Silvercrest Asset Management Group Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Dollar amounts below are in millions unless stated otherwise. Silvercrest provides investment management and family office services. It owns approximately 62% of Silvercrest L.P.; the remaining economic interest is reported as non-controlling interests.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $18.55 | $17.23 | $35.97 | $33.95 |
| Income before taxes | $5.56 | $4.13 | $9.67 | $7.83 |
| Net income | $3.33 | $2.80 | $6.14 | $5.04 |
| Net income attributable to Silvercrest | $1.72 | $1.35 | $3.12 | $2.30 |
| Adjusted EBITDA | $5.37 | $5.11 | $10.33 | $10.09 |
| Adjusted EBITDA margin | 28.9% | 29.7% | 28.7% | 29.7% |
| Diluted GAAP EPS | $0.22 | $0.18 | $0.40 | $0.31 |
- Q2 revenue rose 7.7%; six-month revenue rose 6.0%. Management and advisory fees increased 9.8% and 8.5%, respectively, while family office services revenue fell 23.2% and 29.7%.
- Q2 Adjusted EBITDA increased 5.1%, but its margin declined 0.8 percentage points. Six-month Adjusted EBITDA increased 2.4%, with margin down 1.0 percentage point. Adjusted EBITDA is a non-GAAP measure.
- Assets under management (AUM) ended June at $19.0 billion, up 13.8% from $16.7 billion a year earlier and 6.2% from year-end 2014. The Jamison acquisition added approximately $0.7 billion of AUM. Reported AUM excludes approximately $13.8 billion of non-discretionary public-treasurer assets subject to an $825,000 annual fee cap.
- At June 30, cash was $19.1 million, down from $30.8 million at December 31, 2014. Total assets were $96.4 million and total liabilities $37.8 million. Notes payable were $6.17 million; there were no revolving-credit borrowings. The $15 million credit facility was undrawn, and the company reported covenant compliance.
- For the six months, operating cash flow was negative $1.51 million, versus positive $2.43 million a year earlier; investing cash use was $3.83 million and financing cash use $6.36 million. Cash declined $11.70 million. Management attributed the operating cash outflow chiefly to compensation payments and timing of vendor and tax-related payments.
Changes, acquisition, and unusual items
- Jamison closed on June 30, 2015. Consideration was preliminarily valued at $10.71 million: $3.55 million cash, $2.17 million in notes, $3.56 million in SLP units, and $1.43 million estimated contingent consideration. Preliminary allocation included $4.68 million goodwill and $5.80 million intangible assets; management expected final allocation by the 2015 Form 10-K.
- Other income included a $1.0 million favorable adjustment to the tax receivable agreement (TRA) liability, reflecting lower expected future tax benefits after a New York City tax-rate change. Separately, Q2 tax expense included $0.84 million of discrete deferred-tax expense related primarily to New York State tax-rate and New York City sourcing changes. The effective tax rate was 40.2% for Q2 and 36.5% for the first half, versus 32.3% and 35.6% in the comparable periods.
- Compensation expense increased 6.9% in Q2 and 3.7% for the first half, including higher partner incentive accruals. General and administrative expense increased 9.0% and 9.4%, respectively, including professional fees, research costs and occupancy expenses.
- Class A dividends were $0.24 per share for the first half; $1.87 million was paid. SLP distributions to partners were $4.13 million. The company describes partner distributions and Class A dividends as ongoing uses of cash.
- After quarter-end, on August 6, the company granted 966,510 restricted stock units to existing Class B unit holders, settling in SLP Class B units and vesting over four years.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance is provided. Management expects operating cash generation to meet liquidity needs and commitments over the next 12 months.
- Results are sensitive to market values and client flows because most revenue is based on AUM. Management estimated that a 10% change in average AUM, assuming proportional product impact, would change annualized revenue by approximately $1.9 million for Q2 and $1.8 million for the first half at the respective weighted fee rates.
- Management cites risks including adverse markets, client outflows or concentration, fee pressure, investment performance, retaining professionals, regulatory costs, litigation, cybersecurity and operational safeguards, and execution of growth plans. The filing notes that most client investment agreements may be terminated under specified terms.
- The estimated TRA liability was $15.05 million at June 30. The agreement generally entitles partners to 85% of specified realized tax savings; timing and amount depend on taxable income, exchanges, share prices and tax law. The filing warns payments may exceed actual tax savings in some circumstances if tax-basis increases are successfully challenged.
- Credit facilities impose financial and operating covenants. Operating leases had $7.75 million of minimum net rentals disclosed through 2019. The company reported no material pending or threatened legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- How much of AUM growth and future fee revenue is attributable to acquired Jamison assets, organic net flows, market performance, and the separately excluded $13.8 billion public-treasurer relationship.
- Whether Jamison meets earnout targets and how the preliminary goodwill and intangible-asset valuations, integration costs, and acquisition-related debt evolve.
- Whether operating cash flow recovers after compensation and vendor-payment timing effects, given the substantial first-half cash decline and continuing distributions and dividends.
- The sustainability of margins and fee rates amid lower average management fees, rising operating costs, and changing client and strategy mix.
- The impact of the August 2015 award of 966,510 RSUs on future compensation expense, unit ownership and potential dilution; also monitor TRA payments and tax-rate effects.