Silvercrest Asset Management Group Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015. Unaudited. Unless stated otherwise, dollar amounts are in millions.
Business context
Silvercrest provides investment management and family-office services to high-net-worth individuals, families and institutional clients. It reported one operating segment. At quarter-end, Silvercrest held approximately 63% of Silvercrest L.P.; the remaining economic interest is reported as non-controlling interest.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $19.263 | $17.428 | +10.5% |
| Management and advisory fees | $18.334 | $16.703 | +9.8% |
| Family-office services revenue | $0.929 | $0.725 | +28.1% |
| Total expenses | $15.639 | $13.290 | +17.7% |
| Income before taxes | $3.584 | $4.108 | -12.8% |
| Net income | $2.496 | $2.810 | -11.2% |
| Net income attributable to Silvercrest | $1.307 | $1.403 | -6.8% |
| GAAP diluted EPS | $0.16 | $0.18 | Down |
| Adjusted EBITDA (non-GAAP) | $5.255 | $4.966 | +5.8% |
| Adjusted EBITDA margin (non-GAAP) | 27.3% | 28.5% | -1.2 percentage points |
Revenue growth was more than offset at the operating-income level by expense growth. Compensation and benefits rose 17.2% to $11.442 million, including $0.772 million of equity-based compensation versus $0.115 million a year earlier. General and administrative expense increased 19.0% to $4.197 million. The reported effective tax rate was 30.4%, compared with 31.6%.
Assets under management and material changes
- Quarter-end AUM was $17.0 billion, down 6.1% from $18.1 billion at the start of Q1 and 6.6% from $18.2 billion at March 31, 2015. Average AUM was $17.6 billion, versus $18.1 billion.
- During Q1 2016, gross inflows of $1.0 billion were offset by $1.9 billion of outflows and $0.2 billion of market depreciation. Discretionary AUM increased $0.1 billion to $12.2 billion; non-discretionary AUM declined $1.2 billion to $4.8 billion.
- Management attributed higher revenue primarily to the Jamison acquisition and related AUM. Jamison contributed $1.370 million of revenue in Q1 2016. The average annual management fee rose to 0.43% from 0.39%, which management attributed in part to the acquisition and asset mix.
- Investment management and family-office fees from affiliated Silvercrest funds were $1.582 million, down from $1.902 million.
Cash flow, balance sheet and capital resources
- Cash and cash equivalents were $19.106 million at March 31, 2016, down from $31.562 million at December 31, 2015. Total assets were $93.952 million and total equity was $63.096 million.
- Operating activities used $10.617 million of cash, compared with $10.246 million used in Q1 2015. The principal cash-flow driver was a $16.357 million reduction in accrued compensation, reflecting payment timing; lower distributions received from investment funds also affected the year-over-year comparison.
- Investing activities provided $0.311 million, including a $0.507 million reduction in restricted deposits, partly offset by acquisition and capital spending. Financing activities used $2.150 million, including $1.375 million of partner distributions and $0.959 million of Class A dividends. Cash declined by $12.456 million during the quarter.
- Notes payable totaled $4.466 million, including accrued interest. No borrowings were outstanding on the revolving credit facility or delayed-draw term loan. The company reported compliance with credit-facility covenants; the $7.5 million revolving facility matures December 24, 2016.
- The company paid a $0.12-per-share Class A dividend during the quarter and said it intends to continue quarterly dividends, subject to available cash, subsidiary distributions and financing restrictions.
- Operating lease commitments, net of non-cancellable subleases, totaled $61.882 million, including $43.669 million thereafter. The estimated tax receivable agreement liability was $14.795 million; payments depend on realized tax savings and other factors.
Outlook, risks and unusual items
- No specific revenue, earnings or AUM guidance was provided. Management expected operating cash generation to meet cash and liquidity needs for the next 12 months, while noting partner distributions and dividends are material cash uses.
- Management highlighted exposure to market declines and client withdrawals because most revenue is based on managed assets. Its sensitivity illustration estimated that a 10% change in average AUM would change annualized revenue by approximately $7.6 million at the Q1 average fee rate; this is an illustrative estimate, not guidance.
- Q1 AUM outflows, particularly in non-discretionary assets, and market depreciation were material headwinds. Client retention, investment performance, fee rates, competition, hiring and retention, regulation, and operational and data-security safeguards were identified as risks.
- Silvercrest acquired Cappiccille, a tax-services business, on January 11, 2016. It paid $0.148 million at closing and recorded $0.354 million of estimated contingent consideration, with future earnouts tied to revenue. Jamison-related contingent consideration was $1.162 million at quarter-end.
- Management cited seasonal cash-flow effects: Q1 can include prior-year performance-fee receipts and payment of prior-year incentive compensation. No material legal proceedings were pending or threatened, and no significant off-balance-sheet arrangements were reported.
- Management reported effective disclosure controls as of March 31, 2016 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether AUM outflows persist, especially in non-discretionary accounts, and how market performance affects fee revenue.
- How much of revenue and earnings growth is attributable to acquisitions versus organic growth, and the ongoing integration and earnout costs.
- Whether cash generation rebounds after the large Q1 compensation-related cash outflow, and the company’s ability to fund distributions, dividends, lease obligations and debt service.
- The terms, renewal or replacement of the revolving credit facility due in December 2016, and continued covenant compliance.
- The assumptions and eventual cash cost of the tax receivable agreement, as well as the effect of equity awards and dilution on per-share results.
- Adjusted EBITDA and other non-GAAP measures should be assessed alongside GAAP results; adjusted EBITDA increased while GAAP net income and margin declined.