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EVR > SEC Filings for EVR > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for EVERCORE PARTNERS INC.

Form 10-Q for EVERCORE PARTNERS INC.


8-May-2014

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results Item 2. 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, 2013. 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.


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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 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, as well as adjustments to amounts due pursuant to our tax receivable agreements, subsequent to its initial establishment, related to changes in state and local tax rates. Interest Expense includes interest expense associated with the Senior Notes and other financing arrangements.
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 and thereafter, 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.


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Other Expenses
Other Expenses include: a) amortization costs associated with the modification and vesting of LP Units and certain other awards, b) the amortization of intangible assets associated with certain acquisitions and c) compensation charges associated with deferred consideration, retention awards and related compensation for Lexicon employees.
Income from Equity Method Investments
Our share of the income (loss) from our equity interests in G5 ? Evercore, ABS and Pan (consolidated on March 15, 2013 and sold on December 3, 2013) are included within Income from Equity Method Investments, as a component of Income Before Income Taxes, on the Unaudited Condensed Consolidated Statements of Operations.
Provision for Income Taxes
We account for income taxes in accordance with ASC 740, "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
We completed the sale of Pan in December 2013. Accordingly, the historical results of Pan 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 (through October 2013) in Evercore LP, as well as the portions of our operating subsidiaries not owned by Evercore. As described in Note 12 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 from continuing operations for the three months ended March 31, 2014 and 2013. 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.


                                                  For the Three Months Ended March 31,
                                                        2014                          2013            Change
                                                    (dollars in thousands, except per share data)
Revenues
Investment Banking Revenue             $         128,504                        $       131,383           (2 %)
Investment Management Revenue                     21,915                                 21,437            2 %
Other Revenue                                      2,069                                  3,104          (33 %)
Total Revenues                                   152,488                                155,924           (2 %)
Interest Expense                                   3,375                                  3,293            2 %
Net Revenues                                     149,113                                152,631           (2 %)
Expenses
Operating Expenses                               125,103                                125,776           (1 %)
Other Expenses                                     3,296                                 10,605          (69 %)
Total Expenses                                   128,399                                136,381           (6 %)
Income Before Income from Equity
Method Investments and Income Taxes               20,714                                 16,250           27 %
Income from Equity Method Investments                241                                    756          (68 %)
Income Before Income Taxes                        20,955                                 17,006           23 %
Provision for Income Taxes                         7,563                                  7,735           (2 %)
Net Income from Continuing Operations             13,392                                  9,271           44 %
Discontinued Operations
Income (Loss) from Discontinued
Operations                                             -                                 (1,306 )         NM
Provision (Benefit) for Income Taxes                   -                                   (413 )         NM
Net Income (Loss) from Discontinued
Operations                                             -                                   (893 )         NM
Net Income                                        13,392                                  8,378           60 %
Net Income Attributable to
Noncontrolling Interest                            2,824                                  2,409           17 %
Net Income Attributable to Evercore
Partners Inc.                          $          10,568                        $         5,969           77 %
Diluted Net Income (Loss) Per Share
Attributable to Evercore Partners Inc.
Common Shareholders
From Continuing Operations             $            0.25                        $          0.17           47 %
From Discontinued Operations                           -                                  (0.01 )         NM
Net Income Per Share Attributable to
Evercore Partners Inc. Common
Shareholders                           $            0.25                        $          0.16           56 %

As of March 31, 2014 and 2013 we employed approximately 1,000 and 900 people, respectively, worldwide.
Three Months Ended March 31, 2014 versus March 31, 2013 Net Revenues were $149.1 million for the three months ended March 31, 2014, a decrease of $3.5 million, or 2%, versus Net Revenues of $152.6 million for the three months ended March 31, 2013. Investment Banking Revenue decreased 2% and Investment Management Revenue increased 2% compared to the three months ended March 31, 2013. See the segment discussion below for further information. Other Revenue for the three months ended March 31, 2014 was lower than for the three months ended March 31, 2013 primarily as a result of lower gains on our Marketable Securities portfolios. Net Revenues include interest expense on our Senior Notes.

Total Operating Expenses were $125.1 million for the three months ended March 31, 2014, as compared to $125.8 million for the three months ended March 31, 2013, a decrease of $0.7 million, or 1%. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $88.2 million for the three months ended March 31, 2014, a decrease of $3.3 million, or 4%, versus expense of $91.5 million for the three months ended March 31, 2013. The decrease was primarily due to lower discretionary incentive compensation. Non-compensation expenses as a component of Operating Expenses were $36.9 million for the three months ended March 31, 2014, an increase of $2.6 million, or 8%, over non-compensation operating expenses of $34.3 million for the three months ended March 31, 2013. Non-compensation operating expenses increased compared to the three months ended March 31, 2013 primarily as a result of the expansion of our existing businesses.


Total Other Expenses of $3.3 million for the three months ended March 31, 2014 included acquisition related compensation costs of $3.2 million and amortization of intangibles of $0.1 million. Total Other Expenses of $10.6 million for the three months ended March 31, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $5.6 million, acquisition related compensation costs of $4.9 million and amortization of intangibles of $0.1 million.
As a result of the factors noted above, Employee Compensation and Benefits Expense as a percentage of Net Revenues was 61% for the three months ended March 31, 2014, compared to 67% for the three months ended March 31, 2013.

Income from Equity Method Investments was $0.2 million for the three months ended March 31, 2014, as compared to $0.8 million for the three months ended March 31, 2013. The decrease was primarily a result of a decrease in earnings from
G5 ? Evercore.

