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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

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

For the quarterly period ended March 31, 2016

OR

 

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

For the transition period from                          to                         

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)

Registrant’s 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 April 15, 2016, in addition to profit participation interests, there were two managing member interests outstanding.

 

 

 

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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 Ltd’s subsidiaries include Lazard Group and their respective subsidiaries. Lazard Ltd’s primary operating asset is its indirect ownership as of March 31, 2016 of all of the common membership interests in Lazard Group. 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.

 

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)			1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			37
Item 3. Quantitative and Qualitative Disclosures About Market Risk			68
Item 4. Controls and Procedures			68
Part II. Other Information
Item 1. Legal Proceedings			69
Item 1A. Risk Factors			69
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			70
Item 3. Defaults Upon Senior Securities			70
Item 4. Mine Safety Disclosures			70
Item 5. Other Information			70
Item 6. Exhibits			71
Signatures			74

 

 

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PART I. FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

 

		Page
Condensed Consolidated Statements of Financial Condition as of March 31, 2016 and December  31, 2015			2
Condensed Consolidated Statements of Operations for the three month periods ended March  31, 2016 and 2015			4
Condensed Consolidated Statements of Comprehensive Income for the three month periods ended March  31, 2016 and 2015			5
Condensed Consolidated Statements of Cash Flows for the three month periods ended March  31, 2016 and 2015			6
Condensed Consolidated Statements of Changes in Members’ Equity for the three month periods ended March 31, 2016 and 2015			7
Notes to Condensed Consolidated Financial Statements			9

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2016 AND DECEMBER 31, 2015

(UNAUDITED)

(dollars in thousands)

 

		March 31,      2016				December 31,      2015
ASSETS
Cash and cash equivalents		$	691,537			$	1,025,844
Deposits with banks and short-term investments			387,550				389,861
Cash deposited with clearing organizations and other segregated cash			34,034				34,948
Receivables (net of allowance for doubtful accounts of $11,230 and $12,882 at March 31, 2016 and December 31, 2015, respectively):
Fees			414,464				423,817
Customers and other			100,058				73,396
Lazard Ltd subsidiaries			23,587				108,817
			538,109				606,030
Investments			448,539				530,712
Property (net of accumulated amortization and depreciation of $279,431 and $265,505 at March 31, 2016 and December 31, 2015, respectively)			206,856				207,165
Goodwill and other intangible assets (net of accumulated amortization of $58,205 and $57,561 at March 31, 2016 and December 31, 2015, respectively)			332,621				326,976
Deferred tax assets			55,572				52,695
Other assets			245,614				214,823
Total Assets		$	2,940,432			$	3,389,054

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

MARCH 31, 2016 AND DECEMBER 31, 2015

(UNAUDITED)

(dollars in thousands)

 

		March 31,      2016				December 31,      2015
LIABILITIES AND MEMBERS’ EQUITY
Liabilities:
Deposits and other customer payables		$	525,439			$	506,665
Accrued compensation and benefits			234,741				570,409
Senior debt			989,735				989,358
Payable to Lazard Ltd subsidiaries			65,453				104,893
Deferred tax liabilities			10,794				11,104
Capital lease obligations			9,013				9,028
Other liabilities			501,069				494,697
Total Liabilities			2,336,244				2,686,154
Commitments and contingencies
MEMBERS’ EQUITY
Members’ equity (net of 2,071,999 and 3,322,385 shares of Lazard Ltd Class A common stock, at a cost of $83,608 and $161,288 at March 31, 2016 and December 31, 2015, respectively			728,690				839,517
Accumulated other comprehensive loss, net of tax			(181,212	)			(189,758	)
Total Lazard Group LLC Members’ Equity			547,478				649,759
Noncontrolling interests			56,710				53,141
Total Members’ Equity			604,188				702,900
Total Liabilities and Members’ Equity		$	2,940,432			$	3,389,054

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

(UNAUDITED)

(dollars in thousands)

 

		Three Months Ended March  31,
		2016				2015
REVENUE
Investment banking and other advisory fees			$265,143				$301,372
Asset management fees			233,731				261,955
Interest income			1,548				929
Other			9,882				29,738
Total revenue			510,304				593,994
Interest expense			12,700				17,141
Net revenue			497,604				576,853
OPERATING EXPENSES
Compensation and benefits			297,198				328,490
Occupancy and equipment			27,002				27,335
Marketing and business development			19,688				19,190
Technology and information services			22,931				22,893
Professional services			9,532				11,206
Fund administration and outsourced services			13,435				16,148
Amortization of intangible assets related to acquisitions			644				1,033
Other			9,127				69,947
Total operating expenses			399,557				496,242
OPERATING INCOME			98,047				80,611
Provision for income taxes			11,735				11,458
NET INCOME			86,312				69,153
LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			3,900				6,693
NET INCOME ATTRIBUTABLE TO LAZARD GROUP LLC			$82,412				$62,460

 

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

(UNAUDITED)

(dollars in thousands)

 

		Three Months Ended March  31,
		2016				2015
NET INCOME		$	86,312			$	69,153
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Currency translation adjustments (net of tax expense of $9 for the three months ended March 31, 2016)			7,501				(29,386	)
Employee benefit plans:
Actuarial gain (loss) (net of tax expense (benefit) of $(70) and $115 for the three months ended March 31, 2016 and 2015, respectively)			(141	)			219
Adjustment for items reclassified to earnings (net of tax expense of $393 and $563 for the three months ended March 31, 2016 and 2015, respectively)			1,186				1,186
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX			8,546				(27,981	)
COMPREHENSIVE INCOME			94,858				41,172
LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS			3,900				6,694
COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD GROUP LLC		$	90,958			$	34,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

(UNAUDITED)

(dollars in thousands)

 

		Three Months Ended March 31,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	86,312			$	69,153
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization of property			8,389				7,876
Amortization of deferred expenses and share-based incentive compensation			117,108				106,364
Amortization of intangible assets related to acquisitions			644				1,033
Deferred tax benefit			(3,819	)			(9,112	)
Loss on extinguishment of debt			–				60,219
(Increase) decrease in operating assets:
Deposits with banks and short-term investments			19,498				(35,081	)
Cash deposited with clearing organizations and other segregated cash			1,474				(5,544	)
Receivables-net			73,473				(66,526	)
Investments			86,712				118,841
Other assets			(46,174	)			(90,889	)
Increase (decrease) in operating liabilities:
Deposits and other payables			(42,137	)			96,159
Accrued compensation and benefits and other liabilities			(356,297	)			(216,918	)
Net cash (used in) provided by operating activities			(54,817	)			35,575
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property			(5,454	)			(4,055	)
Disposals of property			104				44
Net cash used in investing activities			(5,350	)			(4,011	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Contributions from noncontrolling interests			93				57
Issuance of senior debt, net of expenses			–				396,272
Excess tax benefits from share-based incentive compensation			2,720				9,516
Payments for:
Senior debt			–				(509,098	)
Capital lease obligations			(417	)			(539	)
Distributions to noncontrolling interests			(424	)			(5,831	)
Purchase of Lazard Ltd Class A common stock			(83,140	)			(93,963	)
Distribution to members			(153,090	)			(9,442	)
Settlement of vested share-based incentive compensation			(50,455	)			(101,885	)
Other financing activities			(1,614	)			(1,165	)
Net cash used in financing activities			(286,327	)			(316,078	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH			12,187				(37,175	)
NET DECREASE IN CASH AND CASH EQUIVALENTS			(334,307	)			(321,689	)
CASH AND CASH EQUIVALENTS—January 1			1,025,844				917,212
CASH AND CASH EQUIVALENTS—March 31		$	691,537			$	595,523

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 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
Comprehensive income (loss):
Net income			62,460								62,460				6,693				69,153
Other comprehensive income (loss) - net of tax							(27,982	)			(27,982	)			1				(27,981	)
Amortization of share-based incentive compensation			77,923								77,923								77,923
Distributions to members and noncontrolling interests, net			(9,442	)							(9,442	)			(5,774	)			(15,216	)
Purchase of Lazard Ltd Class A common stock			(93,963	)							(93,963	)							(93,963	)
Delivery of Lazard Ltd Class A common stock in connection with share-based incentive compensation awards and related tax benefit of $9,495			(92,390	)							(92,390	)							(92,390	)
Business acquisitions and related equity transactions:
Lazard Ltd Class A common stock issuable (including related amortization)			89								89								89
Other			(1,165	)							(1,165	)							(1,165	)
Balance – March 31, 2015 (*)		$	538,346			$	(191,270	)		$	347,076			$	63,513			$	410,589

 

(*)	Includes 129,766,090 common membership interests issued at both January 1, 2015 and March 31, 2015. Also includes profit participation interests and two managing member interests.

 

See notes to condensed consolidated financial statements.

 

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LAZARD GROUP LLC

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY

FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2016

(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, 2016 (*)		$	839,517			$	(189,758	)		$	649,759			$	53,141			$	702,900
Comprehensive income:
Net income			82,412								82,412				3,900				86,312
Other comprehensive income - net of tax							8,546				8,546								8,546
Amortization of share-based incentive compensation			94,638								94,638								94,638
Distributions to members and noncontrolling interests, net			(153,090	)							(153,090	)			(331	)			(153,421	)
Purchase of Lazard Ltd Class A common stock			(83,140	)							(83,140	)							(83,140	)
Delivery of Lazard Ltd Class A common stock in connection with share-based incentive compensation awards and related tax benefit of $422			(50,033	)							(50,033	)							(50,033	)
Other			(1,614	)							(1,614	)							(1,614	)
Balance – March 31, 2016 (*)		$	728,690			$	(181,212	)		$	547,478			$	56,710			$	604,188

  

 

(*)	At both January 1, 2016 and March 31, 2016, in addition to profit participation interests, there were two managing member interests.

 

See notes to condensed consolidated financial statements.

