Attached files
file | filename |
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EX-12.1 - EX-12.1 - Lazard Group LLC | d941526dex121.htm |
EX-31.1 - EX-31.1 - Lazard Group LLC | d941526dex311.htm |
EX-31.2 - EX-31.2 - Lazard Group LLC | d941526dex312.htm |
EX-32.2 - EX-32.2 - Lazard Group LLC | d941526dex322.htm |
EX-32.1 - EX-32.1 - Lazard Group LLC | d941526dex321.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2015
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
333-126751
(Commission File Number)
LAZARD GROUP LLC
(Exact name of registrant as specified in its charter)
Delaware | 51-0278097 | |
(State or Other Jurisdiction of Incorporation | (I.R.S. Employer Identification No.) | |
or Organization) |
30 Rockefeller Plaza
New York, NY 10112
(Address of principal executive offices)
Registrants telephone number: (212)-632-6000
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 ¨ | Accelerated filer ¨ | |
Non-accelerated filer x | 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 July 17, 2015, in addition to profit participation interests, there were 129,766,090 common membership interests and two managing member interests outstanding.
Table of Contents
When we use the terms Lazard Group, Lazard, we, us, our and the Company, we mean Lazard Group LLC, a Delaware limited liability company that is the current holding company for the subsidiaries that conduct our businesses. Lazard Ltd is a Bermuda exempt company whose shares of Class A common stock (the Class A common stock) are publicly traded on the New York Stock Exchange under the Symbol LAZ. Lazard Ltds subsidiaries include Lazard Group and their respective subsidiaries. Lazard Ltds primary operating asset is its indirect ownership as of June 30, 2015 of all of the common membership interests in Lazard Group. Lazard Ltd controls Lazard Group through two of its indirect wholly-owned subsidiaries that are co-managing members of Lazard Group.
Lazard Group has granted profit participation interests in Lazard Group to certain of its managing directors. The profit participation interests are discretionary profits interests that are intended to enable Lazard Group to compensate its managing directors in a manner consistent with historical practices.
i
Table of Contents
Item 1. | Financial Statements (Unaudited) |
Page | ||||
Condensed Consolidated Statements of Financial Condition as of June 30, 2015 and December 31, 2014 |
2 | |||
4 | ||||
5 | ||||
6 | ||||
7 | ||||
9 |
1
Table of Contents
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
(dollars in thousands)
June 30, |
December 31, | |||||||
2015 | 2014 | |||||||
ASSETS |
||||||||
Cash and cash equivalents | $ | 689,549 | $ | 917,212 | ||||
Deposits with banks and short-term investments | 287,677 | 207,760 | ||||||
Cash deposited with clearing organizations and other segregated cash | 33,726 | 43,290 | ||||||
Receivables (net of allowance for doubtful accounts of $21,071 and $23,540 at |
||||||||
Fees |
443,682 | 483,681 | ||||||
Customers and other |
61,204 | 74,247 | ||||||
|
|
|
|
|||||
504,886 | 557,928 | |||||||
Investments |
546,553 | 609,226 | ||||||
Property (net of accumulated amortization and depreciation of $255,463 and $256,285 at June 30, 2015 and December 31, 2014, respectively) |
213,744 | 222,569 | ||||||
Goodwill and other intangible assets (net of accumulated amortization of $54,629 and $51,754 at June 30, 2015 and December 31, 2014, respectively) |
335,969 | 347,438 | ||||||
Deferred tax assets |
64,064 | 59,041 | ||||||
Other assets | 262,608 | 206,216 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 2,938,776 | $ | 3,170,680 | ||||
|
|
|
|
See notes to condensed consolidated financial statements.
2
Table of Contents
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2015 AND DECEMBER 31, 2014
(UNAUDITED)
(dollars in thousands)
June 30, 2015 |
December
31, 2014 |
|||||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Liabilities: |
||||||||
Deposits and other customer payables |
$ | 375,835 | $ | 316,602 | ||||
Accrued compensation and benefits |
387,467 | 606,290 | ||||||
Senior debt |
998,350 | 1,048,350 | ||||||
Payable to Lazard Ltd subsidiaries |
151,701 | 155,742 | ||||||
Capital lease obligations |
10,089 | 12,015 | ||||||
Other liabilities |
501,625 | 537,542 | ||||||
|
|
|
|
|||||
Total Liabilities |
2,425,067 | 2,676,541 | ||||||
Commitments and contingencies |
||||||||
MEMBERS EQUITY |
Members equity (net of 2,332,300 and 5,663,243 shares of Lazard Ltd Class A common stock, at a cost of $114,593 and $246,032 at June 30, 2015 and December 31, 2014, respectively) |
649,096 | 594,834 | ||||||
Accumulated other comprehensive loss, net of tax |
(193,842 | ) | (163,288 | ) | ||||
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|
|
|
|||||
Total Lazard Group LLC Members Equity |
455,254 | 431,546 | ||||||
Noncontrolling interests |
58,455 | 62,593 | ||||||
|
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|
|
|||||
Total Members Equity |
513,709 | 494,139 | ||||||
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|
|
|
|||||
Total Liabilities and Members Equity |
$ | 2,938,776 | $ | 3,170,680 | ||||
|
|
|
|
See notes to condensed consolidated financial statements.
3
Table of Contents
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
(dollars in thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
REVENUE |
||||||||||||||||
Investment banking and other advisory fees |
$ | 314,277 | $ | 279,907 | $ | 615,649 | $ | 552,582 | ||||||||
Asset management fees |
268,754 | 275,877 | 530,709 | 528,908 | ||||||||||||
Interest income |
1,361 | 2,620 | 2,290 | 5,592 | ||||||||||||
Other |
36,071 | 25,701 | 65,809 | 47,891 | ||||||||||||
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|
|
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|
|
|||||||||
Total revenue |
620,463 | 584,105 | 1,214,457 | 1,134,973 | ||||||||||||
Interest expense |
12,512 | 17,300 | 29,653 | 34,873 | ||||||||||||
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|
|
|
|
|||||||||
Net revenue |
607,951 | 566,805 | 1,184,804 | 1,100,100 | ||||||||||||
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|
|
|
|||||||||
OPERATING EXPENSES |
||||||||||||||||
Compensation and benefits |
336,707 | 345,911 | 665,197 | 667,461 | ||||||||||||
Occupancy and equipment |
27,267 | 28,354 | 54,602 | 56,661 | ||||||||||||
Marketing and business development |
18,324 | 20,894 | 37,514 | 40,127 | ||||||||||||
Technology and information services |
23,033 | 21,953 | 45,926 | 45,440 | ||||||||||||
Professional services |
12,264 | 12,996 | 23,470 | 20,360 | ||||||||||||
Fund administration and outsourced services |
17,493 | 16,002 | 33,641 | 31,456 | ||||||||||||
Amortization of intangible assets related to acquisitions |
1,857 | 706 | 2,890 | 1,926 | ||||||||||||
Other |
9,870 | 10,101 | 79,817 | 19,393 | ||||||||||||
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|
|
|
|
|
|
|||||||||
Total operating expenses |
446,815 | 456,917 | 943,057 | 882,824 | ||||||||||||
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|
|
|
|
|
|
|||||||||
OPERATING INCOME |
161,136 | 109,888 | 241,747 | 217,276 | ||||||||||||
Provision for income taxes |
14,464 | 15,878 | 25,922 | 33,735 | ||||||||||||
|
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|
|||||||||
NET INCOME |
146,672 | 94,010 | 215,825 | 183,541 | ||||||||||||
LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
1,043 | 553 | 7,736 | 4,673 | ||||||||||||
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|||||||||
NET INCOME ATTRIBUTABLE TO LAZARD GROUP LLC |
$ | 145,629 | $ | 93,457 | $ | 208,089 | $ | 178,868 | ||||||||
|
|
|
|
|
|
|
|
See notes to condensed consolidated financial statements.
4
Table of Contents
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
(dollars in thousands)
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
NET INCOME |
$ | 146,672 | $ | 94,010 | $ | 215,825 | $ | 183,541 | ||||||||
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: |
||||||||||||||||
Currency translation adjustments |
11,072 | 3,194 | (18,314 | ) | 6,785 | |||||||||||
Employee benefit plans: |
||||||||||||||||
Actuarial loss (net of tax benefit of $8,121 and $3,600 for the three months ended June 30, 2015 and 2014, respectively, and $8,006 and $3,650 for the six months ended June 30, 2015 and 2014, respectively) |
(14,836 | ) | (6,389 | ) | (14,617 | ) | (6,946 | ) | ||||||||
Adjustment for items reclassified to earnings (net of tax expense of $538 and $331 for the three months ended June 30, 2015 and 2014, respectively, and $1,101 and $863 for the six months ended June 30, 2015 and 2014, respectively) |
1,190 | 1,280 | 2,376 | 2,569 | ||||||||||||
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX |
(2,574 | ) | (1,915 | ) | (30,555 | ) | 2,408 | |||||||||
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COMPREHENSIVE INCOME |
144,098 | 92,095 | 185,270 | 185,949 | ||||||||||||
LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
1,041 | 553 | 7,735 | 4,673 | ||||||||||||
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COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD GROUP LLC |
$ | 143,057 | $ | 91,542 | $ | 177,535 | $ | 181,276 | ||||||||
|
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|
|
|
|
|
See notes to condensed consolidated financial statements.
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LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2015 AND 2014
(UNAUDITED)
(dollars in thousands)
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 215,825 | $ | 183,541 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization of property |
15,900 | 17,656 | ||||||
Amortization of deferred expenses and share-based incentive compensation |
170,700 | 157,272 | ||||||
Amortization of intangible assets related to acquisitions |
2,890 | 1,926 | ||||||
Deferred tax provision (benefit) |
(3,943 | ) | 3,796 | |||||
Loss on extinguishment of debt |
60,219 | | ||||||
Gain on disposal of subsidiaries |
(24,388 | ) | | |||||
(Increase) decrease in operating assets: |
||||||||
Deposits with banks and short-term investments |
(95,877 | ) | (80,047 | ) | ||||
Cash deposited with clearing organizations and other segregated cash |
8,438 | (5,331 | ) | |||||
Receivables-net |
36,000 | (20,543 | ) | |||||
Investments |
52,746 | (59,438 | ) | |||||
Other assets |
(96,693 | ) | (94,441 | ) | ||||
Increase (decrease) in operating liabilities: |
||||||||
Deposits and other payables |
78,229 | 51,460 | ||||||
Accrued compensation and benefits and other liabilities |
(209,205 | ) | (89,394 | ) | ||||
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Net cash provided by operating activities |
210,841 | 66,457 | ||||||
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Additions to property |
(13,438 | ) | (5,830 | ) | ||||
Disposals of property |
336 | 350 | ||||||
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Net cash used in investing activities |
(13,102 | ) | (5,480 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from: |
||||||||
Contributions from noncontrolling interests |
57 | 237 | ||||||
Issuance of senior debt, net of expenses |
396,272 | | ||||||
Excess tax benefits from share-based incentive compensation |
9,516 | 1,925 | ||||||
Other financing activities |
| 20,200 | ||||||
Payments for: |
||||||||
Senior debt |
(509,098 | ) | | |||||
Capital lease obligations |
(1,019 | ) | (1,168 | ) | ||||
Distributions to noncontrolling interests |
(11,930 | ) | (5,685 | ) | ||||
Purchase of Lazard Ltd Class A common stock |
(141,323 | ) | (141,192 | ) | ||||
Distribution to members |
(40,839 | ) | (73,194 | ) | ||||
Settlement of vested share-based incentive compensation |
(102,634 | ) | (82,526 | ) | ||||
Other financing activities |
(1,634 | ) | (2,985 | ) | ||||
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Net cash used in financing activities |
(402,632 | ) | (284,388 | ) | ||||
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(22,770 | ) | 2,810 | |||||
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
(227,663 | ) | (220,601 | ) | ||||
CASH AND CASH EQUIVALENTSJanuary 1 |
917,212 | 832,277 | ||||||
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CASH AND CASH EQUIVALENTSJune 30 |
$ | 689,549 | $ | 611,676 | ||||
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See notes to condensed consolidated financial statements.
