Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - Lazard Group LLC | lzd-ex322_10.htm |
EX-32.1 - EX-32.1 - Lazard Group LLC | lzd-ex321_6.htm |
EX-31.2 - EX-31.2 - Lazard Group LLC | lzd-ex312_7.htm |
EX-31.1 - EX-31.1 - Lazard Group LLC | lzd-ex311_9.htm |
EX-12.1 - EX-12.1 - Lazard Group LLC | lzd-ex121_8.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
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 ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
☐ |
Accelerated filer |
☐ |
Non-accelerated filer |
☒ |
Smaller reporting company |
☐ |
|
|
Emerging growth company |
☐ |
If the Registrant is an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 19, 2018, in addition to profit participation interests, there were two managing member interests outstanding.
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 September 30, 2018 of all of the common membership interests in Lazard Group and its controlling interest 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 the managing directors in a manner consistent with historical practices.
i
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1
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
(UNAUDITED)
(dollars in thousands)
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September 30, |
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December 31, |
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2018 |
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2017 |
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ASSETS |
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Cash and cash equivalents |
|
$ |
1,102,606 |
|
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$ |
1,470,296 |
|
Deposits with banks and short-term investments |
|
|
1,015,872 |
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|
935,431 |
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Cash deposited with clearing organizations and other segregated cash |
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37,985 |
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|
35,539 |
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Receivables (net of allowance for doubtful accounts of $34,472 and $23,692 at September 30, 2018 and December 31, 2017, respectively): |
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Fees |
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546,636 |
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487,800 |
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Customers and other |
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93,979 |
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83,816 |
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Lazard Ltd subsidiaries |
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23,033 |
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17,135 |
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663,648 |
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588,751 |
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Investments |
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609,595 |
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427,186 |
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Property (net of accumulated amortization and depreciation of $331,702 and $317,816 at September 30, 2018 and December 31, 2017, respectively) |
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212,886 |
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203,828 |
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Goodwill and other intangible assets (net of accumulated amortization of $63,126 and $61,202 at September 30, 2018 and December 31, 2017, respectively) |
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357,381 |
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368,034 |
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Deferred tax assets |
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43,270 |
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46,646 |
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Other assets |
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301,090 |
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224,862 |
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Total Assets |
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$ |
4,344,333 |
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$ |
4,300,573 |
|
See notes to condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
(UNAUDITED)
(dollars in thousands)
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September 30, |
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December 31, |
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2018 |
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2017 |
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LIABILITIES AND MEMBERS’ EQUITY |
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Liabilities: |
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Deposits and other customer payables |
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$ |
1,056,343 |
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$ |
992,338 |
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Accrued compensation and benefits |
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487,426 |
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591,394 |
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Senior debt |
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1,433,702 |
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1,190,383 |
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Payable to Lazard Ltd subsidiaries |
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63,388 |
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65,271 |
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Deferred tax liabilities |
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6,442 |
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9,195 |
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Other liabilities |
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551,992 |
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545,092 |
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Total Liabilities |
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3,599,293 |
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3,393,673 |
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Commitments and contingencies |
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MEMBERS’ EQUITY |
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Members' equity (net of 10,455,449 and 9,907,479 shares of Lazard Ltd Class A common stock, at a cost of $489,304 and $411,560 at September 30, 2018 and December 31, 2017, respectively) |
