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EVR > SEC Filings for EVR > Form 10-Q on 7-Nov-2012All Recent SEC Filings

Show all filings for EVERCORE PARTNERS INC.

Form 10-Q for EVERCORE PARTNERS INC.


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with Evercore Partners Inc.'s unaudited condensed consolidated financial statements and the related notes included elsewhere in this Form 10-Q.

Forward-Looking Statements

This report contains or incorporates by reference forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act, which reflect our current views with respect to, among other things, our operations and financial performance. In some cases, you can identify these forward-looking statements by the use of words such as "outlook", "believes", "expects", "potential", "continues", "may", "should", "seeks", "approximately", "predicts", "intends", "plans", "estimates", "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties.

Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these forward-looking statements. All statements other than statements of historical fact are forward-looking statements and are based on various underlying assumptions and expectations and are subject to known and unknown risks, uncertainties and assumptions, and may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. We believe these factors include, but are not limited to, those described under "Risk Factors" discussed in the Annual Report on Form 10-K for the year ended December 31, 2011 and subsequent quarterly reports on Form 10-Q. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included or incorporated by reference in this report. We undertake no obligation to publicly update or review any forward-looking statement. We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for our management to predict all risks and uncertainties, nor can management assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Key Financial Measures

Revenue

Total revenues reflect revenues from our Investment Banking and Investment Management business segments that include fees for services, transaction-related client reimbursements plus other revenue. Net revenues reflect total revenues less interest expense related to repurchase agreements and the Senior Notes.

Investment Banking. Our Investment Banking business earns fees from our clients for providing advice on mergers, acquisitions, divestitures, leveraged buyouts, restructurings and similar corporate finance matters, and from underwriting and private placement activities, as well as commissions from our sales and trading activities. The amount and timing of the fees paid vary by the type of engagement. In general, advisory fees are paid at the time we sign an engagement letter, during the course of the engagement or when an engagement is completed. The majority of our investment banking revenue consists of advisory fees that are dependent on the successful completion of a transaction. A transaction can fail to be completed for many reasons, including failure of parties to agree upon final terms with the counterparty, to secure necessary board or shareholder approvals, to secure necessary financing or to achieve necessary regulatory approvals. In the case of bankruptcy engagements, fees are subject to approval of the court. Underwriting revenues are recognized when the offering has been deemed to be completed, placement fees are generally recognized at the time of the client's acceptance of capital or capital commitments and commissions are recorded on a trade-date basis or, in the case of payments under commission sharing arrangements, on the date earned.

Revenue trends in our advisory business generally are correlated to the volume of merger and acquisition ("M&A") activity and/or restructuring activity, which tends to be counter-cyclical to M&A. However, deviations from this trend can occur in any given year or quarter for a number of reasons. For example, changes in our market share or the ability of our clients to close certain large transactions can cause our revenue results to diverge from the level of overall M&A or restructuring activity.

Investment Management. Our Investment Management business includes operations related to the management of the Institutional Asset Management, Wealth Management and Private Equity businesses. Revenue sources primarily include management fees, which include fees earned from portfolio companies, fiduciary and consulting fees, performance fees (including carried interest) and gains (or losses) on our investments.

Management fees for third party clients generally represent a percentage of assets under management ("AUM"). Fiduciary and consulting fees, which are generally a function of the size and complexity of each engagement, are individually negotiated. Management fees from private equity operations are generally a percentage of committed capital or invested capital at rates agreed with the investment funds we manage or with the individual client. Performance fees from private equity funds are earned when specified


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benchmarks are exceeded. In certain circumstances, such fees are subject to "claw-back" provisions. Portfolio company fees include monitoring, director and transaction fees associated with services provided to the portfolio companies of the private equity funds we manage. Gains and losses include both realized and unrealized gains and losses on principal investments, including those arising from our equity interest in investment partnerships.

