Silvercrest Asset Management Group Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; financial amounts below are in millions unless stated otherwise. Silvercrest provides investment management and family office services. It owns approximately 62.8% of Silvercrest L.P.; the remaining 37% is reported as non-controlling interests.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
|---|---|---|---|---|
| Revenue | $24.6 | $22.1 | $48.9 | $44.0 |
| Income before tax | $5.5 | $5.1 | $10.9 | $9.9 |
| Net income | $4.2 | $3.6 | $8.2 | $6.9 |
| Net income attributable to Silvercrest | $2.3 | $1.9 | $4.6 | $3.5 |
| GAAP diluted EPS | $0.28 | $0.23 | $0.55 | $0.44 |
| Net income margin | 17.1% | 16.3% | 16.9% | 15.7% |
| Adjusted EBITDA (non-GAAP) | $7.1 | $6.8 | $14.0 | $13.3 |
| Adjusted EBITDA margin (non-GAAP) | 28.9% | 30.7% | 28.7% | 30.1% |
- Management and advisory fees rose 11.5% in Q2 and 11.2% in H1; family office services revenue increased 6.6% and 8.4%, respectively. Performance fees and allocations were nil in 2018, versus $10,000 in each 2017 comparison period.
- Assets under management (AUM) were $21.8 billion at quarter-end, up 9.5% from $19.9 billion a year earlier. Average AUM was $21.7 billion in Q2 and $21.6 billion in H1. Discretionary assets represented 74% of AUM; non-discretionary assets represented 26%.
- H1 total expenses increased 11.8% to $38.2 million, including compensation and benefits of $28.8 million and general and administrative costs of $9.4 million. Partner incentive payments included in compensation were $13.9 million, versus $11.5 million in H1 2017.
- The H1 effective tax rate was 24.1%, down from 30.1%, primarily reflecting the lower corporate tax rate under the Tax Cuts and Jobs Act. H1 adjusted net income was $8.4 million and adjusted diluted EPS was $0.61; these are non-GAAP measures.
Liquidity, cash flow and debt
- Cash and cash equivalents were $44.6 million at June 30, 2018, down from $53.8 million at December 31, 2017. Total assets were $108.8 million and total liabilities were $33.6 million.
- H1 operating activities used $0.7 million of cash, compared with $0.9 million provided in H1 2017. The filing cites cash-flow effects including lower accrued compensation, which declined by $12.4 million. Investing activities used $0.5 million; financing activities used $8.0 million. Cash declined by $9.2 million during the half.
- Financing outflows included $5.0 million of partner distributions, $2.3 million of Class A dividends and $0.4 million of earnout payments, partly offset by $0.6 million of partner note repayments received. The quarterly Class A dividend was raised from $0.12 to $0.14 per share.
- No borrowings remained under the credit facility at June 30, and Jamison-related notes payable were fully repaid. The $15 million facility includes a $7.5 million revolving line maturing December 21, 2018 and a $7.5 million delayed-draw term loan; its draw and maturity dates were extended to June 25, 2023 and June 24, 2025, respectively. The company reported compliance with facility covenants.
- Operating lease commitments, net of listed subleases, totaled approximately $59.9 million. The estimated tax receivable agreement liability was $9.2 million; future payments depend on realized tax savings and other factors.
Material changes, outlook and risks
- Revenue growth reflected higher AUM. Q2 AUM rose from $21.5 billion at March 31 to $21.8 billion at June 30, including $0.4 billion of market appreciation and net cash outflows of approximately $0.1 billion. H1 AUM increased from $21.3 billion, with $0.4 billion of market appreciation and net cash outflows of approximately $0.1 billion.
- Expenses grew faster than Q2 revenue: total expenses rose 12.9% versus revenue growth of 11.3%. Higher bonuses drove much of the compensation increase; higher occupancy costs, including the New York office lease, and portfolio/system costs also contributed. H1 net rent expense was $2.7 million, versus $1.8 million a year earlier.
- Management said it expects cash and operating cash generation to meet liquidity needs for the next 12 months. It provided no specific earnings or AUM guidance. Management expects partner distributions to remain a material use of cash and intends to continue quarterly Class A dividends, subject to available cash and financing restrictions.
- Results are sensitive to market values and client flows because advisory fees are primarily based on AUM. Disclosed risks include investment performance, client retention, competitive conditions, hiring and retaining professionals, regulation and litigation, data security and operational safeguards. The company noted that a 10% change in average AUM would change annualized revenue by approximately $9.8 million at the reported 0.45% weighted average fee rate.
- Other items to note: the company adopted ASC 606 with an immaterial impact; it reported no significant off-balance-sheet arrangements, no goodwill impairment in the periods presented, and effective disclosure controls at June 30, 2018.
Important facts for investors to verify
- Whether the revolving credit facility maturing in December 2018 was renewed, amended or repaid after quarter-end.
- Subsequent AUM, net flows and investment performance, particularly given the Q2 net cash outflow and absence of performance-fee revenue.
- Whether compensation, occupancy and systems costs continue to rise faster than revenue and pressure Adjusted EBITDA margins.
- Cash conversion and the timing of bonus payments, partner distributions, dividends, lease obligations and tax receivable agreement payments.
- The assumptions underlying non-GAAP Adjusted EBITDA, adjusted net income and adjusted EPS, and the distinction between consolidated net income and income attributable to Silvercrest shareholders.