Lazard(LAZ) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Lazard Ltd's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents Lazard Ltd's unaudited condensed consolidated financial statements, including statements of financial condition, operations, comprehensive income, cash flows, and changes in stockholders' equity, along with detailed notes. Key financial highlights include a decrease in total assets and liabilities, an increase in stockholders' equity, and a slight increase in net income attributable to Lazard Ltd for the nine months ended September 30, 2020 Condensed Consolidated Statements of Financial Condition This statement provides a snapshot of Lazard Ltd's financial position, detailing assets, liabilities, and stockholders' equity at specific dates | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :----- | :-------------------------- | :-------------------------- | | Total Assets | $5,466,997 | $5,639,581 | | Total Liabilities | $4,688,299 | $4,958,007 | | Total Stockholders' Equity | $778,698 | $681,574 | - Total assets decreased by $172.58 million, and total liabilities decreased by $269.71 million from December 31, 2019, to September 30, 2020[11][13] - Total stockholders' equity increased by $97.12 million from December 31, 2019, to September 30, 2020[13] Condensed Consolidated Statements of Operations This statement outlines Lazard Ltd's revenues, expenses, and net income over specific reporting periods | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Total Revenue | $598,022 | $611,073 | $1,748,443 | $1,923,552 | | Net Revenue | $577,678 | $591,068 | $1,687,984 | $1,865,432 | | Total Operating Expenses | $472,998 | $538,695 | $1,403,342 | $1,591,711 | | Operating Income | $104,680 | $52,373 | $284,642 | $273,721 | | Net Income Attributable to Lazard Ltd | $75,092 | $46,704 | $212,572 | $209,523 | | Basic EPS | $0.69 | $0.42 | $1.96 | $1.87 | | Diluted EPS | $0.66 | $0.40 | $1.88 | $1.77 | - For the nine months ended September 30, 2020, total revenue decreased by 9.1% YoY, while net income attributable to Lazard Ltd increased by 1.5% YoY[16] - Operating income for the three months ended September 30, 2020, increased by 100% YoY to $104.68 million[16] Condensed Consolidated Statements of Comprehensive Income This statement presents Lazard Ltd's net income and other comprehensive income components, reflecting total changes in equity from non-owner sources | Metric | 3 Months Ended Sep 30, 2020 (in thousands) | 3 Months Ended Sep 30, 2019 (in thousands) | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net Income | $76,515 | $48,196 | $207,922 | $218,185 | | Other Comprehensive Income (Loss), Net of Tax | $29,137 | $(16,636) | $13,864 | $(14,803) | | Comprehensive Income Attributable to Lazard Ltd | $104,228 | $30,067 | $226,435 | $194,720 | - Comprehensive income attributable to Lazard Ltd increased significantly by 246.6% for the three months ended September 30, 2020, and by 16.3% for the nine months ended September 30, 2020, primarily due to positive currency translation adjustments[19] Condensed Consolidated Statements of Cash Flows This statement details Lazard Ltd's cash inflows and outflows from operating, investing, and financing activities over specific periods | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by operating activities | $255,406 | $318,409 | | Net cash used in investing activities | $(34,059) | $(40,571) | | Net cash used in financing activities | $(384,418) | $(188,667) | | Net decrease in cash and cash equivalents and restricted cash | $(110,837) | $(3,316) | - Net cash provided by operating activities decreased by 19.8% for the nine months ended September 30, 2020, compared to the prior year[23] - Net cash used in financing activities more than doubled, increasing by 103.7% for the nine months ended September 30, 2020, primarily due to changes in share repurchases and dividend payments[23] Condensed Consolidated Statements of Changes in Stockholders' Equity This statement tracks changes in Lazard Ltd's stockholders' equity, including net income, dividends, and share-based compensation | Metric | Jan 1, 2020 (in thousands) | Sep 30, 2020 (in thousands) | | :----- | :------------------------- | :------------------------- | | Total Lazard Ltd Stockholders' Equity | $609,991 | $693,813 | | Net income (9 months) | N/A | $212,572 | | Other comprehensive income (9 months) | N/A | $13,863 | | Amortization of share-based incentive compensation (9 months) | N/A | $177,428 | | Purchase of Class A common stock (9 months) | N/A | $(95,227) | | Class A common stock dividends (9 months) | N/A | $(147,233) | - Total Lazard Ltd Stockholders' Equity increased by $83.82 million from January 1, 2020, to September 30, 2020[38] - The increase was primarily driven by net income and amortization of share-based incentive compensation, partially offset by common stock dividends and purchases of Class A common stock[38] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. ORGANIZATION AND BASIS OF PRESENTATION This note describes Lazard Ltd's business structure, segments, and the foundational principles used in preparing its financial statements - Lazard Ltd operates as a global financial advisory and asset management firm through its two primary business segments: Financial Advisory and Asset Management[42][48] - The Corporate segment manages cash, investments, deferred tax assets, and outstanding indebtedness[44] - Lazard