Affiliated Managers Group, Inc. — 2019 Q1 Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company that invests in and supports boutique investment management Affiliates. This unaudited Form 10-Q covers the three months ended March 31, 2019, compared with the three months ended March 31, 2018. Aggregate assets under management were $774.2 billion at March 31, 2019, down 7% year over year, across more than 500 investment products.
Key financial metrics
| Metric | Q1 2018 | Q1 2019 | Change |
|---|---|---|---|
| Consolidated revenue | $612.4 million | $543.1 million | Down 11% |
| Net income (controlling interest) | $153.0 million | $(200.8) million | Turned to loss |
| Diluted EPS | $2.77 | $(3.87) | Turned to loss |
| Adjusted EBITDA (controlling interest) | $286.5 million | $215.6 million | Down 25% |
| Economic net income (controlling interest) | $215.2 million | $169.0 million | Down 21% |
| Operating cash flow | $205.0 million | $(17.9) million | Down $222.9 million |
| Cash and cash equivalents | $565.5 million at Dec. 31, 2018 | $305.2 million at Mar. 31, 2019 | Down $260.3 million |
| Total debt | $1,829.6 million | $1,780.7 million | Down $48.9 million |
Consolidated net loss attributable to controlling interest was approximately 37% of consolidated revenue, versus a positive approximately 25% net margin in Q1 2018. The loss was materially affected by a $415.0 million non-cash impairment of an equity method Affiliate. Adjusted EBITDA was approximately 39.7% of consolidated revenue; this is a supplemental, non-GAAP comparison and is not directly comparable to net margin.
Material changes versus the prior comparable period
- Aggregate fees declined 24% to $1,252.0 million, including a 15% decline in performance-based fees and a 9% decline in asset-based fees.
- Average assets under management declined 8% to $772.6 billion. Management attributed the decline primarily to global and U.S. equity strategies, industry-wide demand for passive products, and net client outflows.
- Equity method revenue declined 32% to $708.9 million and equity method earnings declined 37% to $80.1 million. Equity method income, net of amortization and impairments, changed from income of $96.3 million to a loss of $358.1 million.
- Consolidated expenses declined 11% to $387.8 million, primarily reflecting lower compensation and selling, general and administrative expenses. Intangible amortization and impairment expense increased 28% to $29.6 million.
- Cash used in operating activities was $17.9 million, compared with $205.0 million of operating cash flow in Q1 2018. The decline primarily reflected lower distributions from equity method investments and lower earnings adjusted for non-cash items.
- The company repurchased 854,171 shares for $90.6 million, or an average $106.09 per share, and paid $17.0 million in common stock dividends.
Guidance, outlook, commentary, risks and unusual items
- Management stated that operating cash flow, together with revolver borrowings, is expected to support cash needs for the foreseeable future. AMG also expects to use cash for Affiliate investments, common stock repurchases, Affiliate equity repurchases, debt service, dividends and distributions.
- At March 31, 2019, AMG had approximately $1.2 billion of remaining revolver capacity and was in compliance with its credit facility covenants. Management reported credit ratings of A3 from Moody’s and A- from S&P.
- On January 18, 2019, AMG amended its credit facilities to include a $1.25 billion revolving facility maturing in 2024 and a $450.0 million term loan maturing in 2023.
- On March 27, 2019, AMG issued $280.0 million of 5.875% junior subordinated notes due 2059; an additional $20.0 million was issued on April 8, 2019. Most proceeds were used to repay revolver borrowings.
- AMG established a $500.0 million equity distribution and forward equity program on March 27, 2019; no shares had been sold under the program as of March 31.
- The $415.0 million impairment reflected materially reduced growth expectations for a U.S. credit alternative Affiliate whose flagship product underperformed, with redemptions and lower fundraising expectations reducing projected fees and cash flows. Management identified no triggering events for impairment at the remaining equity method Affiliates.
- AMG had $146.6 million of unfunded co-investment commitments and potential contingent payments of $152.5 million through 2020, although management expected no significant contingent payments. A $25.7 million purchase of an additional 5% interest in a non-U.S. Affiliate was expected to close in Q2 2019.
- AMG expects to repurchase approximately $150 million of Affiliate equity during 2019. Redeemable non-controlling interests were $754.8 million at March 31, 2019.
- Management highlighted risks from market performance, asset flows, fee-rate pressure, performance-based fee volatility, Affiliate impairment assumptions, foreign exchange, leverage, regulatory requirements and contingent or put-related Affiliate obligations.
- On May 6, 2019, AMG announced an expected Q3 2019 acquisition of a minority equity interest in Garda Capital Partners LP.
Most important facts for investors to verify
- Whether the $415.0 million Affiliate impairment is isolated or signals continuing deterioration in the affected strategy and broader equity method portfolio.
- Subsequent trends in assets under management, net client flows, performance fees and fee rates, particularly in U.S. and global equities.
- The sustainability of cash generation after the sharp decline in operating cash flow and the reduction in cash balances.
- Debt maturities, revolver usage, interest-rate exposure and compliance with leverage and interest-coverage covenants.
- The timing and cash impact of the $150 million expected Affiliate equity repurchases, $146.6 million of unfunded commitments, $25.7 million Affiliate purchase and other put or contingent obligations.
- The effect of the new junior subordinated notes, equity distribution program, share repurchases and the announced Garda Capital Partners investment on leverage and shareholder dilution.