Silvercrest Asset Management Group Inc. — Q3 2019 Form 10-Q
Business and period: Silvercrest provides investment management and family-office services to high-net-worth individuals, families, and institutions. This unaudited filing covers the quarter and nine months ended September 30, 2019; financial amounts below are in millions unless otherwise stated. The company reports one operating segment.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $27.8 | $24.9 | $74.3 | $73.8 |
| Income before taxes | $6.3 | $5.2 | $14.9 | $16.1 |
| Net income | $4.8 | $3.9 | $11.2 | $12.1 |
| Net income attributable to Silvercrest | $2.7 | $2.2 | $6.2 | $6.7 |
| GAAP diluted EPS | $0.30 | $0.26 | $0.72 | $0.81 |
| Adjusted EBITDA and margin | $8.9; 32.1% | $7.0; 28.3% | $21.3; 28.6% | $21.1; 28.5% |
Q3 revenue grew 11.7%, primarily from discretionary-account growth and Cortina revenue after its July acquisition. Nine-month revenue rose 0.6%. Q3 GAAP net income margin was 17.3% versus 15.6%; the nine-month margin was 15.1% versus 16.4%. Adjusted EBITDA, adjusted net income, and adjusted EPS are non-GAAP measures; nine-month adjusted net income was $12.4 million versus $12.6 million, and adjusted diluted EPS was $0.86 versus $0.92.
- Revenue and AUM: Management and advisory fees were $26.8 million in Q3 (up 12.6%) and $71.3 million for nine months (up 0.9%). Family-office revenue declined 8.1% in Q3 and 4.8% year to date. AUM ended at $23.5 billion, up 8.3% from September 2018 and 23.7% from December 2018. Cortina added $1.7 billion of AUM. At quarter-end, 74% of AUM was discretionary and 26% non-discretionary.
- Expenses and taxes: Q3 expenses increased 9.0% to $21.5 million, including a 33.8% rise in general and administrative costs. For nine months, expenses rose 2.9% to $59.6 million; lower compensation costs partly offset higher acquisition-related, occupancy, and other administrative expenses. The effective tax rate was 23.7% in Q3 and 24.7% year to date.
- Cash flow: For nine months, operating activities provided $3.8 million, compared with $14.7 million in 2018; investing used $39.1 million, mainly for acquisitions and capital expenditures; financing provided $6.9 million. Cash declined $28.4 million to $40.8 million. The operating cash-flow decline reflected, among other items, compensation payments, lease-accounting adoption, and receivable timing.
- Liquidity and debt: At September 30, cash was $40.8 million, receivables net were $8.9 million, and total liabilities were $107.9 million. Term-loan borrowings were $17.1 million, versus none at year-end 2018; there were no revolver borrowings. The term-loan facility was increased to $25.5 million, and the $7.5 million revolving facility was extended to June 2020. The company reported compliance with its credit covenants and expected operating cash flow to meet needs for the next 12 months.
- Other balance-sheet items: Goodwill was $63.7 million and net intangible assets were $30.0 million, largely reflecting acquisitions. Adoption of lease accounting added substantial operating lease assets and liabilities; reported operating lease liabilities were $40.9 million.
Material changes and unusual items
- Cortina acquisition: Completed July 1, 2019, adding a growth-equity capability and a Midwest presence. The preliminary purchase consideration was $57.8 million, including $13.8 million of estimated contingent consideration; additional earn-outs could reach $26.2 million. Purchase-price allocations were preliminary. Cortina contributed $3.2 million of revenue and $1.0 million of pretax income during the quarter.
- Neosho acquisition: Completed January 15, 2019. Acquisition-related goodwill, contingent consideration, and earn-outs were recorded.
- Financing and costs: The company drew $18.0 million under its amended term loan in connection with the acquisition period and repaid $0.9 million of principal during the first nine months. Q3 acquisition-related professional fees and insurance costs were included in non-GAAP adjustments; management also cited office renovation costs and amortization of acquired intangibles.
- Lease accounting: ASC 842 adoption on January 1, 2019 materially increased reported lease assets and liabilities; prior-period balance-sheet figures were not recast.
- Capital returns and ownership: The company paid $3.9 million in Class A dividends during the first nine months, at $0.15 per share per quarter. Cortina-related Class B units and partner exchanges increased the share/unit base and non-controlling interests.
Outlook, commentary, and risks
The filing provides no specific earnings or revenue guidance. Management said it expected to fund operations and commitments over the next 12 months primarily from operating cash flows. Results remain sensitive to market levels and investment performance because advisory fees are largely AUM-based; market declines may also prompt client withdrawals. Other disclosed risks include client and key-person retention, fee pressure, competition, hiring and retention of investment professionals, regulatory and litigation costs, cybersecurity and operational safeguards, and acquisition integration. Partner distributions and Class A dividends are material cash uses. The tax receivable agreement requires payment of 85% of realized qualifying tax savings; the recorded liability was approximately $9.8 million, and future exchange-related payments could be additional. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Track organic AUM flows, client retention, market-driven AUM changes, and Cortina’s ability to retain and grow acquired revenue.
- Review final Cortina purchase-price allocations and subsequent changes to contingent consideration and earn-out estimates.
- Monitor operating cash generation, acquisition spending, debt draws and repayments, covenant headroom, and the revolver’s renewal or refinancing.
- Assess whether administrative-cost growth, lease obligations, partner distributions, and dividends remain supportable by cash flow.
- Reconcile GAAP results with management’s non-GAAP adjustments and evaluate the impact of dilution and the tax receivable agreement.