Ltd indirectly held 100% of Lazard Group common membership interests as of September 30, 2020[43] 2. RECENT ACCOUNTING DEVELOPMENTS This note outlines the adoption of new accounting guidance and their impact on Lazard Ltd's financial statements - Lazard adopted new CECL guidance on January 1, 2020, resulting in a $7.58 million cumulative-effect adjustment to retained earnings, primarily impacting fee receivables[54] - New guidance for goodwill impairment test and cloud computing implementation costs were adopted on January 1, 2020, applied prospectively[57][58] - Related party guidance for VIEs and fair value measurement disclosure changes were adopted on January 1, 2020, with no material impact to the financial statements[61][62] 3. REVENUE RECOGNITION This note details Lazard Ltd's policies for recognizing revenue from financial advisory and asset management services - Financial Advisory fees are recognized upon transaction completion, announcement, or as retainer fees over the service period[65][74] - Asset Management fees are primarily management fees based on assets under management (AUM), recognized daily, monthly, or quarterly[66][74] - Incentive fees for hedge funds and private equity funds are recognized when a significant reversal is not probable, typically at the end of the performance measurement period, and are subject to loss carryforward or clawback provisions[68][71][72] | Segment | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :------ | :--------------------------------------- | :--------------------------------------- | | Financial Advisory | $909,245 | $973,964 | | Asset Management (Management Fees and Other) | $809,071 | $910,321 | | Asset Management (Incentive Fees) | $5,542 | $7,118 | 4. RECEIVABLES This note explains Lazard Ltd's policies for managing and accounting for receivables, including the allowance for doubtful accounts - Receivables are stated net of an estimated allowance for doubtful accounts, determined in accordance with the CECL model, based on historical charge-off experience and adjusted for specific customer conditions[79][80] - Financial Advisory fee receivables are generally deemed past due after 60 days, with specific contractual terms for Restructuring and Private Capital Advisory services[81] | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | | Beginning Balance | $27,130 | $40,164 | | Adjustment for adoption of new accounting guidance | $7,575 | - | | Bad debt expense, net of reversals | $5,108 | $(6,097) | | Ending Balance | $38,250 | $31,288 | 5. INVESTMENTS This note provides details on Lazard Ltd's investment portfolio, including categories, fair values, and unrealized gains or losses | Category | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :------- | :-------------------------- | :-------------------------- | | Equities | $38,103 | $48,521 | | Alternative investments | $33,105 | $16,581 | | Debt funds | $133,702 | $113,579 | | Equity funds | $294,956 | $218,435 | | Private equity | $35,379 | $34,362 | | Total investments | $535,245 | $531,995 | - Total investments were $535.25 million at September 30, 2020, a slight increase from $531.99 million at December 31, 2019[88] - Net unrealized investment gains for the nine months ended September 30, 2020, were $16.90 million, compared to $26.56 million in 2019[97] 6. FAIR VALUE MEASUREMENTS This note describes Lazard Ltd's methodology for fair value measurements and the categorization of assets and liabilities within the fair value hierarchy - Lazard categorizes investments and certain assets/liabilities into a three-level fair value hierarchy based on observability of inputs[98] | Level | Assets (Sep 30, 2020, in thousands) | Liabilities (Sep 30, 2020, in thousands) | | :---- | :---------------------------------- | :--------------------------------------- | | Level 1 | $481,421 | $1,005 | | Level 2 | $1,925 | $285,946 | | Level 3 | $2,776 | - | | NAV | $51,048 | - | | Total | $537,170 | $286,951 | - Investments valued at Net Asset Value (NAV) as a practical expedient totaled $51.05 million at September 30, 2020[109][110] 7. DERIVATIVES This note details Lazard Ltd's use of derivative instruments for hedging purposes and their impact on financial performance - Lazard uses derivatives (forward foreign currency exchange rate contracts, interest rate swaps, total return swaps) to hedge exposures to currency exchange rates, interest rates, and equity/debt prices[125] - Derivative liabilities relating to Lazard Fund Interests (LFI) and other deferred compensation arrangements totaled $285.58 million at September 30, 2020[130] | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | | Forward foreign currency exchange rate contracts | $(4,816) | $5,065 | | LFI and other similar deferred compensation arrangements | $(15,427) | $(22,118) | | Total return swaps and other | $1,835 | $(8,309) | | Total Net Gains (Losses) | $(18,408) | $(25,362) | 8. PROPERTY This note provides information on Lazard Ltd's property, plant, and equipment, including changes in net book value | Category | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :------- | :-------------------------- | :-------------------------- | | Buildings | $148,303 | $142,298 | | Leasehold improvements | $227,937 | $197,358 | | Furniture and equipment | $231,884 | $215,254 | | Construction in progress | $23,693 | $32,477 | | Total Property (net) | $233,481 | $219,842 | - Property, net of accumulated