Affiliated Managers Group, Inc. — Q1 2018 Form 10-Q Summary
Business context and reporting period
Global asset management company with equity investments in boutique investment managers (“Affiliates”). The filing covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Assets under management were $830.9 billion across more than 550 investment products at March 31, 2018.
Key financial metrics
| Metric | Q1 2017 | Q1 2018 | Change |
|---|---|---|---|
| Consolidated revenue | $544.3 million | $612.4 million | 13% |
| Income before taxes | $253.3 million | $287.5 million | 13% |
| Net income | $193.6 million | $224.0 million | 16% |
| Net income attributable to controlling interest | $122.5 million | $153.0 million | 25% |
| Diluted EPS | $2.13 | $2.77 | 30% |
| Adjusted EBITDA attributable to controlling interest | $243.8 million | $286.5 million | 18% |
| Economic net income attributable to controlling interest | $183.2 million | $215.2 million | 17% |
| Operating cash flow | $122.1 million | $205.0 million | 68% |
Net income margin increased to approximately 36.6% from 35.6%; controlling-interest net income margin increased to approximately 25.0% from 22.5%. The effective tax rate attributable to the controlling interest declined to 28.4% from 32.1%, primarily reflecting the 2017 U.S. tax law changes.
- Average assets under management increased 13% to $839.7 billion, while aggregate fees increased 21% to $1.65 billion. Performance fees increased 13% and asset-based fees increased 8%.
- Consolidated expenses increased 11% to $435.4 million. Compensation increased 10%, selling, general and administrative expense increased 20%, and intangible amortization increased 6%.
- Cash and cash equivalents declined to $334.2 million from $439.5 million at December 31, 2017, after $313.1 million of financing cash outflows.
- Senior debt was $1.56 billion and convertible securities were $310.5 million at March 31, 2018. The company had approximately $1 billion of available revolver capacity and was in compliance with its debt covenants.
- The company paid a $0.30 per-share dividend and repurchased 0.8 million common shares for $173.1 million, or an average of $192.70 per share, during the quarter.
Material changes versus the prior comparable period
- Assets under management benefited from growth in alternatives and global equities, foreign exchange effects, and market activity, but net client cash flows were negative $1.9 billion. U.S. equity strategies experienced outflows consistent with industry trends toward passive products.
- Equity method revenue rose 26% to $1.04 billion and equity method income increased 12% to $96.3 million. Growth was moderated because a greater proportion of revenue growth occurred at Affiliates in which AMG owns a lower share of earnings.
- Performance fees were a significant contributor to aggregate fee growth and may vary between periods.
- Share repurchases increased materially from the prior year, while net senior debt activity changed from $85.0 million of repayments in Q1 2017 to $5.0 million of net borrowings in Q1 2018.
- Redeemable non-controlling interests increased to $941.6 million from $811.9 million, primarily due to changes in redemption value.
- The company adopted new revenue recognition and financial-instrument accounting standards on January 1, 2018. Management reported no significant impact on the consolidated financial statements, although distribution-related fees and expenses were presented differently.
Guidance, outlook, risks and unusual items
Management expects operating cash flow, revolver borrowings and proceeds from the equity distribution program to provide sufficient liquidity for foreseeable needs. Expected cash uses include share repurchases, Affiliate equity distributions and repurchases, dividends, debt repayments, working capital, and investments in Affiliates. Management indicated plans to repurchase approximately $125.0 million of Affiliate equity during 2018, although timing and amounts may vary.
- Unfunded co-investment commitments were $120.4 million and may be called in future periods.
- Contingent payments related to consolidated Affiliates were expected to total $10.2 million, including $8.2 million in 2018; maximum potential payments for equity method Affiliates were $170.0 million, although no payments were expected.
- A minority owner of an equity method Affiliate may sell a portion of its ownership interest to AMG annually beginning in the fourth quarter of 2018 at fair market value.
- Annual amortization of acquired client relationships was estimated at approximately $90 million in each of 2018 and 2019 for consolidated relationships, and approximately $100 million in 2018 for equity method Affiliates.
- Key risks include market declines, foreign exchange movements, client outflows, changes in fee rates and product mix, variability in performance fees, Affiliate ownership and redemption obligations, regulatory requirements, legal contingencies, and reliance on debt and capital markets.
- The filing provides no formal earnings guidance for 2018. Forward-looking statements are subject to the risks described in the company’s 2017 Form 10-K.
Most important facts for investors to verify
- Whether asset growth and fee increases persist after the unusually strong performance-fee contribution.
- The sustainability of net client flows, particularly continued outflows in U.S. equity strategies.
- Cash generation after share repurchases, dividends, Affiliate distributions, debt service and potential Affiliate equity purchases.
- Available revolver capacity, leverage and compliance with debt covenants following the March 2018 refinancing.
- The timing and ultimate cost of $120.4 million of unfunded commitments, contingent payments and Affiliate equity redemption obligations.
- The effect of tax-law changes and any future refinement of the company’s provisional 2017 tax accounting.
- The impact of rising intangible amortization and the company’s reliance on non-GAAP measures such as Adjusted EBITDA and Economic net income.