Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed an unaudited Form 10-Q for the three months ended March 31, 2012. AMG invests in and partners with boutique investment management firms across Mutual Fund, Institutional, and High Net Worth distribution channels. Assets under management increased 7% year over year to $363.9 billion, supported by positive investment performance and $23.5 billion of net client cash flows over the prior twelve months.
Financial Performance and Liquidity
| Metric | Q1 2011 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $426.3 million | $417.7 million | (2%) |
| Operating income | $124.9 million | $108.8 million | (13%) |
| Operating margin | 29.3% | 26.0% | Down 330 bps |
| Net income | $89.4 million | $93.0 million | 4% |
| Net income attributable to controlling interest | $39.1 million | $37.4 million | (4%) |
| Diluted EPS | $0.74 | $0.71 | (4%) |
| Economic net income | $85.1 million | $83.5 million | (2%) |
| Economic EPS | $1.60 | $1.58 | (1%) |
| EBITDA | $118.2 million | $114.1 million | (3%) |
| Operating cash flow | $128.3 million | $52.5 million | (59%) |
Revenue declined primarily because of lower average fee rates and $1.9 million of lower performance fees. Mutual Fund revenue declined 5% to $175.7 million, while Institutional and High Net Worth revenue was essentially flat. Income from equity-method investments increased 42% to $14.5 million, and investment and other income increased 20% to $10.4 million.
Total operating expenses increased 2% to $308.9 million. Compensation expense rose 1% to $181.1 million, while selling, general and administrative expense declined 3% to $85.0 million. Amortization increased 38% to $30.4 million, including an $8.7 million impairment of indefinite-lived intangible assets.
Cash and cash equivalents were $393.7 million at March 31, 2012, compared with $449.5 million at December 31, 2011. Investing activities provided $2.1 million, while financing activities used $113.2 million, including $82.0 million of distributions to non-controlling interests and $32.7 million for common-share repurchases.
Senior bank debt was $250.0 million. Convertible securities had carrying values of $439.2 million for the senior notes and $513.3 million for the junior trust preferred securities. The company reported $750.0 million of remaining credit-facility capacity, a bank leverage ratio of 1.5, and bank interest coverage of 8.1, versus covenant limits of 3.0 and a minimum of 3.0, respectively. AMG was in compliance with its credit facility covenants.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 2%, while operating income decreased 13% and operating margin fell to 26.0% from 29.3%.
- Controlling-interest net income and diluted EPS decreased 4%, despite a 4% increase in consolidated net income, because non-controlling interests received a larger share of earnings.
- The company recognized a $9.9 million gain from reducing its estimate of contingent acquisition payments, of which $5.0 million was attributable to the controlling interest.
- An $8.7 million impairment was recorded for indefinite-lived intangible assets at a growth-oriented U.S. equity mutual-fund affiliate.
- Operating cash flow fell to $52.5 million, primarily due to lower distributions from equity-method investments, slower collections of advisory fees, and increased payments of accounts payable and accrued liabilities.
- AMG repurchased approximately 335,000 common shares for $36.1 million at an average price of $107.65.
- Redeemable non-controlling interests increased to $509.6 million from $451.8 million, primarily due to a $62.0 million increase in redemption value.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management expected to finance planned investments in Veritable and Yacktman with existing cash and borrowings under the credit facility. The Veritable investment was expected to close in the second quarter of 2012 and the Yacktman investment in the third quarter, subject to customary closing conditions and regulatory approvals. Management also expected approximately $50.0 million of Affiliate equity repurchases during 2012.
AMG had contingent acquisition-payment obligations with a maximum potential of up to $496.3 million through 2017. The company expected to pay approximately $99.9 million during 2012–2015, including approximately $72.0 million in 2012. It also had $80.6 million of co-investment commitments related to Pantheon Ventures, of which Russell Investments was contractually obligated to reimburse $45.6 million if called.
Management stated that cash flows from operations, credit-facility borrowings, and potential forward-equity-sale proceeds should be sufficient for foreseeable cash needs. Key risks include changes in global and equity markets, declines in assets under management or performance fees, difficulty completing or financing new investments, and adverse operating results at existing or new Affiliates.
Further declines in assets under management at the impaired mutual-fund affiliate were expected to result in additional impairment. Management indicated that a 5% decline in the related assets under management, assuming other factors were unchanged, could produce an additional impairment of approximately $7.0 million.
The filing did not provide formal earnings guidance. It stated that interim results are not necessarily indicative of full-year results.
Most Important Facts to Verify
- Whether the Veritable and Yacktman transactions closed on the anticipated timelines and the final purchase prices and financing terms.
- Whether the impaired mutual-fund affiliate recorded the additional impairment that management considered likely in the second quarter.
- Actual operating cash flow and distributions from equity-method Affiliates in subsequent quarters.
- Changes in assets under management, net client flows, fee rates, and performance-fee revenue, particularly in the Mutual Fund channel.
- Settlement timing and final amounts for contingent acquisition payments, Affiliate equity repurchases, and the 2013 put right on the senior convertible notes.
- Compliance with debt covenants and availability under the credit facility as acquisitions and other capital uses proceed.
- Potential effects of market performance, foreign currency movements, valuation assumptions, and Level 3 fair-value estimates on earnings and equity.