depreciation and amortization, increased by $13.64 million from December 31, 2019, to September 30, 2020[132] 9. GOODWILL AND OTHER INTANGIBLE ASSETS This note details Lazard Ltd's goodwill and other intangible assets, including their carrying amounts and changes during the period - Goodwill totaled $373.20 million at September 30, 2020, with $308.65 million attributable to the Financial Advisory segment[135] - Goodwill increased by $1.42 million for the nine months ended September 30, 2020, primarily due to foreign currency translation adjustments[136] - Other intangible assets, net of accumulated amortization, were $0.65 million at September 30, 2020[137] 10. SENIOR DEBT This note provides details on Lazard Group's senior debt obligations, including maturity dates, principal amounts, and carrying values | Note | Maturity Date | Principal (Sep 30, 2020, in thousands) | Carrying Value (Sep 30, 2020, in thousands) | | :--- | :------------ | :------------------------------------- | :------------------------------------------ | | 2025 Senior Notes | 2/13/25 | $400,000 | $397,938 | | 2027 Senior Notes | 3/1/27 | $300,000 | $297,474 | | 2028 Senior Notes | 9/19/28 | $500,000 | $492,858 | | 2029 Senior Notes | 3/11/29 | $500,000 | $493,217 | | Total | | $1,700,000 | $1,681,487 | - Lazard Group's senior debt totaled $1.68 billion at September 30, 2020[139] - The company has a $200.00 million senior revolving credit facility expiring in July 2023, with no outstanding amounts as of September 30, 2020[140] - Lazard was in compliance with all senior debt covenants as of September 30, 2020[142] 11. COMMITMENTS AND CONTINGENCIES This note outlines Lazard Ltd's various contractual commitments and potential liabilities from legal and regulatory proceedings - Lazard has various contractual commitments, including investment capital funding commitments and obligations to fund pension plans[145][146] - The company is involved in judicial, regulatory, and arbitration proceedings, but management believes the aggregate outcome will not have a material adverse effect on its business or financial condition[147] 12. STOCKHOLDERS' EQUITY This note details the components of Lazard Ltd's stockholders' equity, including share repurchase programs and accumulated other comprehensive income - A total of $305.60 million of share repurchase authorization remained available under the company's program as of September 30, 2020[151] | Year | Shares Purchased (9 Months Ended Sep 30) | Average Price Per Share | | :--- | :--------------------------------------- | :---------------------- | | 2019 | 11,946,943 | $36.01 | | 2020 | 2,912,035 | $32.70 | - Accumulated Other Comprehensive Loss (AOCI) improved from $(293.65) million at January 1, 2020, to $(279.79) million at September 30, 2020, primarily due to positive currency translation adjustments[153] 13. INCENTIVE PLANS This note describes Lazard Ltd's various share-based incentive compensation plans and the associated expenses | Award Type | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :--------- | :--------------------------------------- | :--------------------------------------- | | RSUs | $112,435 | $140,597 | | PRSUs | $5,627 | $16,540 | | Restricted Stock | $22,969 | $24,871 | | Profits interest participation rights | $37,172 | $42,105 | | DSUs | $2,173 | $2,159 | | Total | $180,376 | $226,272 | - Total share-based incentive compensation expense for the nine months ended September 30, 2020, was $180.38 million[166] - The Minimum Value Condition for February 2019 profits interest participation rights was met during the nine months ended September 30, 2020[186] 14. EMPLOYEE BENEFIT PLANS This note provides information on Lazard Ltd's pension plans, including net periodic benefit costs and their drivers - Net periodic benefit cost for pension plans was a credit of $(2.24) million for the nine months ended September 30, 2020, a significant improvement from a cost of $1.16 million in 2019[203] - The improvement was primarily due to a higher expected return on plan assets[203] 15. BUSINESS REALIGNMENT This note details the business realignment initiatives undertaken by Lazard Ltd, including associated costs and remaining obligations - Lazard completed a business realignment in the third quarter of 2019, involving employee reductions and the closing of subscale offices and investment strategies[204] - Remaining accrued obligations related to the business realignment were $1.91 million at September 30, 2020, down from $25.28 million at January 1, 2020[204] 16. INCOME TAXES This note explains Lazard Ltd's income tax provision, effective tax rate, and factors influencing tax expense - The effective tax rate for the nine months ended September 30, 2020, was 27.0%, an increase from 20.3% in the prior year[206] - The increase in the effective tax rate primarily relates to a reduction in discrete benefits and changes in the geographic mix of earnings[206] 17. NET INCOME PER SHARE OF COMMON STOCK This note outlines the calculation of Lazard Ltd's basic and diluted net income per share of common stock - Diluted net income per share was $1.88 for the nine months ended September 30, 2020, up from $1.77 in 2019[211] - Basic net income per share was $1.96 for the nine months ended September 30, 2020, up from $1.87 in 2019[211] - The company utilizes the 'two-class' method for computing basic and diluted net income per share due to certain profits interest participation