Affiliated Managers Group, Inc. — Q3 2014 Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company investing in boutique investment management firms across Institutional, Mutual Fund and High Net Worth distribution channels. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Assets under management increased 18% year over year to $599.5 billion at September 30, 2014. Including the subsequent investment in Veritas Asset Management LLP, management cited approximately $617 billion. Growth reflected investment performance, net client cash flows and new Affiliate investments.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2014 | Change | 9M 2013 | 9M 2014 | Change |
|---|---|---|---|---|---|---|
| Revenue | $551.6 million | $640.3 million | 16% | $1,594.8 million | $1,869.7 million | 17% |
| Operating income | $169.1 million | $224.2 million | 33% | $481.0 million | $616.6 million | 28% |
| Operating margin | 30.7% | 35.0% | +430 bps | 30.2% | 33.0% | +280 bps |
| Net income | $156.4 million | $191.0 million | 22% | $420.4 million | $529.4 million | 26% |
| Net income attributable to controlling interest | $75.2 million | $104.3 million | 39% | $202.3 million | $281.5 million | 39% |
| Diluted EPS | $1.37 | $1.84 | 34% | $3.70 | $5.01 | 35% |
| Economic net income | $121.8 million | $156.8 million | 29% | $367.2 million | $444.4 million | 21% |
| EBITDA attributable to controlling interest | $170.4 million | $218.1 million | 28% | $518.4 million | $621.9 million | 20% |
Revenue growth was primarily driven by higher average assets under management and 2014 Affiliate investments. Q3 revenue increased 12% in Institutional, 19% in Mutual Fund and 19% in High Net Worth. Nine-month revenue growth was 10%, 24% and 15%, respectively.
- Income from equity method investments increased 47% in Q3 and 26% for nine months, to $50.1 million and $152.6 million, respectively.
- Operating expenses increased 9% in Q3 and 13% for nine months. Compensation increased 12% and 13%; selling, general and administrative expense increased 8% and 21%.
- Intangible amortization and impairments declined 12% in Q3 and 14% for nine months, partly because certain assets became fully amortized.
- The effective tax rate attributable to controlling interests increased to 36.8% in Q3 from 29.6% and to 36.9% for nine months from 33.4%, primarily because a 2013 U.K. tax-rate benefit did not recur.
- Comprehensive income attributable to controlling interest was $83.8 million in Q3 and $260.3 million for nine months, compared with $100.0 million and $186.6 million, respectively, in 2013. Foreign currency translation losses reduced 2014 comprehensive income.
Cash flow, debt and liquidity
| Metric | 9M 2013 | 9M 2014 |
|---|---|---|
| Operating cash flow | $747.6 million | $1,030.4 million |
| Cash used in investing | $43.8 million | $551.0 million |
| Cash used in financing | $611.6 million | $385.5 million |
| Ending cash and cash equivalents | $522.4 million | $560.2 million |
Investing cash outflows increased mainly because investments in Affiliates rose by $508.1 million to $534.4 million. Financing uses included $468.3 million of distributions to non-controlling interests, $51.7 million of share repurchases and debt repayments, partly offset by new borrowings.
- At September 30, 2014, senior bank debt was $250.0 million, senior notes were $736.7 million and convertible securities were $302.6 million.
- The company had no borrowings under its $1.25 billion revolving credit facility and had a $250.0 million senior unsecured term loan. It stated that it was in compliance with all debt covenants.
- AMG issued $400.0 million of 4.25% senior notes due 2024 and completed the conversion or retirement of its 2006 junior convertible securities, issuing approximately 1.9 million common shares.
- Approximately 0.3 million common shares were repurchased during the nine months at an average price of $206.81. Approximately 2.0 million shares remained available under repurchase programs.
Material changes, transactions and unusual items
- AMG completed majority investments in SouthernSun Asset Management and River Road Asset Management and an equity investment in EIG Global Energy Partners during the first nine months of 2014. The transactions contributed $32.6 million of revenue and $4.2 million of earnings during the period, according to the filing.
- The provisional consideration for SouthernSun and River Road totaled $357.4 million, including $150.2 million of goodwill and $196.4 million of acquired client relationships.
- On October 31, 2014, after the reporting date, AMG completed its majority investment in Veritas for $323.7 million, financed with available cash and $145.0 million of credit-facility borrowings.
- The company recognized an $18.8 million expense in the first quarter related to settlement of the 2006 junior convertible securities. No goodwill impairment was identified in the September 30, 2014 assessment.
- Redeemable non-controlling interests increased to $703.7 million from $641.9 million at December 31, 2013, primarily from changes in redemption value.
Outlook, risks and contingencies
Management expects operating cash flow, available revolving-credit capacity and potential forward-equity proceeds to fund foreseeable needs, including Affiliate investments, distributions to Affiliate partners, debt service, share repurchases and working capital. The filing does not provide formal earnings or revenue guidance.
- Unfunded co-investment commitments were $70.6 million; $23.8 million may be reimbursable by a prior owner if called.
- Contingent payments under past acquisition agreements could total up to $524.1 million through 2017. Expected payments related to consolidated Affiliates were $75.0 million, with a net present value of $57.0 million at September 30, 2014.
- Contractual obligations totaled $2.75 billion, including debt, leases, other liabilities and derivative instruments. Contingent payment obligations disclosed separately totaled $276.0 million.
- Key risks include market declines affecting assets under management, investment performance and performance fees; unsuccessful Affiliate investments; financing needs and potential dilution; regulatory, tax, accounting and compliance changes; foreign currency exposure; and uncertainty in contingent payments and tax examinations.
- The company carried $19.4 million of liabilities for uncertain tax positions, including interest and related charges.
Investor verification checklist
- Verify the effect of the post-quarter Veritas acquisition, including its financing, assets under management and earnings contribution.
- Assess whether assets under management growth, net client flows and investment performance remain sufficient to support revenue growth.
- Reconcile GAAP EPS with Economic EPS and evaluate the impact of intangible amortization, deferred taxes and other add-backs.
- Monitor leverage, debt maturities, interest costs and compliance with revolving-credit and term-loan covenants after the Veritas borrowing.
- Review the valuation assumptions and final purchase-price allocations for SouthernSun, River Road and EIG.
- Track contingent acquisition payments, Affiliate equity repurchases, non-controlling-interest distributions and unfunded investment commitments.
- Consider the higher effective tax rate and the potential outcomes of U.S. and foreign tax examinations.