Affiliated Managers Group, Inc. — Q3 2018 Form 10-Q Summary
Business context and reporting period
Global asset management company with equity investments in more than 550 boutique investment products and Affiliates. Assets under management were $829.6 billion at September 30, 2018. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Consolidated revenue | $601.3 million | $585.7 million | $1,813.9 million | $1,700.9 million |
| Net income | $201.9 million | $216.8 million | $631.1 million | $614.9 million |
| Net income attributable to controlling interest | $124.9 million | $125.4 million | $394.9 million | $374.2 million |
| Diluted EPS | $2.34 | $2.22 | $7.27 | $6.57 |
| Adjusted EBITDA attributable to controlling interest | $237.8 million | $256.3 million | $770.5 million | $754.8 million |
| Economic net income attributable to controlling interest | $184.0 million | $191.3 million | $594.8 million | $563.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $876.2 million | $800.5 million |
Approximate consolidated net margins were 33.6% in Q3 2018 and 37.0% in Q3 2017; for the nine-month periods, approximately 34.8% and 36.1%, respectively. Controlling-interest net margin was approximately 20.8% in Q3 2018 and 21.4% in Q3 2017.
- Average assets under management increased 6% year over year in the quarter to $834.1 billion and 9% year to date to $834.5 billion.
- Aggregate fees increased less than 1% in Q3 to $1,278.0 million and 9% year to date to $4,210.7 million. Q3 asset-based fees rose 2%, while performance fees declined 1%.
- Cash and cash equivalents were $448.1 million at September 30, 2018, compared with $439.5 million at December 31, 2017.
- Senior debt was approximately $1.5 billion and convertible securities were $306.6 million on the balance sheet at September 30, 2018. The company reported approximately $1 billion of remaining revolver capacity while remaining in compliance with its covenants.
- Dividends increased to $0.30 per share in Q3 2018 from $0.20 in Q3 2017; nine-month dividends were $0.90 per share versus $0.60.
Material changes versus the prior comparable period
- Revenue increased 3% in Q3 and 7% year to date, primarily from higher average assets under management and asset-based revenue.
- Net income attributable to controlling interest was essentially flat in Q3 but increased 6% year to date. Lower interest expense and a lower effective tax rate offset weaker equity method income, lower investment income, and higher operating expenses.
- Adjusted EBITDA declined 7% in Q3 despite higher fees, reflecting weaker earnings at certain equity method Affiliates, higher nonrecurring Affiliate equity and compensation expenses, and lower investment and other income. Year-to-date Adjusted EBITDA increased 2%.
- Equity method income declined 16% in Q3 and 17% year to date. Year-to-date results included a $33.3 million expense, or $25.0 million net of tax, to reduce the carrying value of one equity method Affiliate to zero.
- Consolidated expenses increased 8% in both Q3 and the first nine months. Selling, general and administrative expense rose 12% in Q3 and 17% year to date, partly reflecting the presentation of distribution-related costs under the new revenue-recognition standard.
- Interest expense declined 11% in Q3 and 7% year to date, principally following redemption of the 6.375% senior notes due 2042; higher revolver and term-loan rates partly offset the benefit.
- Share repurchases totaled $427.1 million in the first nine months, including 2.5 million shares repurchased at an average price of $166.19. Approximately 2.5 million authorized shares remained available at September 30.
- Operating cash flow increased 9% to $876.2 million. Financing cash outflows were $841.7 million, primarily reflecting debt repayments, common-stock repurchases, distributions to non-controlling interests, and dividends.
Guidance, outlook, risks and unusual items
- Management expects operating cash flow, revolver borrowings, and potential equity-distribution-program proceeds to provide sufficient liquidity for the foreseeable future. No specific earnings guidance was provided in the filing.
- Management cited continued demand for alternatives, multi-asset strategies, and global equities, but noted industry-wide outflows from U.S. equity strategies and continued demand for passive products.
- As of September 30, the company had $130.4 million of unfunded co-investment commitments, $968.9 million of redeemable non-controlling interests, and expected 2018 Affiliate equity repurchases of approximately $125 million.
- Total contractual obligations were $2.86 billion, including debt, convertible securities, leases, Affiliate equity repurchase obligations, and transition tax. The filing excludes certain obligations whose timing cannot be predicted, including the $130.4 million co-investment commitments.
- Foreign-exchange exposure remains material. The company entered into pound sterling forward and collar contracts designated as net investment hedges. Foreign currency translation produced a $56.4 million other comprehensive loss in Q3 and a $47.5 million loss for the first nine months.
- In October 2018, the term loan was converted to U.S. dollars and increased to $450 million, with an additional $75 million available subject to conditions; the maturity date remained May 31, 2021. Additional sterling hedges were also entered into.
- The company early adopted several accounting standards in 2018. Management expects the upcoming lease standard to increase reported assets and liabilities but not materially affect the income statement. The company planned to finalize its accounting for the 2017 U.S. tax-law changes in Q4 2018.
- Material risks include investment-market declines, client outflows, fee-rate compression, underperformance and reduced earnings at Affiliates, foreign-exchange movements, interest-rate increases, Affiliate equity redemptions, contingent payments, legal or regulatory matters, and counterparty risk on derivatives.
Most important facts for investors to verify
- Reconcile debt balances and available revolver capacity, including the October 2018 term-loan amendment and applicable leverage and interest-coverage covenants.
- Assess whether the decline in Q3 equity method earnings and Adjusted EBITDA reflects temporary items or continuing weakness at specific Affiliates.
- Monitor net client flows, fee-rate compression, performance fees, and the mix of assets among alternatives, global equities, U.S. equities, and multi-asset strategies.
- Evaluate the cash impact and timing of Affiliate equity repurchases, redeemable non-controlling interests, co-investment commitments, and contingent payment obligations.
- Review the accounting and tax effects of the $33.3 million Affiliate write-down, 2018 accounting-standard adoptions, and finalization of the 2017 tax-law measurements.
- Consider the effect of foreign-exchange movements and derivative hedge settlements on comprehensive income, liquidity, and equity.