rights[210] 18. RELATED PARTIES This note discloses transactions and balances with related parties, including investment advisory fees and the Tax Receivable Agreement - Investment advisory fees from sponsored funds were $386.41 million for the nine months ended September 30, 2020[214] - The Tax Receivable Agreement (TRA) liability was $221.89 million at September 30, 2020, reflecting a payment of $25.45 million during the nine-month period[218] - The TRA provides for payments to LTBP Trust based on cash savings in U.S. federal, state, and local income tax from certain tax basis increases and benefits[215] 19. REGULATORY AUTHORITIES This note provides information on Lazard Ltd's compliance with regulatory capital requirements for its subsidiaries - LFNY's regulatory net capital was $170.63 million, exceeding the minimum requirement by $167.00 million at September 30, 2020[223] - The aggregate regulatory net capital of the U.K. Subsidiaries was $163.19 million, exceeding the minimum by $140.74 million[224] - All of Lazard's subsidiaries with regulatory capital requirements were in compliance as of September 30, 2020[227] 20. SEGMENT INFORMATION This note presents financial data for Lazard Ltd's operating segments: Financial Advisory, Asset Management, and Corporate | Segment | Net Revenue (9 Months Ended Sep 30, 2020, in thousands) | Operating Income (9 Months Ended Sep 30, 2020, in thousands) | | :------ | :---------------------------------------------------- | :--------------------------------------------------------- | | Financial Advisory | $909,245 | $145,233 | | Asset Management | $814,613 | $214,601 | | Corporate | $(35,874) | $(75,192) | | Total | $1,687,984 | $284,642 | - Financial Advisory operating income increased by 32% for the nine months ended September 30, 2020, compared to 2019[233] - Asset Management operating income decreased by 19% for the nine months ended September 30, 2020, compared to 2019[233] 21. CONSOLIDATED VIEs This note explains Lazard Ltd's consolidated Variable Interest Entities, primarily funds established for employee deferred compensation - Lazard's consolidated Variable Interest Entities (VIEs) primarily include funds established for employees participating in LFI deferred compensation[236] - Total assets of consolidated VIEs were $159.76 million at September 30, 2020, with investments (including LFI) being the largest component[236] 22. COVID-19 This note discusses the impact of the COVID-19 pandemic on Lazard Ltd's operations and financial performance - The COVID-19 pandemic has negatively impacted the global economy, leading Lazard to implement remote work and restrict travel[237] - These arrangements have not materially affected Lazard's ability to maintain and conduct business operations, including financial reporting systems[237] - The nature and extent of COVID-19's future effect on Lazard's operational and financial performance remains uncertain and difficult to predict[237] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Lazard's financial condition and results of operations, highlighting the impact of the COVID-19 pandemic, business segment performance, and key financial metrics. It also details the company's liquidity, capital resources, and critical accounting policies, emphasizing the cyclical nature of its businesses and the importance of independent advice Forward-Looking Statements and Certain Factors that May Affect Our Business This section outlines forward-looking statements and key risk factors that could materially impact Lazard Ltd's future business and financial results - The report contains forward-looking statements regarding future financial performance, growth strategies, and business plans, which are subject to known and unknown risks[240] - Important factors that could cause actual results to differ materially include declines in economic conditions, revenues, third-party financial problems, liquidity issues, and competitive pressures[240][243] - The company does not guarantee future results and is under no duty to update forward-looking statements[242] Business Summary This section provides an overview of Lazard Ltd's global financial advisory and asset management services and its independent advisory model - Lazard is a global financial advisory and asset management firm, operating from more than 40 cities and 25 countries[246] - The firm specializes in crafting solutions to complex financial and strategic challenges for a diverse set of clients, including corporations, governments, and institutions[246] - Lazard's business model as an independent advisor, leveraging its global network and reputation, is expected to continue creating opportunities[247][248] Business Environment and Outlook This section discusses the current macroeconomic environment, including the impact of COVID-19, and Lazard Ltd's outlook for its business segments - The COVID-19 pandemic continues to negatively impact global economic activity, leading to an uncertain macroeconomic outlook despite extraordinary government and central bank measures[252] - Lazard expects a challenging near-term business environment due to elevated uncertainty and capital markets volatility, although global M&A market strengthened in Q3 2020[253] - The Financial Advisory business is seeing increased activity in restructuring, capital advisory, and sovereign advisory practices, while Asset Management is focused on incorporating ESG considerations