National Financial Partners Corp. has a market cap of $334.7 million; its shares were traded at around $7.93 with a P/E ratio of 3.4 and P/S ratio of 0.3. Highlight of Business Operations:The Company is a leading independent financial services distribution company. The Company offers high net worth individuals and companies throughout the United States and in Canada comprehensive solutions across corporate and executive benefits, life insurance and wealth transfer, and investment advisory products and services. Founded in 1998 and commencing operations on January 1, 1999, National Financial Partners Corp. (“NFP”) has grown internally and through acquisitions and as of September 30, 2009, operates over 150 firms. During the nine months ended September 30, 2009, revenue decreased $180.0 million, or 21.1%, to $671.1 million from $851.1 million during the nine months ended September 30, 2008. The Company experienced a net loss of $495.2 million for the nine months ended September 30, 2009, a decrease of $516.1 million from net income of $20.9 million during the nine months ended September 30, 2008. The net loss was due to a substantial increase in the level of impairment of goodwill and intangible assets from $10.2 million for the nine months ended September 30, 2008 to $612.2 million for the nine months ended September 30, 2009. Excluding the after tax impact of impairments, the net income decline was a result of lower revenue, particularly in life insurance, partially offset by declines in cost of services and general and administrative expense.
The Company s firms earn revenue that consists primarily of commissions and fees earned from the sale of financial products and services to their clients. The Company s firms also incur commissions and fees expense and operating expense in the course of earning revenue. NFP pays management fees to non-employee principals of its firms and/or certain entities they own based on the financial performance of each respective firm. The Company refers to revenue earned by the Company s firms less the expenses of its firms, including management fees, as gross margin. The Company excludes amortization and depreciation from gross margin. These amounts are separately disclosed as part of Corporate and other expenses. Management uses gross margin as a measure of the performance of the firms that the Company has acquired. Gross margin declined from $150.3 million, or 17.7% of revenue, during the nine months ended September 30, 2008 to $121.3 million, or 18.1% of revenue, during the nine months ended September 30, 2009. Gross margin percentage improved slightly despite the decrease in revenue as a result of decreases in the variable components of the Company s cost structure.
The Company s gross margin is offset by expenses that NFP incurs at the corporate level, including corporate and other expenses. Corporate and other expenses increased from $90.4 million during the nine months ended September 30, 2008 to $686.4 million during the nine months ended September 30, 2009. Corporate and other expenses include general and administrative expense, amortization, depreciation, impairment of goodwill and intangible assets, and (gain) loss on sale of subsidiaries. General and administrative expense includes the operating expenses of NFP s corporate headquarters. General and administrative expense declined from $48.9 million during the nine months ended September 30, 2008 to $37.9 million during the nine months ended September 30, 2009. General and administrative expense as a percentage of revenue declined slightly from 5.7% during the period ending September 30, 2008 to 5.6% for the nine months ended September 30, 2009.
The Company recognized an impairment charge of $607.3 million during the first quarter of 2009, an impairment charge of $2.9 million during the second quarter and an impairment charge of $2.0 million during the third quarter. This represented a significant increase from impairments of $10.2 million recorded during the nine months ended September 30, 2008. The increase in the impairment charge reflected the incorporation of market data, including NFP s market value which had remained below net book value through the end of the second quarter, the performance of the Company in the weak economic environment, discount rates that are risk adjusted to reflect both company-specific and market-based credit spreads and other relevant market data. Among other items, the market value reflected the decline in the Company s sales, particularly in the life insurance area, and the Company s capital structure. As a result, the Company recognized an impairment charge of $612.2 during the nine months ended September 30, 2009.
The Company uses gross margin before management fees and gross margin before management fees as a percentage of total revenue to evaluate how the Company s business is performing before giving consideration to a principal s participation in their firm s earnings. This measure is one for which the principal is compensated and reflects the principal s performance and is a result of their direct operating authority and control. Management fees as a percentage of gross margin before management fees is a measure that management uses to evaluate how much of the Company s margin and margin growth is being shared with principals. This management fee percentage is a variable, not a fixed, ratio. Management fees as a percentage of gross margin before management fees will fluctuate based upon the aggregate mix of earnings performance by individual firms. It is based on the percentage of the Company s earnings that are capitalized at the time of acquisition, the performance relative to NFP s preferred position in the earnings and the growth of the individual firms and in the aggregate. Management fees may be higher during periods of strong growth due to the increase in incentive accruals. Higher firm earnings will generally be accompanied by higher incentive accruals. Where firm earnings decrease, management fees and management fee percentage may be lower as incentive accruals are either reduced or eliminated. In addition, because management fees earned are based on a firm s cumulative performance through the year, to the extent that a firm s performance improves through the year, whether by revenue growth or expense reductions, the management fee percentage may likewise increase through the year. For example, if a firm has base earnings and target earnings of $1.0 million and $2.0 million, respectively, and if the firm s cumulative earnings are $0.7 million for the first nine months of the year, no management fee would be earned and the management fee percentage would be zero. In the remaining fourth quarter, if the firm was able to achieve cumulative earnings of $2.0 million, the management fee earned would be $1.0 million and the management fee percentage would be equal to approximately 80% for the quarter. Further, since NFP retains a cumulative preferred interest in base earnings, the relative percentage of management fees generally decreases as firm earnings decline. For firms that do not achieve base earnings, principals typically earn no management fee. Thus, a principal generally earns more management fees only when firm earnings grow and, conversely, principals earn less when firm earnings decline. This structure provides the Company with protection against earnings shortfalls through reduced management fee expense; in this manner the interests of the principals and shareholders remain aligned.
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