Affiliated Managers Group, Inc. — 2022 Q3 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and nine months ended September 30, 2022, filed November 7, 2022. AMG partners with independent active investment management firms. Aggregate assets under management were $644.6 billion at quarter-end, down 14% from $747.8 billion a year earlier, primarily reflecting market declines, foreign exchange, and net client outflows.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Consolidated revenue | $578.6 million | $575.2 million | $1,789.9 million | $1,720.6 million |
| Net income | $164.3 million | $208.4 million | $557.0 million | $606.7 million |
| Net income attributable to controlling interest | $112.6 million | $128.4 million | $368.0 million | $387.3 million |
| Diluted EPS | $2.80 | $3.00 | $8.83 | $8.95 |
| Adjusted EBITDA attributable to controlling interest | $220.4 million | $227.7 million | $689.1 million | $701.8 million |
| Economic net income attributable to controlling interest | $166.4 million | $168.5 million | $516.9 million | $524.5 million |
Consolidated revenue increased 1% in the quarter and 4% year to date. Aggregate fees were $1,165.5 million in Q3, up 8%, but $3,675.6 million year to date, essentially unchanged from the prior-year period. Q3 revenue benefited from higher performance-based fees, which offset lower asset-based fees.
Q3 net income attributable to controlling interest fell 12%, while nine-month income fell 5%. Net margins based on consolidated revenue were approximately 28.4% for Q3 and 31.1% year to date; controlling-interest net margins were approximately 19.5% and 20.6%, respectively. These calculations are derived from reported GAAP amounts.
Operating cash flow was $797.4 million for the first nine months, compared with $897.3 million in the prior-year period. Investing cash flow used $266.6 million, including $147.8 million of investments in Affiliates and $110.5 million of net purchases of investment securities. Financing cash flow used $779.1 million, including $353.1 million of net common-stock repurchases, $278.0 million of distributions to non-controlling interests, and $60.8 million of debt repayments or junior convertible security repurchases.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $622.9 million at September 30, 2022, down from $908.5 million at December 31, 2021.
- Total debt was $2,534.8 million, consisting principally of $349.9 million of senior bank debt, $1,094.8 million of senior notes, $751.5 million of junior subordinated notes, and $338.6 million of junior convertible securities.
- The company had no borrowings under its $1.25 billion revolving credit facility. The revolver and $350 million term loan mature in October 2026.
- Total assets were $8,430.2 million and total liabilities were $4,288.2 million at quarter-end.
- Management stated that cash, operating cash flow, and available revolver capacity are expected to fund foreseeable requirements. AMG reported investment-grade ratings of A3 from Moody’s and BBB+ from S&P.
Material changes versus the prior comparable period
- Assets under management declined 14% year over year. For Q3, net client cash flows were negative $8.8 billion, market changes reduced AUM by $21.2 billion, and foreign exchange reduced AUM by $11.6 billion.
- Performance-based fees increased $105.1 million, or 10%, in aggregate during Q3, while asset-based fees decreased $15.8 million, or 2%.
- Investment and other income declined from $37.5 million to $3.1 million in Q3 and from $91.1 million to a $5.3 million expense year to date, primarily because of lower unrealized gains on other investments and marketable securities.
- Total consolidated expenses increased 8% in Q3 and 5% year to date. Compensation and selling, general and administrative expenses increased, partly because of investments in new Affiliates made in late 2021. Intangible amortization and impairments increased 62% in Q3 and 56% year to date.
- Equity method income increased 25% in Q3 to $44.8 million but decreased 1% year to date to $123.9 million.
- AMG repurchased 0.6 million shares in Q3 and 2.5 million shares year to date, at average prices of $125.13 and $135.73, respectively. A total of 5.8 million shares remained available under repurchase authorizations as of the October 2022 authorization.
- Effective January 1, 2022, ASU 2020-06 changed the accounting for junior convertible securities, increasing reported debt by $101.5 million at adoption and affecting diluted EPS through additional assumed shares.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide a specific quantitative earnings forecast in the filing. AMG expects continued demand for return-oriented strategies, with secular growth opportunities in private markets, liquid alternatives, Asia, wealth management, and ESG. Management also noted industry-wide outflows from certain equity strategies and continued demand for passive products.
AMG expects investments in Affiliates, share repurchases, debt repayment, distributions to Affiliate equity holders, dividends, and working capital to remain primary uses of cash. It expected net Affiliate equity purchases of approximately $15 million during the remainder of 2022.
The sale of AMG’s interest in Baring Private Equity Asia to EQT closed in October 2022. AMG was entitled to receive $240.0 million in cash and 28.68 million EQT ordinary shares, with 25% subject to a six-month lock-up. The gain was taxable at closing, and management intended to use proceeds for taxes, transaction expenses, debt repayment, repurchases, investments, and general corporate purposes.
- Unfunded commitments to Affiliate-sponsored investment products were $154.7 million.
- AMG reported contingent payment obligations with a fair value of $13.9 million and maximum potential payments of up to $110.0 million related to certain consolidated Affiliates.
- For equity-method Affiliates, the company reported contingent payment obligations of up to $147.5 million tied to financial targets, while management expected approximately $13 million to become payable.
- Foreign currency translation produced a $172.0 million year-to-date after-tax loss in other comprehensive income, contributing to accumulated other comprehensive loss of $329.2 million.
- Management completed its annual goodwill impairment assessment and identified no impairment. No impairment of indefinite-lived acquired client relationships was indicated.
- Key risks include market declines, foreign exchange movements, client outflows, performance-based fee volatility, Affiliate investment and valuation risk, liquidity and refinancing needs, contingent payments, regulatory requirements, and the uncertain outcome of legal or other contingencies.
Most important facts for investors to verify
- Whether AUM stabilizes or continues to decline, particularly in global and U.S. equity strategies.
- The sustainability and timing of performance-based fees, which materially supported Q3 revenue.
- Cash conversion and liquidity after share repurchases, Affiliate investments, distributions, debt service, and the BPEA transaction.
- The effect of rising interest rates, foreign exchange, and market valuations on revenue, investment income, debt costs, and equity-method results.
- Timing and amount of deferred, contingent, and Affiliate equity purchase obligations, including the $154.7 million of unfunded investment commitments.
- Use of proceeds from the BPEA sale and the treatment of the associated taxable gain.
- The impact of ASU 2020-06 and assumed settlement of redeemable non-controlling interests on diluted EPS and reported leverage.