The provision for income taxes for the three months ended March 31, 2014 was $7.6 million, which reflected an effective tax rate of 36%. The provision was impacted by the noncontrolling interest associated with LP Units, state, local and foreign taxes and other adjustments. The provision for income taxes for the three months ended March 31, 2013 was $7.7 million, which reflected an effective tax rate of 45%. The provision was impacted by the vesting of LP Units, which were fully vested as of December 31, 2013, as well as the noncontrolling interest associated with LP Units and the release of valuation allowances for certain deferred tax assets.

Noncontrolling Interest was $2.8 million for the three months ended March 31, 2014 compared to $2.4 million for the three months ended March 31, 2013 (which includes noncontrolling interest related to discontinued operations of ($0.4) million).
Impairment of Assets
During the first quarter of 2014, there were no material changes in the facts and assumptions related to the November 30, 2013 impairment assessment that would have caused the Company to reach a different conclusion. As such, the Company considered the criteria required by ASC 350, "Intangibles - Goodwill and Other", and ASC 360, "Property, Plant, and Equipment", and concluded that there were no triggering events during the first quarter of 2014 that would have required a Step 1 impairment assessment.


Business Segments
The following data presents revenue, expenses and contributions from our equity
method investments included within continuing operations, by business segment.
Investment Banking
The following table summarizes the operating results of the Investment Banking
segment.

                                          For the Three Months Ended March 31,
                                               2014                   2013             Change
                                                        (dollars in thousands)
Revenues
Investment Banking Revenue:
Advisory Revenue                       $         116,452       $         113,505            3 %
Commission Revenue                                 8,256                   7,046           17 %
Underwriting Revenue                               3,796                  10,832          (65 %)
Total Investment Banking Revenue (1)             128,504                 131,383           (2 %)
Other Revenue, net (2)                              (653 )                   213           NM
Net Revenues                                     127,851                 131,596           (3 %)
Expenses
Operating Expenses                               105,532                 105,066            - %
Other Expenses                                     3,214                   9,855          (67 %)
Total Expenses                                   108,746                 114,921           (5 %)
Operating Income (3)                              19,105                  16,675           15 %
Income (Loss) from Equity Method
Investments                                         (310 )                   170           NM
Pre-Tax Income from Continuing
Operations                             $          18,795       $          16,845           12 %

(1) Includes client related expenses of $2.5 million for the three months ended March 31, 2014 and 2013.

(2) Includes interest expense on the Senior Notes of $1.1 million for the three months ended March 31, 2014 and 2013.

(3) Includes Noncontrolling Interest of ($0.9) million and $0.4 million for the three months ended March 31, 2014 and 2013, respectively.

For the three months ended March 31, 2014, the level of North American announced and completed M&A activity increased 29% and 34%, respectively, compared to the three months ended March 31, 2013, while the level of Global announced and completed M&A activity for the three months ended March 31, 2014 increased 38% and decreased (2%), respectively, compared to the three months ended March 31, 2013:

                                         For the Three Months Ended March 31,
                                               2014                 2013             Change
Industry Statistics ($ in billions) *
Value of North American M&A Deals
Announced                              $              313     $           243           29 %
Value of North American M&A Deals
Completed                              $              346     $           259           34 %
Value of Global M&A Deals Announced    $              673     $           486           38 %
Value of Global M&A Deals Completed    $              533     $           544           (2 %)
Evercore Statistics **
Total Number of Fee Paying Advisory
Clients                                               116                 115            1 %
Investment Banking Fees of at Least $1
million from Advisory Clients                          32                  26           23 %

* Source: Thomson Reuters April 10, 2014

** Includes revenue generating clients only


Investment Banking Results of Operations Three Months Ended March 31, 2014 versus March 31, 2013 Net Investment Banking Revenues were $127.9 million for the three months ended March 31, 2014 compared to $131.6 million for the three months ended March 31, 2013, which represented a decrease of 3%. We earned advisory fees from 116 clients for the three months ended March 31, 2014 compared to 115 for the three months ended March 31, 2013, representing a 1% increase. We had 32 fees in excess of $1.0 million for the three months ended March 31, 2014, compared to 26 for the three months ended March 31, 2013, representing a 23% increase. The decrease in revenues from the three months ended March 31, 2013 primarily reflects a decrease in the number of underwriting transactions during the three months ended March 31, 2014 in our U.S. and Mexico businesses. Commission Revenue for the three months ended March 31, 2014 was higher than for the three months ended March 31, 2013 primarily as a result of increased volume in our U.S. business.

Operating Expenses were $105.5 million for the three months ended March 31, 2014, flat compared to $105.1 million for the three months ended March 31, 2013. Employee Compensation and Benefits Expense, as a component of Operating Expenses, was $75.5 million for the three months ended March 31, 2014, as compared to $78.0 million for the three months ended March 31, 2013, a decrease of $2.5 million, or 3%. The decrease was primarily due to lower discretionary incentive compensation, consistent with the overall decrease in revenues. Non-compensation expenses, as a component of Operating Expenses, were $30.0 million for the three months ended March 31, 2014, as compared to $27.1 million for the three months ended March 31, 2013, an increase of $2.9 million, or 11%. Non-compensation operating expenses increased from the prior year primarily driven by growth in the business. The increase in Investment Banking headcount has also led directly and indirectly to cost increases relating to travel, professional and regulatory fees.
Other Expenses of $3.2 million for the three months ended March 31, 2014 were related to acquisition related compensation costs. Other Expenses of $9.9 million for the three months ended March 31, 2013 included compensation costs associated with the vesting of LP Units and certain other awards of $4.9 million and acquisition related compensation costs of $4.9 million.


Investment Management
The following table summarizes the operating results of the Investment
Management segment.

                                           For the Three Months Ended March 31,
                                               2014                     2013             Change
                                                         (dollars in thousands)
Revenues
Investment Advisory and Management
. . .
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