Transaction-Related Client Reimbursements. In both our Investment Banking and Investment Management segments, we make various transaction-related expenditures, such as travel and professional fees, on behalf of our clients. Pursuant to the engagement letters with our advisory clients or the contracts with the limited partners in the private equity funds we manage, these expenditures may be reimbursable. We define these expenses as transaction-related expenses and record such expenditures as incurred and record revenue when it is determined that clients have an obligation to reimburse us for such transaction-related expenses. Client expense reimbursements are recorded as revenue on the Unaudited Condensed Consolidated Statements of Operations on the later of the date an engagement letter is executed or the date we pay or accrue the expense.

Other Revenue and Interest Expense. Other Revenue and Interest Expense is derived primarily from investing customer funds in financing transactions. These transactions are principally repurchases and resales of Mexican government and government agency securities. Revenue and expenses associated with these transactions are recognized over the term of the repurchase or resale transaction. Other Revenue includes income earned on marketable securities, cash and cash equivalents and assets segregated for regulatory purposes. Interest Expense includes interest expense associated with the Senior Notes.

Operating Expenses

Employee Compensation and Benefits Expense. We include all payments for services rendered by our employees, as well as profits interests in our businesses that have been accounted for as compensation, in employee compensation and benefits expense.

We maintain compensation programs, including base salary, cash, deferred cash and equity bonus awards and benefits programs and manage compensation to estimates of competitive levels based on market conditions and performance. Our level of compensation reflects our plan to maintain competitive compensation levels to retain key personnel, and it reflects the impact of newly-hired senior professionals, including related grants of equity awards which are generally valued at their grant date.

Increasing the number of high-caliber, experienced senior level employees is critical to our growth efforts. In our advisory businesses, these hires generally do not begin to generate significant revenue in the year they are hired.

Our annual compensation program includes share-based compensation awards and deferred cash awards as a component of the annual bonus awards for certain employees. These awards are generally subject to annual vesting requirements over a four-year period beginning at the date of grant, which occurs in the first quarter of each year; accordingly, the expense is generally amortized over the stated vesting period. With respect to the annual awards granted in February 2012, the Company adopted new retirement eligibility criteria, which stipulates that if an employee has at least five years of continuous service, is at least 55 years of age and has a combined age and years of service of at least 65 years, the employee is eligible for retirement (prior year's awards required combined years of service and age of at least 70 years). Retirement eligibility allows for continued vesting of awards after employees depart from the Company, provided they give the minimum advance notice, which is generally one year. As a consequence of these changes, a greater number of employees will become retirement eligible and the related requisite service period over which we will expense these awards will be shorter than the stated vesting period.

Non-Compensation Expenses. The balance of our operating expenses includes costs for occupancy and equipment rental, professional fees, travel and related expenses, communications and information technology services, depreciation and amortization, acquisition and transition costs and other operating expenses. We refer to all of these expenses as non-compensation expenses.

Other Expenses

Other Expenses include: a) amortization costs associated with the modification and vesting of LP Units and certain other awards, b) compensation charges associated with deferred consideration, retention awards and related compensation for Lexicon employees, c) charges associated with the vesting of Event-based Awards, d) special charges incurred in connection with exiting facilities in the UK, e) special charges related to the exiting of a lease commitment for office space and an introducing fee in connection with the Lexicon acquisition and f) amortization of intangibles associated with certain acquisitions.

Income from Equity Method Investments

Our share of the income (loss) from our equity interests in G5, ABS and Pan are included within Income from Equity Method Investments, as a component of Income Before Income Taxes, on the Unaudited Condensed Consolidated Statements of Operations.


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Provision for Income Taxes

We account for income taxes in accordance with ASC 740, "Accounting for Income Taxes" ("ASC 740"), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax basis of our assets and liabilities.

Discontinued Operations

In October 2011, EAM announced its plan to wind down its business. EAM's management and the Company made this decision because EAM was unable to attain sufficient scale to be a viable business due to several factors, including the ongoing effects of the financial crisis. The wind down of EAM's business was completed by December 31, 2011. Accordingly, the historical results of EAM have been included within Discontinued Operations on the Unaudited Condensed Consolidated Statements of Operations.