 

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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 Amended and Restated Operating Agreement dated as of October 26, 2015 (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 world’s preeminent financial advisory and asset management firms and has long specialized in crafting solutions to the complex financial and strategic challenges of our clients. We serve a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals.

Lazard Ltd indirectly held 100% of all outstanding Lazard Group common membership interests as of March 31, 2016 and December 31, 2015. Lazard Ltd, through its control of the managing members of Lazard Group, controls Lazard Group.

Lazard Group’s principal operating activities are included in two business segments:

 

•

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

 

•

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

In addition, we record selected other activities in our Corporate segment, including management of cash, investments, deferred tax assets, outstanding indebtedness and assets and liabilities associated with Lazard Group’s Paris-based subsidiary Lazard Frères Banque SA (“LFB”).

LFB, as a registered bank, is engaged primarily in commercial and private banking services for clients and funds managed by Lazard Frères Gestion SAS (“LFG”) and other clients, investment banking activities, including participation in underwritten offerings of securities in France, and asset-liability management.

Basis of Presentation

The accompanying condensed consolidated financial statements of Lazard 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 Group’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Form 10-K”). The accompanying December 31, 2015 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.

Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. For example, discretionary compensation and benefits expense for interim periods is accrued based on the year-to-date amount of revenue earned, and an assumed annual ratio of compensation and benefits expense to revenue, with the applicable amounts adjusted for certain items. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates.

The consolidated results of operations for the three month period ended March 31, 2016 are not indicative of the results to be expected for any future interim or annual period.

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

The Company’s policy is to consolidate entities in which it has a controlling financial interest. The Company consolidates:

 

•

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

 

•

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

When the Company does not have a controlling interest in an entity, but exerts significant influence over such entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of earnings or losses of the entity. Intercompany transactions and balances have been eliminated.

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

 

2.	RECENT ACCOUNTING DEVELOPMENTS

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The new guidance is effective for annual and interim periods beginning after December 15, 2016 and early adoption is not permitted. On July 9, 2015, the FASB approved the deferral of the effective date of the new revenue guidance by one year to annual reporting periods beginning after December 15, 2017, with early adoption being permitted for annual periods beginning after December 15, 2016. The Company is currently evaluating the new guidance.

Amendments to the Consolidation Analysis—In February 2015, the FASB issued updated guidance for the consolidation of certain legal entities. The updated guidance eliminates the deferral of certain consolidation standards for entities considered to be investment companies and modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or VOEs. The new guidance is effective for annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company adopted this guidance using the modified retrospective method with an effective adoption date of January 1, 2016. The adoption of this guidance did not have a material impact on our consolidated financial statements or related disclosures.

Interest—Imputation of Interest—In April 2015, the FASB issued updated guidance which requires a company to classify debt issuance costs related to a recognized debt liability in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption permitted and is to be applied on a retrospective basis. The adoption of this guidance by the Company in the first quarter of 2016 resulted in a reclassification as of December 31, 2015 of $8,992 from “other assets” to “senior debt” on our condensed consolidated statements of financial condition.

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

Fair Value Measurement—In May 2015, the FASB issued updated guidance for the classification and disclosure of certain investments using the net asset value (“NAV”) as a practical expedient to measure the fair value of the investment. The guidance removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using NAV as a practical expedient. The new guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015, with early adoption permitted. The new guidance is to be applied on a retrospective basis. The Company elected to early adopt this guidance in the quarter ended September 30, 2015 and has removed investments that are measured at NAV as a practical expedient from the fair value hierarchy in all periods presented in the consolidated financial statements and related disclosures.

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

 

3.	RECEIVABLES

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

Receivables are stated net of an estimated allowance for doubtful accounts, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute. Activity in the allowance for doubtful accounts for the three month periods ended March 31, 2016 and 2015 was as follows:

 

		Three Months Ended March 31,
		2016				2015
Beginning Balance		$	12,882			$	23,540
Bad debt expense, net of recoveries			514				1,232
Charge-offs, foreign currency translation and other adjustments			(2,166	)			(6,313	)
Ending Balance		$	11,230			$	18,459

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

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

Of the Company’s fee receivables at March 31, 2016 and December 31, 2015, $78,271 and $81,774, respectively, represented interest-bearing financing receivables. In addition, at March 31, 2016 and December 31, 2015, the Company had interest-bearing receivables from Lazard Ltd subsidiaries of $18,692 and $106,567, respectively. 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 $441,146 and $417,689 at March 31, 2016 and December 31, 2015, respectively, approximates fair value.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

4.	INVESTMENTS

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

 

		March 31, 2016				December 31, 2015
Interest-bearing deposits		$	57,399			$	54,885
Debt			—				535
Equities			39,481				44,834
Funds:
Alternative investments (a)			54,907				67,600
Debt (a)			47,273				55,935
Equity (a)			137,132				197,787
Private equity			104,224				100,219
			343,536				421,541
Equity method			8,123				8,917
Total investments			448,539				530,712
Less:
Interest-bearing deposits			57,399				54,885
Equity method			8,123				8,917
Investments, at fair value		$	383,017			$	466,910
Securities sold, not yet purchased, at fair value (included in “other liabilities”)		$	2,876			$	3,239

 

(a)

Interests in alternative investment funds, debt funds and equity funds include investments with fair values of $11,715, $22,628 and $99,898, respectively, at March 31, 2016 and $10,996, $31,598 and $156,081, respectively, at December 31, 2015, held in order to satisfy the Company’s liability upon vesting of previously granted Lazard Fund Interests (“LFI”) and other similar deferred compensation arrangements. LFI represent grants by the Company to eligible employees of actual or notional interests in a number of Lazard-managed funds, subject to service-based vesting conditions (see Notes 6 and 12).

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

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

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

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

Debt funds primarily consist of seed investments in funds related to our Asset Management business that invest in debt securities, amounts related to LFI discussed above and an investment in a Lazard-managed debt fund.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

Private equity investments include those owned by Lazard and those consolidated but not owned by Lazard. Private equity investments owned by Lazard are primarily comprised of investments in private equity funds. Such investments primarily include (i) Edgewater Growth Capital Partners III, L.P. (“EGCP III”), a fund primarily making equity and buyout investments in middle market companies, (ii) until the fourth quarter of 2015, Lazard Australia Corporate Opportunities Fund 2 (“COF2”), an Australian fund targeting Australian mid-market investments, (iii) a mezzanine fund, which invests in mezzanine debt of a diversified selection of small- to mid-cap European companies, and (iv) a fund targeting significant noncontrolling-stake investments in established private companies.

Private equity investments consolidated but not owned by Lazard relate to the economic interests that are owned by the management team and other investors in the Edgewater Funds (“Edgewater”).

During the three month periods ended March 31, 2016 and 2015, the Company reported in “revenue-other” on its condensed consolidated statements of operations net unrealized investment gains and losses pertaining to “trading” securities still held as of the reporting date as follows:

 

		Three Months Ended March 31,
		2016				2015
Net unrealized investment gains		$	4,992			$	1,995

 

5.	FAIR VALUE MEASUREMENTS

Fair Value Hierarchy of Investments and Certain Other Assets and Liabilities—Lazard categorizes its investments and certain other assets and liabilities recorded at fair value into a three-level fair value hierarchy as follows:

 

Level 1.

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

 

Level 2.

Assets and liabilities whose values are based on (i) quoted prices for similar assets or liabilities in an active market, or quoted prices for identical or similar assets or liabilities in non-active markets, or (ii) inputs other than quoted prices that are directly observable or derived principally from, or corroborated by, market data.

 

Level 3.

Assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect our own assumptions about the assumptions a market participant would use in pricing the asset or liability. Items included in Level 3 include securities or other financial assets whose trading volume and level of activity have significantly decreased when compared with normal market activity and there is no longer sufficient frequency or volume to provide pricing information on an ongoing basis.

The Company’s investments in debt securities are classified as Level 1 when their respective fair values are based on unadjusted quoted prices in active markets.

The fair value of equities is classified as Level 1 or Level 3 as follows: marketable equity securities are classified as Level 1 and are valued based on the last trade price on the primary exchange for that security as provided by external pricing services; equity securities in private companies are generally classified as Level 3.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

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

The fair values of derivatives entered into by the Company are classified as Level 2 and are based on the values of the related underlying assets, indices or reference rates as follows: the fair value of forward foreign currency exchange rate contracts is a function of the spot rate and the interest rate differential of the two currencies from the trade date to settlement date; the fair value of total return swaps is based on the change in fair values of the related underlying equity security, financial instrument or index and a specified notional holding; the fair value of interest rate swaps is based on the interest rate yield curve; and the fair value of derivative liabilities related to LFI and other similar deferred compensation arrangements is based on the value of the underlying investments, adjusted for forfeitures. See Note 6.

