Affiliated Managers Group, Inc. — Q3 2010 Form 10-Q Summary
Business context and reporting period
AMG is a global asset-management company that invests in boutique investment managers and operates through Mutual Fund, Institutional, and High Net Worth distribution channels. The filing covers the unaudited three and nine months ended September 30, 2010. AMG reported approximately $279.7 billion of assets under management at quarter-end, compared with $208.0 billion at December 31, 2009.
Financial performance and key metrics
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Revenue | $354.4 million | $217.5 million | $937.5 million | $597.2 million |
| Operating income | $95.6 million | $63.0 million | $260.0 million | $159.7 million |
| Operating margin | 27.0% | 29.0% | 27.7% | 26.7% |
| Net income attributable to controlling interest | $34.0 million | $17.8 million | $76.6 million | $34.9 million |
| Diluted EPS | $0.65 | $0.40 | $1.57 | $0.82 |
| EBITDA | $102.3 million | $60.5 million | $252.2 million | $162.9 million |
| Operating cash flow | $168.4 million | $80.2 million | $351.5 million | $168.1 million |
- Q3 revenue increased 63%, operating income increased 52%, controlling-interest net income increased 91%, and diluted EPS increased 63% year over year.
- Nine-month revenue increased 57%, operating income increased 63%, controlling-interest net income increased 119%, and diluted EPS increased 91%.
- Economic Net Income, a non-GAAP measure, was $77.9 million for Q3 and $192.5 million for the nine months, versus $45.6 million and $125.8 million, respectively, in the prior-year periods.
- Average assets under management increased 44% in Q3 and 37% for the nine months. Q3 revenue growth was led by Mutual Fund revenue, up 88%, and Institutional revenue, up 56%.
Liquidity, debt, and balance sheet
- Cash and cash equivalents were $255.5 million at September 30, 2010, compared with $259.5 million at December 31, 2009.
- Outstanding senior bank debt was $371.0 million under a $770.0 million revolving credit facility maturing in February 2012. Remaining revolver capacity was $399.0 million.
- Senior convertible securities had a carrying value of $419.0 million, and junior convertible trust preferred securities had a carrying value of $509.2 million. The zero-coupon senior convertible notes were converted into 873,626 common shares and retired during the second quarter.
- AMG reported an internal leverage ratio of 1.7:1, bank leverage ratio of 2.0, and bank interest coverage ratio of 6.3, compared with covenant limits of 3.5 and a minimum coverage ratio of 3.0. The company stated that it was in compliance with its credit facility.
- Cash flow used in investing was $840.8 million for the nine months, primarily reflecting investments in Affiliates. Financing cash flow was $483.2 million, supported by borrowings and proceeds from forward equity settlements.
Material changes versus the prior comparable period
- AMG completed investments in Artemis, Aston, and Pantheon during the first nine months of 2010. These transactions materially increased assets, goodwill, acquired client relationships, revenue, and debt financing requirements.
- New Affiliate investments contributed $178.9 million of revenue and $20.8 million of earnings for the nine months ended September 30, 2010.
- Goodwill increased from $1.413 billion at year-end 2009 to $1.996 billion at September 30, 2010; acquired client relationships increased from $571.6 million to $1.401 billion. No goodwill impairment was identified in the annual third-quarter assessment.
- Operating expenses increased 68% in Q3 and 55% for the nine months. Selling, general and administrative expense rose particularly sharply due to new Affiliate expenses, acquisition-related professional fees, and the absence of a $6.0 million insurance recovery recorded in 2009.
- Performance fees were approximately 2% of Q3 revenue in both years, but increased to $39.2 million for the first nine months of 2010, up $23.1 million, or 144%.
- During the third quarter, AMG modified governance provisions and deconsolidated certain investment partnerships. This eliminated partnership revenue and related non-controlling-interest income from the consolidated income statement and contributed to comparability differences.
- Income taxes increased to $24.0 million in Q3 from $5.4 million and to $52.9 million for the nine months from $15.3 million. The 2010 Q3 provision included a $4.1 million deferred tax benefit from United Kingdom tax-rate changes.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects principal future cash uses to include new and existing Affiliate investments, distributions to Affiliate managers, interest payments, debt-security repurchases, common-stock repurchases, and working capital.
- AMG announced an agreement to acquire a majority interest in Trilogy Global Advisors, which managed approximately $14 billion of assets as of September 30, 2010. Management planned to finance the investment with available cash and Revolver borrowings; the filing does not provide a closing date or final purchase price.
- AMG expects to repurchase approximately $100 million of Affiliate equity during the following twelve months, although timing and amounts are difficult to predict. Redeemable non-controlling interests were $386.2 million at September 30, 2010.
- AMG had approximately $97.964 million of commitments to co-invest in Pantheon partnerships, of which Russell Investments was contractually obligated to reimburse $72.703 million when called.
- Past acquisition agreements could require contingent payments of up to $609 million through 2015. The filing states that no significant payments were expected during the remainder of 2010. Expected settlement amounts disclosed as contingent obligations were $111.5 million, with a maximum settlement amount of $168 million through 2011 and $442 million thereafter.
- Key risks include declines or volatility in global and equity markets, reductions in assets under management and advisory fees, performance-fee variability, difficulty completing future investments on favorable terms, availability and cost of financing, rising amortization and tax expenses, and the ability of Affiliates to maintain operating margins and client relationships.
- AMG entered into interest-rate swaps covering $50 million of variable-rate debt, with a weighted average fixed rate of 1.66% from October 2010 through October 2015. The swaps had an unrealized loss of $0.6 million at quarter-end.
- The company did not repurchase common shares during Q3, but its repurchase authorization covered 1,584,706 shares at quarter-end. Disclosure controls and internal control over financial reporting were reported effective, with no material changes during the quarter.
Investor verification points
- Verify the closing, financing, and subsequent contribution of the Trilogy investment, including its effect on leverage and assets under management.
- Assess the sustainability of revenue and earnings growth after separating acquisition-related contributions, performance fees, investment returns, and the deconsolidation of partnerships.
- Review the maturity, put, conversion, and potential cash-settlement requirements of the 2008 senior convertible notes and junior convertible trust preferred securities.
- Reconcile future Affiliate-equity repurchase obligations, contingent acquisition payments, Pantheon co-investment commitments, and related-party payables with available liquidity.
- Monitor market-driven changes in assets under management, client cash flows, performance fees, foreign exchange, and potential goodwill or intangible-asset impairment.