Business Context and Reporting Period
Company: Evercore Partners Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: Evercore is an investment banking and investment management firm organized as a holding company. Its primary operating segments are Advisory (M&A, restructuring, corporate finance) and Investment Management (private equity funds, institutional asset management). The company operates globally with significant presence in the U.S., Mexico, and Europe.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2008 |
Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Total Revenues | $65,718 | $183,428 | $239,450 |
| Net Revenues (Total Rev - Interest Exp) | $56,813 | $161,419 | $227,807 |
| Net Income (Loss) | $(468) | $623 | $(37,633) |
| Diluted EPS | $(0.04) | $0.05 | $(3.97) |
| Cash and Cash Equivalents (End of Period) | $284,355 | $284,355 | $184,949 |
| Notes Payable (Senior Notes) | $94,832 | $94,832 | $0 |
| Total Assets | $837,705 | $837,705 | $721,176 |
Operating Cash Flow (Nine Months): $9.5 million provided by operating activities.
Headcount: 314 employees as of September 30, 2008 (up from 288 in 2007).
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 16% in Q3 and 23% in the nine-month period compared to 2007. Advisory revenue, the primary driver, fell 23% in Q3 and 28% year-to-date due to a significant reduction in M&A transaction volume and value globally.
- Profitability Improvement: Despite revenue declines, the company returned to profitability in the nine-month period ($0.6 million net income) compared to a net loss of $37.6 million in the same period in 2007. The 2007 loss was heavily impacted by $125.9 million in stock-based compensation charges related to a follow-on offering.
- Expense Management: Total operating expenses decreased 6% in Q3 and 10% year-to-date. Employee compensation decreased slightly, while non-compensation expenses dropped due to reduced professional fees (Sarbanes-Oxley compliance completion) and occupancy costs.
- Debt Issuance: In August 2008, the company issued $120 million in Senior Notes and warrants, increasing interest expense by 56% in Q3 and 89% year-to-date compared to 2007.
- Special Charges: The company incurred $4.1 million in special charges year-to-date related to the write-off of capitalized costs for a deferred private equity fund (ECP III), employee severance, and the closing of the Los Angeles office.
Guidance, Outlook, Risks, and Unusual Items
- Market Conditions: Management notes that global financial markets have been disruptive and volatile throughout 2008. Reduced M&A activity and illiquid credit markets are expected to continue to pressure advisory revenues.
- Private Equity Fees: Management fees for U.S. private equity funds declined as funds completed their investment periods, causing a step-down in fee rates from 2% of committed capital to 1% of invested capital.
- Tax Rate: The effective tax rate for the nine months ended September 30, 2008, was 51.0%, higher than the normalized rate of approximately 33.7% due to share price decreases affecting share-based compensation deductions. The full-year 2008 effective tax rate is expected to be approximately 48%.
- Legal Proceedings: The company is involved in an appeal regarding the High Voltage Engineering Corp. bankruptcy matter. The First Circuit Court of Appeals denied the plaintiff's appeal in October 2008, though the plaintiff has requested an en banc review. Management does not believe this will have a material adverse effect on financial condition.
- Capital Commitments: The company has unfunded commitments of $8.7 million to existing private equity funds and has committed $150 million to a new asset management firm, HighView, subject to conditions.
Investor Verification Checklist
- M&A Volume Correlation: Verify the correlation between the reported 28% drop in advisory revenue and the cited 46% drop in North American M&A deal value completed in the first nine months of 2008.
- Debt Service Capacity: Assess the impact of the new $120 million Senior Notes (5.20% coupon, 7.94% effective yield) on future cash flows, particularly given the volatility in the advisory revenue stream.
- Private Equity Fund Performance: Review the valuation of private equity fund investments ($18.9 million) and the potential for claw-backs on carried interest ($4.4 million at risk) if fund performance deteriorates.
- Special Charges Recurrence: Confirm that the $4.1 million in special charges related to ECP III and office closures are one-time events and not indicative of ongoing operational restructuring costs.
- Foreign Exchange Exposure: Evaluate the impact of the Mexican peso and British pound fluctuations on the 22% of net revenues derived from Latin America and Europe, noting the company does not currently hedge these exposures.