and developing new investment strategies[254][255] Financial Statement Overview This section provides an overview of Lazard Ltd's key financial statement components, including revenue drivers and expense management - Financial Advisory net revenue is primarily earned from successful completion of M&A, capital advisory, restructuring, and capital raising transactions, which can fluctuate significantly[266] - Asset Management net revenue is driven by the level and product mix of Assets Under Management (AUM), influenced by global equity markets, fixed income markets, and Lazard's investment performance[267] - Compensation and benefits expense is the largest component of operating expenses, with a goal to maintain a ratio of awarded compensation and benefits expense to operating revenue in the mid- to high-50s percentage range[273][277] Consolidated Results of Operations This section presents Lazard Ltd's consolidated financial performance, including net revenue, operating income, and net income, with non-GAAP adjustments - Lazard's condensed consolidated financial statements are presented in U.S. Dollars, with non-U.S. subsidiaries' results translated at average exchange rates[284] - The company uses non-GAAP measures such as 'operating revenue,' 'adjusted compensation and benefits expense,' and 'adjusted non-compensation expense' for internal management and external comparability[286] | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | | Net Revenue | $1,687,984 | $1,865,432 | | Operating Income | $284,642 | $273,721 | | Net Income Attributable to Lazard Ltd | $212,572 | $209,523 | | Operating Income, as a % of net revenue | 16.9% | 14.7% | | Adjusted compensation and benefits expense, as a % of operating revenue | 60.0% | 57.5% | | Adjusted non-compensation expense, as a % of operating revenue | 18.8% | 20.1% | | Earnings from operations, as a % of operating revenue | 21.2% | 22.4% | Operating Results (Three Months Ended September 30, 2020 versus September 30, 2019) This section analyzes Lazard Ltd's operating performance for the three months ended September 30, 2020, compared to the prior year - Net income attributable to Lazard Ltd increased to $75 million from $47 million, a 60% increase YoY[297] - Net revenue decreased by 2%, while operating income increased by 100% to $104.68 million[298][303] - Adjusted compensation and benefits expense increased 1% to $341 million (60.0% of operating revenue), and adjusted non-compensation expense decreased 18% (18.1% of operating revenue)[300][301] - The effective tax rate increased significantly to 26.9% from 8.0%, primarily due to a reduction in discrete benefits and changes in the geographic mix of earnings[304] Operating Results (Nine Months Ended September 30, 2020 versus September 30, 2019) This section analyzes Lazard Ltd's operating performance for the nine months ended September 30, 2020, compared to the prior year - Net income attributable to Lazard Ltd increased to $213 million from $210 million, a 1.4% increase YoY[306] - Net revenue decreased by 10%, while operating income increased by 4% to $284.64 million[307][312] - Adjusted compensation and benefits expense decreased 5% to $1.01 billion (60.0% of operating revenue), and adjusted non-compensation expense decreased 15% (18.8% of operating revenue)[309][310] - The effective tax rate increased to 27.0% from 20.3%, primarily due to a reduction in discrete benefits[313] Business Segments This section provides a detailed analysis of the financial performance of Lazard Ltd's Financial Advisory, Asset Management, and Corporate segments Financial Advisory This section details the financial performance of Lazard Ltd's Financial Advisory segment, including revenue drivers and operating income | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | | Net Revenue | $909,245 | $973,964 | | Operating Expenses | $764,012 | $863,646 | | Operating Income | $145,233 | $110,318 | | Operating Income, as a % of net revenue | 16.0% | 11.3% | - Financial Advisory net revenue decreased by 7% for the nine months ended September 30, 2020, primarily due to a decrease in M&A fees, partially offset by higher Restructuring fees[323] - Operating income increased by 32% to $145.23 million, and the operating income margin improved to 16.0% from 11.3% for the nine months ended September 30, 2020[325] Asset Management This section details the financial performance of Lazard Ltd's Asset Management segment, including Assets Under Management and revenue trends | Metric | Sep 30, 2020 (in millions) | Dec 31, 2019 (in millions) | | :----- | :------------------------- | :------------------------- | | Total AUM | $227,752 | $248,239 | - Total AUM decreased by 8% to $228 billion at September 30, 2020, from $248 billion at December 31, 2019, due to net outflows, market depreciation, and foreign exchange depreciation[327] - Net revenue decreased by 11% to $814.61 million for the nine months ended September 30, 2020, primarily due to a decrease in average AUM and changes in asset mix[340] - Operating income decreased by 19% to $214.60 million, with an operating income margin of 26.3% for the nine months ended September 30, 2020[342] Corporate This section details the financial performance of Lazard Ltd's Corporate segment, including net interest expense and operating loss | Metric | 9 Months Ended Sep 30, 2020 (in thousands) | 9 Months Ended Sep 30, 2019 (in