Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed its Quarterly Report on Form 10-Q for the period ended March 31, 2009. AMG is an asset management company that invests in a diverse group of boutique investment management firms ("Affiliates"). As of March 31, 2009, the company managed approximately $152.9 billion in assets across three distribution channels: Mutual Fund, Institutional, and High Net Worth.
Key Financial Metrics
| Metric (in millions) | Q1 2009 | Q1 2008 |
|---|---|---|
| Revenue | $178.5 | $335.0 |
| Operating Income | $44.7 | $114.6 |
| Net Income (Controlling Interest) | $6.1 | $31.2 |
| Earnings Per Share (Diluted) | $0.15 | $0.81 |
| Operating Cash Flow | $11.9 | $49.8 |
| Cash and Cash Equivalents (Ending) | $237.3 | $162.2 |
| Senior Debt | $0 | $233.5 |
| EBITDA | $49.2 | $88.6 |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased 47% to $178.5 million, driven primarily by a 38% drop in average assets under management due to global equity market declines and negative net client cash flows ($4.4 billion outflows). Performance fees also declined significantly.
- Profitability Compression: Net income attributable to the controlling interest fell 80% to $6.1 million. Operating expenses decreased 39% to $133.8 million, largely due to revenue-sharing arrangements that align compensation with revenue.
- Debt Reduction: AMG repaid the entire outstanding balance of its Term Loan ($233.5 million) in Q1 2009, leaving no senior bank debt outstanding. The revolving credit facility capacity remains at $770 million.
- Accounting Changes: The company adopted new accounting standards (APB 14-1, FAS 141R, FAS 160, Topic D-98) in Q1 2009, which affected the presentation of convertible debt, non-controlling interests, and acquisition costs.
Guidance, Outlook, and Risks
- Market Sensitivity: Management notes that performance is directly affected by global financial market conditions. Declines in equity markets reduce advisory fees and performance fees.
- Capital Strategy: The company expects to repurchase approximately $50 million of Affiliate equity during 2009. It maintains a forward equity sale agreement to sell up to $200 million of common stock, having settled $144.3 million in Q1 2009.
- Liquidity Position: AMG reported an internal leverage ratio of 1.4:1 and a bank leverage ratio of 1.7:1, well within its 3.5x covenant limit. The company has no near-term debt maturities.
- Contingencies: The company is contingently liable for up to $232 million in payments through 2012 related to past acquisition agreements and a potential investment in Harding Loevner LLC, with approximately $100 million expected to be paid in 2009.
- Forward-Looking Statements: The filing includes standard disclaimers regarding risks such as the inability to find new investments on favorable terms and the availability of capital.
Investor Verification Checklist
- Verify the impact of the 38% decline in average assets under management on future revenue streams.
- Confirm the status of the Harding Loevner LLC transaction restructuring and potential future cash outflows.
- Monitor the settlement of the remaining $55.7 million under the forward equity sale agreement.
- Review the composition of "Redeemable non-controlling interests" ($281.7 million) and potential future cash requirements for Affiliate equity repurchases.
- Assess the sustainability of the 39% effective tax rate given the mix of current and deferred tax provisions.