Business Context and Reporting Period
Affiliated Managers Group, Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. AMG is a global asset management company that invests in boutique investment management firms and operates through Institutional, Mutual Fund, and High Net Worth distribution channels.
- Assets under management were $642.7 billion at June 30, 2015, up 6% from $606.8 billion a year earlier.
- Average assets under management increased 11% in the quarter and 13% year to date, including equity-method Affiliates.
- Growth in assets under management reflected new Affiliate investments, net client cash inflows, and market changes, partly offset by lower performance fees and unfavorable asset mix.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $646.6 million, up 2% | $1,281.6 million, up 4% |
| Operating income | $195.2 million | $426.7 million |
| Net income | $189.9 million, up 7% | $410.6 million, up 22% |
| Net income attributable to controlling interest | $128.7 million, up 30% | $256.7 million, up 46% |
| Diluted EPS | $2.31, up 32% | $4.58, up 45% |
| Economic net income | $171.4 million, up 14% | $333.5 million, up 16% |
| Economic EPS | $3.08, up 16% | $5.99, up 17% |
| EBITDA attributable to controlling interest | $239.2 million, up 13% | $460.1 million, up 14% |
Operating margin was approximately 30.2% in the second quarter versus 31.2% in the prior-year quarter, and approximately 33.3% for the first six months versus 31.9% in the prior-year period. The controlling-interest net margin improved to approximately 19.9% in the quarter from 15.6% and to 20.0% year to date from 14.3%.
- Quarterly revenue growth was driven by higher asset-based fees, partly offset by a $12.3 million decline in performance fees and a less favorable asset mix.
- Six-month revenue growth reflected a $94.0 million increase in asset-based fees, offset by a $13.9 million decline in performance fees and a $26.6 million adverse asset-mix impact.
- Quarterly revenue declined 4% in Institutional, but increased 4% in Mutual Fund and 12% in High Net Worth.
- Compensation expense increased 7% year over year in both reporting periods, while selling, general and administrative expense declined 7% in the quarter and 9% year to date.
- Income from equity-method investments increased 10% in the quarter and 12% year to date.
Cash Flow, Liquidity, and Debt
- Operating cash flow was $470.5 million for the six months, compared with $625.9 million in the prior-year period.
- Investing cash flow used $30.3 million, compared with $545.5 million used in the prior-year period, primarily because Affiliate investments declined to $32.0 million from $534.0 million.
- Financing cash flow used $501.0 million, including $314.8 million of share repurchases and $230.0 million of distributions to non-controlling interests.
- Cash and cash equivalents were $488.5 million at June 30, 2015, down from $550.6 million at December 31, 2014.
- Senior bank debt was $475.0 million, senior notes were $1,084.3 million, and convertible securities were $304.1 million at June 30, 2015.
- The company issued $350.0 million of 3.50% senior notes due 2025 and used the proceeds primarily to repay credit-facility borrowings. Outstanding credit-facility borrowings were $225.0 million, and the company reported compliance with its debt covenants.
- Remaining capacity under the $1.25 billion revolving credit facility was available while maintaining covenant compliance. A forward equity agreement had $252.8 million of remaining notional share capacity.
Material Changes Versus the Prior Comparable Period
- Controlling-interest net income increased 30% in the quarter and 46% year to date, despite only 2% and 4% revenue growth, respectively.
- Results benefited from a $15.0 million after-tax? No: the filing reports a $15.0 million pre-tax gain attributable to controlling interest, or $9.3 million net of tax, in the quarter, and a $44.7 million pre-tax gain, or $27.8 million net of tax, year to date, from revaluation of contingent payment obligations.
- The prior-year six-month period included an $18.8 million expense related to settlement of 2006 junior convertible securities; that expense did not recur.
- Share repurchases totaled $314.8 million in the first six months. AMG repurchased 1.3 million shares year to date at an average price of $217.91.
- Redeemable non-controlling interests increased to $744.3 million from $645.5 million, primarily due to changes in redemption value.
- On April 1, 2015, AMG completed its investment in Baker Street Advisors. On July 13, 2015, after quarter-end, AMG announced an agreement to acquire a majority interest in myCIO Wealth Partners.
Guidance, Outlook, Commentary, and Risks
Management stated that operating cash flow, available revolving-credit borrowings, and potential forward-equity proceeds should be sufficient to meet foreseeable cash needs. Expected uses include Affiliate investments, distributions to Affiliate partners, share repurchases, debt service, settlement of convertible securities, and working capital. Management expected to repurchase approximately $125.0 million of Affiliate equity during 2015.
- Unfunded co-investment commitments were $80.8 million; AMG may receive reimbursement of $18.6 million from a prior owner if specified commitments are called.
- Maximum contingent payment obligations under past acquisition agreements were up to $223.1 million through 2019. Expected settlement amounts were $9.9 million, with no payments expected during the remainder of 2015.
- Contractual obligations totaled $3.519 billion, including debt, leases, Affiliate equity, and derivative obligations. These amounts exclude uncertain tax positions and co-investment commitments.
- The company carried $27.6 million of liabilities for uncertain tax positions, including interest and related charges.
- Performance fees, market movements, client cash flows, asset mix, investment performance, foreign currency movements, and the ability to retain key Affiliate personnel may materially affect results.
- Investments valued using net asset value and Level 3 valuation techniques involve limited liquidity and significant judgment. The company reported no material investment-performance guarantees for unconsolidated variable-interest entities.
- Management identified no significant changes in market-risk disclosures and concluded that disclosure controls were effective as of June 30, 2015.
Most Important Facts for Investors to Verify
- Whether the reported earnings improvement is sustainable after excluding contingent-payment revaluation gains and the nonrecurrence of prior-year convertible-security settlement expense.
- The effect of declining performance fees and lower-fee asset mix on future revenue and margins.
- Future cash requirements for debt service, share repurchases, Affiliate equity redemptions, distributions, and contingent obligations.
- Debt covenant compliance, revolving-credit availability, and the terms and potential dilution associated with the remaining forward-equity capacity.
- The realization, timing, and liquidity of Level 3 investments and unfunded co-investment commitments.
- The financial and strategic impact of Baker Street Advisors and the announced myCIO acquisition.
- Future changes in assets under management, net client flows, investment performance, and market levels across the three distribution channels.