2,193   

 

5. FAIR VALUE MEASUREMENTS

Fair Value Hierarchy of Investments and Certain Other Assets and Liabilities—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, or (ii) inputs other than quoted prices that are directly observable or derived principally from, or corroborated by, market data.

 

Level 3. Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose 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.

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.

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.

 

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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 fair value of investments in alternative investment funds, debt funds and equity funds is classified as Level 1 when the fair values are primarily based on the publicly reported closing price for the fund.

The fair value of investments in private equity funds were classified as Level 3 for certain investments that were valued based on a potential transaction value as of March 31, 2015.

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.

Investments Measured at Net Asset Value—As a practical expedient, the Company uses NAV or its equivalent to measure the fair value of certain investments. NAV is primarily determined based on information provided by external fund administrators. The Company’s investments valued at NAV as a practical expedient in (i) alternative investment funds, debt funds and equity funds are redeemable in the near term, and (ii) in private equity funds are not redeemable in the near term as a result of redemption restrictions.

The following tables present, as of March 31, 2016 and December 31, 2015, the classification of (i) investments and certain other assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy and (ii) investments measured at NAV or its equivalent as a practical expedient:

 

    March 31, 2016  
    Level 1     Level 2     Level 3     NAV (a)     Total  

Assets:

         

Investments:

         

Equities

  $ 38,180      $      $ 1,301      $      $ 39,481   

Funds:

         

Alternative investments

    29,625                 25,282        54,907   

Debt

    59,009                      6        59,015   

Equity

    137,094                      38        137,132   

Private equity

                         104,224        104,224   

Derivatives

           544                      544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 263,908      $ 544      $ 1,301      $ 129,550      $ 395,303   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Securities sold, not yet purchased

  $ 2,876      $      $      $      $ 2,876   

Derivatives

           189,457                      189,457   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 2,876      $ 189,457      $      $      $ 192,333   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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)

 

    December 31, 2015  
    Level 1     Level 2     Level 3     NAV (a)     Total  

Assets:

         

Investments:

         

Debt

  $ 535      $      $      $      $ 535   

Equities

    43,558               1,276               44,834   

Funds:

         

Alternative investments

    45,135                      22,465        67,600   

Debt

    67,128                      6        67,134   

Equity

    197,745                      42        197,787   

Private equity

                         100,219        100,219   

Derivatives

           1,048                      1,048   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 354,101      $ 1,048      $ 1,276      $ 122,732      $ 479,157   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

         

Securities sold, not yet purchased

  $ 3,239      $      $      $      $ 3,239   

Derivatives

           195,689                      195,689   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 3,239      $ 195,689      $      $      $ 198,928   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Represents certain investments measured at NAV or its equivalent as a practical expedient in determining fair value. In accordance with current accounting guidance, these investments have not been classified in the fair value hierarchy. See Note 2 for additional information.

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, 2016 and 2015:

 

    Three Months Ended March 31, 2016  
    Beginning
Balance
    Net  Unrealized/
Realized
Gains (Losses)
Included

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

Investments:

            

Equities

  $ 1,276      $ 3      $      $       $ 22      $ 1,301   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total Level 3 Assets

  $ 1,276      $ 3      $      $       $ 22      $ 1,301   
 

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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

In Revenue-
Other (b)
    Purchases/
Acquisitions/

Transfers (c)
    Sales/
Dispositions
    Foreign
Currency
Translation
Adjustments
    Ending
Balance
 
           

Investments:

           

Equities

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

Private equity funds

           2,629        19,887        (391            22,125   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Level 3 Assets

  $ 1,315      $ 2,631      $ 19,887      $ (391   $ (28   $ 23,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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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) The table for the three month period ended March 31, 2015 reflects the retrospective application of new disclosure guidance adopted by the Company for investments using NAV or its equivalent as a practical expedient when measuring fair value. See Note 2.

 

(b) Earnings for the three month periods ended March 31, 2016 and 2015 include net unrealized gains of $3 and $2,631, respectively.

 

(c) Certain investments that were valued at NAV as of December 31, 2014 of $19,255 were transferred to Level 3 from the NAV category in the three months ended March 31, 2015 as these investments were valued based on potential transaction value as of March 31, 2015.

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, 2016 and 2015.

The following tables present, at March 31, 2016 and December 31, 2015, certain investments that are valued using NAV or its equivalent as a practical expedient in determining fair value:

 

    March 31, 2016
                % 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

  $ 23,763      $      NA   NA   NA   NA     (a)      <30-60 days

Funds of funds

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

Other

    1,071             NA   NA   NA   NA     (c)      <30-60 days

Debt funds

    6             NA   NA   NA   NA     (d)      30 days

Equity funds

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

Private equity funds:

               

Equity growth

    70,382        9,183 (f)    100%   17%   38%   45%     NA      NA

Mezzanine debt

    33,842             100%       100%     NA      NA
 

 

 

   

 

 

             

Total

  $ 129,550      $ 9,183               
 

 

 

   

 

 

             

 

(a) weekly (34%), monthly (57%) and quarterly (9%)
(b) monthly (98%) and quarterly (2%)
(c) daily (30%) and monthly (70%)
(d) daily (100%)
(e) daily (18%), monthly (52%) and quarterly (30%)
(f) Unfunded commitments to private equity investments consolidated but not owned by Lazard of $5,013 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

 

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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)

 

    December 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

  $ 20,410      $      NA   NA   NA   NA     (a)      <30-60 days

Funds of funds

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

Other

    1,590             NA   NA   NA   NA     (c)      <30-60 days

Debt funds

    6             NA   NA   NA   NA     (d)      30 days

Equity funds

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

Private equity funds:

               

Equity growth

    67,895        10,242 (f)    100%   18%   39%   43%     NA      NA

Mezzanine debt

    32,324             100%       100%     NA      NA
 

 

 

   

 

 

             

Total

  $ 122,732      $ 10,242               
 

 

 

   

 

 

             

 

(a) weekly (23%), monthly (69%) and quarterly (8%)
(b) monthly (98%) and quarterly (2%)
(c) daily (20%) and monthly (80%)
(d) daily (100%)
(e) daily (18%), monthly (54%) and quarterly (28%)
(f) Unfunded commitments to private equity investments consolidated but not owned by Lazard of $5,501 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

Investment Capital Funding Commitments—At March 31, 2016, the Company’s maximum unfunded commitments for capital contributions to investment funds primarily arose from commitments to EGCP III, which amounted to $8,613, 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.

 

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

 

18


Table of Contents

LAZARD LTD

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

 

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.

