Affiliated Managers Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods. AMG partners with independent investment management firms and reports both consolidated and equity-method Affiliates. Aggregate assets under management increased 14% year over year to $747.8 billion.
Financial performance and key metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Consolidated revenue | $575.2 million | $494.8 million | $1,720.6 million | $1,473.2 million |
| Net income | $208.4 million | $127.8 million | $606.7 million | $231.2 million |
| Net income attributable to controlling interest | $128.4 million | $71.3 million | $387.3 million | $86.3 million |
| Diluted EPS | $3.00 | $1.53 | $8.95 | $1.83 |
| Adjusted EBITDA attributable to controlling interest | $227.7 million | $181.2 million | $701.8 million | $543.6 million |
| Economic net income attributable to controlling interest | $168.5 million | $152.1 million | $524.5 million | $433.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $897.3 million | $626.8 million |
Q3 consolidated revenue increased 16%, while nine-month revenue increased 17%. Q3 net income attributable to the controlling interest rose 80%; nine-month growth was $301.0 million, with the percentage change not meaningful because of the low 2020 base. Consolidated net income margins were approximately 36.2% in Q3 2021 and 35.3% for the first nine months; controlling-interest net income margins were approximately 22.3% and 22.5%, respectively.
Aggregate fees increased 12% in Q3 to $1,076.2 million and 16% for the nine months to $3,676.2 million. The nine-month increase included a 9% increase in asset-based fees and a 7% increase in performance-based fees. Q3 net client cash flows were positive $3.3 billion, but year-to-date net client cash flows were negative $12.3 billion, reflecting outflows in global and U.S. equity strategies.
Liquidity, debt, capital allocation, and balance sheet
- Cash and cash equivalents were $1,128.0 million at September 30, 2021, compared with $1,039.7 million at December 31, 2020.
- Total debt was $2,491.8 million, up from $2,312.1 million at year-end. Debt included $349.8 million of senior bank debt, $1,093.1 million of senior notes, $751.4 million of junior subordinated notes, and $297.5 million of junior convertible securities.
- The company had no borrowings under its $1.25 billion revolving credit facility and stated that it could borrow the full available capacity while remaining in compliance with its credit facilities.
- In July 2021, AMG issued $200.0 million of 4.20% junior subordinated notes due 2061.
- Operating cash flow of $897.3 million exceeded investing outflows of $177.8 million and financing outflows of $625.5 million, resulting in a $92.2 million increase in cash before other disclosed effects.
- AMG repurchased 2.8 million common shares for $493.0 million during the first nine months, including 0.6 million shares in Q3. As of September 30, 2021, 4.2 million shares remained available under the January 2021 authorization.
- Cash distributions to non-controlling interests were $260.9 million, and net Affiliate equity purchases were $47.8 million during the first nine months.
- Management stated that cash on hand, operating cash flows, and potential revolver borrowings should be sufficient for foreseeable cash needs. The company was rated A3 by Moody’s and BBB+ by S&P Global Ratings.
Material changes versus the prior comparable period
- Revenue growth reflected higher average assets under management, market appreciation, and stronger asset-based fees.
- Equity-method income increased to $35.9 million in Q3 from $17.0 million and to $125.1 million for the nine months from a $78.8 million loss.
- Investment and other income increased to $37.5 million in Q3 and $91.1 million for the nine months, primarily due to valuation and realized gains on other investments.
- Intangible amortization and impairment expense declined 72% in Q3 and 81% for the nine months, largely because 2020 included substantial impairment charges. No impairment of indefinite-lived acquired client relationships was indicated as of September 30, 2021.
- Interest expense increased 20% in Q3 and 26% for the nine months, principally due to debt securities issued in 2020 and 2021.
- Average diluted shares declined to 44.3 million in Q3 and 44.8 million for the nine months, versus 46.5 million and 47.2 million, respectively, driven primarily by share repurchases.
- Controlling-interest stockholders’ equity declined to $2,636.9 million from $2,779.7 million at year-end, primarily reflecting $407.3 million of year-to-date share repurchases and other capital activity.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects continued demand for illiquid alternatives, multi-asset, and fixed-income strategies, while noting continued industry-wide pressure and outflows in certain equity strategies.
- AMG completed its majority investment in Parnassus Investments on October 1, 2021, for $300.4 million of upfront cash, with $150.2 million of deferred consideration due in the fourth quarter of 2022 and contingent payments of up to $75.1 million.
- AMG entered into an agreement to acquire a majority interest in Abacus Capital Group; closing was expected in the fourth quarter of 2021, subject to customary conditions and regulatory approvals.
- Unfunded commitments to Affiliate-sponsored investment products totaled $114.1 million. Contingent payments tied to Affiliate financial targets totaled $188.0 million, although management expected to pay approximately $15 million.
- Deferred and contingent payments related to certain equity-method Affiliates totaled $103.9 million, including $63.9 million payable in 2021 and $40.0 million in 2022.
- Redeemable non-controlling interests increased to $748.9 million, representing potential future cash requirements associated with Affiliate equity put rights.
- Management identified market declines, adverse investment performance, client outflows, foreign exchange movements, future impairment charges, interest-rate changes, and COVID-19-related disruption as risks that could affect results.
- In October 2021, after quarter-end, AMG amended its revolver and term loan, extending both maturities to October 23, 2026 and reducing applicable rates.
- AMG adopted ASU 2019-12 without significant impact. It expected adoption of ASU 2020-06 to increase reported debt by approximately $102.4 million and beginning retained earnings by $4.6 million, while reducing additional paid-in capital by $81.4 million and deferred tax liabilities by $25.6 million.
Important facts for investors to verify
- Reconcile GAAP results with non-GAAP Adjusted EBITDA and Economic net income, particularly the effect of 2020 impairment charges and 2021 investment gains.
- Assess the sustainability of performance-based fees and the effect of year-to-date net client outflows in equity strategies.
- Review leverage, debt maturities, variable-rate exposure, and the terms and capacity of the amended credit facilities.
- Evaluate cash requirements from Parnassus, Abacus, contingent Affiliate payments, unfunded commitments, and potential Affiliate equity redemptions.
- Monitor future impairment risk for goodwill, acquired client relationships, and equity-method investments if markets weaken or Affiliate performance deteriorates.
- Confirm the post-quarter-end accounting and financing effects of the Parnassus acquisition, Abacus closing, and October 2021 credit agreement amendments.