6
Table of Contents
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2014
(UNAUDITED)
(dollars in thousands)
Members Equity |
Accumulated Other Comprehensive Income (Loss), Net of Tax |
Total Lazard Group Members Equity |
Noncontrolling Interests |
Total Members Equity |
||||||||||||||||
Balance January 1, 2014 (*) |
$ | 571,668 | $ | (102,196 | ) | $ | 469,472 | $ | 66,654 | $ | 536,126 | |||||||||
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Comprehensive income: |
||||||||||||||||||||
Net income |
178,868 | 178,868 | 4,673 | 183,541 | ||||||||||||||||
Other comprehensive income net of tax |
2,408 | 2,408 | | 2,408 | ||||||||||||||||
Amortization of share-based incentive compensation |
112,308 | 112,308 | 112,308 | |||||||||||||||||
Distributions to members and noncontrolling interests, net |
(73,194 | ) | (73,194 | ) | (5,448 | ) | (78,642 | ) | ||||||||||||
Purchase of Lazard Ltd Class A common stock |
(141,192 | ) | (141,192 | ) | (141,192 | ) | ||||||||||||||
Delivery of Lazard Ltd Class A common stock in connection with shared-based incentive compensation awards and related tax benefit of $1,776 |
(80,750 | ) | (80,750 | ) | (80,750 | ) | ||||||||||||||
Business acquisitions and related equity transactions: |
||||||||||||||||||||
Lazard Ltd Class A common stock issuable (including related amortization) |
258 | 258 | 258 | |||||||||||||||||
Other |
(2,785 | ) | (2,785 | ) | (2,785 | ) | ||||||||||||||
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|||||||||||
Balance June 30, 2014 (*) |
$ | 565,181 | $ | (99,788 | ) | $ | 465,393 | $ | 65,879 | $ | 531,272 | |||||||||
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(*) | Includes 129,766,090 common membership interests issued at both January 1, 2014 and June 30, 2014. Also includes profit participation interests and two managing member interests issued at each such date. |
See notes to condensed consolidated financial statements.
7
Table of Contents
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS EQUITY
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2015
(UNAUDITED)
(dollars in thousands)
Members Equity |
Accumulated Other Comprehensive Income (Loss), Net of Tax |
Total Lazard Group Members Equity |
Noncontrolling Interests |
Total Members Equity |
||||||||||||||||
Balance January 1, 2015 (*) |
$ | 594,834 | $ | (163,288 | ) | $ | 431,546 | $ | 62,593 | $ | 494,139 | |||||||||
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|
|||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||
Net income |
208,089 | 208,089 | 7,736 | 215,825 | ||||||||||||||||
Other comprehensive loss - net of tax |
(30,554 | ) | (30,554 | ) | (1 | ) | (30,555 | ) | ||||||||||||
Amortization of share-based incentive compensation |
122,793 | 122,793 | 122,793 | |||||||||||||||||
Distributions to members and noncontrolling interests, net |
(40,839 | ) | (40,839 | ) | (11,873 | ) | (52,712 | ) | ||||||||||||
Purchase of Lazard Ltd Class A common stock |
(141,323 | ) | (141,323 | ) | (141,323 | ) | ||||||||||||||
Delivery of Lazard Ltd Class A common stock in connection with share-based incentive compensation awards and related tax benefit of $9,495 |
(93,139 | ) | (93,139 | ) | (93,139 | ) | ||||||||||||||
Business acquisitions and related equity transactions: |
||||||||||||||||||||
Lazard Ltd Class A common stock issuable (including related amortization) |
315 | 315 | 315 | |||||||||||||||||
Other |
(1,634 | ) | (1,634 | ) | (1,634 | ) | ||||||||||||||
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|
|
|
|
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|
|||||||||||
Balance June 30, 2015 (*) |
$ | 649,096 | $ | (193,842 | ) | $ | 455,254 | $ | 58,455 | $ | 513,709 | |||||||||
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(*) | Includes 129,766,090 common membership interests issued at both January 1, 2015 and June 30, 2015. Also includes profit participation interests and two managing member interests issued at each such date. |
See notes to condensed consolidated financial statements.
8
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
1. | ORGANIZATION AND BASIS OF PRESENTATION |
Organization
The accompanying condensed consolidated financial statements are those of Lazard Group LLC and its subsidiaries (collectively referred to with its subsidiaries as Lazard Group or the Company). Lazard Group is a Delaware limited liability company and is governed by an Operating Agreement dated as of May 10, 2005, as amended (the Operating Agreement).
Lazard Ltd, a Bermuda holding company, and its subsidiaries (collectively referred to as Lazard Ltd), including its indirect investment in Lazard Group, is one of the worlds 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 June 30, 2015 and December 31, 2014. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group. LAZ-MD Holdings LLC (LAZ-MD Holdings), an entity formerly owned by Lazard Groups current and former managing directors, held approximately 0.5% of the outstanding Lazard Group common membership interests as of January 1, 2014. As of January 1, 2014, LAZ-MD Holdings was also the sole owner of the one issued and outstanding share of Lazard Ltds Class B common stock (the Class B common stock). In May 2014, the remaining outstanding Lazard Group common membership interests held by LAZ-MD Holdings were exchanged for shares of Lazard Ltds Class A common stock, par value $0.01 per share (Class A common stock), and the sole issued and outstanding share of Lazard Ltds Class B common stock was automatically converted into one share of Lazard Ltds Class A common stock pursuant to the provisions of Lazard Ltds bye-laws, resulting in only one outstanding class of common stock (the Final Exchange of LAZ-MD Interests). Following the Final Exchange of LAZ-MD Interests, Lazard Group became a wholly-owned indirect subsidiary of Lazard Ltd.
Lazard Groups principal operating activities are included in two business segments:
| Financial Advisory, which offers corporate, partnership, institutional, government, sovereign and individual clients across the globe a wide array of financial advisory services regarding mergers and acquisitions (M&A) and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and |
| Asset Management, which offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients. |
In addition, we record selected other activities in our Corporate segment, including management of cash, investments, deferred tax assets, outstanding indebtedness and assets associated with Lazard Groups Paris-based subsidiary Lazard Frères Banque SA (LFB).
LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel et de Résolution (ACPR). It is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (LFG) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, and asset-liability management.
9
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Basis of Presentation
The accompanying condensed consolidated financial statements of Lazard Group 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 Groups Annual Report on Form 10-K for the year ended December 31, 2014 (the Form 10-K). The accompanying December 31, 2014 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.
Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. For example, discretionary compensation and benefits expense for interim periods is accrued based on the year-to-date amount of revenue earned, and an assumed annual ratio of compensation and benefits expense to revenue, with the applicable amounts adjusted for certain items. Although these estimates are based on managements 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 and six month periods ended June 30, 2015 are not necessarily indicative of the results to be expected for any future interim or annual period.
The condensed consolidated financial statements include Lazard Group and Lazard Groups 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 Companys policy is to consolidate entities in which it has a controlling financial interest. The Company consolidates (i) a voting interest entity (VOE) where the Company either holds a majority of the voting interest in such entity or is the general partner in such entity and the third-party investors do not have the right to replace the general partner and (ii) a variable interest entity (VIE) where the Company absorbs a majority of the expected losses, expected residual returns, or both, of such entity. When the Company does not have a controlling interest in an entity, but exerts significant influence over such entitys 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 by separately presenting deferred tax assets in the condensed consolidated statements of financial condition and the condensed consolidated statements of cash flows.
10
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
2. | RECENT ACCOUNTING DEVELOPMENTS |
Revenue from Contracts with CustomersIn 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. 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 AnalysisIn 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 does not expect that the adoption of this guidance will have a material impact on our consolidated financial statements or related disclosures.
InterestImputation of InterestIn April 2015, the FASB issued updated guidance which requires a company to classify debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption permitted. The new guidance is to be applied on a retrospective basis. The Company does not expect that the adoption of this guidance will have a material impact on our consolidated financial statements or related disclosures.
Fair Value MeasurementIn 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 requires a company to remove from within the fair value hierarchy all investments for which fair value is measured using NAV. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption permitted. The new guidance is to be applied on a retrospective basis. The Company does not expect that the adoption of this guidance will have a material impact on our consolidated financial statements, but does expect that this guidance will affect the disclosures related to investments and fair value measurements.
11
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
3. | RECEIVABLES |
The Companys receivables represent fee receivables and 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 and six month periods ended June 30, 2015 and 2014 was as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Beginning balance |
$ | 18,459 | $ | 31,324 | $ | 23,540 | $ | 28,777 | ||||||||
Bad debt expense, net of recoveries |
|
2,061 |
|
(1,633 | ) | 3,293 | 7,503 | |||||||||
Charge-offs, foreign currency translation and other adjustments |
551 | 252 | (5,762 | ) | (6,337 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Ending balance |
$ | 21,071 | $ | 29,943 | $ | 21,071 | $ | 29,943 | ||||||||
|
|
|
|
|
|
|
|
Bad debt expense, net of recoveries is included in investment banking and other advisory fees on the condensed consolidated statements of operations.
At June 30, 2015 and December 31, 2014, the Company had receivables past due or deemed uncollectible of $22,833 and $24,578, respectively.
Of the Companys fee receivables at June 30, 2015 and December 31, 2014, $81,302 and $86,221, respectively, represented interest-bearing financing receivables. Based upon our historical loss experience, the credit quality of the counterparties, and the lack of past due or uncollectible amounts, there was no allowance for doubtful accounts required at those dates related to such receivables.
The aggregate carrying amount of our non-interest bearing receivables of $423,584 and $471,707 at June 30, 2015 and December 31, 2014, respectively, approximates fair value.
12
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
4. | INVESTMENTS |
The Companys investments and securities sold, not yet purchased, consist of the following at June 30, 2015 and December 31, 2014:
June 30, |
December 31, | |||||||
2015 | 2014 | |||||||
Interest-bearing deposits |
$ | 56,411 | $ | 84,575 | ||||
|
|
|
|
|||||
Debt |
1,870 | 10,426 | ||||||
|
|
|
|
|||||
Equities |
53,147 | 57,302 | ||||||
|
|
|
|
|||||
Funds: |
||||||||
Alternative investments (a) |
32,247 | 34,705 | ||||||
Debt (a) |
61,979 | 71,763 | ||||||
Equity (a) |
232,244 | 228,209 | ||||||
Private equity |
101,802 | 114,470 | ||||||
|
|
|
|
|||||
428,272 | 449,147 | |||||||
|
|
|
|
|||||
Equity method |
6,853 | 7,776 | ||||||
|
|
|
|
|||||
Total investments |
546,553 | 609,226 | ||||||
Less: |
||||||||
Interest-bearing deposits |
56,411 | 84,575 | ||||||
Equity method |
6,853 | 7,776 | ||||||
|
|
|
|
|||||
Investments, at fair value |
$ | 483,289 | $ | 516,875 | ||||
|
|
|
|
|||||
Securities sold, not yet purchased, at fair value (included in other liabilities) |
$ | 3,515 | $ | 9,290 | ||||
|
|
|
|
(a) | Interests in alternative investment funds, debt funds and equity funds include investments with fair values of $12,153, $32,226 and $170,003, respectively, at June 30, 2015 and $8,321, $42,070 and $162,798, respectively, at December 31, 2014, held in order to satisfy the Companys liability upon vesting of previously granted Lazard Fund Interests (LFI) and other similar deferred compensation arrangements. LFI represent grants by the Company to eligible employees of actual or notional interests in a number of Lazard-managed funds, subject to service-based vesting conditions (see Notes 6 and 12 of Notes to Condensed Consolidated Financial Statements). |
Interest-bearing deposits have original maturities of greater than three months but equal to or less than one year and are carried at cost that approximates fair value due to their short-term maturities.