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

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

 

		March 31, 2016
		Level 1				Level 2				Level 3				NAV (a)				Total
Assets:
Investments:
Equities		$	38,180			$	–			$	1,301			$	–			$	39,481
Funds:
Alternative investments			29,625								–				25,282				54,907
Debt			47,267				–				–				6				47,273
Equity			137,094				–				–				38				137,132
Private equity			–				–				–				104,224				104,224
Derivatives			–				544				–				–				544
Total		$	252,166			$	544			$	1,301			$	129,550			$	383,561
Liabilities:
Securities sold, not yet purchased		$	2,876			$	–			$	–			$	–			$	2,876
Derivatives			–				189,457				–				–				189,457
Total		$	2,876			$	189,457			$	–			$	–			$	192,333

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		December 31, 2015
		Level 1				Level 2				Level 3				NAV (a)				Total
Assets:
Investments:
Debt		$	535			$	–			$	–			$	–			$	535
Equities			43,558				–				1,276				–				44,834
Funds:
Alternative investments			45,135				–				–				22,465				67,600
Debt			55,929				–				–				6				55,935
Equity			197,745				–				–				42				197,787
Private equity			–				–				–				100,219				100,219
Derivatives			–				1,048				–				–				1,048
Total		$	342,902			$	1,048			$	1,276			$	122,732			$	467,958
Liabilities:
Securities sold, not yet purchased		$	3,239			$	–			$	–			$	–			$	3,239
Derivatives			–				195,689				–				–				195,689
Total		$	3,239			$	195,689			$	–			$	–			$	198,928

 

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

The following tables provide a summary of changes in fair value of the Company’s Level 3 assets for the three month periods ended March 31, 2016 and 2015:

 

		Three Months Ended March 31, 2016
		Beginning Balance				Net  Unrealized/ Realized Gains (Losses) Included In Revenue- Other (b)				Purchases/ Acquisitions				Sales/ Dispositions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	1,276			$	3			$	–			$	–			$	22			$	1,301
Total Level 3 Assets		$	1,276			$	3			$	–			$	–			$	22			$	1,301

 

		Three Months Ended March 31, 2015 (a)
		Beginning Balance				Net  Unrealized/ Realized Gains (Losses) Included In Revenue- Other (b)				Purchases/ Acquisitions/ Transfers (c)				Sales/ Dispositions				Foreign Currency Translation Adjustments				Ending Balance
Investments:
Equities		$	1,315			$	2			$	–			$	–			$	(28	)		$	1,289
Private equity funds			–				2,629				19,887				(391	)			–				22,125
Total Level 3 Assets		$	1,315			$	2,631			$	19,887			$	(391	)		$	(28	)		$	23,414

 

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

 

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

 

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

There were no transfers between any of the Level 1, 2 and 3 categories in the fair value measurement hierarchy during the three month periods ended March 31, 2016 and 2015.

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

 

March 31, 2016

% of Fair Value Not Redeemable

Estimated Liquidation Period of Investments Not Redeemable

Investments Redeemable

Fair Value

Unfunded Commitments

% Next 5 Years

% 5-10 Years

% Thereafter

Redemption Frequency

Redemption Notice Period

Alternative investment funds:

Hedge funds

$

23,763

$

–

NA

NA

NA

NA

(a)

<30-60 days

Funds of funds

448

–

NA

NA

NA

NA

(b)

<30-90 days

Other

1,071

–

NA

NA

NA

NA

(c)

<30-60 days

Debt funds

6

–

NA

NA

NA

NA

(d)

30 days

Equity funds

38

–

NA

NA

NA

NA

(e)

<30-90 days

Private equity funds:

Equity growth

70,382

9,183

(f)

100%

17%

38%

45%

NA

NA

Mezzanine debt

33,842

–

100%

–

–

100%

NA

NA

Total

$

129,550

$

9,183

 

(a)	weekly (34%), monthly (57%) and quarterly (9%)

(b)	monthly (98%) and quarterly (2%)

(c)	daily (30%) and monthly (70%)

(d)	daily (100%)

(e)	daily (18%), monthly (52%) and quarterly (30%)

(f)	Unfunded commitments to private equity investments consolidated but not owned by Lazard of $5,013 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

December 31, 2015

% of Fair Value Not Redeemable

Estimated Liquidation Period of Investments Not Redeemable

Investments Redeemable

Fair Value

Unfunded Commitments

% Next 5 Years

% 5-10 Years

% Thereafter

Redemption Frequency

Redemption Notice Period

Alternative investment funds:

Hedge funds

$

20,410

$

–

NA

NA

NA

NA

(a)

<30-60 days

Funds of funds

465

–

NA

NA

NA

NA

(b)

<30-90 days

Other

1,590

–

NA

NA

NA

NA

(c)

<30-60 days

Debt funds

6

–

NA

NA

NA

NA

(d)

30 days

Equity funds

42

–

NA

NA

NA

NA

(e)

<30-90 days

Private equity funds:

Equity growth

67,895

10,242

(f)

100%

18%

39%

43%

NA

NA

Mezzanine debt

32,324

–

100%

–

–

100%

NA

NA

Total

$

122,732

$

10,242

 

(a)	weekly (23%), monthly (69%) and quarterly (8%)

(b)	monthly (98%) and quarterly (2%)

(c)	daily (20%) and monthly (80%)

(d)	daily (100%)

(e)	daily (18%), monthly (54%) and quarterly (28%)

(f)	Unfunded commitments to private equity investments consolidated but not owned by Lazard of $5,501 are excluded. Such commitments are required to be funded by capital contributions from noncontrolling interest holders.

Investment Capital Funding Commitments—At March 31, 2016, the Company’s maximum unfunded commitments for capital contributions to investment funds primarily arose from commitments to EGCP III, which amounted to $8,613, through the earlier of October 12, 2016 (i.e., the end of the investment period) for investments and/or expenses (with a portion of the undrawn amount of such commitments as of that date remaining committed until October 12, 2023 in respect of “follow-on investments” and/or fund expenses) or the liquidation of the fund.

 

6.	DERIVATIVES

The Company enters into forward foreign currency exchange rate contracts, interest rate swaps, interest rate futures, total return swap contracts on various equity and debt indices and other derivative contracts to economically hedge exposures to fluctuations in currency exchange rates, interest rates and equity and debt prices. The Company reports its derivative instruments separately as assets and liabilities unless a legal right of set-off exists under a master netting agreement enforceable by law. The Company’s derivative instruments are recorded at their fair value, and are included in “other assets” and “other liabilities” on the condensed consolidated statements of financial condition. Gains and losses on the Company’s derivative instruments not designated as hedging instruments are included in “interest income” and “interest expense”, respectively, or “revenue-other”, depending on the nature of the underlying item, in the condensed consolidated statements of operations.

In addition to the derivative instruments described above, the Company records derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements, the fair value of which is

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

based on the value of the underlying investments, adjusted for estimated forfeitures, and is included in “accrued compensation and benefits” in the condensed consolidated statements of financial condition. Changes in the fair value of the derivative liabilities are included in “compensation and benefits” in the condensed consolidated statements of operations, the impact of which equally offsets the changes in the fair value of investments which are currently expected to be delivered upon settlement of LFI and other similar deferred compensation arrangements, which are reported in “revenue-other” in the condensed consolidated statements of operations.

The tables below present the fair values of the Company’s derivative instruments reported within “other assets” and “other liabilities” and the fair values of the Company’s derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements reported within “accrued compensation and benefits” (see Note 12) on the accompanying condensed consolidated statements of financial condition as of March 31, 2016 and December 31, 2015:

 

		March 31,				December 31,
		2016				2015
Derivative Assets:
Forward foreign currency exchange rate contracts		$	498			$	1,015
Total return swaps and other (a)			46				33
		$	544			$	1,048
Derivative Liabilities:
Forward foreign currency exchange rate contracts		$	1,846			$	1,584
Total return swaps and other (a)			7,132				531
LFI and other similar deferred compensation arrangements			180,479				193,574
		$	189,457			$	195,689

 

(a)

For total return swaps, amounts represent the netting of gross derivative assets and liabilities of $58 and $7,144 as of March 31, 2016, respectively, and $460 and $958 as of December 31, 2015, respectively, for contracts with the same counterparty under legally enforceable master netting agreements. Such amounts are recorded “net” in “other assets”, with receivables for net cash collateral under such contracts of $13,436 and $9,636 as of March 31, 2016 and December 31, 2015, respectively.

Net gains (losses) with respect to derivative instruments (predominantly reflected in “revenue-other”) and the Company’s derivative liabilities relating to its obligations pertaining to LFI and other similar deferred compensation arrangements (included in “compensation and benefits” expense) as reflected on the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2016 and 2015, were as follows:

 

		Three Months Ended March 31,
		2016				2015
Forward foreign currency exchange rate contracts		$	(7,300	)		$	15,400
LFI and other similar deferred compensation arrangements			2,514				(4,136	)
Total return swaps and other			(37	)			(2,931	)
Total		$	(4,823	)		$	8,333

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

7.

PROPERTY

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

 

		Estimated Depreciable Life in Years				March 31,				December 31,
						2016				2015
Buildings			33			$	143,456			$	137,181
Leasehold improvements			3-20				169,350				167,838
Furniture and equipment			3-10				163,893				160,552
Construction in progress							9,588				7,099
Total							486,287				472,670
Less - Accumulated depreciation and amortization							279,431				265,505
Property						$	206,856			$	207,165

 

8.	GOODWILL AND OTHER INTANGIBLE ASSETS

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

 

		March 31				December 31,
		2016				2015
Goodwill		$	327,050			$	320,761
Other intangible assets (net of accumulated amortization)			5,571				6,215
		$	332,621			$	326,976

At March 31, 2016 and December 31, 2015, goodwill of $262,509 and $256,220, respectively, was attributable to the Company’s Financial Advisory segment and, at each such respective date, $64,541 of goodwill was attributable to the Company’s Asset Management segment.

Changes in the carrying amount of goodwill for the three month periods ended March 31, 2016 and 2015 are as follows:

 

		Three Months Ended March 31,
		2016				2015
Balance, January 1		$	320,761			$	335,402
Foreign currency translation adjustments			6,289				(10,439	)
Balance, March 31		$	327,050			$	324,963

All changes in the carrying amount of goodwill for the three month periods ended March 31, 2016 and 2015 are attributable to the Company’s Financial Advisory segment.