Noncontrolling Interest

We record noncontrolling interest relating to the ownership interests of our current and former Senior Managing Directors, their estate planning vehicles and Trilantic in Evercore LP, as well as the portions of our operating subsidiaries not owned by Evercore. As described in Note 13 to our unaudited condensed consolidated financial statements herein, Evercore Partners Inc. is the sole general partner of Evercore LP and has a majority economic interest in Evercore LP. As a result, Evercore Partners Inc. consolidates Evercore LP and records a noncontrolling interest for the economic interest in Evercore LP held by the limited partners.

We generally allocate net income or loss to noncontrolling interests held at Evercore LP and at the operating entity level, where required, by multiplying the vested equity ownership percentage of the noncontrolling interest holders for the period by the net income or loss of the entity to which the noncontrolling interest relates. In circumstances where the governing documents of the entity to which the noncontrolling interest relates require special allocations of profits or losses to the controlling and noncontrolling interest holders, then the net income or loss of these entities will be allocated based on these special allocations.

Results of Operations

The following is a discussion of our results of operations for the three and nine months ended September 30, 2012 and 2011. For a more detailed discussion of the factors that affected the revenue and operating expenses of our Investment Banking and Investment Management business segments in these periods, see the discussion in "Business Segments" below.

We operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible for us to predict all risks and uncertainties, nor can we assess the impact of all potentially applicable factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


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                                              For the Three Months Ended                          For the Nine Months Ended
                                                     September 30,                                      September 30,
                                                 2012               2011          Change            2012               2011          Change
                                                                     (dollars in thousands, except per share data)
Revenues
Investment Banking Revenue                  $      133,850       $  139,995            (4 %)    $     372,771       $  337,743            10 %
Investment Management Revenue                       20,434           24,723           (17 %)           60,234           78,154           (23 %)
Other Revenue                                        2,760            3,036            (9 %)            6,649           11,002           (40 %)

Total Revenues                                     157,044          167,754            (6 %)          439,654          426,899             3 %
Interest Expense                                     4,015            4,573           (12 %)           11,330           15,416           (27 %)

Net Revenues                                       153,029          163,181            (6 %)          428,324          411,483             4 %

Expenses
Operating Expenses                                 126,049          131,946            (4 %)          363,023          331,756             9 %
Other Expenses                                      12,735           17,793           (28 %)           42,004           42,906            (2 %)

Total Expenses                                     138,784          149,739            (7 %)          405,027          374,662             8 %

Income Before Income from Equity Method
Investments and Income Taxes                        14,245           13,442             6 %            23,297           36,821           (37 %)
Income from Equity Method Investments                  415              195           113 %             3,519              664           430 %

Income Before Income Taxes                          14,660           13,637             8 %            26,816           37,485           (28 %)
Provision for Income Taxes                           7,187           11,144           (36 %)           12,322           21,644           (43 %)

Net Income from Continuing Operations                7,473            2,493           200 %            14,494           15,841            (9 %)

Discontinued Operations
Income (Loss) from Discontinued
Operations                                              -            (1,718 )          NM                  -            (2,755 )          NM
Provision (Benefit) for Income Taxes                    -              (518 )          NM                  -              (783 )          NM

Net Income (Loss) from Discontinued
Operations                                              -            (1,200 )          NM                  -            (1,972 )          NM

Net Income                                           7,473            1,293           478 %            14,494           13,869             5 %
Net Income (Loss) Attributable to
Noncontrolling Interest                              2,172             (466 )          NM               4,627            6,261           (26 %)

Net Income Attributable to Evercore
Partners Inc.                               $        5,301       $    1,759           201 %     $       9,867       $    7,608            30 %

Diluted Net Income (Loss) Per Share
Attributable to Evercore Partners Inc.
Common Shareholders:
From Continuing Operations                  $         0.17       $     0.06           183 %     $        0.31       $     0.27            15 %
From Discontinued Operations                            -                -             NM                  -             (0.01 )          NM

Net Income Attributable to Evercore
Partners Inc.                               $         0.17       $     0.06           183 %     $        0.31       $     0.26            19 %

As of September 30, 2012 and 2011 we employed approximately 900 and 830 people, respectively, worldwide.

