AFFILIATED MANAGERS GROUP, INC. quarterly report, Q2 FY2019

Affiliated Managers Group, Inc. — 2019 Q2 Form 10-Q Summary

Business context and reporting period

Global asset management company with equity investments in boutique investment managers. The filing covers the three and six months ended June 30, 2019; financial statements are unaudited and presented in millions except per-share data.

Assets under management were $772.2 billion at June 30, 2019, down 6% from $824.2 billion a year earlier.
Average assets under management declined 7% in both the quarter and year-to-date period.
Management cited continued demand for illiquid alternatives, multi-asset and fixed-income strategies, while reporting outflows in quantitative, liquid-alternative and certain equity strategies.

Financial performance and key metrics

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Consolidated revenue	$591.9	$600.1	$1,135.1	$1,212.6
Net income	$180.2	$205.2	$47.2	$429.3
Net income (loss), controlling interest	$107.7	$117.0	$(93.1)	$270.0
Diluted EPS	$2.11	$2.16	$(1.81)	$4.92
Adjusted EBITDA, controlling interest	$219.3	$246.2	$434.8	$532.7
Economic net income, controlling interest	$170.1	$195.6	$339.1	$410.9
Operating cash flow	Not separately provided	Not separately provided	$309.2	$577.3

Controlling-interest net margin was approximately 18.2% in Q2 2019 versus 19.5% in Q2 2018. The six-month controlling-interest margin was approximately negative 8.2%, compared with 22.3% in the prior-year period. Adjusted EBITDA margin was approximately 37.0% for Q2 and 38.3% year to date; these are non-GAAP measures.

Aggregate fees declined 9% to $1,163.1 million in Q2 and 18% to $2,415.1 million year to date. The decrease reflected lower average assets, lower asset-based fee ratios and weaker year-to-date performance-based fees.
Equity method income was $29.4 million in Q2, down 17%; year-to-date equity method income was a loss of $328.8 million, versus income of $131.6 million.
Cash flow from operations was $309.2 million year to date, down $268.1 million, primarily because distributions received from equity method investments fell by $171.9 million.
Cash and cash equivalents were $360.0 million at June 30, 2019, versus $565.5 million at December 31, 2018. Net cash decreased $202.9 million during the first six months.

Balance sheet, debt and liquidity

Total debt was $1,791.4 million at June 30, 2019, comprising approximately $449.7 million of senior bank debt, $743.1 million of senior notes, $309.0 million of junior convertible securities and $289.6 million of junior subordinated notes.
The amended credit facilities include a $1.25 billion senior unsecured revolving facility maturing in 2024 and a $450.0 million term loan maturing in 2023. The company reported $1.25 billion of available revolver capacity and compliance with its covenants.
In early 2019, the company issued $300.0 million of 5.875% junior subordinated notes due 2059 and used most proceeds to repay revolver borrowings.
Management stated that operating cash flow, revolver borrowings and potential debt or equity-market access should be sufficient for foreseeable cash needs. Credit ratings were A3 from Moody’s and A- from S&P.
Contractual obligations totaled $3.50 billion, including debt, interest, leases and affiliate equity repurchase obligations. This excludes $139.3 million of unfunded co-investment commitments and certain other potential obligations.

Material changes versus the prior comparable period

Q2 revenue decreased 1%, while year-to-date revenue decreased 6%. Consolidated revenue benefited from higher performance-based fees in Q2, which partly offset lower asset-based fees.
Q2 controlling-interest net income declined 8%; year-to-date controlling-interest results shifted from $270.0 million of income to a $93.1 million loss.
Adjusted EBITDA declined 11% in Q2 and 18% year to date, principally because of lower aggregate fees and relatively fixed expense bases at certain equity method Affiliates.
During the first quarter, the company recorded a $415.0 million pre-tax, non-cash impairment to reduce the carrying value of a U.S. credit alternative Affiliate to fair value. The impairment was driven by underperformance, redemptions and reduced fundraising expectations.
Cash distributions from equity method investments fell materially, and the company made $141.8 million of net common-stock repurchases, paid $33.4 million of common dividends and distributed $192.7 million to non-controlling interests during the first six months.
The company adopted the new lease standard, recording a $190.8 million lease liability and a $163.6 million right-of-use asset at January 1, 2019.

Guidance, outlook, commentary, risks and unusual items

No specific earnings or revenue guidance was provided in the filing.
Management expects to repurchase approximately $150 million of Affiliate equity during 2019 and identified investments in Affiliates, share repurchases, distributions, debt repayment, dividends and working capital as principal uses of cash.
Unfunded commitments to co-invest in Affiliate-sponsored investment products were $139.3 million and may be called in future periods.
The company was contingently liable for a potential $150.0 million payment through 2020 tied to specified Affiliate financial targets, although management expected no payment as of June 30, 2019.
Affiliate equity holders have conditional put rights, creating potential future repurchase obligations. Reported redeemable non-controlling interests were $727.2 million.
Key risks include declining assets under management, client outflows, investment performance, fee compression, performance-fee volatility, impairment of Affiliate investments, foreign-exchange exposure, interest-rate and refinancing risk, and valuation uncertainty in equity method Affiliates.
The company uses pound sterling-denominated forwards and option collars to hedge foreign-currency exposure related to certain Affiliate investments. Derivative arrangements require collateral and could be affected by counterparty or market movements.
On July 5, 2019, after quarter-end, the company completed a minority investment in Garda Capital Partners LP.

Important facts for investors to verify

Whether assets under management and net client flows stabilize, particularly in alternatives, global equities and quantitative strategies.
The sustainability of performance-based fees and the effect of lower fee ratios on future revenue.
The valuation and operating recovery prospects of the impaired U.S. credit alternative Affiliate, including assumptions used in future impairment testing.
Cash distributions from equity method Affiliates and the company’s ability to fund repurchases, dividends, Affiliate investments and debt obligations.
Future Affiliate equity put exercises, co-investment commitments and the potential $150.0 million contingent payment.
Debt maturities, variable-rate exposure, revolver utilization and the terms of the 5.875% junior subordinated notes.