Debt securities primarily consist of seed investments invested in debt securities held within separately managed accounts related to our Asset Management business.
Equities primarily consist of seed investments invested in marketable equity securities of large-, mid- and small-cap domestic, international and global companies held within separately managed accounts related to our Asset Management business.
Alternative investment funds primarily consist of interests in various Lazard-managed hedge funds and funds of funds.
13
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Debt funds primarily consist of seed investments in funds related to our Asset Management business that invest in debt securities, amounts related to LFI discussed above and an investment in a debt fund held by the Companys broker-dealer subsidiary.
Equity funds primarily consist of seed investments in funds related to our Asset Management business that invest in equity securities, and amounts related to LFI discussed above.
Private equity investments include those owned by Lazard and those consolidated but not owned by Lazard. Private equity investments owned by Lazard are primarily comprised of investments in private equity funds. Such investments primarily include (i) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies, (ii) Corporate Partners II Limited (CP II), a fund targeting significant noncontrolling-stake investments in established private companies, (iii) Edgewater Growth Capital Partners III, L.P. (EGCP III), a fund primarily making equity and buyout investments in middle market companies and (iv) Lazard Australia Corporate Opportunities Fund 2 (COF2), an Australian fund targeting Australian mid-market investments. The Company disposed of its private equity business in Australia in the second quarter of 2015 in a transaction with the management of the disposed business. Revenue of $24,388 relating to the disposal of the business primarily represents the realization of carried interest at fair value and is included in revenue-other on the condensed consolidated statements of operations for the three month and six month periods ended June 30, 2015. See Note 5 of Notes to Condensed Consolidated Financial Statements.
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 and six month periods ended June 30, 2015 and 2014, the Company reported in revenue-other on its condensed consolidated statements of operations net unrealized investment gains and losses pertaining to trading securities still held as of the reporting date as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Net unrealized investment gains (losses) |
$ | (3,206) | $ | 12,754 | $ | (1,211 | ) | $ | 12,858 |
5. | FAIR VALUE MEASUREMENTS |
Lazard categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:
Level 1. | Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that Lazard has the ability to access. |
Level 2. | Assets and liabilities whose values are based on (i) quoted prices for similar assets or liabilities in an active market, or quoted prices for identical or similar assets or liabilities in non-active markets, (ii) assets valued based on NAV or its equivalent redeemable at the measurement date or within the near term without redemption restrictions, or (iii) inputs other than quoted prices that are directly observable or derived principally from, or corroborated by, market data. |
Level 3. | Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose trading volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis, as well as assets valued based on NAV or its equivalent, but not redeemable within the near term as a result of redemption restrictions. |
14
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The Companys investments in debt securities are classified as Level 1 when their respective fair values are based on unadjusted quoted prices in active markets and are classified as Level 2 when their fair values are primarily based on prices as provided by external pricing services.
The fair value of equities is classified as Level 1 or Level 3 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that security as provided by external pricing services; equity securities in private companies are generally classified as Level 3.
The fair value of investments in alternative investment funds is classified as Level 1 when the fair values are primarily based on the publicly reported closing price for the fund, and classified as Level 2 when (i) the fair values are primarily based on NAV or its equivalent, which is primarily determined based on information provided by external fund administrators, and (ii) the investments are redeemable within the near term.
The fair value of investments in debt funds is classified as Level 1 when the fair values are primarily based on the publicly reported closing price for the fund, and classified as Level 2 when the fair values are primarily based on NAV or its equivalent and are redeemable within the near term.
The fair value of investments in equity funds is classified as Level 1 or 2 as follows: publicly traded asset management funds are classified as Level 1 and are valued based on the reported closing price for the fund; and investments in asset management funds redeemable in the near term are classified as Level 2 and are valued at NAV or its equivalent, which is primarily determined based on information provided by external fund administrators.
The fair value of investments in private equity funds is classified as Level 3, and is primarily based on NAV or its equivalent, except for certain investments that are valued based on potential transaction value. Such investments are not redeemable within the near term.
The fair values of derivatives entered into by the Company are classified as Level 2 and are based on the values of the related underlying assets, indices or reference rates as follows: the fair value of forward foreign currency exchange rate contracts is a function of the spot rate and the interest rate differential of the two currencies from the trade date to settlement date; the fair value of total return swaps is based on the change in fair values of the related underlying equity security, financial instrument or index and a specified notional holding; the fair value of interest rate swaps is based on the interest rate yield curve; and the fair value of derivative liabilities related to LFI and other similar deferred compensation arrangements is based on the value of the underlying investments, adjusted for forfeitures. See Note 6 of Notes to Condensed Consolidated Financial Statements.
Where reported information regarding an investment is based on data received from external fund administrators or pricing services, the Company reviews such information and classifies the investment at the relevant level within the fair value hierarchy.
15
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The following tables present the classification of investments and certain other assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014 within the fair value hierarchy:
June 30, 2015 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Investments: |
||||||||||||||||
Debt |
$ | 1,868 | $ | 2 | $ | | $ | 1,870 | ||||||||
Equities |
51,848 | | 1,299 | 53,147 | ||||||||||||
Funds: |
||||||||||||||||
Alternative investments |
7,191 | 25,056 | | 32,247 | ||||||||||||
Debt |
61,973 | 6 | | 61,979 | ||||||||||||
Equity |
232,197 | 47 | | 232,244 | ||||||||||||
Private equity |
| | 101,802 | 101,802 | ||||||||||||
Derivatives |
| 1,582 | | 1,582 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 355,077 | $ | 26,693 | $ | 103,101 | $ | 484,871 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Securities sold, not yet purchased |
$ | 3,515 | $ | | $ | | $ | 3,515 | ||||||||
Derivatives |
| 203,273 | | 203,273 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 3,515 | $ | 203,273 | $ | | $ | 206,788 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2014 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: |
||||||||||||||||
Investments: |
||||||||||||||||
Debt |
$ | 5,540 | $ | 4,886 | $ | | $ | 10,426 | ||||||||
Equities |
55,987 | | 1,315 | 57,302 | ||||||||||||
Funds: |
||||||||||||||||
Alternative investments |
| 34,705 | | 34,705 | ||||||||||||
Debt |
71,759 | 4 | | 71,763 | ||||||||||||
Equity |
228,166 | 43 | | 228,209 | ||||||||||||
Private equity |
| | 114,470 | 114,470 | ||||||||||||
Derivatives |
| 2,355 | | 2,355 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 361,452 | $ | 41,993 | $ | 115,785 | $ | 519,230 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities: |
||||||||||||||||
Securities sold, not yet purchased |
$ | 9,290 | $ | | $ | | $ | 9,290 | ||||||||
Derivatives |
| 208,093 | | 208,093 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 9,290 | $ | 208,093 | $ | | $ | 217,383 | ||||||||
|
|
|
|
|
|
|
|
There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy during the three month and six month periods ended June 30, 2015 and 2014.
16
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The following tables provide a summary of changes in fair value of the Companys Level 3 assets for the three month and six month periods ended June 30, 2015 and 2014:
Three Months Ended June 30, 2015 | ||||||||||||||||||||||||
Beginning Balance |
Net
Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a) |
Purchases/ Acquisitions |
Sales/ Dispositions |
Foreign Currency Translation Adjustments |
Ending Balance |
|||||||||||||||||||
Investments: |
||||||||||||||||||||||||
Equities |
$ | 1,289 | $ | 8 | $ | | $ | | $ | 2 | $ | 1,299 | ||||||||||||
Private equity funds |
107,440 | 54 | 138 | (7,354 | ) | 1,524 | 101,802 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Level 3 Assets |
$ | 108,729 | $ | 62 | $ | 138 | $ | (7,354 | ) | $ | 1,526 | $ | 103,101 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015 | ||||||||||||||||||||||||
Beginning Balance |
Net
Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a) |
Purchases/ Acquisitions |
Sales/ Dispositions |
Foreign Currency Translation Adjustments |
Ending Balance |
|||||||||||||||||||
Investments: |
||||||||||||||||||||||||
Equities |
$ | 1,315 | $ | 10 | $ | | $ | | $ | (26 | ) | $ | 1,299 | |||||||||||
Private equity funds |
114,470 | 7,902 | 847 | (17,885 | ) | (3,532 | ) | 101,802 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Level 3 Assets |
$ | 115,785 | $ | 7,912 | $ | 847 | $ | (17,885 | ) | $ | (3,558 | ) | $ | 103,101 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014 | ||||||||||||||||||||||||
Beginning Balance |
Net
Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a) |
Purchases/ Acquisitions |
Sales/ Dispositions |
Foreign Currency Translation Adjustments |
Ending Balance |
|||||||||||||||||||
Investments: |
||||||||||||||||||||||||
Equities |
$ | 1,337 | $ | 12 | $ | | $ | | $ | 21 | $ | 1,370 | ||||||||||||
Private equity funds |
115,537 | 1,254 | 864 | (416 | ) | (344 | ) | 116,895 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Level 3 Assets |
$ | 116,874 | $ | 1,266 | $ | 864 | $ | (416 | ) | $ | (323 | ) | $ | 118,265 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2014 | ||||||||||||||||||||||||
Beginning Balance |
Net
Unrealized/ Realized Gains (Losses) Included In Revenue- Other (a) |
Purchases/ Acquisitions |
Sales/ Dispositions |
Foreign Currency Translation Adjustments |
Ending Balance |
|||||||||||||||||||
Investments: |
||||||||||||||||||||||||
Equities |
$ | 1,340 | $ | 14 | $ | | $ | | $ | 16 | $ | 1,370 | ||||||||||||
Private equity funds |
114,193 | 6,836 | 1,211 | (5,085 | ) | (260 | ) | 116,895 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Level 3 Assets |
$ | 115,533 | $ | 6,850 | $ | 1,211 | $ | (5,085 | ) | $ | (244 | ) | $ | 118,265 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(a) | Earnings for the three month and six month periods ended June 30, 2015 and the three month and six month periods ended June 30, 2014 include net unrealized gains (losses) of $(1,418), $4,679, $1,123 and $5,536, respectively. |
17
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Fair Value of Certain Investments Based on NAVThe Companys Level 2 and Level 3 investments at June 30, 2015 and December 31, 2014 include certain investments that are valued using NAV or its equivalent as a practical expedient in determining fair value. Information with respect thereto was as follows:
June 30, 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 |
$ | 22,893 | $ | | NA | NA | NA | NA | (a) | <30-60 days | ||||||||||||
Funds of funds |
484 | | NA | NA | NA | NA | (b) | <30-90 days | ||||||||||||||
Other |
1,679 | | NA | NA | NA | NA | (c) | <30-60 days | ||||||||||||||
Debt funds |
6 | | NA | NA | NA | NA | (d) | 30 days | ||||||||||||||
Equity funds |
47 | | NA | NA | NA | NA | (e) | <30-90 days | ||||||||||||||
Private equity funds: |
||||||||||||||||||||||
Equity growth |
44,682 | 5,131 | (f) | 100% | 7% | 91% | 2% | NA | NA | |||||||||||||
Mezzanine debt |
34,853 | | 100% | | | 100% | NA | NA | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total |
$ | 104,644 | $ | 5,131 | ||||||||||||||||||
|
|
|
|
(a) | weekly (22%), monthly (61%) and quarterly (17%) |
(b) | monthly (98%) and quarterly (2%) |
(c) | daily (19%) and monthly (81%) |
(d) | daily (100%) |
(e) | daily (13%), monthly (60%) and quarterly (27%) |
(f) | Unfunded commitments to private equity investments consolidated but not owned by Lazard of $6,588 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders. |
December 31, 2014 | ||||||||||||||||||||||
% of Fair Value Not Redeemable |
Estimated Liquidation Period of Investments Not Redeemable |
Investments Redeemable | ||||||||||||||||||||
Fair Value | Unfunded Commitments |
% Next 5 Years |
% 5-10 Years |
% Thereafter |
Redemption Frequency |
Redemption Notice Period | ||||||||||||||||
Alternative investment funds: |
||||||||||||||||||||||
Hedge funds |
$ | 31,042 | $ | | NA | NA | NA | NA | (a) | <30-60 days | ||||||||||||
Funds of funds |
475 | | NA | NA | NA | NA | (b) | <30-90 days | ||||||||||||||
Other |
3,188 | | NA | NA | NA | NA | (c) | <30-60 days | ||||||||||||||
Debt funds |
4 | | NA | NA | NA | NA | (d) | 30 days | ||||||||||||||
Equity funds |
43 | | NA | NA | NA | NA | (e) | 30-90 days | ||||||||||||||
Private equity funds: |
||||||||||||||||||||||
Equity growth |
75,578 | 18,676 | (f) | 100% | 10% | 63% | 27% | NA | NA | |||||||||||||
Mezzanine debt |
38,892 | | 100% | | | 100% | NA | NA | ||||||||||||||
|
|
|
|
|||||||||||||||||||
Total |
$ | 149,222 | $ | 18,676 | ||||||||||||||||||
|
|
|
|
18
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
(a) | weekly (15%), monthly (66%) and quarterly (19%) |
(b) | monthly (98%) and quarterly (2%) |
(c) | daily (11%), weekly (3%) and monthly (86%) |
(d) | daily (100%) |
(e) | daily (14%), monthly (58%) and quarterly (28%) |
(f) | Unfunded commitments to private equity investments consolidated but not owned by Lazard of $6,888 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders. |
See Note 4 of Notes to Condensed Consolidated Financial Statements for discussion of significant investment strategies for investments with value based on NAV.
