Affiliated Managers Group, Inc. — Q2 2011 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 Mutual Fund, Institutional, and High Net Worth distribution channels. This unaudited Form 10-Q covers the three and six months ended June 30, 2011, compared with the corresponding 2010 periods.
Assets under management were approximately $348.4 billion at June 30, 2011, up 40% from June 30, 2010. Growth reflected investment performance, net client inflows, and new Affiliate investments, including Trilogy Global Advisors. AMG reported more than 350 investment products and approximately $350 billion of assets under management in its executive overview.
Key financial metrics
| Metric | Q2 2010 | Q2 2011 | Change | Six months 2010 | Six months 2011 | Change |
|---|---|---|---|---|---|---|
| Revenue | $332.1 million | $462.3 million | 39% | $583.1 million | $888.5 million | 52% |
| Operating income | $95.8 million | $140.0 million | 46% | $164.4 million | $264.9 million | 61% |
| Operating margin | 28.8% | 30.3% | Up 150 bps | 28.2% | 29.8% | Up 160 bps |
| Net income attributable to controlling interest | $25.2 million | $45.5 million | 81% | $42.7 million | $84.5 million | 98% |
| Diluted EPS | $0.53 | $0.85 | 60% | $0.92 | $1.59 | 73% |
| Economic Net Income | $63.8 million | $91.3 million | 43% | $114.6 million | $176.3 million | 54% |
| EBITDA | $81.7 million | $123.8 million | 52% | $150.0 million | $242.0 million | 61% |
| Operating cash flow | $115.1 million | $180.2 million | 57% | $183.1 million | $310.4 million | 69% |
Q2 net income attributable to controlling interest represented approximately 9.8% of revenue, compared with 7.6% in Q2 2010. Six-month controlling-interest net margin was approximately 9.5%, compared with 7.3% in the prior-year period.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $311.2 million at June 30, 2011, compared with $313.3 million at December 31, 2010.
- Senior bank debt declined to $295.0 million from $460.0 million at year-end. The unsecured revolving credit facility has $750.0 million of committed capacity, with $455.0 million of remaining capacity at quarter-end and potential expansion of up to $150.0 million, subject to lender approval and other conditions.
- Carrying values of the 2008 senior convertible notes and junior convertible trust preferred securities were $428.9 million and $511.2 million, respectively. Combined carrying value of these securities and senior bank debt was approximately $1.24 billion.
- AMG reported an internal leverage ratio of 1.2:1, bank leverage ratio of 1.5, and bank interest coverage ratio of 8.6. The company stated that it was in compliance with its credit facility covenants.
- Six-month investing cash flow was an outflow of $17.2 million, compared with an $814.8 million outflow in 2010, when AMG made substantial investments in Pantheon and Aston. Six-month financing cash flow was an outflow of $297.9 million, compared with a $593.8 million inflow in 2010.
- Total contractual obligations were $3.13 billion, including debt, leases, and other liabilities. The filing also disclosed expected contingent payment obligations of $126.1 million, with maximum potential acquisition-related payments of up to $496.8 million through 2015.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by a 52% increase in Q2 average assets under management and a 53% increase for the six-month period. Consolidated performance fees declined to $18.1 million in Q2 and $22.3 million for the first six months, down 41% and 34%, respectively.
- Institutional revenue increased 54% in Q2 and 61% for the six months; Mutual Fund revenue increased 30% and 53%; High Net Worth revenue increased 13% and 12%.
- Operating expenses increased 36% in Q2 and 49% for the six months. Compensation increased 38% and 44%, while selling, general and administrative expense increased 26% and 52%. Intangible amortization increased 130% and 139%, largely due to new Affiliate investments.
- Income from equity method investments increased 103% in Q2 and 59% for the six months, principally because of increased performance fees at equity-method Affiliates.
- AMG recorded a $12.8 million write-down of a cost-method investment in Q2 2011, allocated to the High Net Worth channel.
- The 2010 partnership investment losses did not recur because certain investment partnerships were deconsolidated in the third quarter of 2010.
- Shares outstanding increased materially, with diluted average shares rising to 53.4 million in Q2 2011 from 47.6 million in Q2 2010, partly reflecting prior equity issuance and acquisition-related activity.
- Redeemable non-controlling interests increased to $517.9 million from $406.3 million at year-end, primarily from changes in redemption value and issuance of additional interests.
Guidance, outlook, management commentary, risks, and unusual items
The filing does not provide formal earnings guidance. Management expects cash requirements to be funded primarily by operating cash flow and available borrowing capacity. Principal expected uses of cash include investments in new and existing Affiliates, distributions to Affiliate managers, debt service, working capital, and approximately $50 million of Affiliate equity repurchases over the following twelve months.
In June 2011, AMG announced AMG Wealth Partners, a subsidiary focused on investments in boutique wealth management firms. In July 2011, AMG entered into a forward equity sale agreement permitting potential common-stock sales with aggregate proceeds of up to $300 million.
- Operating results are sensitive to global financial markets, equity-market performance, assets under management, client flows, and performance fees.
- Performance fees may vary significantly and may not correlate directly with total assets under management.
- Future acquisitions and investments in Affiliates may require additional borrowing or equity issuance and may not produce favorable operating results.
- AMG had $89.6 million of unfunded commitments to co-invest in certain Pantheon Ventures investment partnerships; Russell Investments was contractually obligated to reimburse $58.7 million if those commitments were called.
- Past acquisition agreements could require contingent payments of up to $496.8 million through 2015. The company expected approximately $1.4 million of such payments during the remainder of 2011.
- Tax examinations remain ongoing. The liability for uncertain tax positions was $23.2 million at June 30, 2011 and could increase by up to $3.0 million over the next twelve months due to settlements and expiring statutes of limitation.
- AMG used interest-rate swaps on $100.0 million of debt notional through October 2015 and $25.0 million thereafter through October 2017. The unrealized pre-tax gain was $0.7 million at June 30, 2011.
- Management concluded that disclosure controls and procedures were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether assets under management and net client flows remain resilient if equity markets weaken.
- The sustainability and volatility of performance fees, particularly following their decline in Q2 2011.
- The effect of new Affiliate investments on compensation, amortization, leverage, and cash distributions.
- The timing and funding of the $460 million potential put on the 2008 senior convertible notes in August 2013 and other convertible-security obligations.
- Actual future cash requirements for contingent acquisition payments, Affiliate equity repurchases, and the $89.6 million of unfunded partnership commitments.
- The terms, timing, and potential dilution associated with the July 2011 forward equity sale agreement.
- Resolution of tax examinations and uncertain tax positions, including the potential additional $3.0 million liability.
- The impact of the $12.8 million investment write-down and any further impairment in marketable, cost-method, or Affiliate investments.