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908,702 |
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1,043,574 |
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Accumulated other comprehensive loss, net of tax |
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(217,577 |
) |
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(195,256 |
) |
Total Lazard Group LLC Members' Equity |
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691,125 |
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848,318 |
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Noncontrolling interests |
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53,915 |
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58,582 |
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Total Members’ Equity |
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745,040 |
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906,900 |
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Total Liabilities and Members’ Equity |
|
$ |
4,344,333 |
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$ |
4,300,573 |
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See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
(dollars in thousands)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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REVENUE |
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Investment banking and other advisory fees |
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$ |
309,118 |
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$ |
305,530 |
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$ |
1,136,013 |
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$ |
1,050,471 |
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Asset management fees |
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312,790 |
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301,719 |
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986,777 |
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868,522 |
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Interest income |
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3,075 |
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1,615 |
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8,018 |
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4,959 |
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Other |
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15,250 |
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29,155 |
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|
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46,315 |
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81,092 |
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Total revenue |
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640,233 |
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638,019 |
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2,177,123 |
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2,005,044 |
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Interest expense |
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15,221 |
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14,248 |
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44,211 |
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42,770 |
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Net revenue |
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625,012 |
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623,771 |
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2,132,912 |
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1,962,274 |
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OPERATING EXPENSES |
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Compensation and benefits |
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342,294 |
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359,294 |
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1,160,216 |
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1,134,142 |
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Occupancy and equipment |
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28,673 |
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29,082 |
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87,786 |
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87,334 |
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Marketing and business development |
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21,803 |
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20,045 |
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75,575 |
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63,463 |
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Technology and information services |
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36,368 |
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31,371 |
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102,098 |
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87,329 |
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Professional services |
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13,067 |
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11,005 |
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40,745 |
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31,559 |
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Fund administration and outsourced services |
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34,748 |
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18,292 |
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103,159 |
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52,539 |
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Amortization and other acquisition-related (benefits) costs |
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(1,109 |
) |
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|
335 |
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(1,025 |
) |
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1,946 |
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Other |
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14,436 |
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9,153 |
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50,860 |
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30,510 |
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Total operating expenses |
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490,280 |
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478,577 |
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1,619,414 |
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1,488,822 |
