Affiliated Managers Group, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company that invests in boutique investment management firms and operates across Institutional, Mutual Fund, and High Net Worth distribution channels. The filing covers the unaudited three months ended March 31, 2013, compared with the same period in 2012. AMG reported $462.5 billion of assets under management at March 31, 2013, up 27% from $363.9 billion a year earlier.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $502.2 million | $417.7 million | 20% |
| Operating income | $150.5 million | $108.8 million | 38% |
| Operating margin | 30.0% | 26.0% | Up 4.0 points |
| Net income | $129.7 million | $93.0 million | 39% |
| Net income attributable to controlling interest | $62.4 million | $37.4 million | 67% |
| Diluted EPS | $1.15 | $0.71 | 62% |
| Economic net income | $124.2 million | $83.5 million | 49% |
| Economic EPS | $2.27 | $1.58 | 44% |
| EBITDA | $175.0 million | $114.1 million | 53% |
| Cash flow from operating activities | $202.2 million | $52.5 million | Increase of $149.7 million |
Revenue growth reflected higher average assets under management, investment performance, net client cash flows, and 2012 investments in new Affiliates. Revenue increased 8% in Institutional, 30% in Mutual Fund, and 44% in High Net Worth.
Operating expenses increased 14% to $351.7 million, including compensation and related expenses of $214.5 million, selling, general and administrative expenses of $92.3 million, and intangible amortization and impairments of $32.9 million. Net income attributable to controlling interest represented a 12.4% revenue margin versus 9.0% in the prior-year quarter.
Income from equity method investments increased 249% to $50.6 million, primarily due to higher revenue, early realization of performance fees, and the additional investment in BlueMountain. The quarter also included an $8.2 million loss from revaluation of contingent payment arrangements, compared with a $9.9 million gain in Q1 2012.
Operating cash flow was supported by higher earnings, cash distributions from equity method investments of $93.9 million, and working-capital changes. Investing cash flow was negative $7.0 million. Financing cash flow was negative $285.7 million, principally reflecting $195.0 million of senior bank debt repayments, $125.4 million of distributions to non-controlling interests, and $37.8 million of note and contingent payments.
Cash and cash equivalents declined from $430.4 million at December 31, 2012 to $335.0 million at March 31, 2013. Debt at March 31, 2013 included $150.0 million of senior bank debt, $340.0 million of senior notes, $454.0 million of senior convertible securities, and $516.3 million of junior convertible trust preferred securities. Management reported an internal leverage ratio of 1.2:1, bank leverage ratio of 1.5, and bank interest coverage ratio of 8.5, versus covenant limits of 3.0 and minimum coverage of 3.0.
Material changes versus the prior comparable period
- Assets under management increased 27% year over year to $462.5 billion, with $12.0 billion of net client cash inflows during the quarter and $19.3 billion of investment performance.
- Revenue increased 20%, while operating income increased 38%, reflecting operating leverage.
- Controlling-interest net income increased 67% and diluted EPS increased 62%.
- Income from equity method investments increased substantially, partly due to performance fees and the BlueMountain investment.
- Interest expense increased 30% to $24.2 million, primarily due to senior notes issued in 2012.
- Cash flow from operations increased sharply, while financing cash use increased because of debt repayment, distributions, and contingent payments.
- Other comprehensive income changed from a $23.4 million gain to a $21.5 million loss, principally because of a $22.8 million foreign currency translation loss.
- AMG entered into a new $1.25 billion senior unsecured revolving credit facility in April 2013, maturing in April 2018. The outstanding balance was $100.0 million as of April 30, 2013, with $825.0 million of remaining capacity reported under the prior covenant framework.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal earnings guidance. Management expects cash flows from operations, credit-facility borrowings, and proceeds from potential forward equity settlements to fund foreseeable needs. Expected 2013 uses include investments in Affiliates, contingent payment settlements, distributions to Affiliate partners, debt service, working capital, and approximately $50.0 million of Affiliate equity repurchases.
- Contingent payment obligations had a maximum potential of up to $467.8 million through 2017; expected settlement payments were $215.7 million, including approximately $2.8 million expected in 2013.
- AMG had approximately $73.3 million of co-investment commitments, of which $33.1 million could be reimbursed by a prior owner if called.
- Holders may put up to $460.0 million of senior convertible notes in August 2013. Management stated it currently intends to meet such obligations with credit-facility borrowings if necessary.
- Total contractual obligations were $3.706 billion, including debt, interest, leases, other liabilities, and derivative obligations; contingent obligations were presented separately.
- Market performance, investment performance, asset flows, performance fees, and the ability to source and finance new Affiliate investments could materially affect future results.
- The company is exposed to interest-rate, foreign-currency, investment valuation, regulatory, legal, tax, and liquidity risks. Management stated that ordinary-course legal matters are not expected to have a material adverse effect beyond recorded accruals.
- Interest-rate swaps had a $3.7 million unrealized loss at March 31, 2013, and required $5.3 million of posted collateral.
- Adoption of new accounting guidance on reclassifications from accumulated other comprehensive income had no significant financial statement impact.
Most important facts for investors to verify
- Whether assets under management growth and positive net client flows persist, particularly in the Mutual Fund and High Net Worth channels.
- The sustainability and timing of performance fees and the unusually large increase in equity-method investment income.
- Cash requirements related to the August 2013 convertible-note put right, contingent payments, Affiliate equity repurchases, and non-controlling-interest distributions.
- Compliance with the new credit facility’s leverage and interest-coverage covenants and the availability of borrowing capacity.
- The effect of market declines, foreign-currency movements, interest rates, and changes in investment valuations on revenue, earnings, and comprehensive income.
- The company’s non-GAAP Economic net income and EBITDA reconciliations, particularly the substantial add-backs for amortization, deferred taxes, imputed interest, and Affiliate equity expense.