Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed an unaudited Form 10-Q for the three months ended March 31, 2020. AMG invests in boutique asset management firms and provides centralized operating, distribution, marketing, and product-development capabilities. Aggregate assets under management were $599.9 billion at March 31, 2020, down 23% from $774.2 billion at March 31, 2019. Management reported that COVID-19 materially increased market volatility and economic uncertainty, although AMG and its Affiliates remained operational with minimal disruption at the filing date.
Financial Performance and Key Metrics
| Metric | Q1 2019 | Q1 2020 | Change |
|---|---|---|---|
| Consolidated revenue | $543.1 million | $507.3 million | Down 7% |
| Net income (loss) | $(133.0) million | $40.0 million | Improved |
| Net loss attributable to controlling interest | $(200.8) million | $(15.6) million | Loss narrowed 92% |
| Loss per diluted share | $(3.87) | $(0.33) | Improved |
| Adjusted EBITDA attributable to controlling interest | $215.6 million | $200.4 million | Down 7% |
| Economic net income attributable to controlling interest | $169.0 million | $151.3 million | Down 10% |
| Operating cash flow | $(17.9) million | $85.6 million | Improved |
| Aggregate fees | $1,252.0 million | $1,253.1 million | Flat |
Consolidated expenses declined 9% to $354.3 million. Compensation and related expenses decreased 9% to $207.8 million, selling, general and administrative expenses decreased 6% to $90.3 million, and consolidated intangible amortization and impairments decreased 30% to $20.6 million. Interest expense increased 7% to $19.5 million.
Equity method loss, net, improved to $(113.2) million from $(358.1) million, primarily because equity method intangible amortization and impairment expense fell to $179.3 million from $438.2 million. Q1 2020 included a $140.0 million non-cash impairment of an Affiliate investment; Q1 2019 included a $415.0 million impairment.
Aggregate fees were broadly unchanged because a 9% increase in performance-based fees offset a 9% decrease in asset-based fees. Average assets under management declined 14% to $663.0 billion. Market changes reduced assets under management by $100.9 billion, net client outflows reduced them by $13.8 billion, and foreign exchange reduced them by $11.2 billion during the quarter.
Cash and cash equivalents increased to $592.2 million at March 31, 2020, from $539.6 million at December 31, 2019. Total debt increased to $2.045 billion from $1.794 billion, primarily due to a $250.0 million revolver borrowing. The revolver had $1.0 billion of remaining capacity, and the company was in compliance with its credit facilities. The company reported investment-grade ratings of A3 from Moody’s and BBB+ from S&P Global Ratings.
Material Changes Versus the Prior Comparable Period
- Revenue declined 7% as lower asset-based fees more than offset modestly higher performance-based fees.
- GAAP net loss attributable to controlling interest narrowed substantially, mainly because of lower Affiliate impairment and amortization charges; underlying non-GAAP measures also declined.
- Adjusted EBITDA decreased 7% and Economic net income decreased 10%, reflecting lower earnings at certain Affiliates and a lower economic interest in Affiliates recognizing performance fees.
- Operating cash flow improved to $85.6 million from $(17.9) million, while financing cash outflow fell to $37.7 million from $243.7 million.
- AMG repurchased approximately 0.9 million common shares for $69.6 million and paid $15.1 million in common dividends. It also paid $84.4 million for Affiliate equity repurchases, net of issuances.
- Accumulated other comprehensive loss increased to $229.8 million, primarily due to foreign currency translation losses.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide specific full-year earnings guidance in the filing. It stated that operating cash flow, together with revolver borrowings, is expected to support cash needs, while capital markets may also be accessed. AMG expected to repurchase approximately $135 million of Affiliate equity during the remainder of 2020.
COVID-19 was identified as the principal near-term risk. Prolonged or worsening market declines could reduce assets under management, asset-based fees, earnings, and the value of intangible assets and Affiliate investments. Management estimated that a proportional 1% change in assets under management would change annualized asset-based fees by approximately $15.1 million for consolidated Affiliates and $13.4 million for equity-method Affiliates.
As of March 31, 2020, AMG had $127.0 million of unfunded co-investment commitments, $115.1 million of Affiliate equity repurchase obligations, and expected contingent payments of approximately $47.5 million. Maximum contingent payment obligations could reach $150.0 million in 2021, $77.5 million in 2022, and $62.5 million from 2023 through 2025. The company expected approximately $48 million of such payments and no payments in 2020.
AMG entered into a $250.0 million interest-rate swap with a fixed annual rate of 0.5135% and terminated certain foreign exchange contracts, receiving net proceeds of $24.9 million. Management stated that indefinite-lived Affiliate client relationships and other equity-method investments exceeded carrying value at March 31, 2020, but further market deterioration could result in future impairments.
Important Facts for Investors to Verify
- Whether COVID-19-related market declines and client outflows continue to reduce assets under management, asset-based fees, and performance fees.
- The sustainability of cash generation relative to $2.045 billion of debt, planned Affiliate equity repurchases, dividends, distributions, and other commitments.
- Future impairments of goodwill, client relationships, and equity-method Affiliate investments, particularly following the $140.0 million Q1 2020 impairment.
- The timing and amount of Affiliate equity repurchase obligations, contingent payments, and $127.0 million of unfunded investment commitments.
- The distinction between GAAP results, which remained a loss attributable to controlling interest, and non-GAAP measures such as Adjusted EBITDA and Economic net income.
- AMG’s disclosure that its controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.