Affiliated Managers Group, Inc. — Q3 2013 Form 10-Q Summary
Business Context and Reporting Period
AMG is a global asset management company that invests in boutique investment management firms and operates through Institutional, Mutual Fund, and High Net Worth distribution channels. The filing covers the three and nine months ended September 30, 2013; financial statements are unaudited and presented in millions except per-share data.
Assets under management increased 22% year over year to $508.4 billion at September 30, 2013, driven by $50.2 billion of investment performance and $40.3 billion of organic growth from net client cash flows over the preceding twelve months.
Key Financial Metrics
| Metric | Q3 2012 | Q3 2013 | Change | 9M 2012 | 9M 2013 | Change |
|---|---|---|---|---|---|---|
| Revenue | $467.3 | $551.6 | 18% | $1,314.5 | $1,594.8 | 21% |
| Operating income | $139.7 | $169.1 | 21% | $273.5 | $481.0 | 76% |
| Operating margin | 29.9% | 30.7% | +0.8 pts | 20.8% | 30.2% | +9.4 pts |
| Net income | $118.1 | $156.4 | 32% | $272.0 | $420.4 | 55% |
| Net income attributable to controlling interest | $54.9 | $75.2 | 37% | $98.9 | $202.3 | 105% |
| Diluted EPS | $1.04 | $1.37 | 32% | $1.87 | $3.70 | 98% |
| Economic net income | $101.2 | $121.8 | 20% | $272.3 | $367.2 | 35% |
| EBITDA | $133.5 | $170.4 | 28% | $361.2 | $518.4 | 44% |
| Cash flow from operations | $211.1 | $282.8 | 34% | $447.1 | $747.6 | 67% |
Q3 operating expenses increased 17% to $382.5 million, including compensation and related expenses of $229.8 million and intangible amortization and impairments of $32.7 million. Nine-month intangible amortization and impairments declined 42% to $98.1 million because the prior-year period included a $102.2 million reduction in the carrying value of an indefinite-lived intangible asset.
Revenue growth was led by the Mutual Fund channel, up 29% in Q3 and 33% for nine months. Institutional revenue increased 9% in both periods, while High Net Worth revenue increased 13% in Q3 and 32% for nine months. Equity method income increased 76% in Q3 to $34.1 million and 156% for nine months to $121.0 million, reflecting higher revenue, performance fees, and additional investment in an existing Affiliate.
Liquidity, Debt, and Balance Sheet
- Cash and cash equivalents were $522.4 million at September 30, 2013, compared with $430.4 million at December 31, 2012.
- Outstanding senior bank debt increased to $575.0 million from $325.0 million. The company had a $1.25 billion unsecured revolving credit facility maturing in April 2018, with $675.0 million of remaining capacity.
- Senior notes totaled $340.0 million. Junior convertible trust preferred securities had a $517.9 million carrying value and $730.8 million principal amount.
- The company settled all 2008 senior convertible notes for aggregate cash payments of $641.3 million; the securities were canceled and retired.
- Bank leverage and interest coverage ratios were 1.3 and 9.4, respectively, versus covenant limits of 3.0 maximum leverage and 3.0 minimum interest coverage. AMG stated that it was in compliance with all credit facility terms.
- Cash flow from investing activities was negative $43.8 million for the first nine months, primarily reflecting $26.3 million invested in Affiliates and $15.9 million of fixed-asset purchases.
- Cash flow from financing activities was negative $611.6 million, principally due to the settlement of the senior convertible notes and $218.6 million of distributions to non-controlling interests.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, attributable net income, diluted EPS, EBITDA, and operating cash flow all increased substantially year over year.
- Nine-month attributable earnings benefited from the absence of the prior-year $102.2 million intangible impairment and improved equity method results.
- The nine-month comparison was affected by a $57.3 million gain from contingent payment revaluations in 2012 versus a $10.3 million loss in 2013. The 2013 nine-month results also included $26.5 million of imputed interest and contingent payment expense versus income of $35.7 million in 2012.
- AMG completed the cash settlement of its 2008 senior convertible notes, reducing senior convertible securities on the balance sheet from $450.1 million at year-end 2012 to zero.
- Redeemable non-controlling interests increased to $614.1 million from $477.5 million, primarily due to changes in redemption value.
- Foreign currency translation produced a $14.4 million loss in other comprehensive income for the first nine months of 2013, compared with a $19.7 million gain in the prior-year period.
Guidance, Outlook, Commentary, and Risks
The filing does not provide formal earnings or revenue guidance. Management expects principal future cash uses to include investments in new and existing Affiliates, distributions to Affiliate partners, debt service, and working capital. Management expects cash flows from operations, borrowings under the credit facility, and proceeds from forward equity settlements to support foreseeable cash needs.
- AMG expected to repurchase approximately $50.0 million of Affiliate equity during 2013 and expected no contingent payment settlements during 2013.
- Contingent payment obligations had a maximum potential of $474.0 million through 2017; expected settlement payments were $226.0 million, including $151.0 million related to equity method investments.
- The company had approximately $71.6 million of co-investment commitments, of which $33.8 million could be reimbursed by a prior owner if called.
- Forward equity contracts with $77.0 million of notional value were agreed to be net settled for cash at an average share price of $185.56, including an additional $39.4 million settlement agreed in October 2013.
- Key risks include declines or volatility in global financial and equity markets, reduced advisory or performance fees, unfavorable operating results at Affiliates, difficulty executing additional investments, financing needs, higher interest expense, and potential shareholder dilution.
- Legal proceedings and regulatory capital requirements arise in the ordinary course. Management stated that liabilities beyond recorded accruals were not expected to have a material adverse effect, but outcomes remain uncertain.
- The company adopted new accumulated other comprehensive income disclosure guidance without significant financial statement impact and did not expect the pending investment-company accounting guidance to have a significant impact.
- Management concluded that disclosure controls and procedures were effective, with no material change in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the strong AUM growth and investment performance continue, particularly in the Mutual Fund channel.
- The sustainability and composition of equity method earnings and performance fees.
- The effect of nonrecurring items, including prior-year impairment and contingent payment revaluation gains or losses, on comparability.
- Debt repayment capacity, credit facility covenant headroom, interest-rate exposure, and potential conversion or cash settlement of junior convertible trust preferred securities.
- The timing and ultimate amount of contingent payment obligations, Affiliate equity repurchases, co-investment commitments, and forward equity settlements.
- The impact of market declines, client outflows, fee-rate changes, foreign exchange movements, and future Affiliate investments on revenue and cash flow.
- Future tax examinations, uncertain tax positions, deferred tax liabilities, and the 2013 effective tax rate, which was elevated relative to 2012.