Three Months Ended September 30, 2012 versus September 30, 2011

Net revenues were $153.0 million for the three months ended September 30, 2012, a decrease of $10.2 million, or 6%, versus net revenues of $163.2 million for the three months ended September 30, 2011. Investment Banking Revenue decreased 4% and Investment Management Revenue decreased 17% compared to the three months ended September 30, 2011. See the segment discussion below for further information. Other revenue for the three months ended September 30, 2012 was lower than for the three months ended September 30, 2011 as a result of relatively lower gains on our Marketable Securities portfolios. Net revenues include interest expense on our Senior Notes.

Total Operating Expenses were $126.0 million for the three months ended September 30, 2012 as compared to $131.9 million for the three months ended September 30, 2011, a 4% decrease. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $89.3 million for the three months ended September 30, 2012, a decrease of $11.5 million, or 11%, versus expense of $100.8 million for the three months ended September 30, 2011. The decrease was primarily due to lower discretionary incentive compensation in the Investment Management business. Non-compensation expenses as a component of Operating Expenses were $36.7 million for the three months ended September 30, 2012, an increase of $5.5 million, or 18%, over non-compensation operating expenses of $31.2 million for the three months ended September 30, 2011. Non-compensation operating expenses increased compared to the three months ended September 30, 2011 primarily as a result of the expansion of our new and existing businesses, including the integration of Lexicon.

Total Other Expenses of $12.7 million for the three months ended September 30, 2012 related to compensation costs associated with the vesting of LP Units and certain other awards of $5.5 million, acquisition related compensation charges of $6.8 million and amortization of intangibles of $0.5 million. Total Other Expenses of $17.8 million for the three months ended September 30, 2011 related to compensation costs associated with the vesting of LP Units and certain other awards of $5.3 million, acquisition related compensation charges of $7.7 million, special charges of $2.6 million and amortization of intangibles of $2.1 million.


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As a net result of the factors noted above, Employee Compensation and Benefits Expense as a percentage of Net Revenues decreased to 66% for the three months ended September 30, 2012 from 70% for the three months ended September 30, 2011.

The provision for income taxes for the three months ended September 30, 2012 was $7.2 million, which reflected an effective tax rate of 49%. The provision was impacted by the vesting of LP Units, which are not deductible for income tax purposes, as well as the noncontrolling interest associated with LP Units and the release of valuation allowances for certain deferred tax assets. The provision for income taxes for the three months ended September 30, 2011 was $11.1 million, which reflected an effective tax rate of 82%. The provision was impacted by the vesting of LP Units and certain other awards, as well as the noncontrolling interest associated with LP Units. The effective tax rate for the three months ended September 30, 2012 was lower than for the three months ended September 30, 2011 primarily due to a higher level of expected foreign sourced income in 2012.

Income from equity method investments was $0.4 million for the three months ended September 30, 2012, as compared to $0.2 million for the three months ended September 30, 2011. The increase was a result of income from our investment in ABS, which the Company made in the fourth quarter of 2011.

Noncontrolling interest was $2.2 million for the three months ended September 30, 2012 compared to ($0.5) million for the three months ended September 30, 2011 (which includes noncontrolling interest from discontinued operations of ($1.0) million).

Nine Months Ended September 30, 2012 versus September 30, 2011

Net revenues were $428.3 million for the nine months ended September 30, 2012, an increase of $16.8 million, or 4%, versus net revenues of $411.5 million for the nine months ended September 30, 2011. Investment Banking Revenue increased 10%, and reflects the integration of the Lexicon acquisition for the nine months ended September 30, 2012, and Investment Management Revenue decreased 23% compared to the nine months ended September 30, 2011. See the segment discussion below for further information. Other revenue for the nine months ended September 30, 2012 was lower than for the nine months ended September 30, 2011 as a result of relatively lower gains on our Marketable Securities portfolios. Net revenues include interest expense on our Senior Notes.