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 reported within “accrued compensation and benefits” (see Note 12) on the accompanying condensed consolidated statements of financial condition as of March 31, 2016 and December 31, 2015:

 

   

March 31,

   

December 31,

 
    2016     2015  

Derivative Assets:

   

Forward foreign currency exchange rate contracts

  $ 498      $ 1,015   

Total return swaps and other (a)

    46        33   
 

 

 

   

 

 

 
  $ 544      $ 1,048   
 

 

 

   

 

 

 

Derivative Liabilities:

   

Forward foreign currency exchange rate contracts

  $ 1,846      $ 1,584   

Total return swaps and other (a)

    7,132        531   

LFI and other similar deferred compensation arrangements

    180,479        193,574   
 

 

 

   

 

 

 
  $ 189,457      $ 195,689   
 

 

 

   

 

 

 

 

(a) For total return swaps, amounts represent the netting of gross derivative assets and liabilities of $58 and $7,144 as of March 31, 2016, respectively, and $460 and $958 as of December 31, 2015, 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 $13,436 and $9,636 as of March 31, 2016 and December 31, 2015, 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, 2016 and 2015, were as follows:

 

     Three Months Ended
March 31,
 
     2016     2015  

Forward foreign currency exchange rate contracts

   $ (7,300   $ 15,400   

LFI and other similar deferred compensation arrangements

     2,514        (4,136

Total return swaps and other

     (699     (3,168
  

 

 

   

 

 

 

Total

   $ (5,485   $ 8,096   
  

 

 

   

 

 

 

 

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, 2016 and December 31, 2015, property consists of the following:

 

     Estimated
Depreciable
Life in Years
     March 31,      December 31,  
        2016      2015  

Buildings

     33       $ 143,456       $ 137,181   

Leasehold improvements

     3-20         169,350         167,838   

Furniture and equipment

     3-10         163,894         160,553   

Construction in progress

        9,588         7,099   
     

 

 

    

 

 

 

Total

        486,288         472,671   

Less - Accumulated depreciation and amortization

        279,432         265,506   
     

 

 

    

 

 

 

Property

      $ 206,856       $ 207,165   
     

 

 

    

 

 

 

 

8. GOODWILL AND OTHER INTANGIBLE ASSETS

The components of goodwill and other intangible assets at March 31, 2016 and December 31, 2015 are presented below:

 

   

March 31

   

December 31,

 
    2016     2015  

Goodwill

  $ 327,050      $ 320,761   

Other intangible assets (net of accumulated amortization)

    5,571        6,215   
 

 

 

   

 

 

 
  $ 332,621      $ 326,976   
 

 

 

   

 

 

 

At March 31, 2016 and December 31, 2015, goodwill of $262,509 and $256,220, 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, 2016 and 2015 are as follows:

 

    Three Months Ended
March 31,
 
    2016     2015  

Balance, January 1

  $ 320,761      $ 335,402   

Foreign currency translation adjustments

    6,289        (10,439
 

 

 

   

 

 

 

Balance, March 31

  $ 327,050      $ 324,963   
 

 

 

   

 

 

 

All changes in the carrying amount of goodwill for the three month periods ended March 31, 2016 and 2015 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, 2016 and December 31, 2015, by major intangible asset category, are as follows:

 

    March 31, 2016     December 31, 2015  
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
    Gross
Cost
    Accumulated
Amortization
    Net
Carrying
Amount
 

Performance fees

  $ 30,740      $ 25,506      $ 5,234      $ 30,740      $ 25,192      $ 5,548   

Management fees, customer relationships and non-compete agreements

    33,036        32,699        337        33,036        32,369        667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 63,776      $ 58,205      $ 5,571      $ 63,776      $ 57,561      $ 6,215   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization expense of intangible assets for the three month periods ended March 31, 2016 and 2015 was $644 and $1,033, respectively. Estimated future amortization expense is as follows:

 

Year Ending December 31,

   Amortization
Expense (a)
 

2016 (April 1 through December 31)

   $ 5,023   

2017

     548   
  

 

 

 

Total amortization expense

   $ 5,571   
  

 

 

 

 

  (a) Approximately 47% of intangible asset amortization is attributable to a noncontrolling interest.

 

9. SENIOR DEBT

Senior debt is comprised of the following as of March 31, 2016 and December 31, 2015:

 

                       Outstanding as of,  
     Initial
Principal

Amount
    Maturity
Date
    Annual
Interest
Rate(b)
    March 31, 2016     December 31, 2015  
          Principal     Unamortized
Debt Costs
    Carrying
Value
    Principal     Unamortized
Debt Costs
    Carrying
Value
 

Lazard Group 2017 Senior Notes (a)

    600,000        6/15/17        6.85   $ 98,350      $ 132      $ 98,218      $ 98,350      $ 159      $ 98,191   

Lazard Group 2020 Senior Notes

    500,000        11/14/20        4.25     500,000        4,260        495,740        500,000        4,491        495,509   

Lazard Group 2025 Senior Notes (a)

    400,000        2/13/25        3.75     400,000        4,223        395,777        400,000        4,342        395,658   
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

        $ 998,350      $ 8,615      $
989,735
  
  $ 998,350      $ 8,992      $ 989,358   
       

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.
(b) The effective interest rates of the 2017 Notes, Lazard Group’s 4.25% senior notes due November 14, 2020 (the “2020 Notes”) and the 2025 Notes are 6.96%, 4.43% and 3.87%, 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)

 

The table, as of December 31, 2015, reflects the retrospective application of new guidance adopted by the Company for debt issuance costs. See Note 2.

On September 25, 2015, Lazard Group entered into an Amended and Restated Credit Agreement for a five-year $150,000 senior revolving credit facility with a group of lenders (the “Amended and Restated Credit Agreement”), which expires in September 2020. The Amended and Restated Credit Agreement amended and restated the previous credit agreement dated September 25, 2012. Borrowings under the Amended and Restated Credit Agreement generally will bear interest at LIBOR plus an applicable margin for specific interest periods determined based on Lazard Group’s highest credit rating from an internationally recognized credit agency. At March 31, 2016 and December 31, 2015, no amounts were outstanding under the Amended and Restated Credit Agreement.

The Amended and Restated Credit Agreement, 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, 2016, the Company was in compliance with such provisions. All of the Company’s senior debt obligations are unsecured.

As of March 31, 2016, the Company had approximately $241,000 in unused lines of credit available to it, including the credit facility provided under the Amended and Restated Credit Agreement, and unused lines of credit available to LFB of approximately $34,000 (at March 31, 2016 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, 2016 and December 31, 2015 is carried at historical amounts. At those dates, the fair value of such senior debt was approximately $984,000 and $994,000, 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, 2016, LFB had $5,822 of such indemnifications and held $5,473 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

 

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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)

 

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, 2016 and December 31, 2015, 913,722 shares are issuable on a contingent basis, and 1,371,992 shares have been earned because applicable performance thresholds have been satisfied. As of March 31, 2016 and December 31, 2015, 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. During the second quarter of 2015, the achievement of certain performance thresholds related to the acquired business were satisfied, resulting in the issuance of 27,316 shares of Class A common stock.