thousands) | | :----- | :--------------------------------------- | :--------------------------------------- | | Net Interest (Expense) | $(54,210) | $(45,469) | | Other Revenue (Expense) | $18,336 | $19,498 | | Net Revenue (Expense) | $(35,874) | $(25,971) | | Operating Expenses | $39,318 | $75,877 | | Operating Income (Loss) | $(75,192) | $(101,848) | - The Corporate segment reported a net revenue expense of $(35.87) million and an operating loss of $(75.19) million for the nine months ended September 30, 2020[343] - Net interest expense increased by 19% YoY, while operating expenses decreased by $37 million, primarily due to lower compensation and benefits[348][349] Cash Flows This section analyzes Lazard Ltd's cash flow activities from operations, investing, and financing for the reporting period | Metric | 9 Months Ended Sep 30, 2020 (in millions) | 9 Months Ended Sep 30, 2019 (in millions) | | :----- | :-------------------------------------- | :-------------------------------------- | | Net cash provided by operating activities | $255 | $319 | | Net cash used in investing activities | $(34) | $(41) | | Net cash used in financing activities | $(384) | $(189) | | Net Decrease in Cash and Cash Equivalents and Restricted Cash | $(111) | $(3) | - Net cash provided by operating activities decreased to $255 million for the nine months ended September 30, 2020, from $319 million in 2019[353] - Net cash used in financing activities significantly increased to $384 million from $189 million, primarily due to changes in share repurchases, dividends, and customer deposits[353] Liquidity and Capital Resources This section discusses Lazard Ltd's liquidity position, capital resources, and compliance with debt covenants - Lazard's liquidity is influenced by operating activities, financing activities, and equity offerings, with a seasonal pattern due to incentive compensation payments[355][357] - As of September 30, 2020, Lazard had approximately $1.11 billion in cash and cash equivalents and $219 million in unused lines of credit, including a $200 million senior revolving credit facility[360][362] - Lazard Group was in compliance with its Consolidated Leverage Ratio (1.94 to 1.00) and Consolidated Interest Coverage Ratio (11.61 to 1.00) as of September 30, 2020[364] Stockholders' Equity This section details changes in Lazard Ltd's stockholders' equity, including share repurchases and dividend payments - Total stockholders' equity increased to $779 million at September 30, 2020, from $682 million at December 31, 2019[371] - The increase was driven by net income and amortization of share-based incentive compensation, partially offset by common stock dividends and share repurchases[371] - The company repurchased 2,912,035 shares for $95 million during the nine months ended September 30, 2020, with $306 million of share repurchase authorization remaining[372] Regulatory Capital This section describes Lazard Ltd's approach to managing regulatory capital and ensuring subsidiary compliance - Lazard actively monitors its regulatory capital base to ensure principal subsidiaries comply with minimum capital requirements in their respective jurisdictions[376] - The company's capital structure is designed to provide each subsidiary with capital and liquidity consistent with its business and regulatory requirements[376] - All subsidiaries were in compliance with their regulatory capital requirements as of September 30, 2020[376] Contractual Obligations This section outlines Lazard Ltd's significant contractual obligations, including senior debt, operating leases, and investment commitments | Obligation | Total (in thousands) | Less than 1 Year (in thousands) | 1-3 Years (in thousands) | 3-5 Years (in thousands) | More than 5 Years (in thousands) | | :--------- | :------------------- | :------------------------------ | :----------------------- | :----------------------- | :------------------------------- | | Senior debt (including interest) | $2,203,417 | $70,250 | $140,500 | $532,292 | $1,460,375 | | Operating leases | $744,451 | $22,452 | $158,818 | $129,630 | $433,551 | | Investment capital funding commitments | $5,935 | $5,935 | - | - | - | | Total | $2,953,803 | $98,637 | $299,318 | $661,922 | $1,893,926 | - Total contractual obligations amounted to $2.95 billion as of September 30, 2020, primarily consisting of senior debt and operating leases[377] - Investment capital funding commitments of $5.94 million are due within one year[377] Critical Accounting Policies and Estimates This section describes Lazard Ltd's key accounting policies and estimates that require significant management judgment Revenue Recognition This policy outlines the criteria and methods Lazard Ltd uses to recognize revenue from its various services - Revenue is recognized when a contract with a client is identified, performance obligations are met, and the transaction price is determined and allocated[382] - Incentive fees are recognized when a significant reversal in the amount of cumulative revenue is not probable[382] - An allowance for doubtful accounts is maintained using the CECL model, historical charge-off rates, and specific client creditworthiness assessments[382] Compensation Liabilities This policy describes how Lazard Ltd accounts for its significant annual discretionary compensation liabilities - Annual discretionary compensation, a significant portion of operating expenses, is allocated to interim periods based on an assumed annual ratio