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OPERATING INCOME |
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134,732 |
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|
145,194 |
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|
513,498 |
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|
473,452 |
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Provision for income taxes |
|
|
25,393 |
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|
27,367 |
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|
75,453 |
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|
|
81,802 |
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NET INCOME |
|
|
109,339 |
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|
|
117,827 |
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|
438,045 |
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|
391,650 |
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LESS - NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
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1,652 |
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|
2,261 |
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|
5,037 |
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5,660 |
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NET INCOME ATTRIBUTABLE TO LAZARD GROUP LLC |
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$ |
107,687 |
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$ |
115,566 |
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$ |
433,008 |
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$ |
385,990 |
|
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
(dollars in thousands)
|
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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||||||||||
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2018 |
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2017 |
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2018 |
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2017 |
|
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NET INCOME |
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$ |
109,339 |
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$ |
117,827 |
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$ |
438,045 |
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$ |
391,650 |
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: |
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Currency translation adjustments |
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(7,631 |
) |
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17,818 |
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(29,258 |
) |
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56,440 |
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Employee benefit plans: |
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Actuarial gain (loss) (net of tax expense (benefit) of $214 and $(1,197) for the three months ended September 30, 2018 and 2017, respectively, and $618 and $(3,673) for the nine months ended September 30, 2018 and 2017, respectively) |
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863 |
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(4,715 |
) |
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4,149 |
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(13,819 |
) |
Adjustment for items reclassified to earnings (net of tax expense of $264 and $204 for the three months ended September 30, 2018 and 2017, respectively, and $948 and $676 for the nine months ended September 30, 2018 and 2017, respectively) |
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|
949 |
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1,081 |
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2,788 |
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3,523 |
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX |
|
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(5,819 |
) |
|
|
14,184 |
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|
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(22,321 |
) |
|
|
46,144 |
|
COMPREHENSIVE INCOME |
|
|
103,520 |
|
|
|
132,011 |
|
|
|
415,724 |
|
|
|
437,794 |
|
LESS - COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS |
|
|
1,653 |
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|
2,261 |
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|
|
5,037 |
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|
|
5,661 |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO LAZARD GROUP LLC |
|
$ |
101,867 |
|
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$ |
129,750 |
|
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$ |
410,687 |
|
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$ |
432,133 |
|
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(UNAUDITED)
(dollars in thousands)
|
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Nine Months Ended |
|
|||||
|
|
September 30, |
|
|||||
|
|
2018 |
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2017 |
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
|
$ |
438,045 |
|
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$ |
391,650 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization of property |
|
|
25,078 |
|
|
|
23,203 |
|
Amortization of deferred expenses and share-based incentive compensation |
|
|
293,027 |
|
|
|
283,995 |
|
Amortization and other acquisition-related (benefits) costs |
|
|
(1,025 |
) |
|
|
1,946 |
|
Deferred tax provision (benefit) |
|
|
(1,462 |
) |
|
|
2,413 |
|
Loss on extinguishment of debt |
|
|
6,523 |
|
|
|
- |
|
(Increase) decrease in operating assets: |
|
|
|
|
|
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|
|
Receivables-net |
|
|
(87,885 |
) |
|
|
122,056 |
|
Investments |
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(184,542 |
) |
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|
27,927 |
|
Other assets |
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(144,895 |
) |
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(70,944 |
) |
Increase (decrease) in operating liabilities: |
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Accrued compensation and benefits and other liabilities |
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(42,867 |
) |
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(59,924 |
) |
Net cash provided by operating activities |
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|
299,997 |
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|
722,322 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Additions to property |
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(39,141 |
) |
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(15,387 |