Other Commitments—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, 2016, LFB and LFNY had no such underwriting commitments.

See Notes 5 and 13 for information regarding commitments relating to investment capital funding commitments and obligations to fund our pension plans, respectively.

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, 2016 and the years ended December 31, 2015, 2014 and 2013, the Board of Directors of Lazard authorized the repurchase of Class A common stock as set forth in the table below.

 

Date

   Repurchase
Authorization
     Expiration  

October, 2013

   $ 100,000         December 31, 2015   

April, 2014

   $ 200,000         December 31, 2015   

February, 2015

   $ 150,000         December 31, 2016   

January, 2016

   $ 200,000         December 31, 2017   

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 2008 Incentive Compensation Plan (the “2008

 

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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)

 

Plan”) and the Lazard Ltd 2005 Equity Incentive Plan (the “2005 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:

     

2015

     1,677,464       $ 49.46   

2016

     2,424,571       $ 34.29   

During the three month periods ended March 31, 2016 and 2015, certain of our executive officers received Class A common stock in connection with the vesting of previously-granted deferred equity incentive awards. The vesting of such equity awards gave rise to a tax payable by the executive officers, and, consistent with our past practice, the Company purchased shares of Class A common stock from the executive officers equal in value to the estimated amount of such tax. The aggregate value of such purchases during the three month periods ended March 31, 2016 and 2015 was approximately $3,100 and $17,700, respectively.

As of March 31, 2016, a total of $223,021 of share repurchase authorization remained available under the Company’s share repurchase program, $23,021 of which will expire on December 31, 2016 and $200,000 of which will expire on December 31, 2017.

In addition, on April 20, 2016, the Board of Directors of Lazard authorized the repurchase of additional shares of Class A common stock, which authorization will expire on December 31, 2017, bringing the total share repurchase authorization to $300,000.

During the three month period ended March 31, 2016, 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, 2016 and December 31, 2015, 7,921 shares of Series A preferred stock were outstanding, and no shares of Series B preferred stock were outstanding. At March 31, 2016 and December 31, 2015, no shares of Series A preferred stock were convertible into shares of Class A common stock on a contingent or a non-contingent basis.

 

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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)

 

Accumulated Other Comprehensive Income (Loss), Net of Tax (“AOCI”)The tables below reflect the balances of each component of AOCI at March 31, 2016 and 2015 and activity during the three month periods then ended:

 

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

Balance, January 1, 2016

  $ (97,284   $ (137,073   $ (234,357   $ (1   $ (234,356
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Activity January 1 to March 31, 2016:

         

Other comprehensive income (loss) before reclassifications

    11,739        (141     11,598               11,598   

Adjustments for items reclassified to earnings, net of tax

           1,186        1,186               1,186   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive
income

    11,739        1,045        12,784               12,784   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2016

  $ (85,545   $ (136,028   $ (221,573   $ (1   $ (221,572
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The table below reflects adjustments for items reclassified out of AOCI, by component, for the three month periods ended March 31, 2016 and 2015:

 

     Three Months Ended
March  31,
 
         2016              2015      

Amortization relating to employee benefit plans (a)

   $ 1,579       $ 1,749   

Less – related income taxes

     393         563   
  

 

 

    

 

 

 

Total reclassifications, net of tax

   $ 1,186       $ 1,186   
  

 

 

    

 

 

 

 

(a) Included in the computation of net periodic benefit cost (see Note 13). Such amounts are included in “compensation and benefits” expense on the condensed consolidated statements of operations.

 

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)

 

Noncontrolling Interests—Noncontrolling interests principally represent interests held in Edgewater’s management vehicles that the Company is deemed to control, but does not own.

The tables below summarize net income attributable to noncontrolling interests for the three month periods ended March 31, 2016 and 2015 and noncontrolling interests as of March 31, 2016 and December 31, 2015 in the Company’s condensed consolidated financial statements:

 

     Net Income
Attributable to Noncontrolling

Interests
 
     Three Months Ended
March 31,
 
          2016                2015       

Edgewater

   $ 3,900       $ 6,693   
  

 

 

    

 

 

 

 

     Noncontrolling Interests As Of  
    

March 31,

    

December 31,

 
     2016          2015      

Edgewater

   $ 56,702       $ 53,132   

Other

    
718
  
     719   
  

 

 

    

 

 

 

Total

   $ 57,420       $ 53,851   
  

 

 

    

 

 

 

Dividends Declared, April 20, 2016— On April 20, 2016, the Board of Directors of Lazard declared a quarterly dividend of $0.38 per share on our Class A common stock, payable on May 13, 2016, to stockholders of record on May 3, 2016.

 

12. INCENTIVE PLANS

Share-Based Incentive Plan Awards

A description of Lazard Ltd’s 2008 Plan and 2005 Plan and activity with respect thereto during the three month periods ended March 31, 2016 and 2015 is presented below.

Shares Available Under the 2008 Plan and 2005 Plan

The 2008 Plan authorizes the issuance of 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. Under the 2008 Plan, the maximum number of shares available 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.

The 2005 Plan authorized 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, RSUs and other equity-based awards. Each RSU 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. The 2005 Plan expired in the second quarter of 2015, although unvested awards granted under the 2005 Plan remain outstanding and continue to be subject to its terms.

 

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, 2016 and 2015:

 

    Three Months Ended March 31,  
            2016                  2015          

Share-based incentive awards:

    

RSUs

  $ 54,408       $ 59,071   

PRSUs

    16,689         6,198   

Restricted Stock

    23,476         12,623   

DSUs

    65         31   
 

 

 

    

 

 

 

Total

  $ 94,638       $ 77,923   
 

 

 

    

 

 

 

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, including as a result of any applicable performance conditions. 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 share-based incentive plans and awards 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.

 

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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)

 

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, 2016 and 2015, 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,
 
         2016              2015      

Number of RSUs issued

     700,651        
453,751
  

Charges to retained earnings, net of estimated forfeitures

   $ 23,793       $
22,898
  

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, 2016 and 2015. 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 in lieu of some or all of their cash fees. The number of DSUs 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, 2016 and 2015, 2,110 and 619 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, 2016 and 2015:

 

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

Balance, January 1, 2016

    9,599,658      $ 44.06        312,670      $ 35.98   

Granted (including 700,651 RSUs relating to dividend participation)

    6,140,020      $ 34.54        2,110      $ 31.47   

Forfeited

    (55,826   $ 41.58                 

Vested

    (4,100,192   $ 39.12                 
 

 

 

     

 

 

   

Balance, March 31, 2016

    11,583,660      $ 40.78        314,780      $ 35.95   
 

 

 

     

 

 

   

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   
 

 

 

     

 

 

   

In connection with RSUs that vested during the three month periods ended March 31, 2016 and 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 1,327,399 and 1,892,454 shares of Class A common stock during such respective three month periods. Accordingly, 2,772,793 and 4,716,323 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2016 and 2015, respectively.