 

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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 March 31, 2016 and December 31, 2015, by major intangible asset category, are as follows:

 

		March 31, 2016												December 31, 2015
		Gross Cost				Accumulated Amortization				Net Carrying Amount				Gross Cost				Accumulated Amortization				Net Carrying Amount
Performance fees		$	30,740			$	25,506			$	5,234			$	30,740			$	25,192			$	5,548
Management fees, customer relationships and non-compete agreements			33,036				32,699				337				33,036				32,369				667
		$	63,776			$	58,205			$	5,571			$	63,776			$	57,561			$	6,215

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

 

Year Ending December 31,		Amortization Expense (a)
2016 (April 1 through December 31)		$	5,023
2017			548
Total amortization expense		$	5,571

 

(a)

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

 

9.	SENIOR DEBT

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

 

														Outstanding as of,
		Initial Principal Amount				Maturity Date				Annual Interest Rate(b)				March 31, 2016												December 31, 2015
														Principal				Unamortized Debt Costs				Carrying Value				Principal				Unamortized Debt Costs				Carrying Value
Lazard Group 2017 Senior Notes (a)			600,000				6/15/17				6.85	%		$	98,350			$	132			$	98,218			$	98,350			$	159			$	98,191
Lazard Group 2020 Senior Notes			500,000				11/14/20				4.25	%			500,000				4,260				495,740				500,000				4,491				495,509
Lazard Group 2025 Senior Notes (a)			400,000				2/13/25				3.75	%			400,000				4,223				395,777				400,000				4,342				395,658
Total														$	998,350			$	8,615			$	989,735			$	998,350			$	8,992			$	989,358

 

(a)

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

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

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

The Amended and Restated Credit Agreement, the indenture and the supplemental indentures relating to Lazard Group’s senior notes contain certain covenants, events of default and other customary provisions, including a customary make-whole provision in the event of early redemption, where applicable. As of March 31, 2016, the Company was in compliance with such provisions. All of the Company’s senior debt obligations are unsecured.

As of March 31, 2016, the Company had approximately $241,000 in unused lines of credit available to it, including the credit facility provided under the Amended and Restated Credit Agreement, and unused lines of credit available to LFB of approximately $34,000 (at March 31, 2016 exchange rates) and Edgewater of $55,000. In addition, LFB has access to the Eurosystem Covered Bond Purchase Program of the Banque de France.

The Company’s senior debt at March 31, 2016 and December 31, 2015 is carried at historical amounts. At those dates, the fair value of such senior debt was approximately $984,000 and $994,000, respectively. The fair value of the Company’s senior debt is based on market quotations. The Company’s senior debt would be categorized within Level 2 of the hierarchy of fair value measurements if carried at fair value.

 

10.	COMMITMENTS AND CONTINGENCIES

Leases—The Company has various leases and other contractual commitments arising in the ordinary course of business.

Guarantees—In the normal course of business, LFB provides indemnifications to third parties to protect them in the event of non-performance by its clients. At March 31, 2016, LFB had $5,822 of such indemnifications and held $5,473 of collateral/counter-guarantees to secure these commitments. The Company believes the likelihood of loss with respect to these indemnities is remote. Accordingly, no liability is recorded in the condensed consolidated statement of financial condition.

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

The aggregate fair value of the consideration recognized by the Company at the acquisition date was $61,624. Such consideration consisted of (i) a one-time cash payment, (ii) 1,142,857 shares of Class A common

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

stock (the “Initial Shares”) and (iii) up to 1,142,857 additional shares of Class A common stock (the “Earnout Shares”) that are subject to earnout criteria and payable over time. The Earnout Shares will be issued only if certain performance thresholds are met. As of March 31, 2016 and December 31, 2015, 913,722 shares are issuable on a contingent basis, and 1,371,992 shares have been earned because applicable performance thresholds have been satisfied. As of March 31, 2016 and December 31, 2015, 1,371,992 of the earned shares have been settled.

Contingent Consideration Relating To Other Business Acquisitions—For a business acquired in 2012, at December 31, 2012, 170,988 shares of Class A common stock (including dividend equivalent shares) were issuable on a non-contingent basis. Such shares were delivered in the first quarter of 2013. During the second quarter of 2015, the achievement of certain performance thresholds related to the acquired business were satisfied, resulting in the issuance of 27,316 shares of Class A common stock.

Other Commitments—The Company has various other contractual commitments arising in the ordinary course of business. In addition, from time to time, each of LFB and LFNY may enter into underwriting commitments in which it will participate as an underwriter. At March 31, 2016, LFB and LFNY had no such underwriting commitments.

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

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

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

 

11.	MEMBERS’ EQUITY

Lazard Group Distributions—Distributions in respect of Lazard Group’s common membership interests are allocated to the holders of such interests in accordance with the provisions of the Operating Agreement. Such distributions primarily represent amounts necessary to fund (i) any dividends Lazard Ltd may declare on its Class A common stock and (ii) tax distributions in respect of income taxes that Lazard Ltd’s subsidiaries incur.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

During the three month periods ended March 31, 2016 and 2015, Lazard Group distributed $153,090 and $9,442, respectively, to the subsidiaries of Lazard Ltd.

Pursuant to Lazard Group’s 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 Program—During the three month period ended March 31, 2016 and the years ended December 31, 2015, 2014 and 2013, the Board of Directors of Lazard authorized the repurchase of Class A common stock as set forth in the table below.

 

Date		Repurchase Authorization				Expiration
October, 2013		$	100,000				December 31, 2015
April, 2014		$	200,000				December 31, 2015
February, 2015		$	150,000				December 31, 2016
January, 2016		$	200,000				December 31, 2017

The Company expects that the share repurchase program will primarily be used to offset a portion of the shares that have been or will be issued under the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”). Pursuant to the share repurchase program, purchases have been made in the open market or through privately negotiated transactions. The rate at which the Company purchases shares in connection with the share repurchase program may vary from quarter to quarter due to a variety of factors. Purchases with respect to such program are set forth in the table below:

 

		Number  of Shares Purchased				Average Price  Per Share
Three Months Ended March 31:
2015			1,677,464			$	49.46
2016			2,424,571			$	34.29

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

During the three month period ended March 31, 2015, Lazard Group purchased 215,729 shares of Lazard Ltd Class A common stock from subsidiaries of Lazard Ltd for $11,000. There were no such purchases during the three month period ended March 31, 2016.

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

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

During the three month period ended March 31, 2016, 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.

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

 

		Currency Translation Adjustments				Employee Benefit Plans				Total AOCI				Amount Attributable to Noncontrolling Interests				Total Lazard Group AOCI
Balance, January 1, 2016		$	(52,687	)		$	(137,073	)		$	(189,760	)		$	(2	)		$	(189,758	)
Activity January 1 to March 31, 2016:
Other comprehensive income (loss) before reclassifications			7,501				(141	)			7,360				–				7,360
Adjustments for items reclassified to earnings, net of tax			–				1,186				1,186				–				1,186
Net other comprehensive income			7,501				1,045				8,546				–				8,546
Balance, March 31, 2016		$	(45,186	)		$	(136,028	)		$	(181,214	)		$	(2	)		$	(181,212	)

 

		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 March 31, 2015:
Other comprehensive income (loss) before reclassifications			(29,386	)			219				(29,167	)			1				(29,168	)
Adjustments for items reclassified to earnings, net of tax			–				1,186				1,186				–				1,186
Net other comprehensive income (loss)			(29,386	)			1,405				(27,981	)			1				(27,982	)
Balance, March 31, 2015		$	(38,011	)		$	(153,260	)		$	(191,271	)		$	(1	)		$	(191,270	)

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

 

		Three Months Ended March  31,
		2016				2015
Amortization relating to employee benefit plans (a)		$	1,579			$	1,749
Less – related income taxes			393				563
Total reclassifications, net of tax		$	1,186			$	1,186

 

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

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

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

 

		Net Income Attributable to Noncontrolling Interests
		Three Months Ended March 31,
		2016				2015
Edgewater		$	3,900			$	6,693

 

		Noncontrolling Interests As Of
		March 31,				December 31,
		2016				2015
Edgewater		$	56,702			$	53,132
Other			8				9
Total		$	56,710			$	53,141

 

12.	INCENTIVE PLANS

Share-Based Incentive Plan Awards

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

Shares Available Under the 2008 Plan and 2005 Plan

The 2008 Plan authorizes the issuance of shares of Class A common stock pursuant to the grant or exercise of stock options, stock appreciation rights, restricted stock units (“RSUs”) and other equity-based awards. Under the 2008 Plan, the maximum number of shares available is based on a formula that limits the aggregate number of shares that may, at any time, be subject to awards that are considered “outstanding” under the 2008 Plan to 30% of the then-outstanding shares of Class A common stock.

The 2005 Plan authorized the issuance of up to 25,000,000 shares of Class A common stock pursuant to the grant or exercise of stock options, stock appreciation rights, RSUs and other equity-based awards. Each RSU or similar award granted under the 2005 Plan represents a contingent right to receive one share of Class A common stock, at no cost to the recipient. The fair value of such awards is generally determined based on the closing market price of Class A common stock at the date of grant. The 2005 Plan expired in the second quarter of 2015, although unvested awards granted under the 2005 Plan remain outstanding and continue to be subject to its terms.

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

restricted stock awards) and “professional services” expense (with respect to deferred stock units (“DSUs”)) within the Company’s accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2016 and 2015:

 

		Three Months Ended March 31,
		2016				2015
Share-based incentive awards:
RSUs		$	54,408			$	59,071
PRSUs			16,689				6,198
Restricted Stock			23,476				12,623
DSUs			33				16
Total		$	94,606			$	77,908

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

The Company’s share-based incentive plans and awards are described below.

RSUs and DSUs

RSUs generally require future service as a condition for the delivery of the underlying shares of Class A common stock (unless the recipient is then eligible for retirement under the Company’s retirement policy) and convert into shares of Class A common stock on a one-for-one basis after the stipulated vesting periods. PRSUs, which are RSUs that are also subject to service-based vesting conditions, have additional performance conditions, and are described below. The grant date fair value of the RSUs, net of an estimated forfeiture rate, is amortized over the vesting periods or requisite service periods (generally one-third after two years, and the remaining two-thirds after the third year), and is adjusted for actual forfeitures over such period.

