Business Context and Reporting Period
Affiliated Managers Group, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2015. The company invests in and partners with boutique investment management firms, providing centralized support while maintaining affiliate autonomy. Assets under management were $632.2 billion at March 31, 2015, compared with $620.2 billion at December 31, 2014 and $556.8 billion at March 31, 2014.
Financial Performance and Position
| Metric | Q1 2014 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $593.1 million | $635.0 million | 7% |
| Operating income | $194.0 million | $231.4 million | 19% |
| Operating margin | 32.7% | 36.4% | Up 3.7 points |
| Net income | $159.4 million | $220.7 million | 38% |
| Net income attributable to controlling interest | $77.2 million | $128.0 million | 66% |
| Diluted earnings per share | $1.40 | $2.28 | 63% |
| Economic net income attributable to controlling interest | $137.9 million | $162.1 million | 18% |
| Economic earnings per share | $2.48 | $2.91 | 17% |
| EBITDA attributable to controlling interest | $191.9 million | $221.0 million | 15% |
| Operating cash flow | $297.7 million | $119.1 million | Down $178.6 million |
Revenue growth was led by higher average assets under management at consolidated affiliates, which increased 11%. Mutual Fund revenue rose 9%, High Net Worth revenue rose 13%, and Institutional revenue rose 3%. Total average assets under management, including equity-method affiliates, increased 15% to $623.5 billion.
Operating expenses increased only 1% to $403.6 million. Compensation expense increased 7%, while selling, general and administrative expense declined 11%, primarily because of lower mutual-fund distribution expenses and acquisition-related professional fees. The controlling-interest net margin increased to approximately 20.2% from 13.0%.
Cash and cash equivalents declined to $438.2 million at March 31, 2015 from $550.6 million at year-end. Cash flow from operations was affected by lower distributions from equity-method investments and a $183.4 million decrease in payables and other liabilities. Financing cash flow was negative $217.5 million, including $197.8 million of share repurchases and $114.6 million of distributions to non-controlling interests.
Total debt at March 31, 2015 consisted of $535.0 million of senior bank debt, $1,084.2 million of senior notes and $303.6 million of convertible securities. The company issued $350.0 million of 3.50% senior unsecured notes due 2025 and used the proceeds primarily to repay credit-facility borrowings. The company reported compliance with all credit-facility and term-loan covenants and stated that it could borrow remaining available capacity while remaining compliant.
Material Changes Versus the Prior Comparable Period
- Revenue increased 7%, primarily from 2014 affiliate investments and higher consolidated average assets under management.
- Operating income increased 19% as revenue growth and lower selling, general and administrative expense more than offset higher compensation costs.
- Controlling-interest net income increased 66%, benefiting from operating growth, a lower effective tax rate and a favorable $29.8 million pre-tax revaluation gain on contingent payment arrangements.
- The prior-year period included an $18.8 million pre-tax expense related to settlement of 2006 junior convertible securities; that expense did not recur.
- Operating cash flow declined substantially, while investing cash use fell to $4.3 million because no affiliate investments were made during the quarter.
- The company repurchased 701,488 shares for $197.8 million at an average price of $213.86 per share. At March 31, 2015, 336,612 shares remained available under the existing authorization.
- Foreign currency translation produced a $60.1 million loss in other comprehensive income, compared with an $8.8 million loss in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quarterly or full-year earnings guidance. Management expects operating cash flow, available credit-facility borrowings and potential forward-equity proceeds to support foreseeable cash needs. Expected uses include new and existing affiliate investments, affiliate distributions, share repurchases, debt service, convertible-security settlements and working capital.
Management expected to repurchase approximately $75.0 million of affiliate equity during 2015 and expected approximately $40.0 million of contingent-arrangement payments during 2015. The company had $66.4 million of unfunded co-investment commitments, with potential reimbursement of $19.3 million from a prior owner if called. Contingent payments under past acquisition agreements could reach $276.0 million through 2017; expected settlement amounts were $57.4 million.
Key risks include market and investment performance, changes in assets under management and fee rates, client cash flows, foreign-exchange movements, performance-fee variability, affiliate redemption obligations, debt and interest-rate exposure, tax examinations and the valuation of Level 3 investments and contingent liabilities. The company also notes that interim results are not necessarily indicative of full-year performance.
On May 5, 2015, after quarter-end, the board authorized an additional 3.0 million-share repurchase program, bringing aggregate availability to approximately 3.3 million shares. The company also stated that pro forma assets under management were approximately $638 billion following the April 1, 2015 closing of the Baker Street Advisors investment.
Investor Verification Items
- Verify the sustainability of the 2015 earnings increase after excluding the $29.8 million contingent-payment revaluation gain and the absence of the prior-year convertible-security settlement expense.
- Reconcile GAAP net income and EPS with management’s non-GAAP Economic net income, Economic EPS and EBITDA measures.
- Monitor operating cash conversion, particularly distributions from equity-method affiliates and changes in payables and accrued liabilities.
- Review debt maturities, interest expense, credit-facility capacity and compliance with leverage and interest-coverage covenants.
- Assess the effect of asset mix and fee-rate compression, which reduced revenue by approximately $14.9 million in the quarter.
- Track unfunded investment commitments, affiliate equity redemption obligations and contingent acquisition payments.
- Evaluate foreign-currency exposure and the effect of the $60.1 million translation loss on comprehensive income.