As of March 31, 2016, estimated unrecognized RSU compensation expense was approximately $244,292, with such expense expected to be recognized over a weighted average period of approximately 1.1 years subsequent to March 31, 2016.

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, 2016 and 2015:

 

     Restricted
Shares
     Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2016

     713,738       $ 47.12   

Granted

     1,795,258       $ 36.78   

Forfeited

     (25,662    $ 39.89   

Vested

     (627,110    $ 36.61   
  

 

 

    

Balance, March 31, 2016

     1,856,224       $ 40.77   
  

 

 

    

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   
  

 

 

    

 

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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)

 

In connection with shares of restricted Class A common stock that vested during the three month periods ended March 31, 2016 and 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 77,795 and 88,492 shares of Class A common stock during such respective three month periods. Accordingly, 549,315 and 350,251 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2016 and 2015, 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, 2016, estimated unrecognized restricted stock expense was approximately $52,971, with such expense to be recognized over a weighted average period of approximately 1.2 years subsequent to March 31, 2016.

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. PRSUs will vest on a single date three years following the date of the grant, provided the applicable service and performance conditions are satisfied. However, PRSUs granted in 2013 vested 33% in March 2015 and 67% in March 2016. 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 each PRSU 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.

 

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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 PRSUs during the three month periods ended March 31, 2016 and 2015:

 

      PRSUs     Weighted
Average
Grant Date
Fair Value
 

Balance, January 1, 2016

     1,019,038      $ 44.49   

Granted (a)

     627,956      $ 32.91   

Vested

     (417,018   $ 38.43   
  

 

 

   

Balance, March 31, 2016

     1,229,976      $ 40.63   
  

 

 

   

Balance, January 1, 2015

     1,347,148      $ 37.79   

Granted (a)

     368,389      $ 52.85   

Vested

     (328,793   $ 35.56   
  

 

 

   

Balance, March 31, 2015

     1,386,744      $ 42.32   
  

 

 

   

 

(a) Represents PRSU awards granted during the relevant year at the target payout level.

In connection with PRSUs that vested during the three month periods ended March 31, 2016 and 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 64,169 and 25,239 shares of Class A common stock during such respective three month periods. Accordingly, 352,849 and 303,554 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2016 and 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, 2016, the total estimated unrecognized compensation expense was approximately $21,330, and the Company expects to amortize such expense over a weighted-average period of approximately 0.9 years subsequent to March 31, 2016.

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, 2016 and 2015:

 

    Prepaid
Compensation

Asset
      Compensation  
Liability
 

Balance, January 1, 2016

  $ 75,703      $ 193,574   

Granted

    51,871        51,871   

Settled

           (64,488

Forfeited

    (340     (681

Amortization

    (19,436       

Change in fair value related to:

   

Decrease in fair value of underlying investments

           (2,514

Adjustment for estimated forfeitures

           1,804   

Other

    132        913   
 

 

 

   

 

 

 

Balance, March 31, 2016

  $ 107,930      $ 180,479   
 

 

 

   

 

 

 
    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   
 

 

 

   

 

 

 

The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 1.0 years subsequent to March 31, 2016.

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, 2016 and 2015:

 

     Three Months Ended
March  31,
 
         2016              2015      

Amortization, net of forfeitures

   $ 20,899       $ 26,664   

Change in the fair value of underlying investments

     (2,514      4,136   
  

 

 

    

 

 

 

Total

   $ 18,385       $ 30,800   
  

 

 

    

 

 

 

 

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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.

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, 2016 and 2015:

 

     Pension Plans     Medical Plan  
     Three Months Ended March 31,  
     2016         2015             2016             2015      

Components of Net Periodic Benefit Cost (Credit):

        

Service cost

   $ 307      $ 360      $ 4      $ 8   

Interest cost

     5,213        6,106        45        49   

Expected return on plan assets

     (7,166     (7,071    

Amortization of:

        

Prior service cost

     590        603       

Net actuarial loss (gain)

     989        1,146       
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost (credit)

   $ (67   $ 1,144      $ 49      $ 57   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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.

The Company recorded income tax provisions of $27,654 and $12,017 for the three month periods ended March 31, 2016 and 2015, respectively, representing effective tax rates of 28.1% and 16.1%, 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.

 

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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)

 

As of December 31, 2014, the Company had a valuation allowance on substantially all of our deferred tax assets. Certain of our tax-paying entities at which we have historically recorded significant valuation allowances were profitable on a cumulative basis for the three year periods ended June 30, 2015. In assessing our valuation allowance as of June 30, 2015, we considered all available information, including the magnitude of recent and current operating results, the relatively long duration of statutory carryforward periods, our historical experience utilizing tax attributes prior to their expiration dates, the historical volatility of operating results of these entities and our assessment regarding the sustainability of their profitability. At that time, we concluded that there was a sufficient history of sustained profitability at these entities that it was more likely than not that these entities would be able to realize deferred tax assets. Accordingly, during the period ended June 30, 2015, we released substantially all of the valuation allowance against the deferred tax assets held by these entities.

As a result, during the year ended December 31, 2015, we recorded a deferred tax benefit of approximately $878,000. In addition, included in basis adjustments, we also recorded (i) a separate deferred tax benefit of approximately $378,000 that reflected the tax deductibility of payments under the tax receivable agreement and (ii) a deferred tax expense of approximately $161,000 relating to the reduction of a deferred tax asset as a result of the partial extinguishment of our tax receivable agreement obligation. See Note 16 for more information regarding our accrual under the tax receivable agreement in the second quarter of 2015 and the partial extinguishment of our tax receivable agreement obligation in the third quarter of 2015.

Substantially all of Lazard’s operations outside the U.S. 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.

 

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, 2016 and 2015 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 income attributable to noncontrolling interests resulting from assumed Class A common stock issuances in connection with share-based incentive compensation 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.

 

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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 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, 2016 and 2015 are presented below:

 

                                                       
    Three Months Ended
March  31,
 
    2016     2015  

Net income attributable to Lazard Ltd - basic

  $ 66,823      $ 55,953   

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, net of tax

             
 

 

 

   

 

 

 

Net income attributable to Lazard Ltd - diluted

    $66,823        $55,953   
 

 

 

   

 

 

 

Weighted average number of shares of Class A common stock outstanding

    125,968,430        123,583,678   

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

    72,011        72,011   
 

 

 

   

 

 

 

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

    126,040,441        123,655,689   

Add - dilutive effect, as applicable, of:

   

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

    6,850,843        10,080,257   
 

 

 

   

 

 

 

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

    132,891,284        133,735,946   
 

 

 

   

 

 

 

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

   

Basic

    $0.53        $0.45   
 

 

 

   

 

 

 

Diluted

    $0.50        $0.42   
 

 

 

   

 

 

 

16. RELATED PARTIES

Sponsored Funds

The Company serves as an investment advisor for certain affiliated investment companies and fund entities and receives management fees and, for the alternative investment funds, performance fees for providing such services. Investment advisory fees relating to such services were $118,910 and $135,346 for the three month periods ended March 31, 2016 and 2015, respectively, and are included in “asset management fees” on the condensed consolidated statements of operations. Of such amounts, $48,291 and $42,002 remained as a receivable at March 31, 2016 and December 31, 2015, respectively, and is included in “fees receivable” on the condensed consolidated statements of financial condition.

