Affiliated Managers Group, Inc. — Q3 2019 Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company that invests in and partners with independent boutique investment managers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Assets under management were $750.7 billion at quarter-end, down 10% year over year.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Consolidated revenue | $549.0 million | $601.3 million | $1,684.0 million | $1,813.9 million |
| Net income | $162.1 million | $201.9 million | $209.3 million | $631.1 million |
| Net income attributable to controlling interest | $86.3 million | $124.9 million | $(6.8) million | $394.9 million |
| Diluted EPS | $1.71 | $2.34 | $(0.13) | $7.27 |
| Adjusted EBITDA attributable to controlling interest | $206.5 million | $237.8 million | $641.3 million | $770.5 million |
| Economic net income attributable to controlling interest | $159.4 million | $184.0 million | $498.5 million | $594.8 million |
| Cash flow from operations | Not separately provided | Not separately provided | $616.6 million | $876.2 million |
Q3 consolidated net margin was approximately 29.5%, compared with 33.6% in Q3 2018. Net margin attributable to the controlling interest was approximately 15.7%, compared with 20.8%. For the first nine months, consolidated net margin was approximately 12.4%, compared with 34.8%, while the controlling-interest margin was negative because of impairment charges.
- Aggregate fees declined 12% to $1,130.5 million in Q3 and 16% to $3,545.6 million year to date. Average assets under management declined 8% in both comparable periods.
- Q3 total consolidated expenses decreased 11% to $373.4 million; nine-month expenses decreased 7% to $1,173.8 million.
- Equity method income was $10.3 million in Q3 versus $59.7 million in the prior year and was a $(318.5) million loss for the first nine months versus $191.3 million of income in 2018.
- Cash and cash equivalents were $402.5 million at September 30, 2019, down from $565.5 million at December 31, 2018. Operating cash flow was $616.6 million, investing cash flow was $(139.9) million, and financing cash flow was $(634.2) million.
- Debt was $1,792.6 million at September 30, 2019, consisting primarily of $449.7 million of senior bank debt, $743.4 million of senior notes, $309.8 million of junior convertible securities, and $289.7 million of junior subordinated notes.
- The company reported $1.25 billion of remaining revolver capacity and compliance with its credit facilities. The revolver matures in 2024 and the term loan in 2023.
Material changes versus the prior comparable period
- Revenue, aggregate fees, assets under management, adjusted EBITDA, economic net income, controlling-interest net income, and EPS all declined, primarily because of lower average assets under management, fee-rate compression, and weaker performance-based fees.
- Year-to-date controlling-interest results were substantially affected by a $415.0 million impairment of an equity-method credit alternatives affiliate and an additional $10.0 million impairment recognized in Q3. Total equity-method intangible amortization and impairment expense was $529.1 million year to date versus $109.0 million in 2018.
- The company completed its minority investment in Garda Capital Partners LP on July 5, 2019, with a $162.3 million year-to-date investment in affiliates and $28.8 million of affiliate divestment proceeds.
- AMG issued $300.0 million of 5.875% junior subordinated notes due 2059 and used most proceeds to repay revolver borrowings.
- The company repurchased 2.7 million common shares for $223.4 million during the first nine months, including 1.2 million shares in Q3. It declared or paid common dividends of $49.6 million year to date, including a Q3 dividend of $0.32 per share.
- AMG adopted the new lease standard, recording a $190.8 million lease liability and a $163.6 million right-of-use asset on January 1, 2019.
- Net foreign-currency translation losses were $37.6 million in Q3 and $24.9 million year to date, reducing comprehensive income attributable to the controlling interest.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific numerical earnings or revenue forecast in the filing. Management expects operating cash flow and revolver borrowings to support foreseeable cash needs and identifies investments in affiliates, share repurchases, affiliate equity distributions and repurchases, debt repayment, dividends, and working capital as principal uses of cash. Management expected to repurchase approximately $150 million of affiliate equity during 2019.
- Management cited continued demand for private markets, wealth management, multi-asset, and fixed-income strategies, but reported outflows in quantitative, liquid-alternative, global-equity, and certain other equity strategies.
- Key business risks include market declines, client outflows, fee-rate compression, performance-based fee volatility, pressure from passive products, foreign-exchange movements, and impairment risk in affiliate investments.
- As of September 30, 2019, AMG had $146.3 million of unfunded co-investment commitments and contingent obligations of up to $190.0 million through 2021 tied to affiliate financial targets; management expected no significant payments under the latter.
- Affiliate equity holders had redeemable interests valued at $847.1 million, creating potentially significant future repurchase requirements.
- Goodwill impairment testing was completed with no impairment indicated. The valuation of equity-method affiliates remains sensitive to projected asset growth, client flows, fee levels, margins, tax rates, and discount rates.
- BlueMountain Capital Management, an affiliate with $18.3 billion of assets under management at September 30, 2019, was sold in a transaction that closed October 1, 2019. AMG recorded no significant gain or loss.
- Management stated that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the $425.0 million year-to-date equity-method impairment charges and assess whether further impairments may be required.
- Track assets under management, net client cash flows, performance-based fees, and fee-rate changes, particularly in alternatives and global equities.
- Evaluate cash generation against debt service, affiliate equity repurchases, dividends, share repurchases, unfunded commitments, and redeemable non-controlling interests.
- Review leverage, revolver availability, maturity dates, interest rates, and the economic subordination of the 5.875% junior subordinated notes.
- Assess the effect of the BlueMountain sale and the Garda investment on future earnings, cash flow, ownership, and reported consolidation or equity-method results.
- Distinguish GAAP results from non-GAAP adjusted EBITDA and economic net income, particularly because the latter exclude substantial intangible amortization and impairment-related items.