RSUs generally include a dividend participation right that provides that during vesting periods each RSU is attributed additional RSUs (or fractions thereof) equivalent to any dividends paid on Class A common stock during such period. During the three month periods ended March 31, 2016 and 2015, dividend participation rights required the issuance of 700,651 and 453,751 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. No such DSUs were granted in connection with annual compensation during the three month periods ended March 31, 2016 and 2015. Their remaining compensation is payable in cash, which they may elect to receive in the form of additional DSUs under the Directors’ Fee Deferral Unit Plan described below. DSUs are convertible into shares of Class A common stock at the time of cessation of service to the Board of Directors. DSUs include a cash dividend participation right equivalent to any ordinary quarterly dividends paid on Class A common stock.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The Company’s Directors’ Fee Deferral Unit Plan permits the Non-Executive Directors to elect to receive additional DSUs in lieu of some or all of their cash fees. The number of DSUs granted to a Non-Executive Director pursuant to this election will equal the value of cash fees that the applicable Non-Executive Director has elected to forego pursuant to such election, divided by the market value of a share of Class A common stock on the date immediately preceding the date of the grant. During the three month periods ended March 31, 2016 and 2015, 2,110 and 619 DSUs, respectively, had been granted pursuant to such Plan.

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

The following is a summary of activity relating to RSUs and DSUs during the three month periods ended March 31, 2016 and 2015:

 

		RSUs								DSUs
		Units				Weighted Average Grant Date Fair Value				Units				Weighted Average Grant Date Fair Value
Balance, January 1, 2016			9,599,658			$	44.06				312,670			$	35.98
Granted (including 700,651 RSUs relating to dividend participation)			6,140,020			$	34.54				2,110			$	31.47
Forfeited			(55,826	)		$	41.58				–				–
Vested			(4,100,192	)		$	39.12				–				–
Balance, March 31, 2016			11,583,660			$	40.78				314,780			$	35.95
Balance, January 1, 2015			13,529,116			$	35.19				286,227			$	34.21
Granted (including 453,751 RSUs relating to dividend participation)			3,865,598			$	48.93				619			$	50.90
Forfeited			(110,530	)		$	38.80				–				–
Vested			(6,608,777	)		$	30.30				–				–
Balance, March 31, 2015			10,675,407			$	43.16				286,846			$	34.25

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

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Restricted Stock

The following is a summary of activity related to shares of restricted Class A common stock associated with compensation arrangements during the three month periods ended March 31, 2016 and 2015:

 

		Restricted Shares				Weighted Average Grant Date Fair Value
Balance, January 1, 2016			713,738			$	47.12
Granted			1,795,258			$	36.78
Forfeited			(25,662	)		$	39.89
Vested			(627,110	)		$	36.61
Balance, March 31, 2016			1,856,224			$	40.77
Balance, January 1, 2015			729,827			$	38.63
Granted			576,886			$	50.88
Forfeited			(1,300	)		$	47.09
Vested			(438,743	)		$	37.93
Balance, March 31, 2015			866,670			$	47.12

In connection with shares of restricted Class A common stock that vested during the three month periods ended March 31, 2016 and 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 77,795 and 88,492 shares of Class A common stock during such respective three month periods. Accordingly, 549,315 and 350,251 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2016 and 2015, respectively.

The restricted stock awards include a cash dividend participation right equivalent to any ordinary dividends paid on Class A common stock during the period, which will vest concurrently with the underlying restricted stock award. At March 31, 2016, estimated unrecognized restricted stock expense was approximately $52,971, with such expense to be recognized over a weighted average period of approximately 1.2 years subsequent to March 31, 2016.

PRSUs

PRSUs are subject to both performance-based and service-based vesting conditions. The number of shares of Class A common stock that a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics that relate to Lazard Ltd’s performance over a three-year period. The target number of shares of Class A common stock subject to each PRSU is one; however, based on the achievement of the performance criteria, the number of shares of Class A common stock that may be received in connection with each PRSU generally can range from zero to two times the target number. PRSUs will vest on a single date three years following the date of the grant, provided the applicable service and performance conditions are satisfied. However, PRSUs granted in 2013 vested 33% in March 2015 and 67% in March 2016. In addition, the performance metrics applicable to each PRSU will be evaluated on an annual basis at the end of each fiscal year during the performance period and, if 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 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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

common stock during such period. These dividend equivalents are credited as RSUs that are not subject to the performance-based vesting criteria but are otherwise subject to the same restrictions as the underlying PRSUs to which they relate.

The following is a summary of activity relating to PRSUs during the three month periods ended March 31, 2016 and 2015:

 

		PRSUs				Weighted Average Grant Date Fair Value
Balance, January 1, 2016			1,019,038			$	44.49
Granted (a)			627,956			$	32.91
Vested			(417,018	)		$	38.43
Balance, March 31, 2016			1,229,976			$	40.63
Balance, January 1, 2015			1,347,148			$	37.79
Granted (a)			368,389			$	52.85
Vested			(328,793	)		$	35.56
Balance, March 31, 2015			1,386,744			$	42.32

 

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

In connection with PRSUs that vested during the three month periods ended March 31, 2016 and 2015, the Company satisfied its minimum statutory tax withholding requirements in lieu of delivering 64,169 and 25,239 shares of Class A common stock during such respective three month periods. Accordingly, 352,849 and 303,554 shares of Class A common stock held by the Company were delivered during the three month periods ended March 31, 2016 and 2015.

Compensation expense recognized for PRSU awards is determined by multiplying the number of shares of Class A common stock underlying such awards that, based on the Company’s estimate, are considered probable of vesting, by the grant date fair value. As of March 31, 2016, the total estimated unrecognized compensation expense was approximately $21,330, and the Company expects to amortize such expense over a weighted-average period of approximately 0.9 years subsequent to March 31, 2016.

LFI and Other Similar Deferred Compensation Arrangements

Commencing in February 2011, the Company granted LFI to eligible employees. In connection with LFI and other similar deferred compensation arrangements, which generally require future service as a condition for vesting, the Company recorded a prepaid compensation asset and a corresponding compensation liability on the grant date based upon the fair value of the award. The prepaid asset is amortized on a straight-line basis over the applicable vesting periods or requisite service periods (which are generally similar to the comparable periods for RSUs), and is charged to “compensation and benefits” expense within the Company’s condensed consolidated statement of operations. LFI and similar deferred compensation arrangements that do not require future service are expensed immediately. The related compensation liability is accounted for at fair value as a derivative liability, which contemplates the impact of estimated forfeitures, and is adjusted for changes in fair value primarily related to changes in value of the underlying investments.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

The following is a summary of activity relating to LFI and other similar deferred compensation arrangements during the three month periods ended March 31, 2016 and 2015:

 

		Prepaid Compensation Asset				Compensation   Liability
Balance, January 1, 2016		$	75,703			$	193,574
Granted			51,871				51,871
Settled			–				(64,488	)
Forfeited			(340	)			(681	)
Amortization			(19,436	)			–
Change in fair value related to:
Decrease in fair value of underlying investments			–				(2,514	)
Adjustment for estimated forfeitures			–				1,804
Other			132				913
Balance, March 31, 2016		$	107,930			$	180,479
		Prepaid Compensation Asset				Compensation   Liability
Balance, January 1, 2015		$	73,278			$	207,306
Granted			89,965				89,965
Settled			–				(75,002	)
Forfeited			(104	)			(619	)
Amortization			(24,614	)			–
Change in fair value related to:
Increase in fair value of underlying investments			–				4,136
Adjustment for estimated forfeitures			–				2,565
Other			(844	)			(2,244	)
Balance, March 31, 2015		$	137,681			$	226,107

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

The following is a summary of the impact of LFI and other similar deferred compensation arrangements on “compensation and benefits” expense within the accompanying condensed consolidated statements of operations for the three month periods ended March 31, 2016 and 2015:

 

		Three Months Ended March  31,
		2016				2015
Amortization, net of forfeitures		$	20,899			$	26,664
Change in the fair value of underlying investments			(2,514	)			4,136
Total		$	18,385			$	30,800

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

13.	EMPLOYEE BENEFIT PLANS

The Company provides retirement and other post-retirement benefits to certain of its employees through defined benefit pension plans (the “pension plans”) and, in the U.S., a partially funded contributory post-retirement plan covering qualifying U.S. employees (the “medical plan” and together with the pension plans, the “post-retirement plans”). The Company also offers defined contribution plans to its employees. The post-retirement plans generally provide benefits to participants based on average levels of compensation. Expenses related to the Company’s employee benefit plans are included in “compensation and benefits” expense on the condensed consolidated statements of operations.

Employer Contributions to Pension Plans—The Company’s funding policy for its U.S. and non-U.S. pension plans is to fund when required or when applicable upon an agreement with the plans’ trustees (the “Trustees”). Management also evaluates from time to time whether to make voluntary contributions to the plans.

The following table summarizes the components of net periodic benefit cost (credit) related to the Company’s post-retirement plans for the three month periods ended March 31, 2016 and 2015:

 

		Pension Plans								Medical Plan
		Three Months Ended March 31,
		2016				2015				2016				2015
Components of Net Periodic Benefit Cost (Credit):
Service cost		$	307			$	360			$	4			$	8
Interest cost			5,213				6,106				45				49
Expected return on plan assets			(7,166	)			(7,071	)
Amortization of:
Prior service cost			590				603
Net actuarial loss (gain)			989				1,146
Net periodic benefit cost (credit)		$	(67	)		$	1,144			$	49			$	57

 

14.	INCOME TAXES

Although a portion of Lazard Group’s income is subject to U.S. federal income taxes, Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income from its U.S. operations is generally not subject to U.S. federal income taxes because such income is attributable to its partners. 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 $11,735 and $11,458 for the three month periods ended March 31, 2016 and 2015, respectively, representing effective tax rates of 12.0% and 14.2%, 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.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Substantially all of Lazard’s operations outside the U.S. are conducted in “pass-through” entities for U.S. income tax purposes. The Company provides for U.S. income taxes on a current basis for 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. RELATED PARTIES

Receivable from and Payable to Lazard Ltd Subsidaries

Lazard Group’s receivables from subsidiaries of Lazard Ltd at March 31, 2016 and December 31, 2015 included interest-bearing loans of $18,692 and $106,567, respectively, including accrued interest thereon. Interest income relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $185 for the three month period ended March 31, 2016. There was no such interest income for the three month period ended March 31, 2015.