Total Operating Expenses were $363.0 million for the nine months ended September 30, 2012 as compared to $331.8 million for the nine months ended September 30, 2011, a 9% increase. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $258.5 million for the nine months ended September 30, 2012, an increase of $12.6 million, or 5%, versus expense of $245.9 million for the nine months ended September 30, 2011. The increase was primarily due to increased compensation costs resulting from the expansion of existing businesses and our new businesses, higher costs associated with employee separation arrangements and higher share-based compensation costs, including costs associated with the revised retirement eligibility criteria, offset, in part, by a reduction in discretionary incentive compensation associated with decreased profitability in our Investment Management business. Non-compensation expenses as a component of Operating Expenses were $104.5 million for the nine months ended September 30, 2012, an increase of $18.7 million, or 22%, over non-compensation operating expenses of $85.8 million for the nine months ended September 30, 2011. Non-compensation operating expenses increased compared to the nine months ended September 30, 2011 primarily as a result of the expansion of our new and existing businesses, including the integration of Lexicon, as well as higher occupancy costs.

Total Other Expenses of $42.0 million for the nine months ended September 30, 2012 related to compensation costs associated with the vesting of LP Units and certain other awards of $15.3 million, acquisition related compensation charges of $22.8 million, special charges of $0.7 million and amortization of intangibles of $3.3 million. Total Other Expenses of $42.9 million for the nine months ended September 30, 2011 related to compensation costs associated with the vesting of LP Units and certain other awards of $17.9 million, charges related to the vesting of Event-based Awards of $11.4 million, acquisition related compensation charges of $7.7 million, special charges of $2.6 million and amortization of intangibles of $3.2 million.

As a net result of the factors noted above, Employee Compensation and Benefits Expense as a percentage of Net Revenues was flat at 69% for the nine months ended September 30, 2012 and September 30, 2011.

The provision for income taxes for the nine months ended September 30, 2012 was $12.3 million, which reflected an effective tax rate of 46%. The provision was impacted by the vesting of LP Units, which are not deductible for income tax purposes, as well as the noncontrolling interest associated with LP Units and the release of valuation allowances for certain deferred tax assets. The provision for income taxes for the nine months ended September 30, 2011 was $21.6 million, which reflected an effective tax rate of 58%. The provision was impacted by the vesting of LP Units and certain other awards, as well as the noncontrolling interest associated with LP Units. The effective tax rate for the nine months ended September 30, 2012 was lower than for the nine months ended September 30, 2011 primarily due to a higher level of expected foreign sourced income in 2012.

Income from equity method investments was $3.5 million for the nine months ended September 30, 2012, as compared to $0.7 million for the nine months ended September 30, 2011. The increase was a result of income from our investment in ABS, which the Company made in the fourth quarter of 2011.


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Noncontrolling interest was $4.6 million for the nine months ended September 30, 2012 compared to $6.3 million for the nine months ended September 30, 2011
(which includes noncontrolling interest from discontinued operations of ($1.7)
million).

Impairment Assessment

During the second quarter of 2012, the Institutional Asset Management operating segment experienced a further 13% decline in AUM related to client outflows and market depreciation. The decline was principally driven by Atalanta Sosnoff's performance and outflows. As a result, the Company determined that this met the criteria for a Step 1 impairment assessment as required by ASC 350, "Goodwill and Other Intangible Assets", and ASC 360, "Accounting for the Impairment or Disposal of Long-Lived Assets", for the client-related intangible assets of Atalanta Sosnoff and the goodwill for its Institutional Asset Management reporting unit as of June 30, 2012.

The Company performed a cash flow analysis for the client-related intangible . . .

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