Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) is a global asset management company with equity investments in boutique investment management firms. It operates through Institutional, Mutual Fund, and High Net Worth distribution channels. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the corresponding 2013 period.
Assets under management increased 20% year over year to $556.8 billion, driven by $51.4 billion of investment performance and $35.7 billion of organic growth from net client cash flows over the trailing twelve months. First-quarter 2014 net client cash flows were $7.0 billion.
Financial Performance and Liquidity
| Metric | Q1 2013 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $502.2 million | $593.1 million | 18% |
| Operating income | $150.5 million | $194.0 million | 29% |
| Operating margin | 30.0% | 32.7% | Up 270 bps |
| Net income | $129.7 million | $159.4 million | 23% |
| Net income attributable to AMG | $62.4 million | $77.2 million | 24% |
| Diluted EPS | $1.15 | $1.40 | 22% |
| Economic net income attributable to AMG | $124.2 million | $137.9 million | 11% |
| Economic EPS | $2.27 | $2.48 | 9% |
| EBITDA attributable to AMG | $175.0 million | $191.9 million | 10% |
| Operating cash flow | $202.2 million | $297.7 million | 47% |
Revenue growth reflected higher average assets under management, particularly in the Mutual Fund channel. Operating expenses increased 13% to $399.1 million; compensation increased 10%, selling, general and administrative expenses increased 33%, and intangible amortization and impairments decreased 17% to $27.4 million.
Income from equity method investments declined 9% to $46.2 million because the prior-year period included early realization of performance fees. Interest expense declined 27% to $17.6 million, while imputed interest expense and contingent payment arrangements increased to $22.5 million, including an $18.8 million expense associated with the settlement of the 2006 junior convertible trust preferred securities.
Cash and cash equivalents increased from $469.6 million at December 31, 2013 to $747.1 million at March 31, 2014. Investing cash flow was negative $114.3 million, primarily because of $108.9 million invested in Affiliates. Financing cash flow was positive $94.1 million, reflecting debt issuance and borrowings, partly offset by $219.0 million of distributions to non-controlling interests.
At March 31, 2014, debt consisted of $400.0 million of senior bank debt, $736.6 million of senior notes, and $301.7 million of convertible securities. AMG had $850.0 million of remaining capacity under its $1.25 billion revolving credit facility and stated that it was in compliance with applicable covenants. On April 15, 2014, AMG entered into a $250.0 million five-year senior unsecured term loan, with potential additional borrowing capacity of $100.0 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 18%, with Mutual Fund revenue up 28%, Institutional revenue up 9%, and High Net Worth revenue up 11%.
- Operating margin improved to 32.7% from 30.0%, primarily due to revenue growth and lower relative operating allocations at certain Affiliates.
- Net income attributable to AMG increased 24%, although economic net income increased at a slower 11% rate because of the mix of non-cash and unusual items.
- AMG issued $400.0 million of 4.25% senior notes due 2024 and used proceeds for debt repayment and general corporate purposes.
- Substantially all 2006 junior convertible trust preferred securities were converted into approximately 1.9 million common shares and were canceled and retired. AMG recognized an $18.8 million related expense.
- AMG completed its majority investment in SouthernSun Asset Management on March 31, 2014, for total consideration of $109.9 million. The provisional allocation included $126.9 million of acquired client relationships and $55.7 million of goodwill. SouthernSun's contribution to first-quarter revenue and earnings was not significant.
- Goodwill increased to $2.386 billion and acquired client relationships increased to $1.561 billion, principally reflecting the SouthernSun investment.
- Other comprehensive loss was $22.4 million, primarily from foreign currency translation losses and unrealized investment losses.
Outlook, Risks, Contingencies, and Unusual Items
Management expects cash generated from operations, available borrowings, and proceeds from potential forward equity transactions to support foreseeable cash needs. Expected uses include investments in Affiliates, distributions to Affiliate partners, debt service, potential Affiliate equity repurchases, and working capital.
AMG expected to repurchase approximately $75.0 million of Affiliate equity during 2014 and expected no contingent payment settlements during 2014. Unfunded co-investment commitments totaled approximately $73.1 million, of which $27.4 million could be reimbursed by a prior owner if called. Contingent payments under acquisition agreements could total up to $474.1 million through 2017, subject to specified Affiliate financial targets.
AMG announced or completed additional transactions after quarter-end: an equity investment in EIG Global Energy Partners completed April 1, 2014; an anticipated River Road Asset Management closing in the second quarter of 2014; and an anticipated Veritas Asset Management closing in the third quarter of 2014.
Key risks include sensitivity to global equity and financial markets, asset levels, investment performance, client cash flows, performance fees, the ability to identify and successfully integrate additional Affiliates, financing and dilution risk, regulatory and tax changes, and compliance with debt covenants. The filing states that forward-looking results may differ materially from expectations.
Important Facts for Investors to Verify
- Reconcile GAAP net income and EPS with non-GAAP economic net income, economic EPS, and EBITDA, particularly the effect of the $18.8 million convertible-security settlement expense.
- Confirm the post-quarter-end debt structure, including the April 15, 2014 term loan and the use of proceeds from the 2024 senior notes.
- Monitor AUM levels, net client flows, investment performance, fee mix, and the sustainability of performance-fee revenue.
- Assess the valuation and integration assumptions for SouthernSun and the expected timing and financing of the River Road, EIG, and Veritas transactions.
- Evaluate exposure to contingent Affiliate payments, Affiliate equity repurchases, unfunded investment commitments, and uncertain tax positions of $19.9 million.
- Review the filing's contractual-obligation disclosures and debt covenant requirements, including the reported $2.968 billion of contractual obligations.