Affiliated Managers Group, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Affiliated Managers Group, Inc. is a global asset management company that invests in boutique investment management firms and provides centralized strategic, marketing, distribution, product development, and operational support. The filing covers the three and nine months ended September 30, 2016. Assets under management were $672.4 billion at quarter-end, up 13% year over year, including more than 500 investment products. Management reported approximately $730 billion of pro forma assets under management for pending and recently completed investments.
Financial performance and key metrics
| Metric | Q3 2015 | Q3 2016 | 9M 2015 | 9M 2016 |
|---|---|---|---|---|
| Revenue | $613.1 million | $544.7 million | $1,894.7 million | $1,644.2 million |
| Operating income | $215.2 million | $171.0 million | $641.8 million | $531.5 million |
| Operating margin | 35.1% | 31.4% | 33.9% | 32.3% |
| Net income | $191.0 million | $174.9 million | $599.2 million | $531.6 million |
| Net income attributable to controlling interest | $107.7 million | $109.2 million | $362.0 million | $321.1 million |
| Diluted EPS | $1.96 | $2.00 | $6.51 | $5.88 |
| Adjusted EBITDA | $218.9 million | $219.8 million | $679.1 million | $655.8 million |
| Economic net income | $159.8 million | $164.5 million | $491.4 million | $491.0 million |
| Economic EPS | $2.92 | $3.02 | $8.88 | $9.02 |
Revenue declined 11% in the quarter and 13% year to date. The primary drivers were lower average assets under management at existing Affiliates, lower average fee rates, reduced performance and other fees, and the impact of a United Kingdom regulatory change affecting renewal commissions. Income from equity method investments increased 17% in both the quarter and year-to-date period, supported by recent minority investments and higher earnings from existing Affiliates.
Operating expenses decreased 6% in the quarter and 11% year to date. Compensation and related expenses were essentially flat in the quarter and declined 11% year to date; selling, general and administrative expenses declined 12% and 13%, respectively. The controlling-interest effective tax rate decreased to 31.9% in the quarter and 32.8% year to date, versus 34.0% and 34.8% in the comparable periods.
Cash flow, balance sheet, debt, and liquidity
- Operating cash flow was $683.1 million for the first nine months of 2016, down from $856.2 million in the prior-year period.
- Investing cash flow was negative $868.7 million, primarily reflecting $884.9 million of investments in Affiliates, compared with $50.0 million in the prior-year period.
- Financing cash flow was positive $38.0 million, compared with negative $794.9 million in the prior-year period, reflecting lower debt repayments, lower share repurchases, common-stock issuance, and lower distributions to non-controlling interests.
- Cash and cash equivalents declined from $563.8 million at December 31, 2015 to $422.0 million at September 30, 2016.
- Senior bank debt increased to $873.5 million from $643.3 million; senior notes were $938.8 million and convertible securities were $301.0 million.
- The amended credit facilities mature September 30, 2020. The revolver commitment increased to $1.45 billion and the term loan capacity to $385.0 million. Approximately $960 million of revolver capacity remained available, and the Company was in compliance with its covenants.
- Ratings were A3 from Moody’s and BBB+ from S&P Global Ratings.
Material changes versus the prior comparable period
- Quarterly revenue fell $68.4 million, primarily from lower fee rates, lower existing-Affiliate assets, and lower performance fees.
- Mutual Fund revenue declined 17% in the quarter and 19% year to date; Institutional revenue declined 9% and 11%, respectively. High Net Worth revenue increased 7% in the quarter and 5% year to date.
- Quarterly controlling-interest net income increased 1%, despite lower revenue, while nine-month controlling-interest net income declined 11%. The quarterly result benefited from lower expenses, higher equity-method income, investment gains, and lower taxes.
- Reported nine-month earnings were affected by a $44.7 million prior-year gain from revaluation of contingent payment arrangements. The comparable 2016 gain was $2.8 million, contributing to year-to-date earnings pressure.
- The Company invested $547.6 million in Systematica and Baring on January 4, 2016, and $332.7 million in additional minority investments completed during the third quarter.
- The Company issued 0.9 million shares under a forward equity agreement for $150.3 million; 2.0 million shares remained unsettled at quarter-end.
- Prior-period financial statements were revised for an immaterial non-cash error involving deferred tax benefits on Affiliate equity transactions. The revision did not affect prior-period income before taxes, total stockholders’ equity, or operating cash flow.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide formal numerical earnings guidance. Management expects continued demand for active and alternative strategies and believes the transaction environment for acquiring interests in boutique asset managers remains favorable. Management expects operating cash flow, revolver borrowings, and proceeds from forward equity agreements to fund foreseeable cash needs.
- Unfunded co-investment commitments were $91.8 million; $14.0 million may be reimbursable by a prior owner if called.
- Potential contingent payments through 2019 were up to $84.9 million for consolidated Affiliates and $316.5 million for equity method Affiliates. Expected payments include $10.3 million related to consolidated Affiliates, with none expected in 2016.
- Affiliate equity holders have conditional put rights. Redeemable non-controlling interests increased to $778.5 million from $612.5 million at year-end 2015. The Company expected approximately $75 million of Affiliate equity repurchases during 2016.
- Third Avenue Management and the Company are defendants in litigation related to the liquidation of the Third Avenue Focused Credit Fund. Management stated that the claims are without merit; no significant litigation accruals were recorded.
- Declines in the fair values of indefinite-lived intangible assets at two global-equity Affiliates could lead to future impairments.
- Foreign exchange exposure remains relevant: a 1% change in pound sterling and Canadian dollar exchange rates would affect stockholders’ equity by approximately $4.4 million and $2.1 million, respectively.
- Subsequent events included a minority investment in Winton Capital Group completed October 4, 2016, and an agreement to acquire a minority investment in Forbes Family Trust expected to close in the first quarter of 2017.
Important facts for investors to verify
- Whether declining Mutual Fund and Institutional assets, fee rates, and performance fees persist or stabilize.
- The timing and economics of settling the remaining 2.0 million shares under the forward equity agreement and any issuance under the separate $500 million equity distribution program.
- Post-quarter-end contribution from Winton and the expected timing and funding of the Forbes Family Trust transaction.
- Actual cash requirements for Affiliate equity repurchases, contingent payments, co-investment commitments, and minority-owner put rights.
- Potential impairment exposure for the two global-equity Affiliates and the effect of foreign currency movements.
- The reconciliation of non-GAAP Adjusted EBITDA and Economic net income to GAAP results, particularly the effects of amortization, deferred taxes, contingent-payment revaluations, and Affiliate equity expenses.