Silvercrest Asset Management Group Inc. — Q1 2017 Form 10-Q
Business context and reporting period
For the unaudited quarter ended March 31, 2017, Silvercrest provided investment management and family-office services to high-net-worth individuals, families and institutional investors. The company reported one operating segment. Unless otherwise noted, dollar figures below are in millions.
Financial and operating performance
- Revenue: $21.95, up 14.0% from $19.26 in Q1 2016. Management and advisory fees rose 14.6% to $21.02; family-office revenue was nearly unchanged at $0.93.
- Profit: Income before other items increased to $4.75 from $3.62. Consolidated net income was $3.30, versus $2.50; net income attributable to Silvercrest was $1.69, versus $1.31. GAAP diluted EPS was $0.21, compared with $0.16.
- Margins and adjusted results: Net income margin was 15.0%, up from 13.0%. Adjusted EBITDA, a non-GAAP measure, was $6.49 versus $5.26; adjusted EBITDA margin was 29.6% versus 27.3%. Adjusted diluted EPS was $0.22 versus $0.17.
- Assets under management (AUM): Period-end AUM was $19.3 billion, up from $17.0 billion a year earlier and $18.6 billion at year-end 2016. Q1 growth included $1.7 billion of gross inflows, $1.5 billion of gross outflows and $0.5 billion of market appreciation. Average AUM was $19.0 billion.
- Expenses: Total expenses increased 10.0% to $17.20. Compensation and benefits rose 14.3% to $13.08, principally due to higher bonus accruals and salaries; general and administrative expenses declined 1.7% to $4.12.
- Cash flow and liquidity: Operating cash flow was negative $11.26, compared with negative $10.62 in Q1 2016; the filing attributes the outflow largely to annual compensation payments and timing of other working-capital items. Cash declined $14.81 during the quarter to $22.71. Investing cash outflow was $0.09 and financing cash outflow was $3.46.
- Debt and capital returns: Notes payable totaled $2.42 at quarter-end. No amounts were drawn on the revolving credit facility or delayed-draw term loan; the company reported covenant compliance. It paid $0.97 in Class A dividends, or $0.12 per share, and $1.95 in partner distributions.
Changes versus the prior comparable period
- Revenue growth was driven mainly by higher AUM and management fees. AUM increased 13.5% year over year, with improved client inflows and lower outflows than in Q1 2016, as well as market appreciation.
- Operating expenses grew more slowly than revenue, supporting improved reported and adjusted margins. Compensation growth was the principal expense pressure.
- Operating cash use increased modestly year over year. Financing cash use also rose, including $0.76 of acquisition-related earnout payments versus $0.18 a year earlier.
Outlook, risks and notable items
- Management said it expects operating cash generation to meet liquidity needs over the next 12 months; it did not provide numerical earnings or revenue guidance. It noted that first-quarter cash flow is affected by the timing of prior-year incentive compensation and any performance-fee receipts.
- Results are sensitive to market performance because advisory fees are primarily based on AUM. Market declines could reduce fees and prompt client withdrawals. Retaining clients and investment professionals, maintaining fee levels and investment performance, and regulatory, data-security and operational risks are also identified concerns.
- Approximately $16.6 billion of non-discretionary assets associated with a public treasurer’s office are excluded from reported AUM; the related advisory fee is capped at $0.825 million annually. Reported AUM therefore does not include this relationship’s assets.
- The company recorded $0.12 of severance in Q1; it is excluded from Adjusted EBITDA as a non-GAAP adjustment. It also paid $0.76 in acquisition earnouts. These items, and the company’s non-GAAP adjustments, should be considered alongside GAAP results.
- The tax receivable agreement requires payment to current and future eligible partners of 85% of certain realized tax savings. The recorded liability was $14.55 at March 31, 2017; management estimated approximately $15.0 million of future payments related to the original unit purchase, with additional payments from later exchanges potentially substantial. Actual amounts and timing are uncertain.
- Net future operating-lease commitments were $59.33, primarily reflecting office leases, including a New York City lease extension commencing in October 2017. The company stated it had no significant off-balance-sheet arrangements.
- Revenue-recognition guidance was under evaluation, with adoption planned using the cumulative-effect method; management expected increased revenue disclosures but had not determined the financial-statement impact. Adoption of the new lease standard was expected to increase reported assets and liabilities.
Important facts for investors to verify
- Whether AUM growth, net flows and investment performance continue to support management-fee revenue, including the effect of the excluded public-treasurer relationship.
- How compensation, bonuses and partner incentive allocations affect margins and cash generation in subsequent quarters.
- The maturity and availability of the revolving facility, covenant compliance, and the schedule for repayment of the $2.42 million of notes payable.
- The amount and timing of tax receivable agreement payments, and whether tax benefits are realized as assumed.
- The impact of lease commitments and upcoming accounting-standard adoptions on future reported liquidity and balance-sheet measures.