As of March 31, 2016 and December 31, 2015, Lazard Group’s payables to subsidiaries of Lazard Ltd included interest-bearing loans, including accrued interest thereon, of approximately $62,500 and $102,000, respectively. Interest expense relating to interest-bearing loans with subsidiaries of Lazard Ltd amounted to $867 and $1,021 for the three month periods ended March 31, 2016 and 2015, respectively. In addition, as of both March 31, 2016 and December 31, 2015, Lazard Group’s payables to subsidiaries of Lazard Ltd included $2,840 in connection with Lazard Group’s prior year business acquisitions.

Sponsored Funds

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

Other

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

 

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 LFNY’s Financial and Operational Combined Uniform Single (“FOCUS”) report filed with the Financial Industry Regulatory Authority (“FINRA”), or $100, whichever is greater. In addition, the ratio of aggregate indebtedness (as defined) to net capital may not exceed 15:1. At March 31, 2016, LFNY’s regulatory net capital was $90,470, which exceeded the minimum requirement by $87,155. LFNY’s aggregate indebtedness to net capital ratio was 0.55:1 as of March 31, 2016.

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

Certain U.K. subsidiaries of the Company, including LCL, Lazard Fund Managers Limited and Lazard Asset Management Limited (collectively, the “U.K. Subsidiaries”) are regulated by the Financial Conduct Authority. At March 31, 2016, the aggregate regulatory net capital of the U.K. Subsidiaries was $149,828, which exceeded the minimum requirement by $132,962.

CFLF, under which asset management and commercial banking activities are carried out in France, is subject to regulation by the Autorité de Contrôle Prudentiel et de Résolution (“ACPR”) for its banking activities conducted through its subsidiary, LFB. The investment services activities of the Paris group, exercised through LFB and other subsidiaries of CFLF, primarily LFG (asset management), also are subject to regulation and supervision by the Autorité des Marchés Financiers. At March 31, 2016, the consolidated regulatory net capital of CFLF was $136,054, which exceeded the minimum requirement set for regulatory capital levels by $90,432. In addition, pursuant to the consolidated supervision rules in the European Union, LFB, in particular, as a French credit institution, is required to be supervised by a regulatory body, either in the U.S. or in the European Union. During the third quarter of 2013, the Company and the ACPR agreed on terms for the consolidated supervision of LFB and certain other non-Financial Advisory European subsidiaries of the Company (referred to herein, on a combined basis, as the “combined European regulated group”) under such rules. Under this supervision, the combined European regulated group is required to comply with minimum requirements for regulatory net capital to be reported on a quarterly basis and satisfy periodic financial and other reporting obligations. At December 31, 2015, the regulatory net capital of the combined European regulated group was $165,662, which exceeded the minimum requirement set for regulatory capital levels by $91,445. Additionally, the combined European regulated group, together with our European Financial Advisory entities, is required to perform an annual risk assessment and provide certain other information on a periodic basis, including financial reports and information relating to financial performance, balance sheet data and capital structure.

Certain other U.S. and non-U.S. subsidiaries are subject to various capital adequacy requirements promulgated by various regulatory and exchange authorities in the countries in which they operate. At March 31, 2016, for those subsidiaries with regulatory capital requirements, their aggregate net capital was $100,172, which exceeded the minimum required capital by $74,113.

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

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

The Company’s segment information for the three month periods ended March 31, 2016 and 2015 is prepared using the following methodology:

 

•

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

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

•

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

 

•

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

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

Each segment’s operating expenses include (i) compensation and benefits expenses incurred directly in support of the businesses and (ii) other operating expenses, which include directly incurred expenses for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and indirect support costs (including compensation and other operating expenses related thereto) for administrative services. Such administrative services include, but are not limited to, accounting, tax, human resources, legal, facilities management and senior management activities.

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

 

				Three Months Ended March 31,
				2016				2015
Financial Advisory		Net Revenue		$	266,014			$	301,519
		Operating Expenses			227,078				242,935
		Operating Income		$	38,936			$	58,584
Asset Management		Net Revenue		$	245,759			$	279,807
		Operating Expenses			175,161				181,792
		Operating Income		$	70,598			$	98,015
Corporate		Net Revenue		$	(14,169	)		$	(4,473	)
		Operating Expenses			(2,682	)			71,515
		Operating Loss		$	(11,487	)		$	(75,988	)
Total		Net Revenue		$	497,604			$	576,853
		Operating Expenses			399,557				496,242
		Operating Income		$	98,047			$	80,611

 

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LAZARD GROUP LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

(dollars in thousands, unless otherwise noted)

 

		As Of
		March 31, 2016				December 31, 2015
Total Assets
Financial Advisory		$	714,484			$	763,374
Asset Management			598,382				640,034
Corporate (a)			1,627,566				1,985,646
Total (a)		$	2,940,432			$	3,389,054

 

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

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Lazard Group’s condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q (the “Form 10-Q”), as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in our Annual Report on Form 10-K for the year ended December 31, 2015 (the “Form 10-K”). All references to “2016”, “2015”, “first quarter”, “three months” or “the period” refer to, as the context requires, the three month periods ended March 31, 2016 and March 31, 2015.

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

Management has included in Parts I and II of this Form 10-Q, including in its MD&A, statements that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “target,” “goal” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies, business plans and initiatives and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. These factors include, but are not limited to, those discussed in our Form 10-K under the caption “Risk Factors,” including the following:

 

•

a decline in general economic conditions or global or regional financial markets;

 

•

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

 

•

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

 

•

losses due to unidentified or unanticipated risks;

 

•

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

 

•

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

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

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

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

 

•

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

 

•

ability to deploy surplus cash through distributions to members, purchases of Lazard Ltd Class A common stock and debt 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, including awarded compensation and benefits expense and adjusted compensation and benefits expense, and non-compensation expense;

 

•

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

 

•

likelihood of success and impact of litigation;

 

•

expected tax rates, including effective tax rates;

 

•

changes in interest and tax rates;

 

•

availability of certain tax benefits, including certain potential deductions;

 

•

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

 

•

changes in foreign currency exchange rates;

 

•

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

 

•

effects of competition on our business; and

 

•

impact of future legislation and regulation on our business.

The Company is committed to providing timely and accurate information to the investing public, consistent with our legal and regulatory obligations. To that end, the Company uses its websites to convey information about our businesses, including the anticipated release of quarterly financial results, quarterly financial, statistical and business-related information, and the posting of updates of AUM in various mutual funds, hedge funds and other investment products managed by Lazard Asset Management LLC (together with its subsidiaries, “LAM”) and Lazard Frères Gestion SAS (“LFG”). Investors can link to Lazard Ltd, Lazard Group and their operating company websites through http://www.lazard.com. Our websites and the information contained therein or connected thereto shall not be deemed to be incorporated into this Form 10-Q.

Business Summary

Lazard is one of the world’s preeminent financial advisory and asset management firms. We have long specialized in crafting solutions to the complex financial and strategic challenges of a diverse set of clients around the world, including corporations, governments, institutions, partnerships and individuals. Founded in 1848 in New Orleans, we currently operate from 42 cities in key business and financial centers across 27 countries throughout North America, Europe, Asia, Australia, the Middle East, and Central and South America.

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

 

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We operate in cyclical businesses across multiple geographies, industries and asset classes. In recent years, we have expanded our geographic reach, bolstered our industry expertise and continued to build in growth areas. Companies, government bodies and investors seek independent advice with a geographic perspective, deep understanding of capital structure, informed research and knowledge of global economic conditions. We believe that our business model as an independent advisor will continue to create opportunities for us to attract new clients and key personnel.

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

 

•

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

 

•

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

In addition, we record selected other activities in our Corporate segment, including management of cash, investments, deferred tax assets, outstanding indebtedness and assets and liabilities associated with Lazard Group’s Paris-based subsidiary, Lazard Frères Banque SA (“LFB”).

LFB, as a registered bank, is engaged primarily in commercial and private banking services for clients and funds managed by LFG and other clients, investment banking activities, including participation in underwritten offerings of securities in France, and asset-liability management.

Our consolidated net revenue was derived from the following segments:

 

		Three Months Ended March 31,
		2016				2015
Financial Advisory			53	%			52	%
Asset Management			49				49
Corporate			(2	)			(1	)
Total			100	%			100	%

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

Business Environment and Outlook

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

 

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Equity market indices for developed markets at March 31, 2016 generally decreased as compared to such indices at March 31, 2015. Emerging markets equity indices at March 31, 2016 decreased as compared to March 31, 2015, but increased in the first quarter of 2016 compared to December 31, 2015. In the global M&A markets during the first quarter of 2016, the value and number of all completed M&A transactions decreased as compared to the same period in the prior year, as did the subset of such transactions involving values greater than $500 million. During the same time, the value and number of all announced M&A transactions, including the subset of such transactions involving values greater than $500 million, also decreased. During the first quarter of 2016, global restructuring activity, as measured by the number of corporate defaults, increased as compared to the first quarter of 2015. The aggregate value of debt defaults (measured on a global basis) remained consistent with the 2015 period.

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

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

 

•

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

 

•

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

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge continuously, and it is not possible for our management to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. See Item 1A, “Risk Factors” in our Form 10-K. Furthermore, net income and revenue in any period may not be indicative of full-year results or the results of any other period and may vary significantly from year to year and quarter to quarter.

Overall, we continue to focus on the development of our business, including the generation of stable revenue growth, earnings growth and 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.

 

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Financial Advisory

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

 

		Three Months Ended March 31,
		2016				2015				% Incr /  (Decr)
		($ in billions)
Completed M&A Transactions:
All deals:
Value		$	811			$	900				(10	)%
Number			8,389				10,153				(17	)%
Deals Greater than $500 million:
Value		$	633			$	694				(9	)%
Number			223				281				(21	)%
Announced M&A Transactions:
All deals:
Value		$	750			$	934				(20	)%
Number			9,243				10,317				(10	)%
Deals Greater than $500 million:
Value		$	536			$	723				(26	)%
Number			252				278				(9	)%

 

Source:

Dealogic as of April 1, 2016.

