Affiliated Managers Group, Inc. — 2Q17 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Results are unaudited and presented in millions unless otherwise stated.
Business context
Affiliated Managers Group is a global active asset management company investing in and supporting boutique investment management firms. At June 30, 2017, aggregate assets under management were $772.1 billion, up 19% year over year. The company reported one global active asset management segment after changing its internal performance assessment framework in the first quarter of 2017.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Revenue | $570.9 | $554.1 | 3% |
| Income from equity method investments | $75.0 | $65.2 | 15% |
| Operating income | $275.9 | $247.0 | 12% |
| Operating margin | 48.3% | 44.6% | Up approximately 370 bps |
| Net income | $204.4 | $183.6 | 11% |
| Net income attributable to controlling interest | $126.3 | $108.3 | 17% |
| Diluted EPS | $2.22 | $1.98 | 12% |
| Adjusted EBITDA attributable to controlling interest | $254.8 | $220.3 | 16% |
| Economic net income attributable to controlling interest | $188.7 | $167.4 | 13% |
For the six months ended June 30, 2017, revenue was $1,115.2, operating income was $538.4, net income attributable to the controlling interest was $248.8, diluted EPS was $4.35, adjusted EBITDA was $498.6, and economic net income was $371.9. Six-month operating margin was approximately 48.3%, compared with approximately 44.9% in the prior-year period.
Aggregate revenue, which combines consolidated revenue and equity method revenue, increased 23% in the quarter and 30% year to date. Equity method revenue increased 47% in the quarter to $653.5 and 65% year to date to $1,473.2, driven by higher average assets under management and performance fees, including contributions from 2016 investments.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $444.0 for the first six months of 2017, compared with $341.4 in 2016.
- Investing cash flow was an inflow of $1.0, compared with an outflow of $540.0 in 2016. The prior-year period included $551.4 of investments in Affiliates; 2017 investments in Affiliates were $30.3.
- Financing cash flow was an outflow of $517.2, primarily reflecting $285.0 of senior debt repayments, $170.2 of common stock repurchases, $178.6 of distributions to non-controlling interests, and $22.6 of common dividends.
- Cash and cash equivalents declined from $430.8 at December 31, 2016 to $364.6 at June 30, 2017.
- Carrying value of senior bank debt was $790.0, senior notes were $945.4, and convertible securities were $308.6 at June 30, 2017.
- The company had a $1.45 billion revolving credit facility and a $385.0 million term loan, both maturing September 30, 2020. Approximately $1.0 billion remained available under the revolver, and the company was in compliance with its covenants.
- Stockholders’ equity was $3,600.0 and total equity was $4,370.4 at June 30, 2017.
Material changes versus the prior comparable period
- Assets under management increased 19% to $772.1 billion; average assets under management increased 18% in the quarter and 19% year to date.
- Consolidated revenue grew modestly, while equity method revenue grew substantially because of higher assets and performance fees from newer and existing Affiliates.
- Total operating expenses were essentially flat in the quarter and declined slightly year to date. Compensation increased, while selling, general and administrative expense and intangible amortization declined.
- Income from equity method investments increased 15% in the quarter and 21% year to date, despite higher equity method intangible amortization.
- Common share repurchases increased to $170.2 million year to date from $33.4 million in the prior-year period. The company also paid $22.6 million of common dividends, compared with none in the 2016 period.
- The effective tax rate attributable to the controlling interest declined to 32.5% in the quarter and 32.3% year to date, compared with 31.7% and 33.2%, respectively, in the prior-year periods.
Outlook, management commentary, risks, and unusual items
Management expects operating cash flow, revolver borrowings, and potential proceeds from the equity distribution program to support foreseeable cash requirements. Expected uses include debt repayment, distributions and repurchases of Affiliate equity, common dividends, share repurchases, working capital, and investments in Affiliates. Management expected to repurchase approximately $175 million of Affiliate equity during 2017.
Management cited continued demand for alternative and multi-asset strategies and opportunities for strong active managers, while noting continued industry-wide demand for passive strategies and outflows in U.S. equity strategies. No formal earnings guidance was provided in the filing.
- Unfunded co-investment commitments were $92.1 million; $11.1 million could be reimbursed by a prior owner if called.
- Contingent payment obligations for consolidated Affiliates were up to $21.7 million, with expected payments of $8.9 million, including $1.6 million in 2017. Potential obligations for equity method Affiliates were up to $170.0 million, although no payments were expected.
- Third Avenue-related litigation settlements were approved during the quarter. A previously recorded $15.0 million reserve was unchanged, with funding expected from Third Avenue and its insurers in the third quarter of 2017.
- The company gave notice to redeem $200.0 million of 6.375% senior notes due 2042 on August 15, 2017 at 100% of principal.
- The company contributed its interest in Forbes Family Trust to Wealth Partners Capital Group on July 5, 2017 in exchange for a minority interest.
- Key risks include market and foreign-exchange movements, investment performance and performance-fee variability, client flows, leverage and interest rates, valuation of Affiliate interests and contingent obligations, regulatory requirements, litigation, and the ability to execute additional Affiliate investments.
Investor verification checklist
- Verify the sustainability and accounting mix of growth in equity method revenue and performance fees.
- Reconcile consolidated revenue growth with the 19% increase in assets under management and changes in fee rates and product mix.
- Review debt repayment, the August 2017 senior-note redemption, revolver availability, and covenant compliance.
- Assess cash needs arising from Affiliate equity repurchases, redeemable non-controlling interests, co-investment commitments, and contingent payments.
- Evaluate the effect of passive-investing trends and reported U.S. equity outflows on future assets under management and fee revenue.
- Confirm the resolution and funding of the Third Avenue litigation settlement and any remaining legal exposure.
- Review non-GAAP adjusted EBITDA and economic net income reconciliations alongside GAAP earnings and cash flow.