Investment Capital Funding CommitmentsAt June 30, 2015, the Companys maximum unfunded commitments for capital contributions to investment funds arose from (i) commitments to CP II, which amounted to $570 for potential follow-on investments and/or for fund expenses through the earlier of February 25, 2017 or the liquidation of the fund, (ii) commitments to EGCP III, which amounted to $12,036, through the earlier of October 12, 2016 (i.e., the end of the investment period) for investments and/or expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until October 12, 2023 in respect of follow-on investments and/or fund expenses) or the liquidation of the fund and (iii) commitments to COF2, which amounted to $4,192, through the earlier of November 11, 2016 (i.e., the end of the investment period) for investments and/or fund expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until November 11, 2019 in respect of follow-on investments and/or fund expenses) or the liquidation of the fund.
In July 2015, our commitments to COF2 were reduced to approximately $230.
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 Companys 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 Companys derivative instruments not designated as hedging instruments are included in interest income and interest expense, respectively, or revenue-other, depending on the nature of the underlying item, in the condensed consolidated statements of operations.
In addition to the derivative instruments described above, the Company records derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements, the fair value of which is based on the value of the underlying investments, adjusted for estimated forfeitures, and is included in accrued compensation and benefits in the condensed consolidated statements of financial condition. Changes in the fair value of the derivative liabilities are included in compensation and benefits in the condensed consolidated statements of operations, the impact of which equally offsets the changes in the fair value of investments which are currently expected to be delivered upon settlement of LFI and other similar deferred compensation arrangements, which are reported in revenue-other in the condensed consolidated statements of operations.
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The tables below present the fair values of the Companys derivative instruments reported within other assets and other liabilities and the fair values of the Companys derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements) on the accompanying condensed consolidated statements of financial condition as of June 30, 2015 and December 31, 2014:
June 30, 2015 |
December 31, 2014 |
|||||||
Derivative Assets: |
||||||||
Forward foreign currency exchange rate contracts |
$ | 480 | $ | 2,355 | ||||
Total return swaps and other |
1,102 | | ||||||
|
|
|
|
|||||
Total |
$ | 1,582 | $ | 2,355 | ||||
|
|
|
|
|||||
Derivative Liabilities: |
||||||||
Forward foreign currency exchange rate contracts |
$ | 1,210 | $ |
124 |
| |||
Total return swaps and other (a) |
| 663 | ||||||
LFI and other similar deferred compensation arrangements |
202,063 | 207,306 | ||||||
|
|
|
|
|||||
$ | 203,273 | $ | 208,093 | |||||
|
|
|
|
(a) | For total return swaps, amounts represent the netting of gross derivative assets and liabilities of $1,323 and $221 as of June 30, 2015, respectively, and $1,123 and $1,786 as of December 31, 2014, respectively, for contracts with the same counterparty under legally enforceable master netting agreements. Such amounts are recorded net in other assets, with receivables for net cash collateral under such contracts of $9,954 and $12,364 as of June 30, 2015 and December 31, 2014, respectively. |
Net gains (losses) with respect to derivative instruments (predominantly reflected in revenue-other) and the Companys 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 and six month periods ended June 30, 2015 and 2014, were as follows:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Forward foreign currency exchange rate contracts |
$ | (4,023 | ) | $ | 178 | $ | 11,377 | $ | (975 | ) | ||||||
LFI and other similar deferred compensation arrangements |
1,894 | (8,906 | ) | (2,242 | ) | (11,532 | ) | |||||||||
Total return swaps and other |
(133 | ) | (5,698 | ) | (3,064 | ) | (7,272 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | (2,262 | ) | $ | (14,426 | ) | $ | 6,071 | $ | (19,779 | ) | |||||
|
|
|
|
|
|
|
|
20
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
7. | PROPERTY |
At June 30, 2015 and December 31, 2014, property consists of the following:
Estimated Depreciable Life in Years |
June 30, 2015 |
December 31, 2014 |
||||||||||
Buildings |
33 | $ | 140,986 | $ | 152,982 | |||||||
Leasehold improvements |
3-20 | |
168,192 |
|
167,837 | |||||||
Furniture and equipment |
3-10 | 153,106 | 150,457 | |||||||||
Construction in progress |
6,923 | 7,578 | ||||||||||
|
|
|
|
|||||||||
Total |
|
469,207 |
|
478,854 | ||||||||
Less - Accumulated depreciation and amortization |
255,463 | 256,285 | ||||||||||
|
|
|
|
|||||||||
Property |
$ | 213,744 | $ | 222,569 | ||||||||
|
|
|
|
8. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The components of goodwill and other intangible assets at June 30, 2015 and December 31, 2014 are presented below:
June 30, 2015 |
December 31, 2014 |
|||||||
Goodwill |
$ | 326,822 | $ | 335,402 | ||||
Other intangible assets (net of accumulated amortization) |
9,147 | 12,036 | ||||||
|
|
|
|
|||||
$ | 335,969 | $ | 347,438 | |||||
|
|
|
|
At June 30, 2015 and December 31, 2014, goodwill of $262,281 and $270,861, respectively, was attributable to the Companys Financial Advisory segment and, at each such respective date, $64,541 of goodwill was attributable to the Companys Asset Management segment.
Changes in the carrying amount of goodwill for the six month periods ended June 30, 2015 and 2014 are as follows:
Six Months Ended
June 30, |
||||||||
2015 | 2014 | |||||||
Balance, January 1 |
$ |
335,402 |
|
$ | 345,453 | |||
Foreign currency translation adjustments |
(8,580 | ) | 6,590 | |||||
|
|
|
|
|||||
Balance, June 30 |
$ | 326,822 | $ | 352,043 | ||||
|
|
|
|
All changes in the carrying amount of goodwill for the six month periods ended June 30, 2015 and 2014 are attributable to the Companys Financial Advisory segment.
21
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The gross cost and accumulated amortization of other intangible assets as of June 30, 2015 and December 31, 2014, by major intangible asset category, are as follows:
June 30, 2015 | December 31, 2014 | |||||||||||||||||||||||
Gross Cost |
Accumulated Amortization |
Net Carrying Amount |
Gross Cost |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||
Performance fees |
$ | 30,740 | $ | 22,985 | $ | 7,755 | $ | 30,740 | $ | 21,116 | $ | 9,624 | ||||||||||||
Management fees, customer relationships and non-compete agreements |
33,036 | 31,644 | 1,392 | 33,050 | 30,638 | 2,412 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 63,776 | $ | 54,629 | $ | 9,147 | $ | 63,790 | $ | 51,754 | $ | 12,036 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangible assets for the three month and six month periods ended June 30, 2015 was $1,857 and $2,890, respectively, and for the three month and six month periods ended June 30, 2014 was $706 and $1,926, respectively. Estimated future amortization expense is as follows:
Year Ending December 31, |
Amortization Expense (a) |
|||
2015 (July 1 through December 31) |
$ | 3,668 | ||
2016 |
5,479 | |||
|
|
|||
Total amortization expense |
$ | 9,147 | ||
|
|
(a) | Approximately 45% of intangible asset amortization is attributable to a noncontrolling interest. |
9. | SENIOR DEBT |
Senior debt is comprised of the following as of June 30, 2015 and December 31, 2014:
Initial Principal Amount |
Maturity Date |
Annual Interest Rate |
Outstanding As Of | |||||||||||||||||
June 30, 2015 |
December 31, 2014 |
|||||||||||||||||||
Lazard Group 6.85% Senior Notes |
600,000 | 6/15/17 | 6.85 | % | 98,350 | 548,350 | ||||||||||||||
Lazard Group 4.25% Senior Notes |
500,000 | 11/14/20 | 4.25 | % | 500,000 | 500,000 | ||||||||||||||
Lazard Group 3.75% Senior Notes (a) |
400,000 | 2/13/25 | 3.75 | % | 400,000 | | ||||||||||||||
Lazard Group Credit Facility |
150,000 | 9/25/15 | 0.79 | % | | | ||||||||||||||
|
|
|
|
|||||||||||||||||
Total |
$ | 998,350 | $ | 1,048,350 | ||||||||||||||||
|
|
|
|
(a) | During February 2015, Lazard Group completed an offering of $400,000 aggregate principal amount of 3.75% senior notes due 2025 (the 2025 Notes). Lazard Group also issued a notice to redeem $450,000 of Lazard Groups 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 expensesother on the condensed consolidated statement of operations for the six month period ended June 30, 2015. |
On September 25, 2012, Lazard Group entered into a $150,000, three-year senior revolving credit facility with a group of lenders (the Credit Facility). The Credit Facility replaced a similar revolving credit facility which was
22
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
terminated as a condition to effectiveness of the Credit Facility. Interest rates under the Credit Facility vary and are based on either a Federal Funds rate or a Eurodollar rate, in each case plus an applicable margin. As of June 30, 2015, the annual interest rate for a loan accruing interest (based on the Federal Funds overnight rate), including the applicable margin, was 0.79%. At June 30, 2015 and December 31, 2014, no amounts were outstanding under the Credit Facility.
The Credit Facility expires in September 2015 and contains customary terms and conditions, including certain financial covenants. In addition, the Credit Facility, the indenture and the supplemental indentures relating to Lazard Groups 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 June 30, 2015, the Company was in compliance with such provisions. All of the Companys senior debt obligations are unsecured.
As of June 30, 2015, the Company had approximately $247,000 in unused lines of credit available to it, including the Credit Facility, and unused lines of credit available to LFB of approximately $39,000 (at June 30, 2015 exchange rates) and Edgewater of $55,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.
The Companys senior debt at June 30, 2015 and December 31, 2014 is carried at historical amounts. At those dates, the fair value of such senior debt was approximately $1,010,000 and $1,135,000, respectively, and exceeded the aggregate carrying value by approximately $12,000 and $87,000, respectively. The fair value of the Companys senior debt is based on market quotations. The Companys senior debt would be categorized within Level 2 of the hierarchy of fair value measurements if carried at fair value.
10. | COMMITMENTS AND CONTINGENCIES |
LeasesThe Company has various leases and other contractual commitments arising in the ordinary course of business.
GuaranteesIn the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At June 30, 2015, LFB had $4,868 of such indemnifications and held $4,429 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 TransactionsOn 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, Edgewaters leadership team retained a substantial economic interest in such entities.