) |
Disposals of property |
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|
1,365 |
|
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|
285 |
|
Net cash used in investing activities |
|
|
(37,776 |
) |
|
|
(15,102 |
) |
CASH FLOWS FROM FINANCING ACTIVITIES: |
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|
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Proceeds from: |
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|
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Customer deposits |
|
|
79,960 |
|
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|
149,506 |
|
Contributions from noncontrolling interests |
|
|
528 |
|
|
|
- |
|
Issuance of senior debt, net of expenses |
|
|
490,970 |
|
|
|
- |
|
Payments for: |
|
|
|
|
|
|
|
|
Senior debt |
|
|
(255,543 |
) |
|
|
- |
|
Capital lease obligations |
|
|
(57 |
) |
|
|
(7,329 |
) |
Distributions to noncontrolling interests |
|
|
(10,232 |
) |
|
|
(3,049 |
) |
Purchase of Class A common stock |
|
|
(306,591 |
) |
|
|
(252,538 |
) |
Distributions to members |
|
|
(364,751 |
) |
|
|
(294,966 |
) |
Settlement of vested share-based incentive compensation |
|
|
(109,485 |
) |
|
|
(67,384 |
) |
Other financing activities |
|
|
(5,484 |
) |
|
|
(10,083 |
) |
Net cash used in financing activities |
|
|
(480,685 |
) |
|
|
(485,843 |
) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
(66,339 |
) |
|
|
128,040 |
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
|
(284,803 |
) |
|
|
349,417 |
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—January 1 |
|
|
2,441,266 |
|
|
|
1,580,138 |
|
CASH AND CASH EQUIVALENTS AND RESTRICTED CASH—September 30 |
|
$ |
2,156,463 |
|
|
$ |
1,929,555 |
|
|
|
|
|
|
|
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|
|
RECONCILIATION OF CASH AND CASH EQUIVALENTS AND RESTRICTED CASH WITHIN THE CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION: |
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
||
|
|
2018 |
|
|
2017 |
|
||
Cash and cash equivalents |
|
$ |
1,102,606 |
|
|
$ |
1,470,296 |
|
Deposits with banks and short-term investments |
|
|
1,015,872 |
|
|
|
935,431 |
|
Cash deposited with clearing organizations and other segregated cash |
|
|
37,985 |
|
|
|
35,539 |
|
TOTAL CASH AND CASH EQUIVALENTS AND RESTRICTED CASH |
|
$ |
2,156,463 |
|
|
$ |
2,441,266 |
|
See notes to condensed consolidated financial statements.
6
LAZARD GROUP LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2017
(UNAUDITED)
(dollars in thousands)
|
|
|
|
|
|
Accumulated Other Comprehensive |
|
|
Total Lazard Group |
|
|
|
|
|
|
Total |
|
|||
|
|
Members' |
|
|
Income (Loss), |
|
|
Members' |
|
|
Noncontrolling |
|
|
Members' |
|
|||||
|
|
Equity |
|
|
Net of Tax |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
|||||
Balance - January 1, 2017 (*) |
|
$ |
949,669 |
|
|
$ |
(270,775 |
) |
|
$ |
678,894 |
|
|
$ |
57,246 |
|
|
$ |
736,140 |
|
Adjustment for the cumulative effect on prior years from the adoption of new accounting guidance related to share-based incentive compensation |
|
|
4,945 |
|
|
|
|
|
|
|
4,945 |
|
|
|
|
|
|
|
4,945 |
|
Balance, as adjusted - January 1, 2017 |
|
|
954,614 |
|
|
|
(270,775 |
) |
|
|
683,839 |
|
|
|
57,246 |
|
|
|
741,085 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
385,990 |
|
|
|
|
|
|
|
385,990 |
|
|
|
5,660 |
|
|
|
391,650 |
|
Other comprehensive income - net of tax |
|
|
|
|
|
|
46,143 |
|
|
|
46,143 |
|
|
|
1 |
|
|
|
46,144 |
|
Amortization of share-based incentive compensation |
|
|
220,648 |
|
|
|
|
|
|
|
220,648 |
|
|
|
|
|
|
|
220,648 |
|
Distributions to members and noncontrolling interests, net |
|
|
(294,966 |
) |
|
|
|
|
|
|
(294,966 |
) |
|
|
(3,049 |
) |
|
|
(298,015 |
) |
Purchase of Class A common stock |
|
|
(252,538 |
) |
|
|
|
|
|
|
(252,538 |
) |
|
|
|
|
|
|
(252,538 |
) |
Delivery of Class A common stock in connection with share-based incentive compensation |
|
|
(67,384 |
) |
|
|
|
|
|
|
(67,384 |
) |
|
|
|
|
|
|
(67,384 |
) |
Business acquisitions and related equity transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock issuable (including related amortization) |
|
|
278 |
|
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
278 |
|
Delivery of Class A common stock and related tax benefit of $10 |
|
|
615 |
|
|
|
|
|
|
|
615 |
|
|
|
|
|
|
|
615 |
|
Other |
|
|
(4,803 |
) |
|
|
|
|
|
|
(4,803 |
) |
|
204 |
|
|
|
(4,599 |
) |
|
Balance - September 30, 2017 (*) |
|
$ |
942,454 |
|
|
$ |
(224,632 |
) |
|
$ |
717,822 |
|
|
$ |
60,062 |
|
|
$ |
777,884 |
|
(*) As of January 1, 2017 and September 30, 2017, in addition to profit participation interests, there were two managing member interests.
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS’ EQUITY
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2018
(UNAUDITED)
(dollars in thousands)
|
|
|
|
|
|
|
Accumulated Other Comprehensive |
|
|
Total Lazard Group |
|
|
|
|
|
|
Total |
|
|||
|
|
|
Members' |
|
|
Income (Loss), |
|
|
Members' |
|
|
Noncontrolling |
|
|
Members' |
|
|||||
|
|
|
Equity |
|
|
Net of Tax |
|
|
Equity |
|
|
Interests |
|
|
Equity |
|
|||||
Balance - January 1, 2018 (*) |
|
|
$ |
1,043,574 |
|
|
$ |
(195,256 |
) |
|
$ |
848,318 |
|
|
$ |
58,582 |
|
|
$ |
906,900 |
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
433,008 |
|
|
|
|
|
|
|
433,008 |
|
|
|
5,037 |
|
|
|
438,045 |
|
Other comprehensive loss - net of tax |
|
|
|
|
|
|
|
(22,321 |
) |
|
|
(22,321 |
) |
|
|
- |
|
|
|
(22,321 |
) |
Amortization of share-based incentive compensation |
|
|
|
218,186 |
|
|
|
|
|
|
|
218,186 |
|
|
|
|
|
|
|
218,186 |
|
Distributions to members and noncontrolling interests, net |
|
|
|
(364,751 |
) |
|
|
|
|
|
|
(364,751 |
) |
|
|
(9,704 |
) |
|
|
(374,455 |
) |
Purchase of Class A common stock |
|
|
|
(306,591 |
) |
|
|
|
|
|
|
(306,591 |
) |
|
|
|
|
|
|
(306,591 |
) |
Delivery of Class A common stock in connection with share-based incentive compensation and related tax expense of $173 |
|
|
|
(109,657 |
) |
|
|
|
|
|
|
(109,657 |
) |
|
|
|
|
|
|
(109,657 |
) |
Business acquisitions and related equity transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock issuable (including related amortization) |
|
|
|
278 |
|
|
|
|
|
|
|
278 |
|
|
|
|
|
|
|
278 |
|
Other |
|
|
|
(5,345 |
) |
|
|
|
|
|
|
(5,345 |
) |
|
|
|
|
|
|
(5,345 |
) |
Balance - September 30, 2018 (*) |
|
|
$ |
908,702 |
|
|
$ |
(217,577 |
) |
|
$ |
691,125 |
|
|
$ |
53,915 |
|
|
$ |
745,040 |
|
(*) As of January 1, 2018 and September 30, 2018, in addition to profit participation interests, there were two managing member interests.
See notes to condensed consolidated financial statements.
8
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 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, as amended (the “Operating Agreement”).