Tax Receivable Agreement

The Second Amended and Restated Tax Receivable Agreement, dated as of October 26, 2015 (the “Amended and Restated Tax Receivable Agreement”), between Lazard and LTBP Trust, a Delaware statutory trust (the “Trust”), provides for the payment by our subsidiaries to the Trust of (i) approximately 45% (following the July 2015 purchase described below) of the amount of cash savings, if any, in U.S. federal, state and local

 

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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 tax or franchise tax that we actually realize as a result of the increases in tax basis and of certain other tax benefits related to the Amended and Restated Tax Receivable Agreement, and (ii) an amount that we currently expect will approximate 85% of the cash tax savings that may arise from tax benefits attributable to payments under the Amended and Restated Tax Receivable Agreement. Our subsidiaries expect to benefit from the balance of cash savings, if any, in income tax that our subsidiaries realize. Any amount paid by our subsidiaries to the Trust will generally be distributed to the owners of the Trust, including our executive officers, in proportion to their beneficial interests in the Trust.

For purposes of the Amended and Restated Tax Receivable Agreement, cash savings in income and franchise tax will be computed by comparing our subsidiaries’ actual income and franchise tax liability to the amount of such taxes that our subsidiaries would have been required to pay had there been no increase in the tax basis of certain tangible and intangible assets of Lazard Group attributable to our subsidiaries’ interest in Lazard Group and had our subsidiaries not entered into the Amended and Restated Tax Receivable Agreement. The term of the Amended and Restated Tax Receivable Agreement will continue until approximately 2033 or, if earlier, until all relevant tax benefits have been utilized or expired.

As described in Note 14, during the period ended June 30, 2015, we released substantially all of our valuation allowance against deferred tax assets. As a result, we accrued a corresponding liability of $961,948 during the quarter ended June 30, 2015 for amounts relating to the Amended and Restated Tax Receivable Agreement at that time.

The amount of the Amended and Restated Tax Receivable Agreement liability is an undiscounted amount based upon currently enacted tax laws, the current structure of the Company and various assumptions regarding potential future operating profitability. The assumptions reflected in the estimate involve significant judgment. As such, the actual amount and timing of payments under the Amended and Restated Tax Receivable Agreement could differ materially from our estimates. Any changes in the amount of the estimated liability would be recorded as a non-compensation expense in the condensed consolidated statement of operations. Adjustments, if necessary, to the related deferred tax assets would be recorded through the “provision (benefit) for income taxes”.

In July 2015, we purchased approximately 47% of the then-outstanding beneficial interests in the Trust from certain owners of the Trust for $42,222 in cash, which resulted in the automatic cancellation of such beneficial interests and the extinguishment of a significant portion of our payment obligations under the Amended and Restated Tax Receivable Agreement. The extinguishment of these payment obligations resulted in a pre-tax gain of $420,792 recorded in “provision pursuant to tax receivable agreement” on the consolidated statement of operations for the year ended December 31, 2015. In addition, the extinguishment of these payment obligations resulted in a reduction of the tax benefits that would have been attributable to the actual payments and, accordingly, we recorded a deferred tax expense of approximately $161,000 on the consolidated statement of operations for the year ended December 31, 2015.

For the three month period ended March 31, 2015, the Company recorded a “provision pursuant to tax receivable agreement” on the condensed consolidated statements of operations of $6,535. The cumulative liability relating to our obligations under the Amended and Restated Tax Receivable Agreement as of March 31, 2016 and December 31, 2015 was $513,648 and $523,962, respectively, and is recorded in “tax receivable agreement obligation” on the condensed consolidated statements of financial condition. The balance at March 31, 2016 reflects a payment made under the Amended and Restated Tax Receivable Agreement in the first quarter of 2016 of $10,086.

 

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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)

 

Other

See Note 11 for information regarding related party transactions pertaining to shares repurchased from certain of our executive officers.

 

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, 2016, LFNY’s regulatory net capital was $90,470, which exceeded the minimum requirement by $87,155. LFNY’s aggregate indebtedness to net capital ratio was 0.55:1 as of March 31, 2016.

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, 2016, the aggregate regulatory net capital of the U.K. Subsidiaries was $149,828, which exceeded the minimum requirement by $132,962.

CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the Autorité de Contrôle Prudentiel et de Résolution (“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, 2016, the consolidated regulatory net capital of CFLF was $136,054, which exceeded the minimum requirement set for regulatory capital levels by $90,432. 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 supervision, the combined European regulated group is required to comply with minimum requirements for regulatory net capital to be reported on a quarterly basis and satisfy periodic financial and other reporting obligations. At December 31, 2015, the regulatory net capital of the combined European regulated group was $165,662, which exceeded the minimum requirement set for regulatory capital levels by $91,445. 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.

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, 2016, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $100,172, which exceeded the minimum required capital by $74,113.

At March 31, 2016, each of these subsidiaries individually was in compliance with its regulatory capital requirements.

 

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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)

 

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.

 

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. In addition, as described in Note 1 above, the Company records selected other activities in its Corporate segment.

The Company’s segment information for the three month periods ended March 31, 2016 and 2015 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.

 

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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,
 
          2016           2015        

Financial Advisory

   Net Revenue    $ 266,014      $ 301,519   
   Operating Expenses      227,078        242,935   
     

 

 

   

 

 

 
   Operating Income    $ 38,936      $ 58,584   
     

 

 

   

 

 

 

Asset Management

   Net Revenue    $ 245,759      $ 279,807   
   Operating Expenses      175,161        181,792   
     

 

 

   

 

 

 
   Operating Income    $ 70,598      $ 98,015   
     

 

 

   

 

 

 

Corporate

   Net Revenue    $ (13,555   $ (3,577
   Operating Expenses      (2,398     78,359   
     

 

 

   

 

 

 
   Operating Loss    $ (11,157   $ (81,936
     

 

 

   

 

 

 

Total

   Net Revenue    $ 498,218      $ 577,749   
   Operating Expenses      399,841        503,086   
     

 

 

   

 

 

 
   Operating Income    $ 98,377      $ 74,663   
     

 

 

   

 

 

 

 

     As Of  
     March 31,
2016
     December 31,
2015
 

Total Assets

     

Financial Advisory

   $ 714,484       $ 763,374   

Asset Management

     598,382         640,034   

Corporate (a)

     2,698,725         3,074,366   
  

 

 

    

 

 

 

Total (a)

   $ 4,011,591       $ 4,477,774   
  

 

 

    

 

 

 

 

(a) As of December 31, 2015, reflects the retrospective application of new disclosure guidance adopted by the Company for debt issuance costs. See Note 2.