The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common stock (the Initial Shares) and (iii) up to 1,142,857 additional shares of Class A common stock (the Earnout Shares) that are subject to earnout criteria and payable over time. The Earnout Shares will be issued only if certain performance thresholds are met. As of June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014, 1,371,992 of the earned shares have been settled.
23
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Contingent Consideration Relating To Other Business AcquisitionsFor 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 CommitmentsThe 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 June 30, 2015, LFB and LFNY had no such underwriting commitments.
See Notes 5 and 13 of Notes to Condensed Consolidated Financial Statements for information regarding commitments relating to investment capital funding commitments and obligations to fund our pension plans, respectively.
In the opinion of management, the fulfillment of the commitments described herein will not have a material adverse effect on the Companys condensed consolidated financial position or results of operations.
LegalThe 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 Companys 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. | MEMBERS EQUITY |
Lazard Group DistributionsAs previously described, Lazard Groups common membership interests are held by subsidiaries of Lazard Ltd and, until May 2014, also were held by LAZ-MD Holdings. Pursuant to provisions of the Operating Agreement, Lazard Group distributions in respect of its common membership interests are allocated to the holders of such interests on a pro rata basis. Such distributions represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltds subsidiaries incur and, until May 2014, that the members of LAZ-MD Holdings incurred as a result of holding Lazard Group common membership interests.
During the six month periods ended June 30, 2015 and 2014, Lazard Group distributed the following amounts to LAZ-MD Holdings and the subsidiaries of Lazard Ltd (none of which related to tax distributions):
Six Months Ended June 30, |
||||||||
2015 | 2014 | |||||||
Subsidiaries of Lazard Ltd |
$ | 40,839 | $ | 72,981 | ||||
LAZ-MD Holdings |
| 213 | ||||||
|
|
|
|
|||||
$ | 40,839 | $ | 73,194 | |||||
|
|
|
|
24
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Pursuant to Lazard Groups Operating Agreement, Lazard Group allocates and distributes to its members a substantial portion of its distributable profits in installments, as soon as practicable after the end of each fiscal year. Such installment distributions usually begin in February.
Share Repurchase ProgramDuring the six month period ended June 30, 2015 and for the years ended December 31, 2014, 2013, and 2012, the Board of Directors of Lazard authorized the repurchase of Class A common stock and Lazard Group common membership interests as set forth in the table below.
Date |
Repurchase Authorization |
Expiration | ||||||
October 2012 |
$ | 200,000 | December 31, 2014 | |||||
October 2013 |
$ | 100,000 | December 31, 2015 | |||||
April 2014 |
$ | 200,000 | December 31, 2015 | |||||
February 2015 |
$ | 150,000 | December 31, 2016 |
The Company expects that the share repurchase program will primarily be used to offset a portion of the shares that have been or will be issued under the Lazard Ltd 2005 Equity Incentive Plan (the 2005 Plan) and the Lazard Ltd 2008 Incentive Compensation Plan (the 2008 Plan). Pursuant to the share repurchase program, purchases have been made in the open market or through privately negotiated transactions. The rate at which the Company purchases shares in connection with the share repurchase program may vary from quarter to quarter due to a variety of factors. Purchases with respect to such program are set forth in the table below:
Number
of Shares Purchased |
Average Price Per Share |
|||||||
Six Months Ended June 30: |
||||||||
2014 |
4,114,206 | $ | 46.83 | |||||
2015 |
2,306,694 | $ | 51.04 |
The shares purchased in the six months ended June 30, 2014 included 1,000,000 shares purchased from Natixis S.A. on June 26, 2014 for $50,340 in connection with the sale by Natixis S.A. of its entire investment in Lazard Ltds Class A common stock. The purchase transaction closed on July 1, 2014.
As of June 30, 2015, a total of $161,199 of share repurchase authorizations remained available under the share repurchase program, $11,199 of which will expire on December 31, 2015 and $150,000 of which will expire on December 31, 2016.
During the six month period ended June 30, 2015, Lazard Ltd 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.
25
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Accumulated Other Comprehensive Income (Loss), Net of Tax (AOCI)The tables below reflect changes in the balances of each component of AOCI during the six month periods ended June 30, 2015 and 2014:
Currency Translation Adjustments |
Employee Benefit Plans |
Total AOCI |
Amount Attributable to Noncontrolling Interests |
Total Lazard Group AOCI |
||||||||||||||||
Balance, January 1, 2015 |
$ | (8,625 | ) | $ | (154,665 | ) | $ | (163,290 | ) | $ | (2 | ) | $ | (163,288 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Activity January 1 to June 30, 2015: |
||||||||||||||||||||
Other comprehensive loss before reclassifications |
(18,314 | ) | (14,617 | ) | (32,931 | ) | (1 | ) | (32,930 | ) | ||||||||||
Adjustments for items reclassified to earnings, net of tax |
| 2,376 | 2,376 | | 2,376 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net other comprehensive loss |
(18,314 | ) | (12,241 | ) | (30,555 | ) | (1 | ) | (30,554 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, June 30, 2015 |
$ | (26,939 | ) | $ | (166,906 | ) | $ | (193,845 | ) | $ | (3 | ) | $ | (193,842 | ) | |||||
|
|
|
|
|
|
|
|
|
|
Currency Translation Adjustments |
Employee Benefit Plans |
Total AOCI |
Amount Attributable to Noncontrolling Interests |
Total Lazard Group AOCI |
||||||||||||||||
Balance, January 1, 2014 |
$ | 35,236 | $ | (137,431 | ) | $ | (102,195 | ) | $ | 1 | $ | (102,196 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Activity January 1 to June 30, 2014: |
||||||||||||||||||||
Other comprehensive income (loss) before reclassifications |
6,785 | (6,946 | ) | (161 | ) | | (161 | ) | ||||||||||||
Adjustments for items reclassified to earnings, net of tax |
| 2,569 | 2,569 | | 2,569 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net other comprehensive income (loss) |
6,785 | (4,377 | ) | 2,408 | | 2,408 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance, June 30, 2014 |
$ | 42,021 | $ | (141,808 | ) | $ | (99,787 | ) | $ | 1 | $ | (99,788 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
The table below reflects adjustments for items reclassified out of AOCI, by component, for the three month and six month periods ended June 30, 2015 and 2014:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Amortization relating to employee benefit plans (a) |
$ | 1,728 | $ | 1,611 | $ | 3,477 | $ | 3,432 | ||||||||
Less related income taxes |
538 | 331 | 1,101 | 863 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total reclassifications, net of tax |
$ | 1,190 | $ | 1,280 | $ | 2,376 | $ | 2,569 | ||||||||
|
|
|
|
|
|
|
|
(a) | Included in the computation of net periodic benefit cost (see Note 13 of Notes to Condensed Consolidated Financial Statements). Such amount is included in compensation and benefits expense on the condensed consolidated statement of operations. |
Noncontrolling InterestsNoncontrolling interests principally represent interests held in Edgewaters management vehicles that the Company is deemed to control, but does not own.
26
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The tables below summarize net income attributable to noncontrolling interests for the three month and six month periods ended June 30, 2015 and 2014 and noncontrolling interests as of June 30, 2015 and December 31, 2014 in the Companys condensed consolidated financial statements:
Net
Income Attributable to Noncontrolling Interests |
||||||||||||||||
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Edgewater |
$ | 1,041 | $ | 552 | $ | 7,734 | $ | 4,672 | ||||||||
Other |
2 | 1 | 2 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 1,043 | $ | 553 | $ | 7,736 | $ | 4,673 | ||||||||
|
|
|
|
|
|
|
|
Noncontrolling Interests As Of | ||||||||
June 30, 2015 |
December 31, 2014 |
|||||||
Edgewater |
$ | 58,446 | $ | 62,584 | ||||
Other |
9 | 9 | ||||||
|
|
|
|
|||||
Total |
$ | 58,455 | $ | 62,593 | ||||
|
|
|
|
12. | INCENTIVE PLANS |
Share-Based Incentive Plan Awards
A description of Lazard Ltds 2005 Plan and 2008 Plan and activity with respect thereto during the three month and six month periods ended June 30, 2015 and 2014, is presented below.
Shares Available Under the 2008 Plan and the 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 stock unit or similar award granted under the 2005 Plan represented a contingent right to receive one share of Class A common stock, at no cost to the recipient. The fair value of such awards was 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.
27
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, 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 Companys accompanying condensed consolidated statements of operations for the three month and six month periods ended June 30, 2015 and 2014:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Share-based incentive awards: |
||||||||||||||||
RSUs |
$ | 32,263 | $ | 40,931 | $ | 91,334 | $ | 93,216 | ||||||||
PRSUs |
8,414 | 4,902 | 14,612 | 6,700 | ||||||||||||
Restricted Stock |
2,830 | 4,244 | 15,453 | 10,856 | ||||||||||||
DSUs |
681 | 717 | 697 | 768 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 44,188 | $ | 50,794 | $ | 122,096 | $ | 111,540 | ||||||||
|
|
|
|
|
|
|
|
The ultimate amount of compensation and benefits expense relating to share-based awards is dependent upon the actual number of shares of Class A common stock that vest. The Company periodically assesses the forfeiture rates used for such estimates. A change in estimated forfeiture rates results in a cumulative adjustment to previously recorded compensation and benefits expense and also would cause the aggregate amount of compensation expense recognized in future periods to differ from the estimated unrecognized compensation expense described below.
The Companys incentive plans are described below.
RSUs and DSUs
RSUs generally require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Companys 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.
28
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, 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 six month periods ended June 30, 2015 and 2014, dividend participation rights required the issuance of 529,616 and 203,537 RSUs, respectively.
Non-executive members of the Board of Directors of Lazard Group, who are the same Non-Executive Directors of Lazard Ltd (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, which resulted in 23,961 and 26,360 DSUs granted in connection with annual compensation during the six month periods ended June 30, 2015 and 2014, respectively. 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. DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock.
The Companys 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 that shall be granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date immediately preceding the date of the grant. During the six month periods ended June 30, 2015 and 2014, 1,183 and 4,383 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.
The following is a summary of activity relating to RSUs and DSUs during the six month periods ended June 30, 2015 and 2014:
RSUs | DSUs | |||||||||||||||
Units | Weighted Average Grant Date Fair Value |
Units | Weighted Average Grant Date Fair Value |
|||||||||||||
Balance, January 1, 2015 |
13,529,116 | $ | 35.19 | 286,227 | $ | 34.21 | ||||||||||
Granted (including 529,616 RSUs relating to dividend participation) |
3,982,135 | $ | 48.83 | 25,144 | $ | 55.45 | ||||||||||
Forfeited |
(397,637 | ) | $ | 43.04 | | | ||||||||||
Vested |
(6,873,352 | ) | $ | 30.79 | | | ||||||||||
|
|
|
|
|||||||||||||
Balance, June 30, 2015 |
10,240,262 | $ | 43.14 | 311,371 | $ | 35.92 | ||||||||||
|
|
|
|
|||||||||||||
Balance, January 1, 2014 |
16,630,009 | $ | 34.51 | 251,434 | $ | 32.02 | ||||||||||
Granted (including 203,537 RSUs relating to dividend participation) |
3,625,734 | $ | 42.87 | 30,743 | $ | 49.97 | ||||||||||
Forfeited |
(77,368 | ) | $ | 37.01 | | | ||||||||||
Vested |
(6,381,080 | ) | $ | 37.98 | | | ||||||||||
|
|
|
|
|||||||||||||
Balance, June 30, 2014 |
13,797,295 | $ | 35.09 | 282,177 | $ | 33.97 | ||||||||||
|
|
|
|
In connection with RSUs that vested during the six month periods ended June 30, 2015 and 2014, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 1,895,301 and
29
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
1,853,416 shares of Class A common stock in the respective six month periods. Accordingly, 4,978,051 and 4,527,664 shares of Class A common stock held by the Company were delivered during the six month periods ended June 30, 2015 and 2014, respectively.
