Business context and reporting period
This is BrightSphere Investment Group Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020. The company is a global asset manager with Quant & Solutions, Alternatives and Liquid Alpha segments. Acadian Asset Management is an affiliate within Quant & Solutions; the reported figures are for BrightSphere consolidated, not Acadian alone.
Key financial metrics
Amounts are in millions of dollars unless stated otherwise.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $174.7 | $207.1 | $357.3 | $414.3 |
| Operating income | $26.2 | $46.6 | $100.3 | $114.6 |
| Net income attributable to controlling interests | $18.9 | $28.0 | $51.5 | $80.7 |
| Diluted EPS | $0.23 | $0.31 | $0.62 | $0.85 |
| U.S. GAAP operating margin | 15.0% | 22.5% | 28.1% | 27.7% |
| Economic net income (non-GAAP) | $32.9 | $41.0 | $67.2 | $80.2 |
| ENI operating margin (non-GAAP) | 34.3% | 35.8% | 33.6% | 34.5% |
- Revenue and profitability: Q2 management fees were $170.7, down 17.1% year over year; the six-month total was $349.2, down 15.5%. Management attributed the decline mainly to lower average AUM, market declines earlier in 2020, outflows and the prior-year Vanguard strategy reallocation. Q2 consolidated net income was $53.9, but $35.0 was attributable to non-controlling interests in consolidated funds; controlling-interest earnings were $18.9.
- Cash flow: For the first six months, operating cash flow excluding consolidated funds was positive $62.6, compared with cash use of $229.5 a year earlier. Management said the prior-year comparison reflected settlement of the Landmark earnout. Investing cash flow excluding funds was positive $10.1; financing cash flow was negative $68.2. Cash and cash equivalents on the balance sheet were $115.8 at June 30; cash including restricted cash held by consolidated funds was $125.3.
- Debt and liquidity: Total borrowings were $545.7, including $524.0 of third-party debt and $21.7 of non-recourse seed-capital borrowings. Third-party debt included $130.0 drawn on a $450.0 revolving facility. The company reported third-party debt/TTM Adjusted EBITDA of 2.2x against a 3.0x covenant limit, and interest coverage of 7.8x against a 4.0x minimum; it said it was covenant-compliant. Management expected available cash, operating cash generation and financing access to cover operations and capital needs for at least 12 months.
- Other balance-sheet items: Total assets were $1,422.8 and total liabilities $1,190.3. Other compensation liabilities were $367.5; operating lease liabilities were $124.9.
Material changes versus comparable periods
- Q2 revenue fell $32.4 (15.6%) and controlling-interest net income fell $9.1 (32.5%) year over year. AUM was $181.0 billion at June 30, down $44.0 billion from June 30, 2019; it had declined to $161.8 billion at March 31 before recovering with Q2 market appreciation.
- First-half operating margin edged up to 28.1% from 27.7%, despite lower revenue. Cost reductions lowered compensation and benefits and general and administrative expense, while first-half results included a $16.4 goodwill impairment charge for Copper Rock.
- Q2 net consolidated-fund investment gains were $35.6 versus losses of $4.5 in Q2 2019, reflecting the market rebound. These gains chiefly accrued to fund non-controlling interests and should not be read as equivalent to earnings attributable to BrightSphere shareholders.
- First-half operating cash flow improved substantially from the prior-year period, primarily because of the Landmark earnout-related liability movement in 2019. The company repurchased 5.7 million shares for $35.3 in the first half; weighted-average shares were lower year over year.
Outlook, commentary, risks and unusual items
- Market and COVID-19 risk: Management described continuing uncertainty from the pandemic and market volatility. Fee revenue depends substantially on AUM, market values, client flows and fee mix. A 10% AUM change was estimated to affect annualized post-tax ENI by approximately $26.2, under the filing’s stated assumptions.
- Impairment: The $16.4 Copper Rock goodwill impairment followed a first-quarter AUM decline and revised forecasts. Management warned that further COVID-related market or AUM deterioration could lead to additional goodwill or intangible-asset impairments.
- Transactions after quarter-end: Spouting Rock purchased BrightSphere’s Copper Rock interests on July 24, 2020; the filing said the transaction did not significantly affect the financial statements. On July 26, BrightSphere agreed to sell Barrow Hanley for $319 cash consideration, subject to customary adjustments, with closing expected in Q4 2020. Barrow Hanley contributed $17.5 of first-half controlling-interest net income.
- Other commitments and contingencies: The company had approximately $39 of unfunded co-investment commitments through 2022 and a $2.5 office-lease security-deposit guaranty expiring in 2022. It reported no material litigation accruals. Management said cash resources and expected operations would fund needs for at least the next 12 months and anticipated proceeds from the Barrow Hanley sale.
- Non-GAAP measures: ENI and Adjusted EBITDA are management measures, not substitutes for U.S. GAAP results or operating cash flow. ENI excludes or adjusts for items including certain compensation, impairment, amortization, restructuring and seed/co-investment returns.
Important facts for investors to verify
- Track AUM, net flows and fee impact—particularly whether outflows and market movements continue to pressure management-fee revenue.
- Confirm completion, final proceeds and adjustments for the Barrow Hanley sale, and assess the post-sale business mix; separately note Copper Rock’s completed sale.
- Assess the quality and sustainability of reported earnings by separating controlling-interest results from consolidated-fund gains and non-controlling interests, and by reconciling GAAP results to ENI.
- Monitor liquidity, debt-covenant headroom, the revolving facility and the $39 of co-investment commitments.
- Review assumptions underlying the Copper Rock impairment and the potential for additional impairments amid ongoing market and COVID-19 uncertainty.