 

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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, 2015 (the “Form 10-K”). All references to “2016”, “2015”, “first quarter”, “three months” or “the period” refer to, as the context requires, the three month periods ended March 31, 2016 and March 31, 2015.

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;

 

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ability to offset stockholder dilution through share repurchases;

 

   

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

 

   

strategies and investment policies;

 

   

financing plans and the availability of short-term borrowing;

 

   

competitive position;

 

   

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

 

   

potential growth opportunities available to our businesses;

 

   

recruitment and retention of our managing directors and employees;

 

   

potential levels of compensation expense, including awarded compensation and benefits expense and adjusted compensation and benefits expense, and non-compensation expense;

 

   

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

 

   

likelihood of success and impact of litigation;

 

   

expected tax rates, including effective tax rates;

 

   

changes in interest and tax rates;

 

   

availability of certain tax benefits, including certain potential deductions;

 

   

potential impact of certain events or circumstances on our financial statements;

 

   

changes in foreign currency exchange 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”) and Lazard Frères Gestion SAS (“LFG”). 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 42 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.

 

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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.

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, corporate preparedness 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, deferred tax assets, outstanding indebtedness and assets and liabilities associated with Lazard Group’s Paris-based subsidiary, Lazard Frères Banque SA (“LFB”).

LFB, as a registered bank, is engaged primarily in commercial and private banking services for clients and funds managed by LFG and 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,
 
         2016             2015      

Financial Advisory

     53     52

Asset Management

     49        49   

Corporate

     (2     (1
  

 

 

   

 

 

 

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) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small-to mid-cap European companies and (iii) 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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Equity market indices for developed markets at March 31, 2016 generally decreased as compared to such indices at March 31, 2015. Emerging markets equity indices at March 31, 2016 decreased as compared to March 31, 2015, but increased in the first quarter of 2016 compared to December 31, 2015. In the global M&A markets during the first quarter of 2016, the value and number of all completed M&A transactions decreased 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 and number of all announced M&A transactions, including the subset of such transactions involving values greater than $500 million, also decreased. During the first quarter of 2016, global restructuring activity, as measured by the number of corporate defaults, increased as compared to the first quarter of 2015. The aggregate value of debt defaults (measured on a global basis) remained consistent with the 2015 period.

In the first quarter of 2016, volatile market conditions continued. On an ongoing basis, volatile conditions may persist, and regional macroeconomic and geopolitical factors, including the United Kingdom’s consideration of whether to exit, or significantly change, its relationship with the European Union, may impact our business. However, corporate cash balances remain high, and interest rates remain low for companies with strong credit ratings. Although market volatility may continue and may affect our business in 2016, the longer-term trends appear to remain favorable for both of our businesses.

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

 

  Financial Advisory – The fundamentals for continued M&A activity 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 other economies.

 

  Asset Management – In the short to intermediate term, we expect most investor demand 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 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: European Long/Short Equity, various Quantitative Equity strategies and Middle East North African Equities.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See Item 1A, “Risk Factors” in 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.

 

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Financial Advisory

As reflected in the following table, which sets forth global M&A industry statistics, the value and number of all completed transactions, including completed transactions with values greater than $500 million, decreased in the first quarter of 2016 as compared to 2015. With respect to announced M&A transactions, the value and number of all transactions, including announced transactions with values greater than $500 million, also decreased in the first quarter of 2016 as compared to 2015.

 

      Three Months Ended March 31,  
      2016      2015      %
Incr /  (Decr)
 
    

($ in billions)

 

Completed M&A Transactions:

        

All deals:

        

Value

   $ 811       $ 900         (10 )% 

Number

     8,389         10,153         (17 )% 

Deals Greater than $500 million:

        

Value

   $ 633       $ 694         (9 )% 

Number

     223         281         (21 )% 

Announced M&A Transactions:

        

All deals:

        

Value

   $ 750       $ 934         (20 )% 

Number

     9,243         10,317         (10 )% 

Deals Greater than $500 million:

        

Value

   $ 536       $ 723         (26 )% 

Number

     252         278         (9 )% 

 

Source: Dealogic as of April 1, 2016.

Global restructuring activity during the first quarter of 2016, as measured by the number of corporate defaults, increased as compared to the first quarter of 2015. The number of defaulting issuers increased to 33 in the first quarter of 2016, according to Moody’s Investors Service, Inc., as compared to 16 in the first quarter of 2015. The aggregate value of debt defaults (measured on a global basis) remained consistent with the 2015 period.

Asset Management

The percentage change in major equity market indices at March 31, 2016, as compared to such indices at December 31, 2015, and at March 31, 2015, is shown in the table below.

 

      Percentage Changes
March 31, 2016 vs.
 
     December 31,
2015
    March 31,
2015
 

MSCI World Index

     (1 )%      (5 )% 

Euro Stoxx

     (8 )%      (19 )% 

MSCI Emerging Market

     5     (14 )% 

S&P 500

     1     0

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, 2016 increased 2% versus AUM at December 31, 2015, primarily due to foreign exchange and market appreciation, partially offset by net outflows. Average AUM for the first quarter of 2016 decreased 7% as compared to average AUM in the first quarter of 2015 and 2% as compared to the fourth quarter of 2015.

 

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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 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 or a redemption occurs during the year). The incentive fees received at the end of the measurement period are not subject to reversal or payback. Incentive fees on hedge funds are often subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain gains realized by the hedge funds in future periods before any incentive fees can be earned.

For private equity funds, incentive fees may be earned in the form of a “carried interest” if profits arising from realized investments exceed a specified threshold. Typically, such carried interest is ultimately calculated

 

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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 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 2016 represented (2)% of Lazard’s net revenue, total assets in the Corporate segment represented 67% of Lazard’s consolidated total assets as of March 31, 2016, which are attributable to cash and cash equivalents, investments in debt and equity securities, interests in alternative investment, debt, equity and private equity funds, deferred tax assets and certain assets associated with LFB.

Operating Expenses

The majority of Lazard’s operating expenses relate to compensation and benefits for managing directors and employees. Our compensation and benefits expense includes (i) salaries and benefits, (ii) amortization of the relevant portion of previously granted deferred incentive compensation awards, including (a) share-based incentive compensation under the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”), which expired in the second quarter of 2015, 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, estimated forfeiture rates, competitive pay conditions and the nature of revenues earned, as well as the mix between current and deferred compensation.

For interim periods, we use “adjusted compensation and benefits expense” and the ratio of “adjusted compensation and benefits expense” to “operating revenue,” both non-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.