of awarded compensation and benefits expense to operating revenue[384] Income Taxes This policy details the judgments and estimates involved in determining Lazard Ltd's income tax provision and related balances - Significant judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, any valuation allowance, and unrecognized tax benefits[385] - A valuation allowance of $76 million was recorded against deferred tax assets at December 31, 2019, for entities where realization was not more likely than not[389] Amended and Restated Tax Receivable Agreement This policy explains the accounting for Lazard Ltd's Tax Receivable Agreement liability and its estimation methodology - The Tax Receivable Agreement (TRA) liability is an undiscounted amount based on currently enacted tax laws and assumptions about future operating profitability[394] - The TRA liability was $222 million at September 30, 2020, and $247 million at December 31, 2019[396] - Actual amounts and timing of payments under the TRA could differ materially from estimates due to changes in company structure or taxable income[395] Investments This policy describes Lazard Ltd's accounting for investments, including fair value measurement and recognition of gains or losses - Investments, primarily debt and equity securities and fund interests, are carried at fair value (except interest-bearing deposits) with increases or decreases reflected in earnings[398] - Fair value is generally based on market prices or Net Asset Value (NAV) for fund investments[398] | Metric | Sep 30, 2020 (in thousands) | Dec 31, 2019 (in thousands) | | :----- | :-------------------------- | :-------------------------- | | Total investments | $535,245 | $531,995 | | Seed investments | $123,042 | $113,308 | | LFI investments | $350,209 | $259,138 | Assets Under Management This policy outlines how Lazard Ltd values and reports its Assets Under Management, including pricing sources and due diligence - Assets Under Management (AUM) primarily consist of debt and equity instruments, with values provided by well-recognized, independent, third-party vendors[405][406] - The company performs regular due diligence procedures on its pricing service providers[407] Goodwill This policy describes Lazard Ltd's accounting for goodwill, including impairment testing procedures and frequency - Goodwill has an indefinite life and is tested for impairment annually (as of November 1) or more frequently if circumstances indicate impairment[408] - The company performs a qualitative evaluation to determine if the fair value of a reporting unit is less than its carrying amount[408] Consolidation This policy explains Lazard Ltd's criteria for consolidating entities, distinguishing between Voting Interest Entities and Variable Interest Entities - Lazard consolidates entities where it has a controlling interest, determined by evaluating whether the entity is a Voting Interest Entity (VOE) or a Variable Interest Entity (VIE)[409][415] - Seed and LFI investments in certain VOEs and VIEs often require consolidation, though their impact on consolidated financial statements is generally not material[411] Risk Management This section details Lazard Ltd's strategies and exposures related to various financial risks, including market, credit, and operational risks Investments This section discusses Lazard Ltd's exposure to equity market price risk and interest rate risk within its investment portfolio - Lazard's exposure to equity market price risk in its investment portfolio was approximately $105 million at September 30, 2020, with hedging activities in place[416] - A hypothetical 10% adverse change in equity market prices would result in a net decrease of approximately $0.3 million in carrying value as of September 30, 2020[416] - Exposure to interest rate and credit spread risk was $43 million, and a hypothetical 100 basis point adverse change would decrease carrying value by approximately $1.0 million[417] Risks Related to Receivables This section addresses Lazard Ltd's credit risk associated with receivables and lending activities, including collateralization - Total receivables amounted to $575 million, net of an allowance for doubtful accounts of $38 million, at September 30, 2020[420] - LFB's lending activities, including $84 million in loans at September 30, 2020, are fully collateralized and closely monitored for counterparty creditworthiness[421] Credit Concentrations This section describes Lazard Ltd's approach to monitoring and mitigating credit concentration risk with individual counterparties - The company monitors large exposures to individual counterparties to reduce credit concentration risk[422] Risks Related to Derivatives This section outlines Lazard Ltd's use of derivatives for hedging and the associated financial exposures and liabilities - Lazard uses derivatives to hedge exposures to currency exchange rates, interest rates, and market movements for certain seed investments[423] - Derivative assets were $2 million and derivative liabilities (excluding LFI) were $0.4 million at September 30, 2020[423] - Derivative liabilities relating to LFI awards amounted to $286 million at September 30, 2020, with changes in fair value equally offset by underlying investments[425] Risks Related to Cash and Cash Equivalents and Corporate Indebtedness This section discusses Lazard Ltd's management of cash and cash equivalents and the interest rate risk associated with its