Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed this unaudited Form 10-Q for the quarter ended March 31, 2016. AMG is a global asset-management company that invests in boutique investment management firms and provides strategic, marketing, distribution, product-development and operational support. Assets under management were $642.0 billion at March 31, 2016, up 2% from $632.2 billion a year earlier.
During the quarter, AMG completed minority investments in Systematica Investments L.P. and Baring Private Equity Asia for aggregate consideration of $547.6 million. These investments are accounted for under the equity method.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $635.0 million | $545.4 million | (14%) |
| Operating income | $231.4 million | $178.8 million | (23%) |
| Operating margin | 36.4% | 32.8% | Down 3.6 points |
| Net income | $220.7 million | $174.0 million | (21%) |
| Net income attributable to controlling interest | $128.0 million | $104.5 million | (18%) |
| Diluted EPS | $2.28 | $1.92 | (16%) |
| EBITDA attributable to controlling interest | $221.0 million | $215.7 million | (2%) |
| Economic net income attributable to controlling interest | $162.1 million | $159.9 million | (1%) |
| Economic EPS | $2.91 | $2.94 | 1% |
| Operating cash flow | $119.1 million | $26.1 million | (78%) |
Revenue and Segment Performance
- Consolidated average assets under management declined 10% to $364.1 billion, primarily reflecting lower institutional and mutual-fund assets.
- Institutional revenue declined 10% to $227.3 million; mutual-fund revenue declined 21% to $250.4 million; high-net-worth revenue increased 6% to $67.7 million.
- Revenue declined primarily because asset-based fees at existing Affiliates fell $99.0 million. New Affiliate investments contributed $7.9 million, while performance and other fees at existing Affiliates contributed $1.6 million.
- Income from equity method investments increased 28% to $68.0 million, including $14.2 million of equity-method intangible amortization.
- Assets under management increased during the quarter from $611.3 billion to $642.0 billion, driven by $17.2 billion of new investments, $5.1 billion of net client inflows, $7.1 billion of market appreciation and $1.4 billion of foreign-ex exchange benefit.
Liquidity, Cash Flow and Capitalization
- Cash and cash equivalents were $297.6 million at March 31, 2016, down from $563.8 million at December 31, 2015.
- Cash flow used in investing activities was $550.9 million, primarily reflecting the $551.3 million of Affiliate investments.
- Financing cash flow was $262.9 million, supported by $515.0 million of senior-debt borrowings and partly offset by $95.0 million of debt and convertible-security repayments, $101.6 million of distributions to non-controlling interests and $16.9 million of common-stock repurchases.
- Senior bank debt increased to $1.063 billion from $643.3 million; senior notes were $937.7 million and convertible securities were $299.7 million at quarter-end. Total reported debt was approximately $2.301 billion.
- AMG had a $1.3 billion senior unsecured revolving facility and a $350.0 million senior unsecured term loan, both maturing September 30, 2020. Management stated that the company was in compliance with all credit-facility covenants and could borrow remaining capacity while remaining compliant.
- AMG was rated A3 by Moody’s and BBB+ by S&P Global Ratings.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, controlling-interest net income and diluted EPS declined substantially, primarily because of lower average assets and fee rates in the institutional and mutual-fund channels.
- Operating expenses declined 9% to $366.6 million, including a 10% decrease in compensation expense and a 12% decrease in selling, general and administrative expense.
- Equity-method earnings increased because of 2015 and 2016 Affiliate investments and higher advisory and performance fees, partially offset by increased equity-method amortization.
- The prior-year period included a $29.8 million controlling-interest gain from the revaluation of contingent payment arrangements, compared with a $2.8 million gain in Q1 2016. This reduced the comparability of GAAP earnings and contributed to the decline in reported EPS.
- Operating cash flow fell sharply, while debt increased to fund the new Affiliate investments.
- AMG repurchased 207,170 shares in March at an average price of $161.16. Approximately 2.1 million shares remained available under the May 2015 authorization.
Outlook, Risks, Contingencies and Unusual Items
Management did not provide a specific full-year revenue or earnings forecast in the filing. Management expects operating cash flow, revolver borrowings and proceeds from potential forward equity agreements to provide sufficient liquidity for foreseeable needs. Expected cash uses include investments in Affiliates, distributions to Affiliate partners, share repurchases, debt service and working capital.
- AMG expects to repurchase approximately $100 million of Affiliate equity during 2016; $30.1 million was repurchased during the first quarter.
- Unfunded co-investment commitments totaled $77.2 million, with potential reimbursement of $15.4 million from a prior owner if the commitments are called.
- Contingent payments through 2019 could reach $84.9 million for consolidated Affiliates and $316.5 million for equity-method Affiliates, subject to specified financial targets. Expected payments related to consolidated Affiliates were $10.3 million, with none expected in 2016.
- Affiliate equity holders have conditional rights to sell interests to AMG, and a minority owner of a recently acquired equity-method Affiliate may sell a portion of its interest annually beginning in 2018 at fair market value.
- Third Avenue Management, a consolidated Affiliate, faces legal actions related to the liquidation of the Third Avenue Focused Credit Fund. AMG is not a party to those actions; management reported no significant related accruals as of March 31, 2016.
- AMG reported a $26.9 million liability for uncertain tax positions at quarter-end. Tax examinations and settlements could result in additional payments or benefits.
- Key risks include market declines, negative client flows, changes in asset mix and fee rates, investment performance, foreign-exchange movements, leverage, contingent Affiliate obligations, regulatory requirements and the valuation of acquired client relationships.
- Several new accounting standards were issued or adopted. The filing states that the standards adopted on January 1, 2016 did not have a significant financial-statement impact; the impact of other pending standards was still under evaluation.
Most Important Facts for Investors to Verify
- Whether the sharp decline in institutional and mutual-fund average assets and revenue stabilizes, and whether net client flows remain positive.
- Whether the $547.6 million Systematica and Baring investments generate the expected equity-method earnings and cash distributions.
- AMG’s ability to fund investments, Affiliate equity repurchases and distributions while maintaining leverage and credit-facility compliance.
- The timing and ultimate amount of contingent payment obligations, Affiliate equity put rights and the 2018 minority-owner purchase option.
- The effect of performance fees, market movements, foreign exchange and fee-rate mix on future revenue.
- The outcome and potential financial exposure from Third Avenue-related litigation and uncertain tax positions.
- The reconciliation and sustainability of non-GAAP EBITDA, Economic net income and Economic EPS relative to GAAP results.