Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, for Evercore Partners Inc., an investment banking firm organized into two segments: Advisory and Investment Management. The reporting period includes the impact of a "Follow-On Offering" completed in May 2007, which triggered significant vesting of equity awards and a reorganization of the company's capital structure. The financial statements reflect the consolidated results of the Successor Company (post-IPO) and are not directly comparable to pre-IPO periods due to changes in accounting for Senior Managing Director compensation and tax structures.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Total Revenues | $78.1 million | $239.5 million |
| Net Revenues (Total Rev - Interest Exp) | $72.4 million | $227.8 million |
| Net Income (Loss) | $2.3 million | $(37.6) million |
| Net Income (Loss) Per Share (Basic) | $0.19 | $(3.97) |
| Cash and Cash Equivalents | $184.9 million | $184.9 million |
| Total Assets | $721.2 million | $721.2 million |
| Total Liabilities | $506.1 million | $506.1 million |
| Stockholders' Equity | $166.3 million | $166.3 million |
Segment Performance (Nine Months Ended Sep 30, 2007):
- Advisory: Net Revenues of $211.2 million; Operating Loss of $(23.9) million (driven by non-cash equity charges).
- Investment Management: Net Revenues of $16.6 million; Operating Loss of $(36.7) million (driven by non-cash equity charges).
Material Changes vs. Prior Period
Revenue Growth: Net revenues increased 73.5% year-over-year for the three months ended September 30, 2007, and 74.1% for the nine-month period. This growth was primarily driven by the Advisory segment, which saw an 85.8% increase in revenue for the quarter, attributed to a strong M&A market and the inclusion of acquired entities (Protego and Braveheart/Evercore Europe).
Profitability Decline: Despite revenue growth, the company reported a net loss of $37.6 million for the nine months ended September 30, 2007, compared to a net income of $66.2 million in the same period of 2006. This reversal is almost entirely due to a $125.9 million non-cash equity-based compensation charge recorded in the second quarter of 2007. This charge resulted from the vesting of Evercore LP partnership units, Restricted Stock Units (RSUs), and restricted stock triggered by the Follow-On Offering.
Expense Increases: Total operating expenses rose 199.2% for the quarter and 183.9% for the nine-month period compared to 2006. Employee compensation and benefits expense increased significantly due to the inclusion of Senior Managing Director compensation (previously treated as distributions) and the aforementioned non-cash equity charges. Non-compensation expenses also rose due to expanded office space in New York and costs associated with being a public company (Sarbanes-Oxley compliance).
Guidance, Outlook, and Risks
Management Commentary: Management expects to record a loss before income taxes and minority interest for the full fiscal year ending December 31, 2007, primarily due to the one-time equity vesting charges. The company anticipates that new Senior Managing Directors hired in 2007 will be accretive to earnings by the second calendar year after joining.
Tax Receivable Agreement: The Follow-On Offering triggered a Tax Receivable Agreement. The company recorded a deferred tax asset of $44.0 million and a corresponding liability of $37.4 million payable to related parties (Members) representing 85% of the tax savings realized from the step-up in tax basis. Future payments under this agreement are expected to be substantial.
Risks and Contingencies:
- Internal Controls: Management concluded that disclosure controls and procedures were not effective as of September 30, 2007, citing material weaknesses in the internal control environment, lack of formal risk identification processes, and insufficient personnel with GAAP/SEC reporting experience.
- Legal Proceedings: The company is involved in litigation regarding the High Voltage Engineering Corp. restructuring. While the company has won motions in lower courts, appeals are pending.
- Market Risk: Exposure to foreign currency fluctuations (Mexican Peso and British Pound/Euro) due to operations in Mexico (Protego) and Europe (Evercore Europe). The company does not currently hedge these exposures.
Investor Verification Checklist
- Non-Cash Charges: Verify the impact of the $125.9 million non-cash equity compensation charge on the reported net loss and assess the sustainability of future earnings excluding this one-time event.
- Internal Control Remediation: Review the company's progress in addressing the material weaknesses in internal controls over financial reporting identified in Item 4.
- Tax Receivable Liability: Monitor the $37.4 million liability under the Tax Receivable Agreement and the company's ability to generate sufficient taxable income to realize the associated deferred tax assets.
- Advisory Revenue Concentration: Assess the dependency on large M&A transactions and the impact of market volatility on the Advisory segment, which generated 91.3% of net revenues for the nine-month period.
- Investment Management Volatility: Review the performance of the Private Equity Funds and EAM managed products, noting the decline in Investment Management revenue year-over-year.