Lazard Ltd, a Bermuda holding company, and its subsidiaries (collectively referred to as “Lazard Ltd”), including its indirect investment in Lazard Group, is one of the 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 September 30, 2018 and December 31, 2017. 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”), capital advisory, capital raising, restructurings, shareholder advisory, sovereign advisory and other strategic advisory, and |
|
• |
Asset Management, which offers a broad range of global investment solutions and investment management services in equity and fixed income strategies, asset allocation 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, certain contingent obligations, and assets and liabilities associated with Lazard Group’s Paris-based subsidiary Lazard Frères Banque SA (“LFB”).
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, 2017. The accompanying December 31, 2017 unaudited condensed consolidated statement of financial condition data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP for annual financial statement purposes. The accompanying condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods presented.
Preparing financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and the accompanying disclosures. For example, discretionary compensation and benefits expense for interim periods is accrued based on the year-to-date amount of revenue earned, and an assumed annual ratio of compensation and benefits expense to revenue, with the applicable amounts adjusted for certain items. Although these estimates are based on management’s knowledge of current events and actions that Lazard may undertake in the future, actual results may differ materially from the estimates.
The consolidated results of operations for the three month and nine month periods ended September 30, 2018 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
9
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
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 Lazard Frères Gestion SAS (“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 either (i) applies the equity method of accounting in which it records a proportionate share of the entity’s net earnings, or (ii) elects the option to measure at fair value. Intercompany transactions and balances have been eliminated.
Certain prior period amounts have been reclassified to conform to the current period presentation, specifically related to the adoption of new guidance impacting the condensed consolidated statements of cash flows (see Note 2).
2. |
RECENT ACCOUNTING DEVELOPMENTS |
Revenue from Contracts with Customers—In May 2014, the FASB issued comprehensive new revenue recognition guidance. The guidance requires a company to recognize revenue when it transfers promised services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those services and requires enhanced disclosures. The guidance also changes the accounting for certain contract costs, including whether they may be offset against revenue in the condensed consolidated statements of operations. 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. The guidance may be adopted using a full retrospective approach or a modified cumulative effect approach. The Company adopted the revenue recognition guidance upon its effective date of January 1, 2018 using the modified cumulative effect approach. The Company applied the new guidance to contracts that have not yet been completed as of the adoption date. The Company’s adoption efforts included the identification of revenue within the scope of the guidance and the evaluation of revenue contracts.
The Company evaluated the potential impact of the new guidance, including (i) the timing of revenue recognition for Financial Advisory and Asset Management fees and (ii) the presentation of certain contract costs. With respect to revenue recognition, the Company assessed the impact of the new guidance on the recognition of fees for Financial Advisory (e.g., transaction completion, transaction announcement and retainers), and Asset Management (e.g., management and incentive fees), including the potential requirement under the new guidance to recognize certain transaction completion fees in periods prior to the periods in which the applicable transactions close. The Company’s assessment included an analysis of whether the Company’s fulfillment of its performance obligations would be deemed to occur over time, or at specific points in time, under the new guidance. Specifically, recognition would be deemed to occur over time if the client receives and consumes benefits from the services as the Company performs the services. The Company concluded that Financial Advisory and Asset Management fees would typically be recognized over time as performance occurs, subject to constraints, using an appropriate measure of progress based on resources consumed, which is consistent with when the client receives benefits. There was no material impact to the Company’s recognition of revenue upon adoption of the new guidance.
The new guidance requires the Company to prospectively present certain contract costs on a gross basis. The most significant changes with respect to presentation relate to (a) certain distribution costs within our Asset Management business and (b) certain reimbursable deal costs within our Financial Advisory business, both of which were previously presented net against revenues and are now presented as expenses on a gross basis under the new guidance because the Company is primarily responsible for fulfilling the promise of the arrangement. For the three month and nine month periods ended September 30, 2018, the presentation of such costs on a gross basis resulted in an increase to net revenue of $24,392 and $72,001, respectively, primarily comprised of increases to asset management fees and investment banking and other advisory fees. In addition, there was a corresponding increase to operating expenses of $24,392 and $72,001, respectively, primarily comprised of an increase to distribution costs presented within fund administration and outsourced services and an increase to reimbursable deal costs presented within marketing and business
10
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
development. These amounts would have been presented on a net basis prior to the adoption of the new guidance, and there was no material impact to net income as a result of the gross basis of presentation under the new guidance.
See Note 3 for further information on contracts within the scope of the new guidance.
