Affiliated Managers Group, Inc. — Q3 2011 Form 10-Q Summary
Business context and reporting period
AMG is a global asset management company that invests in boutique investment management firms and provides centralized strategic, distribution, marketing and operational support. The filing covers the three and nine months ended September 30, 2011; financial statements are unaudited. AMG reported approximately $305.9 billion of assets under management across Mutual Fund, Institutional and High Net Worth channels.
Financial performance and liquidity
| Metric | Q3 2010 | Q3 2011 | 9M 2010 | 9M 2011 |
|---|---|---|---|---|
| Revenue | $354.4 million | $413.8 million | $937.5 million | $1,302.4 million |
| Operating income | $95.6 million | $126.0 million | $260.0 million | $390.9 million |
| Operating margin | 27.0% | 30.4% | 27.7% | 30.0% |
| Net income | $69.0 million | $80.1 million | $180.0 million | $270.5 million |
| Net income attributable to controlling interest | $34.0 million | $40.1 million | $76.6 million | $124.6 million |
| Diluted EPS | $0.65 | $0.76 | $1.57 | $2.34 |
| Economic Net Income | $77.9 million | $82.1 million | $192.5 million | $258.5 million |
| EBITDA | $102.3 million | $112.9 million | $252.2 million | $355.0 million |
| Operating cash flow | $168.4 million | $243.8 million | $351.5 million | $554.2 million |
Q3 revenue increased 17%, operating income 32%, controlling-interest net income 18% and diluted EPS 17%. For the nine-month period, revenue increased 39%, operating income 50%, controlling-interest net income 63% and diluted EPS 49%. The improvement primarily reflected higher average assets under management and contributions from newer Affiliates.
At September 30, 2011, cash and cash equivalents were $323.3 million, compared with $313.3 million at December 31, 2010. Senior bank debt was $210.0 million, versus $460.0 million at year-end. Carrying values were $432.2 million for senior convertible securities and $511.9 million for junior convertible trust preferred securities. AMG reported an internal leverage ratio of 1.2:1, bank leverage of 1.4 and bank interest coverage of 8.6, remaining in compliance with its debt covenants.
Material changes versus the prior comparable periods
- Assets under management increased 9% year over year to $305.9 billion, supported by $23.6 billion of net client cash flows and $15.2 billion from the Trilogy Global Advisors investment, partly offset by $11.8 billion of negative investment performance.
- Average assets under management increased 19% in Q3 and 40% for the nine months. Institutional and Mutual Fund revenue increased 17% and 18%, respectively, in Q3; High Net Worth revenue increased 11%.
- Consolidated performance fees declined to $3.2 million in Q3 and $25.3 million for the nine months, decreases of 43% and 35%, respectively.
- Operating expenses increased 11% in Q3 and 35% year to date. Compensation and related expenses rose 32% year to date, while intangible amortization rose 70%, primarily due to 2010 Affiliate investments.
- Income from equity-method investments increased 41% year to date to $40.1 million, including a $42.7 million increase in performance fees realized by equity-method Affiliates.
- A $12.8 million cost-method investment write-down was recognized during the nine months and was allocated to the High Net Worth channel.
- Comprehensive income attributable to the controlling interest was a loss of $41.3 million in Q3 and $53.1 million year to date, principally due to foreign-currency, derivative and investment-market losses.
Outlook, risks, contingencies and unusual items
No formal earnings or revenue guidance was provided. Management expects cash to be used for investments in new and existing Affiliates, distributions to Affiliate managers, debt service and working capital. AMG expected to repurchase approximately $50 million of Affiliate equity during the following twelve months and expected approximately $2.8 million of contingent-obligation payments during the remainder of 2011.
- Past acquisition agreements could require contingent payments of up to $491.8 million through 2015; the expected settlement amount disclosed in the contractual-obligations table was $125.0 million.
- AMG had $84.1 million of co-investment commitments to investment partnerships, with Russell Investments contractually obligated to reimburse $54.1 million if called.
- Uncertain tax positions totaled $21.9 million, and the liability could increase by up to $2.5 million over the next 12 months.
- AMG’s $75.0 million of treasury rate locks were settled in October 2011 for a $4.7 million pretax loss. The filing states that a fixed-rate debt issuance was anticipated before June 2012.
- The fair value of AMG’s Value Partners investment declined, producing a $25.8 million unrealized loss at September 30, 2011. Further market declines could affect investment values and comprehensive income.
- Goodwill was $2.116 billion; the annual impairment assessment identified no impairment. Management noted that further declines in certain indefinite-lived mutual fund advisory-contract assets could result in a future impairment.
- In November 2011, after quarter-end, AMG entered into a $1.0 billion senior unsecured credit facility, including a $250 million term loan and a $750 million revolver. The term loan was used partly to repay the $210 million outstanding under the prior facility.
- On October 18, 2011, the board authorized repurchases of up to an additional 2.0 million shares; approximately 3.0 million shares were available under all repurchase programs at that date.
- Management identifies market declines, investment performance, client flows, the ability to acquire Affiliates on favorable terms, access to capital and Affiliate operating results as principal risks.
Important facts for investors to verify
- Reconcile GAAP net income and EPS with Economic Net Income, EBITDA and other non-GAAP measures.
- Monitor assets under management, client flows, investment performance and the sustainability of revenue growth as performance fees declined materially.
- Review the terms, covenants, maturities and interest costs of the November 2011 amended credit facility and outstanding convertible securities.
- Assess potential cash requirements from contingent acquisition payments, Affiliate equity repurchases, partnership commitments and tax contingencies.
- Evaluate impairment sensitivity for goodwill, indefinite-lived advisory contracts and marketable securities, including the Value Partners investment.
- Confirm subsequent-period effects of the October treasury-lock settlement and the additional share-repurchase authorization.