corporate indebtedness - Cash and cash equivalents totaled approximately $1.11 billion at September 30, 2020, primarily invested in highly liquid institutional money market funds and short-term bank accounts[427] - A hypothetical 1% increase or decrease in interest rates would impact annual operating income relating to cash and cash equivalents by approximately $11 million[426] Operational Risk This section describes Lazard Ltd's framework for managing operational risk through policies, internal controls, and business continuity programs - Operational risk is inherent in all businesses and is managed through a framework of policies, internal controls, and business continuity and disaster recovery programs[428] - The company purchases insurance policies to protect against accidental losses and those that may significantly affect financial objectives or operations[428] Recent Accounting Developments This section refers to detailed discussions of recently issued accounting developments and their financial statement impact - For a discussion of recently issued accounting developments and their impact, refer to Note 2 of the Notes to Condensed Consolidated Financial Statements[429] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Risk Management' discussion within 'Management's Discussion and Analysis of Financial Condition and Results of Operations' for comprehensive quantitative and qualitative disclosures about market risk - Quantitative and qualitative disclosures about market risk are included under the caption 'Management's Discussion and Analysis of Financial Condition and Results of Operations—Risk Management'[430] Item 4. Controls and Procedures Management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the company's disclosure controls and procedures and concluded they were effective as of the end of the reporting period. No material changes to internal control over financial reporting occurred during the most recent fiscal quarter - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective as of the end of the reporting period[431] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[432] PART II. OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and equity sales Item 1. Legal Proceedings Lazard is involved in various judicial, regulatory, and arbitration proceedings arising from its business operations. While individual matters could be significant, management believes that, in aggregate, these proceedings will not have a material adverse effect on the company's business or financial condition - The company is involved in judicial, regulatory, and arbitration proceedings in the ordinary course of business[434] - Management believes that the results of any pending matters, in the aggregate, will not have a material effect on its business or financial condition[434] Item 1A. Risk Factors The COVID-19 pandemic is identified as a new material risk factor, potentially adversely affecting Lazard's business, financial condition, and results of operations. This includes risks from economic downturns, market volatility impacting M&A and AUM, operational disruptions from remote work, and heightened cybersecurity risks - The COVID-19 pandemic is a new material risk factor that could adversely affect Lazard's business, financial condition, and results of operations[436] - Potential impacts include decreased M&A transaction volume and value, reduced AUM, and increased price competition[437] - Remote work arrangements may lead to reduced productivity, communication limitations, and heightened operational and cybersecurity risks[438][439] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Lazard reported no unregistered sales of equity securities. The company continued its share repurchase program, with $305.6 million remaining authorized as of September 30, 2020. During the third quarter of 2020, no shares were repurchased under the publicly announced program, but 14,562 shares were purchased from employees for tax withholding purposes - No unregistered sales of equity securities occurred[441] - As of September 30, 2020, $305.6 million of share repurchase authorization remained available[443] - During the third quarter of 2020, 14,562 shares were purchased from employees for tax withholding requirements, with an average price of $31.35 per share[443] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported[446] Item 4. Mine Safety Disclosures This item is not applicable to Lazard Ltd - This item is not applicable[447] Item 5. Other Information No other information was reported in this section - No other information was reported[448] Item 6. Exhibits This section lists all exhibits filed with the 10-Q report, including organizational documents, indentures for senior notes, incentive compensation plans, and certifications, providing supporting documentation for the financial statements and disclosures - The section lists various exhibits, including the Certificate of Incorporation, Amended and Restated Bye-Laws, Indentures for Senior Notes, and Incentive Compensation Plans[452][453][454] - It also includes certifications from the Chief Executive Officer and Chief Financial Officer[454] SIGNATURES This section contains the official signatures of Lazard Ltd's authorized financial officers, certifying the accuracy of the report - The report was signed on November 2, 2020, by Evan L. Russo, Chief Financial Officer, and Dominick Ragone, Chief Accounting Officer[457]