Affiliated Managers Group, Inc. — Form 10-Q Summary
Business context and reporting period
Affiliated Managers Group, Inc. is a global asset management company that invests in and partners with boutique investment management firms. The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. Aggregate assets under management increased 20% to $803.7 billion at September 30, 2017. The company reported one operating segment beginning in 2017.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $585.7 million | $544.7 million | $1,700.9 million | $1,644.2 million |
| Operating income | $289.5 million | $238.5 million | $827.9 million | $732.2 million |
| Net income | $216.8 million | $175.9 million | $614.9 million | $533.0 million |
| Net income attributable to controlling interest | $125.4 million | $110.2 million | $374.2 million | $322.5 million |
| Diluted EPS | $2.22 | $2.02 | $6.57 | $5.90 |
| Adjusted EBITDA attributable to controlling interest | $256.3 million | $219.8 million | $754.8 million | $655.8 million |
| Economic net income attributable to controlling interest | $191.3 million | $165.5 million | $563.2 million | $492.3 million |
- Q3 revenue increased 8%; nine-month revenue increased 3%.
- Q3 operating income increased 21%; nine-month operating income increased 13%. Operating margin was approximately 49.4% in Q3 and 48.7% for the nine months, versus approximately 43.8% and 44.5%, respectively, in the prior-year periods.
- Net income attributable to the controlling interest increased 14% in Q3 and 16% for the nine months. Diluted EPS increased 10% in Q3 and 11% for the nine months.
- Average assets under management increased 19% in both the quarter and nine-month period. Consolidated Affiliate average assets rose 10% in Q3 and 8% year to date; equity method Affiliate average assets rose 32% and 34%, respectively.
- Aggregate revenue, including equity method Affiliate revenue, increased 27% in Q3 and 29% for the nine months. Equity method revenue increased 50% and 60%, respectively, driven by higher asset-based revenue and performance fees.
Cash flow, balance sheet, debt and liquidity
- Cash flow from operating activities was $800.5 million for the nine months ended September 30, 2017, compared with $684.5 million in 2016.
- Investing cash flow was an inflow of $4.9 million, compared with an outflow of $868.7 million in 2016, when the company made substantial Affiliate investments.
- Financing cash flow was an outflow of $871.5 million, including $645.0 million of senior debt repayments, $276.4 million of common-stock repurchases, $266.8 million of distributions to non-controlling interests and $33.8 million of dividends.
- Cash and cash equivalents declined to $374.7 million at September 30, 2017, from $430.8 million at December 31, 2016.
- At September 30, 2017, carrying amounts were $870.0 million of senior bank debt, $745.5 million of senior notes and $309.3 million of convertible securities. Total liabilities were $3.49 billion and total equity was $4.40 billion.
- The company had approximately $1.0 billion of remaining revolver capacity and stated that operating cash flow, revolver borrowings and equity-distribution proceeds should be sufficient for foreseeable cash needs. The credit facilities mature September 30, 2020, and the company was in compliance with all covenants.
- During the quarter, the company redeemed and retired all $200.0 million of its 6.375% senior notes due 2042.
Material changes versus the prior comparable period
- Growth was led by equity method Affiliates, including the contribution of 2016 investments, higher performance fees and stronger market results.
- Revenue from consolidated Affiliates increased 8% in Q3 but only 3% for the nine months, as asset growth was partly offset by lower asset-based revenue ratios and lower year-to-date performance fees.
- Total operating expenses declined 2% in Q3 and 1% for the nine months. Intangible amortization and impairments declined 21% in both periods, while nine-month selling, general and administrative expense declined 6%.
- Income from equity method investments increased 5% in Q3 and 15% for the nine months. Higher equity method intangible amortization moderated the increase in equity method earnings.
- Common-stock repurchases increased substantially: $276.4 million during the first nine months of 2017 versus $33.4 million in the prior-year period. The company repurchased 1.7 million shares year to date at an average price of $164.00.
- The quarterly dividend was $0.20 per share; year-to-date dividends were $0.60 per share, compared with no dividends reported in the prior-year periods.
Guidance, outlook, risks and unusual items
- No specific earnings or revenue guidance was provided in the filing. Management expects demand for alternative and multi-asset strategies to continue and believes active managers remain positioned for growth, while noting continued industry pressure and outflows in U.S. equity strategies.
- Unfunded co-investment commitments totaled $94.9 million. Contingent payment obligations were up to $21.7 million for consolidated Affiliates and up to $170.0 million for equity method Affiliates; expected payments were $8.9 million for consolidated Affiliates and none for equity method Affiliates.
- Affiliate equity holders have conditional put rights. Redeemable non-controlling interests increased to $804.6 million, and the company repurchased $161.5 million of Affiliate equity during the first nine months; approximately $10 million of additional repurchases were expected in Q4 2017.
- A minority owner of an equity method Affiliate may sell part of its ownership interest to the company annually beginning in Q4 2018 at fair market value.
- Legal claims related to the liquidation of the Third Avenue Focused Credit Fund were resolved through a court-approved settlement during the quarter; no additional expense was recognized because the previously recorded $15.0 million reserve covered the matter.
- Goodwill impairment testing indicated no impairment as of September 30, 2017. The company continues to face exposure to market performance, client flows, performance fees, foreign exchange, investment valuation, regulatory requirements and the results of its Affiliates.
- A 1% change in pound sterling and Canadian dollar exchange rates was estimated to affect stockholders’ equity by approximately $13 million and $2 million, respectively.
- Management stated that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Reconcile reported consolidated revenue with aggregate revenue, including equity method Affiliates, and assess the effect of the 2017 reporting-presentation change.
- Evaluate how much earnings growth is attributable to market appreciation, performance fees and 2016 Affiliate investments versus recurring client cash flows.
- Review the company’s ownership percentages and non-controlling interest economics, which materially affect the conversion of Affiliate results into controlling-interest earnings.
- Monitor debt maturities, revolver availability, covenant compliance and the impact of further debt repayments or Affiliate equity repurchases on liquidity.
- Assess potential cash requirements from the $94.9 million of unfunded commitments, contingent payments, Affiliate equity put rights and the 2018 minority-owner purchase right.
- Consider the effect of ongoing intangible amortization, deferred taxes and other non-GAAP adjustments when comparing GAAP earnings with Adjusted EBITDA and Economic net income.