Silvercrest Asset Management Group Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Silvercrest provides investment management and family office services. Unless indicated otherwise, financial amounts below are in millions of dollars; the statements consolidate Silvercrest L.P. and include non-controlling interests.
Financial and operating performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $32.2 | $33.1 | $65.7 | $64.3 |
| Net income | $9.5 | $5.7 | $21.9 | $10.0 |
| Net income attributable to Silvercrest | $5.8 | $3.3 | $13.3 | $5.9 |
| Adjusted EBITDA | $9.2 | $10.4 | $19.4 | $20.1 |
| Adjusted EBITDA margin | 28.5% | 31.5% | 29.6% | 31.2% |
- Q2 revenue declined 2.8%; six-month revenue increased 2.1%. Management and advisory fees were $31.1 million in Q2 and $63.6 million for the six months. Q2 performance fees were negligible at $2,000.
- GAAP net income margin was 29.4% in Q2 versus 17.1%; for the six months it was 33.3% versus 15.5%. GAAP diluted EPS was $0.58 for Q2 and $1.35 for the six months, compared with $0.35 and $0.61, respectively.
- Adjusted net income was $5.8 million in Q2 and $12.5 million for the six months, versus $6.7 million and $12.9 million. Adjusted diluted EPS was $0.39 and $0.83, versus $0.45 and $0.87. These are non-GAAP measures.
- Assets under management (AUM) ended the quarter at $28.7 billion, down 8.0% from March 31 and 11.1% from year-end 2021. Six-month net flows were positive $0.7 billion, but market depreciation reduced AUM by $4.3 billion. Average AUM was $30.0 billion for Q2 and $30.5 billion for the six months. The average annual management fee rate was 0.43%, down from 0.44%.
- Six-month operating cash flow was negative $6.6 million, compared with positive $2.0 million a year earlier. Investing activities used $0.3 million and financing activities used $11.3 million; cash declined $18.2 million to $67.6 million.
- At June 30, cash was $67.6 million; total liabilities were $77.6 million and equity was $129.7 million. Term-loan borrowings were $7.2 million, with no revolver borrowings. Operating lease liabilities were $30.0 million and finance lease liabilities $0.2 million.
Changes, unusual items and management commentary
- Q2 revenue fell primarily with market depreciation and net outflows from discretionary assets. For the six months, fee revenue grew despite market declines, supported by net client inflows. Discretionary AUM declined while non-discretionary AUM increased.
- Reported expenses fell sharply: 21.3% in Q2 and 25.3% for the six months. A major driver was the fair-value reduction in Cortina acquisition contingent consideration, which reduced general and administrative expense by $4.1 million in Q2 and $10.6 million in the six-month period. The comparable 2021 periods included expense increases of $1.6 million and $3.9 million, respectively. This materially affects comparisons of reported and adjusted results.
- Compensation expense was $18.0 million in Q2, down 2.7%, and $36.6 million for the six months, up 1.4%. Management attributed changes to bonus accruals, salaries, benefits and staffing.
- The Cortina second retention payment of $5.6 million became due after acquired revenue exceeded the applicable threshold; the remaining contingent consideration liability was $6.8 million for Cortina and $0.5 million for Neosho.
- The credit facility was amended to replace LIBOR with SOFR and extend the revolving facility maturity to June 18, 2023. The term loan matures July 1, 2026. The company reported compliance with facility covenants at quarter-end.
- Management said operating cash and existing liquidity were expected to meet needs for the next 12 months. It expects cash requirements to include compensation, operating costs, taxes, debt service, partner distributions and Class A dividends. No specific earnings or AUM guidance was provided.
- Management identified market declines, client withdrawals, investment performance, client retention, competition, staffing, cybersecurity and privacy, regulation, operational disruptions, COVID-19 and acquisition integration among relevant risks. The company stated that market declines can reduce fee revenue and may prompt further withdrawals. It reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- How much of the increase in GAAP income reflects the Cortina contingent-consideration fair-value adjustment, and how do non-GAAP adjustments affect the comparison?
- Whether AUM flows, market performance and the 0.43% fee rate support future fee revenue, particularly given the discretionary AUM decline.
- Cash conversion and working-capital movements: operating cash flow was negative despite higher net income, notably amid reductions in accrued compensation and accounts payable.
- Timing and amount of Cortina and Neosho earnout payments, and the facility’s 2023 revolver maturity, SOFR terms and covenant headroom.
- Whether distributions and dividends remain supportable if markets or operating cash flows weaken; TRA payments are also variable and Silvercrest estimates approximately $9.4 million for specified existing obligations, with later exchange-related payments potentially additional.