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 the fiscal year associated with deferred incentive compensation awards;

 

   

We add incentive compensation with respect to the fiscal year, which is comprised of:

 

  (i) the deferred incentive compensation awards granted in the year-end compensation process with respect to the fiscal year (e.g. deferred incentive compensation awards granted in 2016 related to the 2015 year-end compensation process), including Performance-based restricted stock unit (“PRSU”) awards (based on the target payout level);

 

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  (ii) the portion of investments in people (e.g. “sign-on” bonuses or retention awards) and other special deferred incentive compensation awards that is applicable to the fiscal year the award becomes effective; and

 

  (iii) amounts in excess of the target payout level for PRSU awards at the end of their respective performance periods; and

 

   

We reduce the amounts in (i), (ii) and (iii) above by an estimate of future forfeitures with respect to such awards; and

 

   

We adjust for year-end foreign exchange fluctuations.

Compensation and benefits expense is the largest component of our operating expenses. We seek to maintain discipline with respect to compensation, including the rate at which we award deferred compensation. Our goal is to attain a ratio of awarded compensation and benefits expense to operating revenue and a ratio of adjusted compensation and benefits expense to operating revenue over the cycle in the mid-to-high-50s percentage range, which compares to 55.8% and 55.4%, respectively, for the year ended December 31, 2015. 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 significant portion of the Company’s 6.85% senior notes due 2017 (the “2017 Notes”) (see Note 9 of Notes to Condensed Consolidated Financial Statements).

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.

Our operating expenses also include our “provision pursuant to the tax receivable agreement” and the “amortization of intangible assets related to acquisitions”. For all periods, the amortization of intangible assets related to acquisitions pertains primarily to the acquisition of Edgewater.

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).

In the second quarter of 2015, we released substantially all of our valuation allowance related to the deferred tax assets. When we are able to use the deferred tax assets in future periods to reduce our income taxes, we will be required to pay a significant portion of the tax savings pursuant to our tax receivable agreement. We therefore also recognized a related liability under the tax receivable agreement. In addition, in the third quarter of 2015, we purchased a portion of our obligation relating to the tax receivable agreement, which had the effect of reducing such liability.

 

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See “Critical Accounting Policies and Estimates—Income Taxes” below and Notes 14 and 16 of Notes to Condensed Consolidated Financial Statements for additional information regarding income taxes, our deferred tax assets, the valuation allowance release in 2015 and the tax receivable agreement obligation.

Noncontrolling Interests

Noncontrolling interests primarily consist of amounts related to Edgewater’s management vehicles that the Company is deemed to control but not own. See Note 11 of Notes to Condensed Consolidated Financial Statements for information regarding the Company’s noncontrolling interests.

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, 2016 was negatively impacted in comparison to the prior year period. The majority of the negative impact was offset by the positive impact of the exchange rate movements on our operating expenses denominated in currencies other than 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,
 
          2016             2015      
    

($ in thousands)

 

Net Revenue

   $ 498,218      $ 577,749   
  

 

 

   

 

 

 

Operating Expenses:

    

Compensation and benefits

     297,210        328,502   

Non-compensation

     101,987        167,016   

Amortization of intangible assets related to acquisitions

     644        1,033   

Provision pursuant to tax receivable agreement

            6,535   
  

 

 

   

 

 

 

Total operating expenses

     399,841        503,086   
  

 

 

   

 

 

 

Operating Income

     98,377        74,663   

Provision for income taxes

     27,654        12,017   
  

 

 

   

 

 

 

Net Income

     70,723        62,646   

Less – Net Income Attributable to Noncontrolling Interests

     3,900        6,693   
  

 

 

   

 

 

 

Net Income Attributable to Lazard Ltd

   $ 66,823      $ 55,953   
  

 

 

   

 

 

 

Operating Income, as a % of net revenue

     19.7     12.9
  

 

 

   

 

 

 

 

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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,
 
     2016     2015  
    

($ in thousands)

 

Operating Revenue:

    

Net revenue

   $ 498,218      $ 577,749   

Adjustments:

    

Interest expense (a)

     11,546        16,077   

Revenue related to noncontrolling interests (b)

     (6,212     (8,734

(Gains) losses on investments pertaining to LFI (c)

     2,514        (4,136
  

 

 

   

 

 

 

Operating revenue

   $ 506,066      $ 580,956   
  

 

 

   

 

 

 

 

(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,
 
     2016     2015  
    

($ in thousands)

 

Adjusted Compensation and Benefits Expense:

    

Total compensation and benefits expense

   $ 297,210      $ 328,502   

Adjustments:

    

Noncontrolling interests (a)

     (1,752     (1,217

(Charges) credits pertaining to LFI (b)

     2,514        (4,136
  

 

 

   

 

 

 

Adjusted compensation and benefits expense

   $ 297,972      $ 323,149   
  

 

 

   

 

 

 

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

     58.9     55.6
  

 

 

   

 

 

 

 

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

 

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     Three Months Ended
March 31,
 
         2016             2015      
    

($ in thousands)

 

Adjusted Non-Compensation Expense:

    

Total non-compensation expense

   $ 101,987        $167,016   

Adjustments:

    

Noncontrolling interests (a)

     (398     (363

Charges pertaining to senior debt refinancing (b)

            (60,219
  

 

 

   

 

 

 

Adjusted non-compensation expense

   $ 101,589        $106,434   
  

 

 

   

 

 

 

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

     20.1     18.3
  

 

 

   

 

 

 

 

(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 significant portion of the Company’s 2017 Notes are excluded because of the non-operating nature of such transactions. See “—Liquidity and Capital Resources—Financing Activities.”

 

     Three Months Ended
March 31,
 
         2016             2015      
    

($ in thousands)

 

Earnings From Operations:

    

Operating revenue

   $ 506,066      $ 580,956   

Deduct:

    

Adjusted compensation and benefits expense

     (297,972     (323,149

Adjusted non-compensation expense

     (101,589     (106,434
  

 

 

   

 

 

 

Earnings from operations

   $ 106,505      $ 151,373   
  

 

 

   

 

 

 

Earnings from operations, as a % of operating revenue

     21.0     26.1
  

 

 

   

 

 

 

Headcount information is set forth below:

 

     As Of
     March 31,
2016
   December 31,
2015
   March 31,
2015

Headcount:

              

Managing Directors:

              

Financial Advisory

       146          139          147  

Asset Management

       96          90          90  

Corporate

       20          18          17  
    

 

 

      

 

 

      

 

 

 

Total Managing Directors

       262          247          254  

Other Employees:

              

Business segment professionals

       1,174          1,173          1,121  

All other professionals and support staff

       1,193          1,190          1,151  
    

 

 

      

 

 

      

 

 

 

Total

       2,629          2,610          2,526  
    

 

 

      

 

 

      

 

 

 

 

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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, 2016 versus March 31, 2015

The Company reported net income attributable to Lazard Ltd of $67 million, as compared to net income of $56 million in the 2015 period. The changes in the Company’s operating results during these periods are described below.

