Silvercrest Asset Management Group Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited results are consolidated and include Silvercrest L.P.; approximately 38% of its economic interests are presented as non-controlling interests. Financial statement amounts below are in U.S. dollars; figures are converted to millions where shown.
Business context and performance
Silvercrest provides investment management and family office services, primarily to ultra-high-net-worth individuals, families and institutions. At September 30, assets under management (AUM) were $20.6 billion, up 15.1% from $17.9 billion a year earlier and 10.8% from $18.6 billion at year-end 2016. For the nine months, gross inflows of $5.3 billion were largely offset by $4.9 billion of outflows; market appreciation contributed $1.6 billion to AUM growth. About 74% of AUM was discretionary.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $22.8m | $20.5m | $66.9m | $59.1m |
| Income before taxes | $5.3m | $3.9m | $15.2m | $11.1m |
| Net income | $3.7m | $2.9m | $10.6m | $7.5m |
| Net income attributable to Silvercrest | $1.9m | $1.5m | $5.4m | $3.7m |
| GAAP net income margin | 16.3% | 14.1% | 15.9% | 12.7% |
| Adjusted EBITDA | $7.0m | $5.9m | $20.3m | $16.6m |
| Adjusted EBITDA margin | 30.7% | 28.8% | 30.3% | 28.0% |
| GAAP diluted earnings per share | $0.23 | $0.19 | $0.67 | $0.47 |
Management and advisory fees, the principal revenue source, rose 11.9% in Q3 and 13.7% year to date, mainly on higher AUM. Family office services revenue increased 5.7% and 3.5%, respectively. Compensation and benefits rose 11.0% in Q3 and 11.9% year to date, primarily from higher bonus accruals and salaries; general and administrative expense declined in both comparisons. The effective tax rate was 30.2% for Q3 and 30.1% for the nine-month period.
Adjusted EBITDA and adjusted earnings measures are non-GAAP measures; the company cautions that they supplement, and do not replace, GAAP results. The filing reports adjusted net income of $3.3 million for Q3 and $9.4 million year to date.
Cash flow, debt and liquidity
- Cash and cash equivalents were $39.6 million at September 30, 2017, versus $37.5 million at December 31, 2016. Total assets were $109.6 million and total liabilities $38.9 million.
- Operating cash flow was $13.9 million for the first nine months, compared with $9.3 million in 2016. Investing activities used $0.6 million; financing activities used $11.3 million. Cash increased $2.0 million over the period.
- Notes payable were $0.7 million, down from $2.5 million at year-end. No borrowings were outstanding under the $7.5 million revolving facility or the $7.5 million delayed-draw term facility. The revolving facility was scheduled to expire December 23, 2017; the company reported covenant compliance and availability under the term loan through June 25, 2018.
- Cash uses included $6.0 million of partner distributions and $2.9 million of Class A dividends in the first nine months. Dividends paid were $0.36 per Class A share for the period. The company expects distributions to partners to remain a material cash use.
- Net operating lease commitments were $57.7 million, primarily extending through 2028. A capital lease obligation of $0.3 million was also reported.
Outlook, risks and other notable items
- No specific earnings, revenue or AUM guidance is provided. Management expects operating cash flow to meet cash and liquidity needs for the next 12 months and expects to continue quarterly Class A dividends, subject to available cash, subsidiary distributions and financing restrictions.
- Revenue depends substantially on market-sensitive AUM and client retention. A market decline could reduce fee revenue and prompt withdrawals. The filing estimates that a 10% change in average AUM, assuming proportional change across products, would change annualized revenue by approximately $9 million at the period’s average fee rate.
- The tax receivable agreement (TRA) requires payment to eligible partners of 85% of realized tax savings. The estimated TRA liability was $14.6 million; payment timing and amounts depend on taxable income, unit exchanges, stock prices and tax rules. The company warns payments could be substantial and, in certain circumstances, could exceed actual tax savings if tax-basis increases were successfully challenged.
- Other disclosed risks include adverse market or economic conditions, fee pressure, client outflows and retention, competition for investment professionals, regulatory and litigation costs, data-security and operational failures, and possible U.S. tax-law changes.
- The company reported no significant off-balance-sheet arrangements, no goodwill impairment, and effective disclosure controls as of September 30, 2017. It was evaluating the effects of new accounting standards; adoption of the lease standard was expected to increase reported assets and liabilities.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced after its stated December 23, 2017 expiration, and whether covenant compliance continued.
- How AUM, net flows, investment performance and realized fee rates evolve, given the high dependence on management fees.
- Whether compensation growth, particularly bonuses and partner incentive allocations, remains aligned with revenue and margin growth.
- The timing and cash impact of TRA payments, partner distributions, dividends and lease commitments.
- How much reported earnings growth is attributable to Silvercrest shareholders versus non-controlling interests, and how non-GAAP adjustments compare with GAAP performance.