Business Context and Reporting Period
Company: Affiliated Managers Group, Inc. (AMG)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: AMG is an asset management company with equity investments in a diverse group of boutique investment management firms ("Affiliates"). It operates through three principal distribution channels: Mutual Fund, Institutional, and High Net Worth. As of June 30, 2008, the company managed approximately $241.8 billion in assets under management (AUM), excluding pro forma pending acquisitions.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
|---|---|---|
| Revenue | $308,964 | $643,998 |
| Operating Income | $103,981 | $219,392 |
| Net Income | $35,295 | $68,073 |
| Diluted EPS | $0.89 | $1.79 |
| Operating Cash Flow | $120,455 | $57,694 |
| Cash and Cash Equivalents | $193,237 (Ending Balance) | $193,237 (Ending Balance) |
| Senior Bank Debt | $573,000 (Outstanding) | $573,000 (Outstanding) |
| EBITDA | $88,800 | $178,200 |
Material Changes vs. Prior Period
- Revenue: Revenue decreased 7% ($22.5 million) for the three months ended June 30, 2008, compared to the same period in 2007, primarily due to a 5% decline in average AUM driven by negative investment performance and net client outflows. For the six-month period, revenue remained flat (0% change) due to higher performance fees offsetting AUM declines.
- Net Income: Net income decreased 16% ($6.6 million) for the quarter and 13% ($10.4 million) for the six months compared to the prior year periods. This was driven by lower revenue and investment income, partially offset by reduced minority interest and operating expenses.
- Assets Under Management (AUM): Total AUM declined from $274.8 billion at year-end 2007 to $241.8 billion at June 30, 2008. The decline was attributed to negative investment performance ($18.9 billion) and net client outflows ($10.5 billion) year-to-date.
- Debt Structure: In the first quarter of 2008, the company retired its floating rate senior convertible securities and 2004 mandatory convertible securities ("PRIDES") via conversion to common stock, reducing interest expense and altering the capital structure.
Guidance, Outlook, and Risks
- Acquisitions: In July 2008, AMG announced agreements to acquire majority interests in Harding Loevner LLC (approx. $6 billion AUM) and Gannett Welsh & Kotler, LLC (approx. $7 billion AUM). These transactions are expected to close upon receipt of customary approvals.
- Capital Markets: In August 2008, the company issued $460 million of senior convertible notes due 2038. Additionally, a forward equity sale agreement allows the company to sell up to $200 million of common stock through Q3 2009.
- Risks: Performance is directly tied to global financial market conditions. Declines in equity markets reduce advisory fees and AUM. The company faces risks related to the success of new investments and the ability to raise capital on acceptable terms.
- Contingencies: The company has conditional obligations to purchase retained equity interests from Affiliate managers. If all such rights were exercised as of June 30, 2008, the aggregate payment would be approximately $1.37 billion.
Investor Verification Checklist
- AUM Trends: Verify the impact of negative investment performance and net outflows on future revenue streams, particularly in the Mutual Fund and Institutional segments.
- Debt Covenants: Confirm compliance with leverage and interest coverage covenants under the $940 million senior credit facility, especially given the increase in senior bank debt to $573 million.
- Convertible Securities: Review the terms of the newly issued $460 million senior convertible notes and the remaining zero-coupon notes to assess potential future dilution.
- Acquisition Integration: Monitor the closing and integration of the Harding Loevner and GW&K acquisitions to assess pro forma AUM growth.
- Minority Interest: Analyze the fluctuation in minority interest allocations, which significantly impacts Net Income available to common shareholders.