Net revenue decreased $80 million, or 14%, with operating revenue decreasing $75 million, or 13%, as compared to the 2015 period. Fee revenue from investment banking and other advisory activities decreased $36 million, or 12%, primarily due to decreases in M&A and Other Advisory fees. The decrease in M&A and Other Advisory fee revenue primarily reflected a lower level of closings and a decrease in the average transaction fee with respect to completed transactions involving fees greater than $1 million as compared to the 2015 period. Asset management fees, including incentive fees, decreased $28 million, or 11%, as compared to the 2015 period, due to a decrease in average AUM, a change in the mix of AUM and a decrease in incentive fees relating to traditional investment products. In the aggregate, interest income, other revenue and interest expense decreased $15 million as compared to the 2015 period, primarily due to investment losses, partially offset by a decrease in interest expense.

Compensation and benefits expense decreased $31 million, or 10%, as compared to the 2015 period, primarily due to a decrease in discretionary compensation associated with decreased operating revenue.

Adjusted compensation and benefits expense (which excludes certain items and which we believe allows for improved comparability between periods, as described above) was $298 million, a decrease of $25 million, or 8%, as compared to $323 million in the 2015 period. The ratio of adjusted compensation and benefits expense to operating revenue was 58.9% for the 2016 period, as compared to 55.6% for the 2015 period and 55.4% for full-year 2015. The ratio of adjusted compensation and benefits expense in the 2016 period generally reflected lower operating revenue in the 2016 period and seasonally high amortization expense.

Non-compensation expense decreased $65 million, or 39%, as compared to the 2015 period, primarily due to a non-recurring charge of $60 million related to the redemption of a significant portion of the Company’s 2017 Notes in the 2015 period. Adjusted non-compensation expense, which excludes such charge, as well as non-compensation costs relating to noncontrolling interests, decreased $5 million, or 5%, as compared to the 2015 period. The ratio of adjusted non-compensation expense to operating revenue was 20.1%, as compared to 18.3% in the 2015 period.

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

As a result of the possible 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 16 of Notes to Condensed Consolidated Financial Statements for additional information).

Operating income increased $24 million as compared to the 2015 period, which included a charge relating to the redemption of a significant portion of the Company’s 2017 Notes, as well as the impact of the provision pursuant to the tax receivable agreement described above.

Earnings from operations decreased $45 million, or 30%, as compared to the 2015 period, which excluded the charge related to the redemption of a significant portion of the Company’s 2017 Notes, as well as the impact of the provision pursuant to the tax receivable agreement described above, and, as a percentage of operating revenue, was 21.0%, as compared to 26.1% in the 2015 period.

 

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The provision for income taxes reflects an effective tax rate of 28.1%, as compared to 16.1% for the 2015 period. The increase in the effective tax rate is primarily the result of a change in our valuation allowance related to the deferred tax assets in the 2015 period and a change in the geographic mix of earnings. See Note 14 of Notes to Condensed Consolidated Financial Statements.

Net income attributable to noncontrolling interests decreased $3 million, or 42%, as compared to the 2015 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,
 
     2016     2015  
    

($ in thousands)

 

M&A and Other Advisory

   $ 214,591      $ 260,804   

Capital Raising

     8,873        17,569   
  

 

 

   

 

 

 

Total Strategic Advisory

     223,464        278,373   

Restructuring

     42,550        23,146   
  

 

 

   

 

 

 

Net Revenue

     266,014        301,519   

Operating Expenses

     227,078        242,935   
  

 

 

   

 

 

 

Operating Income

   $ 38,936      $ 58,584   
  

 

 

   

 

 

 

Operating Income, as a % of net revenue

     14.6     19.4
  

 

 

   

 

 

 

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, decreased 18% in 2016 as compared to 2015. The industry statistics for global M&A transactions described above reflect a 10% and 17% decrease in the value and number, respectively, of all completed transactions in the 2016 period as compared to the 2015 period. For M&A deals with values greater than $500 million, the value and number of completed transactions in the 2016 period decreased 9% and 21%, respectively, as compared to the 2015 period.

 

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Certain Lazard fee and transaction statistics are set forth below:

 

     Three Months Ended
March 31,
 
         2016             2015      

Lazard Statistics:

    

Number of clients with fees greater than $1 million:

    

Total Financial Advisory

     66        68   

M&A and Other Advisory

     55        56   

Percentage of total Financial Advisory net revenue from top 10 clients

     35     39

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

     13        22   

 

(a) Source: Dealogic as of April 1, 2016.

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,
 
         2016             2015      

United States

     66     57

Europe

     31        39   

Rest of World

     3        4   
  

 

 

   

 

 

 

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, 2016 versus March 31, 2015

Financial Advisory net revenue decreased $36 million, or 12%, as compared to the 2015 period. Total Strategic Advisory net revenue, representing fees from our M&A and Other Advisory and Capital Raising businesses, decreased $55 million, or 20%, and Restructuring revenue increased $19 million, or 84%, as compared to the 2015 period.

M&A and Other Advisory revenue decreased $46 million, or 18%, while Capital Raising revenue decreased $9 million, or 50%, as compared to the 2015 period. The decrease in M&A and Other Advisory revenue primarily reflected a lower level of closings and a decrease in the average transaction fee with respect to completed transactions involving fees greater than $1 million as compared to the 2015 period. Our major clients,

 

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which in the aggregate represented a significant portion of our M&A and Other Advisory revenue in the 2016 period, included Kraton Polymers, PartnerRe, Pepco Holdings, Reynolds American, Shell and Whiting Petroleum.

Restructuring revenue in the 2016 period primarily reflected the closing of several large assignments, as well as a higher level of activity in the U.S. energy sector in the 2016 period. Our major clients, which in the aggregate represented a significant portion of our Restructuring revenue in the 2016 period, included Hovensa, Paragon Offshore, Vantage Drilling and Walter Energy.

Operating expenses decreased $16 million, or 7%, as compared to the 2015 period, primarily due to a decrease in compensation and benefits expense.

Financial Advisory operating income was $39 million, a decrease of $20 million, or 34%, as compared to operating income of $59 million in the 2015 period and, as a percentage of net revenue, was 14.6%, as compared to 19.4% in the 2015 period.

Asset Management

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

 

<
     As of  
     March 31,
2016
     December 31,
2015
 
    

($ in millions)

 

AUM by Asset Class:

     

Equity:

     

Emerging Markets

   $ 38,823       $ 36,203   

Global

     32,407         31,407   

Local

     31,232         31,354   

Multi-Regional

     53,350         52,531   
  

 

 

    

 

 

 

Total Equity

     155,812         151,495   
  

 

 

    

 

 

 

Fixed Income:

     

Emerging Markets

     14,110         14,378   

Global

     4,341         4,132   

Local

    
3,867
  
    
3,899
  

Multi-Regional

     8,052         7,978