As of June 30, 2015, estimated unrecognized RSU compensation expense was approximately $192,787, with such expense expected to be recognized over a weighted average period of approximately 1.0 year subsequent to June 30, 2015.
Restricted Stock
The following is a summary of activity related to shares of restricted Class A common stock associated with compensation arrangements during the six month periods ended June 30, 2015 and 2014:
Restricted Shares |
Weighted Average Grant Date Fair Value |
|||||||
Balance, January 1, 2015 |
729,827 | $ | 38.63 | |||||
Granted |
576,886 | $ | 50.88 | |||||
Forfeited |
(44,769 | ) | $ | 50.23 | ||||
Vested |
(501,298 | ) | $ | 39.19 | ||||
|
|
|||||||
Balance, June 30, 2015 |
760,646 | $ | 46.87 | |||||
|
|
|||||||
Balance, January 1, 2014 |
575,054 | $ | 32.72 | |||||
Granted |
449,911 | $ | 45.52 | |||||
Forfeited |
(9,438 | ) | $ | 41.45 | ||||
Vested |
(205,075 | ) | $ | 35.23 | ||||
|
|
|||||||
Balance, June 30, 2014 |
810,452 | $ | 39.09 | |||||
|
|
In connection with shares of restricted Class A common stock that vested during the six month periods ended June 30, 2015 and 2014, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 92,500 and 29,999 shares of Class A common stock during such respective six month periods. Accordingly, 408,798 and 175,076 shares of Class A common stock held by the Company were delivered during the six month periods ended June 30, 2015 and 2014, respectively.
The restricted stock awards include a cash dividend participation right equivalent to any ordinary dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At June 30, 2015, estimated unrecognized restricted stock expense was approximately $21,470, with such expense to be recognized over a weighted average period of approximately 1.1 years subsequent to June 30, 2015.
PRSUs
PRSUs are subject to both performance-based and service-based vesting conditions. The number of shares of Class A common stock that a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics that relate to Lazard Ltds 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
30
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
range from zero to two times the target number (with the exception of the PRSUs granted in 2013, for which (i) the performance period ended on December 31, 2014 and (ii) the number of shares of Class A common stock that may be received is equal to approximately 2.2 times the target number). The PRSUs granted in 2015 and 2014 will vest on a single date three years following the date of the grant and the PRSUs granted in 2013 vested 33% in March 2015 and will vest 67% in March 2016, in each case provided the applicable service and performance conditions are satisfied, other than with respect to the PRSUs granted in 2013, which performance conditions have been satisfied as of December 31, 2014. In addition, the performance metrics applicable to each PRSU will be evaluated on an annual basis at the end of each fiscal year during the performance period and, if Lazard Ltd 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 award will no longer be at risk of forfeiture based on the achievement of performance criteria. PRSUs include dividend participation rights that provide that during vesting periods the target number of PRSUs (or, following the relevant performance period, the actual number of shares of Class A common stock that are no longer subject to performance conditions) receive dividend equivalents at the same rate that dividends are paid on Class A common stock during such period. These dividend equivalents are credited as RSUs that are not subject to the performance-based vesting criteria but are otherwise subject to the same restrictions as the underlying PRSUs to which they relate.
The following is a summary of activity relating to PRSUs during the six month periods ended June 30, 2015 and 2014:
PRSUs | Weighted Average Grant Date Fair Value |
|||||||
Balance January 1, 2015 |
1,347,148 | $ | 37.79 | |||||
Granted |
368,389 | $ | 52.85 | |||||
Vested |
(696,499 | ) | $ | 35.96 | ||||
|
|
|||||||
Balance June 30, 2015 |
1,019,038 | $ | 44.49 | |||||
|
|
|||||||
Balance, January 1, 2014 |
448,128 | $ | 36.11 | |||||
Granted |
360,783 | $ | 44.46 | |||||
|
|
|||||||
Balance, June 30, 2014 |
808,911 | $ | 39.83 | |||||
|
|
In connection with PRSUs that vested during the six month period ended June 30, 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of issuing 32,086 shares of Class A common stock in the period. Accordingly, 664,413 shares of Class A common stock held by the Company were delivered during the six month period ended June 30, 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 Companys estimate, are considered probable of vesting, by the grant date fair value. As of June 30, 2015, the total estimated unrecognized compensation expense was approximately $24,406, and the Company expects to amortize such expense over a weighted-average period of approximately 0.8 years subsequent to June 30, 2015.
LFI and Other Similar Deferred Compensation Arrangements
Commencing in February 2011, the Company granted LFI to eligible employees. In connection with LFI and other similar deferred compensation arrangements, which generally require future service as a condition for
31
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
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 Companys 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.
The following is a summary of activity relating to LFI and other similar deferred compensation arrangements during the six month periods ended June 30, 2015 and 2014:
Prepaid Compensation Asset |
Compensation Liability |
|||||||
Balance, January 1, 2015 |
$ | 73,278 | $ | 207,306 | ||||
Granted |
89,817 | 89,817 | ||||||
Settled |
| (92,893 | ) | |||||
Forfeited |
(3,259 | ) | (6,290 | ) | ||||
Amortization |
(44,522 | ) | | |||||
Change in fair value related to: |
||||||||
Increase in fair value of underlying investments |
| 2,242 | ||||||
Adjustment for estimated forfeitures |
| 3,433 | ||||||
Other |
176 | (1,552 | ) | |||||
|
|
|
|
|||||
Balance, June 30, 2015 |
$ | 115,490 | $ | 202,063 | ||||
|
|
|
|
|||||
Prepaid Compensation Asset |
Compensation Liability |
|||||||
Balance, January 1, 2014 |
$ | 60,433 | $ | 162,422 | ||||
Granted |
92,711 | 92,711 | ||||||
Settled |
| (52,944 | ) | |||||
Forfeited |
(1,189 | ) | (1,659 | ) | ||||
Amortization |
(39,457 | ) | | |||||
Change in fair value related to: |
||||||||
Increase in fair value of underlying investments |
| 11,532 | ||||||
Adjustment for estimated forfeitures |
| 2,929 | ||||||
Other |
37 | 172 | ||||||
|
|
|
|
|||||
Balance, June 30, 2014 |
$ | 112,535 | $ | 215,163 | ||||
|
|
|
|
The amortization of the prepaid compensation asset will generally be recognized over a weighted average period of approximately 1.0 year subsequent to June 30, 2015.
32
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LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
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 and six month periods ended June 30, 2015 and 2014:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Amortization, net of forfeitures |
$ | 18,260 | $ | 21,603 | $ | 44,924 | $ | 41,916 | ||||||||
Change in the fair value of underlying investments |
(1,894 | ) | 8,906 | 2,242 | 11,532 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 16,366 | $ | 30,509 | $ | 47,166 | $ | 53,448 | ||||||||
|
|
|
|
|
|
|
|
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 Companys employee benefit plans are included in compensation and benefits expense on the condensed consolidated statements of operations.
Employer Contributions to Pension PlansThe Companys funding policy for its U.S. and non-U.S. pension plans is to fund when required or when applicable upon an agreement with the plans trustees (the Trustees). Management also evaluates from time to time whether to make voluntary contributions to the plans.
On March 31, 2015, the Company and the Trustees of the U.K. defined benefit pension plans concluded the December 31, 2013 triennial valuations of the plans. In connection with such valuations, the Company and the Trustees agreed upon pension funding terms pursuant to which the Company agreed, among other things, (i) to make contributions of 11.2 million British pounds into the plans by way of three equal contributions at June 30, September 30 and December 31, 2015, and (ii) that the Companys existing account security arrangement would be dissolved and the cash balance within such accounts would be paid into the plans by June 30, 2015. On June 4, 2015, the full balance of 11.2 million British pounds in the account security arrangement was paid into the plans. At December 31, 2014, the balance of the account security arrangement was $17,500 and was recorded in cash deposited with clearing organizations and other segregated cash on the accompanying condensed consolidated statements of financial condition. Income on the account security arrangement accreted to the Company and is recorded in interest income.
33
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The following table summarizes the components of net periodic benefit cost (credit) related to the Companys post-retirement plans for the three month and six month periods ended June 30, 2015 and 2014:
Pension Plans | Medical Plan | |||||||||||||||
Three Months Ended June 30, | ||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Components of Net Periodic Benefit Cost (Credit): |
||||||||||||||||
Service cost |
$ | 353 | $ | 228 | $ | 5 | $ | 5 | ||||||||
Interest cost |
6,153 | 7,640 | 41 | 44 | ||||||||||||
Expected return on plan assets |
(7,019 | ) | (8,228 | ) | | | ||||||||||
Amortization of: |
||||||||||||||||
Prior service cost |
591 | 735 | | | ||||||||||||
Net actuarial loss (gain) |
1,137 | 1,118 | | (242 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost (credit) |
$ | 1,215 | $ | 1,493 | $ | 46 | $ | (193 | ) | |||||||
|
|
|
|
|
|
|
|
Pension Plans | Medical Plan | |||||||||||||||
Six Months Ended June 30, | ||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Components of Net Periodic Benefit Cost (Credit): |
||||||||||||||||
Service cost |
$ | 713 | $ | 451 | $ | 13 | $ | 17 | ||||||||
Interest cost |
12,259 | 15,171 | 90 | 97 | ||||||||||||
Expected return on plan assets |
(14,090 | ) | (16,307 | ) | | | ||||||||||
Amortization of: |
||||||||||||||||
Prior service cost |
1,194 | 1,468 | | | ||||||||||||
Net actuarial loss (gain) |
2,283 | 2,229 | | (265 | ) | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net periodic benefit cost (credit) |
$ | 2,359 | $ | 3,012 | $ | 103 | $ | (151 | ) | |||||||
|
|
|
|
|
|
|
|
14. | INCOME TAXES |
Although a portion of Lazard Groups income is subject to U.S. federal income taxes, Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Groups income from its U.S. operations is generally not subject to U.S. federal income taxes because such income is attributable to its partners. 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 $14,464 and $25,922 for the three month and six month periods ended June 30, 2015, respectively, and $15,878 and $33,735 for the three month and six month periods ended June 30, 2014, respectively, representing effective tax rates of 9.0%, 10.7%, 14.4% and 15.5%, respectively. The difference between the U.S. federal statutory rate of 35.0% and the effective tax rates reflected above principally relates to (i) Lazard Group primarily operating as a limited liability company in the U.S., (ii) change in the valuation allowance affecting the provision for income taxes, (iii) taxes payable to foreign jurisdictions, and (iv) U.S. state and local taxes (primarily UBT), which are incremental to the U.S. federal statutory tax rate.
34
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Substantially all of Lazards 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 the relevant portion of those earnings. The repatriation of prior earnings attributable to non-pass-through entities would not result in the recognition of a material amount of additional U.S. income taxes.
15. | PAYABLE TO LAZARD LTD SUBSIDIARIES |
As of June 30, 2015 and December 31, 2014, Lazard Groups payables to subsidiaries of Lazard Ltd included interest-bearing loans, plus accrued interest thereon, of approximately $148,700 and $152,600, respectively. Interest expense relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $1,025 and $2,046 for the three month and six month periods ended June 30, 2015, respectively, and $1,595 and $3,216 for the three month and six month periods ended June 30, 2014, respectively. In addition, as of both June 30, 2015 and December 31, 2014, Lazard Groups payables to subsidiaries of Lazard Ltd included $2,840 in connection with Lazard Groups prior year business acquisitions.
16. | 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 LFNYs 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 June 30, 2015, LFNYs regulatory net capital was $112,976, which exceeded the minimum requirement by $110,110. LFNYs aggregate indebtedness to net capital ratio was 0.38:1 as of June 30, 2015.
Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (collectively, the U.K. Subsidiaries) are regulated by the Financial Conduct Authority. At June 30, 2015, the aggregate regulatory net capital of the U.K. Subsidiaries was $115,445, which exceeded the minimum requirement by $97,014.
CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the ACPR for its banking activities conducted through its subsidiary, LFB. The investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), also are subject to regulation and supervision by the Autorité des Marchés Financiers. At June 30, 2015, the consolidated regulatory net capital of CFLF was $133,985, which exceeded the minimum requirement set for regulatory capital levels by $95,785. In addition, pursuant to the consolidated supervision rules in the European Union, LFB, in particular, as a French credit institution, is required to be supervised by a regulatory body, either in the U.S. or in the European Union. During the third quarter of 2013, the Company and the ACPR agreed on terms for the consolidated supervision of LFB and certain other non-Financial Advisory European subsidiaries of the Company (referred to herein, on a combined basis, as the combined European regulated group) under such rules. Under this new supervision, the combined European regulated group is required to comply with minimum requirements for regulatory net capital to be reported on a quarterly basis and satisfy periodic financial and other reporting obligations. At March 31, 2015, the regulatory net capital of the combined European regulated group was $201,766, which exceeded the minimum requirement set for regulatory capital levels by $126,478. Additionally, the combined European regulated group, together
35
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
with our European Financial Advisory entities, is required to perform an annual risk assessment and provide certain other information on a periodic basis, including financial reports and information relating to financial performance, balance sheet data and capital structure (which is similar to the information that the Company had already been providing informally). This new supervision under, and provision of information to, the ACPR became effective December 31, 2013.
Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At June 30, 2015, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $116,436, which exceeded the minimum required capital by $89,831.
At June 30, 2015, each of these subsidiaries individually was in compliance with its regulatory capital requirements.
Any new or expanded rules and regulations that may be adopted in countries in which we operate (including regulations that have not yet been proposed) could affect us in other ways.
17. | SEGMENT INFORMATION |
The Companys 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 Companys principal operating activities are included in its Financial Advisory and Asset Management business segments, as described in Note 1 of Notes to Condensed Consolidated Financial Statements. In addition, as described in Note 1 of Notes to Condensed Consolidated Financial Statements, the Company records selected other activities in its Corporate segment.
The Companys segment information for the three month and six month periods ended June 30, 2015 and 2014 is prepared using the following methodology:
| Revenue and expenses directly associated with each segment are included in determining operating income. |
| Expenses not directly associated with specific segments are allocated based on the most relevant measures applicable, including headcount, square footage and other factors. |
| Segment assets are based on those directly associated with each segment, and include an allocation of certain assets relating to various segments, based on the most relevant measures applicable, including headcount, square footage and other factors. |
The Company allocates investment gains and losses, interest income and interest expense among the various segments based on the segment in which the underlying asset or liability is reported.
Each segments 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.
36
Table of Contents
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
(UNAUDITED)
(dollars in thousands, 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 segments contribution with respect to net revenue, operating income (loss) and total assets:
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||||
Financial Advisory |
Net Revenue | $ | 316,384 | $ | 280,769 | $ | 617,903 | $ | 556,265 | |||||||||
Operating Expenses | 253,221 | 253,804 | 496,156 | 499,219 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating Income | $ | 63,163 | $ | 26,965 | $ | 121,747 | $ | 57,046 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Asset Management |
Net Revenue | $ | 305,838 | $ | 288,164 | $ | 585,645 | $ | 556,728 | |||||||||
Operating Expenses | 193,791 | 185,237 | 375,583 | 360,998 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating Income | $ | 112,047 | $ | 102,927 | $ | 210,062 | $ | 195,730 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Corporate |
Net Revenue | $ | (14,271 | ) | $ | (2,128 | ) | $ | (18,744 | ) | $ | (12,893 | ) | |||||
Operating Expenses | (197 | ) | 17,876 | 71,318 | 22,607 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating Loss | $ | (14,074 | ) | $ | (20,004 | ) | $ | (90,062 | ) | $ | (35,500 | ) | ||||||
|
|
|
|
|
|
|
|
|||||||||||
Total |
Net Revenue | $ | 607,951 | $ | 566,805 | $ | 1,184,804 | 1,100,100 | ||||||||||
Operating Expenses | 446,815 | 456,917 | 943,057 | 882,824 | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
Operating Income | $ | 161,136 | $ | 109,888 | $ | 241,747 | $ | 217,276 | ||||||||||
|
|
|
|
|
|
|
|
As Of | ||||||||
June 30, 2015 |
December 31, 2014 |
|||||||
Total Assets |
||||||||
Financial Advisory |
$ | 773,432 | $ | 785,557 | ||||
Asset Management |
486,851 | 588,403 | ||||||
Corporate |
1,678,493 | 1,796,720 | ||||||
|
|
|
|
|||||
Total |
$ | 2,938,776 | $ | 3,170,680 | ||||
|
|
|
|
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion should be read in conjunction with Lazard Groups 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 Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in our Annual Report on Form 10-K for the year ended December 31, 2014 (the Form 10-K). All references to 2015, 2014, second quarter, first half or the period refer to, as the context requires, the three month and six month periods ended June 30, 2015 and June 30, 2014.
Forward-Looking Statements and Certain Factors that May Affect Our Business
Management has included in Parts I and II of this Form 10-Q, including in its MD&A, statements that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as may, might, will, should, could, would, expect, plan, anticipate, believe, estimate, predict, potential, target, goal or continue, and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies, business plans and initiatives and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in our Form 10-K under the caption Risk Factors, including the following:
| a decline in general economic conditions or global or regional financial markets; |
| a decline in our revenues, for example due to a decline in overall mergers and acquisitions (M&A) activity, our share of the M&A market or our assets under management (AUM); |
| losses caused by financial or other problems experienced by third parties; |
| losses due to unidentified or unanticipated risks; |
| a lack of liquidity, i.e., ready access to funds, for use in our businesses; and |
| competitive pressure on our businesses and on our ability to retain and attract employees at current compensation levels. |
These risks and uncertainties are not exhaustive. Other sections of the Form 10-K and this Form 10-Q describe additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations and we do not intend to do so.
Forward-looking statements include, but are not limited to, statements about:
| financial goals, including the ratio of awarded compensation and benefits expense to operating revenue; |
| ability to deploy surplus cash through distributions to members, purchases of Lazard Ltd Class A common stock and debt repurchases; |
| ability to offset stockholder dilution through share repurchases; |
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| possible or assumed future results of operations and operating cash flows; |
| strategies and investment policies; |
| financing plans and the availability of short-term borrowing; |
| competitive position; |
| future acquisitions, including the consideration to be paid and the timing of consummation; |
| potential growth opportunities available to our businesses; |
| recruitment and retention of our managing directors and employees; |
| potential levels of compensation expense and non-compensation expense; |
| potential operating performance, achievements, productivity improvements, efficiency and cost reduction efforts; |
| likelihood of success and impact of litigation; |
| expected tax rates, including effective tax rates; |
| changes in interest and tax rates; |
| availability of certain tax benefits, including certain potential deductions; |
| potential impact of certain events or circumstances on our financial statements; |
| 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 worlds preeminent financial advisory and asset management firms. We have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Founded in 1848 in New Orleans, we currently operate from 43 cities in key business and financial centers across 27 countries throughout North America, Europe, Asia, Australia, the Middle East, and Central and South America.
Our primary business purpose is to serve our clients. Our deep roots in business centers around the world form a global network of relationships with key decision-makers in corporations, governments and investing institutions. This network is both a competitive strength and a powerful resource for Lazard and our clients. As a firm that competes on the quality of our advice, we have two fundamental assets: our people and our reputation.
We operate in cyclical businesses across multiple geographies, industries and asset classes. In recent years, we have expanded our geographic reach, bolstered our industry expertise and continued to build in growth areas. Companies, government bodies and investors seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global economic conditions. We believe that our business model as an independent advisor will continue to create opportunities for us to attract new clients and key personnel.
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Our principal sources of revenue are derived from activities in the following business segments:
| Financial Advisory, which offers corporate, partnership, institutional, government, sovereign and individual clients across the globe a wide array of financial advisory services regarding M&A and other strategic matters, restructurings, capital structure, capital raising and various other financial matters, and |
| Asset Management, which offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, alternative investments and private equity funds to corporations, public funds, sovereign entities, endowments and foundations, labor funds, financial intermediaries and private clients. |
In addition, we record selected other activities in our Corporate segment, including management of cash, investments, deferred tax assets, outstanding indebtedness and assets associated with Lazard Groups Paris-based subsidiary, Lazard Frères Banque SA (LFB).
LFB is a registered bank regulated by the Autorité de Contrôle Prudentiel et de Résolution (ACPR). It is engaged primarily in commercial and private banking services for clients and funds managed by 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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
Financial Advisory |
52 | % | 49 | % | 52 | % | 50 | % | ||||||||
Asset Management |
50 | 51 | 49 | 51 | ||||||||||||
Corporate |
(2 | ) | | (1 | ) | (1 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
|
|
|
|
|
|
|
|
We also invest our own capital from time to time, generally alongside capital of qualified institutional and individual investors in alternative investments or private equity investments, and, since 2005, we have engaged in a number of alternative investments and private equity activities, including, historically, investments through (i) the Edgewater Funds (Edgewater), our Chicago-based private equity firm (see Note 10 of Notes to Condensed Consolidated Financial Statements), (ii) Lazard Australia Corporate Opportunities Fund 2 (COF2), an Australian fund targeting Australasian mid-market investments, (iii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small-to mid-cap European companies and (iv) a fund targeting significant noncontrolling-stake investments in established private companies. We also make investments to seed our Asset Management strategies.
Business Environment and Outlook
Economic and global financial market conditions can materially affect our financial performance. As described above, our principal sources of revenue are derived from activities in our Financial Advisory and Asset Management business segments. As our Financial Advisory revenues are primarily dependent on the successful completion of merger, acquisition, restructuring, capital raising or similar transactions, and our Asset Management revenues are primarily driven by the levels of AUM, weak economic and global financial market conditions can result in a challenging business environment for M&A and capital-raising activity as well as our Asset Management business, but may provide opportunities for our restructuring business.
Despite market volatility in the early part of the first half of 2015, equity market indices for developed markets at June 30, 2015 generally increased or remained stable as compared to such indices at December 31, 2014. Emerging markets indices at June 30, 2015 have generally increased as compared to December 31, 2014.
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In the global M&A markets during the first half of 2015, the value of all completed M&A transactions increased as compared to the same period in the prior year, as did the subset of such transactions involving values greater than $500 million. During the same time, the value of all announced M&A transactions, including the subset of such transactions involving values greater than $500 million, also increased, reflecting an active global M&A environment. While the value of completed and announced transactions increased as compared to the prior period, the number of announced transactions (excluding the subset of announced transactions involving values greater than $500 million) decreased. During the first half of 2015, global restructuring activity remained low, consistent with the last several years.
In the first half of 2015, corporate cash balances remain high and interest rates remain low. The U.S. macroeconomic environment has improved, but Europe and many of the developing markets remain unsettled, particularly with respect to foreign exchange markets. Although market and foreign currency volatility may continue, the longer-term trends appear to remain favorable for both of our businesses.
We intend to leverage our existing infrastructure to capitalize on any global macroeconomic recovery, positive momentum in the M&A cycle, and strength in the global equity markets. We believe that we can generate revenue growth by remaining adequately staffed to capitalize on any macroeconomic recovery and deploying our intellectual capital to generate new revenue streams.