Classification of Certain Cash Receipts and Cash Payments—In August and November 2016, the FASB issued updated guidance which clarifies how a company should classify certain cash receipts and cash payments on the statement of cash flows and clarifies that restricted cash should be included in the total of cash and cash equivalents on the statement of cash flows. The new guidance for both updates is effective for annual and interim periods beginning after December 15, 2017 and is to be applied on a retrospective basis. The Company adopted this new guidance on January 1, 2018. The adoption of the new guidance in the first quarter of 2018 resulted in the reclassification of “cash deposited with clearing organizations and other segregated cash” and “deposits with banks and short-term investments” from operating activities to components of “cash and cash equivalents and restricted cash” on the condensed consolidated statement of cash flows. In addition, the Company reclassified cash flows related to customer deposits from operating activities to financing activities. This resulted in changes in deposits with banks and short-term investments and customer deposits no longer being reflected in cash flows from operating activities. Except for the reclassification of these items on the condensed consolidated statement of cash flows, the new guidance had no impact on the Company’s financial statements.
Clarifying the Definition of a Business—In January 2017, the FASB issued updated guidance to clarify the definition of a business within the context of business combinations. The updated guidance requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, such asset or group of assets is not a business. This updated guidance is expected to reduce the number of transactions that need to be further evaluated as business combinations. If further evaluation is necessary, the updated guidance will require that a business set include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. The updated guidance will remove the evaluation of whether a market participant could replace missing elements. The new guidance is effective for annual and interim periods beginning after December 15, 2017 and is to be applied on a prospective basis. The Company adopted the new guidance on January 1, 2018 and it will be applied to business combinations on a prospective basis.
Compensation—Retirement Benefits—Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost—In March 2016, the FASB issued updated guidance on the presentation of net benefit cost in the statement of operations and the components eligible for capitalization. The new guidance requires that only the service cost component of net periodic pension cost and net periodic postretirement benefit cost be presented with other employee compensation costs in operating expenses, applied on a retrospective basis. The other components of net benefit cost, including amortization of prior service cost, and gains and losses from settlements and curtailments, are included in other operating expenses. The new guidance also stipulates that only the service cost component of net benefit cost is eligible for capitalization, applied on a prospective basis. This new guidance is effective for annual and interim periods beginning after December 15, 2017. The Company adopted the new guidance on January 1, 2018 and there was no material impact to the Company’s financial statements.
Compensation—Stock Compensation: Scope of Modification Accounting—In May 2017, the FASB issued updated guidance on modifications to share-based payment awards. The updated guidance requires entities to account for the effects of a modification to a share-based payment award unless the following are all the same immediately before and after the modification: (i) the fair value of the award, (ii) the vesting conditions of the award, and (iii) the classification of the award as an equity instrument or a liability instrument. This new guidance is effective for annual and interim periods beginning after December 15, 2017 and is to be applied on a prospective basis. The Company adopted the new guidance on January 1, 2018, and there was no material impact to the Company’s financial statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income—In February 2018, the FASB issued updated guidance on the tax effects of items in “accumulated other comprehensive income (loss), net of tax” (“AOCI”). Specifically, the new guidance will permit, but not require, a reclassification from AOCI to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate under the Tax Cuts and Jobs Act of 2017 (see Note 15). The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with an option to apply it in the period of adoption or on a retrospective basis for each period in which the effect of the change in the U.S. federal corporate income tax rate is recognized. Early adoption of the new guidance is permitted for public business entities for reporting periods for which financial statements have not yet been issued. The Company is currently evaluating the new guidance.
11
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
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. Currently, the Company plans to adopt the new guidance as of the effective date, January 1, 2019, and is considering the practical expedients available. The new guidance is to be applied on a modified retrospective basis.
The Company continues to evaluate the new guidance, and is in the process of evaluating its leasing activities and contracts, as well as processes and internal controls over financial reporting relating to its leasing activities. See Note 11 for further information on the Company's commitments under lease agreements. The population of contracts potentially subject to recognition in the statement of financial condition and their initial measurement remains under evaluation.
Improvements to Nonemployee Share-Based Payment Accounting—In June 2018, the FASB issued updated guidance to simplify the accounting for nonemployee share-based payment transactions. The new guidance generally requires equity-classified nonemployee share-based payment awards to be measured at the grant date, which is the date at which a grantor and grantee reach a mutual understanding of the key terms and conditions of a share-based payment award. This update generally aligns the accounting for equity-classified share-based payment awards to nonemployees with the measurement date required for employees. The new guidance is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. Upon adoption, the new guidance would be applied on a modified retrospective basis. The Company is currently evaluating the new guidance.
Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments—In June 2016, the FASB issued new guidance regarding the measurement of credit losses on financial instruments. The new guidance replaces the incurred loss impairment methodology in the current guidance with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to determine credit loss estimates. The new guidance is effective for annual and interim periods beginning after December 15, 2019 with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the new guidance.
Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment—In January 2017, the FASB issued updated guidance which eliminated Step 2 from the goodwill impairment test. Step 2 is the process of measuring a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The new guidance requires entities to measure a goodwill impairment loss as the amount by which a reporting unit’s carrying value exceeds its fair value, limited to the carrying amount of goodwill. The FASB also eliminated the requirements for entities that have reporting units with zero or negative carrying amounts to perform a qualitative assessment for the goodwill impairment test. Instead, those entities would be required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount. The new guidance is effective for interim or annual goodwill impairment tests performed in fiscal years beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the new guidance.
Intangibles—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract—In August 2018, the FASB issued updated guidance on the accounting for implementation costs incurred in a cloud computing arrangement. The new guidance requires the capitalization of the implementation costs incurred in a cloud computing arrangement to be aligned with the requirements for capitalizing costs incurred to develop or obtain internal-use software. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. Upon adoption, the Company may elect to apply the new guidance on either a prospective or retrospective basis. The Company is currently evaluating the new guidance.
Fair Value Measurement: Changes to the Disclosure Requirements for Fair Value Measurement—In August 2018, the FASB issued updated guidance which modifies the disclosure requirements on fair value measurement. The updated guidance eliminates or modifies various required disclosures under the current guidance and includes additional requirements. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating the new guidance.
12
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Compensation–Retirement Benefits: Changes to the Disclosure Requirements for Defined Benefit Plans—In August 2018, the FASB issued updated guidance which modifies the disclosure requirements regarding defined benefit plans and other postretirement plans. The updated guidance eliminates or clarifies certain currently required disclosures and includes additional requirements. The new guidance is effective for annual and interim reporting periods beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the new guidance.
3. |
REVENUE RECOGNITION |
Investment Banking and Other Advisory Fees—Fees for Financial Advisory services are recorded when: (i) a contract with a client has been identified, (ii) the performance obligations in the contract have been identified, (iii) the fee or other transaction price has been determined, (iv) the fee or other transaction price has been allocated to each performance obligation in the contract, and (v) the Company has satisfied the applicable performance obligation. The expenses that are directly related to such transactions are recorded as incurred and presented within operating expenses when the Company is primarily responsible for fulfilling the promise of the arrangement. Revenues associated with the reimbursement of such expenses are recorded when the Company is contractually entitled to reimbursement and presented within investment banking and other advisory fees.
Asset Management Fees—Fees for Asset Management services are primarily comprised of management fees and incentive fees. Management fees are derived from fees for investment management and other services provided to clients. Revenue is recorded in accordance with the same five criteria as Financial Advisory fees, which generally results in management fees being recorded on a daily, monthly or quarterly basis, primarily based on a percentage of client assets managed. Fees vary with the type of assets managed, with higher fees earned on equity assets, alternative investment (such as hedge fund) and private equity funds, and lower fees earned on fixed income and money market products. Expenses that are directly related to the sale or distribution of fund interests are recorded as incurred and presented within operating expenses when the Company is primarily responsible for fulfilling the promise of the arrangement. Revenues associated with the reimbursement of such expenses are recorded when the Company is contractually entitled to reimbursement and presented within asset management fees.
In addition, 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 specific 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 when a significant reversal in the amount of the cumulative revenue to be recognized is not probable, which is typically at the end of the relevant performance measurement period. The incentive fee measurement period is generally an annual period (unless an account is terminated 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 generally are subject to loss carryforward provisions in which losses incurred by the hedge funds in any year are applied against certain gains realized by the hedge funds in future periods before any incentive fees can be earned.
For private equity funds, incentive fees may be earned in the form of a “carried interest” if profits arising from realized investments exceed a specified threshold. Typically, such carried interest is ultimately calculated on a whole-fund basis and, therefore, clawback of carried interests during the life of the fund can occur. As a result, the Company records incentive fees earned on our private equity funds when a significant reversal in the amount of the cumulative revenue to be recognized is not probable, which is typically at the end of the relevant performance period.
