Business Context and Reporting Period
Affiliated Managers Group, Inc. (AMG) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. AMG invests in and partners with boutique investment management firms across Institutional, Mutual Fund, and High Net Worth distribution channels. Assets under management were $469.5 billion at June 30, 2013, up 22% from $384.6 billion at June 30, 2012, driven by $46.0 billion of investment performance and $41.0 billion of organic net client cash flows over the preceding twelve months.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $541.0 million, up 26% | $1,043.3 million, up 23% |
| Operating income | $161.4 million; 29.8% margin | $311.9 million; 29.9% margin |
| Net income | $134.2 million, up 120% | $264.0 million, up 72% |
| Net income attributable to AMG | $64.7 million | $127.1 million |
| Diluted EPS | $1.18 | $2.33 |
| Cash flow from operations | $262.7 million | $464.8 million |
| EBITDA | $173.0 million, up 52% | $348.0 million, up 53% |
| Economic net income | $121.1 million, up 38% | $245.4 million, up 43% |
| Economic EPS | $2.18, up 31% | $4.45, up 37% |
Revenue growth reflected higher average assets under management, investment performance, net client flows, and contributions from Affiliate investments made in 2012. Six-month revenue increased in all channels: Institutional 9%, Mutual Fund 36%, and High Net Worth 45%.
At June 30, 2013, cash and cash equivalents were $413.8 million, compared with $430.4 million at December 31, 2012. Total assets were $6.07 billion and total liabilities were $2.46 billion. Total debt carrying values included $100.0 million of senior bank debt, $340.0 million of senior notes, $404.8 million of senior convertible securities, and $517.1 million of junior convertible trust preferred securities.
The company generated $464.8 million of operating cash flow during the first six months, used $9.8 million in investing activities, and used $466.0 million in financing activities. Financing uses included debt repayment, distributions to non-controlling interests, repurchases of convertible notes, and contingent payments.
Material Changes Versus the Prior Comparable Period
- Operating income rose sharply as revenue increased while total operating expenses increased only 3% for the six-month period. The operating margin expanded from approximately 15.8% in the first half of 2012 to approximately 29.9% in the first half of 2013.
- Intangible amortization and impairment expense declined to $65.5 million from $145.1 million for the first six months. The prior-year period included a $102.2 million reduction in the carrying value of an indefinite-lived intangible asset at an Affiliate.
- Income from equity method investments increased 211% to $86.9 million for the first six months, reflecting higher Affiliate revenue and performance fees and an additional investment in an existing Affiliate.
- The 2012 periods benefited from gains on revaluation of contingent payment arrangements of $57.3 million for the first six months, while 2013 recorded a $10.3 million loss. This unfavorable comparison was more than offset by operating growth and lower intangible impairment expense.
- Interest expense increased 31% for both the quarter and first six months, principally because of senior notes issued in the second half of 2012.
- Senior bank debt declined from $325.0 million at year-end 2012 to $100.0 million at June 30, 2013. AMG repurchased $53.4 million principal amount of its 2008 senior convertible notes during the quarter and repurchased an additional $26.1 million in July 2013.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management stated that cash flows from operations, borrowings under the credit facility, and proceeds from potential forward equity settlements are expected to support foreseeable cash needs. AMG expects principal cash uses to include investments in new and existing Affiliates, distributions to Affiliate partners, debt service, Affiliate equity repurchases, contingent obligations, and working capital.
- AMG expects to repurchase approximately $50.0 million of Affiliate equity during 2013.
- Under past acquisition agreements, maximum contingent payments could reach $465.0 million through 2017. Management expected $217.0 million of payments, with none expected in 2013; the reported present value of expected payments for consolidated Affiliates was $44.3 million at June 30, 2013.
- AMG had $1.2 billion of remaining capacity under its $1.25 billion unsecured revolving credit facility, which matures in April 2018. The company reported a bank leverage ratio of 1.3 and interest coverage ratio of 8.7, compared with covenant limits of 3.0 maximum leverage and 3.0 minimum coverage.
- AMG was upgraded to BBB by Standard & Poor’s and Fitch during the quarter. Interest-rate swaps had a $2.7 million unrealized loss at June 30, 2013, and AMG had posted $4.0 million of collateral related to the swaps.
- AMG called all remaining 2008 senior convertible notes for redemption on August 15, 2013. Holders could convert before August 14, 2013; the notes were expected to be canceled and retired during the third quarter.
- AMG had $71.3 million of commitments to co-invest in investment partnerships, potentially callable in future periods, with contractual reimbursement rights for $32.7 million from a prior owner if called.
- Principal risks include declines or lack of sustained growth in global and equity markets, lower advisory or performance fees, weaker Affiliate operating results, difficulty completing or financing future Affiliate investments, market and foreign-currency exposure, regulatory requirements, litigation, and uncertainty regarding tax examinations and contingent payments.
Management reported that disclosure controls and procedures were effective as of June 30, 2013, and that no material change in internal control over financial reporting occurred during the quarter.
Investor Verification Checklist
- Verify the sustainability of AUM growth, including the contribution from investment performance versus organic net client flows.
- Reconcile GAAP net income and EPS with Economic net income, Economic EPS, and EBITDA, particularly the effects of amortization, impairment, deferred taxes, and contingent-payment revaluations.
- Review the post-quarter retirement of the 2008 senior convertible notes and the resulting impact on debt, interest expense, cash, shares, and deferred taxes.
- Monitor debt covenants, credit-facility availability, interest-rate exposure, and the maturity and potential conversion of the junior convertible trust preferred securities.
- Assess the timing and amount of contingent acquisition payments, Affiliate equity repurchases, co-investment commitments, and distributions to non-controlling interests.
- Evaluate whether the significant improvement in operating margin is attributable to recurring operating performance rather than the nonrecurrence of the prior-year impairment charge and other unusual items.