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

Asset Management

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

 

		Percentage Changes March 31, 2016 vs.
		December 31, 2015				March 31, 2015
MSCI World Index			(1	)%			(5	)%
Euro Stoxx			(8	)%			(19	)%
MSCI Emerging Market			5	%			(14	)%
S&P 500			1	%			0	%

The fees that we receive for providing investment management and advisory services are primarily driven by the level of AUM and the nature of the AUM product mix. Accordingly, market movements, foreign currency exchange rate volatility and changes in our AUM product mix will impact the level of revenues we receive from our Asset Management business when comparing periodic results. A substantial portion of our AUM is invested in equities. Movements in AUM during the period generally reflect the changes in equity market indices. Our AUM at March 31, 2016 increased 2% versus AUM at December 31, 2015, primarily due to foreign exchange and market appreciation, partially offset by net outflows. Average AUM for the first quarter of 2016 decreased 7% as compared to average AUM in the first quarter of 2015 and 2% as compared to the fourth quarter of 2015.

 

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Financial Statement Overview

Net Revenue

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

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

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

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

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

 

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on a whole-fund basis and, therefore, clawback of carried interest during the life of the fund can occur. As a result, incentive fees earned on our private equity funds are not recognized until potential uncertainties regarding the ultimate realizable amounts have been determined, including any potential for clawback.

Corporate segment net revenue consists primarily of investment gains and losses on the Company’s “seed investments” related to our Asset Management business, principal investments in private equity funds and “equity method” investments, net of hedging activities, as well as gains and losses on investments held in connection with Lazard Fund Interests (“LFI”) and interest income and interest expense. Corporate net revenue also can fluctuate due to changes in the fair value of investments classified as “trading”, as well as due to changes in interest and currency exchange rates and in the levels of cash, investments and indebtedness.

Although Corporate segment net revenue during 2016 represented (2)% of Lazard’s net revenue, total assets in the Corporate segment represented 55% of Lazard’s consolidated total assets as of March 31, 2016, which are attributable to cash and cash equivalents, investments in debt and equity securities, interests in alternative investment, debt, equity and private equity funds, deferred tax assets and certain assets associated with LFB.

Operating Expenses

The majority of Lazard’s operating expenses relate to compensation and benefits for managing directors and employees. Our compensation and benefits expense includes (i) salaries and benefits, (ii) amortization of the relevant portion of previously granted deferred incentive compensation awards, including (a) share-based incentive compensation under the Lazard Ltd 2008 Incentive Compensation Plan (the “2008 Plan”) and the Lazard Ltd 2005 Equity Incentive Plan (the “2005 Plan”), which expired in the second quarter of 2015, and (b) LFI and other similar deferred compensation arrangements (see Note 12 of Notes to Condensed Consolidated Financial Statements), (iii) a provision for discretionary or guaranteed cash bonuses and profit pools and (iv) when applicable, severance payments. Compensation expense in any given period is dependent on many factors, including general economic and market conditions, our actual and forecasted operating and financial performance, staffing levels, estimated forfeiture rates, competitive pay conditions and the nature of revenues earned, as well as the mix between current and deferred compensation.

For interim periods, we use “adjusted compensation and benefits expense” and the ratio of “adjusted compensation and benefits expense” to “operating revenue,” both non-U.S. GAAP measures, for comparison of compensation and benefits expense between periods. For the reconciliations and calculations with respect to “adjusted compensation and benefits expense” and related ratios to “operating revenue,” see the table under “Consolidated Results of Operations” below.

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

 

•

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

 

•

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

 

(i)

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

 

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(ii)

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

 

(iii)

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

 

•

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

 

•

We adjust for year-end foreign exchange fluctuations.

Compensation and benefits expense is the largest component of our operating expenses. We seek to maintain discipline with respect to compensation, including the rate at which we award deferred compensation. Our goal is to attain a ratio of awarded compensation and benefits expense to operating revenue and a ratio of adjusted compensation and benefits expense to operating revenue over the cycle in the mid-to-high-50s percentage range, which compares to 55.8% and 55.4%, respectively, for the year ended December 31, 2015. While we have implemented initiatives that we believe will assist us in attaining a ratio within this range, there can be no guarantee that such a ratio will be attained or that our policies or initiatives will not change in the future. We may benefit from pressure on compensation costs within the financial services industry in future periods; however, increased competition for senior professionals, changes in the macroeconomic environment or the financial markets generally, lower operating revenue resulting from, for example, a decrease in M&A activity, our share of the M&A market or our AUM levels, changes in the mix of revenues from our businesses or various other factors could prevent us from attaining this goal.

Our operating expenses also include “non-compensation expense,” which includes costs for occupancy and equipment, marketing and business development, technology and information services, professional services, fund administration and outsourced services and other expenses. In 2015, non-compensation expense also included the expenses related to the redemption of a significant portion of the Company’s 6.85% senior notes due 2017 (the “2017 Notes”) (see Note 9 of Notes to Condensed Consolidated Financial Statements).

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

Our operating expenses also include the “amortization of intangible assets related to acquisitions”. For all periods, the amortization of intangible assets related to acquisitions pertains primarily to the acquisition of Edgewater.

Provision for Income Taxes

Lazard Group primarily operates in the U.S. as a limited liability company that is treated as a partnership for U.S. federal income tax purposes. As a result, Lazard Group’s income pertaining to the limited liability company is not subject to U.S. federal income tax 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).

 

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Noncontrolling Interests

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

Consolidated Results of Operations

Lazard’s condensed consolidated financial statements are presented in U.S. Dollars. Many of our non-U.S. subsidiaries have a functional currency (i.e., the currency in which operational activities are primarily conducted) that is other than the U.S. Dollar, generally the currency of the country in which the subsidiaries are domiciled. Such subsidiaries’ assets and liabilities are translated into U.S. Dollars using exchange rates as of the respective balance sheet date, while revenue and expenses are translated at average exchange rates during the respective periods based on the daily closing exchange rates. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of 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 months ended March 31, 2016 was negatively impacted in comparison to the prior year period. The majority of the negative impact was offset by the positive impact of the exchange rate movements on our operating expenses denominated in currencies other than the U.S. dollar.

The condensed consolidated financial statements are prepared in conformity with U.S. GAAP. Selected financial data from the Company’s reported condensed consolidated results of operations is set forth below, followed by a more detailed discussion of both the consolidated and business segment results.

 

		Three Months Ended March  31,
		2016				2015
		($ in thousands)
Net Revenue		$	497,604			$	576,853
Operating Expenses:
Compensation and benefits			297,198				328,490
Non-compensation			101,715				166,719
Amortization of intangible assets related to acquisitions			644				1,033
Total operating expenses			399,557				496,242
Operating Income			98,047				80,611
Provision for income taxes			11,735				11,458
Net Income			86,312				69,153
Less – Net Income Attributable to Noncontrolling Interests			3,900				6,693
Net Income Attributable to Lazard Group LLC		$	82,412			$	62,460
Operating Income, as a % of net revenue			19.7	%			14.0	%

 

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

 

		Three Months Ended March  31,
		2016				2015
		($ in thousands)
Operating Revenue:
Net revenue		$	497,604			$	576,853
Adjustments:
Interest expense (a)			12,348				17,081
Revenue related to noncontrolling interests (b)			(6,212	)			(8,734	)
(Gains) losses on investments pertaining to LFI (c)			2,514				(4,136	)
Operating revenue		$	506,254			$	581,064

 

(a)	Interest expense (excluding interest expense incurred by LFB) is added back in determining operating revenue because such expense relates to corporate financing activities and is not considered to be a cost directly related to the revenue of our business.

(b)	Revenue related to the consolidation of noncontrolling interests is excluded from operating revenue because the Company has no economic interest in such amount.

(c)	Represents changes in the fair value of investments held in connection with LFI and other similar deferred compensation arrangements for which a corresponding equal amount is excluded from compensation and benefits expense.

 

		Three Months Ended March 31,
		2016				2015
		($ in thousands)
Adjusted Compensation and Benefits Expense:
Total compensation and benefits expense		$	297,198			$	328,490
Adjustments:
Noncontrolling interests (a)			(1,752	)			(1,217	)
(Charges) credits pertaining to LFI (b)			2,514				(4,136	)
Adjusted compensation and benefits expense		$	297,960			$	323,137
Adjusted compensation and benefits expense, as a % of operating revenue			58.9	%			55.6	%

 

(a)	Expenses related to the consolidation of noncontrolling interests are excluded because Lazard has no economic interest in such amounts.

(b)	Represents changes in fair value of the compensation liability recorded in connection with LFI and other similar deferred incentive compensation awards for which a corresponding equal amount is excluded from operating revenue.

 

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		Three Months Ended March 31,
		2016				2015
		($ in thousands)
Adjusted Non-Compensation Expense:
Total non-compensation expense		$	101,715				$166,719
Adjustments:
Noncontrolling interests (a)			(398	)			(363	)
Charges pertaining to senior debt refinancing (b)			–				(60,219	)
Adjusted non-compensation expense		$	101,317				$106,137
Adjusted non-compensation expense, as a % of operating revenue			20.0	%			18.3	%

 

(a)	Expenses related to the consolidation of noncontrolling interests are excluded because the Company has no economic interest in such amounts.

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

 

		Three Months Ended March 31,
		2016				2015
		($ in thousands)
Earnings From Operations:
Operating revenue		$	506,254			$	581,064
Deduct:
Adjusted compensation and benefits expense			(297,960	)			(323,137	)
Adjusted non-compensation expense			(101,317	)			(106,137	)
Earnings from operations		$	106,977			$	151,790
Earnings from operations, as a % of operating revenue			21.1	%			26.1	%

Headcount information is set forth below:

 

		As Of
		March 31, 2016					December 31, 2015					March 31, 2015
Headcount:
Managing Directors:
Financial Advisory				146					139					147
Asset Management				96					90					90
Corporate				20					18					17
Total Managing Directors				262					247					254
Other Employees:
Business segment professionals				1,174					1,173					1,121
All other professionals and support staff				1,193					1,190					1,151
Total				2,629					2,610					2,526

 

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Operating Results

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

Three Months Ended March 31, 2016 versus March 31, 2015

The Company reported net income attributable to Lazard Group of $82 million, as compared to net income of $62 million in the 2015 period. The changes in the Company’s operating results during these periods are described below.

