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AssetMark(AMK) - 2024 Q1 - Quarterly Report
AssetMarkAssetMark(US:AMK)2024-05-07 20:34

PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited condensed consolidated financial statements for Q1 2024 show significant net income growth and a pending merger agreement with GTCR Condensed Consolidated Balance Sheets Total assets and stockholders' equity increased as of March 31, 2024, driven by higher cash balances and retained earnings Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $247,626 | $217,680 | | Total current assets | $322,093 | $291,111 | | Goodwill | $487,909 | $487,909 | | Total assets | $1,656,826 | $1,620,563 | | Liabilities & Equity | | | | Total current liabilities | $69,247 | $75,842 | | Total liabilities | $347,312 | $353,181 | | Total stockholders' equity | $1,309,514 | $1,267,382 | | Total liabilities and stockholders' equity | $1,656,826 | $1,620,563 | Condensed Consolidated Statements of Comprehensive Income Q1 2024 net income rose significantly due to revenue growth and the non-recurrence of a prior-year SEC settlement accrual Q1 2024 vs Q1 2023 Income Statement (in thousands, except per share data) | Metric | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Total revenue | $190,266 | $170,298 | | Total operating expenses | $138,576 | $124,148 | | Other (income) expense, net | ($332) | $19,865 | | Income before income taxes | $49,728 | $23,938 | | Net income | $37,964 | $17,222 | | Diluted EPS | $0.50 | $0.23 | - The significant increase in net income was largely due to a $20.0 million accrual for an SEC settlement recorded in 'Other (income) expense, net' during Q1 2023, which did not recur in Q1 202472163165 Condensed Consolidated Statements of Cash Flows Operating cash flow increased in Q1 2024 due to higher net income, while investing cash use grew and financing activities were nil Cash Flow Summary (in thousands) | Activity | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $47,415 | $39,126 | | Net cash used in investing activities | ($17,469) | ($13,932) | | Net cash used in financing activities | $0 | ($25,000) | | Net change in cash | $29,946 | $194 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail accounting policies, goodwill stability, debt, and disclose the significant subsequent merger agreement with GTCR - On April 25, 2024, the Company entered into a merger agreement with GTCR Everest Borrower, LLC, valued at approximately $2.62 billion81 - In September 2023, the company settled with the SEC regarding a previously disclosed matter, paying a civil penalty of $9.5 million and disgorgement and prejudgment interest of $8.8 million, with a $20 million accrual recorded in Q1 202372194 - The company's goodwill balance remained unchanged at $487.9 million as of March 31, 2024, and a qualitative analysis determined it was not impaired37 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses strong Q1 2024 revenue and asset growth, the pending GTCR merger, and improved non-GAAP metrics Overview and Merger Agreement The company agreed to be acquired by an affiliate of GTCR for $35.25 per share, pending regulatory approvals - On April 25, 2024, the company entered into a merger agreement with GTCR Everest Borrower, LLC, where stockholders will receive $35.25 per share in cash8788 - The company's majority stockholder, HIIHL, has already provided the required stockholder approval for the merger via written consent8991 Financial and Operational Highlights The company reported double-digit year-over-year growth in revenue, net income, platform assets, and engaged advisers in Q1 2024 Q1 2024 Financial Highlights (YoY) | Metric | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Total Revenue | $190.3M | $170.3M | +11.7% | | Net Income | $38.0M | $17.2M | +120.9% | | Adjusted EBITDA | $65.9M | $58.8M | +12.1% | Asset and Adviser Growth (as of March 31) | Metric | 2024 | 2023 | Change | | :--- | :--- | :--- | :--- | | Platform Assets | $116.9B | $96.2B | +21.5% | | Engaged Advisers | 3,208 | 2,976 | +7.8% | Results of Operations Revenue growth was driven by higher asset-based fees, while a significant increase in net income was aided by a non-recurring prior-year expense Revenue Breakdown (in thousands) | Revenue Type | Q1 2024 | Q1 2023 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Asset-based | $149,984 | $131,039 | $18,945 | 14.5% | | Spread-based | $30,093 | $31,999 | ($1,906) | (6.0)% | | Subscription-based | $4,252 | $3,544 | $708 | 20.0% | | Total Revenue | $190,266 | $170,298 | $19,968 | 11.7% | - Asset-based expenses increased by $7.4 million (19.8%) due to higher platform assets156 - Employee compensation rose by $3.1 million (6.6%) due to increased salaries and related expenses to support growth158 Non-GAAP Financial Metrics Adjusted EBITDA and Adjusted Net Income both grew in Q1 2024, excluding items like share-based compensation and a prior-year SEC accrual Adjusted EBITDA Reconciliation (in thousands) | Line Item | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net income | $37,964 | $17,222 | | Adjustments (Taxes, Interest, D&A) | $19,557 | $15,440 | | EBITDA | $57,921 | $32,662 | | Share-based compensation | $4,168 | $3,822 | | Reorganization and integration costs | $3,841 | $1,909 | | Accrual for SEC settlement | $0 | $20,000 | | Other adjustments | ($23) | $405 | | Adjusted EBITDA | $65,907 | $58,788 | Adjusted