Our outlook with respect to our Financial Advisory and Asset Management businesses is described below.
| Financial Advisory The fundamentals for continued growth of a strategic M&A cycle appear to remain in place. Demand continues for expert, independent strategic advice that can be levered across geographies and our range of advisory capabilities. The global scale and breadth of our Financial Advisory business allows us to advise on large, complex cross-border transactions across a variety of industries. In addition, we believe our businesses throughout the emerging markets, Japan and Australia position us for growth in these markets, while enhancing our relationships with, and the services that we can provide to, clients in developed economies. |
| Asset Management Generally, we have seen increased investor demand across regions and investment platforms. In the short to intermediate term, we expect most of our growth will come from defined benefit and defined contribution plans in the developed economies because of their sheer scope and size. Over the longer term, we expect an increasing share of our AUM to come from the developing economies in Asia, Latin America and the Middle East, as their retirement systems evolve and individual wealth is increasingly deployed in the financial markets. Our global footprint is already well established in the developed economies and we expect our business in the developing economies will continue to expand. Given our globally diversified platform and our ability to provide investment solutions for a global mix of clients, we believe we are positioned to benefit from growth that may occur in the asset management industry. In recent years, we have expanded the global footprint of our Asset Management business by opening offices in Singapore, Dubai and Dublin. We are continually developing and seeding new investment strategies that extend our existing platforms. Recent examples of growth initiatives include the following investment strategies: Emerging Markets Debt, Emerging Markets Small Cap Equity, Middle East North African Equities, Asian Equities, U.S. Long/Short Equity and International Concentrated Equity. |
We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 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.
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Overall, we continue to focus on the development of our business, including the generation of stable revenue growth, earnings growth and member returns, the prudent management of our costs and expenses, the efficient use of our assets and the return of equity to our members.
Certain data with respect to our Financial Advisory and Asset Management businesses is included below.
Financial Advisory
As reflected in the following table, which sets forth global M&A industry statistics, the value of all completed transactions, including completed transactions with values greater than $500 million, increased in the first half of 2015 as compared to the first half of 2014, while the number of all completed transactions decreased over the same period. With respect to announced M&A transactions, the value of all announced transactions, including announced transactions with values greater than $500 million, increased in the first half of 2015 as compared to the first half of 2014, while the number of all announced transactions decreased over the same period.
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||||||||||
2015 | 2014 | % Incr / (Decr) |
2015 | 2014 | % Incr / (Decr) |
|||||||||||||||||||
($ in billions) |
||||||||||||||||||||||||
Completed M&A Transactions: |
||||||||||||||||||||||||
All deals: |
||||||||||||||||||||||||
Value |
$ | 903 | $ | 613 | 47 | % | $ | 1,756 | $ | 1,354 | 30 | % | ||||||||||||
Number |
7,925 | 10,083 | (21 | )% | 17,254 | 19,754 | (13 | )% | ||||||||||||||||
Deals Greater than $500 million: |
||||||||||||||||||||||||
Value |
$ | 715 | $ | 401 | 78 | % | $ | 1,380 | $ | 959 | 44 | % | ||||||||||||
Number |
263 | 229 | 15 | % | 526 | 491 | 7 | % | ||||||||||||||||
Announced M&A Transactions: |
||||||||||||||||||||||||
All deals: |
||||||||||||||||||||||||
Value |
$ | 1,375 | $ | 1,010 | 36 | % | $ | 2,277 | $ | 1,671 | 36 | % | ||||||||||||
Number |
8,819 | 10,474 | (16 | )% | 18,650 | 20,301 | (8 | )% | ||||||||||||||||
Deals Greater than $500 million: |
||||||||||||||||||||||||
Value |
$ | 1,133 | $ | 772 | 47 | % | $ | 1,828 | $ | 1,246 | 47 | % | ||||||||||||
Number |
330 | 308 | 7 | % | 602 | 551 | 9 | % |
Source: | Dealogic as of July 6, 2015. |
Global restructuring activity during the first half of 2015, as measured by the number of corporate defaults, increased as compared to the first half of 2014, however, the aggregate value of debt defaults remained low, consistent with the last several years. The number of defaulting issuers increased to 38 in the 2015 period, according to Moodys Investors Service, Inc., as compared to 25 in the 2014 period.
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Asset Management
The percentage change in major equity market indices at June 30, 2015, as compared to such indices at March 31, 2015, December 31, 2014, and at June 30, 2014, is shown in the table below.
Percentage Changes June 30, 2015 vs. |
||||||||||||
March 31, 2015 |
December 31, 2014 |
June 30, 2014 |
||||||||||
Euro Stoxx |
(7.4 | )% | 8.8 | % | 6.1 | % | ||||||
MSCI Emerging Market |
(0.2 | )% | 1.7 | % | (7.5 | )% | ||||||
MSCI World Index |
(0.3 | )% | 1.5 | % | (0.5 | )% | ||||||
S&P 500 |
(0.2 | )% | 0.2 | % | 5.3 | % |
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 June 30, 2015 increased 3% versus AUM at December 31, 2014, primarily due to market appreciation and net inflows, partially offset by adverse foreign exchange movements. Average AUM in the first half of 2015 increased 5% as compared to average AUM in the 2014 period.
Financial Statement Overview
Net Revenue
The majority of Lazards 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 Lazards control.
Lazards 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 Lazards 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
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reasons, including investment performance, changes in prevailing interest rates and financial market performance. In addition, as Lazards 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 Lazards 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 funds 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 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 Companys seed investments related to our Asset Management business, principal investments in private equity funds and equity method investments, net of hedging activities, as well as gains and losses on investments held in connection with Lazard Fund Interests (LFI) and on the extinguishment of debt (to the extent applicable), interest income and interest expense. Corporate net revenue also can fluctuate due to changes in the fair value of investments classified as trading, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness.
Although Corporate segment net revenue during the first half of 2015 represented (1)% of Lazards net revenue, total assets in the Corporate segment represented 57% of Lazards consolidated total assets as of June 30, 2015, 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 assets associated with LFB.
Operating Expenses
The majority of Lazards 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.
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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 each fiscal year associated with the vesting of deferred incentive compensation awards, |
| We add (i) the deferred incentive compensation awards granted applicable to the relevant year-end compensation process (e.g. deferred incentive compensation awards granted in 2015, 2014 and 2013 related to the 2014, 2013 and 2012 year-end compensation processes, respectively) and (ii) investments in people (e.g. sign-on bonuses) and other special deferred incentive compensation awards granted throughout the applicable year, with such amounts in (i) and (ii) reduced by an estimate of future forfeitures of such awards, and |
| We adjust for year-end foreign exchange fluctuations. |
Compensation and benefits expense is the largest component of our operating expenses. Our goal is for annual awarded compensation and benefits expense to rise at a slower rate than operating revenue growth, and if operating revenue declines, awarded compensation and benefits expense should also decline. In addition, we seek to maintain discipline with respect to the rate at which we award deferred compensation. We believe that over the cycle we can attain a ratio of awarded compensation and benefits expense to operating revenue in the mid-to-high-50s percentage range, which compares to 55.6% for the year ended December 31, 2014. While we have implemented initiatives that we believe will assist us in attaining a ratio within this range, there can be no guarantee that such a ratio will be attained or that our policies or initiatives will not change in the future. We may benefit from pressure on compensation costs within the financial services industry in future periods; however, increased competition for senior professionals, changes in the macroeconomic environment or the financial markets generally, lower operating revenue resulting from, for example, a decrease in M&A activity, our share of the M&A market or our AUM levels, changes in the mix of revenues from our businesses or various other factors could prevent us from attaining this goal.
Our operating expenses also include non-compensation expense, which includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and other expenses. In 2015, non-compensation expense also included the expenses related to the redemption of a substantial majority of the Companys 6.85% senior notes due 2017 (the 2017 Notes) (see Note 9 of Notes to Condensed Consolidated Financial Statements). For all periods, the amortization of intangible assets related to acquisitions pertains primarily to the acquisition of Edgewater.
We believe that adjusted non-compensation expense, a non-U.S. GAAP measure, provides a more meaningful basis for assessing our operating results. For calculations with respect to adjusted non-compensation expense see the table under Consolidated Results of Operations below.
Provision for Income Taxes
Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Groups income pertaining to the limited liability company
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is not subject to U.S. federal income taxes because taxes associated with such income represent obligations of the individual partners. Outside the U.S., Lazard Group operates principally through 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).
Noncontrolling Interests
Noncontrolling interests primarily consist of amounts related to Edgewaters 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 Companys noncontrolling interests.
Consolidated Results of Operations
Lazards 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 subsidiarys functional currency are reported as a component of members 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 month and six month periods ended June 30, 2015 was negatively impacted in comparison to the prior year periods. The majority of the negative impact in each period was offset by the positive impact of the exchange rate movements on our operating expenses denominated in currencies other than the U.S. dollar.
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The condensed consolidated financial statements are prepared in conformity with U.S. GAAP. Selected financial data from the Companys 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 June 30, |
Six Months Ended June 30, |
|||||||||||||||
2015 | 2014 | 2015 | 2014 | |||||||||||||
($ in thousands) |
||||||||||||||||
Net Revenue |
$ | 607,951 | $ | 566,805 | $ | 1,184,804 | $ | 1,100,100 | ||||||||
Operating Expenses: |
||||||||||||||||
Compensation and benefits |
336,707 | 345,911 | 665,197 | 667,461 | ||||||||||||
Non-compensation |
108,251 | 110,300 | 274,970 | 213,437 | ||||||||||||
Amortization of intangible assets related to acquisitions |
1,857 | 706 | 2,890 | 1,926 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expenses |
446,815 | 456,917 | 943,057 | 882,824 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income |
161,136 | 109,888 | 241,747 | 217,276 | ||||||||||||
Provision for income taxes |
14,464 | 15,878 | 25,922 | 33,735 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net Income |
146,672 | 94,010 | 215,825 | 183,541 | ||||||||||||
Less Net Income Attributable to Noncontrolling Interests |
1,043 | 553 | 7,736 | 4,673 | ||||||||||||
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|
|
|
|
|
|||||||||
Net Income Attributable to Lazard Group |
$ | 145,629 | $ | 93,457 | $ | 208,089 | $ | 178,868 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating Income as a % of net revenue |
26.5 | % | 19.4 | % | 20.4 | % | 19.8 | % | ||||||||
|
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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 |
Six Months Ended June 30, |
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2015 | 2014 | 2015 | 2014 | |||||||||||||
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Operating Revenue: |
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Net revenue |
$ | 607,951 | $ | 566,805 | $ | 1,184,804 | $ | 1,100,100 | ||||||||
Adjustments: |
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Interest expense (a) |
12,452 | 17,150 | 29,533 | 34,486 | ||||||||||||
Revenue related to noncontrolling interests (b) |
(3,588 | ) | (2,512 | ) | (12,322 | ) | (8,778 | ) | ||||||||
Private equity revenue adjustment (c) |
(12,203 | ) | | (12,203 | ) | | ||||||||||
(Gains) losses on investments pertaining to LFI (d) |
1,894 | (8,906 | ) | (2,242 | ) | (11,532 | ) | |||||||||
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Operating revenue |
$ | 606,506 | $ | 572,537 | $ | 1,187,570 | $ | 1,114,276 | ||||||||
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(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) | The Company disposed of its private equity business in Australia in the second quarter of 2015 in a transaction with the management team of the disposed business. Revenue of $24,388 relating to the disposal |
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of the business (which primarily represents the realization of carried interest at fair value) is adjusted for the recognition of an obligation of $12,203 with the management of the disposed business, which obligation was previously recognized for U.S. GAAP. |
(d) | Represents changes in the fair value of investments held in connection with LFI and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from compensation and benefits expense. |
Three Months Ended June 30, |
Six Months Ended June 30, |
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2015 | 2014 | 2015 | 2014 | |||||||||||||
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Adjusted Compensation and Benefits Expense: |
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Total compensation and benefits expense |
$ | 336,707 | $ | 345,911 | $ | 665,197 | $ | 667,461 | ||||||||
Adjustments: |
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Noncontrolling interests (a) |
(1,184 | ) | (1,098 | ) | (2,401 | ) | (2,246 | ) | ||||||||
(Charges) credits pertaining to LFI (b) |
1,894 | (8,906 | ) | (2,242 | ) | (11,532 | ) | |||||||||
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Adjusted compensation and benefits expense |
$ | 337,417 | $ | 335,907 | $ | 660,554 | $ | 653,683 | ||||||||
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Adjusted compensation and benefits expen |