Net revenue decreased $79 million, or 14%, with operating revenue decreasing $75 million, or 13%, as compared to the 2015 period. Fee revenue from investment banking and other advisory activities decreased $36 million, or 12%, primarily due to decreases in M&A and Other Advisory fees. The decrease in M&A and Other Advisory fee revenue primarily reflected a lower level of closings and a decrease in the average transaction fee with respect to completed transactions involving fees greater than $1 million as compared to the 2015 period. Asset management fees, including incentive fees, decreased $28 million, or 11%, as compared to the 2015 period, due to a decrease in average AUM, a change in the mix of AUM and a decrease in incentive fees relating to traditional investment products. In the aggregate, interest income, other revenue and interest expense decreased $15 million as compared to the 2015 period, primarily due to investment losses, partially offset by a decrease in interest expense.

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

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

Non-compensation expense decreased $65 million, or 39%, as compared to the 2015 period, primarily due to a non-recurring charge of $60 million related to the redemption of a significant portion of the Company’s 2017 Notes in the 2015 period. Adjusted non-compensation expense, which excludes such charge, as well as non-compensation costs relating to noncontrolling interests, decreased $5 million, or 5%, as compared to the 2015 period. The ratio of adjusted non-compensation expense to operating revenue was 20.0%, as compared to 18.3% in the 2015 period.

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

Operating income increased $17 million as compared to the 2015 period, which included a charge relating to the redemption of a significant portion of the Company’s 2017 Notes.

Earnings from operations decreased $45 million, or 30%, as compared to the 2015 period, which excluded the charge related to the redemption of a significant portion of the Company’s 2017 Notes, and, as a percentage of operating revenue, was 21.1%, as compared to 26.1% in the 2015 period.

The provision for income taxes reflects an effective tax rate of 12.0%, as compared to 14.2% for the 2015 period. The increase in the effective tax rate primarily reflects the change in the geographic mix of earnings. See Note 14 of Notes to Condensed Consolidated Financial Statements.

 

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

Business Segments

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

Financial Advisory

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

 

		Three Months Ended March 31,
		2016				2015
		($ in thousands)
M&A and Other Advisory		$	214,591			$	260,804
Capital Raising			8,873				17,569
Total Strategic Advisory			223,464				278,373
Restructuring			42,550				23,146
Net Revenue			266,014				301,519
Operating Expenses			227,078				242,935
Operating Income		$	38,936			$	58,584
Operating Income, as a % of net revenue			14.6	%			19.4	%

Net revenue trends in Financial Advisory for M&A and Other Advisory and Restructuring are generally correlated to the level of completed industry-wide M&A transactions and restructuring transactions occurring subsequent to corporate debt defaults, respectively. However, deviations from this relationship can occur in any given year for a number of reasons. For instance, our results can diverge from industry-wide activity where there are material variances from the level of industry-wide M&A activity in a particular market where Lazard has significant market share, or regarding the relative number of our advisory engagements with respect to larger-sized transactions, and where we are involved in non-public or sovereign advisory assignments. For example, our M&A and Other Advisory revenue, which includes Sovereign and Capital Structure Advisory revenue, decreased 18% in 2016 as compared to 2015. The industry statistics for global M&A transactions described above reflect a 10% and 17% decrease in the value and number, respectively, of all completed transactions in the 2016 period as compared to the 2015 period. For M&A deals with values greater than $500 million, the value and number of completed transactions in the 2016 period decreased 9% and 21%, respectively, as compared to the 2015 period.

 

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Certain Lazard fee and transaction statistics are set forth below:

 

		Three Months Ended March 31,
		2016				2015
Lazard Statistics:
Number of clients with fees greater than $1 million:
Total Financial Advisory			66				68
M&A and Other Advisory			55				56
Percentage of total Financial Advisory net revenue from top 10 clients			35	%			39	%
Number of M&A transactions completed with values greater than $500 million (a)			13				22

 

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

The geographical distribution of Financial Advisory net revenue is set forth below in percentage terms and is based on the Lazard offices that generate Financial Advisory net revenue, which are located in the U.S., Europe (primarily in the U.K., France, Italy, Spain and Germany) and the rest of the world (primarily in Australia) and therefore may not be reflective of the geography in which the clients are located.

 

		Three Months Ended March 31,
		2016				2015
United States			66	%			57	%
Europe			31				39
Rest of World			3				4
Total			100	%			100	%

The Company’s managing directors and many of its professionals have significant experience, and many of them are able to use this experience to advise on M&A, strategic advisory matters and restructuring transactions, depending on clients’ needs. This flexibility allows Lazard to better match its professionals with the counter-cyclical business cycles of mergers and acquisitions and restructurings. While Lazard measures revenue by practice area, Lazard does not separately measure the costs or profitability of M&A services as compared to restructuring services. Accordingly, Lazard measures performance in its Financial Advisory segment based on overall segment operating revenue and operating income margins.

Financial Advisory Results of Operations

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

Three Months Ended March 31, 2016 versus March 31, 2015

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

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

 

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

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

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

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

Asset Management

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

 

		As of
		March 31, 2016				December 31, 2015
		($ in millions)
AUM by Asset Class:
Equity:
Emerging Markets		$	38,823			$	36,203
Global			32,407				31,407
Local			31,232				31,354
Multi-Regional			53,350				52,531
Total Equity			155,812				151,495
Fixed Income:
Emerging Markets			14,110				14,378
Global			4,341				4,132
Local			3,867				3,899
Multi-Regional			8,052				7,978
Total Fixed Income			30,370				30,387
Alternative Investments			3,150				3,297
Private Equity			929				858
Cash Management			293				343
Total AUM		$	190,554			$	186,380

Total AUM at March 31, 2016 was $191 billion, an increase of $5 billion, or 2%, as compared to total AUM of $186 billion at December 31, 2015, primarily due to foreign exchange and market appreciation, partially offset by net outflows. Average AUM for the three months ended March 31, 2016 decreased 7% as compared to the first quarter of 2015 and 2% as compared to the fourth quarter of 2015.

As of March 31, 2016, approximately 88% of our AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors, compared to approximately 89% as of December 31, 2015, and, as of March 31, 2016, approximately 12% of our AUM was managed on behalf of individual client relationships, which are principally with family offices and individuals, compared to approximately 11% at December 31, 2015.

 

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As of March 31, 2016, AUM with foreign currency exposure represented approximately 71% of our total AUM, as compared to 72% at December 31, 2015. AUM with foreign currency exposure generally declines in value with the strengthening of the U.S. Dollar and increases in value as the U.S. Dollar weakens, with all other factors held constant.

The following is a summary of changes in AUM by asset class for the three months ended March 31, 2016 and 2015:

 

		Three Months Ended March 31, 2016
		AUM Beginning Balance				Inflows				Outflows				Net Flows				Market Value Appreciation/ (Depreciation)				Foreign Exchange Appreciation/ (Depreciation)				AUM Ending Balance
		($ in millions)
Equity		$	151,495			$	8,042			$	(6,989	)		$	1,053			$	286			$	2,978			$	155,812
Fixed Income			30,387				1,324				(2,719	)			(1,395	)			441				937				30,370
Other			4,498				442				(461	)			(19	)			(118	)			11				4,372
Total		$	186,380			$	9,808			$	(10,169	)		$	(361	)		$	609			$	3,926			$	190,554

Inflows in the Equity asset class were primarily attributable to the Multi-Regional and Global equity platforms, and inflows in the Fixed Income asset class were primarily attributable to the Emerging Markets and Multi-Regional platforms. Outflows in the Equity asset class were primarily attributable to the Emerging Markets and Global equity platforms, and outflows in the Fixed Income asset class were primarily attributable to the Emerging Markets and Multi-Regional platforms.

 

		Three Months Ended March 31, 2015
		AUM Beginning Balance				Inflows				Outflows				Net Flows				Market Value Appreciation/ (Depreciation)				Foreign Exchange Appreciation/ (Depreciation)				AUM Ending Balance
		($ in millions)
Equity		$	160,912			$	6,150			$	(6,930	)		$	(780	)		$	8,535			$	(5,815	)		$	162,852
Fixed Income			31,110				3,403				(1,231	)			2,172				517				(2,077	)			31,722
Other			5,081				83				(434	)			(351	)			(103	)			(20	)			4,607
Total		$	197,103			$	9,636			$	(8,595)			$	1,041			$	8,949			$	(7,912	)		$	199,181

As of April 14, 2016, AUM was $192.5 billion, a $1.9 billion increase since March 31, 2016. The increase in AUM was due to market appreciation of $2.6 billion, partially offset by net outflows of $0.2 billion and foreign exchange depreciation of $0.5 billion.

Average AUM for the three month periods ended March 31, 2016 and 2015 for each significant asset class is set forth below. Average AUM generally represents the average of the monthly ending AUM balances for the period.

 

		Three Months Ended March 31,
		2016				2015
		($ in millions)
Average AUM by Asset Class:
Equity		$	149,969			$	161,440
Fixed Income			30,253				32,180
Alternative Investments			3,435				3,615
Private Equity			869				1,062
Cash Management			275				109
Total Average AUM		$	184,801			$	198,406

 

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The following table summarizes the reported operating results attributable to the Asset Management segment:

 

		Three Months Ended March 31,
		2016				2015
		($ in thousands)
Revenue:
Management Fees		$	226,450			$	252,087
Incentive Fees			1,806				6,283
Other Income			17,503				21,437
Net Revenue			245,759				279,807
Operating Expenses			175,161				181,792