Silvercrest Asset Management Group Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Silvercrest provides investment management and family office services, primarily to ultra-high-net-worth individuals and institutions. Figures below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $24.0 | $23.9 | $52.4 | $46.5 |
| Income before taxes | $1.2 | $4.5 | $13.7 | $8.6 |
| Consolidated net income | $0.8 | $3.4 | $10.5 | $6.4 |
| Net income attributable to Silvercrest | $0.5 | $1.9 | $6.0 | $3.6 |
| Adjusted EBITDA (non-GAAP) | $6.7 | $6.6 | $14.9 | $12.3 |
| Adjusted EBITDA margin (non-GAAP) | 27.7% | 27.5% | 28.4% | 26.5% |
- Q2 management and advisory fees were $23.0 million; family office services revenue was $1.0 million. Q2 GAAP net income margin was 3.3%, versus 14.0% a year earlier; six-month margin was 20.0%, versus 13.8%.
- Q2 expenses rose 16.4% to $22.7 million. General, administrative and other expenses increased 70.6% to $9.3 million, principally due to a $3.8 million unfavorable fair-value adjustment to Cortina acquisition earnout consideration. Compensation expense fell 4.6% to $13.4 million.
- At June 30, cash and cash equivalents were $37.7 million, down from $52.8 million at year-end 2019. Total liabilities were $93.1 million and equity was $100.4 million. Term-loan borrowings were $14.4 million, down from $16.2 million; no revolver borrowings were outstanding. The company reported compliance with credit-facility covenants.
- For the first six months, operating cash flow was negative $4.4 million, investing cash flow negative $0.4 million, and financing cash flow negative $10.4 million; cash declined $15.2 million. Financing uses included $5.0 million of partner distributions, $3.0 million of Class A dividends, $1.8 million of term-loan repayments and $0.7 million of earnout payments.
Changes versus comparable periods
- Q2 revenue grew 0.5% year over year, while Silvercrest-attributable net income declined to $0.5 million from $1.9 million. The quarter’s GAAP results were weighed down by the Cortina earnout revaluation; Q2 Adjusted EBITDA was broadly stable. Adjusted measures are non-GAAP and include exclusions described in the filing.
- Six-month revenue increased 12.7%, and Silvercrest-attributable net income rose to $6.0 million from $3.6 million. Cortina, acquired July 1, 2019, contributed $5.4 million of six-month revenue in 2020.
- Assets under management (AUM) ended June at $23.8 billion, up from $20.6 billion at March 31, primarily due to market appreciation. AUM was down 5.2% from $25.1 billion at December 31, 2019, reflecting first-quarter market depreciation. The filing reports average AUM of $22.2 billion for Q2 and $24.5 billion for the first half.
- Six-month operating cash use improved from $8.1 million in 2019, but remained negative. The company attributed cash use in part to compensation payments and working-capital movements.
Outlook, risks and notable items
- Management gave no quantified earnings or revenue guidance. It said demand for services continued, but warned that COVID-19-related market effects could further reduce AUM and revenue, and that the pandemic’s duration and financial impact remained uncertain. The filing states the pandemic affected Q2 and continued to affect Q3 operations.
- Most advisory fees are based on AUM at the prior quarter-end and billed in advance, so market declines can affect revenue with a lag. Management estimated that a 10% change in average AUM would change annualized revenue by approximately $9.6 million for Q2 or $10.5 million for the first half, using the respective 0.43% average fee rate.
- The company said it was operating remotely and had activated business-continuity plans. It identified potential operational, cybersecurity, workforce, client-retention and market risks. Disclosure controls were deemed effective at June 30, 2020; management reported no material control changes during the quarter.
- The revolving-credit-facility maturity was extended to June 19, 2021. Operating lease liabilities were $38.4 million; the filing also presents future lease commitments. The company said it expected operating cash generation to meet liquidity needs over the next 12 months, while noting pandemic uncertainty.
- Cortina earnout fair-value movements were volatile: a $3.8 million unfavorable adjustment in Q2 and a $2.2 million favorable adjustment for the six-month period. The remaining Cortina contingent-consideration liability was $11.8 million at June 30. The company also disclosed a $9.9 million estimated tax-receivable-agreement liability; actual timing and payments depend on tax savings and other factors.
Important facts for investors to verify
- Subsequent AUM, client inflows and outflows, market performance, and fee revenue after June 30—particularly given advance billing and the stated COVID-19 exposure.
- The components and assumptions behind non-GAAP Adjusted EBITDA and the large Q2 Cortina earnout adjustment; compare those measures with GAAP results.
- Cash generation, compensation-related working-capital movements, partner distributions and dividends, and the capacity to service debt and lease obligations.
- Progress against Cortina earnout targets, future contingent payments, and the assumptions underlying the tax-receivable-agreement liability.
- Credit-facility covenants and the June 2021 revolver maturity, as well as any updated liquidity assessment if market or operating conditions deteriorate.