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. Its principal distribution channels are Institutional, Mutual Fund, and High Net Worth. The filing covers the unaudited three and nine months ended September 30, 2015, compared with the corresponding 2014 periods.
Assets under management were $593.8 billion at September 30, 2015, down 1% from $599.5 billion a year earlier. The decline primarily reflected $35.0 billion of market depreciation, partly offset by $23.2 billion from new investments and $6.5 billion of organic net client cash flows.
Financial Metrics
| Metric | Q3 2014 | Q3 2015 | 9M 2014 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $640.3 million | $613.1 million | $1,869.7 million | $1,894.7 million |
| Operating income | $224.2 million | $215.2 million | $616.6 million | $641.8 million |
| Operating margin | 35.0% | 35.1% | 33.0% | 33.9% |
| Net income | $189.9 million | $192.3 million | $527.4 million | $602.9 million |
| Net income attributable to controlling interest | $103.2 million | $109.0 million | $279.5 million | $365.7 million |
| Diluted EPS | $1.82 | $1.98 | $4.98 | $6.57 |
| Operating cash flow | — | — | $1,030.4 million | $856.2 million |
Q3 revenue decreased 4%, while controlling-interest net income increased 6% and diluted EPS increased 9%. For the first nine months, revenue increased 1%, controlling-interest net income increased 31%, and diluted EPS increased 32%. Nine-month results benefited substantially from a $44.7 million gain from revaluing contingent payment obligations and lower imputed interest expense.
- Economic net income attributable to controlling interest was $160.8 million in Q3 and $494.2 million for nine months, compared with $156.8 million and $444.4 million, respectively, in 2014.
- Economic EPS was $2.93 in Q3 and $8.93 for nine months, compared with $2.76 and $7.90, respectively.
- Controlling-interest EBITDA was $218.9 million in Q3 and $679.1 million for nine months, compared with $218.1 million and $621.9 million, respectively.
- Income from equity method investments increased 20% in Q3 to $57.9 million and 15% for nine months to $171.2 million.
- Q3 revenue declined in Institutional and Mutual Fund, by 8% and 3%, respectively, while High Net Worth revenue increased 3%. Nine-month revenue increased 3% in Mutual Fund and 9% in High Net Worth, but declined 3% in Institutional.
Cash Flow, Debt and Liquidity
- Operating cash flow was $856.2 million for the first nine months of 2015, down from $1,030.4 million, primarily because of settlements of payables, accrued liabilities and other liabilities.
- Investing cash outflow was $62.4 million, compared with $551.0 million in 2014; investments in Affiliates decreased to $50.0 million from $534.4 million.
- Financing cash outflow was $794.9 million, driven by $379.6 million of share repurchases, $336.9 million of distributions to non-controlling interests, and net debt repayments.
- Cash and cash equivalents were $541.7 million at September 30, 2015, compared with $550.6 million at December 31, 2014.
- Debt at September 30, 2015 consisted of $410.0 million of senior bank debt, $1,084.5 million of senior notes, and $304.7 million of convertible securities.
- On September 22, 2015, the Company entered into a $1.3 billion senior unsecured revolving credit facility and a $350.0 million senior unsecured term loan, both maturing September 30, 2020. The facilities include leverage and interest coverage covenants.
- The Company issued $350.0 million of 3.50% senior notes due 2025 and subsequently redeemed $140.0 million of 5.25% senior notes due 2022 on October 22, 2015.
- Management stated that operating cash flow, revolver borrowings, and potential forward equity proceeds are expected to be sufficient for foreseeable cash needs.
Material Changes Versus the Prior Comparable Period
- Average assets under management increased 1% in Q3 and 9% for nine months, but period-end assets under management declined 1% year over year because of market losses.
- Existing-Affiliate asset-based fees declined in Q3 and nine months, reflecting lower average assets and a lower average fee rate caused by mix shifts toward lower-fee Institutional and Mutual Fund products relative to High Net Worth.
- Operating expenses declined 4% in Q3 and were essentially flat for nine months. Q3 compensation expense decreased 6%, while nine-month compensation expense increased 3% because of newer Affiliates.
- Interest expense increased 24% in Q3 and 20% for nine months due to the 2025 notes and higher revolver borrowing costs.
- The controlling-interest effective tax rate declined to 33.2% in Q3 and 34.1% for nine months, from 36.8% and 36.9%, respectively, partly because certain non-U.S. earnings were treated as indefinitely reinvested.
- Share repurchases totaled $379.6 million for nine months. The Company repurchased 1.5 million shares at an average price of $214.53 and had approximately 2.5 million shares remaining under its repurchase authorization at September 30, 2015.
Outlook, Risks, Contingencies and Unusual Items
- Management expects principal future cash uses to include investments in Affiliates, distributions to Affiliate partners, share repurchases, debt service, and working capital.
- Unfunded commitments to co-investment partnerships totaled $74.8 million; $15.5 million may be reimbursable by a prior owner if called.
- Maximum contingent payment obligations through 2019 were $72.1 million for consolidated Affiliates and $151.0 million for equity method Affiliates. Management expected payments of $9.9 million related to consolidated Affiliates and none related to equity method Affiliates; no payments were expected during the remainder of 2015.
- The Company had $27.4 million of liabilities for uncertain tax positions, including $25.6 million that could affect the effective tax rate if recognized. Tax examinations may result in additional payments or benefits.
- Investment management revenue is sensitive to market levels, client cash flows, asset mix, fee rates, performance fees, and the performance of Affiliates. Foreign currency movements also affected comprehensive income, which included a $57.9 million foreign currency translation loss for nine months.
- Subsequent events included completion of a majority investment in myCIO Wealth Partners on October 1, 2015, and announced plans to acquire minority interests in Systematica Investments, Abax Investments, and Ivory Investment Management.
- No goodwill impairment was identified in the September 30, 2015 annual assessment. The filing does not provide formal earnings guidance.
Investor Verification Checklist
- Verify the sustainability of nine-month earnings growth excluding the $44.7 million contingent-payment revaluation gain and other non-recurring items.
- Monitor assets under management, market sensitivity, net client flows, and fee-rate mix, particularly in Institutional and Mutual Fund channels.
- Review leverage, credit-facility covenants, refinancing requirements, and the effect of the 2025 notes and October 2022-note redemption.
- Assess cash requirements for Affiliate investments, Affiliate equity repurchases, share repurchases, distributions, and the $74.8 million of unfunded commitments.
- Evaluate the impact of contingent payment obligations, redeemable non-controlling interests of $695.3 million, and potential Affiliate equity redemptions.
- Review tax uncertainties, foreign currency exposure, investment valuation assumptions, and the Company’s reliance on non-GAAP Economic net income and EBITDA measures.