Receivables relating to asset management and incentive fees are reported in “fees receivable” on the consolidated statements of financial condition.
13
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
The Company disaggregates revenue based on its business segment results and believes that the following information provides a reasonable representation of how performance obligations relate to the nature, amount, timing and uncertainty of revenue and cash flows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
|
|
September 30, 2018 (d) |
|
|
September 30, 2018 (d) |
|
||
Net Revenue: |
|
|
|
|
|
|
|
|
Financial Advisory (a) |
|
$ |
309,846 |
|
|
$ |
1,137,781 |
|
|
|
|
|
|
|
|
|
|
Asset Management: |
|
|
|
|
|
|
|
|
Management Fees and Other (b) |
|
$ |
323,283 |
|
|
$ |
1,012,127 |
|
Incentive Fees (c) |
|
|
1,957 |
|
|
|
19,984 |
|
Total Asset Management |
|
$ |
325,240 |
|
|
$ |
1,032,111 |
|
(a) |
Financial Advisory is comprised of M&A Advisory, Capital Advisory, Capital Raising, Restructuring, Shareholder Advisory, Sovereign Advisory, and other strategic advisory work for clients. The benefits of these advisory services are generally transferred to the Company’s clients over time, and consideration for these advisory services typically includes transaction completion, transaction announcement and retainer fees. Retainer fees are generally fixed and recognized over the period in which the advisory services are performed. However, transaction announcement and transaction completion fees are variable and subject to constraints, and they are typically not recognized until there is an announcement date or a completion date, respectively, due to the uncertainty associated with those events. The advisory fees that may be unrecognized as of the end of a reporting period, primarily comprised of fees associated with transaction announcements and transaction completions, generally remain unrecognized due to the uncertainty associated with those events. |
(b) |
Management fees and other is primarily comprised of management services. The benefits of these management services are transferred to the Company’s clients over time. Consideration for these management services generally includes management fees, which are based on assets under management and recognized over the period in which the management services are performed. The selling or distribution of fund interests is a separate performance obligation within management fees and other, and the benefits of such services are transferred to the Company’s clients at the point in time that such fund interests are sold or distributed. |
(c) |
Incentive fees is primarily comprised of management services. The benefits of these management services are transferred to the Company’s clients over time. Consideration for these management services is generally variable and includes performance or incentive fees. The fees allocated to these management services that are unrecognized as of the end of the reporting period are generally amounts that are subject to constraints due to the uncertainty associated with performance targets and clawbacks. |
(d) |
In addition to the above, contracts with clients include trade-based commission income, which is recognized at the point in time of execution and presented within other revenue. Such income may be earned by providing trade facilitation, execution, clearance and settlement, custody, and trade administration services to clients. |
With regard to the disclosure requirement for remaining performance obligations, the Company elected the practical expedients permitted in the guidance to (i) exclude contracts with a duration of one year or less; and (ii) exclude variable consideration, such as transaction completion and transaction announcement fees, that is allocated entirely to unsatisfied performance obligations. Excluded variable consideration typically relates to contracts with a duration of one year or less, and is generally constrained due to uncertainties. Therefore, when applying the practical expedients, amounts related to remaining performance obligations are not material to the Company’s financial statements.
4. |
RECEIVABLES |
The Company’s receivables represent fee receivables, amounts due from customers and other receivables, and amounts due from Lazard Ltd subsidiaries.
14
LAZARD GROUP LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(UNAUDITED)
(dollars in thousands, unless otherwise noted)
Receivables are stated net of an estimated allowance for doubtful accounts, for past due amounts and for specific accounts deemed uncollectible, which may include situations where a fee is in dispute.
Activity in the allowance for doubtful accounts for the three month and nine month periods ended September 30, 2018 and 2017 was as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
September 30, |
|
|
September 30, |
|
||||||||||
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Beginning Balance |
|
$ |
34,906 |
|
|
$ |
25,094 |
|
|
$ |
23,692 |
|
|
$ |
16,386 |
|
Bad debt expense, net of recoveries |
|
|
1,488 |
|
|
|
4,753 |
|
|
|
18,106 |
|
|
|
18,584 |
|
Charge-offs, foreign currency translation and other adjustments |
|
|