Net Income Reconciliation (in thousands) | Line Item | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Net income | $37,964 | $17,222 | | Acquisition-related amortization | $2,180 | $2,174 | | Expense adjustments | $3,853 | $22,216 | | Share-based compensation | $4,168 | $3,822 | | Other (income) expense, net | ($35) | $88 | | Tax effect of adjustments | ($2,910) | ($5,821) | | Adjusted net income | $45,220 | $39,701 | Liquidity and Capital Resources The company maintains sufficient liquidity through cash from operations and its credit facility, with cash and equivalents of $247.6 million - As of March 31, 2024, the company had cash and cash equivalents of $247.6 million166 - The company has a 2022 Credit Agreement which includes a $375.0 million revolving credit facility and a term loan, with an outstanding balance of $93.8 million as of March 31, 2024169171 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risk from asset values, interest rate risk from client cash programs, and variable-rate debt - A 1% decrease in the aggregate value of assets on the platform would have caused pre-tax income for the quarter to decline by approximately $1.3 million181 - A 100 basis point change in short-term interest rates would result in an approximate $22.4 million annual change in income before taxes from the client cash program184 - A 100 basis point increase in the interest rate on the 2022 Credit Agreement would decrease annual income before taxes by approximately $0.9 million185 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the quarter-end with no material changes to internal controls - The Principal Executive Officer and Principal Financial Officer concluded that as of March 31, 2024, the company's disclosure controls and procedures were effective188 - There were no material changes in the company's internal control over financial reporting during the first quarter of 2024189 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company reports no material impact from ongoing legal proceedings, referencing a previously disclosed and settled SEC matter - In September 2023, the company settled a matter with the SEC, paying a $9.5 million civil penalty and $8.8 million in disgorgement and prejudgment interest194 Item 1A. Risk Factors The company faces risks from its pending merger, market volatility, competition, regulation, cybersecurity, and its controlling stockholder Risks Related to the Merger The pending merger with GTCR creates uncertainty, operational restrictions, and risks of non-completion or potential litigation - The company is subject to business uncertainties and contractual restrictions while the merger is pending, which could harm business relationships and financial results195 - Failure to complete the merger could adversely affect the business and stock price, and the company may be required to pay a termination fee of approximately $80.8 million under certain circumstances196198 Risks Related to Business and Regulation Business risks include revenue volatility from market conditions, intense competition, and compliance with extensive government regulations - Revenue may fluctuate significantly due to market conditions, as a majority of revenue is asset-based202210 - The company operates in an intensely competitive industry and derives nearly all revenue from the financial advisory sector, making it vulnerable to industry downturns205207 - The business is subject to extensive and evolving government regulation in the U.S., and failure to comply could result in fines, sanctions, or revocation of registrations297305 Risks Related to IP, Data, and Cybersecurity The company faces significant threats from cyber-attacks, data breaches, evolving AI risks, and complex data privacy regulations - The company is exposed to data and cybersecurity risks that could result in data breaches, service interruptions, and significant liability due to the sensitive financial information it stores255 - The integration and use of Artificial Intelligence (AI) exposes the company to risks including potential biases, cybersecurity threats, and a rapidly evolving regulatory landscape284285 - The company must comply with numerous, evolving data protection regulations like California's CCPA/CPRA and Europe's GDPR, which imposes significant compliance costs262266272 Risks Related to Controlling Stockholder and Ownership The PRC-based controlling stockholder introduces risks related to foreign laws, CFIUS review, and exemptions from certain NYSE governance rules - The controlling stockholder, HTSC, is subject to PRC laws and regulations that may influence decisions and require PRC regulatory approval for certain corporate actions286288 - Future acquisitions may be subject to review by the Committee on Foreign Investment in the United States (CFIUS), which could delay or block transactions293 - The company is a "controlled company" under NYSE rules due to HTSC's majority ownership, exempting it from requirements like having a majority of independent directors331 Other Information (Items 2-6) This section confirms no unregistered equity sales, defaults, or new 10b5-1 plans, and lists the exhibits filed with the report - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the first quarter of 2024350 - The sections for Unregistered Sales of Equity Securities, Defaults Upon Senior Securities, and Mine Safety Disclosures are not applicable349